20-F 1 d1277626_20-f.htm d1277626_20-f.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 20-F

[_]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
OR
 
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2011
 
 
 
OR
 
 
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from  ____________ to ____________
 
 
 
OR
 
 
[_]
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
Date of event requiring this shell company report: Not applicable
 
 
 
Commission file number: 1-10137
 
 
 
 
 
EXCEL MARITIME CARRIERS LTD.
 
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
 
(Translation of Registrant's name into English)
 
 
 
 
 
LIBERIA
 
(Jurisdiction of incorporation or organization)
 
 
 
Excel Maritime Carriers Ltd.
 
Par La Ville Place
 
14 Par La Ville Road
 
Hamilton HM JX Bermuda
 
(Address of principal executive offices)
 
 
 
Pavlos Kanellopoulos
 
(Tel) +30 210 620 9520 ir@excelmaritime.com
 
(Fax) +30 210 620 9528
 
17th km of National Road Athens-Lamia & Finikos Street
 
145 64, Nea Kifisia, Greece

 
1

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange on which registered
 
 
 
             Common shares, par value $0.01
 
          New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:
 
As of December 31, 2011, there were 88,909,430 shares of Class A common stock and 230,746 shares of Class B common stock of the registrant outstanding.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
|_| Yes
|X| No

If this report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 
|_| Yes
|X| No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
|X| Yes
|_| No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

 
|_| Yes
|_| No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer |_|
Accelerated filer |X|
Non-accelerated filer |_|

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing.
 
 
 
|X| U.S. GAAP
|_| International Financial Reporting Standards as issued by the International Accounting Standards Board
 
 
|_| Other
 

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 
|_| Item 17
|_| Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
|_| Yes
|X| No


 
2

 

TABLE OF CONTENTS
 
 
PART I
 
 
 
ITEM 1 -
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
6
 
 
 
 
 
ITEM 2 -
OFFER STATISTICS AND EXPECTED TIMETABLE
6
 
 
 
 
 
ITEM 3 -
KEY INFORMATION
6
 
 
 
 
 
ITEM 4 -
INFORMATION ON THE COMPANY
39
 
 
 
 
 
ITEM 4A -
UNRESOLVED STAFF COMMENTS
55
 
 
 
 
 
ITEM 5 -
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
56
 
 
 
 
 
ITEM 6 -
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
82
 
 
 
 
 
ITEM 7 -
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
86
 
 
 
 
 
ITEM 8 -
FINANCIAL INFORMATION
88
 
 
 
 
 
ITEM 9 -
THE OFFER AND LISTING
88
 
 
 
 
 
ITEM 10 -
ADDITIONAL INFORMATION
89
 
 
 
 
 
ITEM 11 -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
104
 
 
 
 
 
ITEM 12 -
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
105
 
 
 
 
PART II
 
 
 
 
 
 
 
 
ITEM 13 -
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
105
 
 
 
 
 
ITEM 14 -
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
105
 
 
 
 
 
ITEM 15 -
CONTROLS AND PROCEDURES
105
 
 
 
 
 
ITEM 16A-
AUDIT COMMITTEE FINANCIAL EXPERT
107
 
 
 
 
 
ITEM 16B-
CODE OF ETHICS
107
 
 
 
 
 
ITEM 16C-
PRINCIPAL ACCOUNTANT FEES AND SERVICES
107
 
 
 
 
 
ITEM 16D-
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
108
 
 
 
 
 
ITEM 16E-
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
108
 
 
 
 
 
ITEM 16F-
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
108
 
 
 
 
 
ITEM 16G-
CORPORATE GOVERNANCE
108
       
  ITEM 16H- MINE SAFETY DISCLOSURE  108

 
3

 


 
 
 
 
PART III
 
 
 
 
 
 
 
 
ITEM 17 -
FINANCIAL STATEMENTS
108
 
 
 
 
 
ITEM 18 -
FINANCIAL STATEMENTS
108
 
 
 
 
 
ITEM 19 –
EXHIBITS
 

 
4

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
 
Matters discussed in this document may constitute forward-looking statements.
 
The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking state­ments in order to encourage companies to provide prospective information about their business. Forward-looking sta­­te­­­ments include statements concerning plans, objectives, goals, strategies, future events or performance, and under­­lying assumptions and statements other than those of historical facts.
 
Please note that in this document, "we," "us," "our," "the Company" and "Excel" all refer to Excel Maritime Car­riers Ltd. and its wholly-owned and majority-owned consolidated subsidiaries.
 
The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe har­bor legislation. This document and any other written or oral statements made by us or on our behalf may include for­ward-looking statements, which reflect our current views and assumptions with respect to future events and financial performance, and are subject to risks and uncertainties. The words "will," "may," "should," "expect," "intend," "plan," "believe," "anticipate," "esti­ma­te," "forecast," "pro­ject," "potential" and varia­tions of such words and similar expressions, which are predictions of, or indicate fu­tu­re events and future trends whi­ch do not relate to historical matters,  identify forward-looking statements.
 
The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including, without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties. Actual results may differ materially from those expressed or implied by such forward-looking statements (and from past results, performance and achie­ve­ments). Although we believe that these assum­ptions were reasonable when made, because these assumptions are inhe­rently subject to significant uncer­tainties and contingencies which are difficult or impossible to predict and are be­yond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or proje­ctions. Shareholders and prospective investors are cautioned not to place undue reliance on such forward-loo­king sta­te­ments.
 
In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market con­di­tions, including changes in demand for drybulk vessels, fluctuations in charter hire rates and vessel values, changes in the Company's operating expenses, including bunker prices, drydocking and insurance costs, changes in governmental rules and regulations, changes in income tax legislation or actions taken by regulatory authorities, po­te­ntial liability from pending or future litigation, general domestic and international political conditions, potential dis­ru­ption of shipping routes due to accidents or political events, and other important factors described from time to ti­me in the reports filed by the Compa­ny with the U.S. Securities and Exchange Commission, or the SEC.

These forward-looking statements are made as of the date hereof and are not intended to give any assurance as to fu­ture results. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, either to reflect new information, changes in events, conditions or circumstances on which such statements are based, or otherwise.

 
5

 

PART I
 
 
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable
 
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable
 
ITEM 3 - KEY INFORMATION
 
A. Selected Financial Data
 
The following table summarizes our selected historical financial information and other operating data at the dates and for the periods indicated. The selected historical financial data in the table as of December 31, 2007, 2008, 2009, 2010 and 2011 are derived from our audited consolidated financial statements and notes thereto which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP). The consolidated statement of operations and cash flow data for the years ended December 31, 2009, 2010 and 2011 and the conso­lidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated fi­nan­cial statements included elsewhere in this 2011 Annual Report. The selected consolidated financial data should be read in conjunction with "Item 5 - Operating and Financial Review and Prospects", the consolidated financial sta­te­ments, related notes, and other financial information included elsewhere in this 2011 Annual Report.
 

Selected Historical Financial Data and Other Operating Information
 
   
Year ended December 31,
 
   
2007 (1)
      2008 (1), (2)     2009       2010       2011  
   
(In thousands of U.S. dollars, except for share and per share data and average daily results)
 
STATEMENT OF OPERATIONS DATA:
                                     
Voyage revenues
    176,689       461,203       391,746       422,966       353,397  
Time charter amortization
    -       233,967       364,368       262,305       3,475  
Revenues from managing related party vessels
    818       890       488       376       17  
Voyage expenses
    (11,077 )     (28,145 )     (19,317 )     (27,563 )     (42,740 )
Charter hire expense
    -       (23,385 )     (32,832 )     (32,831 )     (32,832 )
Charter hire amortization
    -       (28,447 )     (39,952 )     (39,945 )     (36,526 )
Commissions – related parties
    (2,204 )     (3,620 )     (2,260 )     (3,188 )     (3,892 )
Vessel operating expenses
    (33,637 )     (69,684 )     (83,197 )     (86,700 )     (85,074 )
Depreciation
    (27,864 )     (98,753 )     (123,411 )     (125,283 )     (128,089 )
Vessel impairment loss
    -       (2,232 )     -       -       -  
Dry docking and special survey costs
    (6,834 )     (13,511 )     (11,379 )     (11,243 )     (13,326 )
General and administrative expenses
    (12,586 )     (32,925 )     (42,995 )     (35,748 )     (35,583 )
Loss on disposal of JV ownership interest
    -       -       (3,705 )     -       -  
Gain on sale of vessels
    6,993       -       61       -       6,432  
Write down of goodwill
    -       (335,404 )     -       -       -  
Impairment loss on intangible asset
    -       -       -       -       (146,732 )
Loss from vessel's purchase cancellation
    -       (15,632 )     -       -       -  
Operating income (loss)
    90,298       44,322       397,615       323,146       (161,473 )
Interest and finance costs, net
    (8,111 )     (54,889 )     (56,287 )     (36,686 )     (35,582 )
Losses on derivative financial instruments
    (439 )     (35,884 )     (1,126 )     (27,061 )     (13,292 )
Foreign exchange gains (losses)
    (367 )     71       (322 )     (44 )     (187 )
Other, net
    (66 )     1,585       408       243       839  
US source income taxes
    (486 )     (783 )     (660 )     (772 )     (700 )
Income from investment in affiliate
    873       487       -       -       -  
Loss in value of investment
    -       (10,963 )     -       -       -  
Net income (loss)
    81,702       (56,054 )     339,628       258,826       (210,395 )
Loss assumed (income earned) by non controlling interests
    2       140       154       (997 )     (1,198 )
Net income (loss) attributable to Excel
    81,704       (55,914 )     339,782       257,829       (211,593 )
 
 
6

 
 
     
Year ended December 31,
 
       2007(1)        2008(1), (2)      
2009
     
2010
     
2011
 
   
(In thousands of U.S. dollars, except for share and per share data and average daily results)
Earnings (losses) per common share, basic
    4.10       (1.53 )     5.03       3.20       (2.51 )
Weighted average number of shares, basic
    19,949,644       37,003,101       67,565,178       80,629,221       84,463,674  
Earnings (losses) per common share, diluted
    4.09       (1.53 )     4.85       3.10       (2.51 )
Weighted average number of shares, diluted
    19,965,676       37,003,101       69,999,760       83,102,923       84,463,674  
Cash dividends declared per share
    0.60       1.20       -       -       -  
                                         
BALANCE SHEET DATA:
                                       
Cash and cash equivalents
    243,672       109,792       100,098       65,917       53,749  
Current assets, including cash
    252,734       127,050       148,100       97,201       82,845  
Vessels net / advances for vessels under construction
and acquisition
    527,164       2,893,615       2,731,347       2,699,216       2,579,285  
Total assets                                                             
    813,499       3,316,809       3,130,182       3,031,820       2,721,929  
Current liabilities, including current portion of long-term debt
    55,990       314,903       217,174       172,737       167,500  
Total long-term debt, excluding current portion 
    315,301       1,256,707       1,121,765       1,046,672       952,716  
Total Stockholders' equity
    442,208       1,053,398       1,486,272       1,764,148       1,560,564  
                                         
CASH FLOW DATA:
                                       
Net cash provided by operating activities
    108,733       263,899       147,252       158,499       104,350  
Net cash used in investing activities
    (123,609 )     (785,279 )     (2,282 )     (92,849 )     (1,520 )
Net cash provided by (used in) financing activities
    172,259       387,500       (154,664 )     (99,831 )     (114,998 )
                                         
FLEET DATA:
                                       
Average number of vessels(3)
    16.5       38.6       47.2       47.7       47.7  
Available days for fleet(4)
    5,646       13,724       16,878       16,746       17,058  
Calendar days for fleet(5)                                                             
    6,009       14,134       17,229       17,401       17,407  
Fleet utilization(6)                                                             
    94.0 %     97.1 %     98.0 %     96.2 %     98.0 %
                                         
ADJUSTED EBITDA(7)                                                             
    119,271       307,963       231,720       246,161       162,833  
                                         
AVERAGE DAILY RESULTS:
                                       
Time charter equivalent rate(8)
    28,942       31,291       21,932       23,421       17,984  
Vessel operating expenses(9)
    5,598       4,930       4,829       4,982       4,887  
General and administrative expenses(10)
    2,156       2,324       2,514       2,057       2,055  
Total vessel operating expenses(11)
    7,754       7,254       7,343       7,039       6,942  

(1) The financial information for the years presented has been adjusted to reflect the adoption of the amendments in the accounting for Non-controlling Interest in a Subsidiary provided in FASB Accounting Standards CodificationTM ("ASC") ASC Topic 810-10-45, the adoption of ASC Topic 470-20 which requires the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the is­suer's non-convertible borrowing rate, as well as the change in the method of accounting for dry docking and special survey costs. With the exception of the amendments made in ASC 810 which require retrospective application only in the presentation and disclosure re­quire­ments, the other two accounting changes require retrospective application for all periods presented and were effected in the acco­mpa­nying consolidated financial statements in accordance with ASC Topic 250 "Accounting Changes and Error Corrections", which re­qui­res that an accounting change should be retrospectively applied to all prior periods presented, unless it is impractical to determine the prior period impacts.

(2) On January 29, 2008, we entered into an Agreement and Plan of Merger with Quintana Maritime Limited, or Quintana, and Bird Acqui­sition Corp., or Bird, our wholly-owned subsidiary. On April 15, 2008, we completed the acquisition of 100% of the voting equity interests in Quintana. As a result of the acquisition, Quintana operates as a wholly-owned subsidiary of Excel under the name Bird. The acquisition of Quintana was accounted for under the purchase method of accounting. The Company began consolidating Quintana from April 16, 2008, as of which date the results of operations of Quintana are included in the 2008 consolidated statement of operations.

 
7

 


(3) Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the nu­mber of calendar days each vessel was a part of our fleet during the period divided by the number of calendar days in that period.

(4) Available days for fleet are the total calendar days the vessels were in our possession for the relevant period after subtracting for off-hire days associated with major repairs, drydockings or special or intermediate surveys.

(5) Calendar days are the total days we possessed the vessels in our fleet for the relevant period including off-hire days associated with ma­jor repairs, drydockings or special or intermediate surveys.

(6) Fleet utilization is the percentage of time that our vessels were available for revenue generating available days, and is determined by divi­ding available days by fleet calendar days for the relevant period.

(7) Adjusted EBITDA represents net income (loss) attributable to us plus net interest and finance costs, depreciation, impairments or write downs, other losses and taxes eliminating the effect of stock-based compensation, gains or losses on the sale of vessels or owner­ship interests, amortization of deferred time charter assets and liabilities and unrealized gains or losses on derivatives, which are signifi­cant non-cash items. Drydocking and special survey costs are also included in the Adjusted EBITDA for comparability purposes, as a num­ber of our peers use the deferral method of accounting for such costs. Management uses adjusted EBITDA as a performance measu­re. We believe that Adjusted EBITDA is useful to investors because the shipping industry is capital intensive and may involve significant fi­na­n­­­cing costs. Adjusted EBITDA is not a measure of financial performance under U.S. GAAP (non-GAAP measure), and does not re­pre­sent and should not be considered to be an alter­na­tive to net in­come, operating income or any other indicator of a company's opera­ting performance required by U.S. GAAP. Our calcu­la­tion of Ad­ju­sted EBITDA may not be the same as that used by other companies in the shipping or other industries. The table below pro­vides a re­con­ci­liation of our Adjusted EBITDA to net income:

   
Year ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(In thousands of U.S. dollars)
 
Net income (loss) attributable to Excel
    81,704       (55,914 )     339,782       257,829       (211,593 )
 Interest and Finance costs, net(a)
    7,827       64,952       84,651       65,690       57,654  
 Depreciation
    27,864       98,753       123,411       125,283       128,089  
 Dry dock and special survey costs
    6,834       13,511       11,379       11,243       13,326  
Loss on disposal of JV ownership interest
    -       -       3,705       -       -  
Write down of goodwill
    -       335,404       -       -       -  
Vessel impairment loss
    -       2,232       -       -       -  
Loss from vessel's purchase cancellation
    -       8,382       -       -       -  
Loss in value of investment
    -       10,963       -       -       -  
Unrealized derivative financial instruments (gains) losses
    723       25,821       (27,238 )     (1,943 )     (8,780 )
Time charter revenue amortization, net of charter hire amortization expense
    -       (205,520 )     (324,416 )     (222,360 )     33,051  
Impairment loss on intangible asset
    -       -       -       -       146,732  
Stock based compensation
    826       8,596       19,847       9,647       10,169  
Gain on sale of vessels
    (6,993 )     -       (61 )     -       (6,432 )
Gain on joint venture de-consolidation
    -       -       -       -       (83 )
U.S. source income taxes
    486       783       660       772       700  
Adjusted EBITDA
    119,271       307,963       231,720       246,161       162,833  

(a)
This amount includes loan interest incurred on our credit facilities (including the effects of the realized inflows/outflows of our derivative financial instruments), the amortization of financing fees associated with these facilities, certain commitment fees incurred on the unused portion of the credit facilities for our newbuildings and interest earned on our deposits.

(8) Time Charter Equivalent, or TCE, is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our me­thod of calculating the TCE rate is con­si­stent with industry standards and is determined by dividing "voyage revenues" (net of voyage ex­penses) by available days for the relevant time period. The TCE rate is not a measure of financial performance under U.S. GAAP (non-GAAP measure), and may not be comparable to similarly titled measures of other companies. However, TCE is a standard shipping industry performance mea­sure used primarily to com­pa­re period-to-period changes in a shipping company's performance despite changes in the mix of charter ty­pes (i.e., spot voyage char­ters, time charters and bareboat charters), under which the vessels may be employed bet­ween the periods. The fol­lowing table reflects the cal­cu­lation of our TCE rates for the years presented (amounts in thousands of U.S. dol­lars, except for TCE ra­te, which is expressed in U.S. dollars and available days):

 
8

 


   
2007
   
2008
   
2009
   
2010
   
2011
 
Voyage revenues
  $ 176,689     $ 461,203     $ 391,746     $ 422,966     $ 353,397  
Voyage expenses and commissions to related parties
    (13,281 )     (31,765 )     (21,577 )     (30,751 )     (46,632 )
Time Charter Equivalent revenues
  $ 163,408     $ 429,438     $ 370,169     $ 392,215     $ 306,765  
Available days for fleet
    5,646       13,724       16,878       16,746       17,058  
Time Charter Equivalent (TCE) rate
  $ 28,942     $ 31,291     $ 21,932     $ 23,421     $ 17,984  

 (9)  Daily vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insu­ra­nce, maintenance and repairs are calculated by dividing vessel operating expenses by fleet calendar days for the relevant time period.

(10) Daily general and administrative expenses are calculated by dividing general and administrative expenses, including fo­reign exchange differences, by fleet calendar days for the relevant time period.

(11) Total vessel operating expenses, or TVOE, is a measurement of our total expenses associated with operating our ves­sels. TVOE is the sum of vessel operating expenses and general and administrative expenses. Daily TVOE is the sum of dai­ly vessel operating expenses and daily general and administrative expenses.

B. Capitalization and Indebtedness
 
Not Applicable
 
C. Reasons for the Offer and Use of Proceeds
 
Not Applicable

D. Risk Factors
 
Some of the following risks relate principally to the industry in which we operate and our business in general. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected and the trading price of our securities could decline.
 
The drybulk carrier charter market has sustained significant fluctuations since October 2008, which has adver­sely affected our earnings and may require us to impair the carrying values of our fleet, require us to raise ad­ditional capital in order to remain compliant with our loan covenants and loan covenant waivers and affect our ability to pay dividends in the future.
 
The drybulk shipping industry is cyclical with attendant volatility in charter hire rates and pro­fitability. For example, the degree of charter hire rate volatility among different types of drybulk carriers has varied widely. The Baltic Drybulk Index, or BDI, declined from a high of 11,793 in May 2008 to a low of 663 in December 2008, which represents a decline of approximately 94%. Over the comparable period of May through December 2008, the high and low of the Baltic Panamax Index and the Baltic Capesize Index represent a decline of approximately 96% and 99%, respectively. During 2009, the BDI increased from a low of 772 in January to a high of 4,661 in November of 2009. In 2010, the BDI increased from 3,299 in January 2010 to a high of 4,209 in May 2010 and subsequently decreased to a low of 1,700 in July 2010. During 2011, the BDI remained volatile, ranging from a low of 1,043 on February 4, 2011 to a high of 2,173 on October 14, 2011. As of December 23, 2011, the BDI was 1,738. On February 3, 2012, the BDI dropped to a 26-year low of 647, owing to a combination of both weak vessel demand and further increases in supply. On March 15, 2012, the BDI was 866.

The decline and volatility in charter ra­tes is primarily due to the number of newbuilding deliveries as vessel oversupply is gradually taking its toll on the market. Increased demand for drybulk commodities has been unable to fully absorb the approximately 98 million new deadweight tonnage that entered the mar­ket in 2011, despite almost record high scrapping levels of appro­ximately 22.3 million deadweight ton­nage and an approximately 30% delivery slippage. 2011 was the second consecutive year of double-digit growth in the drybulk fleet. In 2011, 1,181 drybulk carriers of a cumulative 98 million tons dead­weight entered service, represe­nting a year-on-year increase in deadweight of approximately 14% compared to 2010. As of the end of December 2011, new­buil­ding orders had been placed for an aggre­gate of approximately 32% of the existing global drybulk fleet on a dead­­weight basis, with deliveries occurring inter­mittently until 2015. The decline and volatility in charter rates in the dry­bulk market affects the value of dry­bulk vessels, which follows the trends of drybulk charter ra­tes and ear­nings on our charters, and simi­larly, affects our cash flows, liquidity and compliance with the co­ve­­nants co­ntai­ned in our loan agree­ments.

 
9

 


 The cur­rent volatility in the drybulk charter market may significantly reduce the charter rates for our vessels tra­ding in the spot market. As a result of such decline in charter rates, the mar­­­ket value of our vessels may con­ti­nue to de­crease, which would require us to raise ad­ditional capital in or­der to remain compliant with our loan cove­nants and loan covenant waiver agreements, and could result in our lenders accelerating our indebtedness and fore­closing on their collateral, which would adversely affect our earnings and financial condition.

Our loan agreements contain various financial covenants. See Item 10.C "Material Contracts–Loan Agree­ments" and Item 5.A "Recent De­ve­lopments–Loan Amendments." Low drybulk charter rates and drybulk vessel va­lues have affected our ability to comply with some of these covenants in the past and may affect our compliance in the future. If we are not able to remedy a non-compliance under our loan agreements or obtain waivers, our lenders could require us to post additional collateral, enhance our equity and liquidity, increa­se our interest payments or pay down our indebtedness to a level where we are in compliance with our loan covenants, sell vessels from our fleet, or they could accelerate our indebtedness and foreclose on their collateral, which would impair our ability to continue to conduct our business. In addition, if we are not in compliance with these covenants and we are unable to obtain wai­vers, we will not be able to pay di­vi­­dends in the future until the covenant defaults are cured or we obtain wai­vers. We may also be required to re­­clas­sify all of our indebtedness as current liabilities, which would be signifi­cantly in excess of our cash and other current assets, and accordingly would adversely affect our ability to continue as a going concern. This may limit our ability to continue to conduct our operations, finance our future operations, make acqui­sitions, pursue business opportunities, or make payments on our debt obligations.

The fair market values of our vessels have generally experienced high volatility and have declined significantly in the pa­st. You should expect the market values of our vessels to fluctuate de­pen­ding on general eco­nomic and market conditions affecting the shipping industry and prevailing charter hire rates, competition from other shipping companies and other modes of transportation, the types, sizes and ages of our vessels, ap­pli­cable go­ver­nmental regulations and the cost of newbuildings. If a dete­rmina­tion is made that a vessel's fu­ture useful life is limited or its future earnings capacity is reduced, it could result in an impairment of its value on our financial sta­tements that would result in a charge against our earnings and the reduction of our stockholders' equity. If for any rea­son we sell our ves­sels at a time when prices have fallen, the sale price may be less than the vessels' carrying amount on our financial sta­tements, and we would incur a loss and a re­­­du­ction in earnings.

In addition, if we are able to sell additional shares at a time when the charter rates in the drybulk charter market are low, such sales could be at prices below those at which shareholders had purchased their shares, which could, in turn, result in significant dilution of our then existing shareholders and affect our a­bi­lity to pay dividends in the future and our earnings per share. Even if we are able to raise additional ca­pi­tal in the equity markets, there is no assurance we will remain compliant with our loan covenants in the fu­tu­re.

Charterhire rates for drybulk vessels are volatile and have declined significantly since their histo­ric highs and may decrease further in the future, which may adversely affect our earnings and fi­nan­cial con­di­tion.
 
We are an independent shipping company that operates in the drybulk shipping markets. One of the factors that impacts our profitability is the freight rates we are able to charge. The drybulk shipping industry is cyclical with attendant volatility in charter hire rates and profitability. The degree of charter hire rate volatility among different types of drybulk vessels has varied widely, and charter hire rates for drybulk vessels have reached near historically low levels. Because we charter some of our vessels pursuant to vo­ya­­ge charters or short-term time charters, we are exposed to changes in spot market and short-term char­ter rates for drybulk carriers and such changes may affect our earnings and the value of our drybulk car­riers at any given time.

 
10

 

While our focus on the voyage and short-term time charter mar­kets may enable us to benefit if industry condi­tions streng­then, we must consistently procure this type of char­ter business to obtain these benefits. Conver­sely, such depen­dence makes us vulnerable to declining mar­­ket rates for this type of charters. 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 existing hire ra­tes. In the recent past, short-term time charter and spot market charter rates for some drybulk carriers declined below the operating costs of those vessels be­fore rising. There can be no assurance that we will be successful in keeping all our vessels fully employed in these short-term markets or that fu­tu­re spot and short-term charter rates will be sufficient to enable our vessels to be operated profitably. If the current low charter rates in the drybulk market continue through any significant period, our ear­nings may be adversely affected.

Fluctuations in char­ter rates result from changes in the supply and demand for vessel capacity and changes in the supply and demand for the major commodities carried by sea internationally. Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.
 
Factors that influence demand for vessel capacity include:

 
·
supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;

 
·
changes in the exploration or production of energy resources, commodities, semi-finished and finished consumer and industrial products;

 
·
the location of regional and global exploration, production and manufacturing facilities;

 
·
the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;

 
·
the globalization of production and manufacturing;

 
·
global and regional economic and political conditions, including armed conflicts and terrorist activities; embargoes and strikes;

 
·
natural disasters and other disruptions in international trade;

 
·
developments in international trade;

 
·
changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;

 
·
environmental and other regulatory developments;

 
·
currency exchange rates; and

 
·
weather.

The factors that influence the supply of vessel capacity include:

 
·
the number of newbuilding deliveries;

 
·
the scrapping rate of older vessels;

 
·
vessel casualties;

 
11

 
      
 
 
·
the level of port congestion;
 
 
·
changes in environmental and other regulations that may limit the useful life of vessels;

 
·
the number of vessels that are out of service, namely those that are laid-up, drydocked, awaiting repairs or otherwise not available for hire; and

 
·
changes in global drybulk commodity production.
 
In addition to the prevailing and anticipated freight rates, factors that affect the rate of new­building, scrapping and laying-up include newbuilding prices, secondhand vessel values in relation to scrap prices, cost of bunkers and other operating costs, costs associated with classification society surveys, nor­mal maintenance and insu­rance coverage, the efficiency and age profile of the existing drybulk fleet in the market, and government and in­du­stry regulation of maritime transportation practices, particularly envi­ron­mental protection laws and regulations. The­se factors influencing the supply of, and demand for, ship­ping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.

We anticipate that the future demand for our drybulk vessels will be dependent upon economic growth in the world's economies, seasonal and regional changes in demand, changes in the capacity of the global drybulk fleet and the sources and supply of drybulk cargo to be transported by sea. Given the large number of new drybulk carriers currently on order with shipyards, the capacity of the global drybulk carrier fleet seems likely to increase and economic growth may not resume in areas that have experienced a recession or continue to be slow in other areas.
 
The current global economic downturn may continue to negatively impact our business.
 
In the current global economy, operating businesses have faced and continue to face tightening cre­dit, weakening demand for goods and services, weak international liquidity conditions and declining mar­kets. Lower demand for drybulk cargoes, as well as diminished trade credit available for the delivery of such cargoes, have led to decreased demand for drybulk carriers, creating downward pressure on charter rates and vessel values. The current economic downturn has had a number of adverse consequences for drybulk and other shipping sectors, including, among other things:
 
 
·
an absence of available financing for vessels;
 
 
·
a further decrease in the market value of vessels and no active second-hand market for the sale of vessels;
 
 
·
low charter rates; and
 
 
·
declaration of bankruptcy by some charterers, operators and shipowners.
 
The occurrence of one or more of these events could have a material adverse effect on our busi­ness, results of operations, cash flows and financial condition.
 
Continued disruptions in world financial markets and the resulting governmental action in Europe, the United States and in other parts of the world could have a material adverse impact on our ability to obtain financing, our results of operations, financial condition and cash flows and could cause the mar­ket price of our common shares to further decline.
 
The credit markets in Europe, the United States and worldwide have experienced significant con­tra­ction, deleveraging and reduced liquidity, and the United States federal government, state govern­ments, the European Union and foreign governments have implemented and are considering a broad variety of go­vernmental action and/or new regulation of the financial markets and may implement additional regu­la­tions in the future. Securities and futures markets and the credit markets are subject to comprehensive sta­tu­tes, re­gu­lations and other requirements.

 
12

 

The SEC, other regulators, self-regulatory organizations and ex­cha­­­n­ges have taken in the past, and may take in the future, extraordinary actions to address market emer­gencies, and may effect cha­nges in law or interpretations of existing laws.
 
A number of financial institutions experienced serious financial difficulties in recent years, and an increa­sing number of financial institutions will likely continue to ex­pe­rience serious financial difficulties as a result of a dete­rioration in the stability, or perceived stability, of the re­spe­ctive countries in which these institutions are based or operate, due to the European sovereign debt cri­sis, which began in May 2010 in the wake of Greece's public fi­nance problems and spread rapidly to the cou­­n­­­tries of the Euro area exhibiting greatest weakness.

The ongoing deterioration of the sovereign debt of several European countries, together with the risk of contagion to other, more stable, countries, particularly France and Germany, has exacerbated the glo­­bal economic crisis. This situation has also raised a number of un­cer­tainties regarding the stability and ove­rall standing of the Eu­ro­­pean Monetary Union. The Eurozone has recently seen an increase in credit spreads, together with reduced liqui­dity and access to financing on the market. In 2011, these negative trends ha­ve wor­­­se­ned and have caused consi­derable turbulence on the global financial and credit markets due to the fears related to the downgrading of the so­ve­reign debt of several Eurozone countries, including France, and fiscal insta­bility in other countries, such as Japan, the United Kingdom and the United States, which saw its cre­dit rating being downgraded by Standard & Poor's.

The failure of the initiatives implemented by supranational institutions to resolve the debt crisis could lead to serious concerns that the Eurozone sovereign debt crisis could worsen, which may result in the reintroduction of na­­tional currencies in one or more Eurozone countries or, in particularly dire circum­stances, the abandonment of the Euro. The depar­ture or risk of departure from the Euro by one or more Eu­ro­­zone countries and/or the abandonment of the Euro as a currency could have major negative effects on the world financial markets.

In addition, the uncertainty surrounding the future of the credit markets in Europe, the United States and the rest of the world has resulted in reduced access to credit worldwide. As of December 31, 2011, we had to­tal out­standing indebtedness of approximately $1.1 billion. Our activities are subject to li­qui­dity risk, that is, the risk that we will unable to meet our payment obligations, including loan com­mitments, when due. In light of this, the availa­bility of the liquidity needed to carry out the various activi­ties in which we are engaged and the a­bi­­lity to ac­cess long-term financing are essential for us to be able to meet our anticipated and un­foreseen cash pay­ment obli­gations, so as not to impair our day-to-day operations or fi­nancial position. The global financial market crisis and the current instability have led to a sharp fall in liquidity.
 
Although we have no exposure to sovereign debt of governments and other public bodies of cou­n­tries in or outside the Eurozone, we face risks attendant to changes in economic environments, changes in interest rates and in­stability in certain securities markets, among other factors. Major market disruptions and the current adverse chan­ges in market conditions and regulatory climate in Europe, the United States and worldwide may adversely affect our business or impair our ability to borrow amounts under any future fi­nan­cial arrangements. There is a possibility that our ability to access the liquidity we need may be affe­cted by further increases in the cost of bor­rowing, a redu­ction in the availability of financing, an increa­se in the cost of other forms of fundraising and/or an inability to sell our assets or to liquidate our invest­ments, whi­ch would, in turn, have an impact on our activities, wi­th major nega­tive effects on our operating results and capital and financial po­si­tion.

The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors may have a material adverse effect on our results of opera­tions, fina­n­cial condition or cash flows and could cause the price of our common stock to further decline signi­fi­cantly.

We currently maintain all of our cash and cash equivalents with a limited number of financial insti­tu­tions which su­bjects us to credit risk.
 
We currently maintain all of our cash and cash equivalents with a limited number of financial insti­tutions located in the United Kingdom, Switzerland, Greece, The Netherlands, Luxembourg and Germany. We do not expect any of our balances to be covered by insurance in the event of default by any of these financial institu­tions. The oc­­cur­rence of such a de­fault could therefore have a material adverse effect on our business, financial con­dition, results of operations and cash flows, and we may lose part or all of our cash that we have deposited with such financial institutions.

 
13

 


An economic slowdown in the Asia Pacific region could exacerbate the effect of recent slowdowns in the econo­mies of the United States and Europe and may have a material adverse effect on our business, financial condition and results of operations.

Negative changes in economic conditions in any Asia Pacific country, particularly in China, may exacerbate the effect of the significant recent slowdowns in the economies of the United States and Europe and may have a material adverse effect on our business, financial condition and results of operations, as well as our future prospects. Before the global economic financial crisis began in 2008, China had one of the world's fastest growing eco­nomies in terms of gross domestic product, or GDP, which had a significant impact on shipping demand. In 2011, the growth rate of China's GDP decreased to approximately 9.2%, as compared to approximately 10.4% for the year ended December 31, 2010 and 9.2% for the year ended December 31, 2009. China has recently imposed mea­sures to restrain lending, which may further contribute to a slowdown in its economic growth. It is possible that China and other countries in the Asia Pacific region will continue to experience slowed or even negative economic grow­th in the near future. Moreover, the current economic slowdown in the economies of the U­ni­­ted States, Europe and other Asian countries may further adversely affect economic growth in China and elsewhere. Our business, fina­n­cial condition and 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.

Changes in the economic and political environment in China and policies adopted by the Chinese 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 such respects 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 utilization 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 were 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 upon the outcome of such experiments. If the Chinese government does not continue to pursue a policy of economic reform, the level of imports to and exports from China could be adversely affected by the Chinese government's changes to these economic reforms, 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, operating results and financial condition.

Political, economic, natural and other risks in the markets where we have operations may cause serious disruptions to our business.

We operate in various countries around the world, including emerging markets such as the Middle East, and are exposed to risks of political unrest, war, terrorism, piracy, natural disasters, widespread trans­mission of communicable infectious diseases and economic and other forms of instability, which can result in disruption to our or our customers' businesses and seizure of, or damage to, our assets or pure eco­no­­mic loss. These events could also cause partial or complete closure of ports and sea passages, such as the Suez or Panama Canals, potentially resulting in higher costs, vessel delays and cancellations on some of our lines. While the recent events in the Middle East and Japan have not yet had a material impact on our bu­si­ness, worsening problems or other developments in those regions or other developments could affect our operations there and impact our financial performance materially.
 
 
 
14

 

Our business may be adversely affected by protectionist policies and regulatory regimes adopted by countries globally.

There is a risk that countries could, in the wake of the global financial and economic crisis or in response to real or perceived currency manipulations or trade imbalances, resort to protectionist measures or make changes to the regulatory regimes in which we operate in order to protect and preserve domestic industries. Such measures could include raising import tariffs, providing subsidies to domestic industries, restrictions on currency repatriation and the creation of other trade barriers. A global trend towards prote­ctionism would be harmful to the global economy in general, as protectionist measures could cause world trade to shrink and counter-measures taken by pro­tectionist policies' target countries would increase the chance for all-out trade wars. As our business success hinges, among other things, on global trade volumes, the stated protectionist policies and regulatory regimes would have a material adverse effect on our busi­ness, financial condition and results of operations.

Our operating results are subject to seasonal fluctuations, which could affect our operating results and ability to service our debt or pay dividends in the future.
 
We operate our vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charterhire rates. To the extent we operate vessels in the spot market this seasonality may result in quarter-to-quarter volatility in our operating results. The drybulk sector is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain com­modities. As a result, our revenues from our drybulk carriers may be weaker during the fiscal quarters ending June 30 and September 30, and, conversely, our revenues from our drybulk carriers may be stronger in fiscal quarters ending December 31 and March 31. While this sea­so­nality will not affect our operating results as long as our fleet is employed on period time charters, to the extent our vessels are employed in the spot market, it could ma­te­rially affect our operating results in the future.

 
15

 

Our vessels may call on ports located in countries that are subject to restrictions imposed by the United States government, which could be viewed negatively by investors and could negatively affect the trading price of our shares of common stock.
 
We currently employ all of our vessels under time charter contracts with unaffiliated parties. Under the ter­ms of these time charters, and consistent with shipping industry practice, the charterer of each ves­sel pays us a daily time charter rate and directs the vessel's route, loading and discharge ports and car­goes car­ried. While we do not control the routes or ports of call made by our vessels, all of the time charter con­tra­cts under which our vessels o­pe­rate contain express prohibitions proscribing trades of our vessels in Su­dan and Cuba, as well as countries that are prohibited in trading by the United Nations or the United Sta­tes. In addition, we have not had, and do not intend to have in the future, directly or indirectly, any agree­ments, com­mercial arrangements or other contacts with the go­vernments of, or entities controlled by the govern­ments of Iran, Sudan, Syria or Cuba, and have not provided, and do not intend to provide any goods or ser­vi­ces, directly or indirectly, to the governments of, or entities controlled by the governments of, such cou­­­n­tries.
 
Occasionally, however, upon char­terers' in­stru­­ctions, our vessels have called, and may again 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, inclu­ding Iran, Sudan and Syria. In 2011, our ves­sels made seven calls on the Iranian port of Bandar Imam Kho­meini and one call on the Syrian port of Tar­tous out of a total of 661 calls on worldwide ports. In 2010, our ves­sels made six calls on the Iranian port of Ban­dar Imam Kho­meini. In 2009, our ves­sels made five calls on the Iranian port of Bandar Imam Kho­meini, one call on the Sudanese port of Port Sudan and one call on the Syrian port of Lat­takia. In each of these voyages, the cargo con­si­sted solely of agri­cultural products. The amount of revenue earned under the above voyages for the years ended December 31, 2011, 2010 and 2009 was not significant to our results of operations.
 
The U.S. sanctions and embargo laws and regulations vary in their applica­tion, as they do not all ap­ply to the same covered persons or proscribe the same activities, and such san­ctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Ac­countability and Divestment Act, or CISADA, which expan­ded the scope of the former Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions to non-U.S. com­­pa­­nies, such as our com­pa­ny, and introduces limits on the ability of companies and persons to do business or trade with Iran when such acti­vities relate to the investment, supply or export of refined petro­leum or pe­tro­­leum products. In addition, in No­vember 2011, President Barack Obama signed Executive Order No 13590, which authorizes energy-related san­ctions on persons who knowingly pro­vide goods, services, technology, or support (above certain limited monetary thres­holds) to Iran that could directly and significantly contribute to either the maintenance or enhancement of Iran's abi­lity to de­ve­lop or produce petroleum resources or petrochemical products. These sanctions are intended to further ad­dress the con­nection between Iran's energy sector and its nuclear program that were highlighted in CISADA.
 
Although we believe that we are in compliance with all applicable sanctions and embargo laws and regu­lations, and intend to maintain such compliance, there can be no assurance that we will be in com­pliance in the fu­ture, particularly as the scope of certain laws may be unclear and may be subject to chan­ging interpretations. Any such violation could result in fines or other penalties and could result in some inve­stors deciding, or being required, to divest their interest, or not to invest, in our company. Additionally, so­me investors may decide to divest their inte­rest, or not to invest, in our company simply because we do business with companies that do business in sanctioned countries. Moreover, our charterers may violate ap­plicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our ves­sels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business.
 
Acts of piracy have historically affected ocean-going vessels, including our own, trading in re­gions of the world such as the South China Sea, the Indian Ocean, and the Arabian Sea, and in the Gulf of Aden off the coast of Soma­lia. On December 11, 2010, our vessel Renuar was hijacked in waters east of So­­­ma­lia and was released on April 23, 2011.

 
16

 

In 2008, 2009 and 2010, the frequency of piracy incidents increased significantly, particularly in the Gulf of Aden off the coast of Somalia, with drybulk vessels and tankers particularly vulnerable to such attacks. For example, in November 2008, the Sirius Star, a tanker vessel not affiliated with us, was captu­red by pirates in the Indian Ocean while carrying crude oil estimated to be worth $100 million, and was released in January 2009. In April 2009, the Maersk Alabama, a 17,000-ton containership not affiliated wi­th us, was seized by Somali pirates. The ship was later released. Following recent international anti-piracy efforts, the number of successful vessel attacks has fallen from twenty in 2010 to four in 2011.

If these piracy attacks result in regions in which our vessels are deployed being characterized as "war risk" zo­nes by insurers, as the Gulf of Aden temporarily was in May 2008, or as "war and strikes" listed areas by the Joint War Committee, premia payable for such coverage could increase significantly and such insurance co­ve­rage may be more difficult to obtain.
 
We may not be adequately insured to cover losses from these incidents, which could have a ma­terial adverse effect on us. Although we usually obtain war risk insurance for certain of our ves­­sels making port calls in de­­si­gnated war zone areas, we cannot provide assurance that such insurance will be obtained prior to one of our ves­sels entering into an actual war zone, which could result in that vessel not being insured. 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. In addition, de­tention of any of our vessels, hijacking as a result of an act of pi­racy against our vessels, or an in­crease in cost, or un­a­vailability, or insufficiency of insurance for our ves­sels, could have a material adverse impact on our business, financial condition, results of operations and a­bi­lity to service our debt or pay dividends in the fu­ture.
 
 World events outside our control may negatively affect the shipping industry, which could adversely affect our o­pe­rations and financial condition.

Terrorist attacks like those in New York in 2001, London in 2005, Mumbai in 2008 and other countries and the continuing response of the world community to these attacks, as well as the threat of future terrorist attacks around the world, continue to cause uncertainty in the world financial markets and may affect our business, results of operations and financial condition. Continuing conflicts in North Africa and the Middle East and the presence of U.S. and other armed forces in various regions around the world may lead to additional acts of terrorism and armed conflict, which may contribute to further economic instability in the global financial markets. In the past, political conflicts resulted in attacks on vessels, mi­ning of waterways and other efforts to disrupt international shipping. For example, in October 2002, the VLCC Limburg was attacked by terrorists in Yemen. Acts of terrorism and piracy have also affected ves­sels trading in regions such as the South China Sea. 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 in the United States or the world. These uncertainties could adversely affect our ability to obtain additional fi­­nancing on terms acceptable to us or at all. Any of these occurrences could have a material adverse impact on our operating results, revenue, and costs.
 
In addition, because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we are engaged in business or whe­re our vessels are registered. Future hostilities or political instability in regions where we operate or may operate could have a material adverse effect on our business, results of operations and abili­ty to service our debt and pay dividends. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries where our vessels trade may limit trading activities with those countries, which could also harm our business, financial condition and results of operations.

We are subject to complex laws and regulations, including environmental, safety and security regulations that could adversely affect the cost, manner or feasibility of doing business.
 
 

 
17

 

Our operations are subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which our vessels will operate or will be registered, which could significantly affect the ownership and operation of our vessels. These requirements include, but are not limited to, conventions of the International Maritime Organization, or IMO, such as the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of 1978, the International Convention for the Safety of Life at Sea of 1974, the International Convention on Load Lines of 1966, the Convention on Limitation of Liability for Maritime Claims (as amended), or 1976 Convention, the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocol in 1976, 1984, and 1992, and amended in 2000, or the CLC, the U.S. Oil Pollution Act of 1990, or OPA, the U.S. Comprehensive Envi­ronmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Air Act, U.S. Clean Water Act and the U.S. Marine Transportation Security Act of 2002. Compliance with such laws, regulations and stan­dards, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions, including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation of emer­gency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition. Failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations.
 
Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the United States. An oil spill could result in significant liability, including fines, penalties and criminal liability and remediation costs for natural resource damages under o­ther federal, state and local laws, as well as third-party damages. Under OPA, we will be required to satisfy insurance and financial responsibility requirements for potential marine fuel spills and other pollution incidents. Furthermore, the 2010 explosion of the Deepwater Horizon and the subsequent release of oil into the Gulf of Mexi­co, or other events, may result in further regulation of the shipping industry, and modifications to statutory liability schemes, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although we arrange for insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition.
 
Further legislation, or amendments to existing legislation, applicable to international and national maritime trade are expected over the coming years in areas such as ship recycling, sewage systems, emission control (inclu­ding emissions of greenhouse gases), ballast treatment and handling. The United States has recently enacted legislation and regulations that require more stringent controls of air and water emissions from ocean-going vessels. Such legislation or regulations may require additional capital expenditures or operating expenses (such as increased costs for low-sulfur fuel) in order for us to maintain our vessels in compliance with international and/or national re­gu­lations.
 
The operation of our vessels is affected by the requirements set forth in the United Nations' International Maritime Organization's International Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code.  The ISM Code requires ship owners, ship managers and bareboat charterers to develop and maintain an extensive "Safety Management System" that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emer­gencies. If we fail to comply with the ISM Code, we may be subject to increased liability, our insurance coverage may be invalidated or decreased, or our vessels may be detained in, or denied access to, certain ports. Currently, each of our vessels is ISM code-certified by Bureau Veritas or American Bureau of Shipping and we expect that any ves­sel that we agree to purchase will be ISM code-certified upon delivery to us. Bureau Veritas and American Bureau of Shipping have awarded ISM certification to Maryville Maritime Inc., or Maryville, our vessel mana­gement company and a wholly-owned subsidiary of ours. However, there can be no assurance that such certification will be maintained indefinitely.
 
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.
 
 

 
18

 

International shipping is subject to various security and customs inspection and related procedures in countries of origin and destination and transshipment points. Inspection procedures may result in the seizure of contents of our vessels, delays in the loading, offloading or delivery and the levying of customs du­ties, fines or other penalties against us.
 
It is possible that changes to inspection procedures could impose additional financial and legal obligations on us or require significant capital expenditures. 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 uneconomical or impractical. Any such changes or developments may have a ma­terial adverse effect on our business, financial condition and results of operations.
 
Rising fuel prices may affect our profitability.

The price of bunker fuel is correlated with crude oil prices, which in turn have historically exhibited significant volatility in short periods of time and have recently been at, or close to, historic highs. Furthermore, crude oil prices are influenced by a host of economic and geopolitical factors, such as global terrorism, political instability, tensions in the Middle East, insurrections in the Niger Delta, a long-term increase in global demand for oil and the economic development of emerging markets, China and India in particular.

While we generally will not bear the cost of fuel, or bunkers for vessels operating on time charters, fuel is a significant factor in negotiating charter rates. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability at the time of charter negotiation. In addition, upon redelivery of vessels at the end of a period time or trip time charter, we may be obligated to repurchase bunkers on board at prevailing market prices, which could be materially higher than fuel prices at the inception of the charter period. Fuel is also a significant, if not the largest, expense in our shipping operations when vessels are not under period charters. Changes in the price of fuel may adversely affect our profitability. The price and supply of fuel is unpre­dictable and fluctuates based on events out­side our control, including geopolitical developments, supply and demand for oil and gas, actions by the Orga­ni­zation of Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil pro­­­ducing cou­ntries and regions, regional production patterns and environmental concerns. Further, fuel may be­co­me much more expensive in the future, which may reduce the profitability and competitiveness of our business ver­sus other forms of transportation.
 
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 bear under our period time and spot char­ters. Increa­ses in crew costs may adversely affect our profitability.
 
An oversupply of drybulk carrier capacity may lead to reductions in charterhire rates and pro­fitability.
 
The market supply of drybulk carriers has been increasing, and the number of drybulk vessels on order as of January 2012, was approximately 37% for Panamax class vessels and 32% for Capesize class vessels of the then-existing global drybulk fleet in terms of deadweight tons, with the majority of new deliveries expected mainly during 2012. As of December 2011, new­buil­ding orders had been placed for an aggregate of approximately 32% of the existing global drybulk fleet on a dead­­weight basis, with deliveries occurring intermittently until 2015.
 
Newbuildings were deli­ve­red in signi­ficant numbers starting at the begin­ning of 2006 and continue to be delivered in significant numbers. In 2011, 1,181 drybulk carriers of a cumulative 98 million dead­weight have ente­red service, represe­nting a year-on-year increase in deadweight of approximately 14% compared to 2010.
 
Due to lack of financing many analysts expect significant cancellations and/or slippage of new­building orders, although available data with regard to cancellations of existing newbuilding orders or de­lays of newbuilding de­liveries are not always accura­te. While vessel supply will continue to be affected by the delivery of new ves­­sels and the removal of vessels from the global fleet, either through scrapping or ac­ci­dental losses, an oversupply of dry­bulk carrier capacity could exacerbate the recent decrease in charter ra­tes or prolong the current period of low cha­rter rates. If we cannot enter into period time char­ters on acceptable ter­ms, we may have to secure charters in the spot market, where charter rates are more volatile and reve­nues are, therefore, less predictable. If the current low charter rate environment persists, or a further redu­ction occurs, upon the expiration or termination of our vessels' cur­rent charters, we may only be able to re-charter our vessels at reduced or un­profitable rates or we may not be able to charter these ves­sels at all. 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 materially adversely affect our business, financial condition and results of ope­rations.

 
19

 

 
 
Our commercial vessels are subject to inspection by a classification society.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. Classification societies are non-governmental, self-regulating organizations and certify 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 Safety of Life at Sea Convention. The Company's vessels are currently enrolled with Bureau Veri­tas, American Bureau of Shipping, Nippon Kaiji Kyokai, Det Norske Veritas and Lloyd's Register of Shipping.

A vessel must undergo Annual Surveys, Intermediate Surveys and Special Surveys. In lieu of a Special Survey, a vessel's machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Our vessels are on Special Survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel is also required to be drydocked every two to three years for inspection of the underwater parts of such vessel. Generally, we will make a decision to scrap a vessel or reassess its useful life at the time of a vessel's fifth Special Survey.

If any vessel fails any Annual Survey, Intermediate Survey, or Special Survey, the vessel may be unable to tra­de between ports and, therefore, would be unemployable, potentially causing a negative impact on our revenues due to the loss of revenues from such vessel until it is able to trade again.

Risk of loss and lack of adequate insurance may affect our results.

Adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circum­stances and events create an inherent risk of catastrophic marine disasters and property loss in the operation of any ocean-going vessel. In addition, business interruptions may occur due to political circumstances in foreign countries, hostilities, labor strikes, and boycotts. Any such event may result in loss of revenues or increased costs.

Our business is affected by a number of risks, including mechanical failure of our vessels, collisions, pro­perty loss to the vessels, cargo loss or damage.

In addition, the operation of any ocean-going vessel is subject to the inherent possibility of catastrophic mari­ne disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and ope­ra­ting vessels in international trade. OPA, by imposing potentially unlimited liability upon owners, operators and bareboat charterers for certain oil pollution accidents in the U.S., has made liability insurance more expensive for ship owners and operators and has also caused insurers to consider reducing available liability coverage. Outside of the United States, other national laws generally provide for the owner to bear strict liability for pollution, subject to a right to limit liability under applicable national or international regimes for limitation of liability, such as the 1976 Convention. Additionally, the European Union has amended certain directives such that we could incur criminal lia­bility in instances of pollution where criminal liability would not otherwise be incurred elsewhere.

We carry insurance to protect against most of the accident-related risks involved in the conduct of our bu­siness and we maintain environmental damage and pollution insurance coverage. We do not carry insurance covering the loss of revenue resulting from vessel off-hire time. We believe that our insurance coverage is adequate to protect us against most accident-related risks involved in the conduct of our business and that we maintain appro­priate levels of environmental damage and pollution insurance coverage. Currently, the available amount of covera­ge for pollution is $1.0 billion for drybulk carriers per vessel per incident. However, there can be no assurance that all risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations in the past have resulted in increased costs for insurance against the risk of environmental damage or pollution. In the future, we may be unable to procure adequate insurance coverage to protect us against environmental damage or pollution.

 
 
20

 


The smuggling of drugs, weapons or other contraband onto our vessels may lead to governmental claims against us.

We expect that our vessels will call in areas where smugglers attempt to hide drugs, weapons and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with con­traband, whether with or without the knowledge of any of our crew, we may face govern­mental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows and financial condition.

Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings.
 
A government could requisition one or more of our vessels for title or hire, or seize one or more of our vessels. Requisition for title occurs when a government takes control of a vessel and becomes her owner. Requi­sition for hire oc­curs when a government takes control of a vessel and effectively becomes her charterer at dictated char­ter rates. Generally, requisitions occur during a period of war or emergency, although governments may elect to requisition vessels in other circumstances. Government requisition of one or more of our ves­sels would ne­ga­tively impact our revenues.
 
Maritime claimants could arrest our vessels, which could interrupt our cash flow.
 
Crew members, suppliers of goods and services to a vessel, shippers of cargo, vessel financing participants and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to make signi­fi­cant payments to have the arrest 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 try to assert "sister ship" liability against one vessel in our fleet for claims relating to another of our ships.
 
The operation of our ocean-going vessels entails the possibility of marine disasters including damage or de­struction of the vessel due to accident, the loss of a vessel due to piracy or terrorism, loss of life, damage or de­struction of cargo and similar events that may cause a loss of revenue from affected vessels and could damage our business reputation, which may in turn lead to loss of business.

The operation of our ocean-going vessels entails certain inherent risks that may adversely affect our business and reputation, including:
 
 
·
damage or destruction of a vessel due to marine disaster such as a collision;
 
 
·
the loss of a vessel due to piracy and terrorism;
 
 
·
cargo and property losses or damage as a result of the foregoing or less drastic causes such as human error, mechanical failure and bad weather;

 
·
environmental accidents as a result of the foregoing; and
 
 
·
business interruptions and delivery delays caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather con­di­tions.
 
 

 
21

 


Any of these circumstances or events could substantially increase our costs.
 
For example, the cost of replacing a vessel or cleaning up a spill could substantially lower its reve­nues by taking such vessels out of operation permanently or for periods of time. The involvement of our vessels in a disaster or delays in delivery or loss of cargo may harm our reputation as a safe and reliable ves­sel operator and could cause us to lose business.
 
The operation of drybulk vessels has certain unique operational risks; failure to adequately maintain our vessels could have a material adverse effect on our business, financial condition and results of operations.
 
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 do not adequately maintain our vessels, we may be unable to prevent these events. The oc­cur­rence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
 
Our vessels may suffer damage and we may face unexpected drydocking costs which could adversely affect our cash flow and financial condition.
 
If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and can be substantial. We may have to pay drydocking costs that our insurance does not cover in full. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are con­veniently located. We may be unable to find spa­ce at a suitable drydocking facility or we may be forced to travel to a drydocking facility that is distant from the relevant vessel's posi­tion. 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 dividends, if any, in the future. We may not have insurance that is sufficient to cover all or any of the­se costs or losses and may have to pay drydocking costs not covered by our insurance.
 
A drop in spot charter rates may provide an incentive for some charterers to renegotiate or default on their time charters, which could reduce our revenues and have a material adverse effect on our business, financial condition and results of operations.
 
When we enter into a time charter, charter rates under that time charter are fixed for the term of the charter. The ability of each of our charterers to perform its obligations under the charter depends on a number of factors that are beyond our control and may include, among other things, general economic condi­tions, the condition of the maritime and offshore industries, the overall financial condition of the char­terer, charter rates received for specific types of vessels and various expenses. In addition, if the spot char­ter rates in the drybulk shipping industry become significantly lower than the time charter rates that some of our charterers are obligated to pay us under our existing time charters, the charterers may have incentive to default under that time charter or attempt to renegotiate the time charter. If our charterers default on their charters, we will seek the remedies available to us, which may include arbitration or litiga­tion to enforce the contracts, although such efforts may not be successful. If our charterers fail to pay their obligations, we would have to attempt to re-charter our vessels at lower charter rates, which would affect our results from ope­rations and ability to comply with our loan covenants. If our charterers default and we are not able to comply with our loan covenants and our lenders chose to accelerate our indebtedness and foreclose on their liens, we could be required to sell vessels in our fleet and our ability to continue to conduct our business wou­ld be impaired.

 
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The mismatch between the terms of the bareboat charters on which we charter in certain of our vessels and the terms of the voyage or time charters on which we charter them out could adversely affect our results of ope­ra­tions.

We currently charter in seven of the vessels we operate under long-term bareboat charters expiring in 2015 on terms that currently differ significantly, in respect of duration and rates of hire, from those of the charters on which the vessels are chartered out. We cannot assure you that we will be able to successfully charter out these ves­sels in the future for periods and at rates sufficient to allow us to cover our cost of ope­rating the vessels and to meet our obligations under the bareboat charters, which could adversely affect our earnings, results of operations and cash flows. In addition, in the event that we fail to meet our obligations under any of such bareboat charters, the re­spe­cti­ve owner may, in some jurisdictions, such as South Africa, assert "sister ship" liability against ano­ther vessel in our fleet and attempt to arrest or arrest such vessel, which could interrupt our cash flow and require us to pro­vide si­gni­fi­cant financial security to have the arrest lifted.
 
We depend upon a few significant customers for a large part of our revenues. The loss of one or more of these customers could adversely affect our financial performance.
 
We have historically derived a significant part of our revenue from a small number of charterers. In 2010, we derived approximately 30% of our gross revenues from a single charterer, Bunge Geneva S.A. In 2011, we derived approximately 14% and 11% of our gross revenues from Global Maritime Investments Ltd and EDF Tra­ding Limited, respectively.
 
If one or more of our customers is unable to perform under one or more charters with us and we are not able to find a replacement charter, or if a customer exercises certain rights to terminate the charter, we could suffer a loss of revenues that could materially adversely affect our business, financial condition and results of operations.
 
We could lose a customer or the benefits of a time charter if, among other things:
 
 
·
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, default under the charter;
 
 
·
the customer terminates the charter because the vessel has been subject to seizure for more than a specified number of days; or

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

When our time charters end, we may not be able to replace them promptly or with profitable ones and, in addition, any such new charters are potentially subject to further decline in charter rates and other market deterioration, which could adversely affect our results of ope­ra­tions.

We cannot assure you that we will be able to obtain charters at comparable rates or with comparable charterers, if at all, when the charters on the vessels in our fleet expire. The charterers under the­se charters have no obligation to renew or extend the charters. We will generally attempt to re-charter our ves­sels at favorable rates with repu­table charterers as the charters expire, unless management determines at that time to employ the vessel in the spot market. We cannot assure you that we will succeed. Failure to obtain replacement charters will reduce or eliminate our revenue, our ability to expand our fleet and our abi­lity to service our debt and pay dividends to sha­reholders.

 
23

 

 
If drybulk vessel charter hire rates are lower than those under our current charters, we may have to enter into charters with lower charter hire rates. Also, it is possible that we may not obtain any charters. In addition, 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 would increase our vessel operating costs.
 
The market values of our vessels have declined and may further decrease. This could lead us to incur losses when we sell vessels or we may be required to write down their carrying value, which may adver­sely affect our earnings, or default under our loan agreements.
 
 
The fair market values of our vessels have generally experienced high volatility and have declined significantly compared with May 2008. You should expect the market values of our vessels to fluctuate depending on a number of factors, including:

 
·
general economic and market conditions affecting the shipping industry;

 
·
the prevailing rate of charter hire;

 
·
competition from other shipping companies and other modes of transportation;

 
·
the types, sizes and ages of our vessels;

 
·
the supply and demand for vessels;

 
·
applicable governmental regulations;

 
·
technological advances; and

 
·
the cost of newbuildings.
 
When the market value of a vessel declines, it reduces our ability to refinance the outstanding debt or obtain future financing. The market values of our vessels are at relatively low levels.

Our lending facilities, which are secured by mortgages on our vessels, require us to comply with minimum security vessel values and satisfy certain financial and other covenants, including those that are affected by the market value of our vessels. See Item 10.C "Material Contracts–Loan Agree­ments" and Item 5.A "Recent De­ve­lopments–Loan Amendments." We were in compliance with our covenants as of December 31, 2011. However, further de­clines in the market and vessel values could cause us to breach finan­cial covenants relating to the maintenance of minimum security vessel values contained in our lending facilities. If we do breach such covenants and are unable to pledge additional collateral, remedy, or our lenders refuse to waive, the relevant breach, our len­ders could accelerate our indebtedness and foreclose on the vessels in our fleet securing those lending faci­li­ties. As a result of cross-default provisions contai­ned in our loan agreements, derivative financial instrument and notes, this could, in turn, lead to ad­di­tional defaults under our other loan agreements, derivative financial instruments and notes and the consequent acceleration of the indebtedness there­under and the commencement of similar foreclosure procee­dings by other lenders. If our indeb­tedness were acce­lerated in full or in part, it would be difficult for us to refinance our debt or obtain additional finan­cing and we could lose our vessels if our lenders foreclosed on their liens, which would adversely affect our a­bi­­li­ty to continue our business.
 
Further declines in charter rates and other market deterioration could cause us to incur impairment charges.
 
We evaluate the carrying amounts of our vessels to determine if events have occurred that would require an impairment of their carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and projection of future cash flows related to the vessels is complex and requires us to make various estimates on the basis of various assumptions, including future freight rates and earnings from the vessels which have been historically volatile.

 
24

 

 
 
When our estimate of undiscounted future cash flows for any vessel is lower than the vessel's car­rying value, the carrying value is written down, by recording a charge to operations, to the vessel's fair mar­ket value if the fair market value is lower than the vessel's carrying value. The carrying values of our ves­sels may not represent their fair market value in the future because the new market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Any impairment char­ges incurred as a result of declines in charter rates could have a material adverse effect on our business, results of operations, cash flows and financial condition.
 
To service our indebtedness, we will require a significant amount of cash.  Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition and results of operations.
 
Our ability to make scheduled payments on, and to refinance, our indebtedness will depend on our ability to generate cash from operations in the future. This, to a certain extent, is subject to general econo­mic, financial, competitive, legislative, regulatory and other fa­ctors that are beyond our control.  We cannot assure you that our business will generate sufficient cash flow from operations in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If our cash flow and capital resour­ces are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Our cash flow and capital resources may be insuf­ficient for payment of interest on and principal of our debt in the future and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could impair our liquidity.

We may not be able to raise the required amount under the agreement we reached with our lenders under the Nordea credit facility in March 2012.

In March 2012, we reached an agreement with all the lenders under the Nordea credit facility on the amen­d­ment, for a period from the effective date of such amendment (March 30, 2012) through December 31, 2013, of the amortization sche­dule, the collateral value clause and certain of the financial covenants of the facility (the effectiveness of which will be as of January 1, 2012). In accordance with such ame­nd­ment, the loan repayment schedule will be mo­di­­­fied to al­low for the de­fer­ral of the repayment of principal amount of up to $100.0 million, originally scheduled for 2012 and 2013, to the balloon payment at the end of the facility's term in 2016.

Under the amendment, the Company is required to raise at least $30.0 million in new equity by December 31, 2012. In addition, the loan amendment and the exercise of the deferral option thereunder were conditional upon, among other things, the deposit of $20.0 million out of the $30.0 million that is re­qui­red to be rai­­sed, into an escrow (special purpose blocked) account. In that respect, we reached an agreement with certain entities affilia­ted with the family of the Chairman of our Board of Directors to deposit such amount into the escrow account. Under the amendment, we are required to raise the $30.0 million in new equity as follows: (i) at least $20.0 million will be raised throu­gh an equity offering by Sep­tem­ber 30, 2012, with any short­fall being covered through the use of the funds depo­sited into the escrow account; and (ii) the re­mai­ning $10.0 million will be raised by December 31, 2012, wi­th any short­­fall being covered through the use of any funds remai­ning in the escrow account.

However, there can be no as­surance that we will be able to successfully access the capital markets and raise the entire amount required under the amen­ded fa­cility or that the funds deposited into the escrow account will be sufficient to cover any shortfall in the equity offering in its entirety.

 
25

 

Our existing senior secured credit facilities prohibit our subsidiaries from guaranteeing our debt in most circumstances, which may decrease our ability to raise funds.

Many of our existing senior secured credit facilities contain covenants that prohibit our subsi­diaries from guaranteeing any new debt we incur without prior written approval by all lenders. As a holding company, we have no assets other than the capital stock of our subsidiaries, and all of our income is gene­rated by our subsidiaries, and the inability of our subsidiaries to guarantee our debt may deter some lenders that would otherwise be willing to provide us with loans. This in turn may limit our ability to raise new funds or financing at times when it is important for us to do so, which may have an adverse effect on our o­pe­ra­tions and financial performance.

If we default on our obligations to pay any of our indebtedness, we may be subject to restrictions on the payment of our other debt obligations or cause a cross-default or cross-acceleration.

If we are unable to generate sufficient cash flow or are otherwise una­ble to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in any agreement governing our indebtedness, we would be in default under the ter­ms of the agreements governing such indebtedness. In the event of such default:

 
·
the lenders or holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable and, if not promptly paid, institute foreclosure proceedings against our assets;

 
·
even if those lenders or holders do not declare a default, they may be able to cause all of our available cash to be used to repay the indebtedness owed to them; and

 
·
such default could cause a cross-default or cross-acceleration under our other indebtedness. As a result of such default and any actions the lenders may take in response thereto, we could be forced into bankruptcy or liquidation.

Based on amounts outstanding as of December 31, 2011 under our credit facilities, we would have to re­pay $107.6 million during 2012, assuming the Company did not exercise, subject to certain conditions, its right to defer any principal instalments of up to $100.0 million, the payment of which was originally scheduled for 2012 and 2013, as further discussed in Item 5.A "Recent De­ve­lopments–Loan Amendments." We be­lie­ve that we will conti­nue to be in com­­­pliance with our loan co­ve­­nants, as amen­­ded, for a reasonable time. However, there can be no as­surance that we will be in compliance with our loan cove­­nants in the future, given the uncertainty as to whe­ther char­ter rates and vessel values will continue to dete­rio­rate. In the event that our cash flow from ope­ra­tions co­nti­nues to be ne­gati­vely im­pa­cted by low charter rates and ves­sel values, ab­sent further amendments or waivers to our credit fa­cilities or addi­tional fi­nan­cing, we may not be able to conti­nue to comply, at future covenant mea­­su­re­ment dates, with the fina­ncial co­ve­nants of our loan agree­ments, or ha­ve a­de­quate liquidity to make the re­qui­red pay­ments of principal and inte­rest on our debt.

 The derivative contracts we have entered into to hedge our exposure to fluctuations in interest rates could result in higher than market interest rates and charges against our income.
 
We currently have four interest rate swaps for purposes of managing our exposure to fluctua­tions in interest rates applicable to indebtedness under four of our credit facilities, which were advanced at a floating rate based on the London Interbank Offered Rate, or LIBOR. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially differently from our expectations. Since two of our existing interest rate swaps do not, and future derivative contracts may not, qualify for treatment as hedges for accounting purposes, we will recognize fluctuations in the fair value of such contracts in our statement of operations. In addition, our financial condition could be materially adversely af­fected to the extent we do not hedge our exposure to interest rate fluctuations under our financing arran­gements. Any hedging activities we engage in may not effecti­vely manage our interest rate exposure or have the desired impact on our financial conditions or results of opera­tions.

 
26

 

Investment in derivative instruments such as forward freight agreements could result in losses.

From time to time, we may take positions in derivative instruments including forward freight agreements, or FFAs. FFAs and other derivative instruments may be used to hedge a vessel owner's expo­sure to the charter market by providing for the sale of a contracted charter rate along a specified route and period of time. Upon settlement, if the contracted charter rate is less than the average of the rates, as repor­ted by an identified index, for the specified route and period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. If we take positions in FFAs or other derivative instruments and do not correctly anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling or termination of the FFA. This could adversely affect our results of operations and cash flows.

Our operations are subject to the risks of litigation.

We are involved on an ongoing basis in litigation arising in the ordinary course of business or other­wise. Litigation may include claims related to commercial, labor, employment, antitrust, securities, tax or environmental matters. Moreover, the process of litigating cases, even if we are successful, may be co­stly, and may approximate the cost of damages sought. These actions could also expose us to adverse publi­city, which might adversely affect our brand and reputation. Litigation trends and expenses and the out­co­me of litigation cannot be predicted with certainty, and adverse litigation trends, expenses and out­co­mes could adversely affect our financial results, to the extent not adequately covered by insurance.
 
Class B shareholders can exert considerable control over us, which may limit future shareholders' ability to influence our actions.
 
Our Class B common shares have 1,000 votes per share and our Class A common shares have one vote per share. Class B shareholders (including certain executive officers and directors) together own 100% of our issued and outstanding Class B common shares, representing approximately 72.2% of the voting power of our outstanding capital stock as of December 31, 2011.
 
Because of the dual class structure of our capital stock, the holders of Class B common shares ha­ve the ability to, and will be able to, control all matters submitted to our stockholders for approval even if they come to own less than 50% of our outstanding Class A common shares. Even though we are not aware of any agreement, arrangement or understanding by the holders of our Class B common shares relating to the voting of their shares of common stock, the holders of our Class B common shares have the power to exert considerable influence over our actions.
 
As of December 31, 2011, Boston Industries S.A. owned approximately 0.1% of our outstanding Class A common shares and approximately 24.1% of our outstanding Class B common shares, together representing approximately 17.4% of the total voting power of our outstanding capital stock. Boston Indu­stries S.A. is controlled by Mrs. Mary Panayotides, the spouse of our Chairman. Mrs. Pana­yotides has no power of voting or disposition of these shares and disclaims beneficial ownership of these sha­res.
 
As of December 31, 2011, our Chairman, Mr. Gabriel Panayotides, owned approximately 41.2% of our outstanding Class A common shares and approximately 43.7% of our outstanding Class B common shares, repre­senting approximately 43% of the total voting power of our capital stock.

As of December 31, 2011, Ms. Ismini Panayotides, our Busi­ness Development Officer and the dau­ghter of our Chairman, owned approximately 6.5% of our outstanding Class B common shares, repre­senting approximately 4.7% of the total voting power of our outstanding capital stock.

 
27

 

We face strong competition.

We obtain charters for our vessels in a highly competitive market that is capital intensive and highly fragmented. Our market share is insufficient to enforce any degree of pricing discipline. Compe­ti­tion for the tran­sportation of drybulk cargo by sea is intense and depends on price, location, size, age, condition and the ac­cepta­bility of the vessel and its operators to the charterers. Although we believe that no single competitor has a do­mi­nant position in the markets in which we compete, we are aware that certain compe­titors may be able to devote grea­ter financial and other resources to their activities than we can, re­sul­ting in a significant competitive threat to us. In addition, due in part to the highly fragmented market, compe­titors with greater resources than us could enter the dry­bulk shipping industry and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter rates and higher quality ves­sels than we are able to offer.
 
We cannot give assurances that we will continue to compete successfully with our competitors or that these fa­ctors will not erode our competitive position in the future.
 
Risk of loss and lack of adequate insurance may affect our results.
 
Adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances and events create an inherent risk of catastrophic marine disasters and property loss in the operation of any ocean-going vessel. In addition, business interruptions may occur due to political circum­stances in foreign countries, hostilities, labor strikes, and boycotts. Any such event may result in loss of revenues or increased costs.
 
Our business is affected by a number of risks, including mechanical failure of our vessels, collisions, property loss to the vessels, cargo loss or damage and business interruption due to political cir­cum­stances in foreign cou­n­tries, hostilities and labor strikes.
 
In addition, the operation of any ocean-going vessel is subject to the inherent possibility of catastrophic marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. The United States Oil Pollution Act of 1990, or OPA, by imposing pote­ntially unlimited liability upon owners, operators and bareboat charterers for certain oil pollution accidents in the U.S., has made liability insurance more expensive for ship owners and operators and has also caused insurers to con­si­der reducing available liability coverage.

We carry insurance to protect against most of the accident-related risks involved in the conduct of our business and we maintain environmental damage and pollution insurance coverage. We do not carry insurance co­vering the loss of revenue resulting from vessel off-hire time. We believe that our insurance coverage is adequate to protect us against most accident-related risks involved in the conduct of our business and that we maintain ap­propriate levels of environmental damage and pollution insurance cove­rage. Currently, the available amount of cove­rage for pollution is $1.0 billion for drybulk carriers per ves­sel per incident. However, there can be no assurance that all risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at com­mer­cially reasonable rates in the future. More stringent environmental regu­lations in the past have resulted in increased costs for insurance against the risk of environmental damage or pollution. In the future, we may be unable to procure adequate insurance coverage to protect us against environ­mental damage or pollution.

Outside of the United States, other national laws generally provide for the owner to bear strict liability for pollution, subject to a right to limit liability under applicable national or international regimes for limitation of liability. The most widely applicable international regime limiting maritime pollution liabi­lity is the Convention on Limitation of Liability for Maritime Claims (London 1976), or 1976 Convention. Rights to limit liability under the 1976 Convention are forfeited where a spill is caused by a shipowner's intentional or reckless conduct. Certain states have ratified the IMO's 1996 Protocol to the 1976 Convention. The Protocol provides for substantially higher liability limits to apply in those jurisdictions than the limits set forth in the 1976 Convention. Finally, some juris­dictions are not a party to either the 1976 Convention or the Protocol of 1996, and, therefore, a ship owner's rights to limit liability for maritime pollution in such jurisdictions may be uncertain.

 
28

 

In some areas of regulation, the European Union has introduced new laws without attempting to procure a corresponding amendment of international law. In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if com­mitted with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Criminal liability for pollu­tion may result in substantial penalties or fines and increased civil liability claims. The directive could therefore result in criminal liability being incurred in circum­stan­ces where it would not be otherwise incur­red under international law. Experience has shown that in the emotive at­mo­­sphere often associated with pollution incidents, the negligence alleged by prosecutors has often been found by courts on grounds which the international maritime community has found hard to understand. Moreover, there is ske­­­pti­cism in the international maritime community that "serious negligence" will prove to be any narrower in pra­ctice than ordinary negligence. Criminal liability for a pollution incident could not only result in us incurring substa­ntial penalties or fines, but may also, in some jurisdictions, facilitate civil liability claims for greater com­pensa­tion than would otherwise have been payable.
 
The declaration and payment of dividends is subject to the discretion of our board of directors and consent of our lenders, and will depend on a number of factors. Our board of directors may not always declare dividends in the future.
 
The declaration and payment of dividends, if any, is subject to the discretion of our board of directors and consent of our lenders. In the event that dividends are reinstated, the timing and amount of any dividends declared will depend on, among other things: (i) our earnings, financial condition and cash requi­rements and available sour­ces of liquidity; (ii) decisions in relation to our growth strategies; (iii) provisions of Mar­shall Islands and Liberian law governing the payment of dividends; (iv) restrictive covenants in our existing and fu­tu­re debt instruments; and (v) global financial conditions. We can give no assurance that dividends will be paid in the future.
 
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 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;
 
 
 
 
current and future restrictions in our loan and credit facilities;
 
 
 
 
prevailing global and regional economic and political conditions;
 
 
 
 
the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business;
 
 
 
 
the amount of cash reserves established by our board of directors; and

 
restrictions under Marshall Islands and Liberian law.

As part of certain amendments to the covenants of our credit facilities in July 2011, we agreed, among o­ther things, to suspend our cash dividends and share repurchases until the earlier of December 31, 2012 or such time as we can satisfy the financial covenant requirements of such facilities, as applicable prior to their July 2011 amend­ment, or our lenders consent to the reinstatement of cash dividends and share repurchases. The period during which cash dividends and share repurchases are suspended will be extended beyond December 31, 2012 unless we are in compliance with the original loan covenants and there are no deferred installments outstanding, under the amend­ments to our credit facilities we agreed with our lenders in March 2012. See Item 10.C "Material Contracts–Loan Agree­ments" and Item 5.A "Recent De­ve­lopments–Loan Amendments." Even if we we­re able to reinstate the payment of cash divi­dends, we would make dividend payments to our shareholders only if our board of dire­ctors, acting in its sole discre­tion, determined that such payments would be in our best interest and in com­­pliance with rele­vant legal and contractual requirements.

 
29

 

 
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. Our growth strategy con­tem­plates that we will finance the acquisition of additional vessels through a combination of our operating cash flow and debt financing or equity financing. If financing is not available to us on acce­ptable terms, our board of directors may decide to finance or refinance such 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.
 
The laws of the Republic of Liberia and The Marshall Islands, where our vessel-owning subsi­diaries are 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. Our subsidiaries may not have suf­ficient funds, surplus or net profits to make distributions to us. We also may not have sufficient surplus or net profits in the future to pay dividends.
 
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 may have difficulty managing our planned growth properly.
 
We intend to continue to grow our fleet. Our future growth will primarily depend on our ability to:
 
 
·
locate and acquire suitable vessels;

 
·
identify and consummate acquisitions or joint ventures;

 
·
enhance our customer base;

 
·
manage our expansion; and

 
·
obtain required financing on acceptable terms.

Growing any business by acquisition presents numerous risks, such as undisclosed liabilities and obligations, the possibility that indemnification agreements will be unenforceable or insufficient to cover potential losses and difficulties associated with imposing common standards, controls, procedures and policies, obtaining additional qualified personnel, managing relationships with customers and integrating newly acquired assets and operations into existing infrastructure. We may be unable to successfully execute our growth plans or we may incur significant expenses and losses in connection with our future growth whi­ch would have an adverse impact on our financial condition and results of operations.

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.
 
We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to sa­tisfy our financial obligations 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, or by the law of the jurisdiction of their incorporation or forma­tion, which regulates the payment of divi­dends by companies.

 
30

 

 
Risks associated with the purchase and operation of secondhand vessels may affect our results of operations.
 
The majority of our vessels were acquired second-hand, and we estimate their useful lives to be 28 years from their date of delivery from the yard, depending on various market factors and management's ability to comply with government and industry regulatory requirements. Part of our business strategy includes the continued acqui­sition of secondhand vessels when we find attractive opportunities.
 
In general, expenditures necessary for maintaining a vessel in good operating condition increase as a vessel ages. Secondhand vessels may also develop unexpected mechanical and operational problems despite adherence to regular survey schedules and proper maintenance. Cargo insurance rates also tend to increase with a vessel's age, and older vessels tend to be less fuel-efficient than newer vessels. While the difference in fuel consumption is factored into the freight rates that our older vessels earn, if the cost of bunker fuels were to increase significantly, it could disproportionately affect our vessels and significantly lower our profits. In addition, changes in governmental regulations, safety or other equipment standards may require:

 
·
expenditures for alterations to existing equipment;
 
 
·
the addition of new equipment; or
 
 
·
restrictions on the type of cargo a vessel may transport.
 
We cannot give assurances that future market conditions will justify such expenditures or enable us to operate our vessels profitably during the remainder of their economic lives.

The aging of our fleet may result in increased operating costs in the future, which could adversely affect our earnings.
 
In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. Our current operating fleet has an average age of approximately 10.8 years.
 
As our fleet ages, we will incur increased costs. Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels due to improvements in engine technology. Cargo insu­ran­ce rates also increase with the age of a vessel, making older vessels less desirable to charte­rers. Govern­mental regu­la­tions, including environmental 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.
 
Technological innovation could reduce our charterhire income and the value of our vessels.
 
The charterhire rates and the value and operational life of a vessel are determined by a number of factors including the vessel's efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel's physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new drybulk carriers are built that are more efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced vessels could adversely affect the amount of charterhire payments we receive for our vessels once their initial charters expire, and the resale value of our vessels could significantly decrease. As a result, our business, results of operations, cash flows and financial condition could be adversely affected.
 
If we acquire additional drybulk carriers and those vessels are not delivered on time or are delivered with si­gni­ficant defects, our earnings and financial condition could suffer.
 

 
31

 

We may acquire additional vessels in the future. A delay in the delivery of any of these ves­sels to us or the failure of the contract counterparty to deliver a vessel at all could cause us to breach our obliga­tions under a related time charter and could adversely affect our earnings, our financial condition and the amount of dividends, if any, that we pay in the future. The delivery of such vessels could be delayed or certain events may arise which could re­sult in us not taking delivery of a vessel, such as a total loss of a ves­sel, a constructive loss of a vessel, or substa­ntial da­mage to a vessel prior to delivery. In addition, the de­­li­­very of any of such vessels with substantial defects could ha­­ve similar consequences.
 
As we expand our business, we may need to improve our operating and financial systems and expand our com­mercial and technical management staff, and will need to recruit suitable employees and crew for our vessels.
 
Our fleet has experienced rapid growth. If we continue to expand our fleet, we will need to recruit suitable additional administrative and management personnel. Although we believe that our current staffing levels are adequate, we cannot guarantee that we will be able to continue to hire suitable employees as we expand our fleet. If we encounter business or financial difficulties, we may not be able to adequately staff our vessels. If we are unable to grow our financial and operating systems or to recruit suitable employees as we expand our fleet, our business and financial condition may be adversely affected.

If management is unable to continue to provide reports as to the effectiveness of our internal control over financial reporting or our independent registered public accounting firm is unable to continue to provide us with unqualified attestation reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.
 
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this and 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 re­gistered public accounting firm. If, in such future annual reports on Form 20-F, our management cannot provide a report as to the effectiveness of our internal control over financial reporting or our independent regi­stered public accounting firm is unable to provide us with an unqualified attestation report as to the ef­fectiveness of our internal control over financial reporting as required by Section 404, investors could lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our common stock.

We are subject to funding calls by our protection and indemnity associations, and our associations may not have enough resources to cover claims made against them.

We are indemnified for legal liabilities incurred while operating our vessels through membership in P&I associations. P&I associations are mutual insurance associations whose members must contribute to cover losses sustained by other association members. The objective of a P&I association is to provide mu­­tual insurance based on the aggregate tonnage of a member's vessels entered into the association. Claims are paid through the aggregate pre­mia of all members of the association, although members remain subject to calls for additional funds if the ag­gregate premia are insufficient to cover claims submitted to the association. Claims submitted to the association may include those incurred by members of the association, as well as claims submitted to the association from other P&I as­sociations with which our P&I association has entered into inter-association agreements. We cannot assure you that the P&I associations to which we belong will remain viable or that we will not become subject to additional funding calls which could adver­sely affect us.

Because many of our employees are covered by industry-wide collective bargaining agreements, failure of industry groups to renew those agreements may disrupt our operations and adversely affect our earnings.
 
We currently employ approximately 1,027 seafarers on-board our vessels and 144 land-based em­ployees in our Athens office. The 144 employees in Greece are covered by industry-wide collective bar­gai­ning agreements that set basic standards. We cannot assure you that these agreements will prevent labor inter­ruptions. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out normally and could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 
32

 
 
 
U.S. tax authorities could treat us as a "passive foreign investment company" which could have adverse U.S. fe­deral income tax consequences to U.S. holders.
 
A foreign corporation will be treated as a "passive foreign investment company" or PFIC, for U.S. federal income tax purposes if either (i) at least 75% of its gross income for any taxable year consists of certain types of "pas­sive income" or (ii) at least 50% of the average value of the corporation's assets produce or are held for the production of those types of "passive income." For purposes of these tests, "passive income" includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royal­ties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute "passive income." U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
 
Based on our past, current and proposed method of operation, we do not believe that we have been, are or will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, we believe that our income from our time chartering activities does not constitute "passive income," and the assets that we own and operate in connection with the production of that income do not constitute passive assets.
 
There is substantial legal authority supporting this position consisting of case law and United States Internal Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes.  However, it should be noted that there is also authority which characterizes time charter income as rental income rather than services income for other tax purposes.  Accordingly, no assurance can be given that the IRS or a court of law will accept this position, and there is a risk that the IRS or a court of law could determine that we are a PFIC.  Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if the nature and extent of our operations changed.

If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face ad­verse U.S. tax consequences. Under the PFIC rules, unless those shareholders make an election available under the United States Internal Revenue Code of 1986, as amended, or the Code (which election could itself have adverse consequences for such shareholders, as discussed below under "Taxation"), such shareholders would be liable to pay U.S. federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess di­stributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholders' holding period of our common shares. See "Taxation" for a more com­prehensive discussion of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.
 
We are subject to the United States Federal Income Tax on United States source income, which could reduce our earnings.
 
Under the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for de­duction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the applicable Trea­sury Regulations promulgated thereunder.
 
We do not believe that we are currently entitled to exemption under Section 883 of the Code for any taxable year. Therefore, we are subject to an effective 2% United States federal income tax on the gross shipping in­come that we de­rive during the year that is attributable to the transport or cargoes to or from the United States. See "Taxation" for a more comprehensive discussion of the U.S. federal income taxation of our shipping revenues.

 
33

 

The market price of our Class A common stock has fluctuated widely and the market price of our Class A com­mon stock may fluctuate in the future.
 
The market price of our Class A common stock has fluctuated widely since our Class A common stock began trading on the New York Stock Exchange, or NYSE, in September 2005 and may continue to do so as a result of many factors, including our actual results of operations and perceived prospects, the pro­spects of our competition and of the shipping industry in general and in particular the drybulk sector, dif­ferences between our actual financial and operating results and those expected by investors and analysts, changes in analysts' recommendations or projections, changes in general valuations for companies in the shipping industry, particularly the drybulk sector, changes in general economic or market conditions and broad market fluctuations.  In addition, future sales of our Class A common stock may decrease our stock pri­ce.
 
Future sales of our Class A common stock could cause the market price of our Class A common stock to decline and our existing stockholders may experience significant dilution.
 
We may issue additional shares of our Class A common stock in the future and our stockholders may elect to sell large numbers of shares held by them from time to time. On August 5, 2010 we filed a shelf registration statement on Form F-3 with the SEC, which became effective on September 21, 2010. In the future, we may use this registration statement to issue up to an aggregate public offering price of $750.0 million of additional common or preferred stock, warrants or subscription rights. Sales of a substantial num­ber of shares of our Class A common stock in the public market, or the perception that these sales cou­ld occur, may depress the market price for our Class A common stock. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future. Our existing stock­holders may also experience significant dilution in the future as a result of any future offering.
 
Because we are a foreign corporation, you may not have the same rights that a shareholder in a U.S. corporation may have.
 
We are a Liberian corporation. Our articles of incorporation and bylaws and the Business Corporation Act of Liberia 1976, as amended, govern our affairs. While the Liberian Business Corporation Act re­sem­bles provisions of the corporation laws of a number of states in the United States, Liberian law does not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and ju­dicial pre­ce­dent in some U.S. juris­dictions. However, while the Liberian courts generally follow U.S. court prece­dent, there have been few judicial ca­ses in Liberia interpreting the Liberian Business Corpo­ration Act. Inve­stors may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would share­holders of a corporation incorporated in a U.S. juris­diction which has developed a substantial body of case law.

Certain of our directors, officers, and principal stockholders are affiliated with entities engaged in business acti­vities similar to those conducted by us which may compete directly with us, causing such persons or entities with which they are affiliated to have conflicts of interest.

Some of our directors, officers and principal stockholders have affiliations with entities that have similar business activities to those conducted by us or that are parties to agreements with us. Certain of our directors are also directors of other shipping companies and they may enter similar businesses in the future. These other affiliations and business activities may give rise to certain conflicts of interest in the course of such individuals' affiliation with us. Although we do not prevent our directors, officers and principal stockholders from having such affiliations, we use our best efforts to cause such individuals to comply with all applicable laws and regulations in addressing such con­flicts of interest. Our officers and employee directors devote their full time and attention to our ongoing opera­tions, and our non-employee directors devote such time as is necessary and required to satisfy their duties as dire­ctors of a public company.

We are incorporated in the Republic of Liberia, which does not have a well-developed body of corporate law.

Our corporate affairs are governed by its amended and restated articles of incorporation and by-laws and by the Liberian Business Corporations Act, or the BCA. The provisions of the BCA are intended to resemble provisions of the corporation laws of a number of states in the United States. The rights and fiduciary responsibilities of directors under the law of the Republic of Liberia are not as clearly established as the rights and fiduciary re­sponsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Stockholder rights may differ as well.

 
34

 

 
We may be unable to retain key management personnel and other employees in the shipping industry, which may negatively impact the effectiveness of our management and results of operations.
 
Our success depends to a significant extent upon the abilities and efforts of our management team. Our ability to retain key members of our management team and to hire new members as may be necessary will contribute to that success. The loss of any of these individuals could adversely affect our business pro­spects and financial con­di­­tion. We are also dependent on qualified personnel in order to execute our day-to-day operations. The loss of the services of any of these individuals for any significant period of time or our ina­bility to attract and retain qua­lified per­son­nel could have a material adverse effect on our capacity to manage our business. Difficulty in hiring and re­tai­ning replacement personnel could have a similar effect. We do not maintain "key man" life insurance on any of our officers.
 
Because we generate all of our revenues in U.S. dollars but incur approximately one fifth of our expenses in other currencies, exchange rate fluctuations could hurt our results of operations.
 
We generate all of our revenues in U.S. dollars but have historically incurred approximately 20% to 25% of our vessel ope­rating expenses in currencies other than U.S. dollars. This variation in operating revenues and expenses could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to the other cur­rencies, in particular the Japanese yen, the Euro, the Singapore dollar and the British pound sterling. Expenses incurred in fo­reign currencies against which the U.S. dollar falls in value may increase as a result of these fluctuations, therefore de­creasing our net income. We currently do not hedge our currency exposure and, as a result, our results of operations and financial condition could suffer.

Unless we set aside reserves for vessel replacement, at the end of a vessel's useful life our revenue will decline if we are also unable to borrow funds for vessel replacement.
 
As of December 31, 2011, the vessels in our current fleet had an average age of 10.6 years. If we do not maintain cash reserves for vessel replacement, we may be unable to replace the vessels in our fleet upon the expiration of their useful lives in the event we also have insufficient credit or access to credit at the times of such expi­ration. We estimate the useful life of our vessels to be 28 years from the date of initial delivery from the ship­yard. Our cash flows and income are dependent on the revenues earned by the chartering of 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 service our debt and pay dividends will be adversely affected. Any reserves set aside for vessel replacement would not be available for other cash needs or dividends.
 
Issuance of preferred stock may adversely affect the voting power of our shareholders and have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.
 
Our articles of incorporation currently authorize our Board to issue preferred shares in one or more series and to determine the rights, preferences, privileges and restrictions, with respect to, among other things, dividends, conversion, voting, redemption, liquidation and the number of shares constituting any series subject to prior share­holders' approval. If our Board determines to issue preferred shares, such is­suance may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable. The issuance of preferred shares with voting and conversion rights may also adversely affect the voting power of the holders of common shares. This could substa­ntially impede the ability of public shareholders 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.

 
35

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants of our existing and future credit facilities and ma­­­ke payments on our debt.
 
As of December 31, 2011, we had total debt of approximately $1.1 billion. Our level of debt could ha­ve im­por­tant consequences for us, including the following:
 
 
·
we may have difficulty borrowing money in the future for acquisitions, capital expenditures or to meet our operating expenses or other general corporate obligations;
 
 
·
we will need to use a substantial portion of our cash flows to pay interest on our debt, which will reduce the amount of money we have for operations, working capital, capital expenditures, expa­n­sion, acquisitions or general corporate or other business activities;
 
 
·
we may have a higher level of debt than some of our competitors, which may put us at a compe­titive disadvantage;
 
 
·
we may be more vulnerable to economic downturns and adverse developments in our industry or the economy in general; and
 
 
·
our debt level, and the financial covenants in our various debt agreements, could limit our fle­xibility in planning for, or reacting to, changes in our business and the industry in which we ope­rate.
 
Conversion of our outstanding notes may dilute the ownership interest of existing stockholders.
 
In October 2007 we issued $150.0 million principal amount of 1.875% Senior Convertible Notes due 2027 (the "notes") in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the U.S. Se­­curities Act of 1933, as amended.

The conversion of some or all of our outstanding notes may dilute the ownership interests of existing stock­hol­ders. Any sales in the public market of any of our Class A common stock issuable upon such conversion could ad­versely affect prevailing market prices of our common stock. In addition, the anticipated conver­sion of our out­standing notes into shares of our common stock or a combination of cash and shares of our common stock could de­press the price of our common stock.

We could be required to repurchase our notes for cash prior to maturity of the notes.

The holders of our notes may, at their option, require us to purchase the principal amount of the notes for cash before the notes' ma­turity on certain specified dates (the earliest of which is October 15, 2014). If required, we may raise such additional funds through public or private debt or equity financing, or other arrangements. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our shareholders.

The agreements and instruments governing our debt contain restrictive covenants, which may limit our liquidity and corporate activities and prevent proper service of debt, which could result in the loss of our vessels.
 
Our loan agreements impose significant operating and financial restrictions on us.  See Item 10.C "Material Contracts–Loan Agree­ments" and Item 5.A "Recent De­ve­lopments–Loan Amendments." These restrictions may limit our ability to:
 
 
·
incur additional indebtedness;
 
 
·
create liens on our assets;
 
 
·
enter into long-term time charters for more than 36 months or long-term bareboat charters for more than 12 months;
 
 
36

 

 
 
·
sell capital stock of our subsidiaries;
 
 
 
·
make investments;
 
·
undergo a change in ownership or control, or permit a change in ownership and control of our Manager;

 
·
engage in mergers or acquisitions;
 
 
·
pay dividends or redeem capital stock;
 
 
·
make capital expenditures;
 
 
·
change the flag, class or the management of our vessels or terminate or materially amend the management agreement relating to each vessel; and
 
 
·
sell our vessels.
 
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.  If we do not comply with the restrictions and covenants in our loan agree­ments, we may not be able to pay dividends to you in the future, finance our future operations, make acquisitions or pursue bu­siness. As of December 31, 2011, we were in compliance with our loan covenants.

We are subject to certain fraudulent transfer and conveyance statutes which may adversely affect hol­ders of our indebtedness.
 
Fraudulent transfer and insolvency laws, to which we and the subsidiaries guaranteeing our inde­btedness may be subject, may result in such indebtedness and guarantees being voided, subordinated or li­mi­ted.
 
The Republic of the Marshall Islands
 
Many of our subsidiaries are organized under the laws of the Republic of the Marshall Islands. While the Republic of the Marshall Islands does not have a bankruptcy statute or general statutory mecha­nism for insolvency proceedings, a Marshall Islands court could apply general U.S. principles of fraudulent conveyance, discussed be­low, in light of the provisions of the Mar­shall Islands Business Corporations Act, or the BCA, restricting the grant of guarantees without a corporate purpose. In such case, a Marshall Isla­nds court could void or subordinate certain of our indebtedness or subsi­diary guarantees, including for the rea­sons a U.S. court could void or subordinate a gua­rantee as described below.
 
United States
 
Federal and state fraudulent transfer and conveyance statutes may apply to the incurrence of our indebtedness or subsidiary guarantees, particularly any future guarantees of any U.S. subsi­diaries we might create. Under U.S. federal bankruptcy law and comparable provisions of U.S. state frau­dulent transfer or conveyance laws, if any such law would be deemed to apply, which may vary from state to state, our indebtedness or any subsidiary guarantees could be voided as a fraudulent transfer or conveyance if: (i) we or any such guarantors, as applicable, incur­red such indebtedness or guarantees with the intent of hin­dering, delaying or defrauding creditors; or (ii) we or any such guarantors, as applicable, received less than reaso­nably equivalent value or fair consideration in return for incurring such inde­btedness or gua­ra­ntees and, in the case of (ii) only, one of the following is also true at the time thereof:
 
 
·
we or any such guarantors, as applicable, were insolvent or rendered insolvent by reason of the incurrence of such indebtedness or guarantees;


 
37

 


 
·
the incurrence of such indebtedness or guarantees left us or any such gua­rantors, as ap­plicable, with an unreasonably small amount of capital to carry on the business;
 
 
·
we or any such guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor's ability to pay as they mature; or
 
 
·
we or any such guarantors was a defendant in an action for money damages, or had a jud­g­ment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

If a court were to find that the incurrence of such indebtedness or guarantee was a fraudulent tran­s­fer or conveyance, the court could void the payment obligations under such indebtedness or guarantee or further su­bor­dinate such indebtedness or guarantee to our presently existing and future indebtedness of ours or of the related gua­rantor, or require the holders of indebtedness to repay any amounts received with re­spe­ct to such indebtedness or gua­ra­ntee. In case of a finding that a fraudulent transfer or conve­yance oc­­curred, the holders of our indebtedness may not receive any repayment on such indebtedness. Further, the voidance of any such indebtedness could result in an event of default with respect to our and our subsi­diaries' other debt that could result in acceleration of such debt.
 
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obli­gation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be consi­dered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the de­btor.
 
We cannot be certain as to the standards a court would use to determine whether or not we or any subsidiary guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issua­nce of any subsidiary guarantees would not be further subordinated to our or any of our guara­ntors' other debt. Ge­ne­rally, however, an entity would be considered insolvent if, at the time it incur­red indebtedness:
 
 
·
the sum of its debts, including contingent liabilities, was greater than the fair saleable va­lue of all of its assets; or
 
 
·
the present fair saleable value of its assets was less than the amount that would be requi­red to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
 
 
·
it could not pay its debts as they become due.
 
Other jurisdictions
 
The laws of the other jurisdictions in which any future guarantors may be organized (such as the Republic of Liberia and Cyprus) may also limit the ability of those guarantors to guarantee debt of a parent com­pany. These li­mi­tations arise under various provisions or principles of corporate law, including provi­sions requiring a subsidiary guarantor to receive adequate corporate benefit from the financing, rules gover­ning preservation of share capital, and thin capitalization and fraudulent transfer principles.
 
It may be difficult to serve process on or enforce a U.S. judgment against us, our officers and the majo­rity of our directors.
 
We are a Liberian corporation and nearly all of our executive officers and directors are located outside of the United States.  Most of our directors and officers and certain of the experts reside outside the United States. In ad­­dition, a substantial portion of our assets and the assets of our directors and officers are located outside of the United States.  As a result, you may have difficulty serving legal process within the United States upon us or any of these persons.  You may also have difficulty enforcing, both in and outside the United States, judgments you may ob­­tain in U.S. courts against us or any of these persons in any action, including actions based upon the civil liability pro­visions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of Liberia or of the non-U.S. jurisdictions in which our offices are located would enter judgments in ori­ginal actions brought in those courts predicated on U.S. federal or state securities laws.

 
38

 


 ITEM 4 - INFORMATION ON THE COMPANY
 
A. History and Development of the Company
 
We, Excel Maritime Carriers Ltd., were incorporated under the laws of the Republic of Liberia on Novem­ber 2, 1988.
 
Our Class A common stock has traded on the NYSE under the symbol "EXM" since September 15, 2005. Prior to that date, our Class A common stock traded on the American Stock Exchange, or the AMEX, under the sa­me symbol. As of December 31, 2011, we had 88,909,430 shares of our Class A common stock and 230,746 sha­res of our Class B common stock issued and outstanding.
 
The address of our registered office in Bermuda is 14 Par-La-Ville Road, Hamilton HM JX, Bermuda. We also maintain executive offices at 17th km National Road Athens-Lamia & Finikos Street, 145 64, Nea Kifisia, Gree­ce. Our telephone number at that address dialing from the U.S. is (011) 30 210 818 7000.
 
Vessel Acquisitions, Dispositions and Other Significant Transactions
 
In February 2009, we sold the M/V Swift for net proceeds of approximately $3.7 million.
 
On October 27, 2009, we and one of our joint venture partners completed two agreements for the exchange of our ownership interests in three joint venture companies. Based on the agreements concluded, we agreed to sell our 50% ownership interest in Lillie Shipco LLC to AMCIC Cape Holdings LLC, or AMCIC, an affiliate company of a member of our Board of Directors for a consideration of $1.2 million and the transfer by AMCIC to us of its 50% ownership interest in Hope Shipco LLC. In addition, AMCIC sold its 28.6% ownership interest in Christine Ship­­co LLC to us for a consideration of $2.8 million. Following the completion of the transaction, we became 100% owner of Hope Shipco LLC, increased our interest in Christine Shipco LLC to 71.4% and disposed our interest in Lil­lie Shipco LLC.

During the years ended December 31, 2009, 2010 and 2011, we paid $9.4 million, $92.7 million and $18.3 million, respectively, representing scheduled advances in rela­tion to our vessels then under construction.

On April 30, 2010, we took delivery of the M/V Christine from the Imabari Shipyard in Japan at a total cost of approximately $72.5 million.

On January 10, 2011, we took delivery of M/V Mairaki from the STX Off­shore and Shipbuilding Co Ltd shipyard at a total shipyard cost of approximately $80.3 million.

In February 2011, we sold the M/V Marybelle for net proceeds of approximately $9.9 million.

In June 2011, we cancelled four shipbuilding contracts for the construction of four Capesize vessels entered into by four joint ventures, Fritz Shipco LLC, Benthe Shipco LLC, Gayle Frances Shipco LLC and Iron Lena Shipco LLC, in each of which we held a 50% ownership interest. No advance payments had been made to the shipyards in con­­nection with the construction of the ves­sels. At the time of cancellation, the construction of the vessels had not com­menced. No payments were made in connection with such cancel­la­tion. Following the cancellation of the four new­­buildings, the joint venture companies that would ta­ke delivery of the vessels were dissolved with no signi­ficant ef­­fect on our financial statements.

In August 2011, we sold the M/V Lady for net proceeds of approximately $7.2 million.
 
 

 
39

 

B. Business Overview
 
We are a provider of worldwide sea borne transportation services for drybulk cargo including, among others, iron ore, coal and grain, collectively referred to as "major bulks," and steel products, fertilizers, cement, bau­xi­te, sugar and scrap metal, collectively referred to as "minor bulks." Our fleet is managed by one of our wholly-owned subsidiaries, Maryville Maritime Inc., or Maryville.
 
Currently, we own a fleet of 40 vessels (including one vessel owned through a joint venture in which we ho­ld a 71.4% interest) and, to­ge­ther with seven vessels under bareboat charters, operate a fleet of 47 vessels (seven Ca­­pesize, 14 Kamsarmax, 21 Panamax, two Supramax and three Handymax vessels) with a total carrying capacity of approximately 4.1 mil­lion dwt.

We deploy our vessels on a mix of period time charters 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. As of March 15, 2012, 33 of the vessels in our fleet were employed under pe­riod ti­me char­ters. Spot charters comprise of voyage charters, which are charters for one specific voya­ge, and short-term time charters, which are charters with a term of less than four months on average. Period time charters are time char­ters with a term of at least four months on average.

In the year ended December 31, 2011, we generated voyage revenues of approximately $353.4 million compared to $423.0 million in the corresponding period in 2010 and $391.7 million in the cor­responding pe­riod in 2009.
 
Our Fleet
 
The following is a list of the operating vessels in our fleet as of March 15, 2012, all of which are drybulk car­riers:
 
Vessel Name
 
DWT
   
Year Built
 
Charter Type
 
Daily Charter Rate
 
Average Charter Expiration
Capesize vessels (7)
                     
Mairaki(1)
    181,000       2011  
Period
    $28,000  
Apr 2016
Christine(1)(2)
    180,000       2010  
Period
    $25,000  
Jan 2016
Sandra(1)
    180,274       2008  
Period
    $26,500  
Nov 2015
Iron Miner
    177,931       2007  
Period
    $17,000  
Mar 2013
Kirmar
    164,218       2001  
Period
 
$49,000 (net)
 
May 2013
Iron Beauty
    164,218       2001  
Period
    $12,250  
Dec 2012
Lowlands Beilun(1)
    170,162       1999  
Period
    $28,000  
Nov 2015
Kamsarmax vessels (14)
                           
Iron Manolis
    82,269       2007  
Period
    $14,000  
Dec 2012
Iron Brooke (8)
    82,594       2007  
Period
    $11,250  
Mar 2013
Iron Lindrew(5)
    82,598       2007  
Period
 
$12,000
 
Jan 2014
Pascha
    82,574       2006  
Period
    $14,000  
Dec 2012
Coal Gypsy(3)
    82,221       2006  
Period
    $11,250  
Apr 2013
Iron Anne
    82,220       2006  
Period
    $14,000  
Dec 2012
Iron Vassilis
    82,257       2006  
Period
    $14,000  
Aug 2012
Iron Bill(3)
    82,187       2006  
Period
    $11,500  
Apr 2013
Ore Hansa(3)
    82,209       2006  
Period
    $11,250  
Apr 2013
Iron Kalypso
    82,224       2006  
Period
    $11,500  
Jan 2013
Iron Fuzeyya(7)
    82,209       2006  
Period
 
$12,750
 
Nov 2013
Santa Barbara(4)
    82,266       2006  
Period
 
$15,000
 
Jun 2013
Coal Hunter(4)
    82,298       2006  
Period
 
$15,000
 
Jun 2013
Iron Bradyn
    82,769       2005  
Period
    $12,000  
Nov 2012
Panamax vessels (21)
                           
 
 
40

 
 
Grain Harvester(3)
    76,417       2004  
Period
    $11,250  
Mar 2013
Grain Express
    76,466       2004  
   Spot
         
Iron Knight
    76,429       2004  
Period
    $12,250  
Jan 2013
Coal Pride
    72,493       1999  
Period
    $16,750  
Apr 2012
Isminaki(5)
    74,577       1998  
Period
 
$11,000
 
Nov 2012
Angela Star(5)
    73,798       1998  
Period
 
$11,000
 
Nov 2012
Elinakos
    73,751       1997  
   Spot
         
Happy Day
    71,694       1997  
Period
    $13,000  
Aug 2012
Iron Man(6)
    72,861       1997  
   Spot
         
Coal Age(6)
    72,824       1997  
   Spot
         
Fearless I(6)
    73,427       1997  
Period
    $15,000  
Apr 2012
Barbara(6)
    73,307       1997  
   Spot
         
Linda Leah(5)(6)
    73,317       1997  
Period
 
$11,000
 
Oct 2012
King Coal(6)
    72,873       1997  
Period
    $11,500  
Jul 2012
Coal Glory(6)
    73,670       1995  
   Spot
         
Powerful
    70,083       1994  
Period
    $10,500  
Jun 2012
First Endeavour
    69,111       1994  
   Spot
         
Rodon
    73,656       1993  
   Spot
         
Birthday
    71,504       1993  
   Spot
         
Renuar
    70,155       1993  
Period
    $13,500  
May 2012
Fortezza
    69,634       1993  
Period
    $13,500  
May 2012
Supramax vessels (2)
                           
July M
    55,567       2005  
   Spot
         
Mairouli
    53,206       2005  
   Spot
         
Handymax vessels (3)
                           
Emerald
    45,588       1998  
   Spot
         
Princess I
    38,858       1994  
   Spot
         
Attractive
    41,524       1985  
   Spot
         
_____________
 
________
                     
TOTAL DWT
    4,137,488                      

 
(1)
The charter includes a 50% profit-sharing arrangement over the indicated base daily time charter rate which is calculated on the basis of the monthly AV4 BCI Time Charter Rate, which is the Baltic Capesize Index Average of four spe­cific time charter routes, as published on a daily basis by the Baltic Exchange in London.

 
(2)
We hold a 71.4% ownership interest in the joint venture that owns the vessel.

 
(3)
The charter will commence upon the expiration of vessel's current charter and the vessel's redelivery by the end on March or April 2012, as applicable.

 
(4)
The daily charter rate during the first year of the charter is $15,000. Thereafter, the charter rate is calculated on the basis of the avera­ge of the AV4 BPI rates, as published on a daily basis by the Baltic Exchange in London during the 15 days preceding the payment of hire, with a gua­ra­nteed minimum daily rate (floor) of $14,000 and a 50% profit-sharing arrangement over the amount specified in each charter.

 
(5)
The daily charter rate is calculated on the basis of the average of the AV4 BPI rates, as published on a daily basis by the Baltic Exchange in London during the 15 days preceding the payment of hire, with a guaranteed minimum daily rate (floor) ranging from $11,000 to $12,000 and a 50% profit-sharing arrangement over the amount specified in each charter.

 
(6)
Indicates a vessel sold to its current owner in July 2007 and subsequently leased back to us under a bareboat charter expiring in July 2015.

 
(7)
The daily charter rate during the first year of the charter is $12,750. Thereafter, the charter rate is calculated on the basis of the avera­ge of the AV4 BPI rates, as published on a daily basis by the Baltic Exchange in London during the 15 days preceding the payment of hire, with a gua­ra­nteed minimum daily rate (floor) of $11,750 and a 50% profit-sharing arrangement over the amount specified in the charter.
 
 
41

 

 
(8)
The vessel is currently under drydocking and the charter will commence upon completion of the drydocking.
 
On January 7, 2011, we entered into a Memorandum of Agreement, or MOA, to sell the M/V Marybelle for net proceeds of approximately $9.9 million and realized a gain of approximately $1.3 million, which was recognized upon delivery of the vessel to her new owners. The vessel delivery took place on February 10, 2011. Fol­­lowing the sale, an amount of approximately $7.8 million was repaid under our Nordea cre­dit facility.

On May 31, 2011, we entered into a MOA to sell the M/V Lady for net proceeds of approximately $7.2 million and realized a gain of approximately $5.1 million, which was recognized upon delivery of the vessel to her new owners. The vessel delivery took place on August 9, 2011. Following the sa­le, an amount of approximately $6.0 mil­­lion was repaid under our Nordea credit facility.

Business Strategy
 
We intend to increase our operating cash flow and strengthen our core business through the following prin­cipal strategies:
 
·      Maximize Fleet Utilization. In the fiscal years 2009, 2010 and 2011, we have maintained vessel utilization rates (defined as number of available days divided by fleet calendar days) of 98.0%, 96.2% and 98.0%, respectively. We look to maximize our vessel utilization.

·      Fleet Expansion and Reduction in Average Age. We intend to continue to grow our fleet and, over time, reduce its average age. Most significantly, our acquisition of Quintana in 2008 allowed us to add 29 modern, well-mai­ntained operating drybulk carriers to our fleet, which, together with three newly built vessels that were delivered to us since Quintana's acquisition, have, on average, an age of approximately 8.3 years and a deadweight weighted ave­rage a­ge of approximately 7.8 years. Our vessel acquisition can­di­dates generally are chosen based on economic re­­turn and strict vessel specifications. We also expect to explore op­por­tunities to sell some of our older vessels at at­tra­ctive pri­­ces over time in order to maintain a modern fleet.
 
·      Balanced Fleet Deployment Strategy. Our fleet deployment strategy seeks to maximize charter revenue throughout industry cycles while maintaining cash flow stability. We intend to achieve this through a balanced portfolio of spot and period time charters. As of March 15, 2012, 33 of our vessels are employed under period charters while 14 operate in the spot market. Upon completion of their current charters, our vessels may or may not be employed on spot/short-duration time charters, depending on the market conditions at the time.
 
·      Capitalizing on our Established Reputation. We believe that we have established a reputation in the inter­na­tional shipping community for maintaining high standards of performance, reliability and safety. In addition, our wholly-owned management subsidiary, Maryville, carries the distinction of being one of the first Greek-based ship management companies to have been certified ISO 14001 compliant by Bureau Veritas. None of our vessels has been involved in a major accident since Maryville became the manager of our vessels in 1998.
 
Competitive Strengths
 
We believe that we possess a number of competitive strengths in our industry:
 
·      Significant Fleet of Modern and Diverse Vessels. As of March 15, 2012, our fleet consists of 47 vessels (inclu­ding 7 chartered-in vessels) representing a total capacity of approximately 4.1 million dwt, making us one of the lar­gest independent drybulk operators in the world. Our fleet has an average age of approximately 10.8 years and a deadweight weighted average age of approximately 9.7 years. We believe that our fleet provides us with cer­tain ope­ra­tional adva­ntages, such as higher productivity and fleet utilization and lower insurance premia and opera­ting costs. Our large, modern sister vessel fleet also provides us with a competitive adva­ntage in the charter market, whe­re vessel age and quality are of significant importance in competing for char­ters.

The diversity of our fleet allows us to provide transportation services across all of the major drybulk trades, including iron ore, coal, grains and minor bulk trades, and to take advantage of different demand dynamics within the drybulk sector and service a wider range of potential customers.

 
42

 
 
 
·      Strong Customer Relationships. We have strong relationships with our customers and charterers that we believe are the result of the quality of our fleet and our reputation for quality vessel operations. Through our wholly-owned management subsidiary, Maryville, we have many long-established customer relationships, and our management believes it is well regarded within the international shipping community. During the past 21 years, vessels managed by Maryville have been repeatedly chartered by subsidiaries of major drybulk operators. In 2010, we derived approximately 30% of our gross revenues from a single charterer, Bunge Geneva S.A. In 2011, we deri­ved ap­pro­xi­mately 14% and 11% of our gross revenues from Global Maritime Investments Ltd and EDF Tra­ding Li­mited, re­spectively.
 
·      Cost Efficient Operations. We have historically operated our fleet at competitive costs by carefully selecting secondhand vessels, competitively commissioning and actively supervising cost efficient shipyards to perform repair, reconditioning and systems upgrading work, together with a proactive preventive maintenance program both ashore and at sea, and employing professional, well trained masters, officers and crews. We believe that this combi­na­tion has allowed us to minimize off-hire periods, effectively manage insurance costs and control overall operating expenses.

·      Experienced Management Team. Our management team has significant experience in operating drybulk carriers and expertise in all aspects of commercial, technical, operational and financial areas of our business, promo­ting a focused marketing effort, tight quality and cost controls, and effective operations and safety monitoring.
 
Ship Management

The technical management of our fleet is conducted by our wholly-owned subsidiary Maryville, since 2005. We believe that having in-house technical management provides us with a compe­titive advantage in control­ling both the cost and quality of our vessel operations. Maryville provides comprehensive ship management servi­ces, including technical supervision, such as repairs, maintenance and inspe­ctions, safety and quality, crewing and trai­ning, as well as supply provisioning. Through our in-house technical ma­na­ger, we are able to efficiently operate our fleet at a lower cost.
 
Brokering agreement
 
On March 4, 2005, we entered into a one-year brokering agreement with Excel Management Ltd, or Excel Management, a Liberian corporation controlled by the Chairman of our Board. Under this brokering agreement, the entity acts as our broker to provide services for the employment and chartering of our vessels for a commission fee equal to 1.25% of the revenue of each contract Excel Management has brokered. This agreement extends auto­matically for successive one-year terms on each anniversary date, unless written notice by either party is given at least one year prior to the commencement of the applicable one year extension period. The agreement was au­to­matically extended by another year on March 4, 2012.

Permits and Authorizations
 
Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions, national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration. 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 price or useful life of our vessels. Additional conventions, laws and re­gulations may be adopted which could limit our ability to do business or increase the cost of doing business.
 
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. The kinds of permits, licenses, certificates and other autho­rizations required for each vessel depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel's crew and the age of the vessel. Subject to these factors, as well as the discussion below, we believe that we have been and will be able to obtain all permits, licenses and certi­fi­ca­tes material to the conduct of our operations. However, additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase our cost of doing business and which may materially adversely affect our operations.

 
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Environmental and Other Regulations

Government regulation significantly affects the ownership and operation of drybulk carriers. A variety of government and private entities subject drybulk vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (United States Coast Guard, harbor master or equivalent), classification so­cieties, flag state administrations (country of registry), charterers or contract of affreightment counterparties, and terminal operators. Certain of these entities will require us to obtain permits, licenses and certificates for the ope­ra­tion of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or tem­po­rarily suspend the operation of one or more of our vessels.

We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the drybulk shipping industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We are required to maintain ope­ra­ting standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of officers and crews and compliance with local, national and international environmental laws and regulations. We believe that the operations of our vessels is in substantial compliance with applicable environmental laws and regu­lations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations. However, because such laws and regulations are frequently changed and may impose in­crea­singly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels. In addition, a future serious marine incident, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, that causes significant adverse envi­ronmental impact could result in additional legislation or regulation that could negatively affect our profitability.

International Maritime Organization

The United Nations' International Maritime Organization (the "IMO") has adopted the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto (collectively referred to as MARPOL 73/78 and herein as "MARPOL").  MARPOL entered into force on Octo­ber 2, 1983.  It has been adopted by over 150 nations, including many of the jurisdictions in which our vessels operate. MARPOL sets forth pollution-prevention requirements applicable to drybulk carriers, among other vessels, and is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil lea­kage or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid or packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately adopted by the IMO in September of 1997.

Air Emissions

In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution.  Effective May 2005, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000.  It also prohibits "deliberate emissions" of "ozone depleting substances," defined to include certain halons and chlorofluorocarbons. "Deliberate emissions" are not limited to times when the ship is at sea; they can for example include discharges occurring in the course of the ship's repair and maintenance. Emissions of "volatile organic compounds" from certain tankers, and the shipboard inci­neration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls (PCBs)) are also prohibited.  Annex VI also includes a global cap on the sulfur content of fuel oil (see below).

The IMO's Maritime Environment Protection Committee, or MEPC, adopted amendments to Annex VI on October 10, 2008, which amendments were entered into force on July 1, 2010. The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulphur contained in any fuel oil used on board ships.  By January 1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur (from the current cap of 4.50%).  By January 1, 2020, sulfur content must not exceed 0.50%, subject to a feasibility review to be completed no later than 2018.

 
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Sulfur content standards are even stricter within certain "Emission Control Areas" ("ECAs").  By July 1, 2010, ships operating within an ECA may not use fuel with sulfur content in excess of 1.0% (from 1.50%), which is further reduced to 0.10% on January 1, 2015. Amended Annex VI establishes procedures for designating new ECAs.  Currently, the Baltic Sea and the North Sea have been so designated. Effective August 1, 2012, certain coa­stal areas of North America will also be designated ECAs, as will (effective January 1, 2014), the United States Caribbean Sea. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA or the states where we operate, com­pliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.

Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new ma­rine engines, depending on their date of installation. The U.S. Environmental Protection Agency promulgated equi­valent (and in some senses stricter) emissions standards in late 2009.

Safety Management System Requirements

The IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International Convention on Load Lines, or the LL Convention, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises the SOLAS and LL Convention stan­dards.

The operation of our ships is also affected by the requirements set forth in Chapter IX of SOLAS, which sets forth the IMO's International Management Code for the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires ship owners and bareboat charterers to develop and maintain an extensive "Sa­fety Management System" that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The fai­lure of a ship owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports. Currently, each of the Company's applicable vessels is ISM code-certified. However, there can be no assurance that such certifications will be maintained indefinitely.

Pollution Control and Liability Requirements

The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions.  For example, the IMO adopted the International Convention for the Control and Management of Ships' Ballast Water and Sediments, or the BWM Convention, in Fe­bruary 2004. The BWM Convention's implementing regulations call for a phased introduction of mandatory bal­last water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Conve­ntion will not enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world's merchant shipping tonnage. To date, there has not been sufficient adoption of this standard for it to take force, but the MEPC adopted a resolution in March 2010 encouraging the installation of ballast water management systems on new ships in accordance with the application dates in the BWM Convention. Additionally, Panama may adopt this standard in the relatively near future, which would be sufficient for it to take force. Upon entry into force of the BWM Convention, mid-ocean ballast exchange would be mandatory for our vessels.  In addition, our vessels would be required to be equipped with a ballast water treatment system that meets mandatory concentration limits not later than the first intermediate or renewal survey, whichever occurs first, after the anniversary date of delivery of the vessel in 2014, for vessels with ballast water capacity of 1500-5000 cubic meters, or after such date in 2016, for vessels with ballast water capacity of greater than 5000 cubic meters.

The IMO adopted the Convention on Limitation of Liability for Maritime Claims (London 1976), or 1976 Convention, and amended it in 1996. Rights to limit liability under the 1976 Convention are forfeited where a spill is caused by a shipowner's intentional or reckless conduct. Certain states have ratified the IMO's 1996 Protocol to the 1976 Convention. The 1996 Protocol provides for substantially higher liability limits to apply in those jurisdictions than the limits originally set forth in the 1976 Convention. For jurisdictions which are not a party to either the 1976 Convention or the Protocol of 1996, a ship owner's rights to limit liability for maritime pollution in such juris­di­ctions may be uncertain.

 
45

 


The IMO has also adopted the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocol in 1976, 1984, and 1992, and amended in 2000, or the CLC. Under the CLC and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel's registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The right to limit liability is forfeited under the CLC where the spill is caused by the shipowner's actual fault and under the 1992 Protocol where the spill is caused by the shipowner's intentional or reckless act or omission where the shipowner knew pollution damage would probably result.  The CLC requires ships covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner's liability for a single incident.

In addition, the IMO has adopted the International Convention on Civil Liability for Bunker Oil Pollution Dama­ge, or the Bunker Convention, to impose strict liability on ship owners for pollution damage in jurisdictional waters of rati­fying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-rati­fying states, liability for spills or releases of oil carried as fuel in ship's bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.

The IMO continues to review and introduce new regulations. It is impossible to predict what additional re­gu­­lations, if any, may be passed by the IMO and what effect, if any, such regulations might have on our opera­tions.

The United States Oil Pollution Act of 1990 and CERCLA

OPA established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all "owners and operators" whose vessels trade with the United States, its ter­ritories and possessions or whose vessels operate in United States waters, which includes the United States' ter­ritorial sea and its 200 nautical mile exclusive economic zone around the United States.  The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea.  OPA and CERCLA both define "owner and operator" in the case of a vessel as any person owning, operating or chartering by demise, the vessel.  Both OPA and CERCLA impact our operations.

Under OPA, vessel owners and operators are "responsible parties" and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all contain­ment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:

(i)            injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;

(i)            injury to, or economic losses resulting from, the destruction of real and personal property;

(iii)
net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;

(iv)           loss of subsistence use of natural resources that are injured, destroyed or lost;

(v)
lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and

 
46

 

(vi)          net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs.  Effective July 31, 2009, the U.S. Coast Guard adjusted the limits of OPA liability for non-tank vessels (e.g. drybulk) to the greater of $1,000 per gross ton or $854,400 (subject to periodic adjustment for inflation). These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party's gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pol­lution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.

CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, inclu­ding the reasonable costs associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 mil­lion for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regu­lations. The limitation on liability also does not apply if the responsible person fails or refused to provide all reaso­nable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.

OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We plan to comply with the U.S. Coast Guard's financial responsibility regulations by providing a certificate of responsibility evi­dencing sufficient self-insurance.

The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes, including the raising of liability caps under OPA. Compliance with any new requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. Additional legislation or regulations applicable to the operation of our vessels that may be implemented in the future could adversely affect our business.

We currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage it could have an adverse effect on our business and results of operation.

OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution inci­dents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA and some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessel owners' responsibilities under these laws. The Company intends to comply with all applicable state regulations in the ports where the Company's vessels call.

The U.S. Clean Water Act

The CWA prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and da­mages and complements the remedies available under OPA and CERCLA.

 
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The EPA regulates the discharge of ballast water and other substances in U.S. waters under the CWA.  EPA regulations require vessels 79 feet in length or longer (other than commercial fishing and recreational vessels) to comply with a Vessel General Permit authorizing ballast water discharges and other discharges incidental to the ope­ra­tion of vessels. The Vessel General Permit imposes technology and water-quality based effluent limits for certain types of discharges and establishes specific inspection, monitoring, recordkeeping and reporting requi­rements to ensure the effluent limits are met. The EPA has proposed a draft 2013 Vessel General Permit to replace the current Ves­sel General Permit upon its expiration on December 19, 2013. Among other things, the draft permit contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in US waters, more strin­gent requirements for exhaust gas scrubbers and requires the use of environmentally acceptable lubricants.  U.S. Coast Guard regulations adopted under the U.S. National Invasive Species Act, or NISA, also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters.  On March 23, 2012, the U.S. Coast Guard announced that it is amending its regulations on ballast water management by establishing standards on the allowable concentration of living organisms in ballast water discharged from ships in U.S. waters.  The revised ballast water standards are consistent with those adopted by the IMO in 2004, and will be effective on or around June 20, 2012.  Compliance with the EPA and the U.S. Coast Guard regulations could require the installation of certain engineering equipment and water treatment systems to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.
The U.S. Clean Air Act

The U.S. Clean Air Act of 1970 (including its amendments of 1977 and 1990) (the "CAA") requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Our vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these requirements. The CAA also requires states to draft State Implementation Plans ("SIPs") designed to attain national health-based air quality stan­dards in each state.  Although state-specific, SIPs may include regulations concerning emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. As indicated above, our vessels operating in covered port areas are already equipped with vapor recovery systems that satisfy the­se existing requirements.

Other Environmental Initiatives

European Union Regulations

In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties.  Member States were required to enact laws or regulations to comply with the directive by the end of 2010. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger. Because this directive does not necessarily correspond with international law, the directive could therefore result in criminal liability being incurred in circumstances where it would not be otherwise incurred under international law. Criminal liability for a pollution incident could not only result in us incurring substantial pe­nalties or fines, but may also, in some jurisdictions, facilitate civil liability claims for greater compensation than would otherwise have been payable.

Greenhouse Gas Regulation

Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions. However, in July 2011 the MEPC adopted two new sets of mandatory requirements to address green­house gas emissions from ships that will enter into force in January 2013. Currently operating ships will be required to develop Ship Energy Efficiency Management Plans, and minimum energy efficiency levels per capacity mile will apply to new ships. These requirements could cause us to incur additional compliance costs. The IMO is also consi­dering the development of market-based mechanisms to reduce greenhouse gas emissions from ships. The European Union has indicated that it intends to propose an expansion of the existing European Union emissions trading sche­me to include emissions of greenhouse gases from marine vessels, and in January 2012 the European Commission launched a public consultation on possible measures to reduce greenhouse gas emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety and has adopted regu­lations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of ves­sels is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental groups seeking such regulation. Any passage of climate control legislation or other regulatory ini­tiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to ma­ke significant financial expenditures which we cannot predict with certainty at this time.

 
48

 


International Labor Organization

The International Labor Organization (ILO) is a specialized agency of the UN with headquarters in Gene­va, Switzerland. The ILO has adopted the Maritime Labor Convention 2006 (MLC 2006). A Maritime Labor Certi­ficate and a Declaration of Maritime Labor Compliance will be required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 will enter into force one year after 30 countries with a minimum of 33% of the world's tonnage have ratified it. The MLC 2006 has not yet been ratified, but its ratification would require us to develop new procedures to ensure full compliance with its requirements.

The International Drybulk Shipping Market
 
The drybulk shipping market is the primary provider of global commodities transportation. Approximately one third of all seaborne trade is drybulk related.

After three consecutive years in which demand for seaborne trade has grown faster than newbuilding supply, the situation was reversed in mid-2005. While demand growth slowed, a new all-time high for newbuilding de­li­veries, together with minimal scrapping, resulted in a weaker market in 2005 which continued in the first half of 2006. Beginning with the second half of 2006, the market showed signs of significant strength which continued in 2007 with the BDI closing the year 2007 at 9,143. The market remained at high levels until May 20, 2008 when the BDI reached an all-time high.

Following May 2008, the BDI fell over 90% from May 2008 through December 16, 2008 and almost 75% during the fourth quarter of 2008 through December 16, 2008, reaching a low of 663, or 94% below the May 2008 high point. The BDI recovered during 2009, at a rate of 350% to close the year at 3,005 points. From January 2009 through December 2009, the BDI reached a high of 4,661, or 700% above the December 2008 low point, in November 2009.

The recuperated charter market in 2009 was a good setting for a fundamentally more stable 2010, although significant order book influx put pressure to overall fleet utilization. In 2010, the BDI traded in a broad range between a high of 4,209 points in May and a low of 1,700 points in July, overall averaging 2,758 points in 2010 or 5% over 2009 BDI average.

In 2011, the drybulk market experienced a decline, with BDI averaging 1,549 points or 44% below the pre­vious year's average reaching its lowest point in February 2011 at 1,043 points, which however moderately reverted la­ter in the year to reach a high of 2,173 points in October 2011. On December 23, 2011, the BDI was at 1,738 points.

The general decline in the drybulk carrier charter market has resulted in lower charter rates for vessels expo­sed to the spot market and time charters linked to the BDI. We currently employ 14 of our vessels in the spot mar­ket and 33 of our vessels under period time charters, 11 of which are linked to the BCI and BPI indices, as pu­bli­shed on a daily basis by the Baltic Exchange in London.

 
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Capesize rates, which averaged $130,000 per day in August 2008 and fell to approximately $2,300 per day in December 2008, surging thereafter to an average $33,300 for the year 2010, averaged $15,640 per day in 2011, approximately 53% lower than the previous year. The lowest Capesize rate levels in 2011 were at $4,570 per day in February and the highest at $32,890 per day in December, with the Capesize market being approximately at $6,010 per day in late February 2012.

 We believe the rate decline has been primarily attributable to vessel oversupply gradually taking its toll on the market. Increased demand for drybulk commodities has been unable to fully absorb the approximately 98 million new deadweight tonnage that entered the market in 2011, despite almost record high scrapping levels of appro­ximately 22.3 million deadweight tonnage and an approximately 30% delivery slippage. 2011 was the second conse­cutive year of double-digit growth in the global drybulk fleet, as indi­­cated by the fleet's 14% increase in dead­weight carrying capacity for the year.

On the demand side, global steel consumption witnessed an increase of approximately 4% in 2011, despite the somewhat moderate GDP growth rate of the three largest steel consuming regions, China, the European Union and the United States.

China's GDP growth of 9.2% in 2011 was somewhat lower than the 10.4% in 2010, whe­reas the Euro­zone's 1.6% and the United States' 1.8% GDP growth in 2011 have likely been reflective of the weaker economic conditions these regions experienced during 2011.

China remained the world's largest iron ore importer in 2011, showing an increase of approximately 10% in its imports of the commodity compared to 2010, with Brazil reporting record high iron ore export levels in 2011, 5% higher than those in 2010 and 22% above those in 2009.

On the coal trade segment, global thermal coal trade remained firm in 2011, underpinned by a sharp de­mand increase of approximately 20% in India, where new coal-fired power stations continue to be constructed. Steam coal trade has also been supported by steady demand levels on the part of other major importing regions, such as China and Europe, despite a slight decrease in Japan's imports in 2011 following the earthquake and tsunami in March 2011.

While global trade is likely to continue to grow, we expect the overcapacity in the shipping market to conti­nue to exert considerable pressure on charter rates, negating any upward trends possibly arising from any favorable pri­ce and volume developments in the underlying markets. There can be no assurance as to how long charter rates will remain at their currently low levels or whether they will improve or deteriorate and, if so, when and to what degree. Charter rates may remain at depressed levels for some time, which will adversely affect our revenue and profitability.

As a result of the volatility and rate decline witnessed in the charter markets, the continued lack of availability of credit to finance vessel acquisitions and an overwhelming orderbook delivery rate during 2011, vessel values have remained under severe pressure. Indicatively, as of December 2011, values of five-year Panamax vessels with 76,000 deadweight carrying capacity have reportedly decreased by 26% compared to the same values  in December 2010, whereas five-year Capesize vessels of 170,000 deadweight carrying capacity were valued 28% less compared to December 2010.

Vessel Security Regulations

Since the terrorist attacks of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance vessel security such as the Maritime Transportation Security Act of 2002, or MTSA.  To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the U.S. Environmental Protection Agency (EPA).

 
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Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new Chapter V became effective in July 2004 and imposes various detailed se­curity obligations on vessels and port authorities, and mandates compliance with the International Ship and Port Fa­cilities Security Code, or the ISPS Code. The ISPS Code is designed to enhance the security of ports and ships a­gainst terrorism. To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel's flag state. Among the various requirements are:
 
 
 
·
on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship's identity, position, course, speed and navigational status;

 
·
on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;

 
·
the development of vessel security plans;

 
·
ship identification number to be permanently marked on a vessel's hull;

 
·
a continuous synopsis record kept onboard showing a vessel's history including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and

 
·
compliance with flag state security certification requirements.

Ships operating without a valid certificate may be detained at port until it obtains an ISSC, or it may be expel­led from port, or refused entry at port.

Furthermore, additional security measures could be required in the future which could have a significant financial impact on us. The U.S. Coast Guard regulations, intended to be aligned with international maritime secu­rity standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid ISSC that attests to the vessel's compliance with SOLAS security requirements and the ISPS Code. We have im­ple­mented the various security measures addressed by the MTSA, SOLAS and the ISPS Code and take measures for our vessels to attain compliance with all applicable security requirements within the prescribed time periods. Although management does not believe these additional requirements will have a material financial impact on our operations, there can be no assurance that there will not be an interruption in operations to bring vessels into com­pliance with the applicable requirements and any such interruption, could cause a decrease in charter revenues.
 
Customers
 
We have many long-established customer relationships, and management believes that we are well regarded within the international shipping community. During the past 20 years, vessels managed by Maryville have been repeatedly chartered by subsidiaries of major drybulk operators. In 2010, we derived approximately 30% of our gross revenues from a single charterer, Bunge Geneva S.A. In 2011, we derived approximately 14% and 11% of our gross revenues from Global Maritime Investments Ltd and EDF Trading Limited, respectively.
 
 

 
51

 

Inspection by Classification Societies
 
The hull and machinery of every large, commercial oceangoing vessel must be "classed" by a classification society.  A classification society certifies that a vessel is "in-class," signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regula­tions of the vessel's country of registry and the international conventions of which that country is a mem­ber.  In ad­dition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the autho­rities concerned.
 
The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
 
For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:

 
·
Annual Surveys.  For seagoing ships, annual surveys are conducted for the hull and the machinery, in­cluding the electrical plant and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.

 
·
Intermediate Surveys.  Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class re­ne­wal.  Intermediate surveys may be carried out on the occasion of the second or third annual sur­vey.
 
 
·
Class Renewal Surveys.  Class renewal surveys, also known as special surveys, are carried out for the ship's hull, machinery, including the electrical plant and for any special equipment classed, at the intervals indicated by the character of classification for the hull.  At the special survey the ves­sel is thoroughly examined, including audio-gauging to determine the thickness of the steel stru­ctures.  Should the thickness be found to be less than class requirements, the classification society wou­ld prescribe steel renewals. The classification society may grant a one year grace period for com­­pletion of the special survey. Substantial amounts of money may have to be spent for steel re­newals to pass a special survey if the vessel experiences excessive wear and tear.  In lieu of the special survey every four or five years, depending on whether a grace period was granted, a ship­owner has the option of arranging with the classification society for the vessel's hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five year cycle.  At an owner's application, the surveys required for class renew­al may be split ac­cording to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal.
 
All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two sub­sequent surveys of each area must not exceed five years.
 
Most vessels are also dry docked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a recommendation that mu­st be rectified by the shipowner within prescribed time limits.
 
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as "in-class" by a classification society that is a member of the International Association of Classification Societies.  All our vessels are certified as being "in-class" by Bureau Veritas, American Bureau of Shipping, Nippon Kaiji Kyokai, Det Norske Veritas and Lloyd's Register of Shipping.  All new and secondhand vessels that we purchase must be cer­tified prior to their delivery under our standard purchase contracts and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, we have no obligation to take delivery of the vessel.
 

 
52

 

Our wholly-owned management subsidiary, Maryville, implemented Safety Management and Quality standards long before they became mandatory by the relevant institutions. Although the shipping industry was aware that the ISM Code would become mandatory as of July 1, 1998, Maryville, in conjunction with ISO 9002:1994, commenced operations back in 1995 aiming to voluntarily implement both systems well before the International Safety Management date.
 
Maryville was the first ship management company in Greece to receive simultaneous ISM and ISO Safety and Quality Systems Certifications in February 1996 for the safe operation of dry cargo vessels.  At the end of 2003, Maryville's Management System was among the first five company management systems to have been successfully audited and found to be in compliance with management System Standards for both ISO 9001:2000 and ISO 14001:1996 mentioned above. Certification to Maryville for both standards was issued in early 2004. ISO 9001:2000 was subsequently revised on November 15, 2008. During our audit in October 2011, we were certified to be in accordance with the requirements of the management system Standards for ISO 9001:2008.
 
In lieu of a special survey, a vessel's machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. The Company's vessels are on special survey cy­cles for hull inspection and continuous survey cycles for machinery inspection. Every vessel is also required to be dry­docked every two to three years for inspection of the underwater parts of such vessel.

Risk of Loss and Liability Insurance
 
General
 
The operation of any cargo vessel includes risks such as mechanical and structural failure of the vessel, phy­sical damage and business interruption arising from casualties such as collisions, personal injuries, property loss, cargo loss or damage and the consequences of political circumstances in foreign countries, such as piracy, hostilities, blockades and labor strikes.  In addition, there is always an inherent possibility of marine disaster, including oil spil­ls and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.  OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of any vessel tra­ding in the United States exclusive economic zone for certain oil pollution accidents in the United States, has ma­de liability insurance more expensive for ship owners and operators trading in the U.S. market.
 
Hull and Machinery Insurance and War Risks Insurance
 
We maintain hull and machinery and marine war risks insurance, which includes the risk of physical dama­ge, actual or constructive total loss, and limited protection and indemnity insurance arising from covered marine war risks. We do not always carry insurance covering the loss of revenue resulting from vessel off-hire time. We believe that our insurance coverage is adequate to protect us against most marine perils arising out of the conduct of our bu­si­­­ness and that we maintain appropriate levels of environmental damage and pollution insurance coverage. However, there can be no assurance that all risks are adequately insured against, that any particular claim will be paid, that an insurer will always be capable of paying it, or that we will be able to procure adequate insurance coverage at com­mercially reasonable rates.
 
Protection and Indemnity Insurance
 
The vessels we operate are part of protection and indemnity associations, or P&I Clubs, which cover, among other things, our third-party liabilities in connection with the operation of our vessels. This includes third-par­ty liability and other expenses and claims in connection with injury or death of crew, passengers and other third par­ties, loss or damage to cargo, dama­ge to third-party property, pollution arising from oil or other substances, wre­ck removal and related costs. Sub­ject to the "capping" discussed below, our coverage, except for pollution, is unli­mi­­ted.
 
Our current protection and indemnity insurance coverage for oil pollution is $1.0 billion per vessel per incident. Our P&I policies are subject to deductibles of up to $11,000 for crew claims, and deductibles ranging bet­ween $2,000 and $7,500 for all other claims per each accident or occurrence.

 
53

 

The P&I Clubs into which our vessels are entered are among the 13 P&I Clubs that compose the Interna­tio­nal Group of P&I Clubs, which insure more than 90% of the world's oceangoing tonnage and are parties to the Inter­na­tional Group Pooling Agreement. Under this pooling agreement, claims in excess of $8.0 million and up to a ma­xi­­­mum of just over $7 billion are shared between the member P&I Clubs. Insurance of liabilities arising out of oil po­l­­­lution is capped at $1.0 billion and insurance of liabilities in respect of passengers is capped at $2.0 billion. With re­­­­spect to claims ran­ging between $60.0 mil­lion and $3.06 bil­lion, the International Group Pool's exposure is re­in­su­red through the glo­bal reinsurance market. The 13 P&I Clubs that compose the Interna­tio­nal Group opera­te on a not-for-profit basis with member ship­owners paying the actu­al cost of claims made against their club together with such club's con­­tri­butions to the International Group Pool and the cost of the International Group Pool's re­in­su­ra­nce. Under such system, shipowners typically make an advance payment for a policy year and, depending on the amount of claims made against the P&I Club during the year and the club's required contri­bution to the Inter­national Group Pool, member shipowners may be required to pay supplemental amounts until the policy year is closed, which nor­mal­ly occurs three years following the commencement of the policy year in question. To the extent we expe­rience sup­­­ple­mentary calls, our policy is to expense such amounts. Supplementary cal­ls for 2009 and 2010 amounted to $0.6 million and $0.08 mil­lion, respectively, and were included in opera­ting expenses in the conso­li­dated financial sta­tements for the twelve-month periods ended December 31, 2009 and 2010, respectively. All such amounts were not ma­te­rial. There were no supplementary calls for 2011.

Although there is no cap on our liability exposure under this agreement, historically, supplemental calls have ranged from 0% to 40% of our annual insurance premia, and in no year have exceeded $1.0 million.
 
C. Organizational Structure
 
We are currently the parent company of the following subsidiaries:
 
Subsidiary
 
Place of Incorporation
 
Percentage of Ownership
 
 
 
 
 
Maryville Maritime Inc.
 
Liberia
 
100%
Point Holdings Ltd.(1)
 
Liberia
 
100%
Bird Acquisition Corp.(2)
 
Marshall Islands
 
100%

(1)
Point Holdings Ltd. is the parent company, holding 100% in each of the following 15 Liberian ship-owning sub­si­diaries, each of which owns one vessel: Fianna Navigation S.A., Marias Trading Inc., Yasmine International Inc., Tanaka Services Ltd., Amanda Enterprises Limited, Whitelaw Enterprises Co., Candy Enterprises Inc., Fou­ntain Servi­ces Limited, Harvey Development Corp., Teagan Shipholding S.A., Minta Holdings S.A., Odell Inter­na­tional Ltd., Ingram Limited, Barland Holdings Inc. and Castalia Services Ltd.  In ad­dition, Point is the parent compa­ny holding 100% in each of the following six Libe­rian non ship-owning companies: Snapper Mari­ne Limited, Magalie Inve­st­ments Co., Melba Management Limited, Naia Develop­ment Corp., Liegh Jane Navigation S.A. and Thurman International Ltd., which is the parent company (100% owner) of Centel Ship­ping Com­pa­­ny Ltd., a Cyprus non ship-owning company.

(2)
Bird is the parent company, holding 100% in each of the following 24 Marshall Islands ship-owning subsidiaries, each of which owns one vessel: Lowlands Beilun Shipco LLC, Iron Miner Shipco LLC, Kirmar Shipco LLC, Iron Beauty Shipco LLC, Iron Manolis Shipco LLC, Iron Brooke Shipco LLC, Iron Lindrew Shipco LLC, Coal Hunter Shipco LLC, Pascha Shipco LLC, Coal Gypsy Shipco LLC, Iron Anne Shipco LLC, Iron Vassilis Shipco LLC, Iron Bill Shipco LLC, Santa Barbara Shipco LLC, Ore Hansa Shipco LLC, Iron Kalypso Shipco LLC, Iron Fuzeyya Shipco LLC, Iron Bradyn Shipco LLC, Grain Harvester Shipco LLC, Grain Express Shipco LLC, Iron Knight Shipco LLC, Coal Pride Shipco LLC, Sandra Shipco LLC and Hope Shipco LLC. In addition, Bird is the parent company, holding 100% in each of the following seven Marshall Islands non ship-owning companies: Iron Man Shipco LLC, Coal Age Shipco LLC, Fearless Shipco LLC, Barbara Shipco LLC, Linda Leah Shipco LLC, King Coal Shipco LLC and Coal Glory Shipco LLC, each of which sold its vessel to a third party in July 2007 and subsequently leased the vessel back under a bareboat charter. Bird is also a joint venture partner in Christine Shipco LLC, a Marshall Islands ship-owning company, in whi­ch Bird holds a 71.4% interest.
 
D. Property, Plant and Equipment
 
We do not own any real estate property. Our management agreement with Maryville includes terms under which we and our subsidiaries are being offered office space, equipment and secretarial services at 17th km National Road Athens-Lamia & Finikos Str., Nea Kifisia, Greece. Maryville has a rental agreement with an unrelated par­ty for the rental of these office premises.

 
54

 
 
 
ITEM 4A – UNRESOLVED STAFF COMMENTS
 
None

 
55

 


ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following management's discussion and analysis of the results of our operations and our financial condition should be read in conjunction with the financial statements and the notes to those statements included in "Item 18 - Financial Statements." This discussion includes forward-looking statements that involve risks and uncer­tainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, such as those set forth in the "Risk Factors" section and elsewhere in this report.

Overview

We are a provider of worldwide seaborne transportation services for drybulk cargo, including, among o­thers, iron ore, coal and grain, collectively referred to as "major bulks," and steel products, fertilizers, cement, bau­xite, sugar and scrap metal, collectively referred to as "minor bulks." Our fleet is managed by one of our wholly-owned subsidiaries, Maryville.

Currently, we own a fleet of 40 vessels (including one vessel owned through a joint venture in which we hold a 71.4% interest) and, together with seven vessels under bareboat charters, operate a fleet of 47 vessels (seven Ca­pesize, 14 Kamsarmax, 21 Panamax, two Supramax and three Handymax vessels) with a total carrying capacity of approximately 4.1 mil­lion dwt.

We deploy our vessels on a mix of period time charters 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. As of March 15, 2012, 33 of the vessels in our fleet were employed under period time char­ters, while 14 operate in the spot market. We believe that our customers enter into period time and spot charters with us because of the quality of our ves­sels and our record of safe and efficient operations.

In the year ended December 31, 2011, we generated voyage revenues of approximately $353.4 million com­­pared to $423.0 million in the corresponding period in 2010 and $391.7 million in the cor­responding pe­riod in 2009. In fiscal 2011, our revenues were nega­tively impacted by the weaker market environment, as daily charter ra­tes and vessel values continued to be adver­sely affected by the increased tonnage that entered the market during that pe­riod.

In the year ended December 31, 2011, we had an operating loss of approximately $161.5 million compared to an operating income of $323.1 million in the corresponding period in 2010, primarily due to the recognition of an impair­ment loss of $146.7 million in fiscal 2011. In the same period, we generated $104.4 million of cash from ope­rating acti­vities and received $17.1 million of cash from the sale of our oldest Handy­max vessels, resulting in a pro­fit of $6.4 million. The proceeds from these sales were used to repay bank indebtedness.

In July 2011, we entered into amendments to our credit facilities to relax certain of the financial co­ve­nants for the period from June 30, 2011 until December 31, 2012. In addition, in March 2012, we agreed with our lenders to fur­ther amend our credit facilities for a period up to December 31, 2013 to modify the loan repayment schedule and al­low for the deferral of the re­pay­ment of prin­cipal amount of up to $100.0 million and to relax certain of the financial covenants. See Item 10.C "Material Contracts–Loan Agree­ments" and Item 5.A "Recent De­ve­lopments–Loan Amendments."

As of March 15, 2012, we have secured contract coverage for 100% and 59%, respectively, of the avai­lable days of our Capesize vessels and Kamsarmax/Panamax vessels for the year ending December 31, 2012. With respect to the entire fleet, 61% of the available days of 2012 have been fixed, 27% of which under contracts which offer an up­­side potential through profit sharing arrangements or index-linked structures and hedge against downside price ri­sk through floor protection.

A. Operating Results

Principal factors impacting our results of operations and financial condition and key performance indicators

 
56

 



Our results of operations are affected by numerous factors. The principal factors that have impacted the business during the fiscal periods presented in the following discussion and analysis and that are likely to continue to impact our business are the following:

 
·
The cyclical nature of the industry and its impact on charter rates and vessel values;

 
·
The cost of capital driven by the availability of global credit; and

Because many of these factors are beyond our control and certain of these factors have historically been vo­latile, past performance is not necessarily indicative of future performance and it is difficult to predict future perfor­ma­nce with any degree of certainty.

Cyclical nature of the industry

One of the factors that impact our profitability is the freight and hire rates that we are able to charge. The drybulk shipping industry is cyclical with attendant volatility in charter hire rates and profitability. The drybulk industry has often been characterized by periods of imbalances between supply and demand, causing charter hire rates to be volatile. The degree of charter hire rate volatility among different types of drybulk vessels has varied wi­de­ly, and charter hire rates for drybulk vessels have significantly declined over the last two years. Fluctuations in char­­ter rates result from changes in the supply and demand for vessel capacity and changes in the supply and de­mand for the major commodities carried by sea internationally. Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.

Our fleet deployment strategy seeks to maximize charter revenue throughout industry cycles while mai­ntaining cash flow stability. We intend to achieve this through a balanced portfolio of spot charters, which generally last from several days to several weeks, and period time charters, which can last up to several years. Our gross reve­nues consist primarily of: (i) hire earned under time charter contracts, where charterers pay a fixed daily hire and any profit share over a daily hire base rate, where applicable; or (ii) amounts earned under voyage charter contracts, where charterers pay a fixed amount per ton of cargo carried. Gross revenues are also affected by the proportion between voyage and time charters, since revenues from voyage charters are generally higher than equivalent time charter hire revenues, as they are of a shorter duration and cover all costs relating to a given voyage, including port ex­penses, canal dues and fuel (bunker) costs. Accordingly, year-to-year comparisons of gross revenues are not ne­ces­sarily indicative of the fleet's performance. We believe that the time charter equivalent per vessel, or TCE, which is defined as gross revenue per day less commissions and voyage costs, provides a more accurate measure for com­pa­rison.

In 2011, charter hire rates again declined significantly due to the number of newbuilding deliveries with ves­sel over­supply gradually taking its toll on the market. Increased demand for drybulk commodities has been un­able to ful­ly absorb the approximately 98 million new deadweight tonnage that entered the mar­ket in 2011, despite almost re­cord high scrapping levels of appro­ximately 22.3 million deadweight ton­nage and an approximately 30% delivery slip­page. 2011 was the second consecutive year of double-digit grow­th in the drybulk fleet, as indi­­cated by the 14% increase in deadweight carrying capacity for the year. The de­cli­ne and volatility in charter rates in the dry­bulk market affects the value of drybulk vessels, which follows the tre­nds of drybulk charter ra­tes, and ear­nings on our charters, and simi­larly, affects our cash flows, liquidity and com­plia­nce with the co­ve­­nants co­ntai­ned in our loan agree­ments.

As of March 15, 2012, 33 of our vessels are employed under period time charters with average ma­turities ranging from a few months to four years, while 14 of our vessels operate in the spot market. See "Infor­mation on the Company-Business Overview-Our Fleet" above for a list of the operating vessels in our fleet and their charter ar­range­ments.

Cost of capital

 
57

 

We operate in a capital-intensive industry, which requires extensive investment in revenue-producing assets. Much of this investment is funded through long-term financing. Our loans, with the exception of our $150.0 mil­lion 1.875% Unsecured Convertible Senior Notes due 2027, contain interest rates that fluctuate with the financial mar­­kets. Increasing interest rates could adversely impact future earnings. In this respect, we use interest rate swaps to manage net exposure to interest rate fluctuations related to our borrowings and to lower our overall borrowing co­sts.

Our overall borrowing cost is affected by changes in the general level of interest rates, particularly London Interbank Offered Rate, or LIBOR. As an indication of the extent of our sensitivity to interest rate changes, an in­crea­se of 100 basis points would have decreased our net income and cash flows in the current year by approximately $5.0 million on the basis of our debt and hedged debt level during 2011. As of December 31, 2011, we had total outstanding indebtedness of approximately $1.1 billion. For the year ended December 31, 2011, our interest expense on our outstanding indebtedness was $48.6 million, including interest incurred under our interest rate swap agreements.

The following table presents the key performance indicators that management uses to assess our financial condition and results of operations:

   
2009
   
2010