F-1 1 c52273_f1.htm 3B2 EDGAR HTML -- c52273_preflight.htm


As filed with the Securities and Exchange Commission on May 16, 2008

Registration Statement No. 333-  



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM F-1
REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


Safe Bulkers, Inc.
(Exact name of registrant as specified in its charter)

 

 

 

 

 

Republic of the Marshall Islands

 

4412

 

N/A

(State or other jurisdiction of incorporation or organization)

 

(Primary Standard Industrial Classification Code Number)

 

(I.R.S. Employer Identification No.)

32 Avenue Karamanli
P.O. Box 70837
16605 Voula
Athens, Greece
011-30-210-895-7070

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590-9338

(Name and address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

 

 

 

William P. Rogers, Jr., Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
(212) 474-1000

(telephone number)

(212) 474-3700

(facsimile number)

 

Stephen P. Farrell, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
(212) 309-6000

(telephone number)

(212) 309-6001

(facsimile number)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the “Securities Act”), check the following box. £

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £  


CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

Title of Each Class of
Securities to be Registered

 

Amount to be
Registered(1)

 

Proposed
Maximum
Offering Price
Per Security(2)

 

Proposed
Maximum
Aggregate
Offering Price(1)(2)

 

Amount of
Registration Fee

 

Common Stock, par value $0.001 per share

 

 

 

11,500,000

   

 

$

 

22.00

   

 

$

 

253,000,000

   

 

$

 

9,942.90

 

 

Preferred Stock Purchase Rights(3)

 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1)

 

 

 

Includes shares to be sold upon exercise of the underwriters’ overallotment option.

 

(2)

 

 

 

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(o).

 

(3)

 

 

 

The preferred stock purchase rights are initially attached to and trade with the shares of our common stock registered hereby. Value attributed to such rights, if any, is reflected in the market price of our common stock.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion
Preliminary Prospectus dated May 16, 2008

PROSPECTUS

10,000,000 Shares

Safe Bulkers, Inc.
Common Stock


This is the initial public offering of our common stock. All of the shares of common stock being sold in this offering are being sold by Vorini Holdings Inc., our sole stockholder.

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder.

We expect the initial public offering price to be between $20.00 and $22.00 per share. Currently, no public market exists for the shares. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “SB.”

Investing in our common stock involves risks that are described in the section entitled “Risk Factors” beginning on page 17 of this prospectus.


 

 

 

 

 

 

 

 

Per Share

 

Total

Public offering price

 

 

$

   

 

$

 

Underwriting discounts and commissions

 

 

$

   

 

$

 

Proceeds to selling stockholder

 

 

$

   

 

$

 

The underwriters may also purchase up to an additional 1,500,000 shares of our common stock from the selling stockholder at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Each share of our common stock includes one purchase right that, under certain circumstances, entitles the holder to purchase from us a unit consisting of one-one thousandth of a share of preferred stock at a purchase price of $25.00 per unit, subject to specified adjustments.

The shares of common stock will be ready for delivery on or about  , 2008.


 

 

 

Merrill Lynch & Co.

 

Credit Suisse


 

 

 

 

 

Jefferies & Company

 

Dahlman Rose & Company

 

Poten Capital Services LLC

DnB NOR Markets

The date of this prospectus is  , 2008.


VASSOS

STALO


TABLE OF CONTENTS

 

 

 

 

 

Page

PROSPECTUS SUMMARY

 

 

 

1

 

RISK FACTORS

 

 

 

17

 

FORWARD-LOOKING STATEMENTS

 

 

 

40

 

USE OF PROCEEDS

 

 

 

41

 

DIVIDEND POLICY

 

 

 

41

 

CAPITALIZATION

 

 

 

43

 

SELECTED COMBINED FINANCIAL AND OTHER DATA

 

 

 

45

 

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

 

 

 

49

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

55

 

THE INTERNATIONAL DRYBULK SHIPPING INDUSTRY

 

 

 

85

 

BUSINESS

 

 

 

98

 

MANAGEMENT

 

 

 

120

 

PRINCIPAL AND SELLING STOCKHOLDERS

 

 

 

125

 

OUR MANAGER AND MANAGEMENT RELATED AGREEMENTS

 

 

 

127

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

 

 

130

 

DESCRIPTION OF INDEBTEDNESS

 

 

 

133

 

DESCRIPTION OF CAPITAL STOCK

 

 

 

142

 

SHARES ELIGIBLE FOR FUTURE SALE

 

 

 

148

 

MARSHALL ISLANDS COMPANY CONSIDERATIONS

 

 

 

150

 

TAX CONSIDERATIONS

 

 

 

154

 

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

 

 

 

161

 

UNDERWRITING

 

 

 

162

 

LEGAL MATTERS

 

 

 

167

 

EXPERTS

 

 

 

167

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

 

 

167

 

INDUSTRY DATA

 

 

 

168

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

 

 

168

 

GLOSSARY OF SHIPPING TERMS

 

 

 

169

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

F-1

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with additional or different information. If any person provides you with different or inconsistent information, you should not rely upon it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. Information contained on our website does not constitute part of this prospectus.

i


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should carefully read this entire prospectus, including the historical financial statements and the notes to those financial statements. You should pay special attention to the “Risk Factors” section beginning on page 17 of this prospectus to determine whether an investment in our common stock is appropriate for you.

Unless otherwise indicated, all references to currency amounts in this prospectus are to U.S. dollars and all information in this prospectus assumes that the underwriters’ overallotment option is not exercised. Unless otherwise indicated, all data regarding our fleet and our charters is as of December 31, 2007 and assumes delivery of vessels to us on the scheduled dates. Unless otherwise indicated: Swiss franc, or CHF, amounts translated into U.S. dollars have been translated at a rate of CHF1.1267:$1.00, and Japanese yen, or ¥, amounts translated to U.S. dollars have been translated at a rate of ¥112.35:$1.00, the exchange rates in effect as of December 31, 2007. Unless otherwise indicated, references in this prospectus to “Safe Bulkers,” the “Company,” “we,” “our,” “us” or similar terms when used in a historical context refer to Safe Bulkers, Inc. or any one or more of the entities that are being transferred or contributed to Safe Bulkers, Inc. in connection with this offering (each such entity, a “Subsidiary”) as well as additional entities, which were under common control with the Subsidiaries but which will not be transferred or contributed to Safe Bulkers, Inc. in connection with this offering (each such additional entity, an “Additional Company”), or to such entities collectively. When used in the present tense or prospectively, those terms refer, depending on the context, to Safe Bulkers, Inc., any one or more of its subsidiaries (including each Subsidiary), or to such entities collectively. We use the term “period time charter” to refer to the hire of a vessel for a period of more than three months. We use the term “spot charter” to refer to the hire of a vessel for a period of three months or less. For the definitions of other shipping terms used in this prospectus, including “newbuild,” “Panamax,” “Kamsarmax,” “Post-Panamax” and “Capesize,” see the “Glossary of Shipping Terms” beginning on page 169 of this prospectus.

Business Overview

We are an international provider of marine drybulk transportation services, transporting bulk cargoes, particularly grain, iron ore and coal, along worldwide shipping routes for some of the world’s largest consumers of marine drybulk transportation services. Our current fleet of 11 Japanese-built drybulk vessels, with an aggregate carrying capacity of 887,900 deadweight tons (“dwt”) and an average age of 2.6 years as of December 31, 2007, is one of the world’s youngest fleets of Panamax, Kamsarmax and Post-Panamax class vessels. Our fleet is expected to almost double (on a dwt basis) by mid-2010 as the result of the delivery of eight drybulk newbuilds, comprised of two Kamsarmax, four Post-Panamax and two Capesize class vessels. Upon delivery of the last of our eight contracted newbuilds in May 2010, our fleet will be comprised of 19 vessels, having an aggregate carrying capacity of 1,759,900 dwt and an average age of 3.2 years.

We employ our vessels on both period time charters and spot charters with some of the world’s largest consumers of marine drybulk transportation services, including Bunge Limited (“Bunge”), Cargill International S.A. (“Cargill”) and Daiichi Chuo Kisen Kaisha (“Daiichi”) or their affiliates, which together accounted for 69.2% of our revenues for the year ended December 31, 2007. Bunge, Cargill and Daiichi accounted for 29.9%, 21.1% and 18.2%, respectively, of our revenues during that period. We believe our customers, some of which have been chartering our vessels or vessels of our affiliates for over 20 years, enter into period time and spot charters with us because of the quality of our young and modern vessels and our record of safe and efficient operations. We intend to deploy our vessels on a mix of period time and spot charters according to our assessment of market conditions, adjusting the mix of these charters to take advantage of the relatively stable cash flow and high utilization rates associated with period time charters or to profit from attractive spot charter rates during periods of strong charter market conditions. We have recently entered into five-year period time charters, which are scheduled to commence in late 2008, 2009 and 2010, for six vessels in our current fleet and two of our newbuilds, and have entered into a 20-year period time charter commencing in 2011 for one of our newbuilds. By chartering these vessels in advance, we have been able to take advantage of the recent strong market conditions, while at the same time, reducing our exposure to charter rate fluctuations in late 2008, 2009 and 2010 when all of our

1


newbuilds are delivered. In addition, as of December 31, 2007, we had arranged one- to three-year period time charters commencing in 2008 for the three vessels in our fleet which were deployed on spot charters as of December 31, 2007. As a result, as of December 31, 2007, we had period time charter commitments for approximately 75.9%, 50.6% and 36.1% of our fleet’s anticipated available days in 2008, 2009 and 2010, respectively, and our contracted period time charter arrangements entered into as of December 31, 2007, for 2008 through 2010 are expected to provide revenues of $347.1 million.

During 2006 and 2007, our fleet utilization was 99.94% and 99.98%, respectively, and our daily time charter equivalent rates were $22,550 and $42,327, respectively, with revenues of $99.0 million and $172.1 million, respectively. In addition, during 2006 and 2007, our gain on sale of assets was $37.0 million and $112.4 million, respectively, and our net income was $97.2 million and $211.7 million, respectively.

We are controlled by the Hajioannou family, which has a long history of operating and investing in the international shipping industry, including a long history of vessel ownership. Vassos Hajioannou, the late father of Polys Hajioannou, our chief executive officer, and Nicolaos Hadjioannou, our chief operating officer, first invested in shipping in 1958. Since that time, the Hajioannou family’s presence within the drybulk shipping industry has become well-established and continues to grow. Polys Hajioannou has been actively involved in the industry since 1987, when he joined the predecessor of our affiliated management company, Safety Management Overseas S.A., which we refer to as “Safety Management” or our “Manager.” Nicolaos Hadjioannou joined Safety Management in 1999. Over the past 13 years, under the leadership of Polys Hajioannou and Nicolaos Hadjioannou, we have renewed our fleet by selling ten drybulk vessels during periods of what we viewed as favorable secondhand market conditions and contracting to acquire 29 drybulk newbuilds. As a result, we have maintained an average age for the vessels in our fleet of 3.2 years as of the end of each year from 1995 to 2007 and we continue to maintain a modern fleet of vessels with advanced designs that provide operational advantages. Also under their leadership, we have expanded the classes of drybulk vessels in our fleet and the aggregate carrying capacity of our fleet has grown from 146,000 dwt in 1995 to 887,900 dwt currently. In addition to benefiting from the experience and leadership of Polys Hajioannou and Nicolaos Hadjioannou, we also benefit from the expertise of our Manager which, along with its predecessor, has specialized in drybulk shipping since 1965, providing services to over 30 drybulk vessels. A number of our Manager’s key management and operational personnel have been continuously employed with Safety Management and its predecessor companies for over 25 years.

Our Fleet

Our fleet is currently comprised of 11 Japanese-built drybulk vessels with an aggregate carrying capacity of 887,900 dwt and an average age of 2.6 years as of December 31, 2007. Upon delivery of the last of our eight contracted newbuilds in May 2010, our fleet will be comprised of five Panamax, five Kamsarmax, seven Post-Panamax and two Capesize class vessels with an aggregate carrying capacity of 1,759,900 dwt, and an average age of 3.2 years. Our main focus is on Panamax, Kamsarmax and Post-Panamax class vessels because these types of vessels have the ability to access all major ports and the flexibility to handle a wide variety of drybulk cargoes.

As a result of our fleet’s low average age and our Manager’s technical and commercial management expertise, we have historically experienced lower maintenance and hull and machinery insurance costs and relatively fewer unscheduled off-hire days per vessel than the industry in general. All of our vessels, including our newbuilds, have been manufactured or are being manufactured to high specifications that provide our vessels with operational advantages. Our fleet, as well as our newbuilds, comprise several groups of “sister ships” which, we believe, provide us and our customers with scheduling flexibility and create economies of scale that enable us to realize cost efficiencies when maintaining, supplying and crewing our vessels.

2


The table below presents information with respect to our drybulk vessel fleet, including our newbuilds, and its deployment as of December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessel Name
(Subsidiary Owner)

 

Dwt

 

Month and
Year
Built (1)

 

Country
Built

 

Charterer

 

Charter
Type

 

Charter Rate
(2)

 

Commissions (3)

 

Time Charter
Period (4)

 

Sister
Ship (5)

Current Fleet

 

 

 

 

 

 

 

 

 

 

 

($/day)

 

 

 

 

 

 

Panamax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efrossini (Efragel
Shipping Corporation
(“Efragel”)) (6)

 

 

 

76,000

   

Feb. 2003

 

Japan

 

Cargill

 

 

 

Spot

   

 

 

$88,750

   

 

 

4.375%

   

Spot

 

A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$69,600

/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59,600

/

 

 

 

 

Feb. 2008–

 

 

 

 

 

 

 

 

 

 

NYK

 

 

 

Time

   

 

 

49,600

 

(7)

 

 

 

4.50%

   

Feb. 2011

 

 

 

Maria
(Marindou Shipping
Corporation
(“Marindou”)) (6)

 

 

 

76,000

   

Apr. 2003

 

Japan

 

NCS

 

 

 

Spot

   

 

 

$89,000

   

 

 

5.0%

   

Spot

 

A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$67,000

/

 

 

 

 

Feb. 2008–

 

 

 

 

 

 

 

 

 

Daiichi

 

 

 

Time

   

 

 

46,000

 

(8)

 

 

 

1.25%

   

Feb. 2011

 

 

 

Vassos
(Avstes Shipping
Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oct. 2007–

 

 

(“Avstes”)) (6)

 

 

 

76,000

   

Feb. 2004

 

Japan

 

Daiichi

 

 

 

Time

   

 

 

$43,000

   

 

 

3.75%

   

Nov. 2008

 

A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan. 2009–

 

 

 

 

 

 

 

 

 

Daiichi

 

 

 

Time

   

 

 

$29,000

   

 

 

1.25%

   

Jan. 2014

 

 

 

Katerina
(Kerasies Shipping
Corporation
(“Kerasies”)) (6)

 

 

 

76,000

   

May 2004

 

Japan

 

Bunge

 

 

 

Spot

   

 

 

$80,000

   

 

 

3.75%

   

Spot

 

A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Feb. 2008–

 

 

 

 

 

 

 

 

 

 

Bunge

 

 

 

Time

   

 

 

$62,000

   

 

 

3.75%

   

Feb. 2009

 

 

 

Maritsa
(Marathassa Shipping
Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(“Marathassa”)) (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 2007–

 

 

(9)

 

 

 

76,000

   

Jan. 2005

 

Japan

 

Daiichi

 

 

 

Time

   

 

 

$44,500

   

 

 

3.75%

   

Jan. 2008

 

A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan. 2008–

 

 

 

 

 

 

 

 

 

Bunge

 

 

 

Time

   

 

 

$53,500

   

 

 

3.75%

   

Jan. 2009 (10)

 

 

 


Kamsarmax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pedhoulas Merchant
(Pemer Shipping Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nov. 2007–

 

 

(“Pemer”))

 

 

 

82,300

   

Mar. 2006

 

Japan

 

Daiichi

 

 

 

Time

   

 

 

$38,500

   

 

 

3.75%

   

Jan. 2009

 

B

 

Pedhoulas Trader
(Petra Shipping Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2007–

 

 

(“Petra”)) (11)

 

 

 

82,300

   

May 2006

 

Japan

 

Daiichi

 

 

 

Time

   

 

 

$46,500

   

 

 

1.25%

   

Feb. 2008

 

B

 

Pedhoulas Leader
(Pelea Shipping Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dec. 2007–

 

 

(“Pelea”))

 

 

 

82,300

   

Mar. 2007

 

Japan

 

Daiichi

 

 

 

Time

   

 

 

$36,750

   

 

 

3.75%

   

Feb. 2010

 

B

Post-Panamax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stalo
(Staloudi Shipping

 

 

 

 

 

 

 

Intermare

 

 

 

 

 

 

 

July 2007–

 

 

Corporation

 

 

 

 

 

 

 

Transport

 

 

 

 

 

 

 

Sept. 2009

 

 

(“Staloudi”)) (6) (12)

 

 

 

87,000

   

Jan. 2006

 

Japan

 

GmbH

 

 

 

Time

   

 

 

$48,500

   

 

 

5.0%

   

 

 

C

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apr. 2010–

 

 

 

 

 

 

 

 

 

 

Daiichi

 

 

 

Time

   

 

 

$34,160

   

 

 

1.25%

   

Mar. 2015

 

 

 

3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessel Name
(Subsidiary Owner)

 

Dwt

 

Month and
Year
Built (1)

 

Country
Built

 

Charterer

 

Charter
Type

 

Charter
Rate (2)

 

Commissions (3)

 

Time Charter
Period (4)

 

Sister
Ship (5)

Current Fleet

 

 

 

 

 

 

 

 

 

 

 

($/day)

 

 

 

 

 

 

Post-Panamax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marina

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Marinouki Shipping

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mar. 2007–

 

 

(“Marinouki”)) (13) (12)

 

 

 

87,000

   

Jan. 2006

 

Japan

 

Bunge

 

Time

 

 

$

 

25,000

   

 

 

3.75%

   

Jan. 2008

 

C

 

Sophia
(Soffive Shipping
Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2007–

 

 

(“Soffive”)) (6) (12)

 

 

 

87,000

   

June 2007

 

Japan

 

Bunge

 

Time

 

 

$

 

24,000

   

 

 

3.75%

   

Aug. 2008

 

C

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nov. 2008–

 

 

 

 

 

 

 

 

 

 

Daiichi

 

Time

 

 

$

 

34,720

   

 

 

1.25%

   

Nov. 2013

 

 

 

Subtotal

 

 

 

887,900

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Newbuilds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kamsarmax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hull No. 2054
(Maxdeka Shipping
Corporation

 

 

 

 

 

South

 

 

 

 

 

 

 

 

 

 

 

 

(“Maxdeka”))

 

 

 

81,000

   

Mar. 2010

 

Korea

 

 

 

 

 

 

 

D (14)

 

Hull No. 2055
(Maxenteka Shipping
Corporation

 

 

 

 

 

South

 

 

 

 

 

 

 

 

 

 

 

 

(“Maxenteka”))

 

 

 

81,000

   

May 2010

 

Korea

 

 

 

 

 

 

 

D (14)

 


Post-Panamax class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eleni
(Eniaprohi Shipping
Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“Eniaprohi”)) (12),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apr. 2010–

 

 

(15)

 

 

 

87,000

   

Nov. 2008

 

Japan

 

Daiichi

 

Time

 

 

$

 

34,160

   

 

 

1.25%

   

Mar. 2015

 

C

 

Martine
(Eniadefhi Shipping
Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mar. 2009–

 

 

(“Eniadefhi”)) (12)

 

 

 

87,000

   

Mar. 2009

 

Japan

 

Daiichi

 

Time

 

 

$

 

40,500

   

 

 

1.25%

   

Mar. 2014

 

C

 

Hull No. 1039
(Maxdodeka Shipping
Corporation

 

 

 

 

 

South

 

 

 

 

 

 

 

 

 

 

 

 

(“Maxdodeka”))

 

 

 

92,000

   

July 2009

 

Korea

 

 

 

 

 

 

 

E (14)

 

Hull No. 1050
(Maxdekatria Shipping
Corporation

 

 

 

 

 

South

 

 

 

 

 

 

 

 

 

 

 

 

(“Maxdekatria”))

 

 

 

92,000

   

Mar. 2010

 

Korea

 

 

 

 

 

 

 

E (14)

 


Capesize class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hull No. 1074
(Eptaprohi Shipping
Corporation
(“Eptaprohi”))

 

 

 

176,000

   

Mar. 2010

 

China (16)

 

 

 

 

 

 

 

F

 

4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessel Name
(Subsidiary Owner)

 

Dwt

 

Month and
Year
Built (1)

 

Country
Built

 

Charterer

 

Charter
Type

 

Charter Rate
(2)

 

Commissions (3)

 

Time Charter
Period (4)

 

Sister
Ship (5)

Newbuilds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capesize class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hull No. 1075
(tbn Kanaris)
(Maxpente Shipping
Corporation
(“Maxpente”)) (17)

 

 

 

176,000

   

Jan. 2010

 

China (16)

 

 

 

 

 

 

 

F

 

Subtotal

 

 

 

872,000

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 

 

1,759,900

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

 

 

For newbuilds, the dates shown reflect the expected delivery dates. See footnote (15) below for additional information regarding the expected delivery date of the Eleni.

 

(2)

 

 

 

Quoted charter rates are gross charter rates.

 

(3)

 

 

 

Commissions reflect payments made to third party brokers or our charterers, and do not include the 1.0% fee payable on gross freight, charter hire, ballast bonus and demurrage to our Manager pursuant to our vessel management agreements with our Manager as of January 1, 2008 and pursuant to our new management agreement that will be in place following this offering.

 

(4)

 

 

 

The start dates listed reflect either actual start dates or, in the case of contracted charters that had not commenced as of December 31, 2007, scheduled start dates. Actual start dates may differ from the scheduled start dates depending on the terms of the charter and market conditions, and we generally have the option under our charter contracts to deliver the vessel within 30 to 60 days prior to or after the scheduled start date. Redelivery dates listed are the expected redelivery dates. Actual redelivery dates may differ from the expected redelivery dates depending on the terms of the charter and market conditions. Charterers under our charter contracts generally have a period of between 30 and 60 days during which they can redeliver the vessel.

 

(5)

 

 

 

Each vessel with the same letter is a “sister ship” of each other vessel that has the same letter.

 

(6)

 

 

 

This vessel was under period time or spot charter as of December 31, 2007, and, as of that date, was scheduled to commence a future period time charter as indicated in footnote (4) above. Information for both the charter under which the vessel was deployed as of December 31, 2007 and the future period time charter has been provided for this vessel. To the extent there is an interim period between the end of the current charter and the future period time charter, we expect to employ such vessel in the spot market during such period.

 

(7)

 

 

 

The gross daily charter rates to be paid by Nippon Yusen Kaisha (“NYK”) for the Efrossini are $69,600, $59,600 and $49,600 during the first, second and third years, respectively.

 

(8)

 

 

 

The daily charter rates to be paid by Daiichi for the Maria are $67,000 during 2008 and $46,000 during 2009 and 2010.

 

(9)

 

 

 

On March 13, 2008, we entered a five-year period time charter with Shinwa Kaiun Kaisha Tokyo (“Shinwa”) pursuant to which Shinwa will charter the Maritsa or a sister ship commencing in the first quarter of 2010. Pursuant to the charter, Shinwa may choose from among three charter rate structures, and must select among them prior to the commencement of the charter. Under the first option, the gross daily charter rates under this charter are $32,000 during the first and second years, $28,000 during the third year and $24,000 during the fourth and fifth years; under the second option, the gross daily charter rates under this charter are $32,500 during the first, second and third years and $21,250 during the fourth and fifth years; and under the third option, the gross daily charter rate under this charter is $28,000 during all five years. In each case, gross daily charter rates under this charter are subject to a 1.25% commission.

5


 

(10)

 

 

 

The Maritsa time charter with Bunge was scheduled to commence in February 2008, but we agreed in January 2008 to early delivery of the vessel in exchange for a payment by Bunge in the amount of $75,000.

 

(11)

 

 

 

On January 24, 2008, we entered into a time charter with Bunge pursuant to which we agreed to charter the Pedhoulas Trader commencing February 9, 2008 and due to expire by July 24, 2008 at a gross daily charter rate of $54,000. On March 3, 2008, we agreed with Bunge to terminate the charter. We estimate that the compensation payable to the charterer for early redelivery of the vessel, which is expected to occur on May 30, 2008, will be approximately $800,000. In April 2008, we entered a five-year period time charter with Kawasaki Kisen Kaisha, Ltd., or K-Line, pursuant to which K-Line will charter the Pedhoulas Trader commencing July 2008. The gross daily charter rates under this charter are $69,000, $56,500, $42,000, $20,000 and $20,000 during the first, second, third, fourth and fifth years, respectively, subject to a 1.00% commission.

 

(12)

 

 

 

Double-hulled vessel.

 

(13)

 

 

 

On March 5, 2008, we entered a five-year period time charter with K-Line pursuant to which K-Line will charter the Marina or a sister ship commencing in the third or fourth quarter of 2008. The gross daily charter rates under this charter are $61,500, $51,500, $41,500, $31,500 and $21,500 during the first, second, third, fourth and fifth years, respectively, subject to a 2.5% commission.

 

(14)

 

 

 

These Kamsarmax and Post-Panamax class newbuilds are being built in different shipyards than our current Kamsarmax and Post-Panamax class vessels, but may be subject to similar operational treatment as the current vessels of the same class because they have substantially the same specifications as the current vessels. Under certain of our charter contracts, we are able to substitute these newbuilds for the current vessels nominated under the charter contract, although in certain cases, such substitution may result in a discount in the charter rate.

 

(15)

 

 

 

Delivery date for this newbuild reflects agreement with the shipyard to deliver the newbuild in the fourth quarter of 2008, which is earlier than the originally scheduled delivery date of January 31, 2009 in the applicable newbuild contract, for an additional fee of $5,265 (¥591,500) per day for each day between the actual delivery date and the January 31, 2009 originally scheduled delivery date. On April 17, 2008, we entered a period time charter with Daiichi pursuant to which Daiichi will charter the Eleni commencing in November 2008 through October 2009. The gross daily charter rate under this charter is $77,000 per day, subject to a 1.25% commission.

 

(16)

 

 

 

This vessel is being built at the Jiangsu Rongsheng Heavy Industries Group Co., Ltd. (“Rongsheng”) shipyard.

 

(17)

 

 

 

On February 7, 2008 we entered into a 20-year period time charter with Eastern Energy Pte. Ltd. pursuant to which Eastern Energy Pte. Ltd. will charter the vessel to be named Kanaris commencing in the third or fourth quarter of 2011. The gross daily charter rate under this charter is $25,928 subject to a 2.5% commission. The obligations of Eastern Energy Pte. Ltd. have been guaranteed by Tata Power Company Limited and Coastal Gujarat Power Limited, two companies which are part of the Tata Group of companies. During the expected interim period between the scheduled delivery of the Kanaris and the commencement of this period time charter, we expect to employ the Kanaris in the spot market or on a period time charter.

Management of our Fleet

Our chief executive officer, president, chief operating officer and chief financial officer, collectively referred to in this prospectus as our “executive officers,” provide strategic management for our company and also supervise the management of our day-to-day operations by our Manager, Safety Management. We believe our Manager has built a strong reputation in the drybulk shipping community by providing customized, high-quality operational services in an efficient manner. Under our management agreement to be entered into prior to this offering, our Manager and its affiliates provide us and our subsidiaries with technical, administrative, commercial and certain other services for an initial term expiring on the second anniversary of this offering with automatic one-year renewals for an additional eight years at our option. Until the second anniversary of this offering, in return for providing technical, administrative,

6


commercial and certain other services, our Manager receives a fee of $575 per vessel per day for vessels in our fleet. Our Manager also receives a fee of 1.0% on all gross freight, charter hire, ballast bonus and demurrage with respect to each vessel in our fleet. Further, our Manager receives a commission of 1.0% based on the contract price of any vessel bought or sold by it on our behalf, including each of our contracted newbuilds other than the purchase of the two Post-Panamax class vessels being built by the IHI shipyard in Japan. For these two Post-Panamax class vessels, our Manager will receive a commission of 1.0% based on the contract prices of the vessels through separate agreements with Itochu Corporation. We also pay our Manager a flat supervision fee of $375,000 per newbuild. After the second anniversary of this offering, these fees and commissions will be adjusted each year by agreement between us and our Manager. Our arrangements with our Manager and its performance are reviewed by our board of directors. Our Manager has agreed not to provide management services to any other entities without the prior approval of our board of directors, other than under limited circumstances involving pre-existing business arrangements or opportunities that we decline to pursue, described under “Business—Management of Our Fleet,” to entities controlled by Polys Hajioannou or Nicolaos Hadjioannou, including SafeFixing Corp. (“SafeFixing”). Our Manager is ultimately owned by Machairiotissa Holdings Inc., which is a Marshall Islands corporation wholly owned by Polys Hajioannou.

Our Competitive Strengths

We believe that we possess a number of strengths that provide us with a competitive advantage in the drybulk shipping industry, including:

Young fleet of Panamax, Kamsarmax and Post-Panamax class vessels. With a carrying capacity of 887,900 dwt, we have one of the world’s youngest fleets of Panamax, Kamsarmax and Post-Panamax class vessels. Our current fleet of 11 Japanese-built vessels had an average age of 2.6 years as of December 31, 2007, as compared to the average age of 11.5 years for the world fleet of Panamax, Kamsarmax and Post-Panamax class vessels. Upon delivery in May 2010 of the last of our eight contracted newbuilds, our combined fleet of 19 drybulk vessels will have an average age of 3.2 years. The vessels in our current fleet are designed to lift more cargo on the same draft, compared to the industry average, to have lower-than-average fuel consumption and to have larger-than-average generators, which offer greater operational efficiency and safety than smaller generators.

Significant contracted growth at attractive prices. We have contracts for eight drybulk newbuilds which, upon delivery, will add an aggregate 872,000 dwt in capacity to our fleet, almost doubling the carrying capacity of our current fleet. These newbuilds, with scheduled deliveries between the fourth quarter of 2008 and the second quarter of 2010, are comprised of two Japanese-built Post-Panamax class vessels, with contract prices of approximately $37.7 million (¥4.3 billion) per vessel (plus an estimated additional cost of $0.4 million for early delivery of one of these vessels), two South Korean-built Post- Panamax class vessels, with contract prices of $73.5 million per vessel, two Chinese-built Capesize class vessels, with contract prices of $80.0 million and $81.0 million, respectively, and two South Korean-built Kamsarmax class vessels, with contract prices of $48.1 million per vessel, subject to upward price adjustments not to exceed $3.9 million. The contract prices for our newbuilds, which are subject to certain adjustments such as reimbursement of certain third-party seller interest expenses and payments for early delivery at our request, are significantly below the current market prices for vessels with similar specifications and delivery dates.

Reputation for operating excellence. We believe our Manager has established a history of providing excellent service to leading drybulk charterers utilizing our young and well-maintained fleet. Our Manager’s high operating standards have resulted in a very limited number of unscheduled off-hire days for our vessels, as reflected by our vessels being utilized on an average of 99.74% of available days for the three years ended December 31, 2007. We also believe that our focus on operational excellence has enabled us to develop our relationships with high quality charterers such as Bunge, Cargill and Daiichi. This operational focus has resulted in lower hull and machinery insurance premiums, maintenance expenses and operating costs that create cost advantages to us.

Long-term relationships with key industry players. We, through our Manager, have established long-term relationships with some of the largest drybulk shippers in the industry by providing reliable service and consistently meeting customers’ expectations. Our policy is to charter our vessels primarily to

7


the underlying charterers that use our vessels to transport drybulk commodities rather than charterers that sub-charter them to third parties. We believe our direct relationship with the actual shippers of drybulk commodities allows us to develop strong customer relationships, which results in significant repeat business and gives us insight into the underlying demand for those commodities. Our Manager has also developed strong relationships with shipyards, including the Tsuneishi and IHI shipyards in Japan from which we have ordered 20 newbuilds over the past 13 years.

Long history of investing in the drybulk shipping industry. Our Manager and its affiliates have been focused solely on the drybulk business since the founding of our Manager’s predecessor in 1965. Our management team and key management and operational personnel at our Manager consist of experienced executives, many of whom have more than 25 years of experience in the drybulk shipping industry. Our management team and Manager have demonstrated their ability to successfully manage our business throughout varying cycles in the drybulk industry, strategically balancing the period time and spot charter deployment of our fleet and employing an opportunistic approach to selling vessels and investing in newbuilds. In connection with this approach, since 1995, we have sold ten vessels and acquired 21 newbuilds, in addition to the eight newbuilds we currently have on order.

Our Business Strategy

Our primary objectives are to profitably grow our business, increase the distributable cash flow per share and maximize value to our stockholders by pursuing the following strategies:

Pursue a balanced chartering strategy. We intend to employ our drybulk vessels on a mix of period time and spot charters and, according to our assessment of market conditions, adjust the mix of these charters to take advantage of the relatively stable cash flow and high utilization rates associated with long-term period time charters or to profit from attractive spot rates during periods of strong charter market conditions. We have recently entered into five-year period time charters, which are scheduled to commence in late 2008, 2009 and 2010, for six vessels in our current fleet and two of our newbuilds, and have entered into a 20-year period time charter commencing in 2011 for one of our newbuilds. By chartering these vessels in advance, we have been able to take advantage of the recent strong charter market conditions, while at the same time, reducing our exposure to charter rate fluctuations in late 2008, 2009 and 2010 when all of our newbuilds are delivered.

Strategically expand the size of our fleet. We intend to grow our fleet through timely and selective investment in newbuild contracts for drybulk vessels in a manner that is accretive to cash flow per share. Although we intend to focus on Panamax, Kamsarmax and Post-Panamax class newbuilds, we will monitor market conditions regularly and may purchase drybulk vessels of other sizes or contract for secondhand drybulk vessels when those acquisitions present favorable investment opportunities. When acquiring vessels, we prefer to invest in groups of vessels, including vessels that will be sister ships to vessels we already own, in order to take advantage of the operational flexibility and economies of scale that sister ships afford us and our charterers.

Continue to operate a high-quality fleet. We intend to maintain a young fleet that meets the highest industry standards by strategically replacing existing vessels with newbuilds that have the technical specifications and advanced designs to allow us to continuously provide our customers with modern, high-quality vessels that meet their needs. During the past 13 years, we have sold ten vessels and acquired 21 newbuilds, which has allowed us to maintain a fleet with an average age of 3.2 years as of the end of each year from 1995 to 2007. As of December 31, 2007, the average age of the vessels in our current fleet was 2.6 years, and upon delivery of the last of our contracted newbuilds in May 2010, the average age of the vessels in our fleet will be 3.2 years. We preserve the quality of our vessels through a comprehensive maintenance and inspection program supervised by our experienced, affiliated Manager.

Capitalize on track record and relationships. We intend to capitalize on our Manager’s track record of strong operating performance, as demonstrated by its long-term relationships with reputable high- quality charterers. We believe our safety as an operator and our long-term client relationships have helped us build relationships with financial institutions and shipyards, respectively, which provide us with attractive growth opportunities. We intend to continue to utilize these relationships to profitably charter Panamax class or larger drybulk vessels to charterers who are end-users of our services.

8


Selected Risk Factors

Our ability to successfully implement our business strategy is dependent on our ability to manage a number of risks relating to our industry and our business. These risks include:

The international drybulk shipping industry is cyclical and volatile. The drybulk shipping industry is cyclical with attendant volatility in charter rates, vessel values and industry profitability. A decline in demand for commodities transported in drybulk vessels or a further increase in supply of drybulk vessels could cause a significant decline in charter rates, which could materially adversely affect our results of operations and financial condition as well as the value of our fleet.

An economic slowdown in the Asian region could materially impact our business. We expect that a significant number of the port calls made by our vessels will be in the Asian region, and a negative change in economic conditions in any Asian country, particularly China, Japan and, to some extent, India, may have an adverse effect on our results of operations, as well as our future prospects.

We depend upon a limited number of customers. We expect to derive a significant part of our revenue from a limited number of customers. If one or more of these customers terminates its charters, chooses not to recharter our vessels or is unable to perform under its charters with us and we are not able to find replacement charters, we will suffer a loss of revenues.

We depend on our Manager. Our Manager and its affiliates will provide us with our executive officers and will provide us with technical, administrative and commercial services. Our operational success will depend significantly upon our Manager’s satisfactory performance of these services.

We require additional secured indebtedness to fund commitments relating to our eight contracted newbuilds. Unless we obtain additional secured indebtedness before the end of 2009, we will not be capable of funding all of our commitments for capital expenditures relating to our eight contracted newbuilds, and may not be able to pay the dividends we intend to pay following this offering, which would materially adversely affect our results of operations and financial condition. We intend to raise $200.0 million of additional secured indebtedness, which would be used principally to fund these commitments.

For further discussion of the risks that we face, see “Risk Factors” beginning on page 17 of this prospectus.

Dividend Policy

We intend to pay our stockholders quarterly dividends of $0.475 per share, or $1.90 per share per year, in February, May, August and November of each year. We expect to pay an initial dividend following closing of this offering in August 2008 calculated based on the pro rata amount of the quarterly dividend for the period from the closing of this offering until the end of the second quarter of 2008.

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. We cannot assure you that we will be able to pay regular quarterly dividends in the amounts stated above or elsewhere in this prospectus, and our ability to pay dividends will be subject to the restrictions in our credit facilities and the provisions of Marshall Islands law as well as the other limitations set forth in the sections of this prospectus entitled “Dividend Policy” and “Risk Factors.”

Drybulk Industry Trends

The marine transportation industry is fundamental to international trade, as it is the only practical and cost effective means of transporting large volumes of basic commodities and finished products over long distances. Drybulk cargoes consist primarily of the major bulk commodities (iron ore, coal and grain) and minor bulk commodities, which are not a major component of demand for Panamax class and larger vessels and include a wide variety of commodities such as steel products, forest products, agricultural products, minerals, sugar and cement.

In 2007, approximately 3.0 billion tons of drybulk cargo was transported by sea, comprising more than one-third of all international seaborne trade. From 2001 to 2007, trade, by tonnage, in all drybulk commodities experienced a compound annual growth rate of 5.6% and ton-mile demand in the drybulk

9


sector experienced a compound annual growth rate of 7.0%. The primary factors that have affected the demand for marine transportation of drybulk cargo and the supply of drybulk vessels:

Demand

 

 

 

 

Increasing global industrial production and consumption and international trade, economic growth and urbanization in China, Russia, Brazil, India and other parts of the Far East, which have increased the demand for drybulk vessels; and

 

 

 

 

Increased voyage lengths from producers to consumers of drybulk commodities, which have generated additional ton-mile demand.

Supply

 

 

 

 

Limited shipyard capacity and long lead times for ordered newbuild vessels, due to a large order book for tankers, containerships and drybulk vessels, which have limited the number of newbuilds entering the market in the near term; and

 

 

 

 

Transportation bottlenecks causing vessel delays in cargo discharging and loading at main exporting terminals worldwide, which have effectively reduced the number of drybulk vessels available for hire.

We can provide no assurance, however, that the industry dynamics described above will continue or that we will be able to expand our business. For further discussion of the risks that we face, see “Risk Factors” beginning on page 17 of this prospectus. Please read “The International Drybulk Shipping Industry” for more information on the drybulk shipping industry.

Corporate Information

Safe Bulkers, Inc. was incorporated on December 11, 2007, under the laws of the Republic of the Marshall Islands, for the purpose of acquiring ownership of 19 Subsidiaries, each incorporated under the laws of the Republic of Liberia, that either currently own vessels or are scheduled to own vessels. Each of these Subsidiaries, since inception, has been under the common control of Polys Hajioannou and Nicolaos Hadjioannou. Following the date of the final prospectus, and prior to the closing of this offering, each of our Subsidiaries will be transferred or contributed to Safe Bulkers, Inc. by Vorini Holdings Inc., a Marshall Islands corporation that will be majority owned by Polys Hajioannou and Nicolaos Hadjioannou, with Maria Hajioannou and Eleni Hajioannou having minority shareholdings (“Vorini Holdings”). See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” for more information on our Reorganization (as defined in such section), which will occur following the date of the final prospectus, and prior to the closing of this offering. Following the closing of this offering, we will conduct our business operations through our Subsidiaries. Each of our vessels is owned by one of our Subsidiaries.

We maintain our principal executive offices at 32 Avenue Karamanli, P.O. Box 70837, 16605 Voula, Athens, Greece. Our telephone number at that address is 011-30-210-895-7070. After the completion of this offering, we will maintain a website at www.safebulkers.com. The information contained in or connected to our website is not a part of this prospectus.

10


The Offering

 

 

 

 

 

 

Shares of common stock offered

 

10,000,000 shares.

 

 

1,500,000 shares, if the underwriters exercise their overallotment option in full.

Shares of common stock to be outstanding immediately following the offering

 

54,500,000 shares.

Use of proceeds

 

The selling stockholder will receive all of the net proceeds from the sale of shares of our common stock in this offering.

Dividends

 

We intend to pay quarterly dividends of $0.475 per share, or $1.90 per share per year. We expect to pay our initial dividend in August 2008, calculated based on the pro rata amount of the quarterly dividend for the period from the closing of this offering until the end of the second quarter of 2008. Declaration and payment of any dividend is subject to the discretion of our board of directors. See “Dividend Policy.”

NYSE listing

 

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “SB.”

Risk factors

 

Investment in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before investing in our common stock.

Each share of our common stock includes one right that, under certain circumstances, will entitle the holder to purchase from us a unit consisting of one-thousandth of a share of preferred stock at a purchase price of $25.00 per unit, subject to specified adjustments.

11


Summary Combined Financial and Other Data

The following table presents summary:

 

 

 

 

historical predecessor combined financial and operating data; and

 

 

 

 

pro forma combined financial and operating data.

The summary historical predecessor combined financial data set forth below as of December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007 have been derived from our audited predecessor combined financial statements, which are included in this prospectus. The summary historical predecessor combined financial data set forth below as of December 31, 2005 have been derived from our audited predecessor combined financial statements, which are not included in this prospectus.

The unaudited pro forma combined financial and operating data are derived from our unaudited pro forma combined condensed financial statements, which are included in this prospectus, and give effect to the following transactions, which occurred (or will occur, in the case of the additional dividend) between January 2008 and the date of this offering, as if those transactions had occurred on December 31, 2007, in the case of the pro forma balance sheet, and January 1, 2007, in the case of the pro forma statement of operations:

 

 

 

 

Borrowings of $120.0 million by our Subsidiaries Efragel, Marindou and Avstes under three new credit facilities, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou in the first quarter of 2008, resulting in net additional indebtedness of $81.5 million. Of the net additional indebtedness of $81.5 million, (i) $16.0 million was retained by the Subsidiaries, and (ii) $65.5 million was advanced to our Manager.

 

 

 

 

Additional interest expense with respect to the net additional indebtedness of $81.5 million described above.

 

 

 

 

Repayment of $10.1 million of Advances from Owners from amounts Due from Manager.

 

 

 

 

Declaration and payment of a dividend in the amount of $147.8 million to our current owners, funded from amounts Due from Manager.

 

 

 

 

Estimated additional dividend of $31.0 million will be declared and payable to our current owners by our Manager on our behalf prior to the closing of the initial public offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

 

 

 

 

Settlement of the remaining Due from Manager balance in the amount of $4.0 million through the transfer of $4.0 million in Restricted cash in collateral accounts held by our Manager to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer, as security for their respective loan facilities.

 

 

 

 

Removal of all activities from the historical predecessor financial statements of the Additional Companies, which will not be owned by us following the completion of this offering, and the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer, a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente. We did not generate any operating revenues or operating expenses with respect to the Pedhoulas Farmer, and Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us. The Additional Companies have been included in our predecessor combined financial statements, along with the Subsidiaries, because together, the Additional Companies and the Subsidiaries constituted all the vessel owning activities of Polys Hajioannou and Nicolaos Hadjioannou during the relevant period.

 

 

 

 

Increase of $2.6 million in general and administrative expenses due to the implementation of the amended management agreements, as of January 1, 2008.

 

 

 

 

Pro forma earnings per share gives retroactive effect to our Reorganization, which involves the issuance (following the date of the final prospectus and prior to the closing of this offering) of

12


 

 

 

 

54.5 million shares of our common stock to the selling stockholder, and resulting capital structure following the closing of this offering. This offering will not involve the issuance of additional shares of our common stock, as all shares of common stock sold in this offering will be sold by the selling stockholder.

The pro forma adjustments do not reflect an estimate of general and administrative expenses to increase as a result of becoming a public company, as such costs are not considered to be factually supportable. However, we currently expect an annual increase of approximately $2.2 million as a result of becoming a public company upon completion of this offering.

The unaudited pro forma predecessor combined condensed financial and operating data is provided for illustrative purposes only and does not represent what our financial position or results of operation would actually have been if the transactions and other events reflected in such statements had occurred during the relevant periods, and is not representative of our results of operations or financial position for any future periods. Investors are cautioned not to place undue reliance on this unaudited pro forma predecessor combined financial and operating data.

Share data in the table below gives effect to the issuance of 54.5 million shares of our common stock as a result of our Reorganization, which will occur following the date of the final prospectus and prior to the closing of this offering.

This information should be read together with, and is qualified in its entirety by, our predecessor combined financial statements and the notes thereto and our unaudited proforma combined condensed financial statements and notes thereto included elsewhere in this prospectus. You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars except share data and fleet data)

STATEMENT OF INCOME

 

 

 

 

 

 

 

 

Revenues

 

 

$

 

82,877

   

 

$

 

99,040

   

 

$

 

172,057

   

 

$

 

167,150

 

Commissions

 

 

 

(3,211

)

 

 

 

 

(3,731

)

 

 

 

 

(6,209

)

 

 

 

 

(6,027

)

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

 

79,666

   

 

 

95,309

   

 

 

165,848

   

 

 

161,123

 

 

 

 

 

 

 

 

 

 

Voyage expenses

 

 

 

(228

)

 

 

 

 

(420

)

 

 

 

 

(179

)

 

 

 

 

(166

)

 

Vessel operating expenses

 

 

 

(10,366

)

 

 

 

 

(13,068

)

 

 

 

 

(12,429

)

 

 

 

 

(12,327

)

 

Depreciation

 

 

 

(7,610

)

 

 

 

 

(9,553

)

 

 

 

 

(9,583

)

 

 

 

 

(9,583

)

 

General and administrative expenses—
Management fee to related party

 

 

 

(803

)

 

 

 

 

(1,006

)

 

 

 

 

(1,177

)

 

 

 

 

(3,759

)

 

Early redelivery cost

 

 

 

   

 

 

(150

)

 

 

 

 

(21,438

)

 

 

 

 

(21,438

)

 

Gain on sale of assets

 

 

 

26,785

   

 

 

37,015

   

 

 

112,360

   

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

87,444

   

 

 

108,127

   

 

 

233,402

   

 

 

113,850

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

(3,668

)

 

 

 

 

(6,140

)

 

 

 

 

(8,225

)

 

 

 

 

(12,298

)

 

Other finance costs

 

 

 

(124

)

 

 

 

 

(116

)

 

 

 

 

(161

)

 

 

 

 

(167

)

 

Interest income

 

 

 

692

   

 

 

775

   

 

 

1,290

   

 

 

1,195

 

(Loss) on derivatives

 

 

 

(3,171

)

 

 

 

 

(1,963

)

 

 

 

 

(704

)

 

 

 

 

(704

)

 

Foreign currency gain/(loss)

 

 

 

13,477

   

 

 

(3,279

)

 

 

 

 

(13,759

)

 

 

 

 

(13,966

)

 

Amortization and write-off of deferred finance charges

 

 

 

(63

)

 

 

 

 

(180

)

 

 

 

 

(166

)

 

 

 

 

(117

)

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

94,587

   

 

$

 

97,224

   

 

$

 

211,677

   

 

$

 

87,793

 

 

 

 

 

 

 

 

 

 

Pro forma earnings per share, basic and diluted (unaudited) (1)

 

 

$

 

1.74

   

 

$

 

1.78

   

 

$

 

3.88

   

 

$

 

1.61

 

Pro forma weighted average number of shares, basic and diluted (unaudited)

 

 

 

54,500,000

   

 

 

54,500,000

   

 

 

54,500,000

   

 

 

54,500,000

 

13


 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars except share data and fleet data)

OTHER FINANCIAL DATA

 

 

 

 

 

 

 

 

Net cash (used in)/provided by operating activities

 

 

$

 

(22,349

)

 

 

 

$

 

(12,806

)

 

 

 

$

 

278,506

 

 

 

Net cash (used in)/provided by investing activities

 

 

 

(6,065

)

 

 

 

 

(33,835

)

 

 

 

 

88,416

 

 

 

Net cash provided by/(used in) financing activities

 

 

 

28,414

   

 

 

46,641

   

 

 

(366,922

)

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

 

   

 

 

   

 

 

 

 

 

OTHER DATA

 

 

 

 

 

 

 

 

EBITDA (2)

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

Adjusted EBITDA (3)

 

 

 

78,451

   

 

 

75,307

   

 

 

116,001

   

 

 

108,596

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

Pro Forma

 

As of
December 31,
2007

 

2005

 

2006

 

2007

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

Total current assets

 

 

$

 

159,538

   

 

$

 

282,021

   

 

$

 

98,883

   

 

$

 

18,513

 

Total fixed assets

 

 

 

232,655

   

 

 

253,448

   

 

 

308,340

   

 

 

308,340

 

Other non-current assets

 

 

 

405

   

 

 

314

   

 

 

434

   

 

 

4,434

 

Total assets

 

 

 

392,598

   

 

 

535,783

   

 

 

407,657

   

 

 

331,287

 

Total current liabilities

 

 

 

111,271

   

 

 

172,275

   

 

 

41,507

   

 

 

62,421

 

Derivative liabilities

 

 

 

   

 

 

   

 

 

242

   

 

 

242

 

Long-term debt, net of current portion

 

 

 

149,500

   

 

 

134,457

   

 

 

306,267

   

 

 

387,753

 

Time charter discount

 

 

 

   

 

 

   

 

 

2,766

   

 

 

2,766

 

Total owners’ equity/(deficit)

 

 

 

131,827

   

 

 

229,051

   

 

 

56,875

   

 

 

(121,895

)

 

Total liabilities and owners’ equity/(deficit)

 

 

 

392,598

   

 

 

535,783

   

 

 

407,657

   

 

 

331,287

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

FLEET DATA (4)

 

 

 

 

 

 

 

 

Average number of vessels

 

 

 

9.2

   

 

 

11.5

   

 

 

10.7

   

 

 

10.3

 

Ownership days

 

 

 

3,370

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Available days

 

 

 

3,350

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Operating days

 

 

 

3,343

   

 

 

4,205

   

 

 

3,913

   

 

 

3,777

 

Fleet utilization

 

 

 

99.21

%

 

 

 

 

99.94

%

 

 

 

 

99.98

%

 

 

 

 

99.99

%

 

Time charter equivalent rates

 

 

$

 

23,713

   

 

$

 

22,550

   

 

$

 

42,327

   

 

$

 

42,604

 

Daily vessel operating expenses

 

 

$

 

3,076

   

 

$

 

3,106

   

 

$

 

3,176

   

 

$

 

3,263

 


 

 

(1)

 

 

 

With respect to the periods presented based on our historical predecessor combined statements of operations, pro forma earnings per share gives retroactive effect to our Reorganization and resulting capital structure following the completion of this offering.

 

 

 

 

 

With respect to the periods presented based on our unaudited pro forma combined statements of operations, pro forma earnings per share reflects earnings per share after giving retroactive effect to our Reorganization and the other pro forma events as set forth in our unaudited pro forma combined condensed financial statements and resulting capital structure following the completion of this offering. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” for more information on our Reorganization (as defined in such section) prior to this offering.

 

 

 

 

 

This offering will not involve the issuance of additional shares of our common stock as all shares of common stock sold in this offering will be sold by the selling stockholder.

14


 

(2)

 

 

 

EBITDA represents net income before interest, income tax expense, depreciation and amortization. EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or “GAAP.” EBITDA assists our management and investors by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA information. We believe that EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financings, income taxes and the accounting effects of capital expenditures and acquisitions, items which may vary for different companies for reasons unrelated to overall operating performance.

 

 

 

 

 

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. EBITDA should not be considered a substitute for net income and other operations data prepared in accordance with U.S. GAAP or as a measure of profitability. While EBITDA is frequently used as a measure of operating results and performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

The following table sets forth a reconciliation of net income to EBITDA for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars)

Reconciliation of Net Income to EBITDA:

 

 

 

 

 

 

 

 

Net income

 

 

$

 

94,587

   

 

$

 

97,224

   

 

$

 

211,677

   

 

$

 

87,793

 

Depreciation

 

 

 

7,610

   

 

 

9,553

   

 

 

9,583

   

 

 

9,583

 

Interest expense

 

 

 

3,668

   

 

 

6,140

   

 

 

8,225

   

 

 

12,298

 

Interest income

 

 

 

(692

)

 

 

 

 

(775

)

 

 

 

 

(1,290

)

 

 

 

 

(1,195

)

 

Amortization and write-off of deferred finance charges

 

 

 

63

   

 

 

180

   

 

 

166

   

 

 

117

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

 

 

 

 

 

 

 

 

 

 

(3)

 

 

 

Adjusted EBITDA represents our EBITDA after giving effect to the removal of the gain on sale of assets for the relevant periods. Adjusted EBITDA is not a recognized measurement under GAAP. Adjusted EBITDA assists our management and investors by increasing the comparability of our fundamental performance with respect to our vessel operation, without including the gains we have received through the sale of assets during the relevant periods. We believe that this removal of the gain on sale of assets allows us to better illustrate the operating results of our vessels for the periods indicated.

 

 

 

 

 

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA should not be considered a substitute for net income and other operations data prepared in accordance with U.S. GAAP or as a measure of profitability. While Adjusted EBITDA may also be used as a measure of operating results and performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars)

Reconciliation of EBITDA to Adjusted EBITDA:

 

 

 

 

 

 

 

 

EBITDA

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

Gain on sale of assets

 

 

 

(26,785

)

 

 

 

 

(37,015

)

 

 

 

 

(112,360

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

78,451

   

 

$

 

75,307

   

 

$

 

116,001

   

 

$

 

108,596

 

 

 

 

 

 

 

 

 

 

 

(4)

 

 

 

For a description of the items listed under this heading, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations.”

15


Recent Developments

Our first quarter ended on March 31, 2008. Set forth below is a discussion of our financial information for the three months ended March 31, 2008, compared to the three months ended March 31, 2007.

Net revenues for the three months ended March 31, 2008 were $49.3 million, compared to net revenues of $30.3 million for the three months ended March 31, 2007. Net income for the three months ended March 31, 2008 was $24.7 million, compared to $120.0 million for the three months ended March 31, 2007. The increase in net revenues for the three months ended March 31, 2008, compared with the three months ended March 31, 2007, is primarily attributable to higher charter rates.

The decrease in net income for the three months ended March 31, 2008, compared with the three months ended March 31, 2007, is primarily attributable to the sale of four of our vessels in the three months ended March 31, 2007, the Pedhoulas Farmer, the Pedhoulas Fighter, the Old Kanaris and the Old Eleni, which resulted in a one-time aggregate gain on sale of assets in the amount of $112.4 million in that quarter. We also incurred exchange rate losses of $10.2 million for the three months ended March 31, 2008, compared to $1.2 million for the three months ended March 31, 2007. The exchange rate losses for the three months ended March 31, 2008 largely resulted from the conversion of our loan and credit facilities in currencies other than the U.S. dollar into U.S. dollar amounts. Such conversion resulted in a further reduction of the percentage of outstanding principal amount denominated in foreign currencies from 47.3% on December 31, 2007 to approximately 3.5% as of March 31, 2008, reducing our exposure to currency fluctuations. We also incurred losses on derivatives of $2.6 million for the three months ended March 31, 2008, compared to a gain of approximately $0.04 million for the three months ended March 31, 2007. This change was primarily attributable to the fair value losses of six interest rate swap derivatives offset by a foreign exchange derivative gain on settlement during the threee months ended March 31, 2008. During the three months ended March 31, 2007, there were no interest rate swap derivatives, and the gain arose from foreign exchange derivatives.

Net income for the three months ended March 31, 2008 has also decreased as a result of an increase in general and administrative expenses, from $0.3 million for the three months ended March 31, 2007 to $1.1 million for the three months ended March 31, 2008, primarily due to the implementation of the amended management agreements as of January 1, 2008.

The results of operations and related financial information for the three months ended March 31, 2008 and the three months ended March 31, 2007 are unaudited, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature.

CONDENSED COMBINED STATEMENTS OF INCOME
For the Three Months Ended March 31,

(Unaudited)

 

 

 

 

 

 

 

2007

 

2008

 

 

(in thousands of
U.S. dollars)

Net revenues

 

 

$

 

30,287

   

 

$

 

49,327

 

Operating income

 

 

 

122,750

   

 

 

41,240

 

Net Interest and finance cost

 

 

 

(1,549

)

 

 

 

 

(3,766

)

 

Gain/(loss) on derivatives

 

 

 

41

   

 

 

(2,592

)

 

Foreign currency (loss)

 

 

 

(1,250

)

 

 

 

 

(10,159

)

 

Net income

 

 

$

 

119,992

   

 

$

 

24,723

 

16


RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information contained in this prospectus, before making an investment in our common stock. Any of the risk factors described below could significantly and negatively affect our business, results of operations or financial condition, which may reduce our ability to pay dividends and lower the trading price of our common stock. You may lose all or part of your investment.

Risks Inherent in Our Industry

The international drybulk shipping industry is cyclical and volatile, and charter rates have in the recent past been at historically high levels; these factors may lead to reductions and volatility in our charter rates, vessel values and results of operations.

The drybulk shipping industry is cyclical with attendant volatility in charter rates, vessel values and industry profitability. During the period from January 2005 to December 2007, the Panamax time charter average daily rates for one-year period time charters experienced a low of $25,000 and a high of $81,000. At various times since January 2004, charter rates have reached historic highs and in the recent past have been at historically high levels. Charter rates may not be as high as they have been during this recent period or as they are currently in the future. Please see the section of this prospectus entitled “The International Drybulk Shipping Industry—Charter Rates” for information concerning charter rates.

The factors affecting the supply and demand for vessels are outside of our control and are unpredictable, and, as a result, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.

Factors that influence demand for vessel capacity include:

 

 

 

 

demand for and production of drybulk products;

 

 

 

 

global and regional economic conditions;

 

 

 

 

environmental and other regulatory developments;

 

 

 

 

the distance drybulk cargoes are to be moved by sea; and

 

 

 

 

changes in seaborne and other transportation patterns.

Factors that influence the supply of vessel capacity include:

 

 

 

 

the number of newbuild deliveries and the ability of shipyards to deliver newbuilds by contracted delivery dates;

 

 

 

 

the scrapping rate of older vessels;

 

 

 

 

port and canal congestion;

 

 

 

 

the number of vessels that are out of service, including due to vessel casualties; and

 

 

 

 

changes in environmental and other regulations that may limit the useful lives of vessels.

We anticipate that the future demand for our drybulk vessels and, in turn, drybulk charter rates will be dependent upon, among other things, continued demand for imported commodities, economic growth in emerging markets, including China and the rest of the Asia Pacific region, India, Brazil and Russia and the rest of the world, including the United States, which has recently experienced slowing growth, seasonal and regional changes in demand, changes in the capacity of the global drybulk vessel fleet and the sources and supply of drybulk cargo to be transported by sea. The capacity of the world fleet seems likely to increase, and there can be no assurance that economic growth will continue. Adverse economic, political, social or other developments could decrease demand and growth in the shipping industry and thereby reduce our revenue significantly. A decline in demand for commodities transported in drybulk vessels or an increase in supply of drybulk vessels could cause a significant decline in charter rates, which could materially adversely affect our results of operations and financial condition.

17


An oversupply of drybulk vessel capacity may lead to reductions in charter rates and profitability.

The market supply of drybulk vessels has been increasing, and the number of drybulk vessels on order is near historic highs. As of January 31, 2008, newbuild orders had been placed for an aggregate of approximately 56.4% (by dwt) of the existing global drybulk fleet, with deliveries expected during the next 60 months, which is high relative to historical levels. Furthermore, as of January 31, 2008, for Panamax, Kamsarmax and Post-Panamax class vessels in which we currently operate, the vessels on order represented approximately 49.2% (by dwt) of the current fleet capacity, and for Capesize class vessels, the vessels on order represented approximately 77.1% (by dwt) of the current fleet capacity, which also is high historically. This large order book will result in high levels of deliveries over the next few years, which will significantly increase the size of the global fleet of drybulk vessels. This may have a negative impact on charter rates and vessel values depending on the ultimate rate of growth of the fleet, which is also dependent on the number of drybulk vessels taken off-line, including due to scrapping. In recent years, given the high charter rates in the market, there has been minimal scrapping activity in the drybulk sector, with an average of 0.8% (by dwt) of the global drybulk fleet scrapped from 2001 to 2007, and the average age at which vessels are scrapped has increased. Please read “The International Drybulk Shipping Industry—Supply of Drybulk Vessels” for information on the supply of drybulk vessels. Although our contracted newbuilds are generally scheduled to be delivered sooner than the average newbuild currently on order for the global fleet and we have entered into five-year period time charters for two of our newbuilds and a 20-year period time charter for one of our newbuilds, we will be exposed to changes in charter rates with respect to our remaining five newbuilds depending on the ultimate growth of the global drybulk fleet. If we cannot enter into period time charters, we may have to secure a charter in the spot market, where charter rates are volatile and revenues are, therefore, less predictable. In addition, a material increase in the net supply of drybulk vessel capacity without corresponding growth in drybulk vessel demand could have a material adverse effect on our fleet utilization and our charter rates generally and could, accordingly, materially adversely affect our business, financial condition and results of operations.

An economic slowdown in the Asian region could have a material adverse effect on our business, financial position and results of operations.

We expect that a significant number of the port calls made by our vessels will involve the loading or discharging of raw materials in ports in the Asian region, particularly China and Japan. As a result, a negative change in economic conditions in any Asian country, particularly China, Japan and, to some extent, India, may have an adverse effect on our business, financial position and results of operations, as well as our future prospects, by reducing demand and, as a result, charter rates. In recent years, China and India have had two of the world’s fastest growing economies in terms of gross domestic product and have been the main driving force behind the recent increase in marine drybulk trade and the demand for drybulk vessels. We cannot assure you that such recent increase will be sustained or that the Chinese and Indian economies will not experience a decline in the future. Moreover, any additional slowdown in the United States economy or slowdown in the economies of the European Union or certain Asian countries may adversely affect economic growth in China, India and elsewhere. Our business, financial position, results of operations, ability to pay dividends, as well as our future prospects, will likely be materially and adversely affected by an economic downturn in any of these countries.

The international drybulk shipping industry is highly competitive, and we may not be able to compete successfully 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 which have substantially greater resources than we do. Competition for the transportation of drybulk cargo by sea is intense and depends on price, customer relationships, operating expertise, professional reputation and size, age, location and condition of the vessel. Due in part to the highly fragmented market, additional competitors with greater resources could enter the drybulk shipping industry and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter rates than we are able to offer.

18


Rising crew costs may adversely affect our profits.

Crew costs are a significant expense for us under our charters. Recently, the limited supply of and increased demand for well-qualified crew, due to the increase in the size of the global shipping fleet, has created upward pressure on crewing costs, which we generally bear under our period time and spot charters. Increases in crew costs may adversely affect our profitability.

We are subject to regulation and liability under environmental laws that could require significant expenditures and affect our cash flow and net income.

Our business and the operation of our vessels are regulated under international conventions, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration, in order to protect against potential environmental impacts. As a result of highly publicized accidents in recent years, government regulation of vessels, particularly in the area of environmental requirements, can be expected to become more stringent in the future and could require us to incur significant capital expenditures on our vessels to keep them in compliance, or even to scrap or sell certain vessels altogether. For example, various jurisdictions that do not already regulate management of ballast waters are considering regulating the management of ballast waters to prevent the introduction of non-indigenous species that are considered invasive. Such regulations could, if implemented, require us to make changes to the ballast water management plans we currently have in place. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may materially adversely affect our operations. Because such conventions, laws and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions, laws and regulations or the impact thereof on the resale prices or useful lives of our vessels. We are also required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates and financial assurances with respect to our operations.

These requirements can also affect the resale prices or useful lives of our vessels, require reductions in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of or more costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations. Violations of, or liabilities under, environmental regulations can result in substantial penalties, fines and other sanctions, including in certain instances, seizure or detention of our vessels. Events of this nature would have a material adverse effect on our financial condition, results of operations and ability to pay dividends to our stockholders.

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 for Pollution Prevention, or “ISM Code.” The ISM Code requires vessel owners and ship managers to develop and maintain an extensive Safety Management System (“SMS”) 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 vessel owner or vessel manager to comply with the ISM Code may subject it to increased liability, invalidate existing insurance or decrease available insurance coverage for the affected vessels and result in a denial of access to, or detention in, certain ports. Currently, each of the vessels in our current fleet is ISM Code-certified. However, there can be no assurance that such certification will be maintained indefinitely. If we fail to maintain ISM Code certification for our vessels, we may also breach covenants in certain of our credit facilities that require that our vessels be ISM Code-certified. If we breach such covenants due to failure to maintain ISM Code certification and are unable to remedy the relevant breach, our lenders could accelerate our indebtedness and foreclose on the vessels in our fleet securing those credit facilities.

For additional information on these and other environmental requirements, you should carefully review the information contained in the section entitled “Business—Environmental and Other Regulations.”

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Increased inspection procedures, tighter import and export controls and survey requirements could increase costs and disrupt our business.

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery and the levying of customs duties, fines and other penalties against us.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, results of operations and our ability to pay dividends.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the International Convention for the Safety of Life at Sea. A vessel must undergo annual surveys, intermediate surveys and special surveys as part of a continuous five-year survey cycle. Annual surveys are performed every year. Intermediate surveys are extended annual surveys which typically are conducted approximately two and one-half years after commissioning and upon each class renewal. Most vessels are drydocked during the intermediate survey for inspection of underwater parts, however, an in-water intermediate survey may be undertaken in lieu of drydocking, upon the tenth anniversary of vessel delivery, subject to certain conditions. Class renewal surveys, also known as “special surveys,” are more extensive than intermediate surveys and are carried out at the end of each five year period. During the special survey the vessel is thoroughly examined, including thickness-gauging to determine any diminution in the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. If any vessel does not maintain its class and/or fails any annual survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable and we would be in violation of certain covenants in our credit facilities. This would negatively impact our revenues.

Risks associated with operating oceangoing vessels could negatively affect our business and reputation, which could adversely affect our revenues and stock price.

The operation of oceangoing vessels carries inherent risks. These risks include the possibility of:

 

 

 

 

marine disaster;

 

 

 

 

environmental accidents;

 

 

 

 

cargo and property losses or damage;

 

 

 

 

business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions; and

 

 

 

 

piracy.

Such occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery of cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates and damage to our reputation and customer relationships generally. Although we maintain hull and machinery and war risks insurance, as well as protection and indemnity insurance, which may cover certain risks of loss resulting from such occurrences, our insurance coverage may be subject to caps or otherwise not fully cover such losses, and any of these circumstances or events could increase our costs or lower our revenues, which could result in a reduction in the market price of our shares of common stock. The involvement of our vessels in an environmental disaster may also harm our reputation as a safe and reliable vessel owner and operator.

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The shipping industry has inherent operational risks that may not be adequately covered by our insurance.

The operation of any vessel includes risks such as mechanical failure, collision, fire, contact with floating objects, cargo or property 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 a marine disaster, including oil spills and other environmental mishaps. Although our vessels carry a relatively small amount of bunkers, a spill of oil from one of our vessels or losses as a result of fire or explosion could be catastrophic under certain circumstances. There are also liabilities arising from owning and operating vessels in international trade. Our current insurance includes (a) hull and machinery insurance covering damage to our vessels’ hull and machinery from, among other things, contact with free and floating objects, (b) war risks insurance covering losses associated with the outbreak or escalation of hostilities, (c) protection and indemnity insurance (which includes environmental damage and pollution insurance) covering third-party and crew liabilities, such as expenses resulting from the injury or death of crew members, passengers and other third parties, the loss or damage to cargo, third-party 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 and (d) increased value 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. Under the terms of our credit facilities, we will be subject to restrictions on the use of any proceeds we may receive from claims under our insurance policies. Furthermore, in the future, we may not be able to maintain or 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 in the event of a claim or decrease any recovery in the event of a loss. If the damages from a catastrophic oil spill or other marine disaster exceeded our insurance coverage, the payment of those damages could have a severe, adverse effect on us and could possibly result in our insolvency.

In addition, we do not carry loss of hire insurance. Loss of hire insurance covers the loss of revenue during extended vessel off-hire periods, such as those that occur during an unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any loss of a vessel or any extended period of vessel off-hire, due to an accident or otherwise, could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders.

The operation of drybulk vessels has certain unique operational risks.

With a drybulk vessel, the cargo itself and its interaction with the vessel may create operational risks. By their nature, drybulk cargoes are often heavy, dense and easily shifted, and they may react badly to water exposure. In addition, drybulk vessels are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach while at sea. Breaches of a drybulk vessel’s hull may lead to the flooding of the vessel’s holds. If a drybulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we are unable to adequately maintain our vessels, we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business, financial condition, results of operations and ability to pay dividends. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.

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

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proceedings. The arrest or attachment of one or more of our vessels could cause us to default on a charter, breach covenants in certain of our credit facilities, 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.

Changes in the economic and political environment in China and policies adopted by the government to regulate its economy may have a material adverse effect on our business, financial condition and results of operations.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in respects such as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. Prior to 1978, the Chinese economy was a planned economy. Since 1978, increasing emphasis has been placed on the use of market forces in the development of the Chinese economy. Annual and five-year State Plans are adopted by the Chinese government in connection with the development of the economy. Although state-owned enterprises still account for a substantial portion of the Chinese industrial output, in general, the Chinese government is reducing the level of direct control that it exercises over the economy through State Plans and other measures. There is an increasing level of freedom and autonomy in areas such as allocation of resources, production, pricing and management and a gradual shift in emphasis to a “market economy” and enterprise reform. Limited price reforms have been undertaken, with the result that prices for certain commodities are principally determined by market forces. Many of the reforms are unprecedented or experimental and may be subject to revision, change or abolition based on the outcome of such experiments. The Chinese government may cease pursuing a policy of economic reform. The level of imports to and exports from China could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions, all of which could adversely affect our business, results of operations and financial condition.

World events could affect our results of operations and financial condition.

Terrorist attacks such as the attacks on the United States on September 11, 2001, other terrorist attacks since that time and the continuing response of the United States and other countries to these attacks, as well as the threat of future terrorist attacks in the United States or elsewhere, continues to cause uncertainty in the world financial markets and may affect our business, results of operations and financial condition. The continuing conflict in the Middle East 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. In addition, political tensions or conflicts in the Asia Pacific Region, particularly involving China, may reduce the demand for our services. These uncertainties could also adversely affect our ability to obtain any additional financing or, if we are able to obtain additional financing, to do so on terms favorable to us. 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. Terrorist attacks targeted at sea vessels, such as the October 2002 attack in Yemen on the VLCC Limburg, a ship not related to us and other similar attacks since that time, may in the future also negatively affect our operations and financial condition and directly impact our vessels or our customers. Future terrorist attacks could result in increased volatility of the financial markets in the United States and globally and could result in an economic recession affecting the United States, Europe, Asia, the Middle East or the entire world. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations, revenue, costs and ability to pay dividends.

Changing economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered could affect us. In addition, future hostilities or other

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political instability in regions where our vessels trade could also affect our trade patterns and adversely affect our operations and performance.

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 its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although 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 cause us to breach covenants in certain of our credit facilities, negatively impact our business, financial condition, results of operations and ability to pay dividends.

Rising fuel prices may adversely affect our profits.

Upon redelivery of vessels at the end of a period time or trip time charter, we may be obligated to repurchase the fuel (bunkers) on board at prevailing market prices, which could be materially higher than fuel prices at the inception of the charter period. In addition, although we rarely deploy our vessels on voyage charters, fuel is a significant, if not the largest, expense that we would incur with respect to vessels operating on voyage charter. As a result, an increase 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 and regulations.

Seasonal fluctuations in industry demand could adversely affect our results of operations 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 rates. This seasonality may result in quarter-to-quarter volatility in our results of operations, which could affect the amount of dividends, if any, that we pay to our stockholders from quarter to quarter. The market for marine drybulk transportation services 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. This seasonality could materially affect our business, financial condition, results of operations and ability to pay dividends.

Risks Related to Our Company

The market values of our vessels may decrease, which could cause us to breach covenants in our credit facilities and adversely affect our results of operations.

The market value of drybulk vessels has generally experienced high volatility, and market prices for secondhand and newbuild drybulk vessels are at historically high levels. You should expect the market value of our vessels to fluctuate depending on a number of factors, including:

 

 

 

 

general economic and market conditions affecting the shipping industry;

 

 

 

 

prevailing level of charter rates;

 

 

 

 

competition from other shipping companies;

 

 

 

 

configurations, sizes and ages of vessels;

 

 

 

 

cost of newbuilds;

 

 

 

 

governmental or other regulations; and

 

 

 

 

technological advances.

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If the market value of our vessels or newbuilds declines, we may breach some of the covenants contained in our credit facilities, including covenants in our new and existing credit facilities. If we do breach such covenants and we are unable to remedy the relevant breach, our lenders could accelerate our indebtedness and foreclose on the vessels in our fleet securing those credit facilities. If the book value of a vessel is impaired due to unfavorable market conditions, we would incur a loss that could adversely affect our results of operations. In addition, if we sell vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount on our financial statements, resulting in a loss that could adversely affect our results of operations.

Please see the section of this prospectus entitled “The International Drybulk Shipping Industry—Vessel Prices” for information concerning historical prices of drybulk vessels.

The market values of our vessels may decrease, which could limit the amount of funds that we can borrow under any future credit facility.

In the event of a decline in the market value of our fleet, we may not be able to obtain future financing or incur debt on terms that are acceptable to us or at all.

Please see the section of this prospectus entitled “The International Drybulk Shipping Industry—Vessel Prices” for information concerning historical prices of drybulk vessels.

When our current charters end, we may not be able to replace them promptly or with profitable chartering arrangements, which would affect our results of operations and ability to pay dividends.

Of our 11 drybulk vessels currently in service, as of December 31, 2007, three vessels were deployed in the spot market and eight vessels were deployed on period time charters of two years or less. In general, we intend to deploy a portion of our fleet in the spot market.

As described above, charter rates fluctuate significantly based upon available charters and the supply of, and demand for, marine shipping capacity. Our current spot charters and many of our period time charters expire over the next several months, and we are scheduled to receive eight newbuilds over the next few years. As a result, although we have entered into five-year period time charters for six vessels in our current fleet, commencing in late 2008, 2009 and 2010, and two of our newbuilds, commencing in the first quarter of 2009 and the second quarter of 2010, and have entered into a 20-year period time charter for one of our newbuilds commencing in 2011, we will be exposed to changes in charter rates for drybulk vessels and may be entering into charters during downturns in the highly volatile market for marine drybulk transportation services.

We cannot assure you that future charter rates will enable us to operate our vessels profitably or to pay you dividends. We also cannot assure you that we will be able to obtain charters at comparable rates or with comparable charterers, if at all, when the current charters for the vessels in our fleet expire. If we cannot recharter these vessels on new period time charters following the expiration of previous charters, or employ them in the spot market profitably, our results of operations and operating cash flow will suffer. Current drybulk vessel charter rates are high, however, as described above, the market is volatile, and when we enter into a charter when charter rates are low, our revenues and earnings will be adversely affected as we do not expect to be able to substantially lower our operating costs during periods of industry weakness. In the past, short-term period time charter rates and spot market charter rates for drybulk vessels have declined below the operating costs of vessels. In addition, a decline in charter rates will also cause the value of our vessels to decline.

In addition, when our current charters expire, we may have to reposition our vessels without cargo or compensation to deliver them to future charterers or to move vessels to areas where we believe that future employment may be more likely or advantageous. Repositioning our vessels in these circumstances would increase our vessel operating costs.

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A decline in spot market charter rates would affect our results of operations and ability to pay dividends.

During the years ended December 31, 2005, 2006 and 2007, our revenue from spot charters accounted for 38.56%, 52.17% and 51.1%, respectively, of our total revenues. The drybulk charter market is highly competitive and spot charter rates fluctuate significantly. Vessels operating in the spot market generate revenues that are less predictable than those on period time charters. We are therefore exposed to the risk of fluctuating drybulk charter rates, which may have a materially adverse impact on our financial performance. As a result of the volatility in the drybulk carrier charter market, we may not be able to employ our vessels upon the termination of their existing charters at their current charter rates. We cannot assure you that future charter rates will enable us to operate our vessels profitably or to pay you dividends.

Charterers may default on period time charters that provide for above-market rates, which could reduce our revenues.

If we enter into period time charters with charterers when charter rates are high and charter rates subsequently fall significantly, charterers may default under those charters. We intend to enter into period time charters only with reputable charterers, but we cannot assure you that our charterers will not default on the charters. If a charterer defaults on a charter with an above-market charter rate, we will seek the remedies available to us, which may include arbitration or litigation to enforce the contract. After a charterer defaults on a period time charter, we may have to enter into a charter at a lower charter rate, which would reduce our revenues. If we cannot enter into a new period time charter, we may have to secure a charter in the spot market, where charter rates are volatile and revenues are less predictable. It is also possible that we would be unable to secure a charter at all, which would also reduce our revenues.

We cannot assure you that our board of directors will declare dividends.

Our policy is to pay our stockholders quarterly dividends of $0.475 per share, or $1.90 per share per year, in February, May, August and November of each year. We expect to pay an initial dividend following completion of this offering in August 2008, calculated based on the pro rata amount of the quarterly dividend for the period from the closing of this offering until the end of the second quarter of 2008. The declaration and payment of dividends, if any, will always be subject to the discretion of our board of directors and the requirements of Marshall Islands law. The timing and amount of any dividends declared will depend on, among other things: (a) our earnings, financial condition and cash requirements and availability, (b) our ability to obtain debt and equity financing on acceptable terms as contemplated by our growth strategy, (c) provisions of Marshall Islands law governing the payment of dividends and (d) restrictive covenants in our existing and future debt instruments.

The international drybulk 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, if any, that is available for the payment of dividends. The amount of cash we generate from operations may fluctuate based upon, among other things:

 

 

 

 

the rates we obtain from our charters as well as the rates obtained upon the expiration of our existing charters;

 

 

 

 

the level of our operating costs;

 

 

 

 

the number of unscheduled off-hire days and the timing of, and number of days required for, scheduled drydocking of our ships;

 

 

 

 

vessel acquisitions and related financings;

 

 

 

 

restrictions in our credit facilities and in any future debt program;

 

 

 

 

prevailing global and regional economic and political conditions; and

 

 

 

 

the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.

The actual amount of cash we will have available for dividends will also depend on many additional factors, including:

 

 

 

 

our expenses, liabilities and cash reserves;

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changes in our operating cash flows, capital expenditure requirements, working capital requirements and other cash needs;

 

 

 

 

our growth strategy and associated uses of our cash and our financing requirements;

 

 

 

 

modification or revocation of our dividend policy by our board of directors;

 

 

 

 

the amount of cash reserves established by our board of directors; and

 

 

 

 

restrictions under Marshall Islands law.

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, if any, including as a result of the risks described in this section of this prospectus. Our growth strategy contemplates that we will finance the acquisition of additional vessels through a combination of our operating cash flow and debt or equity financing. If financing is not available to us on acceptable terms, our board of directors may determine to finance or refinance acquisitions with a greater percentage of cash from operations to the extent available, which would reduce or even eliminate the amount of cash available for the payment of dividends. We may also enter into other agreements that will restrict our ability to pay dividends.

Under the terms of certain of our existing credit facilities, our Subsidiaries are not permitted to pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend. We expect that any future debt agreements will have similar restrictions on the payment of dividends.

Marshall Islands laws and the laws of the Republic of Liberia, where each of our Subsidiaries is incorporated, generally prohibit the payment of dividends other than from surplus or net profits, or while a company is insolvent or would be rendered insolvent by the payment of such a dividend. We may not have sufficient surplus or net profits in the future to pay dividends, and our Subsidiaries may not have sufficient funds, surplus or net profits to make distributions to us.

The amount of cash we generate from our operations may differ materially from our net income or loss for the period, which will be affected by non-cash items. We may incur other expenses or liabilities that could reduce or eliminate the cash available for distribution as dividends. As a result of these and the other factors mentioned above, we may pay dividends during periods when we record losses and may not pay dividends during periods when we record net income.

We can give no assurance that dividends will be paid in the future.

We depend upon a limited number of 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 expect to derive a significant part of our revenues from a limited number of customers. During 2006, approximately 75.2% of our charter revenues were derived from two charterers, Bunge and Cargill, and during 2007, approximately 69.2% of our revenues were derived from three charterers, Bunge, Cargill and Daiichi. In addition, as of December 31, 2007, eight of our current vessels and two of our newbuilds were deployed, or scheduled to be deployed in the future, on period time charters with Daiichi. If one or more of these customers terminates its charters, chooses not to recharter our vessels or is unable to perform under its charters with us and we are not able to find replacement charters, we will 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 could lose a customer or the benefits of a time charter for many different reasons, including if:

 

 

 

 

the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise;

 

 

 

 

the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire or we default under the charter; or

 

 

 

 

in certain cases, a prolonged force majeure event affecting the customer, including damage to or destruction of relevant production facilities, war or political unrest prevents us from performing services for that customer.

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If we lose a key customer, we may be unable to obtain period time charters on comparable terms with charterers of comparable standing or may have increased exposure to the volatile spot market, which is highly competitive and subject to significant price fluctuations. The loss of any of our customers, charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations, financial condition and our ability to pay dividends.

We may have difficulty properly managing our planned growth through acquisitions of additional vessels.

We expect to take delivery of one newbuild in the fourth quarter of 2008, one newbuild in the first quarter of 2009, one newbuild in the third quarter of 2009 and five newbuilds in the first half of 2010. We intend to grow our business through selective acquisitions of additional vessels, in addition to our contracted newbuilds. Our future growth will primarily depend on our ability to:

 

 

 

 

locate and acquire suitable newbuild and other vessels;

 

 

 

 

identify and consummate vessel acquisitions or joint ventures relating to vessel acquisitions;

 

 

 

 

enlarge our customer base;

 

 

 

 

manage our expansion;

 

 

 

 

operate and supervise any newbuilds we may order; and

 

 

 

 

obtain required debt or equity financing on acceptable terms.

During periods in which charter rates are high, vessel values generally are high as well, and it may be difficult to consummate vessel acquisitions or enter into newbuild contracts at favorable prices. Other risks include 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. 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 efforts.

As we expand our business, we will need to improve or expand our operations and financial systems, staff and crew; if we cannot improve these systems or recruit suitable employees, our performance may be adversely affected.

Our current operating and financial systems may not be adequate as we implement our plan to expand the size of our fleet, and our Manager’s attempts to improve those systems may be ineffective. In addition, as we expand our fleet, we will have to rely on our Manager to recruit additional seafarers and shoreside administrative and management personnel. We cannot assure you that our Manager will be able to continue to hire suitable employees or a sufficient number of employees as we expand our fleet. If our Manager’s unaffiliated crewing agents encounter business or financial difficulties, we may not be able to adequately staff our vessels. We may also have to increase our customer base to provide continued employment for most of our new vessels. If we are unable to operate our financial system, our Manager is unable to operate our operations systems effectively or to recruit suitable employees in sufficient numbers or we are unable to increase our customer base as we expand our fleet, our performance may be adversely affected.

Unless we set aside reserves for vessel replacement, at the end of a vessel’s useful life, our revenue will decline, which would adversely affect our cash flows and income.

As of December 31, 2007, the vessels in our current fleet had an average age of 2.6 years, and following delivery of all of our contracted newbuilds in May 2010, the vessels in our fleet will have an average age of 3.2 years. Unless we maintain cash reserves for vessel replacement, we may be unable to replace the vessels in our fleet upon the expiration of their useful lives. Our cash flows and income are dependent on the revenues we earn by chartering our vessels to customers. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition and ability to pay dividends will be adversely affected. Any reserves set aside for vessel replacement would not be available for other cash needs or dividends. While we have not set aside cash reserves to date, pursuant to our dividend policy, we expect to pay a quarterly dividend of $0.475 per share, or $1.90 per share per year, however, in periods where we make acquisitions, including acquisitions

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to replace vessels, our board of directors may limit the amount or percentage of our cash from operations available to pay dividends. See the section entitled “Dividend Policy.”

If our drybulk newbuilds are not delivered on time or are delivered with significant defects, our earnings and financial condition could suffer.

We have entered into agreements to purchase four Post-Panamax, two Kamsarmax and two Capesize class drybulk newbuilds. Of these additional vessels, one Post-Panamax class vessel is scheduled for delivery in the fourth quarter of 2008, one Post-Panamax class vessels is scheduled for delivery in the first quarter of 2009, one Post-Panamax class vessel is scheduled for delivery in the third quarter of 2009, one Kamsarmax, one Post-Panamax and two Capesize class vessels are scheduled for delivery in the first quarter of 2010 and one Kamsarmax class vessel is scheduled for delivery in the second quarter of 2010. A delay in the delivery of any of these vessels to us or the failure of the shipyard to deliver a vessel at all could cause us to breach our obligations under a related charter and could adversely affect our earnings, our financial condition and the amount of dividends, if any, that we can pay in the future. In addition, the delivery of any of these vessels with substantial defects could have similar consequences.

The delivery of a newbuild could be delayed because of:

 

 

 

 

work stoppages or other labor disturbances or other event that disrupts the operations of the shipyard;

 

 

 

 

quality or engineering problems;

 

 

 

 

changes in governmental regulations or maritime self-regulatory organization standards;

 

 

 

 

lack of raw materials;

 

 

 

 

bankruptcy or other financial crisis of the shipyard;

 

 

 

 

a backlog of orders at the shipyard;

 

 

 

 

hostilities, political or economic disturbances in the country where the vessels are being built;

 

 

 

 

weather interference or catastrophic events, such as major earthquakes or fires;

 

 

 

 

our requests for changes to the original vessel specifications;

 

 

 

 

shortages of or delays in the receipt of necessary construction materials, such as steel, or equipment, such as main engines, electricity generators and propellers;

 

 

 

 

our inability to obtain requisite permits or approvals; or

 

 

 

 

disputes with the shipyard.

In addition, the shipbuilding contracts for the newbuilds generally contain a “force majeure” provision whereby the occurrence of certain events could delay delivery or possibly terminate the contract. If delivery of a vessel is materially delayed or if a shipbuilding contract is terminated, it could adversely affect our results of operations and financial condition and our ability to pay dividends to our stockholders.

If we are unable to enter into our new credit facilities and obtain additional secured indebtedness, we may default on our commitments relating to our eight contracted newbuilds, and we may not be able to pay the dividends we intend to pay following this offering, which would materially adversely affect our results of operations and financial condition.

We are scheduled to take delivery of our eight newbuilds in late 2008, 2009 and 2010. The remaining balance of the contract prices are $368.2 million and ¥7.5 billion as of December 31, 2007, including certain additional amounts for adjustments (together, the equivalent of $434.7 million, based on a ¥112.35/$1.00 exchange rate in effect on December 31, 2007), as provided under our newbuild contracts, including certain third party seller interest expenses and adjustments for early delivery. We intend to fund these commitments with available cash, borrowings under our two new credit facilities for which we have accepted commitment letters of $45.0 million each and the majority of available borrowings under an additional secured facility of up to $200.0 million which we intend to obtain before the end of 2009. To the extent that we are unable to enter into these two new credit facilities and obtain such additional secured indebtedness on terms acceptable to us, we will need to find alternative financing. If we are unable to find

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alternative financing, we will not be capable of funding all of our commitments for capital expenditures relating to our eight contracted newbuilds, and we may not be able to pay the dividends we intend to pay following this offering, which would materially adversely affect our results of operations and financial condition.

The aging of our fleet may result in increased operating costs in the future, which could adversely affect our earnings.

In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. As of December 31, 2007, the average age of the vessels in our current fleet was 2.6 years. As our vessels age, they may become less fuel efficient and more costly to maintain and will not be as advanced as more recently constructed vessels due to improvements in design and engine technology. Rates for cargo insurance, paid by charterers, also increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety or other equipment standards related to the age of vessels may 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. If we sell vessels, we are not certain that the price at which we sell them will equal or exceed their carrying amounts at that time.

Our vessels may suffer damage and we may face unexpected costs, which could adversely affect our cash flow and financial condition.

If our vessels suffer damage, they may need to be repaired. The costs of repairs are unpredictable and can be substantial. We may not have insurance that is sufficient to cover all or any of these costs or losses and may have to pay costs not covered by our insurance. The loss of earnings while our vessels are being repaired and repositioned, as well as the actual cost of these repairs, would decrease our earnings and reduce the amount of cash that we have available for dividends.

Because we generate substantially all of our revenues in U.S. dollars but incur a portion of our expenses, hold a portion of our indebtedness and have obligations under two of our newbuild contracts in other currencies, exchange rate fluctuations could adversely affect our results of operations, financial condition and ability to pay dividends.

We generate substantially all of our revenues in U.S. dollars but in 2006 and 2007, incurred approximately 17.7% and 19.1%, respectively, of our expenses in currencies other than the U.S. dollar. As of December 31, 2007, of our aggregate indebtedness of $322.9 million, CHF86.4 million (the equivalent of $76.7 million) was denominated in Swiss francs and ¥8.5 billion (the equivalent of $75.8 million) was denominated in Japanese yen, however, we subsequently converted all of the indebtedness in these currencies into U.S. dollars except for CHF12.9 million (the equivalent of $12.99 million), which remained outstanding as of March 31, 2008. The contract prices, in an aggregate amount of $75.5 million (¥8.5 billion), under two of our newbuild contracts are also denominated in Japanese yen. The difference in currencies could lead to fluctuations in our net income due to changes in the value of the U.S. dollar relative to other currencies, in particular the euro and the Japanese yen. For example, from January 1, 2006 to December 31, 2007, the value of the U.S. dollar declined by approximately 19.6% as compared to the euro and declined by approximately 4.5% as compared to the Japanese yen. We have not hedged our currency exposure, and as a result, our U.S. dollar denominated results of operations and financial condition and our ability to pay dividends could suffer.

Restrictive covenants in our existing credit facilities impose, and any future credit facilities will impose, financial and other restrictions on us.

Our existing credit facilities impose, and any future credit facility will impose, operating and financial restrictions on us. These restrictions in our existing credit facilities generally limit most of our Subsidiaries’ ability to, among other things:

29


 

 

 

 

pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend;

 

 

 

 

enter into long-term charters for more than 13 months;

 

 

 

 

incur additional indebtedness, including through the issuance of guarantees;

 

 

 

 

change the flag, class or management of the vessel mortgaged under such facility or terminate or materially amend the management agreement relating to such vessel;

 

 

 

 

create liens on their assets;

 

 

 

 

make loans;

 

 

 

 

make investments;

 

 

 

 

make capital expenditures;

 

 

 

 

undergo a change in ownership; and

 

 

 

 

sell the vessel mortgaged under such facility.

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 our stockholders, finance our future operations or pursue business opportunities.

Certain of our existing credit facilities require our Subsidiaries to maintain specified financial ratios and satisfy financial covenants. Depending on the credit facility, certain of our Subsidiaries are subject to financial ratios and covenants requiring that these Subsidiaries:

 

 

 

 

ensure that the value of the vessel mortgaged under the applicable credit facility does not fall below 100% to 120%, as applicable, of the outstanding amount of the loan; and

 

 

 

 

ensure that outstanding amounts in currencies other than the U.S. dollar do not exceed 100% or 110%, as applicable, of the U.S. dollar equivalent amount specified in the relevant credit agreement for the applicable period by, if necessary, providing cash collateral security in an amount necessary for the outstanding amounts to meet this threshold.

Although certain of our existing facilities (Pelea, Avstes, New Marindou and New Efragel credit facilties) contain a covenant requiring us to obtain the relevant lender’s consent prior to the payment of dividends by the Subsidiary borrowers, we intend to enter into supplementary agreements removing this covenant prior to the closing of this offering. If, despite our expectation, we remain bound by this covenant after the closing of this offering (which relates to four of our 19 Subsidiaries), it could limit our ability to pay dividends.

The covenants described above are those contained in certain of our Subsidiaries’ existing credit facilities. In addition, we intend to enter into supplemental agreements with respect to certain of our Subsidiaries’ existing credit facilities (see the section entitled “Description of Indebtedness—Our Credit Facilities”). Although the relevant lender has proposed, and we agree with, certain key terms to be included in the supplemental agreements (such as the margin and covenants to apply following the offering), the lender’s proposal is subject to agreement on all relevant terms of the supplemental agreements. Accordingly, the final terms of these supplemental agreements may differ from the proposed terms and could be more onerous, which my require us to seek alternative financing.

We have accepted commitment letters to enter into two $45.0 million credit facilities through two of our Subsidiaries. Upon the completion of this offering, we intend to guarantee the obligations of our Subsidiaries under those two new credit facilities and the existing credit facilities of our Subsidiaries Avstes Shipping Corporation, Efragel Shipping Corporation, Marindou Shipping Corporation and Pelea Shipping Ltd., and certain financial covenants will apply to us, including a consolidated leverage ratio, and debt-to-EBITDA ratios, and minimum tangible net worth. In addition, these credit facilities will contain a covenant that the Hajioannou family maintain its majority interest in us. In addition, we also intend to guarantee the obligations of our Subsidiaries under the credit facilities of Marathassa Shipping Corporation, Marinouki Shipping Corporation, Soffive Shipping Corporation and Kerasies Shipping Corporation, and similar financial covenants will apply to us as those described above.

30


We expect that the restrictions and covenants that will be contained in any new credit facility will differ to those described above. See “Description of Indebtedness” for more information about our Subsidiaries’ existing credit facilities, our new credit facilities and our future credit facilities.

A failure to meet our payment and other obligations or to maintain compliance with the financial covenants that will be in our new credit facilities could lead to defaults under our secured credit facilities. Our lenders could then accelerate our indebtedness and foreclose on the vessels in our fleet securing those credit facilities. The loss of these vessels would have a material adverse effect on our results of operations and financial condition.

Servicing our existing and future indebtedness will limit funds available for other purposes, such as the payment of dividends.

In addition to our existing outstanding secured indebtedness, and the two facilities of $45.0 million each for which we have accepted commitment letters, we intend to finance our growth program in part with additional secured indebtedness. We will have to dedicate cash flow from operations to pay the principal and interest of this indebtedness. 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 existing and any future credit agreements or alternative financing may limit funds otherwise available for working capital, capital expenditures and other purposes, such as the payment of dividends. If we are unable to meet our debt obligations, or if we otherwise default under any existing or future credit facilities, our lenders could accelerate our indebtedness and foreclose on the vessels in our fleet securing those credit facilities. As of December 31, 2007, we had aggregate outstanding indebtedness of approximately $322.9 million (based on the prevailing exchange rates as of that date), and immediately after the closing of this offering, we expect to have aggregate indebtedness of $416.8 million plus the equivalent of ¥400 million in U.S. dollars as of May 27, 2008. Following this offering, we expect to incur additional debt to finance our growth strategy and working capital requirements.

Our ability to obtain additional financing may be dependent on the creditworthiness of our charterers.

The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional capital resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing at all or other than at a higher than anticipated cost may materially affect our results of operation and our ability to implement our business strategy.

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, which are all wholly owned by us either directly or indirectly, conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our wholly owned Subsidiaries. As a result, our ability to make dividend payments depends on our Subsidiaries and their ability to distribute funds to us. The ability of a Subsidiary to make these distributions could be affected by a claim or other action by a third party, including a creditor, and the laws of the Republic of Liberia, where each of our Subsidiaries is incorporated, which regulate the payment of dividends by companies. If we are unable to obtain funds from our Subsidiaries, our board of directors may exercise its discretion not to declare or pay dividends.

Prior to this offering, we have and expect to pay dividends comprising a substantial portion of our retained earnings. As a result, we will have limited cash reserves and would need to seek financing should any circumstance arise that required significant liquid resources.

On December 31, 2007, we paid Polys Hajioannou and Nicolaos Hadjioannou aggregate dividends of $383.9 million, representing our retained earnings as of June 30, 2007. In March and April 2008, we paid Polys Hajioannou and Nicolaos Hadjioannou aggregate dividends of $147.8 million, of which $56.9

31


million represented our retained earnings as of December 31, 2007. The dividends of $147.8 million were funded using amounts due from our Manager. An estimated additional dividend of $31.0 million, which will be funded using amounts due from our Manager, reflecting a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering will also be declared and payable prior to the closing of this offering to Polys Hajioannou and Nicolaos Hadjioannou. Investors in this offering will not be entitled to any portion of this dividend. As a result, immediately following the completion of this offering, our principal source of cash reserves will be (x) $16.0 million of cash on hand, (y) $4.0 million of restricted cash in collateral accounts and (z) cash flow from operations. Accordingly, should circumstances arise that require significant liquid resources, we would have to obtain a loan providing these funds from our existing outstanding and committed credit facilities, other lenders, our existing stockholder or other sources. There can be no assurance that we would be able to obtain such financing on favorable terms or at all, and our business and results of operations could be adversely affected by this lack of liquidity.

We depend on our Manager to operate our business and our business could be harmed if our Manager failed to perform its services satisfactorily.

Pursuant to our management agreement, our Manager and its affiliates will provide us with our executive officers and will provide us with technical, administrative and commercial services (including vessel maintenance, crewing, purchasing, shipyard supervision, insurance, assistance with regulatory compliance, financial services and office space). Our operational success will depend significantly upon our Manager’s satisfactory performance of these services. Our business would be harmed if our Manager failed to perform these services satisfactorily. In addition, if the management agreement were to be terminated or if its terms were to be altered, our business could be adversely affected, as we may not be able to immediately replace such services, and even if replacement services were immediately available, the terms offered could be less favorable than those under our management agreement.

Our ability to compete for and enter into new period time and spot charters and to expand our relationships with our existing charterers will depend largely on our relationship with our Manager and its reputation and relationships in the shipping industry. If our Manager suffers material damage to its reputation or relationships, it may harm our ability to:

 

 

 

 

renew existing charters upon their expiration;

 

 

 

 

obtain new charters;

 

 

 

 

successfully interact with shipyards during periods of shipyard construction constraints;

 

 

 

 

obtain financing on commercially acceptable terms;

 

 

 

 

maintain satisfactory relationships with our charterers and suppliers; and

 

 

 

 

successfully execute our business strategies.

If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business and affect our profitability.

Although we may have rights against our Manager if it defaults on its obligations to us, you will have no recourse against our Manager.

In addition, we have agreed, under our management agreement, to allow our Manager to continue to provide certain management services to an affiliate of our Manager, SafeFixing, that is engaged in the business of chartering in vessels owned by other vessel owners for subsequent chartering out to third party customers. Although our Manager will be required to provide preferential treatment to our vessels with respect to chartering arrangements under the management agreement, our Manager’s time and attention may be diverted from the management of our vessels because of its management of SafeFixing’s vessels.

Further, we may need to seek approval from our lenders to change our Manager.

Management fees are payable to our Manager regardless of our profitability.

Pursuant to our management agreement, we pay our Manager a fee of $575 per day per vessel for providing commercial, technical and administrative services and a fee of 1.0% on gross freight, charter hire,

32


ballast bonus and demurrage. In addition, we will pay our manager certain commissions and fees with respect to vessel purchases and newbuilds. The management fees do not cover expenses such as voyage expenses, vessel operating expenses, maintenance expenses, crewing costs, insurance premiums, commissions and certain public company expenses such as directors and officers’ liability insurance, legal and accounting fees and other similar third party expenses, which are reimbursed by us. The management fees are fixed until the second anniversary of our management agreement, and thereafter, will be adjusted every year by agreement between us and our Manager. The management fees are payable whether or not our vessels are employed, and regardless of our profitability, and we have no ability to require our Manager to reduce the management fees if our profitability decreases. If our profitability decreases, we may be contractually obligated to pay management fees which could have a material adverse effect on our results of operations and financial condition.

Our Manager is a privately held company, and there is little or no publicly available information about it.

The ability of our Manager to continue providing services for our benefit will depend in part on its own financial strength. Circumstances beyond our control could impair our Manager’s financial strength. Because our Manager is privately held, it is unlikely that information about its financial strength would become public or available to us prior to any default by our Manager under the management agreement. As a result, an investor might have little advance warning of problems that affect our Manager, even though those problems could have a material adverse effect on us. As part of our reporting obligations as a public company, we will disclose information regarding our Manager that has a material impact on us to the extent that we become aware of such information.

Our chief executive officer has affiliations with our Manager which could create conflicts of interest between us and our Manager.

Our chief executive officer, Polys Hajioannou, owns all of the issued and outstanding capital stock of our Manager through his wholly owned company, Machairiotissa Holdings Inc. This relationship could create conflicts of interest between us, on the one hand, and our Manager, on the other hand. These conflicts may arise in connection with the chartering, purchase, sale and operation of the vessels in our fleet versus vessels owned or chartered-in by other companies affiliated with our Manager or our chief executive officer. Currently, SafeFixing is the only such affiliate that operates vessels managed by our Manager, however, to the extent we elect not to exercise our right of first refusal with respect to any drybulk vessel that may be acquired by Polys Hajioannou, Nicolaos Hadjioannou, Vorini Holdings Inc., Machairiotissa Holdings Inc., or any entity controlled by or under common control with Polys Hajioannou, Nicolaos Hadjioannou, Vorini Holdings Inc., and/or Machairiotissa Holdings Inc., including SafeFixing (together, the “Hajioannou Entities”), in the future, any of the Hajioannou Entities could acquire and operate such drybulk vessels under the management of our Manager in competition with us. Although, under our management agreement, our Manager will be required to first provide us any chartering opportunities in the drybulk sector, our Manager is not prohibited from giving preferential treatment in other areas of its management to vessels that are beneficially owned by related parties. These conflicts of interest may have an adverse effect on our results of operations. Please read the sections entitled “Our Manager and Management Related Agreements” and “Certain Relationships and Related Party Transactions.”

Our business depends upon certain employees who may not necessarily continue to work for us.

Our future success depends, to a significant extent, upon our chief executive officer, Polys Hajioannou, our chief operating officer, Nicolaos Hadjioannou, and certain other members of our senior management and that of our Manager. Polys Hajioannou and Nicolaos Hadjioannou have substantial experience in the drybulk shipping industry and for 20 and eight years, respectively, have worked with us and our Manager and its predecessor. They and others employed by us and our Manager are crucial to the execution of our business strategies and to the growth and development of our business. If these individuals were no longer to be affiliated with us or our Manager, or if we were to otherwise cease to receive advisory services from them, we may be unable to recruit other employees with equivalent talent and

33


experience, and our business and financial condition could suffer. We do not intend to maintain “key man” life insurance on any of our executive officers.

The provisions in our restrictive covenant arrangements with our chief executive officer and chief operating officer restricting their ability to compete with us, like restrictive covenants generally, may not be enforceable.

Our chief executive officer, Polys Hajioannou, and our chief operating officer, Nicolaos Hadjioannou, have entered into restrictive covenant agreements with us under which they are precluded during the term of their services with us as executives and directors and for one year thereafter (and, in the case of our chief executive officer, for the term of our management agreement with our Manager and one year thereafter, if longer) from owning and operating drybulk vessels and from acquiring, investing or controlling any business that owns or operates such vessels. Courts generally do not favor the enforcement of such restrictions, particularly when they involve individuals and could be construed as infringing on their ability to be employed or to earn a livelihood. Our ability to enforce these restrictions, should it ever become necessary, will depend upon the circumstances that exist at the time enforcement is sought. A court may not enforce the restrictions as written by way of an injunction and we may not necessarily be able to establish a case for damages as a result of a violation of the restrictive covenants. Please read the section entitled “Management—Employment and Restrictive Covenant Agreements.”

Our vessels call on ports located in Iran, which is subject to restrictions imposed by the United States government, which could be viewed negatively by investors and adversely affect the trading price of our common stock.

From time to time, vessels in our fleet have called and/or may call on ports located in countries subject to sanctions and embargoes imposed by the United States government and countries identified by the United States government as state sponsors of terrorism. From January 1, 2005 through December 31, 2007, vessels in our fleet have made 14 calls to ports in Iran out of a total of 695 calls on worldwide ports. One of our vessels, the Pedhoulas Leader, also made one port call to Iran from July 7, 2007 to July 8, 2007 for the sole purpose of bunkering (refueling). Iran continues to be subject to sanctions and embargoes imposed by the United States government and is identified by the United States government as a state sponsor of terrorism. Although these sanctions and embargoes do not prevent our vessels from making calls to ports in these countries, potential investors could view such port calls negatively, which could adversely affect our reputation and the market for our common stock. Investor perception of the value of our common stock may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

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 articles of incorporation 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 certain United States jurisdictions. The rights of stockholders of companies incorporated in 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 our management, directors or controlling stockholders than would stockholders of a corporation incorporated in a United States jurisdiction which has developed a more substantial body of case law in the corporate law area. For more information with respect to how stockholder rights under Marshall Islands law compares to stockholder rights under Delaware laws, please read “Marshall Islands Company Considerations.”

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It may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

We are incorporated under the laws of the Marshall Islands, and our business is operated primarily from our offices in Athens, Greece. In addition, a majority of our directors and officers are or will be non-residents of the United States, and all of our assets and a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. You may also have difficulty enforcing, both within and outside of the United States, judgments you may obtain in the United States courts against us or these persons in any action, including actions based upon the civil liability provisions of United States Federal or state securities laws.

There is also substantial doubt that the courts of the Marshall Islands or Greece would enter judgments in original actions brought in those courts predicated on United States Federal or state securities laws. For more information regarding the relevant laws of the Marshall Islands, please read “Enforceability of Civil Liabilities.”

Risks Relating to the Offering

Because our common stock has never been publicly traded, a trading market may not develop for our common stock and stockholders may not be able to sell their stock.

Prior to this offering, there has not been a public market for our common stock. A liquid trading market for our common stock may not develop. The initial public offering price will be determined in negotiations between the representatives of the underwriters, us and our existing stockholder and may not be indicative of prices that will prevail in the trading market.

The price of our common stock may be volatile following completion of this offering.

The price of our common stock after this offering may be volatile and may fluctuate due to factors including:

 

 

 

 

actual or anticipated fluctuations in our quarterly and annual revenues and earnings and those of our publicly held competitors;

 

 

 

 

fluctuations in the drybulk market;

 

 

 

 

mergers and strategic alliances in the shipping industry;

 

 

 

 

market conditions in the shipping industry;

 

 

 

 

changes in government regulations;

 

 

 

 

revenues and earnings and those of our publicly held competitors;

 

 

 

 

shortfalls in our results of operations from levels forecasted by securities analysts;

 

 

 

 

payment of dividends;

 

 

 

 

announcements concerning us or our competitors;

 

 

 

 

the general state of the securities market; and

 

 

 

 

other developments affecting us, our industry or related industries or our competitors.

The drybulk sector of the shipping industry has been highly unpredictable and volatile. The market price for our common stock may also be volatile. Consequently, you may not be able to sell our common stock at prices equal to or greater than those that you pay in this offering.

Vorini Holdings, our principal stockholder, will control the outcome of matters on which our stockholders are entitled to vote following this offering and its interests may be different from yours.

Vorini Holdings, which is controlled by our chief executive officer, Polys Hajioannou, and our chief operating officer, Nicolaos Hadjioannou, will own approximately 81.7% of our outstanding common stock after this offering, assuming the underwriters do not exercise their overallotment option. This

35


stockholder will be able to control the outcome of matters on which our stockholders are entitled to vote, including the election of our entire board of directors and other significant corporate actions. The interests of this stockholder may be different from yours.

We will be a “controlled company” under the New York Stock Exchange rules, and as such we are entitled to exemption from certain New York Stock Exchange corporate governance standards, and you may not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

After the consummation of this offering, our chief executive officer, Polys Hajioannou, and our chief operating officer, Nicolaos Hadjioannou, through Vorini Holdings, will continue to control a majority of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock Exchange rules, a company of which more than 50% of the voting power is held by another company or group is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including: (a) the requirement that a majority of the board of directors consist of independent directors, (b) the requirement that the nominating committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (c) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities and (d) the requirement of an annual performance evaluation of the nominating, corporate governance and compensation committees. Following this offering, we intend to utilize certain of these exemptions. As a result, non-independent directors, including members of our management who also serve on our board of directors, will comprise the majority of our board of directors and will serve on the nominating, corporate governance and compensation committee of our board of directors which, among other things, fixes the compensation of certain members of our management and resolves governance issues regarding our company. Accordingly, in the future you may not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

If we do not implement all required accounting practices and policies, we may be unable to provide the required financial information in a timely and reliable manner.

Prior to this offering, as a privately held company, we did not adopt the financial reporting practices and policies required of a publicly traded company. Implementation of these practices and policies could disrupt our business, distract our management and employees and increase our costs. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the financial information that a publicly traded company is required to provide in a timely and reliable fashion. Any such delays or deficiencies may limit our ability to obtain financing, either in the public capital markets or from private sources, and thereby impede our ability to implement our growth strategy. In addition, any such delays or deficiencies may result in failure to meet the requirements for continued quotation of our common stock on the New York Stock Exchange, which would adversely affect the liquidity of our common stock.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to include in each of our future annual reports on Form 20-F a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and a related attestation of our independent auditors. This requirement for an attestation of our independent auditors will first apply to us with respect to our annual report on Form 20-F for the fiscal year ending December 31, 2009. After the completion of this offering, we will undertake a comprehensive effort in preparation for compliance with Section 404. This effort will include the documentation, testing and review of our internal controls under the direction of our management. We cannot be certain at this time that all our controls will be considered effective. Therefore, we can give no assurances that our internal control over financial reporting will satisfy the new regulatory requirements when they become applicable to us.

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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 following this offering, 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.

Although we do not currently have any plans to sell additional shares of our common stock, we may issue additional shares of our common stock in the future and our stockholders may elect to sell large numbers of shares held by them from time to time. The number of shares of common stock available for sale in the public market will be limited by restrictions applicable under securities laws and agreements that we and our executive officers, directors and existing stockholder have entered into with the underwriters of this offering. Subject to certain exceptions, these agreements generally restrict us and our executive officers, directors and existing stockholder from directly or indirectly offering, selling, pledging, hedging or otherwise disposing of our equity securities or any security that is convertible into or exercisable or exchangeable for our equity securities and from engaging in certain other transactions relating to such securities for a period of 180 days after the date of this prospectus without the prior written consent of Merrill Lynch Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC.

We intend to enter into a registration rights agreement prior to the closing of this offering with Vorini Holdings, our existing stockholder, pursuant to which we will grant it and certain of its transferees the right, under certain circumstances and subject to certain restrictions and lock-up agreements, to require us to register under the Securities Act shares of our common stock held by them. Under the registration rights agreement, Vorini Holdings and certain of its transferees 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, those persons will have the ability to exercise certain piggyback registration rights in connection with registered offerings 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. We refer you to the sections of this prospectus entitled “Certain Relationships and Related Party Transactions—Registration Rights Agreement”, “Shares Eligible for Future Sale” and “Underwriting” for further information regarding the circumstances under which additional shares of our common stock may be sold.

Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of the shares of our common stock.

Several provisions of our 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 our management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable.

These provisions:

 

 

 

 

authorize our board of directors to issue “blank check” preferred stock without stockholder approval;

 

 

 

 

provide for a classified board of directors with staggered, three-year terms;

 

 

 

 

prohibit cumulative voting in the election of directors;

 

 

 

 

authorize the removal of directors only for cause;

 

 

 

 

prohibit stockholder action by written consent unless the written consent is signed by all stockholders entitled to vote on the action; and

 

 

 

 

establish 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.

37


We have adopted a stockholder rights plan pursuant to which our board of directors may cause the substantial dilution of the holdings of any person that attempts to acquire us without the approval of our board of directors.

These anti-takeover provisions, including the provisions of our prospective 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.

Tax Risks

In addition to the following risk factors, you should read “Tax Considerations—Marshall Islands Tax Considerations,” “Tax Considerations—Liberian Tax Considerations,” and “Tax Considerations—United States Federal Income Tax Considerations” for a more complete discussion of expected material Marshall Islands, Liberian and United States (or “U.S.”) Federal income tax consequences of owning and disposing of our common stock.

We may earn United States source shipping income that will be subject to United States income tax, thereby reducing our cash available for distributions to you.

Under U.S. tax rules, our U.S. source shipping income (that is, income attributable to shipping transportation that begins and/or ends in the United States) will be subject to a 4% U.S. income tax (without allowance for deductions). Our U.S. source shipping income may fluctuate, and we will not qualify for any exemption from this U.S. tax. Many of our charters contain provisions that obligate the charterers to reimburse us for this 4% U.S. tax. To the extent we are not actually reimbursed by our charterers, the 4% U.S. tax will decrease our cash that is available for distributions to you.

For a more complete discussion, see the section entitled “Tax Considerations—United States Federal Income Tax Considerations—Taxation of Our Shipping Income.”

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 U.S. income tax purposes if either (a) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (b) 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 that 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.” U.S. stockholders of a PFIC are subject to a disadvantageous U.S. 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 operations as of the completion of this offering and our anticipated future operations, we believe that we should not be treated as a PFIC with respect to any taxable year. There are legal uncertainties involved in this determination, and no assurance can be given that the U.S. Internal Revenue Service (“IRS”) will accept this position or that we would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations.

If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. stockholders will face adverse U.S. tax consequences. See “Tax Considerations—United States Federal Income Tax Considerations—Taxation of United States Holders” for a more comprehensive discussion of the U.S. Federal income tax consequences to U.S. stockholders if we are treated as a PFIC.

38


The enactment of proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for a preferential rate of United States Federal income taxation.

Legislation has been introduced in the U.S. Senate that would deny the preferential rate of U.S. Federal income tax currently imposed on qualified dividend income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits of a comprehensive income tax treaty with the United States or is created or organized under the laws of a foreign country that has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the United States and imposes only limited taxes on corporations organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted, the preferential rate of U.S. Federal income tax discussed under “Tax Considerations—United States Federal Income Tax Considerations—Taxation of United States Holders—Distributions on Our Common Stock” may no longer be applicable to dividends received from us. As of the date hereof, it is not possible to predict with any certainty whether the proposed legislation will be enacted.

If the regulations regarding the exemption from Liberian taxation for non-resident corporations issued by the Liberian Ministry of Finance were found to be invalid, the net income and cash flows of our Liberian Subsidiaries and therefore our net income and cash flows would be materially reduced.

All of our Subsidiaries are incorporated under the laws of the Republic of Liberia. The Republic of Liberia enacted a new income tax act effective as of January 1, 2001 (the “New Act”) which does not distinguish between the taxation of “non-resident” Liberian corporations, such as our Subsidiaries, which conduct no business in Liberia and were wholly exempt from taxation under the income tax law previously in effect since 1977, and “resident” Liberian corporations which conduct business in Liberia and are, and were under the prior law, subject to taxation.

In 2004, the Liberian Ministry of Finance issued regulations exempting non-resident corporations engaged in international shipping (and not exclusively within Liberia) such as our Subsidiaries, from Liberian taxation under the New Act retroactive to January 1, 2001. It is unclear whether these regulations, which ostensibly conflict with the express terms of the New Act adopted by the Liberian legislature, are valid. However, the Liberian Ministry of Justice issued an opinion that the new regulations are a valid exercise of the regulatory authority of the Ministry of Finance. The Liberian Ministry of Finance has not at any time since January 1, 2001 sought to collect taxes from any of our Subsidiaries.

If our Subsidiaries were subject to Liberian income tax under the New Act, they would be subject to tax at a rate of 35% on their worldwide income. As a result, their, and subsequently our, net income and cash flows would be materially reduced. In addition, as the ultimate stockholder of our Liberian Subsidiaries, we would be subject to Liberian withholding tax on dividends paid by our Subsidiaries at rates ranging from 15% to 20%, which would limit our access to funds generated by the operations of our Subsidiaries and further reduce our income and cash flows.

39


FORWARD-LOOKING STATEMENTS

All statements in this prospectus that are not statements of historical fact are “forward-looking statements.” The disclosure and analysis set forth in this prospectus includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as forward-looking statements. In some cases, predictive, future-tense or forward-looking words such as “believe,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “plan,” “potential,” “may,” “should,” and “expect” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, we and our representatives may from time to time make other oral or written statements which are forward-looking statements, including in our periodic reports that we will file with the SEC, other information sent to our security holders, and other written materials.

Forward-looking statements include, but are not limited to, such matters as:

 

 

 

 

future operating or financial results and future revenues and expenses;

 

 

 

 

future, pending or recent acquisitions, business strategy, areas of possible expansion and expected capital spending or operating expenses;

 

 

 

 

availability of crew, length and number of off-hire days, drydocking requirements and insurance costs;

 

 

 

 

general market conditions and shipping industry trends, including charter rates, vessel values and factors affecting supply and demand;

 

 

 

 

our financial condition and liquidity, including our ability to make required payments under our credit facilities and obtain additional financing in the future to fund capital expenditures, acquisitions and other corporate activities;

 

 

 

 

our expectations about availability of vessels to purchase, the time that it may take to construct and deliver new vessels or the useful lives of our vessels;

 

 

 

 

our continued ability to enter into period time charters with our customers and secure profitable employment for our vessels in the spot market;

 

 

 

 

our expectations relating to dividend payments and ability to make such payments;

 

 

 

 

our ability to leverage to our advantage our Manager’s relationships and reputation within the drybulk shipping industry;

 

 

 

 

our anticipated general and administrative expenses;

 

 

 

 

environmental and regulatory conditions, including changes in laws and regulations or actions taken by regulatory authorities;

 

 

 

 

risks inherent in vessel operation, including discharge of pollutants;

 

 

 

 

potential liability from future litigation; and

 

 

 

 

other factors discussed in the section entitled “Risk Factors.”

We caution that the forward-looking statements included in this prospectus represent our estimates and assumptions only as of the date of this prospectus and are not intended to give any assurance as to future results. Assumptions, expectations, projections, intentions and beliefs about future events may, and often do, vary from actual results and these differences can be material. The reasons for this include the risks, uncertainties and factors described under the section of this prospectus entitled “Risk Factors.” As a result, the forward-looking events discussed in this prospectus might not occur and our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward-looking statements.

We undertake no obligation to update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. We make no prediction or statement about the performance of our common stock.

40


USE OF PROCEEDS

All of the shares of common stock offered by this prospectus are being sold by the selling stockholder. For information about the selling stockholder, see “Principal and Selling Stockholders.” We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholder.

DIVIDEND POLICY

We intend to pay our stockholders quarterly dividends of $0.475 per share, or $1.90 per share per year, in February, May, August and November of each year. We expect to pay our initial dividend following the completion of this offering in August 2008, calculated based on the pro rata amount of the quarterly dividend for the period from the closing of this offering until the end of the second quarter of 2008.

We expect that the dividend we intend to pay to stockholders following the completion of this offering will represent a significant portion of our cash flows from operations, however, we also expect to retain a portion of our cash to help fund the future growth of our fleet. After giving pro forma effect to the removal of the Additional Companies (and the associated $112.4 million gain on their sale), the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer (a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente) and to the other adjustments (see “Unaudited Pro Forma Combined Condensed Financial Statements”) with respect to our combined statement of operations for the year ended December 31, 2007, our net income on a pro forma basis was $87.8 million for 2007. This reflects, on a pro forma basis, the operations of fewer vessels than we anticipate having in our fleet in 2008, 2009 and 2010 and a daily TCE rate below the average rate for which we already had, as of December 31, 2007, period time charter commitments for the following percentages of our fleet’s anticipated available days: 2008—75.9%, 2009—50.6% and 2010—36.1%. We therefore expect that our contracted revenues when compared with our anticipated operating expenses and financing costs will provide the liquidity necessary to support our dividend policy and our growth. As of December 31, 2007, our contracted period time charter arrangements for 2008 through 2010 were expected to provide revenues of $347.1 million. Additionally, the contracted revenue from period time charters entered into as of December 31, 2007 is expected to be $66.5 million for 2011, and $156.1 million from January 1, 2012 onwards. Overall, as of December 31, 2007, the contracted revenue for January 1, 2008 onwards was $569.6 million.

However, in the event our cash needs are greater than expected, or our actual revenues (for example, if a charterer were to default), or the available capacity under our credit facilities are less than we expect, the amounts available to pay dividends would be reduced or we could be unable to pay dividends. In such event, our board of directors may change our dividend policy. For example, we may incur expenses or liabilities, including unbudgeted or extraordinary expenses, or decreases in revenues, including as a result of unanticipated off-hire days or loss of a vessel, that could reduce or eliminate the amount of cash that we have available for distribution as dividends. The drybulk shipping charter market is cyclical and volatile. We cannot predict with assurance of accuracy the amount of cash flows our operations will generate in any given 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 will actually be declared or paid. We intend to raise $200.0 million of additional borrowing capacity. If we are unable to secure this additional borrowing, our ability to pay dividends will be adversely affected. We cannot assure you that we will be able to pay regular quarterly dividends in the amounts stated above or elsewhere in this prospectus, and our ability to pay dividends will be subject to the limitations set forth above and in the section of this prospectus entitled “Risk Factors.”

Following the settlement of intercompany balances with our Manager and with our owners and the payment of dividends prior to this offering to our current owners described under “Dividend Payments” below, we expect to have approximately $16.0 million in available cash and $4.0 million in restricted cash in collateral accounts and aggregate indebtedness of $416.8 million plus the equivalent of ¥400 million in U.S. dollars as of May 27, 2008 immediately after the closing of this offering.

We expect that any future debt agreements will have restrictions on us on the payment of dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend. In addition, Marshall Islands law generally prohibits the payment of dividends other than

41


from surplus (retained earnings and the excess of consideration received for the sale of shares above the par value of the shares) or when a company is insolvent or if the payment of the dividend would render the company insolvent.

We are a holding company with no material assets other than the stock of our Subsidiaries. This means that our ability to make dividend payments will also depend on the ability of our Subsidiaries to distribute funds to us. Under the terms of our Subsidiaries’ credit agreements, following completion of this offering, our Subsidiaries will not be permitted to pay dividends to us if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Facilities.” In addition, the laws of the Republic of Liberia, where each of our Subsidiaries is incorporated, generally prohibit 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.

We believe that, under current U.S. law (which is scheduled to expire after 2010), our dividend payments from earnings and profits will constitute “qualified dividend income” and, as such, non-corporate U.S. stockholders will generally be subject to a 15% U.S. Federal income tax rate with respect to such dividend payments. Distributions in excess of our earnings and profits will be treated first as a non-taxable return of capital to the extent of a U.S. stockholder’s tax basis in its common stock on a dollar-for-dollar basis and thereafter as capital gain. Please see the section of this prospectus entitled “Tax Considerations” for additional information relating to the tax treatment of our dividend payments. Please also see the section entitled “Risk Factors—Tax Risks” for a discussion of proposed legislation affecting the taxation of dividends received from non-U.S. corporations.

Dividend Payments Prior to this Offering

We paid a dividend of $383.9 million to our current owners in December 2007, which represented our retained earnings as of June 30, 2007. In March and April 2008, we paid our current owners an aggregate dividend of $147.8 million, which was funded using amounts due from our Manager. Of the aggregate dividend of $147.8 million, $56.9 million represented retained earnings as of December 31, 2007. An estimated additional dividend of $31.0 million, which will be funded using amounts due from our Manager, reflecting a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering will also be declared and payable prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

42


CAPITALIZATION

The following table sets forth our cash and cash equivalents and combined capitalization as of December 31, 2007 on:

 

 

 

 

an actual combined basis for the Subsidiaries;

 

 

 

 

a pro forma as adjusted basis, giving effect to each of the following transactions which occurred (or will occur, in the case of the additional dividend) between January 2008 and the date of this offering:

 

 

 

 

Borrowings of $120.0 million by our Subsidiaries Efragel, Marindou and Avstes under three new credit facilities, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou in the first quarter of 2008, resulting in net additional indebtedness of $81.5 million. Of the net additional indebtedness of $81.5 million, (i) $16.0 million was retained by the Subsidiaries, and (ii) $65.5 million was advanced to our Manager.

 

 

 

 

Declaration and payment of a dividend in the amount of $147.8 million to our current owners, funded from amounts Due from Manager.

 

 

 

 

Estimated additional dividend of $31.0 million to be declared and be payable to our current owners by our Manager on our behalf prior to the closing of this offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

 

 

 

 

Settlement of the remaining Due from Manager balance in the amount of $4.0 million through the transfer of $4.0 million in Restricted cash in collateral accounts held by our Manager to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer, as security for their respective loan facilities.

There has been no material change in our capitalization, or expected capitalization, between December 31, 2007 and the date of this prospectus, except as adjusted and described above.

The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our predecessor combined financial statements and the related notes thereto and our pro forma combined condensed financial statements and notes thereto included elsewhere in this prospectus.

 

 

 

 

 

 

 

As of December 31, 2007

 

Actual

 

Pro Forma As
Adjusted

 

 

(In thousands,
except share data)

Cash and cash equivalents

 

 

 

   

 

$

 

16,000

 

 

 

 

 

 

Restricted cash

 

 

 

   

 

 

4,000

 

 

 

 

 

 

Debt(1):

 

 

 

 

Current portion of long-term debt

 

 

$

 

16,620

   

 

$

 

16,620

 

Long-term debt, net of current portion

 

 

 

306,267

   

 

 

387,753

 

Total debt

 

 

 

322,887

   

 

 

404,373

 

Owners’ equity:

 

 

 

 

Owners’ capital, no par value (2)

 

 

 

   

 

 

 

Retained earnings/(deficit)

 

 

 

56,875

   

 

 

(121,895

)

 

Total owners’ equity/(deficit)

 

 

 

56,875

   

 

 

(121,895

)

 

Total capitalization

 

 

$

 

379,762

   

 

$

 

282,478

 

43


 

(1)

 

 

 

All of our debt is secured, and all of the proposed credit facilities which we intend to enter prior to this offering will be secured, by mortgages on our vessels and other standard maritime liens. None of our outstanding debt as of December 31, 2007 is guaranteed by any other party and is solely the corporate obligation of the relevant borrower. Following this offering, we will become the guarantor of the reducing revolving credit facilities of our Subsidiaries Efragel Shipping Corporation, Marindou Shipping Corporation, Avstes Shipping Corporation, Eniaprohi Shipping Corporation and Eniadefhi Shipping Corporation. By letter dated May 14, 2008, we have also agreed to become the guarantor of the reducing revolving credit facilities of our Subsidiaries Marathassa Shipping Corporation, Marinouki Shipping Corporation, Kerasies Shipping Corporation and Soffive Shipping Corporation.

 

(2)

 

 

 

Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share; as of the date of this prospectus, no shares were issued and outstanding; following our Reorganization, which will occur following the date of this prospectus and prior to the closing of this offering, there will be 54,500,000 shares issued and outstanding.

44


SELECTED COMBINED FINANCIAL AND OTHER DATA

The following table presents selected:

 

 

 

 

historical predecessor combined financial and operating data; and

 

 

 

 

pro forma combined financial and operating data.

The selected historical predecessor combined financial data set forth below as of December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007 have been derived from our audited predecessor combined financial statements, which are included in this prospectus. The selected historical predecessor combined financial data set forth below as of December 31, 2005 have been derived from our audited predecessor combined financial statements, which are not included in this prospectus.

We have not included our financial data for the years ended December 31, 2003 and 2004 due to the unreasonable effort and expense of preparing such information.

The unaudited pro forma combined financial and operating data are derived from our unaudited pro forma combined condensed financial statements, which are included in this prospectus, and give effect to the following transactions which occurred (or will occur in the case of the additional dividend) between January 2008 and the date of this offering:

 

 

 

 

Borrowings of $120.0 million by our Subsidiaries Efragel, Marindou and Avstes under three new credit facilities, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou in the first quarter of 2008, resulting in net additional indebtedness of $81.5 million. Of the net additional indebtedness of $81.5 million, (i) $16.0 million was retained by the Subsidiaries, and (ii) $65.5 million was advanced to our Manager.

 

 

 

 

Additional interest expense with respect to the net additional indebtedness of $81.5 million described above.

 

 

 

 

Repayment of $10.1 million of Advances from Owners from amounts Due from Manager.

 

 

 

 

Declaration and payment of a dividend in the amount of $147.8 million to our current owners, funded from amounts Due from Manager.

 

 

 

 

Estimated additional dividend of $31.0 million will be declared and payable to our current owners by our Manager on our behalf prior to the closing of the initial public offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

 

 

 

 

Settlement of the remaining Due from Manager balance in the amount of $4.0 million through the transfer of $4.0 million in Restricted cash in collateral accounts held by our Manager to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer, as security for their respective loan facilities.

 

 

 

 

Removal of all activities from the historical predecessor financial statements of the Additional Companies, which will not be owned by us following the completion of this offering, and the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer, a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente. We did not generate any operating revenues or operating expenses with respect to the Pedhoulas Farmer, and Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us. The Additional Companies have been included in our predecessor combined financial statements, along with the Subsidiaries, because together, the Additional Companies and the Subsidiaries constituted all the vessel owning activities of Polys Hajioannou and Nicolaos Hadjioannou during the relevant period.

 

 

 

 

Increase of $2.6 million in general and administrative expenses due to the implementation of the amended management agreements, as of January 1, 2008.

 

 

 

 

Pro forma earnings per share gives retroactive effect to our Reorganization, which involves the issuance (following the date of the final prospectus and prior to the closing of this offering) of 54.5 million shares of our common stock to the selling stockholder, and resulting capital structure following the closing of this offering. This offering will not involve the issuance of additional shares of our common stock, as all shares of common stock sold in this offering will be sold by the selling stockholder.

45


The pro forma adjustments do not reflect an estimate of general and administrative expenses to increase as a result of becoming a public company, as such costs are not considered to be factually supportable. However, we currently expect an annual increase of approximately $2.2 million as a result of becoming a public company upon completion of this offering.

The unaudited pro forma predecessor combined condensed financial and operating data is provided for illustrative purposes only and does not represent what our financial position or results of operation would actually have been if the transactions and other events reflected in such statements had occurred during the relevant periods, and is not representative of our results of operations or financial position for any future periods. Investors are cautioned not to place undue reliance on this unaudited pro forma predecessor combined financial and operating data.

Share data in the table below gives effect to the issuance of 54,500,000 shares of common stock, which will occur following the date of the final prospectus and prior to the closing of this offering.

This information should be read together with, and is qualified in its entirety by, our predecessor combined financial statements and the notes thereto and our unaudited pro forma combined condensed financial statements and notes thereto included elsewhere in this prospectus. You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars
except share data and fleet data)

STATEMENT OF INCOME

 

 

 

 

 

 

 

 

Revenues

 

 

$

 

82,877

   

 

$

 

99,040

   

 

$

 

172,057

   

 

$

 

167,150

 

Commissions

 

 

 

(3,211

)

 

 

 

 

(3,731

)

 

 

 

 

(6,209

)

 

 

 

 

(6,027

)

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

 

79,666

   

 

 

95,309

   

 

 

165,848

   

 

 

161,123

 

 

 

 

 

 

 

 

 

 

Voyage expenses

 

 

 

(228

)

 

 

 

 

(420

)

 

 

 

 

(179

)

 

 

 

 

(166

)

 

Vessel operating expenses

 

 

 

(10,366

)

 

 

 

 

(13,068

)

 

 

 

 

(12,429

)

 

 

 

 

(12,327

)

 

Depreciation

 

 

 

(7,610

)

 

 

 

 

(9,553

)

 

 

 

 

(9,583

)

 

 

 

 

(9,583

)

 

General and administrative expenses—Management fee to related party

 

 

 

(803

)

 

 

 

 

(1,006

)

 

 

 

 

(1,177

)

 

 

 

 

(3,759

)

 

Early redelivery cost

 

 

 

   

 

 

(150

)

 

 

 

 

(21,438

)

 

 

 

 

(21,438

)

 

Gain on sale of assets

 

 

 

26,785

   

 

 

37,015

   

 

 

112,360

   

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

87,444

   

 

 

108,127

   

 

 

233,402

   

 

 

113,850

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

(3,668

)

 

 

 

 

(6,140

)

 

 

 

 

(8,225

)

 

 

 

 

(12,298

)

 

Other finance costs

 

 

 

(124

)

 

 

 

 

(116

)

 

 

 

 

(161

)

 

 

 

 

(167

)

 

Interest income

 

 

 

692

   

 

 

775

   

 

 

1,290

   

 

 

1,195

 

(Loss)/gains on derivatives

 

 

 

(3,171

)

 

 

 

 

(1,963

)

 

 

 

 

(704

)

 

 

 

 

(704

)

 

Foreign currency gain/(loss)

 

 

 

13,477

   

 

 

(3,279

)

 

 

 

 

(13,759

)

 

 

 

 

(13,966

)

 

Amortization and write-off of deferred finance charges

 

 

 

(63

)

 

 

 

 

(180

)

 

 

 

 

(166

)

 

 

 

 

(117

)

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

94,587

   

 

$

 

97,224

   

 

$

 

211,677

   

 

$

 

87,793

 

 

 

 

 

 

 

 

 

 

Pro forma earnings per share, basic and diluted (unaudited) (1)

 

 

$

 

1.74

   

 

$

 

1.78

   

 

$

 

3.88

   

 

$

 

1.61

 

Pro forma weighted average number of shares, basic and diluted (unaudited)

 

 

 

54,500,000

   

 

 

54,500,000

   

 

 

54,500,000

   

 

 

54,500,000

 

OTHER FINANCIAL DATA

 

 

 

 

 

 

 

 

Net cash (used in)/provided by operating activities

 

 

$

 

(22,349

)

 

 

 

$

 

(12,806

)

 

 

 

$

 

278,506

 

 

 

Net cash (used in)/provided by investing activities

 

 

 

(6,065

)

 

 

 

 

(33,835

)

 

 

 

 

88,416

 

 

 

Net cash provided by/(used in) financing activities

 

 

 

28,414

   

 

 

46,641

   

 

 

(366,922

)

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

 

   

 

 

   

 

 

 

 

 

OTHER DATA

 

 

 

 

 

 

 

 

EBITDA (2)

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

Adjusted EBITDA (3)

 

 

 

78,451

   

 

 

75,307

   

 

 

116,001

   

 

 

108,596

 

46


 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

Pro Forma

 

As of
December 31,
2007

 

2005

 

2006

 

2007

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

Total current assets

 

 

$

 

159,538

   

 

$

 

282,021

   

 

$

 

98,883

   

 

$

 

18,513

 

Total fixed assets

 

 

 

232,655

   

 

 

253,448

   

 

 

308,340

   

 

 

308,340

 

Other non-current assets

 

 

 

405

   

 

 

314

   

 

 

434

   

 

 

4,434

 

Total assets

 

 

 

392,598

   

 

 

535,783

   

 

 

407,657

   

 

 

331,287

 

Total current liabilities

 

 

 

111,271

   

 

 

172,275

   

 

 

41,507

   

 

 

62,421

 

Derivative liabilities

 

 

 

   

 

 

   

 

 

242

   

 

 

242

 

Long-term debt, net of current portion

 

 

 

149,500

   

 

 

134,457

   

 

 

306,267

   

 

 

387,753

 

Time charter discount

 

 

 

   

 

 

   

 

 

2,766

   

 

 

2,766

 

Total owners’ equity

 

 

 

131,827

   

 

 

229,051

   

 

 

56,875

   

 

 

(121,895

)

 

Total liabilities and owners’ equity

 

 

 

392,598

   

 

 

535,783

   

 

 

407,657

   

 

 

331,287

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

FLEET DATA (4)

 

 

 

 

 

 

 

 

Average number of vessels

 

 

 

9.2

   

 

 

11.5

   

 

 

10.7

   

 

 

10.3

 

Ownership days

 

 

 

3,370

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Available days

 

 

 

3,350

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Operating days

 

 

 

3,343

   

 

 

4,205

   

 

 

3,913

   

 

 

3,777

 

Fleet utilization

 

 

 

99.21%

   

 

 

99.94%

   

 

 

99.98%

   

 

 

99.99%

 

Time charter equivalent rates

 

 

$

 

23,713

   

 

$

 

22,550

   

 

$

 

42,327

   

 

$

 

42,604

 

Daily vessel operating expenses

 

 

$

 

3,076

   

 

$

 

3,106

   

 

$

 

3,176

   

 

$

 

3,263

 


 

 

(1)

 

 

 

With respect to the periods presented based on our historical predecessor combined statements of operations, pro forma earnings per share gives retroactive effect to our Reorganization and resulting capital structure following the completion of this offering.

With respect to the periods presented based on our pro forma combined statements of operations, pro forma earnings per share reflects earnings per share after giving retroactive effect to our Reorganization and the other pro forma events as set forth in our unaudited pro forma combined condensed financial statements and resulting capital structure following the completion of this offering. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” for more information on our Reorganization (as defined to such section) prior to this offering.

This offering will not involve the issuance of additional shares of our common stock as all shares of common stock sold in this offering will be sold by the selling stockholder.

 

(2)

 

 

 

EBITDA represents net income before interest, income tax expense, depreciation and amortization. EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or “GAAP.” EBITDA assists our management and investors by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA information. We believe that EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financings, income taxes and the accounting effects of capital expenditures and acquisitions, items which may vary for different companies for reasons unrelated to overall operating performance.

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. EBITDA should not be considered a substitute for net income and other operations data prepared in accordance with U.S. GAAP or as a measure of profitability. While EBITDA is frequently used as a measure of operating results and

47


 

 

 

 

performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

The following table sets forth a reconciliation of net income to EBITDA for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars)

Reconciliation of Net Income to EBITDA:

 

 

 

 

 

 

 

 

Net income

 

 

$

 

94,587

   

 

$

 

97,224

   

 

$

 

211,677

   

 

$

 

87,793

 

Depreciation

 

 

 

7,610

   

 

 

9,553

   

 

 

9,583

   

 

 

9,583

 

Interest expense

 

 

 

3,668

   

 

 

6,140

   

 

 

8,225

   

 

 

12,298

 

Interest income

 

 

 

(692

)

 

 

 

 

(775

)

 

 

 

 

(1,290

)

 

 

 

 

(1,195

)

 

Amortization and write-off of deferred finance charges

 

 

 

63

   

 

 

180

   

 

 

166

   

 

 

117

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

 

 

 

 

 

 

 

 

 

 

(3)

 

 

 

Adjusted EBITDA represents our EBITDA after giving effect to the removal of the gain on sale of assets for the relevant periods. Adjusted EBITDA is not a recognized measurement under GAAP. Adjusted EBITDA assists our management and investors by increasing the comparability of our fundamental performance with respect to our vessel operation, without including the gains we have received through the sale of assets during the relevant periods. We believe that this removal of the gain on sale of assets allows us to better illustrate the operating results of our vessels for the periods indicated.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA should not be considered a substitute for net income and other operations data prepared in accordance with U.S. GAAP or as a measure of profitability. While Adjusted EBITDA may also be used as a measure of operating results and performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

 

 

(In thousands of U.S. dollars)

Reconciliation of EBITDA to Adjusted EBITDA:

 

 

 

 

 

 

 

 

EBITDA

 

 

$

 

105,236

   

 

$

 

112,322

   

 

$

 

228,361

   

 

$

 

108,596

 

Gain on sale of assets

 

 

 

(26,785

)

 

 

 

 

(37,015

)

 

 

 

 

(112,360

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

78,451

   

 

$

 

75,307

   

 

$

 

116,001

   

 

$

 

108,596

 

 

 

 

 

 

 

 

 

 

 

(4)

 

 

 

For a description of the items listed under this heading, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations.”

48


UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed balance sheet and unaudited pro forma combined statement of operations presents our financial position as of December 31, 2007 and for the year ended December 31, 2007 on a pro forma basis as if the transactions described below had occurred on December 31, 2007, in the case of the pro forma balance sheet, and January 1, 2007, in the case of the pro forma statement of operations. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to such transactions.

Certain adjustments are based on currently available information and estimates and assumptions; therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions used provide a reasonable basis for presenting the transactions described below and that the pro forma adjustments give appropriate effect to the assumptions and are properly applied in the unaudited pro forma combined condensed balance sheet and unaudited pro forma combined statements of operations.

These unaudited pro forma combined condensed balance sheet and unaudited pro forma combined statements of operations do not purport to represent what our financial position would actually have been had the completion of this offering and the related transactions in fact occurred on the dates described below and only for the unaudited pro forma combined statement of operations, if our company did not include the Additional Companies or the activities of the vessel sold by Maxpente during the relevant periods in the predecessor financial statements. Nor do they purport to project our financial position at any future date. Investors are cautioned not to place undue reliance on this unaudited pro forma predecessor combined financial and operating data.

This information should be read together with our predecessor combined financial statements and the notes thereto included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The unaudited pro forma combined condensed balance sheet assumes the following transactions occurred on December 31, 2007:

Carve-out of Additional Companies

 

 

 

 

As of December 31, 2007, all of the vessels of the Additional Companies have been sold and the remaining net assets distributed as a dividend. As a result, there are no remaining accounts of the Additional Companies to be removed from the predecessor combined balance sheet.

Other adjustments

 

 

 

 

Borrowings of $120.0 million by our Subsidiaries Efragel, Marindou and Avstes under three new credit facilities, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou in the first quarter of 2008, resulting in net additional indebtedness of $81.5 million. Of the net additional indebtedness of $81.5 million, (i) $16.0 million was retained by the Subsidiaries, and (ii) $65.5 million was advanced to our Manager.

 

 

 

 

Repayment of $10.1 million of Advances from Owners from amounts Due from Manager.

 

 

 

 

Declaration and payment of a dividend in the amount of $147.8 million to our current owners, funded from amounts Due from Manager.

 

 

 

 

Estimated additional dividend of $31.0 million will be declared and payable to our current owners by our Manager on our behalf prior to the closing of this offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

 

 

 

 

Settlement of the remaining Due from Manager balance in the amount of $4.0 million through the transfer of $4.0 million in Restricted cash in collateral accounts held by our Manager to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer, as security for their respective loan facilities.

49


The following unaudited pro forma combined statements of operations for the year ended December 31, 2007 give effect to the following events as if they had occurred on January 1, 2007:

Carve-out of Additional Companies

 

 

 

 

Removal of all activities from the historical predecessor financial statements of the Additional Companies, which will not be owned by us following the completion of this offering, and the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer, a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente. We did not generate any operating revenues or operating expenses with respect to the Pedhoulas Farmer, and Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us. The Additional Companies have been included in our predecessor combined financial statements, along with the Subsidiaries, because together, the Additional Companies and the Subsidiaries constituted all the vessel owning activities of Polys Hajioannou and Nicolaos Hadjioannou during the relevant period.

 

 

 

 

Pro forma earnings per share gives retroactive effect to our Reorganization, which involves the issuance (following the date of the final prospectus and prior to the closing of this offering) of 54.5 million shares of our common stock to the selling stockholder, and resulting capital structure following the closing of this offering. This offering will not involve the issuance of additional shares of our common stock, as all shares of common stock sold in this offering will be sold by the selling stockholder.

Other Adjustments

 

 

 

 

Additional interest expense of $4.2 million with respect to borrowings of $120.0 million by our Subsidiaries Efragel, Marindou and Avstes under three new credit facilities, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou in the first quarter of 2008, resulting in net additional indebtedness of $81.5 million.

 

 

 

 

Increase of $2.6 million in general and administrative expenses due to the implementation of the amended management agreements as of January 1, 2008.

 

 

 

 

The pro forma adjustments do not reflect an estimate of general and administrative expenses to increase as a result of becoming a public company, as such costs are not considered to be factually supportable. However, we currently expect an annual increase of approximately $2.2 million as a result of becoming a public company upon completion of this offering.

50


PRO FORMA PREDECESSOR COMBINED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 2007
(In thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

ASSETS

 

Historical
Predecessor

 

Other
Adjustments

 

Notes

 

Pro Forma

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

         

120,000

       

(2

)

     

Cash and cash equivalents

     

       

(38,514

)

       

(2

)

       

16,000

 

 

         

(65,486

)

       

(3

)

     

Accounts receivable trade, net

 

 

 

1,717

   

 

 

 

 

 

 

 

 

1,717

 

 

         

65,486

       

(3

)

     

Due from Manager

         

(10,086

)

       

(4

)

     

 

         

(147,770

)

       

(5

)

     

 

     

96,370

       

(4,000

)

       

(7

)

       

 

Inventories

 

 

 

792

   

 

 

 

 

 

 

 

 

792

 

Prepaid expenses and other current assets

     

4

       

           

4

 

Total current assets

 

 

 

98,883

   

 

 

(80,370

)

 

 

 

 

 

 

18,513

 

FIXED ASSETS

               

Vessels, net

 

 

 

254,817

   

 

 

 

 

 

 

 

 

254,817

 

Advances for vessel acquisitions and vessels under construction

     

53,272

       

           

53,272

 

Other fixed assets, net

 

 

 

251

   

 

 

 

 

 

 

 

 

251

 

Total fixed assets

     

308,340

       

           

308,340

 

OTHER NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Restricted cash

     

     

$

 

4,000

       

(7

)

     

$

 

4,000

 

Deferred finance charges, net

 

 

 

434

   

 

 

 

 

 

 

 

 

434

 

Total assets

     

407,657

       

(76,370

)

           

331,287

 

LIABILITIES AND OWNERS’ EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

               

Current portion of long-term debt

 

 

 

16,620

   

 

 

 

 

 

 

 

 

16,620

 

Unearned revenue

     

4,127

       

           

4,127

 

Trade accounts payable

 

 

 

1,202

   

 

 

 

 

 

 

 

 

1,202

 

Accrued liabilities

     

9,472

       

           

9,472

 

Advances from owners

 

 

 

10,086

   

 

 

(10,086

)

 

 

 

 

(4

)

 

 

 

 

 

Dividend Payable

     

       

31,000

       

(6

)

       

31,000

 

Total current liabilities

 

 

 

41,507

   

 

 

20,914

 

 

 

 

 

 

62,421

 

Long-term debt, net of current portion

     

306,267

       

120,000

       

(2

)

       

387,753

 

 

         

(38,514

)

       

(2

)

     

Derivatives liabilities

 

 

 

242

   

 

 

 

 

 

 

 

 

242

 

Time charter discount

     

2,766

       

           

2,766

 

OWNERS’ EQUITY/(DEFICIT)

 

 

 

 

 

 

 

 

Retained earnings/(deficit)

     

56,875

       

(147,770

)

       

(5

)

       

(121,895

)

 

 

         

(31,000

)

       

(6

)

     

Total owners’ equity/(deficit)

 

 

 

56,875

   

 

 

(178,770

)

 

 

 

 

 

 

(121,895

)

 

Total liabilities and owners’ equity/(deficit)

     

407,657

       

(76,370

)

           

331,287

 

51


PRO FORMA PREDECESSOR COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
(In thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Historical
Predecessor

 

Carve-out of
Additional
Companies

 

Notes

 

Subtotal

 

Other
adjustments

 

Notes

 

Pro forma

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

     

172,057

       

(4,907

)

       

(1

)

       

167,150

       

           

167,150

 

Commissions

 

 

 

(6,209

)

 

 

 

 

182

   

 

 

(1

)

 

 

 

 

(6,027

)

 

 

 

 

 

 

 

 

 

 

(6,027

)

 

Net revenues

     

165,848

       

(4,725

)

           

161,123

       

           

161,123

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voyage expenses

     

(179

)

       

13

       

(1

)

       

(166

)

       

           

(166

)

 

Vessel operating expenses

 

 

 

(12,429

)

 

 

 

 

102

   

 

 

(1

)

 

 

 

 

(12,327

)

 

 

 

 

 

 

 

 

 

 

(12,327

)

 

Depreciation

     

(9,583

)

       

           

(9,583

)

       

           

(9,583

)

 

General and administrative expenses—Management fee to related party

 

 

 

(1,177

)

 

 

 

 

35

   

 

 

(1

)

 

 

 

 

(1,142

)

 

 

 

 

(2,617

)

 

 

 

 

(9

)

 

 

 

 

(3,759

)

 

Early redelivery cost

     

(21,438

)

       

           

(21,438

)

       

           

(21,438

)

 

Gain on sale of assets

 

 

 

112,360

   

 

 

(112,360

)

 

 

 

 

(1

)

 

 

 

 

   

 

 

 

 

 

 

 

 

 

Operating income

     

233,402

       

(116,935

)

           

116,467

       

(2,617

)

           

113,850

 

OTHER (EXPENSE)/INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

     

(8,225

)

       

135

       

(1

)

       

(8,090

)

       

(4,208

)

       

(8

)

       

(12,298

)

 

Other finance costs

 

 

 

(161

)

 

 

 

 

(6

)

 

 

 

 

(1

)

 

 

 

 

(167

)

 

 

 

 

 

 

 

 

 

 

(167

)

 

Interest income

     

1,290

       

(95

)

       

(1

)

       

1,195

       

           

1,195

 

Loss on derivatives

 

 

 

(704

)

 

 

 

 

 

 

 

 

 

 

(704

)

 

 

 

 

 

 

 

 

 

 

(704

)

 

Foreign currency (loss)/gain

     

(13,759

)

       

(207

)

       

(1

)

       

(13,966

)

       

           

(13,966

)

 

Amortization and write-off of deferred finance charges

 

 

 

(166

)

 

 

 

 

49

   

 

 

(1

)

 

 

 

 

(117

)

 

 

 

 

 

 

 

 

 

 

(117

)

 

Net income

     

211,677

       

(117,059

)

           

94,618

       

(6,825

)

           

87,793

 

Pro forma earnings per share, basic and diluted

 

 

 

3.88

 

 

 

 

 

 

(10

)

 

 

 

 

1.74

 

 

 

 

 

 

(10

)

 

 

 

 

1.61

 

Pro forma weighted average number of shares, basic and diluted

     

54,500,000

           

(10

)

       

54,500,000

           

(10

)

       

54,500,000

 

Notes to Adjustments to Pro Forma Combined Condensed Financial Statements

 

(1)

 

 

 

Reflects the removal of all activities from the historical predecessor financial statements of the Additional Companies, which will not be owned by us following the completion of this offering, and the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer, a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente. We did not generate any operating revenues or operating expenses with respect to the Pedhoulas Farmer, and Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us.

The predecessor combined financial statements include the financial statements of the Subsidiaries and those of six Additional Companies, whose principal activity was the ownership of drybulk vessels and that, from inception through December 31, 2007, were under the common control of Polys Hajioannou and Nicolaos Hadjioannou. All vessels owned by the Additional Companies were sold prior to December 31, 2007, and none of the Additional Companies will be owned by us following this offering. Maxpente also owned a vessel, the Pedhoulas Farmer, which was sold on January 9, 2007, however, Maxpente is one of the 19 companies that will be contributed to us following the date of the final prospectus and prior to the closing of this offering and is included as a Subsidiary. Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us.

 

52


 

        As of December 31, 2007, all of the vessels of the Additional Companies have been sold and the remaining net assets distributed as a dividend. As a result, there are no remaining accounts of the Additional Companies to be removed from the predecessor combined balance sheet.
         

(2)

 

 

 

Reflects borrowings of $120.0 million under our three new credit facilities with our three Subsidiaries, Efragel, Marindou and Avstes, all of which have been fully drawn. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou, resulting in net additional indebtedness of $81.5 million and a consequent increase in Cash and cash equivalents.

 

(3)

 

 

 

Reflects the advance of Cash and cash equivalents to our Manager in the amount of $65.5 million from net additional indebtedness of $81.5 million, resulting in a consequent increase in Due from Manager. The remaining cash from net additional indebtedness of $16.0 million will be retained by the Subsidiaries.

 

(4)

 

 

 

Reflects the repayment by our Manager on our behalf of Advances from owners in the amount of $10.1 million and a consequent decrease in Due from Manager.

 

(5)

 

 

 

Reflects the declaration and payment of a dividend in the amount of $147.8 million to our current owners by our Manager on our behalf and a consequent decrease in Due from Manager.

 

(6)

 

 

 

The estimated additional dividend of $31.0 million will be declared and payable to our current owners by our Manager on our behalf prior to the closing of the initial public offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

 

(7)

 

 

 

Reflects settlement of the remaining Due from Manager balance in the amount of $4.0 million in Restricted cash transferred from cash collateral account held by our Manager to two restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries Petra and Pemer as security for their respective loan facilities.

 

(8)

 

 

 

Reflects assumed additional interest expense with respect to borrowings of $120.0 million under our new credit facilities with our Subsidiaries Efragel, Marindou and Avstes. Of the total borrowings of $120.0 million, $38.5 million was used to refinance an existing credit facility of Efragel and a bank loan of Marindou, resulting in net additional indebtedness of $81.5 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

 

New Debt (a)
(In thousands)

 

New Debt
Interest
Rate
(b)

 

New Debt
Interest Cost
(c) = (a) x (b)
(In thousands)

 

Historical Debt
Refinanced (d)
(In thousands)

 

Historical
Interest Cost
(e)
(In thousands)

 

Incremental
Interest Cost
(c) - (e)
(In thousands)

 

Efragel

 

 

$

 

42,000

   

 

 

4.30

%*

 

 

 

$

 

1,831

   

 

$

 

24,630

   

 

$

 

874

   

 

$

 

957

 

 

Marindou

 

 

$

 

42,000

   

 

 

4.60

%*

 

 

 

$

 

1,959

   

 

$

 

13,884

   

 

$

 

420

   

 

$

 

1,539

 

 

Avstes

 

 

$

 

36,000

   

 

 

4.69

%*

 

 

 

$

 

1,712

   

 

$

 

0

   

 

$

 

0

   

 

$

 

1,712

 

 

Total

 

 

$

 

120,000

 

 

 

 

 

$

 

5,502

   

 

$

 

38,514

   

 

$

 

1,294

   

 

$

 

4,208

 

 

*

 

 

 

Represents the fixed five-year SWAP rate entered into in 2008 relevant to the specific new debt, plus the respective credit facility margin.

To illustrate sensitivity to fluctuations in the rate, an increase of 0.125% in the rate would have increased the assumed net interest expense with respect to these borrowings by $152,083 during the year ended December 31, 2007.

 

(9)

 

 

 

Reflects assumed increase of $2.6 million due to the implementation of the amended management agreements as of January 1, 2008. Under our amended management agreements, as well as the new management agreements to be implemented prior to this offering, the Manager receives a daily fee of $575 per vessel plus 1.0% on gross freight, charter hire, ballast bonus, and demurrage from each of the vessel owning companies in exchange for their management services. The total management fee for the year ended December 31, 2007 in the amount of $3.8 million, according to the amended management agreements, is calculated based on the 3,889 aggregate vessel days outstanding and the aggregate gross freight, charter hire, ballast bonus, and demurrage of $152.3

53


 

 

 

 

million. The assumed increase of $2.6 million in the management fee is calculated as the difference between (i) the management fee as calculated under the amended management agreements of $3.8 million, and (ii) the management fee actually recorded for the year ended December 31, 2007 of $1.2 million.

 

(10)

 

 

 

Pro forma earnings per share gives retroactive effect to our Reorganization, which involves the issuance (following the date of the final prospectus and prior to the closing of this offering) of 54.5 million shares of our common stock to the selling stockholder, and resulting capital structure following the closing of this offering. This offering will not involve the issuance of additional shares of our common stock as all shares of common stock sold in this offering will be sold by the selling stockholder.

Sources and Uses of Funds

The following table sets forth the sources and uses of funds used to effect the transactions described above:

 

 

 

Sources of Funds:

 

(in millions)

Settlement of intercompany balances with our Manager

 

 

$

 

96.4

 

Additional indebtedness

 

 

$

 

120.0

 

Total

 

 

$

 

216.4

 

Uses of Funds:

 

 

Refinancing of existing debt

 

 

$

 

38.5

 

Restricted cash

 

 

$

 

4.0

 

Cash retained by Subsidiaries

 

 

$

 

16.0

 

Repayment of advances from owners

 

 

$

 

10.1

 

Declaration and payment of dividend (a)

 

 

$

 

147.8

 

Estimated additional dividend to be declared (b)

 

 

$

 

31.0

 

Total

 

 

$

 

247.4

 

Net (Sources of Funds less Uses of Funds) (b)

 

 

$

 

(31.0

)

 


 

 

(a)

 

 

 

Of the total dividend of $147.8 million paid to our current owners, $56.9 million represented retained earnings as at December 31, 2007.

 

(b)

 

 

 

The estimated additional dividend of $31.0 million will be declared and payable to our current owners by our Manager on our behalf prior to the closing this offering. This dividend reflects a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

54


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our predecessor combined financial statements and the related notes, and the financial and other information included elsewhere in this prospectus. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and are presented in U.S. dollars.

This discussion contains forward-looking statements based on assumptions about our future business. Our actual results may differ from those contained in the forward-looking statements, and such differences may be material. Please read Forward-Looking Statements.

Overview

We are an international provider of marine drybulk transportation services, transporting bulk cargoes, particularly grain, iron ore and coal, along worldwide shipping routes. We were incorporated on December 11, 2007, under the laws of the Marshall Islands for the purpose of acquiring ownership of 19 Subsidiaries, each incorporated under the laws of the Republic of Liberia, that either currently own vessels or are scheduled to own vessels and that, since inception, have been under the common control of Polys Hajioannou and Nicolaos Hadjioannou.

Following the date of the final prospectus, and prior to the closing of this offering, the shares of the Subsidiaries will be contributed by Vorini Holdings, on behalf of its shareholders Polys Hajioannou and Nicolaos Hadjioannou, to Safe Bulkers, Inc., in exchange for the issuance of 100% of the outstanding shares of Safe Bulkers, Inc. to Vorini Holdings. Immediately after this exchange, Polys Hajioannou will enter into share sale and purchase agreements to effect the transfer of 1.5% of the outstanding shares in Vorini Holdings to each of Maria Hajioannou and Eleni Hajioannou, from Polys Hajioannou’s 90% shareholding in Vorini Holdings. Nicolaos Hadjioannou will hold the remaining 10% of the outstanding shares in Vorini Holdings. These transactions are collectively referred to herein as the “Reorganization”. Following the Reorganization, Safe Bulkers, Inc. will own each of the Subsidiaries and Vorini Holdings will be the sole stockholder of Safe Bulkers, Inc.

The predecessor combined financial statements included in this prospectus include the financial statements of the Subsidiaries and those of six Additional Companies, each incorporated under the laws of the Republic of Liberia, whose principal activity was the ownership of drybulk vessels and that, from inception through December 31, 2007, were under the common control of Polys Hajioannou and Nicolaos Hadjioannou. The Additional Companies have been included in our predecessor combined financial statements, along with the Subsidiaries, because together, the Additional Companies and the Subsidiaries constituted all the vessel owning activities of Polys Hajioannou and Nicolaos Hadjioannou during the relevant periods. However, all vessels owned by the Additional Companies were sold prior to December 31, 2007, and none of the Additional Companies will be owned by us following this offering. Maxpente also owned a vessel, the Pedhoulas Farmer, which was sold on January 9, 2007. However Maxpente is one of the 19 companies that will be contributed to Safe Bulkers, Inc. following the date of the final prospectus, and prior to the closing of this offering and is included as a Subsidiary, because Maxpente is expected to own the newbuild Hull No. 1075 upon its delivery to us.

In March and April 2008 we settled all intercompany balances as of December 31, 2007 with our Manager and with our owners. In connection with this, in January 2008, our Manager repaid on our behalf prior advances from owners in the amount of $10.1 million, resulting in a corresponding decrease in amounts due from our Manager. In March and April 2008, we paid a dividend of $147.8 million to Polys Hajionnou and Nicolaos Hadjioannou, our current owners, which was funded from amounts due from our Manager. Finally, in order to settle the remaining amount of $4.0 million due from our Manager, $4.0 million in restricted cash in collateral accounts held by our Manager was transferred in April 2008 to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer.

In addition to the dividend of $147.8 million paid to our current owners in March and April 2008, an estimated additional dividend of $31.0 million, which will be funded using amounts due from our

55


Manager, reflecting a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering will also be declared prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of this dividend.

In March 2008, we paid $7.7 million as advances for vessels under construction funded by advances from our current owners. On May 27, 2008, we will be required to pay an additional ¥400 million as advances for a vessel under construction funded by advances from our current owners. These advances will be paid back to our current owners from either surpluses from operations or from future credit facilities. Immediately after the closing of this offering, we expect to have $20.0 million in cash held by our Subsidiaries of which $16.0 million comprises cash and cash equivalents and $4.0 million comprises restricted cash, aggregate indebtedness of $416.8 million plus the equivalent of ¥400 million in U.S. dollars as of May 27, 2008, and available borrowing capacity of $90.0 million under our two additional credit facilities for which we have accepted commitment letters of $45.0 million each, to be entered into by the Subsidiaries Eniaprohi and Eniadefhi.

Our unaudited pro forma condensed financial statements, as reflected in the section entitled “Unaudited Pro Forma Combined Condensed Financial Statements,” gives effect to (a) the removal of the activities of all Additional Companies and the activities of Maxpente in connection with the sold vessel, the Pedhoulas Farmer; such removal affects only the predecessor combined statement of operations and not the predecessor combined balance sheet, as all of the vessels of the Additional Companies have been sold and an amount equal to our retained earnings declared as a dividend. As a result there are no remaining activities of the Additional Companies to be removed from the predecessor combined balance sheet, (b) the expected settlement of intercompany balances and advances from owners, payment of dividends and incurrence of indebtedness described above and (c) our expected cash on hand and restricted cash of $20.0 million immediately after the closing of this offering. Our unaudited pro forma condensed financial statements have been provided in order to reflect only the activities of the vessels in our fleet immediately following this offering, and the effects of these transactions on our company.

As of December 31, 2007 and as of the date of this prospectus, we own a fleet of 11 Japanese-built drybulk vessels, comprised of five Panamax, three Kamsarmax and three Post-Panamax class vessels, with a total aggregate carrying capacity of 887,900 dwt. As of December 31, 2007, the vessels in our fleet had an average age of approximately 2.6 years.

We have contracted to acquire eight newbuilds, comprised of the following vessels: (a) four Post-Panamax class vessels, scheduled for delivery in the fourth quarter of 2008, first quarter of 2009, third quarter of 2009 and first quarter of 2010, respectively; (b) two Capesize class vessels scheduled for delivery in the first quarter of 2010; and (c) two Kamsarmax class vessels scheduled for delivery in the first and second quarters of 2010. Following delivery of the last of these newbuilds in May 2010, our fleet will consist of 19 vessels, with a total aggregate carrying capacity of 1,759,900 dwt and an average age of approximately 3.2 years.

The average number of drybulk vessels in our fleet and the average age of the vessels in our fleet as of the end of the applicable period for the three years ended December 31, 2007 are set forth in the table below.

Average Number and Average Age of Drybulk Vessels in Our Fleet

 

 

 

 

 

 

 

 

 

 

 

Year Ended
December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

Average number of vessels

 

 

 

9.2

   

 

 

11.5

   

 

 

10.7

   

 

 

10.3

 

Average age of vessels

 

 

 

2.5

   

 

 

2.5

   

 

 

2.6

   

 

 

2.6

 

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “Safe Bulkers,” the “Company,” “us,” “we,” “our” or similar terms when used in a historical context refer to Safe Bulkers, Inc., the Subsidiaries, the Additional Companies, or to such entities collectively, and when used in the present tense or prospectively refer to Safe Bulkers, Inc. or any one or more of its subsidiaries, including the Subsidiaries, or to such entities collectively.

56


Our Charters

We, through our Manager, actively manage the employment of our fleet between period time charters, which can last several years, and spot charters, which generally last up to three months. As of December 31, 2007, 74.32% (on a dwt basis) of our fleet was deployed on period time charters with large consumers of marine drybulk transportation services, including Bunge, Cargill and Daiichi or their respective affiliates. We have arranged to place six of our current vessels and two of our newbuilds under five-year period time charters commencing in late 2008, 2009 and 2010 and one of our newbuilds under a 20-year period time charter commencing in 2011. By chartering these vessels in advance, we have been able to take advantage of the recent strong market conditions, while at the same time, reducing our exposure to charter rate fluctuations in late 2008, 2009 and 2010 when all of our newbuilds are delivered. In addition, as of December 31, 2007, we had arranged one- to three-year period time charters commencing in 2008 for the three vessels in our fleet which were deployed on spot charters as of December 31, 2007. Period time charters and trip time charters, which are a type of spot charter, are contracts for the use of a vessel for a specific period of time during which the charterer pays substantially all the voyage expenses, such as port, canal and fuel costs, agents’ fees, extra war risks insurance and any other expenses related to the cargoes, but the vessel owner pays the vessel operating expenses, which include costs for crewing, insurance, lubricants, spare parts, provisions, stores, maintenance and repairs, statutory and classification expense, drydocking and intermediate and special surveys and other miscellaneous items. We have rarely deployed the vessels in our fleet on voyage charters, which is another type of spot charter, under which the vessel owner typically pays for both voyage expenses and vessel operating expenses. As a result, generally, references to spot charters in this prospectus are to trip time charters.

Our Manager

Our operations are managed by our Manager, Safety Management Overseas S.A., under the supervision of our executive officers and our board of directors. Under our management agreement, our Manager will provide us and our Subsidiaries with technical, administrative and commercial services for an initial term expiring two years following the completion of this offering, with automatic one-year renewals for an additional eight years, at our option. Our Manager is ultimately owned by Machairiotissa Holdings, which is a corporation wholly owned by Polys Hajioannou.

Factors Affecting Our Results of Operations

Our financial results are largely driven by the following factors:

 

 

 

 

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 (also referred to as voyage days) as the total number of days in a period during which each vessel in our fleet was in our possession net of off-hire days associated with scheduled maintenance, which includes major repairs, drydockings, vessel upgrades or special or intermediate surveys. Available days are used 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, excluding scheduled maintenance. Operating days are used 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 ownership days during that period. During the three years ending December 31, 2007, our average annual fleet utilization rate was approximately 99.74%. However, an increase in annual off-hire days could reduce our operating days, and therefore, our fleet utilization. Fleet utilization is used to measure a company’s ability to efficiently find suitable employment for its vessels and minimizing the number of days that its vessels are off-hire for reasons such as scheduled repairs, vessel upgrades, drydockings or special surveys.

57


 

 

 

 

Time charter equivalent rates. We define time charter equivalent rates, or TCE rates, as our charter revenues less commissions and voyage expenses during a period divided by the number of our available days during the period. TCE rate is a standard shipping industry performance measure used primarily to compare daily earnings generated by vessels on period time charters and trip time charters with daily earnings generated by vessels on voyage charters, because charter rates for vessels on voyage charters are generally not expressed in per day amounts, while charter rates for vessels on period time charters and trip time charters generally are expressed in such amounts. We have only rarely employed our vessels on voyage charter and, as a result, generally our TCE rates equal our time charter rates.

 

 

 

 

Daily vessel operating expenses. We define daily vessel operating expenses to include the costs for crewing, insurance, lubricants, spare parts, provisions, stores, repairs, maintenance, statutory and classification expense, drydocking, intermediate and special surveys and other miscellaneous items. Daily vessel operating expenses are calculated by dividing vessel operating expenses by ownership days for the relevant period. Our ability to control our fixed and variable expenses, including our daily vessel operating expenses also affects our financial results. In addition, factors beyond our control, such as developments relating to market premiums for insurance and the value of the U.S. dollar compared to currencies in which certain of our expenses, including certain crew wages, are denominated can cause our vessel operating expenses to increase.

The following table reflects our ownership days, available days, operating days, fleet utilization, TCE rates and daily vessel operating expenses for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Year Ended
December 31,

 

Pro Forma

 

Year Ended
December 31,
2007

 

2005

 

2006

 

2007

Ownership days

 

 

 

3,370

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Available days

 

 

 

3,350

   

 

 

4,208

   

 

 

3,914

   

 

 

3,778

 

Operating days

 

 

 

3,343

   

 

 

4,205

   

 

 

3,913

   

 

 

3,777

 

Fleet utilization

 

 

 

99.21%

   

 

 

99.94%

   

 

 

99.98%

   

 

 

99.99%

 

TCE rates

 

 

$

 

23,713

   

 

$

 

22,550

   

 

$

 

42,327

   

 

$

 

42,604

 

Daily vessel operating expenses

 

 

$

 

3,076

   

 

$

 

3,106

   

 

$

 

3,176

   

 

$

 

3,263

 

Revenues

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 rates that our vessels earn under our charters, which, in turn, are affected by a number of factors, including:

 

 

 

 

levels of demand and supply in the drybulk shipping industry;

 

 

 

 

the age, condition and specifications of our vessels;

 

 

 

 

the duration of our charters;

 

 

 

 

our decisions relating to vessel acquisitions and disposals;

 

 

 

 

the amount of time that we spend positioning our vessels;

 

 

 

 

the availability of our vessels, which is related to the amount of time that our vessels spend in drydock undergoing repairs and the amount of time required to perform necessary maintenance or upgrade work; and

 

 

 

 

other factors affecting charter rates for drybulk vessels.

Revenues from our period time charters comprised 47.8% of our charter revenues for the year ended December 31, 2006 and 48.9% of our charter revenues for the year ended December 31, 2007. The revenues from our spot charters comprised 52.2% of our charter revenues for the year ended December 31, 2006 and 51.1% of our charter revenues for the year ended December 31, 2007.

After giving effect to the removal of the Additional Companies and the activities of the sold vessel Pedhoulas Farmer from our company, our pro forma revenues from our period time charters comprised 49.3% of our charter revenues for the year ended December 31, 2006 and 50.1% of our charter revenues

58


for the year ended December 31, 2007, and our pro forma revenues from our spot charters comprised 50.7% of our charter revenues for the year ended December 31, 2006 and 49.9% of our charter revenues for the year ended December 31, 2007.

Our expected revenues, based on contracted charter rates, from our current period time charter arrangements for our drybulk vessels are shown for the periods indicated in the table below. Although these expected revenues are based on contracted charter rates, any contract is subject to performance by the counterparties. If the charterers are unable to make charter payments to us, our results of operations and financial condition will be materially adversely affected.

Contracted Revenues From Period Time Charters and Contracted Period Time Charter Days
as of December 31, 2007 (1)
(U.S. dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2009

 

2010

 

2011

 

On and After
January 1, 2012

 

Total

Contracted Revenues (2), (3), (4), (5), (6)

 

 

$

 

149,571

   

 

$

 

105,611

   

 

$

 

91,869

   

 

$

 

66,508

   

 

$

 

156,081

   

 

$

 

569,640

 

Fleet’s Contracted Period Time Charter Days

 

 

 

3,062

   

 

 

2,459

   

 

 

2,369

   

 

 

1,890

   

 

 

4,527

   

 

 

14,307

 

Percentage of anticipated available days (7)

 

 

 

75.9%

   

 

 

50.6%

   

 

 

36.1%

   

 

 

27.4%

   

 

 

18.6%

   

 

 

32.3%

 


 

 

(1)

 

 

 

Annual revenue calculations are based on an assumed 365 revenue days per annum and include scheduled drydocking days.

 

(2)

 

 

 

Does not include the five-year period time charter with Kawasaki Kisen Kaisha, Ltd, or K-Line, entered into on March 5, 2008 pursuant to which K-Line will charter the Marina or a sister ship commencing in the third or fourth quarter of 2008. The gross daily charter rates under this charter are $61,500, $51,500, $41,500, $31,500 and $21,500 during the first, second, third, fourth and fifth years, respectively, subject to a 2.5% commission.

 

(3)

 

 

 

Does not include the 20-year period time charter with Eastern Energy Pte. Ltd. entered into on February 7, 2008 pursuant to which Eastern Energy Pte. Ltd. will charter the vessel to be named Kanaris commencing in the third or fourth quarter of 2011. The gross daily charter rate under this charter is $25,928 subject to a 2.5% commission.

 

(4)

 

 

 

Does not include the five-year period time charter with Shinwa entered into on March 13, 2008 pursuant to which Shinwa will charter the Maritsa or a sister ship commencing in the first quarter of 2010. Pursuant to the charter, Shinwa may choose from among three charter rate structures, and must select among them prior to the commencement of the charter. Under the first option, the gross daily charter rates under this charter are $32,000 during the first and second years, $28,000 during the third year and $24,000 during the fourth and fifth years; under the second option, the gross daily charter rates under this charter are $32,500 during the first, second and third years and $21,250 during the fourth and fifth years; and under the third option, the gross daily charter rate under this contract is $28,000 during all five years. In each case, gross daily charter rates under this charter are subject to a 1.25% commission.

 

(5)

 

 

 

Does not include the five-year period time charter with K-Line, entered into in April 2008, pursuant to which K-Line will charter the Pedhoulas Trader commencing in July 2008. The gross daily charter rates under this charter are $69,000, $56,500, $42,000, $20,000 and $20,000 during the first, second, third, fourth and fifth years, respectively, subject to a 1.00% commission.

 

(6)

 

 

 

Does not include the period time charter with Daiichi, entered into on April 17, 2008, pursuant to which Daiichi will charter the Eleni commencing in November 2008 through October 2009. The gross daily charter rate under this charter is $77,000 per day, subject to a 1.25% commission.

 

(7)

 

 

 

Percentage of anticipated available days on and after January 1, 2012 is from January 1, 2012 to March 15, 2015.

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Vessels operating on period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot market during periods characterized by favorable market conditions. Vessels operating in the spot market generate revenues that are less predictable than those on period time charters, but may enable us to capture increased profit margins during periods of high drybulk charter rates, although we are exposed to the risk of low drybulk charter rates, which may have a materially adverse impact on our financial performance. If we fix vessels on period time charters, future spot market rates may be higher or lower than those rates at which we have time chartered our vessels. We are constantly evaluating opportunities to increase the number of our drybulk vessels employed on period time charters, but only expect to enter into additional period time charters if we can obtain contract terms that satisfy our criteria.

Commissions

We pay (through our Manager) commissions ranging from 1.25% to 5.0% on our period time and trip time charters, which are a type of spot charter, to unaffiliated ship brokers, other brokers associated with our charterers and to our charterers. These commissions are directly related to our revenues, from which they are deducted. We expect that the amount of our total commissions to unaffiliated ship brokers and unaffiliated in-house brokers will continue to grow as the size of our fleet grows and revenues increase following delivery of our eight contracted newbuilds and as a result of additional vessel acquisitions. These commissions do not include fees we pay to our Manager, which are described under “—General and Administrative Expenses.”

Voyage Expenses

We charter our vessels primarily through period time charters and trip time charters under which the charterer is responsible for most voyage expenses, such as the cost of bunkers, port expenses, agents’ fees, canal dues, extra war risks insurance and any other expenses related to the cargo. We are responsible for the remaining voyage expenses such as draft surveys, hold cleaning, postage and other minor miscellaneous expenses related to the voyage. We generally do not employ our vessels on voyage charters under which we would be responsible for all voyage expenses, therefore we have not experienced during the relevant periods, and do not expect to experience, material changes to our voyage expenses.

Vessel Operating Expenses

Vessel operating expenses include costs for crewing, insurance, lubricants, spare parts, provisions, stores, repairs, maintenance, statutory and classification expense, drydocking, intermediate and special surveys and other minor miscellaneous items. Due to the young age of our vessels, our main vessel operating expenses are costs for crewing, insurance, spares, stores and provisions, lubricants, taxes and other miscellaneous items. We expect that crewing costs will continue to increase in the future due to the shortage in the supply of qualified personnel. In addition, we expect that insurance costs, drydocking and maintenance costs will increase as our vessels age. Our total 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 acquisition of our eight contracted newbuilds in late 2008, 2009 and 2010 and as we further grow our fleet. Other factors beyond our control, some of which may affect the shipping industry in general, including changes in the market price of lubricants due to increases in oil prices, may also cause these expenses to increase. In addition, a portion of our vessel operating expenses, primarily crew wages to our Greek crew members, are in currencies other than the U.S. dollar. These expenses may increase or decrease as a result of fluctuation of the U.S. dollar against these currencies.

Depreciation

We depreciate our drybulk vessels 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 of delivery from the shipyard. Furthermore, we estimate the residual value of our vessels to be $182 per light-weight ton.

We do not amortize special survey and drydocking costs, but expense such costs as incurred.

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Vessels, Net

Vessels are recorded at their historical cost, which consists of the contract purchase price, any direct material expenses incurred upon acquisition (including improvements, on-site supervision expenses incurred during the construction period, commissions paid, delivery expenses and other expenditures to prepare the vessel for her initial voyage) and financing costs incurred during the construction of the vessel. Subsequent expenditures for conversions and major improvements are also capitalized when it is determined that they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. If such factors are not met, such expenditures are not capitalized and, instead, are charged to expenses as incurred.

Our predecessor combined financial statements do not include any capitalized interest costs. We financed vessel construction through owners advances during the relevant periods and utilize the specific loan method of accounting. As a result, no interest was capitalized as a component of vessel cost for our current vessels. Capitalized interest may be a component of vessel cost in the future, as we expect to finance future vessel construction with additional bank debt instead of owners advances.

Since January 1, 2005, our Manager has received a commission of 1.0% of the contract price of vessel purchases upon delivery of our acquired vessels through separate arrangements with Itochu Corporation, a trading house that has facilitated such purchases and which is also the counterparty in the applicable newbuild contracts. Itochu Corporation has also agreed to pay our Manager a 1.0% commission on the contract prices of the Eleni and Martine, two of our newbuilds, payable upon each of our installment payments, including upon delivery, for these newbuilds. Under our management agreement with our Manager, which will be entered into prior to the closing of this offering, for purchases of vessels including with respect to each of our contracted newbuilds, other than the Eleni and Martine, we will pay our Manager a commission of 1.0% on the contract price of the relevant vessel for our Manager’s services in connection with finalizing the contract, arranging for various regulatory approvals and bank financing and other administrative services. In addition, we will pay our Manager a flat fee of $375,000 per newbuild, for the on-premises supervision of all newbuilds we have agreed to acquire pursuant to shipbuilding contracts, memoranda of agreement, or otherwise. These amounts payable to our Manager will be included as part of the vessel cost.

General and Administrative Expenses

During the period from January 1, 2005 to December 31, 2007, we paid our Manager a management fee of $50,000 per year for each vessel in our fleet and a fee of 0.4% on gross freight, charter hire, ballast bonus and demurrage, excluding any amortization of time charter discount to revenue. The management fee has been recorded as a general and administrative expense. We have amended the existing vessel management agreements, and from January 1, 2008 we are now required to pay to our Manager a management fee of $575 per day per vessel and a fee of 1.0% on gross freight, charter hire, ballast bonus and demurrage.

Following the date of this offering, and in addition to the fees described above, we will pay our Manager the commissions and fees with respect to vessel purchases and newbuilds described above in “—Vessels, Net” and the commissions with respect to vessel sales described below under “—Gain on Sale of Assets.” Although we have not, within the past five years, deployed our vessels on bareboat charter and do not currently have any plans to deploy our vessels on bareboat charter, under our management agreement, we will also provide our Manager with a fee of $250 per day per vessel deployed on bareboat charter for providing commercial, technical and administrative services. We expect that the amount of our total management fees will increase following the delivery of our eight contracted newbuilds and as a result of additional vessel acquisitions.

Our predecessor combined financial statements for prior periods show our results of operations as a private company when we did not pay any compensation to our directors and officers. After the completion of this offering we will be a public company, and we expect to incur additional general and administrative expenses as a public company. We expect that the primary components of general and administrative expenses, other than the management fees described above, will consist of expenses associated with being a public company, which include the preparation of disclosure documents, legal and accounting costs,

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incremental director and officer liability insurance costs, director compensation and costs related to compliance with the Sarbanes-Oxley Act of 2002.

After giving effect to the removal of the Additional Companies and the sold vessel Pedhoulas Farmer from our company, the increase of $2.6 million in fees payable to our Manager effective as of January 1, 2008, together with our projected public company-related expenses and director remuneration of $2.2 million, our general and administrative expenses will increase by an estimated $4.8 million per year.

Interest Expense and Other Finance Costs

We incur interest expense on outstanding indebtedness under our existing credit facilities, which we include in interest expenses. We also incurred financing costs in connection with establishing those facilities, which is included in our finance costs and amortization and write-off of deferred finance charges. Since December 31, 2007, we have incurred, and will incur in the future, additional interest expense on our outstanding borrowings and future borrowings, including financing costs in connection with establishing our new credit facilities for our Subsidiaries Avstes, Efragel and Marindou, and two additional credit facilities for which we have accepted commitment letters of $45.0 million each, to be entered into by the Subsidiaries Eniaprohi and Eniadefhi, respectively. For a description of our existing credit facilities, and our proposed new credit facilities, please read “—Credit Facilities” and “Description of Indebtedness.”

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.

Gain on Sale of Assets

The Additional Companies and the Subsidiary Maxpente each owned vessels that were sold prior to December 31, 2007. Below is a table listing the vessels, their classes, the name of the owning entities prior to disposal and dates of disposal.

 

 

 

 

 

 

 

Vessel Name

 

Class

 

Owner

 

Disposal Date

Marina (the “Old Marina”) (1)

 

Panamax

 

Maripol Shipping Corporation

 

June 8, 2005

Pelopidas

 

Panamax

 

Pelodimous Shipping Corporation

 

November 30, 2006

Sophia (the “Old Sophia”) (1)

 

Panamax

 

Sofikal Shipping Corporation

 

April 11, 2006

Pedhoulas Farmer

 

Kamsarmax

 

Maxpente Shipping Corporation

 

January 9, 2007

Pedhoulas Fighter

 

Kamsarmax

 

Maxtria Shipping Corporation

 

January 26, 2007

Kanaris (the “Old Kanaris”) (1)

 

Panamax

 

Kanastro Shipping Corporation

 

February 20, 2007

Eleni (the “Old Eleni”) (1)

 

Panamax

 

Eleoussa Shipping Corporation

 

March 26, 2007


 

 

(1)

 

 

 

Certain of the sold vessels have the same name as certain vessels in our current fleet, and we refer to these sold vessels as the Old Marina, Old Sophia, Old Kanaris and Old Eleni, as applicable.

The aggregate gains on the sale of these assets were as follows:

 

 

 

 

 

Year Ended December 31,

2005

 

2006

 

2007

$

 

26.8 million

   

 

$

 

37.0 million

   

 

$

 

112.4 million

 

 

 

 

 

 

In connection with each of these asset sales, we have in the past paid our Manager, and will continue to pay our Manager under our management agreement, a commission of 1.0% of the sale price of the vessel. We expect that revenue from vessel sales will decrease in the future as we do not expect to sell vessels at the same rate as vessels have been sold between January 1, 2005 and December 31, 2007. We expect that commissions payable to our Manager on vessel sales will decrease for the same reason.

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Early Redelivery Cost

Early redelivery cost reflects amounts payable to charterers for early termination of a period time charter resulting from our request for early redelivery of a vessel. We generally request such early redelivery when we would like to take advantage of a strong period time charter market environment and believe that an opportunity to enter into a similarly priced period time charter is not likely to be available when the relevant vessel is originally scheduled to be redelivered.

We have entered into such arrangements for early redelivery and incurred such costs in the past, and we may continue to do so in the future, depending on market conditions. On March 9, 2007, we agreed with the charterers of the Stalo to terminate the then-existing period time charter on the vessel. The period time charter had commenced on January 18, 2006, at a daily gross charter rate of $13,500, and was contractually due to expire in May 2011. We desired to terminate the charter because the contracted charter rate was significantly lower than the charter rates that we could receive for the vessel in March 2007. Under the new agreement with the charterer, (a) we were required to pay the charterer $3.4 million upon termination of the old period time charter and redelivery of the vessel and (b) the charterer was offered the opportunity to charter the Marina, Sophia and Pedhoulas Leader under period time charters for periods of up to 5 to 14 months at below-market rates. The effect of chartering these three vessels at below-market rates for the agreed periods was determined to be $11.0 million and was recorded as a cost of terminating the existing period time charter on the Stalo. We also recognized a period time charter discount for the same amount, which will be released to charter revenue over the period of the respective below-market rate period time charters. The total cost of the early termination of the Stalo period time charter amounted to $14.4 million. The Stalo was subsequently fixed on two spot charters, at daily charter rates of $47,500 and $50,000, prior to entering into a two-year period time charter from July 2007 until July 2009, at a daily charter rate of $48,500. These, together, are expected to generate revenues of $40.0 million, which is greater than the total cost of $14.4 million attributable to the early termination of the Stalo period time charter. We anticipate that additional revenues will be obtained from chartering the Stalo from July 2009 to May 2011, which is when the Stalo had originally been scheduled to be redelivered.

On September 20, 2007, we entered into an agreement, at our request, with the then-current charterer of the Katerina to terminate the charter earlier than the originally scheduled termination date of November 9, 2007. That charter had commenced on August 9, 2006 at a daily gross charter rate of $23,125, which was significantly lower than the charter rates that we could receive for the vessel in September 2007. As compensation for early redelivery, we agreed to pay the charterers an amount equal to $1.1 million. The vessel was redelivered on September 30, 2007 and was subsequently fixed on a spot charter until December 2007 at a daily charter rate of $78,000. The revenue earned by this subseqent charter during the period from September 30, 2007 until November 9, 2007 was $3.1 million, which was higher than the $1.1 million cost of early redelivery of the Katerina.

On October 17, 2007, we entered into an agreement, at our request, with the then-current charterer of the Marina to terminate the charter earlier than the originally scheduled termination date of May 22, 2008 in connection with the redelivery of the Stalo, as described above. The charter had commenced on March 26, 2007 at a daily gross charter rate of $25,000. The Marina was redelivered on January 30, 2008, and the actual compensation payable to the charterer amounted to $6.5 million, compared to $6.7 million, which was the estimated amount as of December 31, 2007. The early redelivery costs recorded with the predecessor combined statement of operations for the year ended December 31, 2007 with respect to the Marina amounted to $5.5 million. This amount was comprised of the estimated compensation payable of $6.7 million, which was offset in part by the remaining unamortized portion of the Marina’s time charter discount of $1.2 million in connection with the Stalo redelivery transaction. The vessel was fixed on a spot charter until April 23, 2008 at a daily rate of $56,500 and has been subsequently fixed on another spot charter until June 30, 2008.

The remaining early redelivery cost of $0.5 million for the year ended December 31, 2007 and $0.2 million for the year ended December 31, 2006 represents cash compensation owed to various charterers for agreeing to redeliver their respective chartered vessels for up to fifteen days earlier than the contractual expiry of the relevant period time charters. These costs are expensed in the periods incurred because no replacement charter agreements were secured at the time of the applicable redelivery agreement.

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On March 7, 2008, Petra agreed with the charterers of the Pedhoulas Trader to terminate the $54,000 daily fixed rate time charter which had commenced on February 9, 2008, and was due to expire by July 24, 2008. We estimate that the compensation payable to the charterer for early redelivery of the vessel, which is expected to occur on May 30, 2008, will be approximately $800,000.

Results of Operations

Year ended December 31, 2007 compared to the year ended December 31, 2006

During the year ended December 31, 2007, we had an average of 10.7 drybulk vessels in our fleet. During the year ended December 31, 2006, we had an average of 11.5 drybulk vessels in our fleet.

During the year ended December 31, 2007, we acquired the following vessels: Pedhoulas Leader, a Kamsarmax class vessel and Sophia, a Post-Panamax class vessel.

During the year ended December 31, 2007, we sold the following vessels: Old Kanaris, a Panamax class vessel and Old Eleni, a Panamax class vessel. During this period, we also sold two Kamsarmax class vessels, the Pedhoulas Farmer and the Pedhoulas Fighter, immediately upon their delivery to us from the shipyard during the same period, pursuant to agreements with the purchasers of these vessels.

During the year ended December 31, 2006, we acquired the following vessels: Stalo, a Post-Panamax class vessel; Marina, a Post-Panamax class vessel; Pedhoulas Merchant, a Kamsarmax class vessel; and Pedhoulas Trader, a Kamsarmax class vessel.

During the year ended December 31, 2006, we sold the following vessels: Pelopidas, a Panamax class vessel and Old Sophia, a Panamax class vessel.

Revenues

Revenues increased by 73.8% or $73.1 million to $172.1 million during the year ended December 31, 2007, from $99.0 million during the year ended December 31, 2006. This increase is attributable primarily to an increase in the daily charter rates payable under our charters. Revenues were also affected by a decrease in the number of operating days due to sales of the Kanaris and the Old Eleni, which were not offset by the deliveries of the Pedhoulas Leader and the Sophia. During the year ended December 31, 2007, our operating days decreased by 6.9% to 3,913 days, compared to 4,205 operating days for the year ended December 31, 2006.

Commissions

Commissions to unaffiliated ship brokers, other brokers associated with our charterers and our charterers during the year ended December 31, 2007 amounted to $6.2 million, an increase of $2.5 million, or 67.6%, compared to $3.7 million during the year ended December 31, 2006 and were 3.74% and 3.60% of revenues during the year ended December 31, 2006 and 2007, respectively. The increase in such commissions resulted primarily from the increase in daily charter rates and was similarly affected by the decrease in operating days due to vessel sales.

Vessel operating expenses

Vessel operating expenses decreased by 5.3%, or $0.7 million to $12.4 million during the year ended December 31, 2007, from $13.1 million during the year ended December 31, 2006. The decrease is primarily attributable to the 6.9% decrease in operating days during the year ended December 31, 2007 as compared to the year ended December 31, 2006 resulting from vessel sales. The primary components of our vessel operating expenses such as costs for crewing, and insurances, were moderately increased, while all other cost components decreased. During the year ended December 31, 2007 costs for crewing increased by 3.0%, or $0.2 million, to $6.8 million, compared to $6.6 million during the year ended December 31, 2006. This increase was primarily due to the rising cost of crew salaries, in particular for our Greek crew members who are paid in euros, as a result of the rising strength of the euro compared to the U.S. dollar since December 31, 2006. During the year ended December 31, 2007 the cost for insurance increased by 7.7%, or $0.1 million, to $1.4 million, compared to $1.3 million during the year ended December 31, 2006, and the cost for lubricants during this period remained stable. Daily operating expenses remained relatively

64


constant during the year ended December 31, 2007, at $3,176 per day, compared to $3,106 per day during the year ended December 31, 2006.

Depreciation

Depreciation expense remained constant during the year ended December 31, 2007, at $9.6 million compared to $9.6 million during the year ended December 31, 2006. This reflects the relatively constant number of ownership days as a result of vessel acquisition and vessel sales.

General and administrative expenses—Management fee to related party

General and administrative expenses, which consisted of management fees paid to our Manager, increased 20.0%, or $0.2 million, to $1.2 million during the year ended December 31, 2007, from $1.0 million during the year ended December 31, 2006 due to an increase in our revenues.

Interest expense

Interest expense increased $2.1 million, or 34.4%, to $8.2 million during the year ended December 31, 2007 from $6.1 million during the year ended December 31, 2006. The increase in interest expense was due to the increase in the weighted average amount of loans outstanding to $241.9 million during the year ended December 31, 2007, compared to $183.0 million during the year ended December 31, 2006, as well as the increase in the weighted average interest rate during the year ended December 31, 2007 to 3.35% from 3.27% during the year ended December 31, 2006. See “—Credit Facilities.”

Loss on derivatives

Loss on derivatives decreased $1.3 million, or 64.14%, to a loss of $0.7 million during the year ended December 31, 2007, from a loss of $2.0 million during the year ended December 31, 2006. The decrease of $1.3 million includes the effect from foreign exchange derivatives as well as from interest rate derivatives. The effect from foreign exchange derivatives, which amounts to a decrease of $1.5 million in losses, was due to the declining volume of derivatives contracts in the periods under comparison, as on December 31, 2007 there were no derivative contracts outstanding, versus a notional amount of $13.5 million of such contracts on December 31, 2006. The effect of the interest rate swap concluded on the Kerasies loan amounted to a loss of $0.2 million, representing the negative fair value as of December 31, 2007. No interest rate derivatives were outstanding as of December 31, 2006.

Foreign currency (loss)/gain

Foreign currency (loss)/gain was $(13.8) million during the year ended December 31, 2007, compared to $(3.3) million during the year ended December 31, 2006, representing a change of $10.5 million resulting primarily from more unfavorable currency translation between the U.S. dollar against the Japanese yen and the Swiss franc. As two loans in foreign currencies were converted during 2007 to the U.S. dollar, the outstanding percentage of principal in foreign currencies was reduced to 47.3% as of December 31, 2007, reducing the possibility of foreign currency differences in the future.

Gain on sale of assets

Gain on sale of assets for the year ended December 31, 2007 reflects the sale of the Old Kanaris, Old Eleni, Pedhoulas Farmer and Pedhoulas Fighter to third party drybulk operators for an aggregate contract price of $220.2 million, representing a gain of $112.4 million over the net book value of such vessels at the time of sale. In connection with these sales, we paid our Manager an aggregate of $2.2 million in commissions. Gain on sale of assets for the year ended December 31, 2006 reflects the sale of the Pelopidas and the Old Sophia to third party drybulk operators for an aggregate contract price of $78.1 million, representing a gain of $37.0 million over the net book value of such vessels at the time of sale. In connection with these sales, we paid our Manager an aggregate of $0.8 million in commissions.

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Year ended December 31, 2006 compared to year ended December 31, 2005

During the year ended December 31, 2006, we had an average of 11.5 drybulk vessels in our fleet. During the year ended December 31, 2005, we had an average of 9.2 drybulk vessels in our fleet.

During the year ended December 31, 2006, we acquired the following vessels: Stalo, a Post-Panamax class vessel; Marina, a Post-Panamax class vessel; Pedhoulas Merchant, a Kamsarmax class vessel; and Pedhoulas Trader, a Kamsarmax class vessel.

During the year ended December 31, 2006, we sold the following vessels: Pelopidas, a Panamax class vessel and Old Sophia, a Panamax class vessel.

During the year ended December 31, 2005, we acquired the following vessels: Maritsa, a Panamax class vessel and Old Eleni, a Panamax class vessel.

During the year ended December 31, 2005, we sold the following vessel: Old Marina, a Panamax class vessel.

Revenues

Revenues increased 19.4%, or $16.1 million, to $99.0 million during the year ended December 31, 2006, from $82.9 million during the year ended December 31, 2005. This increase is attributable primarily to an increase in the number of operating days resulting from vessel acquisitions. During the year ended December 31, 2006, we had a total of 4,205 operating days, compared to 3,343 operating days during the year ended December 31, 2005, representing an increase of 25.8%. Revenues were also affected by a decrease in average daily charter rates throughout the drybulk shipping industry during the year ended December 31, 2006. For example, the average one-year daily period time charter rates for Panamax class vessels was $22,475 during 2006 compared to $27,854 during 2005. Please see the section of this prospectus entitled “The International Drybulk Shipping Industry” for a discussion of the historical market for time charter rates.

Commissions

Commissions to unaffiliated ship brokers, other brokers associated with our charterers and our charterers during the year ended December 31, 2006 amounted to $3.7 million, an increase of $0.5 million, or 15.6%, compared to $3.2 million during the year ended December 31, 2005, and comprised 3.7% of revenues during the year ended December 31, 2006 and 3.9% of revenues during the year ended December 31, 2005. The increase in such commissions resulted primarily from the increase in the number of operating days resulting from vessel acquisitions and was offset in part by the decrease in our average daily charter rates.

Vessel operating expenses

Vessel operating expenses increased 26.0%, or $2.7 million, to $13.1 million during the year ended December 31, 2006, from $10.4 million during the year ended December 31, 2005. The increase is primarily attributable to the 25.8% increase in operating days due to vessel acquisitions. During the year ended December 31, 2006, the primary components of our vessel operating expenses, costs for crewing, increased by 22.2% to $6.6 million during the year ended December 31, 2006 from $5.4 million during the year ended December 31, 2005, and for lubricants increased by 50.0% to $1.5 million during the year ended December 31, 2006 from $1.0 million during the year ended December 31, 2005. Daily operating expenses remained relatively constant at $3,106 per day during the year ended December 31, 2006 and $3,076 per day during the year ended December 31, 2005.

Depreciation

Depreciation expense increased 26.3%, or $2.0 million, to $9.6 million during the year ended December 31, 2006, from $7.6 million during the year ended December 31, 2005. The increase was primarily the result of an increase in the number of our vessels, the higher cost of our new vessels and an increase in the number of ownership days during the year ended December 31, 2006.

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General and administrative expenses—Management fee to related party

General and administrative expenses, which consisted of management fees paid to our Manager, increased 25.0%, or $0.2 million, to $1.0 million during the year ended December 31, 2006, from $0.8 million during the year ended December 31, 2005 due to the increase in the number of vessels in our fleet and an increase in our revenues.

Interest expense

Interest expense increased $2.4 million, or 64.9%, to $6.1 million during the year ended December 31, 2006 from $3.7 million during the year ended December 31, 2005. The increase in interest expense was due to the higher interest rates of our loans as well as the increase in the amounts outstanding under our credit facilities during the relevant periods. The weighted average interest rate during the year ended December 31, 2006 was 3.27% compared to 2.30% during the year ended December 31, 2005. The weighted average amount of loans outstanding during the year ended December 31, 2006 was $183.0 million, while during the year ended December 31, 2005, the weighted average was $157.0 million. See “—Credit Facilities.”

Loss on derivatives

Loss on derivatives decreased $1.2 million, or 37.5% to a loss of $2.0 million during the year ended December 31, 2006, from a loss of $3.2 million during the year ended December 31, 2005. The decrease of $1.2 million was due to the declining volume of derivatives contracts in the periods under comparison, as on December 31, 2006 there were outstanding derivatives contracts of notional amount of $13.5 million versus notional amount $38.3 million on December 31, 2005.

Foreign currency (loss)/gain

Foreign currency (loss)/gain decreased $16.8 million, or 124.4%, to a loss of $3.3 million during the year ended December 31, 2006, from a gain of $13.5 million during the year ended December 31, 2005 primarily as a result of unfavorable currency translation between the U.S. dollar and the Japanese yen and the Swiss franc.

Gain on sale of assets

Gain on sale of assets during the year ended December 31, 2006 reflects the sale of the Pelopidas and the Old Sophia to third party drybulk operators for an aggregate contract price of $78.1 million, representing a gain of $37.0 million over the net book value of such vessels at the time of sale. In connection with these sales, we paid our Manager an aggregate of $0.8 million in commissions. Gain on sale of assets during the year ended December 31, 2005 reflects the sale of the Old Marina to a third party drybulk operator for an aggregate contract price of $46.6 million, representing a gain of $26.8 million over the net book value of this vessel at the time of sale. In connection with this sale, we paid our Manager $0.5 million in commissions.

Liquidity and Capital Resources

Historically, our principal source of funds has been advances provided by our owners, operating cash held on our behalf by our Manager, long-term bank borrowings of the Subsidiaries and the Additional Companies and cash from vessel sales held on our behalf by our Manager. In the past, our principal use of funds has been capital expenditures to establish, grow and maintain our fleet, comply with international shipping standards, environmental laws and regulations, fund working capital requirements, make repayments of bank loans and owners advances and, more recently, pay dividends.

As of December 31, 2007, we, through the Subsidiaries, had an aggregate of $322.9 million (based on prevailing exchange rates as of that date) outstanding under various credit agreements to finance the purchase of the vessels owned by such entities, comprised of outstanding amounts in U.S. dollars, Japanese yen and Swiss francs. As of December 31, 2007, none of the Additional Companies had any borrowings outstanding. In connection with this indebtedness, we are currently exposed to currency fluctuations. As of December 31, 2007, of our aggregate indebtedness, CHF86.5 million (the equivalent of $76.7 million, based

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on an exchange rate of CHF1.1267:$1.00 on December 31, 2007) was denominated in Swiss francs and ¥8.5 billion (the equivalent of $75.8 million, based on an exchange rate of ¥112.35:$1.00 on December 31, 2007) was denominated in Japanese yen. We have historically borrowed amounts under our credit facilities in currencies other than the U.S. dollar due to the lower interest rates applicable to borrowings in such currencies. However, since January 1, 2008, we have converted a significant portion of the outstanding amounts under our credit facilities in currencies other than the U.S. dollar into U.S. dollar amounts, resulting in a further reduction of the percentage of outstanding principal amount denominated in foreign currencies from 47.3% on December 31, 2007 to approximately 3.5% as of March 31, 2008, reducing our exposure to currency fluctuations. We intend to convert the amount of CHF12.9 million (the equivalent of $12.99 million) that was outstanding as of March 31, 2008 under the loan agreement into the U.S. dollar at a time when we deem market conditions to be more favorable. We have not hedged our currency exposure and, as a result, prior to the conversion of our loan to the U.S. dollar, our available funds may be affected by changes in the value of the U.S. dollar relative to the Swiss franc. Following the conversion, we will still be exposed to currency fluctuations with respect to the Japanese yen and the euro in connection with certain of our newbuild contracts, two of which are denominated in Japanese yen, and certain of our vessel operating expenses, such as crew wages to our Greek crew members, which are denominated in euros.

Since December 31, 2007, we, through three of our Subsidiaries, have entered into three new credit agreements, under which we have borrowed an aggregate of $120.0 million. We have used these borrowings to refinance $38.5 million of our existing debt, repay advances from owners and pay dividends. We are also intending to enter into a proposed new credit facility of $200.0 million before the end of 2009, part of which will be used to finance capital expenditures, including a portion of the contract prices of our eight contracted newbuilds, payment of advances to current owners, compliance with international shipping standards, environmental laws and regulations and working capital. In addition, we have accepted commitment letters to enter into two additional credit facilities for $45.0 million each to finance capital expenditures, including newbuild contracts, and to provide working capital with respect to two of our newbuilds scheduled for delivery in late 2008 and early 2009. For more details on the two new credit facilities, see “—New Credit Facilities” and “Description of Indebtedness.”

We will require capital to fund ongoing operations, including expenses we incur as a public company following the completion of this offering, the payment of dividends and the construction and acquisition of new vessels and to service existing indebtedness and any other indebtedness that we may incur in the future. Following the completion of this offering and taking into account generally expected market conditions, we anticipate that internally generated cash flow and borrowings under our credit facilities, including our two new credit facilities of $45.0 million each with respect to our newbuilds, will be sufficient to fund the operations of our fleet, including our working capital requirements, and the payment of dividends until the end of 2009. At that time, we expect to require additional indebtedness to partially fund our remaining commitments of an estimated $180.6 million with respect to our newbuilds.

In March and April 2008 we settled all intercompany balances as of December 31, 2007 with our Manager and with our owners. In connection with this, in January 2008, our Manager repaid on our behalf prior advances from owners in the amount of $10.1 million, resulting in a corresponding decrease in amounts due from our Manager. In March and April 2008, we paid a dividend of $147.8 million to Polys Hajionnou and Nicolaos Hadjioannou, our current owners, which was funded from amounts due from our Manager. Finally, in order to settle the remaining amount of $4.0 million due from our Manager, $4.0 million in restricted cash in collateral accounts held by our Manager was transferred in April 2008 to two new restricted cash collateral accounts of $2.0 million held by each of our Subsidiaries, Petra and Pemer.

In addition to the $147.8 milllion dividend paid to our current owners in March and April 2008, an estimated additional dividend of $31.0 million, which will be funded using amounts due from our Manager, reflecting a portion of estimated net income earned from January 1, 2008 until the date immediately prior to the closing of this offering will also be declared prior to the closing of this offering. Investors in this offering will not be entitled to receive any portion of either of this dividend.

In March 2008, we paid $7.7 million as advances for vessels under construction funded by advances from our current owners. On May 27, 2008, we will be required to pay an additional ¥400 million as advances for a vessel under construction funded by advances from our current owners. These advances will be paid back to our current owners from either surpluses from operations or from future

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credit facilities. Immediately after the closing of this offering, we expect to have $20.0 million in cash held by our Subsidiaries of which $16.0 million comprises cash and cash equivalents and $4.0 million comprises restricted cash, aggregate indebtedness of $416.8 million plus the equivalent of ¥400 million in U.S. dollars as of May 27, 2008, and available borrowing capacity of $90.0 million under our two additional credit facilities for which we have accepted commitment letters of $45.0 million each, to be entered into by the Subsidiaries Eniaprohi and Eniadefhi.

We intend, following the completion of this offering, to pay a quarterly dividend of $0.475 per share, or $1.90 per share per year and expect to pay our first dividend following this offering in August 2008, calculated based on the pro rata amount of the quarterly dividend for the period from the closing of this offering until the end of the second quarter of 2008. We expect that the dividend we intend to pay to stockholders following the completion of this offering will represent a significant portion of our cash flows from operations. We intend to raise $200.0 million of additional borrowing capacity. If we are unable to secure this additional borrowing, our ability to pay dividends will be adversely affected.

We also expect to retain a portion of our cash to help fund the future growth of our fleet, other capital expenditures and debt repayments, as determined by our board of directors. After giving pro forma effect to the removal of the Additional Companies (and the associated $112.4 million gain on their sale), the activities of our Subsidiary Maxpente with respect to the Pedhoulas Farmer (a vessel sold on January 9, 2007 immediately following its acquisition by Maxpente) and to the other adjustments (see “Unaudited Pro Forma Combined Condensed Financial Statements”) with respect to our combined statement of operations for the year ended December 31, 2007, our net income on a pro forma basis was $87.8 million for 2007. This reflects, on a pro forma basis, the operations of fewer vessels than we anticipate having in our fleet in 2008, 2009 and 2010 and a daily TCE rate below the average rate for which we already had, as of December 31, 2007, period time charter commitments for the following percentages of our fleet’s anticipated available days: 2008—75.9%, 2009—50.6% and 2010—36.1%. We therefore expect that our contracted revenues when compared with our anticipated operating expenses and financing costs will provide the liquidity necessary to support our dividend policy and our growth. As of December 31, 2007, our contracted period time charter arrangements for 2008 through 2010 were expected to provide revenues of $347.1 million. Additionally, the contracted revenue from period time charters is expected to be $66.5 million for 2011 and $156.1 million from January 1, 2012 onwards. Overall, as of December 31, 2007, the contracted revenue for these years is $569.6 million. However, in the event our future liquidity needs are greater than expected, it could reduce or eliminate the cash available for distributions as dividends. In such event, our board of directors may change our dividend policy.

Our Subsidiaries are incorporated under the laws of the Republic of Liberia, which generally prohibit the payment of dividends other than from surplus or net profits, or while a company is insolvent or would be rendered insolvent by the payment of such a dividend. Additionally, under the terms of certain of our existing credit facilities, our Subsidiaries are not permitted to pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividends.

Cash Flows

Net Cash (Used in)/Provided by Operating Activities

The cash we generate from operating activities is reflected as cash used in operating activities for all periods presented, mainly as a result of our arrangements with our Manager. Under our arrangements with our Manager, our Manager undertakes the execution of all financial transactions on our behalf with respect to third parties and our owners. As a result, all of our cash from a period, including cash from operating activities, investing activities and financing activities, is maintained in the name of our Manager and is reflected as amounts Due from Manager in the predecessor combined statements of cash flows for such period.

For the year ended December 31, 2007, amounts Due from Manager decreased by $143.0 million (which includes the $88.4 million of net cash provided by investing activities shown below in the section “—Net Cash (Used in)/Provided by Investing Activities” and the $366.9 million of net cash used in financing activities shown below in the section “—Net Cash (Used in)/Provided by Financing Activities”) compared to an increase of $83.0 million (which includes the $33.8 million of net cash used in investing

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activities shown below in the section “—Net Cash (Used in)/Provided by Investing Activities” and the $46.6 million of net cash provided by financing activities shown below in the section “—Net Cash (Used in)/Provided by Financing Activities”) for the year ended December 31, 2006. This decrease of $143.0 million during the year ended December 31, 2007, was mainly due to settlement of intercompany accounts with our Manager and our owners, including dividend payments of $383.9 million, partially offset by increased proceeds from long term debt. The increase in amounts Due from Manager for the years ended December 31, 2006 and 2005, remained relatively steady at $83.0 million (which includes the $33.8 million of net cash used in investing activities shown below in the section “—Net Cash (Used in)/Provided by Investing Activities” and the $46.6 million of net cash provided by financing activities shown below in the section “—Net Cash (Used in)/Provided by Financing Activities”) for the year ended December 31, 2006, compared to $80.5 million (which includes the $6.1 million of net cash used in investing activities shown below in the section “—Net Cash (Used in)/Provided by Investing Activities” and the $28.4 million of net cash provided by financing activities shown below in the section “—Net Cash (Used in)/Provided by Financing Activities”) for the year ended December 31, 2005.

Following this offering, our cash will be maintained in bank accounts in our name and monthly transfers will be made to our Manager in order for our Manager to pay the operating and voyage expenses of our vessels.

Net Cash (Used in)/Provided by Investing Activities

Net cash flows provided by investing activities were $88.4 million for the year ended December 31, 2007 compared to net cash flows used in investing activities of $(33.8) million for the year ended December 31, 2006. This increase of $122.2 million from 2006 is attributable to an increase in proceeds from the sale of vessels, as during the year ended December 31, 2007, we sold four vessels, while during the year ended December 31, 2006, we sold two vessels. The increase of $27.7 million in net cash flows used by investing activities to $(33.8) million during the year ended December 31, 2006 as compared to $(6.1) million during the year ended December 31, 2005 is attributable to the increase in payments related to vessel acquisitions, and vessel construction and the increase in proceeds from the sale of vessels. During the year ended December 31, 2006, we paid $110.2 million with respect to vessel acquisitions, and received $76.4 million from the sale of assets compared to payments of $52.2 million and receipt of proceeds from the sale of vessels of $46.1 million during the year ended December 31, 2005.

Net Cash (Used in)/Provided by Financing Activities

Net cash flows (used in) financing activities were $(366.9) million for the year ended December 31, 2007 compared to net cash flows provided by financing activities of $46.6 million for the year ended December 31, 2006. This decrease is largely attributable to a $144.1 million increase in our repayment of owners advances compared to 2006 and dividend payments of $383.9 million, partially offset by a $138.6 million increase in proceeds from long-term debt compared to 2006. Net cash flows from financing activities increased 64.1%, or $18.2 million, to $46.6 million during the year ended December 31, 2006, from $28.4 million during the year ended December 31, 2005. The increase is largely due to a net increase in advances from owners (after repayment) of $44.5 million to $44.8 million during the year ended December 31, 2006, compared to $0.3 million during the year ended December 31, 2005. It is also attributable to a decrease in the net proceeds from long-term debt of $26.4 million to $1.9 million during the year ended December 31, 2006, compared to $28.3 million during the year ended December 31, 2005.

Credit Facilities

We, through the Subsidiaries, have entered into a number of credit facilities in connection with financing the acquisition of our vessels. The table below summarizes certain terms of our existing credit facilities in effect as of December 31, 2007. As of that date, none of the Additional Companies had any existing credit facilities.

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Lender

 

Subsidiary Party
(Encumbered
Vessel) (1)

 

Outstanding
Principal
Amount (2)

 

Interest
Rate

 

Maturity

 

Remaining Repayment
Installments as of
December 31, 2007 (3)

DEN NORSKE BANK
ASA (4)

 

Marindou
(Maria)

 

CHF15.3 million ($13.6 million)

 

LIBOR plus 0.75% per annum

 

May 14, 2013

 

11 semi-annual installments: CHF 700,000 for the first through third installments; CHF 800,000 for the fourth through 10th; and CHF 7,600,000 for the 11th installment

THE ROYAL BANK OF SCOTLAND PLC (5)

 

Kerasies
(Katerina)

 

$40.0 million

 

LIBOR plus 0.575% per annum

 

Dec. 13, 2019

 

24 semi-annual installments: $800,000 for each of the first six installments; $1.1 million for each of the seventh to 18th installments; $1.3 million for each of the 19th to 23rd installments and $15.7 million for the 24th installment

DNB NOR BANK ASA (6)

 

Efragel
(Efrossini)

 

CHF16.6 million and ¥1.0 billion (together, $23.8 million)

 

LIBOR plus 0.75% per annum

 

Nov. 15, 2014

 

14 semi-annual installments: CHF 721,050 and JPY 44,420,000 for the first and second installments; CHF 650,000 and JPY 39,978,000 for the third through 13th installments; and CHF 7,991,360 and JPY 493,062,000 for the 14th installment

THE ROYAL BANK OF SCOTLAND PLC (7)

 

Marathassa (Maritsa)

 

$11.6 million and CHF13.5 million (together, $23.6 million)

 

LIBOR plus 0.675% per annum

 

Feb. 18, 2017

 

19 semi-annual installments: $477,500 and CHF 550,000 for the first installment; $407,500 and CHF 470,000 for each of the second to 18th installments; and $4.2 million and CHF 4,941,600 for the 19th installment

THE ROYAL BANK OF SCOTLAND PLC (8)

 

Marinouki (Marina)

 

¥3.4 billion ($30.4 million)

 

LIBOR plus 0.675% per annum

 

Mar. 4, 2018

 

21 semi-annual installments: JPY 52,000,000 for each of the first three installments; JPY 78,000,000 for each of the fourth to ninth installments; JPY 92,000,000 for each of the 10th to the 20th installments; and JPY 1,783,059,940 million on the 21st installment

DEUTSCHE SCHIFFSBANK AKTIENGESELLSCHAFT (9)

 

Staloudi (Stalo)

 

$30.4 million

 

LIBOR plus 0.65% per annum

 

May 30, 2016

 

Tranche A: 17 semi-annual installments: $687,500 each with an additional balloon payment of $14.6 million due with the last installment
Tranche B: 17 semi-annual installments: $112,500 each with an additional balloon payment of $2.3 million due with the last installment (9)

BAYERISCHE HYPO-UND VEREINSBANK AKTIENGESELLSCHAFT (10)

 

Petra
(Pedhoulas Trader)

 

$2.0 million and CHF41.1 million (together, $38.4 million)

 

LIBOR plus 0.65% per annum

 

Jan. 18, 2019

 

23 semi-annual installments: CHF 1,250,000 for each of the first 22 installments; and $2.0 million and CHF 13,563,000 for the 23rd installment

BAYERISCHE HYPO-UND VEREINSBANK AKTIENGESELLSCHAFT (11)

 

Pemer
(Pedhoulas Merchant)

 

¥4.1 billion ($36.2 million)

 

LIBOR plus 0.65% per annum

 

Mar. 7, 2019

 

23 semi-annual installments: JPY 116,400,000 for each of the first 22 installments; and JPY 1,513,200,000 million for the 23rd installment

DNB NOR BANK ASA (12)

 

Pelea
(Pedhoulas Leader)

 

$41.4 million

 

LIBOR plus 0.575% per annum

 

June 14, 2019

 

23 semi-annual installments: $650,000 for each of the first five installments; $750,000 for the sixth through to the 11th installment; $1.19 million for the 12th through to the 22nd installment; and $19.32 million for the 23rd installment

THE ROYAL BANK OF SCOTLAND PLC (13)

 

Soffive
(Sophia)

 

$45.0 million

 

LIBOR plus 0.575% per annum

 

Nov. 17, 2019

 

24 semi-annual installments: $900,000 for each of the first six installments; $1.2 million for each of the seventh to 18th installments; $1.5 million for each of the 19th to the 23rd installments; and $17.7 million for the final installment.


 

 

(1)

 

 

 

As of December 31, 2007, the Vassos, owned by Avstes, was unencumbered. We entered into a new credit facility in the amount of $36.0 million with DnB NOR Bank ASA on April 17, 2008, under which we have mortgaged the Vassos.

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(2)

 

 

 

Swiss franc, or CHF, amounts translated to U.S. dollars have been translated at a rate of CHF1.1267:$1.00, and Japanese yen, or ¥, amounts translated to U.S. dollars have been translated at a rate of ¥112.35:$1.00, the exchange rates in effect on December 31, 2007. We have converted a significant portion of the outstanding amounts under our current credit facilities denominated in currencies other than the U.S. dollar as of December 31, 2007 and intend to convert the remainder in the future. See “—Subsequent Events—Conversion of Certain Outstanding Borrowings to U.S. Dollar Amounts.”

 

(3)

 

 

 

Remaining installment payments listed based on U.S. dollar amounts set forth in credit agreement and may be payable in the equivalent amount in the relevant optional currency if amounts are outstanding in an optional currency. Actual amounts payable in U.S. dollars may differ from contract repayment amounts based on fluctuations of the optional currency-to-U.S. dollar exchange rate.

 

(4)

 

 

 

Loan Agreement between Den Norske Bank ASA and Marindou, dated May 12, 2003 (the “Old Marindou loan”). The Old Marindou loan was refinanced on January 14, 2008, as described in more detail in “—New Credit Facilities” below.

 

(5)

 

 

 

Loan Agreement between RBS and Kerasies, dated December 13, 2007.

 

(6)

 

 

 

Loan Agreement between DnB NOR BANK ASA and Efragel, dated November 11, 2004 (the “Old Efragel loan”). The Old Efragel loan was refinanced on January 17, 2008, as described in more detail in “—New Credit Facilities” below.

 

(7)

 

 

 

Loan Agreement between RBS and Marathassa, dated February 16, 2005.

 

(8)

 

 

 

Loan Agreement between RBS and Marinouki, dated March 1, 2006. On March 19, 2008, amounts outstanding in Japanese yen under the Marinouki credit facility were converted into U.S. dollar amounts and the total amount outstanding was increased by $4.0 million as a result of currency exchange losses to the lender from the conversion, so that following the conversion and increase, the remaining balance of the credit facility was $32.6 million.

 

(9)

 

 

 

Loan Agreement between Deutsche Schiffsbank Aktiengesellschaft and Staloudi, dated May 29, 2006, as amended December 3, 2007 and May 13, 2008.

 

(10)

 

 

 

Loan Agreement between Bayerische Hypo-Und Vereinsbank Aktiengesellschaft, or “Bayerische”, and Petra, dated January 11, 2007. On January 18, 2008, amounts outstanding in Swiss francs under the Petra credit facility were converted into U.S. dollar amounts so that following the conversion the remaining balance of the credit facility was $38.2 million.

 

(11)

 

 

 

Loan Agreement between Bayerische and Pemer, dated March 7, 2007. On March 7, 2008, amounts outstanding in Japanese yen under the Pemer credit facility were converted into U.S. dollar amounts so that following the conversion the remaining balance of the credit facility was $38.2 million.

 

(12)

 

 

 

Loan Agreement between DnB NOR BANK ASA and Pelea, dated June 12, 2007.

 

(13)

 

 

 

Loan Agreement between RBS and Soffive, dated November 19, 2007.

The credit facilities are secured as follows:

 

 

 

 

first priority mortgages over the vessels owned by the respective borrowers; and

 

 

 

 

first priority assignment of all earnings and insurances from the mortgaged vessels.

The credit facilities also impose operating and financial restrictions on us. These restrictions in our existing credit facilities generally limit our Subsidiaries’ ability to, among other things:

 

 

 

 

pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend;

 

 

 

 

enter into long-term charters for more than 13 months;

 

 

 

 

incur additional indebtedness, including through the issuance of guarantees;

 

 

 

 

change the flag, class or management of the vessel mortgaged under such facility or terminate or materially amend the management agreement relating to such vessel;

 

 

 

 

create liens on their assets;

 

 

 

 

make loans;

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make investments;

 

 

 

 

make capital expenditures;

 

 

 

 

undergo a change in ownership; and

 

 

 

 

sell the vessel mortgaged under such facility.

Our existing credit facilities also require certain of our Subsidiaries to maintain specified financial ratios and satisfy financial covenants. Depending on the credit facility, certain of our Subsidiaries are subject to financial ratios and covenants requiring that these Subsidiaries:

 

 

 

 

ensure that the value of the vessel mortgaged under the applicable credit facility not fall below 100% to 120%, as applicable, of the outstanding amount of the loan; and

 

 

 

 

ensure that outstanding amounts in currencies other than the U.S. dollar do not exceed 100% or 110%, as applicable, of the U.S. dollar equivalent amount specified in the relevant credit agreement for the applicable period by, if necessary, providing cash collateral security in an amount necessary for the outstanding amounts to meet this threshold.

As of December 31, 2006, we were in compliance with all debt covenants. Although we were in breach of certain covenants as of December 31, 2007 prohibiting the entry into charters for a term longer than the maximum specified duration, which resulted in the payment of dividends to shareholders being a breach of covenant under the applicable loan agreements, all of these breaches were subsequently waived in writing by the relevant lenders in February 2008.

The covenants described above are those contained in our existing credit facilities.

Based on the terms of the commitment letters to enter into two new credit facilities of $45.0 million each that we have accepted from DnB NOR Bank ASA, the new credit facilities will contain covenants substantially similar to the covenants described above. Pursuant to those commitment letters, we will also guarantee the obligations of our Subsidiaries under those credit facilities and certain financial covenants will apply to us, including a consolidated leverage ratio, consolidated interest coverage ratio, debt-to-cash flow and debt-to-EBITDA ratios, and minimum tangible net worth. In addition, these credit facilities will contain a covenant that the Hajioannou family maintain its majority interest in us. By letter dated May 14, 2008, we have also agreed to become the guarantor of the reducing revolving credit facilities of our subsidiaries Marathassa Shipping Corporation, Marinouki Shipping Corporation, Kerasies Shipping Corporation and Soffive Shipping Corporation. Under the supplemental agreements we have agreed to enter into with RBS in respect of the Marathassa, Marinouki, Kerasies and Soffive loan agreements, the margin applicable to such loans will in each case increase to 0.75% from 0.675%, 0.675%, 0.575% and 0.575%, respectively. In connection with our intended guarantee of the loans of Efragel Shipping Corporation, Marindou Shipping Corporation and Pelea Shipping Corporation, we expect that the margins applicable to those loan obligations will also increase.

The covenants that may be contained in any new credit facility, however, may differ from the covenants described above. In addition, we intend to enter into supplemental agreements with respect to certain of our Subsidiaries’ existing credit facilities (see the section entitled “Description of Indebtedness—Our Credit Facilities”). Although the relevant lender has proposed, and we agree with, certain key terms to be included in the supplemental agreements (such as the margin and covenants to apply following the offering), the lender’s proposal is subject to agreement on all relevant terms of the supplemental agreements. Accordingly, the final terms of these supplemental agreements may differ from the proposed terms and could be more onerous, which my require us to seek alternative financing.

For additional information regarding our existing credit facilities see “Description of Indebtedness.”

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New Credit Facilities

New Marindou Credit Facility

In January 2008, our Subsidiary Marindou entered into a ten-year, $42.0 million multi-currency reducing revolving credit facility with DnB NOR Bank ASA, which we refer to as the “New Marindou credit facility,” to refinance existing indebtedness and provide working capital. We borrowed $42.0 million on January 14, 2008 under the New Marindou credit facility. Subject to certain requirements, borrowings may be made and outstanding amounts may be converted into the following optional currencies in addition to the U.S. dollar: Swiss francs, Japanese yen and euros.

The interest rate under the New Marindou credit facility is LIBOR plus a margin of 0.65% per annum. The facility amount will be reduced by semi-annual reductions starting July 14, 2008. The amount of each of the first to sixth reductions will be each $750,000; the amount of the seventh to 12th reductions will be each $1.0 million; the amount of the thirteenth through 20th reductions will be each $1.7 million; and a final reduction of $18.0 million will occur together with the 20th scheduled reduction.

Our obligations under the New Marindou credit facility are secured by a first-priority mortgage over the Maria and by a first-priority assignment of our earnings related to the vessel, including charter revenues and any insurance proceeds. In addition, following this offering, we will guarantee the obligations of our Subsidiary Marindou under this credit facility and certain financial covenants will apply to us, including a consolidated leverage ratio, consolidated interest coverage ratio, debt-to-cash flow and debt-to-EBITDA ratios, and minimum tangible net worth. In addition, there will be a covenant that the Hajioannou family maintain its majority interest in us.

New Efragel Credit Facility

In January 2008, our Subsidiary Efragel entered into a ten-year, $42.0 million multi-currency reducing revolving credit facility with DnB NOR Bank ASA, which we refer to as the “New Efragel credit facility,” to refinance existing indebtedness and provide working capital. We borrowed $42.0 million on January 17, 2008 under the New Efragel credit facility. Subject to certain requirements, borrowings may be made and outstanding amounts may be converted into the following optional currencies in addition to the U.S. dollar: Swiss francs, Japanese yen and euros.

The interest rate under the New Efragel credit facility is LIBOR plus a margin of 0.65% per annum. The facility amount will be reduced by semi-annual reductions starting July 17, 2008. The amount of each of the first to sixth reductions will be each $750,000; the amount of the seventh to 12th reductions will be each $1.0 million; the amount of the thirteenth through 20th reductions will be each $1.7 million; and a final reduction of $18.0 million will occur together with the 20th scheduled reduction.

Our obligations under the New Efragel credit facility are secured by a first-priority mortgage over the Efrossini and by a first-priority assignment of our earnings related to the vessel, including charter revenues and any insurance proceeds. In addition, following this offering, we will guarantee the obligations of our Subsidiary Efragel under this credit facility and certain financial covenants will apply to us, including a consolidated leverage ratio, consolidated interest coverage ratio, debt-to-cash flow and debt-to-EBITDA ratios, and minimum tangible net worth. In addition, there will be a covenant that the Hajioannou family maintain its majority interest in us.

Avstes Credit Facility

On April 17, 2008, our Subsidiary Avstes entered into a ten-year, $36.0 million multi-currency reducing revolving credit facility with DnB NOR Bank ASA, which we refer to as the “Avstes credit facility”. We drew down the full amount of $36.0 million on April 18, 2008 under the Avstes credit facility and advanced this amount to our Manager, so that our Manager could pay dividends to our current owners on our behalf. Subject to certain requirements, borrowings may be made and outstanding amounts may be converted into the following optional currencies in addition to the U.S. dollar: Swiss francs, Japanese yen and euros.

The interest rate under the Avstes credit facility is LIBOR plus a margin of 0.80%, and the margin that will apply following this offering will be agreed prior to the closing of this offering. We will incur a

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commitment fee on any unused portion of the amount available under the Avstes credit facility at a rate of 0.20% per year.