20-F 1 d1258422_20-f.htm d1258422_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
 
 
 
 
 
Commission file number 001-33869
 
 
 
 
 
STAR BULK CARRIERS CORP.
 
 
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
(Translation of Registrant's name into English)
 
 
 
 
 
Republic of the Marshall Islands
 
 
(Jurisdiction of incorporation or organization)
 
 
 
 
 
c/o Star Bulk Management Inc., 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece
 
 
(Address of principal executive offices)
 
 
 
 
 
Spyros Capralos, 011 30 210 617 8400, scapralos@starbulk.com,
c/o Star Bulk Management Inc., 40 Agiou Konstantinou Str.
Maroussi 15124, Athens, Greece
 
 
(Name, telephone, email and/or facsimile number and
address of Company Contact Person)
 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class
Name of exchange on which registered
Common Stock, par value $0.01 per share
NASDAQ Global Select Market
 
 
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 80,358,360 shares of 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 (or for such shorter period that the registrant was required to submit and post such files).
 
 
[  ] Yes
[_] No
 
 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
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 or [_] 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
 


 
 

 

FORWARD-LOOKING STATEMENTS
 
Star Bulk Carriers Corp. and its wholly owned subsidiaries, or the Company, desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. The words "believe," "anticipate," "intends," "estimate," "forecast," "project," "plan," "potential," "may," "should," "expect" and similar expressions 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. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.
 
In addition, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include; (i) the strength of world economies; (ii) fluctuations in currencies and interest rates; (iii) general market conditions, including fluctuations in charterhire rates and vessel values; (iv) changes in demand in the drybulk shipping industry, including the market for our vessels; (v) changes in the Company's operating expenses, including bunker prices, drydocking and insurance costs; (vi) changes in governmental rules and regulations or actions taken by regulatory authorities; (vii) potential liability from pending or future litigation; (viii) general domestic and international political conditions; (ix) potential disruption of shipping routes due to accidents or political events; (x) the availability of financing and refinancing, (xi) vessel breakdowns and instances of off-hire, and (xii) other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission, or the Commission. The information set forth herein speaks only as of the date hereof, and the Company disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date hereof.
 

 
 

 

TABLE OF CONTENTS

 
  PART I
 

 
Item 1.    Identity of Directors, Senior Management and Advisers
1
 
Item 2.    Offer Statistics and Expected Timetable
1
 
Item 3.    Key Information
1
 
Item 4.    Information on the Company
25
 
Item 4A.  Unresolved Staff Comments
41
 
Item 5.    Operating and Financial Review and Prospects
41
 
Item 6.     Directors, Senior Management and Employees
63
 
Item 7.     Major Shareholders and Related Party Transactions
69
 
Item 8.     Financial Information
72
 
Item 9.    The Offer and Listing
74
 
Item 10.  Additional Information
75
 
Item 11.  Quantitative and Qualitative Disclosures about Market Risk
85
 
Item 12.  Description of Securities Other than Equity Securities
87
 
  PART II
 

 
Item 13. Defaults, Dividend Arrearages and Delinquencies
87
 
Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds
87
 
Item 15.  Controls and Procedures
87
 
Item 16A.  Audit Committee Financial Expert
91
 
Item 16B.   Code of Ethics
91
 
Item 16C.   Principal Accountant Fees and Services
91
 
Item 16D.   Exemptions from the Listing Standards for Audit Committees
91
 
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
91
 
Item 16F.   Change in Registrant's Certifying Accountant
91
 
Item 16G.   Corporate Governance
91
 
Item 16H.   Mine Safety Disclosure
92
 
 PART III
 

 
Item 17.  Financial Statements
92
 
Item 18.  Financial Statements
92
 
Item 19. Exhibits
93
     



 
 

 

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
 
Throughout this report, the "Company," "Star Bulk," "we," "us" and "our" all refer to Star Bulk Carriers Corp. and its wholly owned subsidiaries. We use the term deadweight ton, or dwt, in describing the size of vessels. Dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel can carry. We operate drybulk vessels of two sizes: Capesize, which are vessels with carrying capacities of more than 85,000 dwt, and Supramax, which are vessels with carrying capacities of between 45,000 and 60,000 dwt. Unless otherwise indicated, all references to "Dollars" and "$" in this report are to U.S. Dollars.
 
Financial data presented herein include the accounts of the Company and of Star Maritime Acquisition Corp., or Star Maritime.
 
Star Maritime was organized under the laws of the State of Delaware on May 13, 2005 as a blank check company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business combination, one or more assets or target businesses in the shipping industry. Star Maritime's common stock and warrants started trading on the American Stock Exchange under the symbols, SEA and SEA.WS, respectively, on December 21, 2005.  Star Bulk was incorporated in the Republic of the Marshall Islands on December 13, 2006 as a wholly-owned subsidiary of Star Maritime.
 
On November 27, 2007, Star Maritime obtained shareholder approval for the acquisition of the initial fleet of eight drybulk carriers and for effecting a redomiciliation merger whereby Star Maritime merged with and into its wholly owned subsidiary at the time Star Bulk with Star Bulk as the surviving entity, or the Redomiciliation Merger. The Redomiciliation Merger was completed on November 30, 2007 as a result of which each outstanding share of Star Maritime common stock was converted into the right to receive one share of Star Bulk common stock and each outstanding warrant of Star Maritime was assumed by Star Bulk with the same terms and restrictions except that each became exercisable for common stock of Star Bulk. We commenced operations on December 3, 2007, which is the date we took delivery of our first vessel.  During the period from Star Maritime's inception on May 13, 2005 to December 3, 2007, we were a development stage enterprise.
 
Our common stock is listed on the Nasdaq Global Select Market under the symbol "SBLK."  All of our warrants expired worthless and ceased trading on the Nasdaq Global Select Market on March 15, 2010.
 
A.           Selected Consolidated Financial Data
 
The table below summarizes our recent financial information.  The information of Star Bulk and its wholly owned subsidiaries for the fiscal year ended December 31, 2007 includes the results for Star Maritime from January 1, 2007 to November 30, 2007, which is the date that the Redomiciliation Merger was completed. We refer you to the notes to our consolidated financial statements for a discussion of the basis on which our consolidated financial statements are presented. The information provided below should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and the consolidated financial statements, related notes and other financial information included herein.
 
The historical results included below and elsewhere in this document are not necessarily indicative of the future performance of Star Bulk.
 

 
1

 

3.A.(i)           CONSOLIDATED STATEMENT OF OPERATIONS
 

(In thousands of U.S. Dollars,
except  per share and share data)
 
Year Ended December 31,
 
 
 
2007
   
2008
   
2009
   
2010
   
2011
 
 
 
 
   
 
         
 
   
 
 
Voyage revenues
    3,633       238,883       142,351       121,042       106,912  
Management fee income
    -       -       -       -       153  
 
    3,633       238,883       142,351       121,042       107,065  
 
                                       
Voyage expenses
    43       3,504       15,374       16,839       22,429  
Vessel operating expenses
    622       26,198       30,168       22,349       25,247  
Drydocking expenses
    -       7,881       6,122       6,576       3,096  
Depreciation
    745       51,050       58,298       46,937       50,224  
Management fees
    23       1,367       771       164       54  
(Gain)/loss on derivative instruments, net
    -       (251 )     2,154       2,083       390  
General and administrative expenses
    7,756       12,424       8,742       15,404       12,455  
Bad debt expense
    -       -       -       2,131       3,139  
Vessel impairment loss
    -       3,646       75,208       34,947       62,020  
Gain on time charter agreement termination
    -       (9,711 )     (16,219 )     -       (2,010 )
Loss on time charter agreement termination
    -       -       11,040       -       -  
Other operational loss
    -       -       -       -       4,050  
Other operational gain
    -       -       -       (26,648 )     (9,260 )
 
    9,189       96,108       191,658       120,782       171,834  
 
                                       
Operating (loss)/ income
    (5,556 )     142,775       (49,307 )     260       (64,769 )
 
                                       
Interest and Finance costs
    (45 )     (10,238 )     (9,914 )     (5,916 )     (5,227 )
Interest and other income
    9,021       1,201       806       525       744  
Loss on debt extinguishment
    -       -       -       -       (307 )
Total other expenses, net
    8,976       (9,037 )     (9,108 )     (5,391 )     (4,790 )
 
                                       
Income/ (loss) before taxes
    3,420       133,738       (58,415 )     (5,131 )     (69,559 )
 
                                       
Income taxes
    (9 )     -       -       -       -  
Net Income/(loss)
    3,411       133,738       (58,415 )     (5,131 )     (69,559 )
 
                                       
Earnings/(loss) per share, basic
    0.11       2.55       (0.96 )     (0.08 )     (0.98 )
Earnings/(loss) per share, diluted
    0.09       2.46       (0.96 )     (0.08 )     (0.98 )
 
                                       
Weighted average number of shares outstanding, basic
    30,065,923       52,477,947       60,873,421       61,489,162       71,047,277  
Weighted average number of shares outstanding, diluted
    36,817,616       54,447,985       60,873,421       61,489,162       71,047,277  

 
 
2

 


 
3.A. (ii)   CONSOLIDATED BALANCE SHEET AND OTHER FINANCIAL DATA
 
(In thousands of U.S. Dollars,
except per share data)
   
Year Ended December 31,
 
                                         
     
2007
     
2008
     
2009
     
2010
     
2011
 
                                         
Cash and cash equivalents
    18,985       29,475       40,142       12,824       15,072  
                                         
Total assets
    403,742       891,376       760,641       703,250       717,928  
Current liabilities, including current portion of long term debt
    3,057       57,287       71,092       43,235       52,154  
Total long term debt, excluding current portion
    -       247,250       187,575       171,044       231,466  
Common stock
    425       584       611       634       804  
Stockholders' equity
    375,378       560,140       499,257       488,252       434,213  
Total liabilities and stockholders' equity
    403,742       891,376       760,641       703,250       717,928  
                                         
OTHER FINANCIAL DATA
                                       
                                         
Dividends declared and paid ($0 $0.98 $0.10 $0.20 and $0.20 per share, respectively)
    -       52,614       6,185       12,385       14,391  
Net cash provided by operating activities
    370       110,747       65,877       87,949       50,604  
Net cash (used in)/ provided by investing activities
    12,963       (423,305 )     (1,430 )     (60,151 )     (122,337 )
Net cash (used in)/ provided by financing activities
    3,534       323,048       (53,780 )     (55,116 )     73,981  
                                         
FLEET DATA
                                       
Average number of vessels (1)
    0.21       10.76       11.97       10.81       12.26  
Total ownership days for fleet (2)
    75       3,933       4,370       3,945       4,475  
Total available days for fleet (3)
    71       3,712       4,240       3,847       4,377  
Total voyage days for fleet (4)
    69       3,618       4,117       3,829       4,336  
Fleet utilization (5)
    93 %     98 %     97 %     99 %     99 %
                                         
AVERAGE DAILY RESULTS (In U.S. Dollars)
                                 
Time charter equivalent (6)
    31,203       42,799       29,450       26,859       19,989  
Vessel operating expenses
    -       6,661       6,903       5,665       5,642  
Management fees
    -       348       176       41       12  
General and administrative expenses
    -       3,159       2,000       3,904       2,783  

(1)
Average number of vessels is the number of vessels that comprised our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in that period.
 
 
(2)
Ownership days are the total calendar days each vessel in the fleet was owned by us for the relevant period.
 
 
(3)
Available days for the fleet are the ownership days after subtracting for off-hire days as a result of major repairs dry-docking or special or intermediate surveys.
 
 
(4)
Voyage days are the total days the vessels were in our possession for the relevant period after subtracting all off-hire days incurred for any reason (including off-hire for dry-docking, major repairs, special or intermediate surveys or transfer of ownership).
 
 
(5)
Fleet utilization is calculated by dividing voyage days by available days for the relevant period.
 
 
(6)
Represents the weighted average time charter equivalent, or TCE, of our entire fleet. TCE rate is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE rate is determined by dividing voyage revenues (net of voyage expenses and amortization of fair value of above/below market acquired time charter agreements) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract, as well as commissions. TCE rate 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 charters, time charters and bareboat charters) under which the vessels may be employed between the periods.  We included under the heading "Average Daily Results" TCE revenues, a non-GAAP measure, as we believe it provides additional meaningful information in conjunction with voyage revenues, the most directly comparable U.S. GAAP measure, because it assists our management in making decisions regarding the deployment and use of our vessels and in evaluating their financial performance. Our calculation of TCE may not be comparable to that reported by other companies. For further information concerning our calculation of TCE rate and of reconciliation of TCE rate to voyage revenue, please see "Item 5. Operating and Financial Review and Prospects – A. Operating Results."
 
 
3

 
B.           Capitalization and Indebtedness
 
Not Applicable.
 
C.           Reasons for the Offer and Use of Proceeds
 
Not Applicable.
 
D.           Risk factors
 
The following risks relate principally to the industry in which we operate and our business in general. Other risks relate principally to the securities market and ownership of our common stock. The occurrence of any of the events described in this section could significantly and negatively affect our business, financial condition, operating results or cash available for dividends or the trading price of our common stock.
 
Industry Specific Risk Factors
 
The current state of the global financial markets and current economic conditions may adversely impact our ability to obtain financing on acceptable terms and otherwise negatively impact our business.
 
Global financial markets and economic conditions have been, and continue to be, volatile.  Recently, operating businesses in the global economy have faced tightening credit, weakening demand for goods and services, deteriorating international liquidity conditions, and declining markets. There has been a general decline in the willingness by banks and other financial institutions to extend credit, particularly in the shipping industry, due to the historically volatile asset values of vessels. As the shipping industry is highly dependent on the availability of credit to finance and expand operations, it has been negatively affected by this decline.
 
Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased, to provide funding to borrowers. Due to these factors, we cannot be certain that financing will be available if needed and to the extent required, on acceptable terms. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
 
If the current global economic environment persists or worsens, we may be negatively affected in the following ways:
 
 
·
we may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate our vessels profitably; and
 
 
·
the market value of our vessels could decrease, which may cause us to recognize losses if any of our vessels are sold.
 
 
4

 
The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations, cash flows and financial condition.
 
Charterhire rates for drybulk carriers are volatile and may further decrease in the future, which would adversely affect our earnings and ability to pay dividends.
 
We currently own and operate a fleet of 14 vessels consisting of six Capesize drybulk carriers and eight Supramax drybulk carriers with a weighted average age of 10.0 years and a combined cargo carrying capacity of approximately 1,475,005 dwt. The drybulk shipping industry is cyclical with attendant volatility in charterhire rates and profitability. The degree of charterhire rate volatility among different types of drybulk carriers varies widely, however, the abrupt and dramatic downturn in the drybulk charter market has severely affected the entire drybulk shipping industry.  The Baltic Dry Index, or the BDI, which is published daily by the Baltic Exchange Limited, or the Baltic Exchange, a London-based membership organization that provides daily shipping market information to the global investing community, is an average of selected ship brokers' assessments of time charter rates paid by a customer to hire a drybulk vessel to transport drybulk cargoes by sea.  The BDI has long been viewed as the main benchmark to monitor the movements of the drybulk vessel charter market and the performance of the entire drybulk shipping market.  The BDI declined 94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and remained volatile during 2009, reaching a low of 772 on January 5, 2009 and a high of 4,661 on November 19, 2009. The BDI continued its volatility in 2010, increasing from 3,235 in January 2010 to a high of 4,209 in May 2010 before subsequently decreasing to a low of 1,700 in July 2010. Following a short period of increase in the third quarter of 2010, the BDI fell to near July 2010 levels by the end of 2010. The BDI further decreased in 2011 reaching a low of 1,043 in February and has continued to decline in 2012 to 753 as of January 26, 2012.  As of March 23 the BDI stood at 908.
 
This downturn in drybulk charter rates and their volatility, which has resulted from the economic dislocation worldwide and the disruption of the credit markets, have had a number of adverse consequences for drybulk shipping, including, among other things:
 
 
·
an absence of financing for vessels;
 
 
·
no active second-hand market for the sale of vessels;
 
 
·
extremely low charter rates, particularly for vessels employed in the spot market;
 
 
·
widespread loan covenant defaults in the drybulk shipping industry; and
 
 
·
declaration of bankruptcy by some operators and shipowners as well as charterers.
 
The occurrence of one or more of these events could adversely affect our business, results of operations, cash flows, financial condition and ability to pay dividends.  There can be no assurance that the drybulk charter market will recover over the next several months and the market could continue to decline further.
 
If the drybulk shipping market remains depressed in the future, our earnings and available cash flow may decrease.  Our ability to re-charter our vessels on the expiration or termination of their current time charters and the charter rates payable under any renewal or replacement charters will depend upon, among other things, economic conditions in the drybulk shipping market.
 
An over-supply of drybulk carrier capacity may prolong or further depress the current low charter rates and, in turn, adversely affect our profitability.
 
Fluctuations in charter rates and vessel values result from changes in the supply and demand for drybulk cargoes carried internationally at sea, including coal, iron, ore, grains and minerals.  The market supply of drybulk carriers has been increasing, as the number of drybulk carriers on order was recently at near historic highs.  These newbuildings were delivered in significant numbers starting at the beginning of 2006 and continued to be delivered in significant numbers through 2011. 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 over-supply of drybulk carrier capacity, particularly in conjunction with slowdown in demand for vessel capacity, could exacerbate the recent decrease in charter rates or prolong the period during which low charter rates prevail. If the current low charter rate environment persists, or a further reduction occurs, during a period when the current charters for our drybulk carriers expire or are terminated, we may only be able to recharter those vessels at reduced rates or we may not be able to charter our vessels at all. The charters for eight of our vessels expire in 2012.
 

 
5

 

 
The factors affecting the supply and demand for vessel capacity are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.
 
The factors that influence demand for vessel capacity include:
 
 
·
demand for and production of drybulk products;
 
 
·
global and regional economic and political conditions, including armed conflicts, terrorist activities, and strikes;
 
 
·
the distance drybulk cargo is to be moved by sea;
 
 
·
changes in seaborne and other transportation patterns;
 
 
·
natural disasters and other disruptions in international trade;
 
 
·
environmental and other regulatory developments;
 
 
·
currency exchange rates; and
 
 
·
weather.
 
The factors that influence the supply of vessel capacity include:
 
 
·
the number of new building deliveries;
 
 
·
port and canal congestion;
 
 
·
the scrapping of older vessels;
 
 
·
vessel casualties;
 
 
·
the number of vessels that are out of service;
 
 
·
changes in environmental and other regulations that may limit the useful life of vessels; and
 
 
·
changes in the production of drybulk products.
 
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, costs 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 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 carriers will be dependent upon continued economic growth in the world's economies, including China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargo to be transported by sea. The capacity of the global drybulk carrier fleet seems likely to increase and economic growth may not continue. Adverse economic, political, social or other developments could also have a material adverse effect on our business and operating results.
 

 
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Many of our vessels will soon be exposed to the volatilities of the drybulk charter markets.
 
Drybulk charter markets have experienced significant continued weakness in 2011. We currently have six vessels in the spot market and the current time charters for six  of our vessels are scheduled to expire by October 2012. The time charter market is highly competitive and spot and short-term trip charter market charterhire rates (which affect time charter rates) may fluctuate significantly based upon the supply of, and demand for, seaborne drybulk shipping capacity. Our ability to re-charter our vessels on the expiration or termination of their current time charters and the charter rates payable under any renewal or replacement charters will depend upon, among other things, economic conditions in the drybulk shipping market. The drybulk carrier charter market is volatile, and in the past, time charter and spot market charter rates for drybulk carriers have declined below operating costs of vessels. If we are required to charter these vessels at a time when demand and charter rates are very low, we may not be able to secure time charter or spot market employment for our vessels at all or at reduced and potentially unprofitable rates. As a result, our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and compliance with covenants in our credit facilities may be affected.
 
An economic slowdown in the Asia Pacific region could exacerbate the effect of recent slowdowns in the economies of the United States and the European Union and may have a material adverse effect on our business, financial condition and results of operations.
 
We anticipate a significant number of the port calls made by our vessels will continue to involve the loading or discharging of drybulk commodities in ports in the Asia Pacific region. Continued economic slowdown in the Asia Pacific region, especially in Japan and China, may exacerbate the effect on us of the recent slowdown in the rest of the world. Before the global economic financial crisis that 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. While the growth rate of China's GDP increased for the year ended December 31, 2011, as compared to the year ended December 31, 2010, the Chinese GDP growth rate remains below pre-2008 levels. China has imposed measures to restrain lending, which may further contribute to a slowdown in its economic growth. China and other countries in the Asia Pacific region may continue to experience slowed or even negative economic growth in the future. Moreover, the current economic slowdown in the economies of the United States, the European Union and other Asian countries may further adversely affect economic growth in China and elsewhere. Our financial condition and results of operations, as well as our future prospects, would likely be impeded by a continuing or worsening economic downturn in any of these countries.
 
The market values of our vessels have declined and may further decline, which could limit the amount of funds that we can borrow or trigger certain financial covenants under our current or future credit facilities and/or we may incur a loss if we sell vessels following a decline in their market value.
 
The fair market values of our vessels have generally experienced high volatility and have declined significantly. The market prices for secondhand Capesize and Supramax drybulk carriers have decreased sharply from their historically high levels.  The fair market value of our vessels may continue to fluctuate (i.e., increase and decrease) depending on a number of factors including:
 
 
·
prevailing level of charter rates;
 
 
·
general economic and market conditions affecting the shipping industry, including competition from other shipping companies;
 
 
·
types, sizes and ages of vessels;
 

 
7

 

 
·
supply and demand for vessels;
 
 
·
other modes of transportation;
 
 
·
cost of newbuildings;
 
 
·
governmental or other regulations;
 
 
·
technological advances; and
 
 
·
competition from other shipping companies and other modes of transportation.
 
In addition, as vessels grow older, they generally decline in value. If the fair market value of our vessels declines further, we may not be in compliance with certain provisions of our term loans and we may not be able to refinance our debt or obtain additional financing. In addition, if we sell one or more of our vessels at a time when vessel prices have fallen, this would result in a loss and a reduction in earnings.
 
Drybulk carrier values have also declined both as a result of a slowdown in the availability of global credit and the significant deterioration in charter rates. Charter rates and vessel values have been affected in part by the lack of availability of credit to finance both vessel purchases and purchases of commodities carried by sea, resulting in a decline in cargo shipments, and the excess supply of iron ore in China, which resulted in falling iron ore prices and increased stockpiles in Chinese ports. There can be no assurance as to how long charter rates and vessel values will remain at their currently low levels. Charter rates may remain at low levels for some time which will adversely affect our revenue and profitability.
 
In addition, because the market value of our vessels may fluctuate significantly, we may incur losses when we sell vessels, which may adversely affect our earnings.  If we sell vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel's carrying amount in our financial statements, resulting in a loss and a reduction in earnings.  We recorded an impairment charge for the Star Alpha during the year ended December 31, 2009, Star Beta during the year ended December 31, 2010, and Star Sigma and Star Ypsilon, during the year ended December 31, 2011.
 
Acts of piracy on ocean-going vessels could adversely affect our business.
 
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden off the coast of Somalia. Although sea piracy worldwide decreased slightly in 2011 for the first time in five years, throughout 2008, 2009 and 2010, the frequency of piracy incidents increased significantly, particularly in the Gulf of Aden off the coast of Somalia. If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as "war risk" zones by insurers or Joint War Committee "war and strikes" listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain.  In addition, crew costs, including costs which may be incurred to the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, results of operations, cash flows, financial condition and ability to pay dividends and may result in loss of revenues, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us under our charters.
 
Disruptions in world financial markets and the resulting governmental action in the United States, Europe, and in other parts of the world could have a material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common stock to further decline.
 
Negative trends in the global economy that emerged in 2008 continue to adversely affect global economic conditions. In addition, the world economy is currently facing a number of new challenges, including uncertainty related to the continuing discussions in the United States regarding the federal debt ceiling and recent turmoil and hostilities in the Middle East, North Africa and other geographic areas and countries. There has historically been a strong link between the development of the world economy and demand for energy, including oil and gas. An extended period of deterioration in the outlook for the world economy could reduce the overall demand for oil and gas and for our services. Such changes could adversely affect our results of operations and cash flows.
 

 
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The United States, the European Union and other parts of the world have recently been or are currently in a recession and continue to exhibit weak economic trends. The credit markets in the United States and Europe have experienced significant contraction, de-leveraging and reduced liquidity, and the U.S. federal government and state governments and European authorities have implemented and are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The Securities and Exchange Commission, or the SEC, and other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws. Global financial markets and economic conditions have been, and continue to be, severely disrupted and volatile. Credit markets and the debt and equity capital markets have been exceedingly distressed.
 
We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. We cannot predict how long the current market conditions will last. However, these recent and developing economic and governmental factors, together with the concurrent decline in charter rates and vessel values, may have a material adverse effect on our results of operations, financial condition or cash flows, have caused the trading price of our common shares on the Nasdaq Global Select Market to decline precipitously and could cause the price of our common shares to continue to decline or impair our ability to make distributions to our shareholders.
 
The instability of the euro or the inability of countries to refinance their debts could have a material adverse effect on our revenue, profitability and financial position.
 
As a result of the credit crisis in Europe, in particular in Greece, Italy, Ireland, Portugal and Spain, the European Commission created the European Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support. In March 2011, the European Council agreed on the need for Eurozone countries to establish a permanent stability mechanism, the European Stability Mechanism, or the ESM, which will be activated by mutual agreement, to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations and the overall stability of the euro. An extended period of adverse development in the outlook for European countries could reduce the overall demand for oil and gas and for our services. These potential developments, or market perceptions concerning these and related issues, could affect our financial position, results of operations and cash flow.
 
Charter rates are subject to seasonal fluctuations and market volatility, which may adversely affect our financial condition and ability to pay dividends.
 
Currently, eight of our vessels are chartered on medium to long-term time charters with an average remaining term of approximately 2.6 years, and six of our vessels are employed in the spot market.  Demand for vessel capacity has historically exhibited seasonal variations and, as a result, fluctuations in charter rates. This seasonality may result in quarter-to-quarter volatility in our operating results for vessels trading in the spot market. 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. As a result, our revenues from our drybulk carriers may be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, our revenues from our drybulk carriers may be stronger in fiscal quarters ended December 31 and March 31. Seasonality in the sector in which we operate could materially affect our operating results and cash available for dividends in the future.
 
Rising fuel prices may adversely affect our profits.
 
Fuel is a significant, if not the largest, expense in our shipping operations when vessels are not under period time 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 the Petroleum Exporting Countries (OPEC) and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce the profitability and competitiveness of our business versus other forms of transportation, such as truck or rail.
 

 
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We are subject to international safety regulations and the failure to comply with these regulations may subject us to increased liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.
 
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 prices or useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates, and financial assurances with respect to our operations.
 
The operation of our vessels is affected by the requirements set forth in the United Nations' International Maritime Organization's International Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires shipowners, ship managers and bareboat charterers to develop and maintain an extensive "Safety Management System" that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner or bareboat charterer to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. If we are subject to increased liability for noncompliance or if our insurance coverage is adversely impacted as a result of noncompliance, we may have less cash available for distribution to our stockholders as dividends. If any of our vessels are denied access to, or are detained in, certain ports, this may decrease our revenues.
 
We operate our vessels worldwide and as a result, our vessels are exposed to international risks which may reduce revenue or increase expenses.
 
The international shipping industry is an inherently risky business involving global operations. Our vessels and their cargoes are at a risk of being damaged or lost because of events such as mechanical failure, collision, human error, war, terrorism, piracy, marine disasters, and bad weather and other acts of God.  In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These sorts of events could interfere with shipping routes and result in market disruptions which may reduce our revenue or increase our expenses.
 
If our vessels call on ports located in countries that are subject to restrictions imposed by the U.S. or other governments, that could adversely affect our reputation and the market for our common stock.
 
From time to time on charterers' instructions, our vessels may call on ports located in countries subject to sanctions and embargoes imposed by the United States government and countries identified by the U.S. government as state sponsors of terrorism, such as Cuba, Iran, Sudan, and Syria.  Neither we, nor any of our subsidiaries, have ever entered or have any future plans to enter, directly or indirectly, any contracts, agreements, or other arrangements with the governments of Iran, Syria, Sudan, or Cuba, or any entities controlled by the governments of those countries, including any entities organized in these countries. Since our inception, and to the best of our knowledge, our only contact with Iran, Syria, Sudan, or Cuba was an indirect contact, through an unaffiliated charterer, involving one our vessels, the Star Omicron.  At the charterer's direction, this vessel called on Iran once during January 2011.  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.  We may not 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.
 

 
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Political instability, terrorist attacks and international hostilities can affect the seaborne transportation industry, which could adversely affect our business.
 
We conduct most of our operations outside of the United States, and our business, results of operations, cash flows, financial condition and ability to pay dividends if reinstated in the future may be adversely affected by changing economic, political and government conditions in the countries and regions where our vessels are employed or registered. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of political conflicts, including the current political instability in the Middle East, North Africa and other geographic countries and areas, terrorist or other attacks, war or international hostilities. Terrorist attacks such as those in New York on September 11, 2001, in London on July 7, 2005, and in Mumbai on November 26, 2008, and the continuing response of the United States and others to these attacks, as well as the threat of future terrorist attacks around the world, continues to cause uncertainty in the world's financial markets and may affect our business, operating results and financial condition. Continuing conflicts and recent developments in the Middle East, including Egypt, and North Africa, including Libya, and the presence of U.S. and other armed forces in Iraq, Afghanistan, and various other regions, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all and any of these occurrences could have a material adverse impact on our business, financial condition, results of operations and ability to pay dividends.
 
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.
 
International shipping is subject to various security and customs inspection and related procedures in countries of origin and destination. 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. 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.
 

 
11

 
 
Maritime claimants could arrest one or more of our vessels, which could interrupt our cash flow.
 
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek to obtain security for its claim by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the "sister ship" theory of liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any "associated" vessel, which is any vessel owned or controlled by the same owner. Claimants could attempt to assert "sister ship" liability against a vessel in our fleet for claims relating to another of our vessels.
 
Governments could requisition our vessels during a period of war or emergency, resulting in a loss of earnings.
 
A government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our vessels may negatively impact our revenues and reduce the amount of cash we have available for distribution as dividends to our stockholders.
 
Company Specific Risk Factors
 
Substantial debt levels could limit our flexibility to obtain additional financing or pursue other business opportunities.
 
As of March 23, 2012, we had outstanding indebtedness of $250.1 million and we expect to incur additional indebtedness as we continue to grow our fleet. This level of debt could have important consequences to us, including the following:
 
 
·
we may not be able to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes or such financing may be unavailable on favorable terms;
 
 
·
we may need to use a substantial portion of our cash from operations to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and dividends to our shareholders;
 
 
·
our debt level could make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally; and
 
 
·
our debt level may limit our flexibility in responding to changing business and economic conditions.
 
Our ability to service our debt will depend upon, among other things, our financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating income is not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms, or at all. In addition, a lack of liquidity in the debt and equity markets could hinder our ability to refinance our debt or obtain additional financing on favorable terms in the future.  In addition, our loan agreements may impose operation restrictions on us such as changing the management of our vessels.  Please see "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Senior Secured Credit Facilities."
 

 
12

 
 
We may be unable to comply with the covenants contained in our loan agreements, which would affect our ability to conduct our business.
 
Our loan agreements for our borrowings, which are secured by mortgages on our vessels, contain various financial and other covenants. Among those covenants are requirements that relate to our financial position, operating performance and liquidity.
 
The market value of drybulk vessels is sensitive, among other things, to changes in the drybulk charter market, with vessel values deteriorating in times when drybulk charter rates are falling and improving when charter rates are anticipated to rise. The current low charter rates in the drybulk market, along with the oversupply of drybulk carriers and the prevailing difficulty in obtaining financing for vessel purchases, have adversely affected drybulk vessel values, including the vessels in our fleet. As a result, we may not meet certain minimum asset coverage ratios and other financial ratios which are included in our loan agreements.
 
Under our $120.0 million loan agreement with Commerzbank AG, we are subject to customary covenants, including one to maintain a ratio of the market value of the vessels mortgaged as collateral to the outstanding borrowings of not less 135%.  We determined that as of December 31, 2011, the market value of the vessels mortgaged under the loan agreement was less than 135% of the amount of those borrowings as required. On January 30, 2012, we paid our next regularly scheduled quarterly payment of $2.75 million and as a result maintained the required ratio of the market value of the vessels mortgaged as collateral to the outstanding borrowings of not less than 135%.
 
We determined as of December 31, 2011 that the market value of the vessels mortgaged under our $31.0 million loan agreement with ABN AMRO Bank was less than the minimum required security cover, which requires the value of the mortgaged vessel plus any additional security to be at least 135% of outstanding borrowings.  On January 26, 2012, we entered into an agreement with ABN AMRO Bank to amend (i) the minimum required security cover covenant from 135% to 100% and (ii) the leverage ratio, which is defined as the total liabilities of the borrower over the market value of all vessels owned, increased from 70% to 75%. Both amendments cover the period from January 26, 2012 to January 31, 2013.  In addition, the interest margin was increased from 2.9% to 3.4% per annum during this period.
 
If we are not in compliance with our covenants and we are not able to obtain additional covenant waivers or modifications, 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 in our fleet, or they could accelerate our indebtedness, which would impair our ability to continue to conduct our business. If our indebtedness is accelerated, we might not be able to refinance our debt or obtain additional financing and could lose our vessels if our lenders foreclose their liens. In addition, if we find it necessary to sell our vessels at a time when vessel prices are low, we will recognize losses and a reduction in our earnings, which could affect our ability to raise additional capital necessary for us to comply with our loan agreements.
 
We may be unable to pay dividends.
 
We pay dividends, if any, on a quarterly basis from our operating surplus, in amounts that allowed us to retain a portion of our cash flows to fund vessel or fleet acquisitions, and for debt repayment and other corporate purposes, as determined by our management and board of directors.
 
In addition, the declaration and payment of any future dividends will be subject at all times to the discretion of our board of directors.  The timing and amount of dividends will depend on our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in our loan agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividends, or if there is no surplus, dividends may be declared or paid out of net profits for the fiscal year.
 

 
13

 
 
If we enter into newbuilding contracts for the construction and acquisition of new vessels, delays or defaults by the shipyards in the construction and delivery of such newbuildings could increase our expenses and diminish our net income and cash flows.
 
We may enter newbuilding contracts for the construction and acquisition of new vessels. These projects are subject to the risk of delay or defaults by the shipyards caused by, among other things, unforeseen quality or engineering problems, work stoppages, weather interference, unanticipated cost increases, delays in receipt of necessary equipment, and inability to obtain the requisite permits or approvals. In accordance with industry practice, in the event the shipyards are unable or unwilling to deliver the vessels, we may not have substantial remedies. Failure to construct or deliver the ships by the shipyards or any significant delays could increase our expenses and diminish our net income and cash flows.
 
We depend upon a few significant customers for a large part of our revenues and the loss of one or more of these customers could adversely affect our financial performance.
 
We derive a significant part of our charterhire from a small number of customers.  For the year ended December 31, 2011, we derived 71% of our voyage revenues from five charterers, as presented in our statement of operations. Currently, eight of our vessels are employed under fixed rate period charters to five customers. If one or more of these 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, results of operations and cash available for distribution as dividends to our shareholders.
 
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; or
 
 
·
the customer terminates the charter because the vessel has been subject to seizure for more than a specified number of days.
 
If we lose a key customer, we may be unable to obtain charters on comparable terms or may become subject to the volatile spot market, which is highly competitive and subject to significant price fluctuations.  The time charters for all of our vessels provide for charter rates that are significantly above current market rates, particularly spot market rates that most directly reflect the current depressed levels of the drybulk charter market. If it were necessary to secure substitute employment, in the spot market or on time charters, for any of these vessels due to the loss of a customer in these market conditions, such employment would be at a significantly lower charter rate than currently generated by such vessels, or we may be unable to secure a charter at all, in either case, resulting in a significant reduction in revenues. The loss of any of our customers or time charters, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends.
 

 
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The failure of our charterers to meet their obligations under our time charter agreements, on which we depend for substantially all of our revenues, could cause us to suffer losses or otherwise adversely affect our business.
 
Currently, eight of our vessels are chartered on medium to long-term time charters with an average remaining term of approximately 2.6 years, and six of our vessels are employed in the spot market.  For the year ended December 31, 2011, 71% of our voyage revenues-net of commissions were generated from five charterers. The ability and willingness of each of our counterparties to perform its obligations under a time charter agreement with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the drybulk shipping industry and the overall financial condition of the counterparties. Consistent with drybulk shipping industry practice, we have not independently analyzed the creditworthiness of the charterers. Charterers are sensitive to the commodity markets and may be impacted by market forces affecting commodities such as iron ore, coal, grain, and other minor bulks. In addition, in these depressed market conditions, certain charterers, including some of our charterers, are renegotiating the terms of the charters or defaulting on their obligations under the charters.  In the event a charterer fails to honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in the spot market or on charters may be at lower rates, depending on the then existing charter rate levels, compared to the rates currently being charged for our vessels.  As of March 23, 2012, all of our vessels employed on time charters earn daily rates that we believe are greater than the prevailing daily spot market rates.
 
We previously entered into time charters for the Star Epsilon and the Star Kappa that were scheduled to expire in 2014. We withdrew the vessels from their charterers' service because of the charterers' repudiatory breach of time charter agreements.  Arbitration proceedings have commenced against the charterers of the vessels in London to pursue damages arising from such breach, which will include the loss of hire.
 
We previously entered into a time charter for the Star Ypsilon that was scheduled to expire in July 2011.  We withdrew the vessel from their charterers' service because of the charterers' repudiatory breach of time charter agreements.  In October 2010, we settled our outstanding claims with respect to the Star Ypsilon and employed the vessels under new time charter agreements at rates lower than we would have earned under the breached charter agreement.
 
The Star Sigma was previously time chartered to Pacific Bulk Shipping Ltd., or Pacific Bulk, for a minimum of 36 months and a maximum of 41 months.  At Pacific Bulk's request, we agreed to extend the term of the time charter to a minimum of 56 months and a maximum of 61 months at a lower daily rate. On December 31, 2011, the Star Sigma was redelivered to us early and on January 4, 2012, we entered into any agreement with Pacific Bulk to accept the early redelivery of the vessel in exchange for an aggregate of $6.454 million consisting of a cash payment of $5.734 million and 1,027 metric tons of fuel valued at $0.720 million.
 
In February 2011, Korea Line Corporation, or KLC, the then charterer of the Star Gamma and Star Cosmo commenced rehabilitation proceedings in Seoul, Korea. Under the rehabilitation plan approved by the KLC's creditors on October 14, 2011 we were entitled to receive compensation for the nonpayment of hire for the Star Gamma and Star Cosmo of $6.839 million, 37% of which was to be repaid in cash over a period of ten years and the remaining 63% in the form of KLC's common shares.  In addition, we entered into an agreement with KLC related to the nonpayment of hire for the Star Gamma pursuant to which an amount of $172,429 was received in October 2011 and an amount of $172,429 will be received in October 2012.  We also entered into two tripartite agreements with KLC and the sub-charterers of the Star Gamma and the Star Cosmo following the exercise of liens on the sub hires due to KLC. Under these agreements, we received $86,177 in December 2011 from the sub-charterer of the Star Gamma and $120,604 from the sub-charterer of the Star Cosmo in March 2012.  As of December 31, 2011, we determined that $497,842 is not recoverable due to the long term period of KLC's rehabilitation plan and the uncertainty surrounding the continuation of KLC's operations, and recognised  a respective provision, which is included  under  "Bad debt expense" in the accompanying consolidated statements of operations.  We refer you to Item 8. "Financial Information – Legal Proceedings" for a discussion of the outstanding claims related to our vessels.
 

 
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We are subject to certain risks with respect to our counterparties on contracts, and failure of such counterparties to meet their obligations could cause us to suffer losses or otherwise adversely affect our business.
 
We have entered into, and may enter into in the future, various contracts, including charterparties and contracts of affreightment (COAs) with our customers, newbuilding contracts with shipyards and credit facilities with our lenders. We also enter into time charters and voyage charters as a charterer. These agreements subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the maritime industry, the overall financial condition of the counterparty, charter rates received for specific types of vessels, and various expenses.  We seek to minimize our counterparty risk by doing business with well established customers and financial institutions. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
We may be subject to litigation, arbitration and other proceedings that could have an adverse effect on our business.
 
On an ongoing basis, we are involved in litigation arising in the ordinary course of business, or otherwise.  We may be exposed to litigation related to personal injury, environmental matters, contractual disagreements, taxes, securities, or maritime matters.  We cannot predict with certainty the outcome or effect of any claim or other litigation matter, or a combination of these.  If we are involved in any future litigation, or if our positions concerning current disputes are found to be incorrect, this may have an adverse effect on our business, financial position, results of operations and ability to pay dividends, because of potential negative outcomes, the costs associated with asserting our claims or defending such lawsuits, and the diversion of management's attention to these matters.
 
Investment in derivative instruments such as freight derivatives  or other derivative instruments could result in losses.
 
From time to time, we may take positions in derivative instruments including freight derivatives and other derivative instruments such as bunkers derivatives. Generally, freight derivatives may be used to hedge a vessel owner's exposure to the charter market for a specified route and period of time, whereas bunker derivatives may be used to hedge the fluctuations in bunker prices. 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 time period, the seller of the freight derivative 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 freight derivatives or other derivative instruments we could suffer losses in the settling or termination of the freight or other derivative instruments. This could adversely affect our results of operation and cash flow.
 
We may have difficulty managing our planned growth properly.
 
We intend to continue to expand our fleet. Our future growth will primarily depend on our ability to:
 
 
·
locate and acquire suitable vessels;
 
 
·
identify and consummate acquisitions or joint ventures;
 
 
·
obtain required financing;
 
 
·
integrate any acquired vessels successfully with our existing operations;
 
 
·
hire, train, and retain qualified personnel and crew to manage and operate our growing business and fleet;
 
 
·
enhance our customer base; and
 
 
·
manage our expansion.
 
Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty experienced in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures. We may not be successful in executing our growth plans and may incur significant expenses and losses.

 
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Increases in LIBOR could affect our profitability, earnings and cash flow.
 
Interest in most loan agreements in our industry is based on published London Interbank Offered Rates (LIBOR). The London market for Dollar loans between banks has recently been volatile, with the spread between published LIBOR and the lending rates actually charged to banks in the London interbank market widening significantly at times. For the past two years LIBOR was at historical lows.  Because the interest rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, an increase in LIBOR would affect the amount of interest payable on our debt, which in turn, could have an adverse effect on our profitability, earnings and cash flow.
 
In the highly competitive international drybulk shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources which may adversely affect our results of operations.
 
We employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than us. Competition for the transportation of drybulk cargoes can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Due in part to the highly fragmented market, competitors with greater resources could operate larger fleets through consolidations or acquisitions and may be able to offer more favorable terms.
 
We may be unable to attract and retain key management personnel and other employees in the shipping industry, which may negatively affect the effectiveness of our management and our results of operations.
 
Our success depends to a significant extent upon the abilities and efforts of our management team. As of March 23, 2012 we had fifty-three employees.  Fifty-one of our employees, through our wholly owned subsidiaries, Star Bulk Management Inc., or Star Bulk Management, and Starbulk S.A, are engaged in the day to day management of the vessels in our fleet. Our success depends upon our ability to retain key members of our management team and the ability of Star Bulk Management to recruit and hire suitable employees. The loss of any members of our senior management team could adversely affect our business prospects and financial condition. Difficulty in hiring and retaining personnel could adversely affect our results of operations. We do not maintain "key-man" life insurance on any of our officers or employees of Star Bulk Management and/or Starbulk S.A.
 
We may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business.
 
Our success depends in large part on the ability of us to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. Competition to attract and retain qualified crew members is intense due to the increase in the size of the global shipping fleet. If we are not able to obtain higher charter rates to compensate for any crew cost increases, it could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends. If we cannot hire, train and retain a sufficient number of qualified employees, we may be unable to manage, maintain and grow our business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.
 
Our vessels may call in ports where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims or restrictions which could have an adverse effect on our business, financial condition, results of operations and cash flows.
 

 
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As we expand our fleet, we will need to expand our operations and financial systems and hire new shoreside staff and seafarers to staff our vessels; if we cannot expand these systems or recruit suitable employees, our performance may be adversely affected.
 
Our operating and financial systems may not be adequate as we expand our fleet, and our attempts to implement those systems may be ineffective. In addition, we rely on our wholly-owned subsidiaries, Star Bulk Management and Starbulk S.A., to recruit shoreside administrative and management personnel and for crew management. Shoreside personnel are recruited by Star Bulk Management and Starbulk S.A. through referrals from other shipping companies and traditional methods of securing personnel, such as placing classified advertisements in shipping industry periodicals. Star Bulk Management had sub-contracted crew management for Star Cosmo, which includes the recruitment of seafarers to Union Commercial Inc., or Union until June 30, 2011, when we transferred these vessel management services to Starbulk S.A, our in-house vessel manager. Star Bulk Management, Starbulk S.A. and its crewing agent may not be able to continue to hire suitable employees as Star Bulk expands its fleet. If we are unable to operate our financial and operations systems effectively, recruit suitable employees or if our unaffiliated crewing agent encounters business or financial difficulties, our performance may be materially adversely affected.
 
Labor interruptions could disrupt our business.
 
Star Bulk Management and Starbulk S.A. currently provide the crew for all of our vessels, which are manned by masters, officers and crews that are employed by our shipowning subsidiaries.  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 and financial condition.
 
We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business.
 
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 operate or are registered, which can significantly affect the ownership and operation of our vessels.  These laws and regulations include, but are not limited to, the regulations of the International Maritime Organization, or IMO, including the International Convention on Civil Liability for Oil Pollution Damage of 1969, the International Convention for the Prevention of Pollution from Ships of 1975, International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, the International Convention on Load Lines of 1966, the U.S. Oil Pollution Act of 1990, or OPA, the Comprehensive Environmental Response, Compensation and Liability Act, 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 gas emissions), 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.  Additionally, we cannot predict the cost of compliance with any new regulations that may be promulgated as a result of the 2010 BP plc Deepwater Horizon oil spill in the Gulf of Mexico.
 
These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition.  A 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.
 
If our vessels fail to maintain their class certification and/or fail any annual survey, intermediate survey, dry-docking or special survey, that vessel would be unable to carry cargo, thereby reducing our revenues and profitability and violating certain covenants under our credit facilities.
 
Every oceangoing vessel must be "classed" by a classification society.  The classification society certifies that the vessel is "in class," signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country is a member.  In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.

 
 
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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 certification, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classes 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, within three months before or after each anniversary date of 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 are to be carried out at or between 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 vessel owner has the option of arranging with the classification society for the vessel's hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.  Upon a vessel owner's request, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class.  This process is referred to as continuous class renewal.
 
All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere.  The period between two subsequent surveys of each area must not exceed five years.
 
Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections.  If any defects are found, the classification surveyor will issue a "recommendation" which must be rectified by the vessel owner within prescribed time limits.
 
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as "in class" by a classification society which is a member of the International Association of Classification Societies.  All of our vessels are certified as being "in class" by RINA, ABS and NKK a major classification societies.
 
If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, dry-docking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable which could cause us to be in violation of certain covenants in our credit facilities.  Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition and results of operations.
 

 
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Our vessels may suffer damage due to the inherent operational risks of the seaborne transportation industry and we may experience unexpected drydocking costs, which may adversely affect our business and financial condition.
 
Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, bad weather, business interruptions caused by mechanical failures, grounding, fire, explosions and collisions, human error, war, terrorism, piracy and other circumstances or events. These hazards may result in death or injury to persons, loss of revenues or property, environmental damage, higher insurance rates, damage to our customer relationships, delay or rerouting. If our vessels suffer damage, they may need to be repaired at a drydocking facility. For example, the costs of drydock repairs are unpredictable and may be substantial. We may have to pay drydocking costs that our insurance does not cover in full. The loss of earnings while these vessels are being repaired and repositioned, as well as the actual cost of these repairs, would decrease our earnings. 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 our vessels may be forced to travel to a drydocking facility that is not conveniently located to our vessels' positions. The loss of earnings while these vessels are forced to wait for space or travel to more distant drydocking facilities would decrease our earnings.
 
The operation of drybulk carriers involves certain unique operational risks.
 
The operation of drybulk carriers has certain unique operational risks. With a drybulk carrier, the cargo itself and its interaction with the vessel can be a risk factor. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk carriers 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 drybulk carrier. Drybulk carriers damaged due to treatment during unloading procedures may be more susceptible to a breach to the sea. Hull breaches in drybulk carriers may lead to the flooding of their holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the drybulk carrier's bulkheads leading to the loss of the drybulk carrier.
 
If we are unable to adequately maintain or safeguard our vessels we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business, financial condition, results of operations and ability to pay dividends if reinstated in the future. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.
 
Purchasing and operating secondhand vessels may result in increased operating costs and vessel off-hire, which could adversely affect our earnings.
 
Our inspection of secondhand vessels prior to purchase does not provide us with the same knowledge about their condition and cost of any required or anticipated repairs that we would have had if these vessels had been built for and operated exclusively by us. We will not receive the benefit of warranties on secondhand vessels.
 
Typically, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.
 
Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
 
We inspected all of our second hand vessels, which we acquired from both related and unrelated third parties, considered the age and condition of the vessels in budgeting for their operating, insurance and maintenance costs, and if we acquire additional secondhand vessels in the future, we may encounter higher operating and maintenance costs due to the age and condition of those additional vessels.
 

 
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We may not have adequate insurance to compensate us for the loss of a vessel, which may have a material adverse effect on our financial condition and results of operation.
 
We have procured hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance coverage and war risk insurance for our fleet. We do not maintain, for our vessels, insurance against loss of hire, which covers business interruptions that result from the loss of use of a vessel. We may not be adequately insured against all risks. We may not be able to obtain adequate insurance coverage for our fleet in the future. The insurers may not pay particular claims. Our insurance policies may contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue. Moreover, insurers may default on claims they are required to pay. If our insurance is not enough to cover claims that may arise, the deficiency may have a material adverse effect on our financial condition and results of operations.
 
We may be subject to calls because we obtain some of our insurance through protection and indemnity associations.
 
We may be subject to increased premium payments, or calls, in amounts based on our claim records and the claim records of our fleet managers as well as the claim records of other members of the protection and indemnity associations (P&I Associations) through which we receive insurance coverage for tort liability, including pollution-related liability. In addition, our P&I Associations may not have enough resources to cover claims made against them. Our payment of these calls could result in significant expense to us, which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
 
Because we generate all of our revenues in dollars but incur a significant portion of our expenses in other currencies, exchange rate fluctuations could have an adverse impact on our results of operations.
 
We generate all of our revenues in dollars but we incur a portion of our expenses in currencies other than the dollar. This difference could lead to fluctuations in net income due to changes in the value of the dollar relative to the other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the dollar falls in value can increase, decreasing our revenues. Further declines in the value of the dollar could lead to higher expenses payable by us.
 
We are a holding company, and depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations or to make dividend payments.
 
We are a holding company, and our subsidiaries, which are all directly and wholly owned by us, conduct all of our operations and own all of our operating assets.  As a result, our ability to satisfy our financial obligations and to pay dividends to our shareholders depends on the ability of our subsidiaries to generate profits available for distribution to us and, to the extent that they are unable to generate profits, we may be unable to pay dividends to our shareholders.
 
We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law, which may negatively affect the ability of public shareholders to protect their interests.
 
We are incorporated under the laws of the Republic of the Marshall Islands, and our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, public shareholders 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 United States jurisdiction.
 

 
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All of our assets are located outside of the United States. Our business is operated primarily from our offices in Athens, Greece. In addition, our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our directors and officers. Although you may bring an original action against us, our officers and directors in the courts of the Marshall Islands based on U.S. laws, and the courts of the Marshall Islands may impose civil liability, including monetary damages, against us, our officers or directors for a cause of action arising under Marshall Islands law, it may be impracticable for you to do so given the geographic location of the Marshall Islands.
 
There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the merger of Star Maritime with and into Star Bulk, with Star Bulk as the surviving corporation, or the Redomiciliation Merger, which would adversely affect our earnings.
 
Section 7874(b) of the U.S. Internal Revenue Code of 1986, as amended, or the "Code", provides that, unless certain requirements are satisfied, a corporation organized outside of the United States which acquires substantially all of the assets (through a plan or a series of related transactions) of a corporation organized in the United States will be treated as a U.S. domestic corporation for U.S. federal income tax purposes if shareholders of the U.S. corporation whose assets are being acquired own at least 80% of the non-U.S. acquiring corporation after the acquisition. If Section 7874(b) of the Code were to apply to Star Maritime and the Redomiciliation Merger, then, among other consequences, the Company, as the surviving entity of the Redomiciliation Merger, would be subject to U.S. federal income tax as a U.S. domestic corporation on its worldwide income after the Redomiciliation Merger. Upon completion of the Redomiciliation Merger and the concurrent issuance of stock to TMT Co. Ltd., or "TMT", a shipping company headquartered in Taiwan, under the acquisition agreements, the shareholders of Star Maritime owned less than 80% of the Company. Therefore, the Company believes that it should not be subject to Section 7874(b) of the Code after the Redomiciliation Merger. Star Maritime obtained an opinion of its counsel, Seward & Kissel LLP, or "Seward & Kissel", that Section 7874(b) of the Code should not apply to the Redomiciliation Merger. However, there is no authority directly addressing the application of Section 7874(b) of the Code to a transaction such as the Redomiciliation Merger where shares in a foreign corporation such as the Company are issued concurrently with (or shortly after) a merger. In particular, since there is no authority directly applying the "series of related transactions" or "plan" provisions to the post-acquisition stock ownership requirements of Section 7874(b) of the Code, the U.S. Internal Revenue Service, or the "IRS", may not agree with Seward & Kissel's opinion on this matter. Moreover, Star Maritime has not sought a ruling from the IRS on this point. Therefore, the IRS may seek to assert that we are subject to U.S. federal income tax on our worldwide income for taxable years after the Redomiciliation Merger, although Seward & Kissel is of the opinion that such an assertion should not be successful.
 
We may have to pay tax on U.S. source income, which would reduce our earnings.
 
Under the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as the Company and its subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States is characterized as U.S. source shipping income and such income is subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the regulations promulgated thereunder by the U.S. Department of the Treasury.
 
We expect that we will qualify for this statutory tax exemption and we have taken this position for U.S. federal income tax return reporting purposes for 2011 and we intend to take this position for 2012. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S. source shipping income. For instance, we would no longer qualify for exemption under Section 883 of the Code for a particular taxable year if shareholders with a 5% or greater interest in our common stock owned, in the aggregate, 50% or more of our outstanding common stock for more than half the days during the taxable year. Due to the factual nature of the issues involved, we can give no assurances with regard to our tax-exempt status or that of any of our subsidiaries.
 
If we are not entitled to the exemption under Section 883 of the Code for any taxable year, we would be subject during those years to a 4% U.S. federal income tax on our U.S. source shipping income. The imposition of this tax would have a negative effect on our business and would result in decreased earnings.

 
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The preferential tax rates applicable to "qualified dividend income" are temporary, and the enactment of proposed legislation could affect whether dividends paid by us constitute "qualified dividend income" eligible for the preferential tax rates.
 
Certain of our distributions may be treated as "qualified dividend income" eligible for preferential rates of U.S. federal income tax to U.S. taxpayers. In the absence of legislation extending the term for these preferential tax rates, all dividends received by such U.S. taxpayers in tax years beginning on January 1, 2013 or later will be subject to U.S. federal income tax at the graduated tax rates applicable to ordinary income.
 
In addition, legislation has been proposed in the U.S. Congress that would, if enacted, deny the preferential rates of U.S. federal income tax currently imposed on "qualified dividend income" with respect to dividends received from a non-U.S. corporation if the non-U.S. corporation is created or organized under the laws of a jurisdiction that does not have a comprehensive income tax system. Because the Marshall Islands imposes only limited taxes on entities organized under its laws, it is likely that if this legislation were enacted, the preferential tax rates of U.S. federal income tax may no longer be applicable to distributions received from us. As of the date hereof, it is not possible to predict with certainty whether this proposed legislation will be enacted.
 
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. shareholders.
 
We will be treated as a "passive foreign investment company," or "PFIC", for U.S. federal income tax purposes if either (1) at least 75% of our gross income for any taxable year consists of certain types of "passive income" or (2) at least 50% of the average value of our assets produce, or are held for the production of, those types of "passive income," to which the Company refers to as "passive assets." 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 may be 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. In addition, U.S. shareholders of a PFIC may be required to file an annual report containing such information as the Secretary of the U.S. Department of the Treasury may provide.
 
Based on our method of operation, we take the position for U.S. federal income tax purposes that we have not been, and are not currently, 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 take the position that our income from our time chartering activities does not constitute "passive income," and the assets that we own and operate in connection with the production of that income do not constitute "passive assets."
 
There is, however, no direct legal authority under the PFIC rules addressing our method of operation. In addition, we have not received an opinion of counsel with respect to this issue. We believe there is substantial legal authority supporting our position consisting of case law and IRS pronouncements concerning the characterization of income derived from these time charters as services income for other tax purposes. However, we note that there is also authority which characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, there is a risk that the IRS or a court of law may not accept our position, and treat us as a PFIC. Moreover, we may constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.
 
If the IRS or a court were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders may face adverse U.S. federal income tax consequences. Under the PFIC rules, unless such U.S. shareholders make an election available under the Code (which election could itself have adverse consequences), such U.S. shareholders would be subject to U.S. federal income tax at the then highest income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common stock, as if the excess distribution or gain had been recognized ratably over the U.S. shareholder's holding period of our common stock.

 
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Risks Relating to Our Common Stock
 
Certain stockholders hold registration rights, which may have an adverse effect on the market price of our common stock.
 
Initial stockholders of Star Maritime who purchased common stock and units in private transactions prior to Star Maritime's initial public offering have certain registration rights which require us, under certain circumstances, to register the resale of their shares. Pursuant to those registration rights, we have included in a registration statement (File No. 333-156843), which was declared effective by the Commission on February 17, 2009, for the resale registration of 14,305,599 shares of common stock. The resale of these common shares in addition to the registration of other securities included in such registration statement may have an adverse effect on the market price of our common stock.  In addition, on September 20, 2011, we filed a registration statement on Form S-8 (File No. 333-176922) that covers the resale of up to 4,665,100 of our common shares that have been and may be issued under our 2007, 2010 and 2011 equity incentive plans.  The resale of these common shares may have an adverse effect on the market price of our common stock.
 
Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to replace or remove our current board of directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.
 
Several provisions of our amended and restated articles of incorporation and bylaws could make it difficult for our stockholders to change the composition of our board of directors in any one year, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable.
 
These provisions include:
 
 
·
authorizing our board of directors to issue "blank check" preferred stock without stockholder approval;
 
 
·
providing for a classified board of directors with staggered, three year terms;
 
 
·
prohibiting cumulative voting in the election of directors; and
 
 
·
authorizing the board to call a special meeting at any time.
 
The market price of our common shares has fluctuated widely and may fluctuate widely in the future, or there may be no continuing public market for you to resell our common stock.
 
The market price of our common stock has fluctuated widely since our common shares began trading on the Nasdaq Global Select Market in December 2007, and may continue to do so as a result of many factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, mergers and strategic alliances in the shipping industry, market conditions in the shipping industry, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, announcements concerning us or our competitors and the general state of the securities market.  Further, there may be no continuing active or liquid public market for our common stock.
 
The market price of our common stock has dropped below $5.00 per share, and the last reported sale price on the Nasdaq Global Select Market on March 23, 2012 was $0.94 per share. If the market price of our common shares remains below $5.00 per share, under stock exchange rules, our shareholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability to continue to use our common shares as collateral may lead to sales of such shares creating downward pressure on and increased volatility in the market price of our common shares. In addition, under the rules of the Nasdaq Global Select Market, listed companies are required to maintain a share price of at least $1.00 per share and if the closing share price stays below $1.00 for a period of 30 consecutive business days, then the listed company would have a cure period of at least 180 days for the purpose of regaining compliance with the $1.00 per share minimum. If the price of our common stock falls below $1.00 and we are unable to regain compliance, we may be involuntarily delisted from the Nasdaq Global Select Market.
 

 
24

 

 
The shipping industry has been highly unpredictable and volatile. The market for common shares in this industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our common shares you may have purchased at a price greater than or equal to its original purchase price, or that you will be able to sell them at all.
 
Item 4.   Information on the Company
 
A.           History and development of the Company
 
We were incorporated in the Marshall Islands on December 13, 2006. Our executive offices are located at c/o Star Bulk Management Inc., 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece and our telephone number is 011 30 210 617 8400.
 
Star Maritime Acquisition Corp., or Star Maritime, was organized under the laws of the State of Delaware on May 13, 2005 as a blank check company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business combination, one or more assets or target businesses in the shipping industry. Following the formation of Star Maritime, its officers and directors were the holders of 9,026,924 shares of common stock representing all of our then issued and outstanding capital stock. On December 21, 2005, Star Maritime consummated its initial public offering of 18,867,500 units, at a price of $10.00 per unit, each unit consisting of one share of Star Maritime common stock and one warrant to purchase one share of Star Maritime common stock at an exercise price of $8.00 per share. In addition, Star Maritime completed during December 2005 a private placement of an aggregate of 1,132,500 units each unit consisting of one share of common stock and one warrant, to Mr. Pappas our Chairman of the Board, Mr. Erhardt, one of our directors, and Mr. Tsirigakis, our former Chief Executive Officer and former director effective March 31, 2012 and Mr. Syllantavos, our former Chief Financial Officer. The gross proceeds of the private placement of $11.3 million were used to pay all fees and expenses of the initial public offering and as a result, the entire gross proceeds of the initial public offering amounting to $188.7 million were deposited in a trust account maintained by American Stock Transfer & Trust Company. Star Maritime's common stock and warrants started trading on the American Stock Exchange under the symbols, SEA and SEA.WS, respectively on December 21, 2005.
 
On January 12, 2007, Star Maritime and Star Bulk entered into definitive agreements to acquire a fleet of eight drybulk carriers with a combined cargo-carrying capacity of approximately 692,000 dwt. from certain subsidiaries of TMT. These eight drybulk carriers are referred to as the initial fleet. The aggregate purchase price specified in the Master Agreement by and among the Company, Star Maritime and TMT, or the Master Agreement, for the initial fleet was $224.5 million in cash and 12,537,645 shares of our common stock, which were issued on November 30, 2007. As additional consideration for eight vessels, we agreed to issue 1,606,962 shares of our common stock to TMT in two installments as follows: (i) 803,481 additional shares of our common stock, no more than 10 business days following the filing of our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, and (ii) 803,481 additional shares of our common stock, no more than 10 business days following the filing of our Annual Report on Form 20-F for the fiscal year ended December 31, 2008. The shares in respect of the first installment were issued to a nominee of TMT on July 17, 2008 and the shares in respect of the second installment were issued to a nominee of TMT on April 28, 2009.
 
On November 2, 2007, the Commission declared effective our joint proxy/registration statement filed on Forms F-1/F-4 and on November 27, 2007 we obtained shareholder approval for the acquisition of the initial fleet and for effecting the Redomiciliation Merger as a result of which Star Maritime merged into Star Bulk with Star Maritime merging out of existence and Star Bulk being the surviving entity.  Each share of Star Maritime common stock was exchanged for one share of Star Bulk common stock and each warrant of Star Maritime was assumed by Star Bulk with the same terms and conditions except that each became exercisable for common stock of Star Bulk.  The Redomiciliation Merger became effective after stock markets closed on November 30, 2007 and the common shares and warrants of Star Maritime ceased trading on the American Stock Exchange under the symbols SEA and SEA.WS, respectively.  Star Bulk shares and warrants started trading on the Nasdaq Global Select Market on December 3, 2007 under the ticker symbols SBLK and SBLKW, respectively. Immediately following the effective date of the Redomiciliation Merger, TMT and its affiliates owned 30.2% of our outstanding common stock.  Mr. Nobu Su, a former member of our board of directors, exercises voting and investment control over the securities held of record by F5 Capital, a Cayman Islands corporation, which is a nominee of TMT.  F5 Capital filed a Schedule 13D/A on July 29, 2008 reporting beneficial ownership of 7.0% of our outstanding common stock.  All of our warrants expired worthless and ceased trading on the Nasdaq Global Select Market on March 15, 2010.
 

 
25

 

 
We began our operations on December 3, 2007 with the delivery of our first vessel Star Epsilon. Three of the eight vessels comprising our initial fleet were delivered to us by the end of December 2007. Additionally, on December 3, 2007, we entered into an agreement to acquire an additional Supramax vessel, Star Kappa from TMT, which was not included in the initial fleet and was delivered to us on December 14, 2007. In 2008, we took delivery of the remaining five vessels that we purchased from TMT, plus an additional four vessels.
 
Vessel Acquisitions, Dispositions and Other Significant Transactions
 
Vessel Acquisitions
 
On February 18, 2010, we entered into an agreement to acquire from an unaffiliated third party, a 2000 built, 171,000 dwt., Capesize drybulk carrier Nord-Kraft (to be renamed Star Aurora) vessel for approximately $42.5 million.  We financed the purchase of this vessel with a combination of cash and bank debt.  In March 2010, we entered into a time charter agreement with Rio Tinto for the Star Aurora for a period of approximately three years at a gross daily rate of $27,500, which commenced upon the delivery of the Star Aurora to us in September 2010.
 
On March 24, 2010, we entered into an agreement with Hanjin Heavy Industries for the construction of the Star Borealis, a 179,678 dwt Capesize vessel, for $53.6 million.  We entered into a ten year time charter agreement for this vessel with STX Panocean at a gross daily hire of $24,750, which commenced on its delivery to us on September 9, 2011.
 
On April 6, 2010, we entered into an agreement with Hanjin Heavy Industries for the construction of the Star Polaris, a 179,546 dwt Capesize vessel, for $53.3 million.  We entered into a two year time charter agreement, with a charterer's option for an additional year, for this vessel with Louis Dreyfus Commodities Suisse SA at a gross daily hire of $16,500 for the first two years and $19,000 for the optional year, which commenced on its delivery to us on November 14, 2011.
 
We financed the construction of the Star Borealis and Star Polaris described above with a combination of cash and bank debt.
 
On May 12, 2011, we entered into agreements to acquire the Star Big and the Star Mega, two secondhand Capesize vessels, with attached long term time charters, for an aggregate purchase price of approximately $51.5 million with long term time charters attached. The Star Big has a carrying capacity of approximately 168,404 dwt and the Star Mega has a carrying capacity of approximately 170,631 dwt.  The vessels were acquired from companies in which family members of our Chairman held minority stakes, and were financed through a combination of our cash, bank debt, and a portion of the proceeds of an underwritten public offering that closed in July 2011. The Star Big and the Star Mega were delivered to us on July 25, 2011 and August 16, 2011, respectively.
 
Vessel Dispositions
 
On July 21, 2009, we entered into an agreement to sell the Star Alpha to an unaffiliated third party for gross proceeds of approximately $19.9 million.  We classified the Star Alpha as an asset held for sale during the third quarter 2009 and as a result recorded an impairment loss of $75.2 million during the year ended December 31, 2009. We delivered the vessel to its new owners on December 21, 2009.
 

 
26

 

 
On January 18, 2010, we entered into an agreement to sell the Star Beta to an unaffiliated third party for gross proceeds of approximately $22.0 million.  We classified the Star Beta as an asset held for sale during the first quarter 2010 and as a result recorded an impairment loss of $34.9 million during the year ended December 31, 2010. We delivered the vessel to its new owners on July 7, 2010.
 
On February 22, 2012 the Company entered into an agreement with a third party in order to sell the vessel Star Ypsilon together with a quantity of 667 metric tons of fuel oil, for a contracted price of $9.13 million less address commission of 3% and brokerage commission of 1%.  The vessel was delivered to its purchasers on March 9, 2012. Due to the sale of vessel Star Ypsilon, the Company prepaid an amount of $7.36 million on March 7, 2012, in accordance with the terms of the $64.5 million loan agreement with HSH Nordbank AG and the mortgage over the respective vessel was released.
 
Other Significant Transactions
 
On January 20, 2011, we entered into a term loan agreement with Credit Agricole Corporate and Investment Bank for up to $70.0 million to partially finance the construction of our two Newbuildings, the Star Borealis and Star Polaris, which were delivered to us in 2011. The total amount that was drawn down upon the delivery of each vessel totaled  $67.275 million. Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit Facilities."
 
On July 21, 2011, we entered into a $31.0 million senior secured credit facility with ABN AMRO Bank N.V. to partially finance the purchase of the Star Big and the Star Mega.  As of December 31, 2011, the total amount of this loan facility has been drawn down.  Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit Facilities."
 
On July 22, 2011, we offered and sold 16,700,000 common shares in an underwritten public offering.  This offering was priced at $1.80 per share, less underwriting discounts, which resulted in net proceeds to us before expenses of approximately $28.8 million.  We used the net proceeds from this offering to fund a portion of the aggregate purchase price of the Star Big and the Star Mega, and for general corporate purposes.
 
On August 10, 2011, our Board of Directors reinstated our share repurchase plan to acquire up to a maximum of $3.0 million of our common shares at a maximum price of $1.30 per share. On November 9, 2011, our Board of Directors extended the duration of the share repurchase plan until December 31, 2012. All shares to be purchased under the plan shall be in the sole discretion of our Board of Directors and in compliance with the plan.  In addition, the repurchased common shares shall be cancelled, and removed from our share capital and returned to our authorized unissued common shares. No shares were repurchased during the year ended December 31, 2011. As of March 23, 2012, under our share repurchase plan we have purchased an aggregate of 319,413 common shares at an average price of $0.98 per share and have $2.7 million of remaining capacity under the plan.
 
On October 3, 2011, we entered a new $64.5 million secured term loan agreement with HSH Nordbank, which has up to a five year term and bears interest at LIBOR plus margin.  The borrowings under this loan agreement together with $5.3 million of own cash were used to repay in full the outstanding borrowings under our two loan facilities with Piraeus Bank. Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit Facilities."
 
On January 4, 2012, we entered an agreement with Pacific Bulk to accept the early redelivery to us of the Star Sigma on December 31, 2011 in exchange for an aggregate of $6.454 million consisting of a cash payment of $5.734 million and 1,027 metric tons of fuel valued at $0.720 million.
 
.
 

 
27

 
 
B.           Business overview
 
Introduction
 
We are an international company providing worldwide transportation of drybulk commodities through our vessel-owning subsidiaries for a broad range of customers of major and minor bulk cargoes including iron ore, coal, grain, cement and fertilizer. We were incorporated in the Marshall Islands on December 13, 2006 as a wholly-owned subsidiary of Star Maritime Acquisition Corp., or Star Maritime. We merged with Star Maritime on November 30, 2007 and commenced operations on December 3, 2007, which was the date we took delivery of our first vessel.
 
Our Fleet
 
We own and operate a fleet of 14 vessels consisting of six Capesize drybulk carriers and eight Supramax drybulk carriers with a weighted average age of 10.0 years and a combined cargo carrying capacity of approximately 1,475,005 dwt. Our fleet carries a variety of drybulk commodities including coal, iron ore, and grains, or major bulks, as well as bauxite, phosphate, fertilizers and steel products, or minor bulks. We currently charter eight of our vessels on medium- to long-term time charters with an average remaining term of approximately 2.6 years, and six of our vessels are currently employed in the spot market.
 
The following table presents summary information concerning our fleet as of March 23, 2012:
 
Vessel Name
Vessel
Type
Size
(dwt.)
Year
Built
 
Daily Gross
Hire Rate
Type/
Month of Contract Expiry
Star Aurora
Capesize
171,199
2000
$
27,500
Time charter/
July 2013
Star Big
Capesize
168,404
1996
$
25,000
Time charter/
November 2015
Star Borealis
Capesize
179,678
2011
$
24,750
Time charter/
July 2021
Star Mega
Capesize
170,631
1994
$
24,500
Time charter/
August 2014
Star Polaris (1)
Capesize
179,546
2011
$
16,500
Time charter/
October  2013
Star Sigma (2)
Capesize
184,403
1991
$
Freight
28.5/ mt
Voyage charter/
Expected March 2012
Star Cosmo (4)
Supramax
52,247
2005
$
11,750
Time charter/
July 2012
Star Delta (4)
Supramax
52,434
2000
$
11,000
Time charter/
April 2012
Star Epsilon (4)
Supramax
52,402
2001
$
12,000
Time charter/
August 2012
Star Gamma (3)
Supramax
53,098
2002
$
14,050
Time charter/
July 2013
Star Kappa
Supramax
52,055
2001
$
12,500
Time charter/
October 2012
Star Omicron
Supramax
53,489
2005
$
Freight
34.5/ mt
Voyage charter/
Expected April 2012
Star Theta
Supramax
52,425
2003
$
14,100
Time charter/
September 2012
Star Zeta (4)
Supramax
52,994
2003
$
11,000
Time charter/
March 2012
 
 
(1)
Our charterer has an option to extend this time charter for one year at a gross daily rate of $19,000.
 
 
 
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(2)
The Star Sigma, which was chartered to Pacific Bulk until October 2013, was redelivered to us early on December 31, 2011. On January 4, 2012 we entered into an agreement with Pacific Bulk to accept the early redelivery of the vessel in exchange for an aggregate of $6.454 million consisting of a cash payment of $5.734 million and 1,027 metric tons of fuel valued at approximately $0.720 million.
 
(3)
Our charterer has an option to extend this time charter for one year at a gross daily rate of $15,500.
 
(4)
For the purposes of this report, we consider these vessels to be employed in the spot market as a result of the short expiry of their current charters.
 
We actively manage the deployment of our fleet on time charters, which generally can last up to several years. We currently charter eight of our vessels on medium to long term time charters with an average remaining term of approximately 2.6 years, and employ six of our vessels in the spot market. Under time charters, the charterer pays voyage expenses such as port, canal and fuel costs.  We pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, as well as for commissions.  In both cases, we are responsible for the drydocking costs relating to each vessel. Our vessels operate worldwide within the trading limits imposed by our insurance terms and we do not operate our vessels in areas where United States, European Union or United Nations sanctions have been imposed.
 
Competition
 
Demand for drybulk carriers fluctuates in line with the main patterns of trade of the major drybulk cargoes and varies according to changes in the supply and demand for these items. We compete with other owners of drybulk carriers in the Capesize, and Supramax size sectors. Ownership of drybulk carriers is highly fragmented and is divided among approximately 1,500 independent drybulk carrier owners. We compete for charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on our reputation as an owner and operator.
 
Our wholly owned subsidiary, Star Bulk Management arranges our charters (whether voyage charters, period time charters, bareboat charters or pools) through the use of a worldwide network of shipbrokers, who negotiate the terms of the charters based on market conditions.  These shipbrokers advise Star Bulk Management on a continuous basis of the availability of cargo for any particular vessel. There may be several shipbrokers involved in any one charter. The negotiation for a charter typically begins prior to the completion of the previous charter in order to avoid any idle time. The terms of the charter are based on industry standards.
 
Customers
 
As of March 23, 2012, our vessels were chartered as follows: Rio Tinto for Star Aurora, Cargill for Star Gamma and Star Theta, Louis Dreyfus for Star Delta, Star Polaris, and Star Zeta, Pacific Basin for Star Kappa, Hyundai Merchant Marine for Star Cosmo, STX Panocean for Star Borealis, SK Shipping for Star Epsilon, OCP Maroc Phosphore for Star Omicron, and  major international companies for Star Big, Star Mega, and Star Sigma.  For the year ended December 31, 2011, we derived 71% of our voyage revenues from five of our customers.
 
Seasonality
 
Demand for vessel capacity has historically exhibited seasonal variations and, as a result, fluctuations in charter rates.  This seasonality may result in quarter-to-quarter volatility in our operating results for vessels trading in the spot market.  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.  As a result, our revenues from our drybulk carriers may be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, our revenues from our drybulk carriers may be stronger in fiscal quarters ended December 31 and March 31. Seasonality in the sector in which we operate could materially affect our operating results and cash available for dividends in the future.
 
Management of the Fleet
 
As of December 31, 2011, we had fifty-three employees. Fifty-one of our employees, through Star Bulk Management and Starbulk S.A., were engaged in the day to day management of the vessels in our fleet. Star Bulk Management and Starbulk S.A. perform operational and technical management services for the vessels in our fleet, including chartering, marketing, capital expenditures, personnel, accounting, paying vessel taxes and maintaining insurance.  Our Chief Executive Officer and Chief Financial Officer are also the senior management of Star Bulk Management. Star Bulk Management employs such number of additional shore-based executives and employees designed to ensure the efficient performance of its activities.
 

 
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We reimburse and/or advance funds as necessary to Star Bulk Management and Starbulk S.A. in order for our managers to conduct their activities and discharge their obligations, at cost.  We also maintain working capital reserves as may be agreed between us and Star Bulk Management from time to time.
 
Star Bulk Management is responsible for the management of the vessels. Star Bulk Management's responsibilities include, inter alia, locating, purchasing, financing and selling vessels, deciding on capital expenditures for the vessels, paying vessels' taxes, negotiating charters for the vessels, managing the mix of various types of charters, developing and managing the relationships with charterers and the operational and technical managers of the vessels. Star Bulk Management subcontracts certain vessel management services to Star Bulk S.A.
 
Starbulk S.A., our wholly owned subsidiary, provides the technical and crew management of all of our vessels.  Technical management includes maintenance, drydocking, repairs, insurance, regulatory and classification society compliance, arranging for and managing crews, appointing technical consultants and providing technical support. Prior to June 30, 2011, the technical and crew management for the Star Cosmo was provided by Union Commercial Inc., an unaffiliated ship management company. The agreement with Union Commercial was terminated on June 30, 2011. From June 30, 2011 onwards Star Bulk S.A. provides the crew and the technical management for all of our vessels.
 
On May 12, 2011, Starbulk S.A. entered into an agreement with Serenity Maritime Inc., an unaffiliated Marshall Islands company, for the commercial and technical management of the Serenity I, a 2006 built Supramax drybulk carrier formerly managed by Combine Marine Inc., a company founded by our Chairman. Pursuant to the terms of this management agreement, we receive a fixed management fee of $750 per day for a one year term beginning on June 11, 2011 that will extend thereafter until terminated by either party upon two months prior written notice. This vessel is managed under the same strategy as the other vessels in our fleet.
 
Crewing
 
Star Bulk Management is responsible for recruiting, either directly or through a technical manager or a crew manager, the senior officers and all other crew members for the vessels in our fleet.  Star Bulk Management has the responsibility to ensure that all seamen have the qualifications and licenses required to comply with international regulations and shipping conventions, and that the vessels are manned by experienced and competent and trained personnel. Star Bulk Management is also responsible for insuring that seafarers' wages and terms of employment conform to international standards or to general collective bargaining agreements to allow unrestricted worldwide trading of the vessels.  Since January 19, 2010, Star Bulk Management and Starbulk S.A., our wholly owned subsidiaries, gradually started to provide in-house crewing management to our vessels. From June 30, 2011 onwards, Star Bulk Management and Starbulk S.A. provide the crewing management for all of our vessels.
 
The International Drybulk Shipping Industry
 
Drybulk cargo is cargo that is shipped in large quantities and can be easily stowed in a single hold with little risk of cargo damage. In 2011, based on preliminary figures, it is estimated that approximately 3.7 billion tons of drybulk cargo was transported by sea.
 
The demand for drybulk carrier capacity is derived from the underlying demand for commodities transported in drybulk carriers, which is influenced various factors such as globalization trends, geological structure, political factors, and weather. The demand for drybulk carriers is determined by the volume and geographical distribution of seaborne drybulk trade, which in turn is influenced by general trends in the global economy and factors affecting demand for commodities. During the 1980s and 1990s seaborne drybulk trade increased by 1-2% per annum. However, between 2000 and 2011, seaborne drybulk trade increased at a compound annual growth rate of 4.0%. The global drybulk carrier fleet may be divided into four categories based on a vessel's carrying capacity.  These categories consist of:
 

 
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·
Capesize vessels, which have carrying capacities of more than 85,000 dwt. These vessels generally operate along long-haul iron ore and coal trade routes. There are relatively few ports around the world with the infrastructure to accommodate vessels of this size.
 
 
·
Panamax vessels have a carrying capacity of between 60,000 and 85,000 dwt. These vessels carry coal, grains, and, to a lesser extent, minor bulks, including steel products, forest products and fertilizers. Panamax vessels are able to pass through the Panama Canal making them more versatile than larger vessels.
 
 
·
Handymax vessels have a carrying capacity of between 35,000 and 60,000 dwt. The subcategory of vessels that have a carrying capacity of between 45,000 and 60,000 dwt are called Supramax. These vessels operate along a large number of geographically dispersed global trade routes mainly carrying grains and minor bulks. Vessels below 60,000 dwt are sometimes built with on-board cranes enabling them to load and discharge cargo in countries and ports with limited infrastructure.
 
 
·
Handysize vessels have a carrying capacity of up to 35,000 dwt. These vessels carry exclusively minor bulk cargo. Increasingly, these vessels have operated along regional trading routes. Handysize vessels are well suited for small ports with length and draft restrictions that may lack the infrastructure for cargo loading and unloading.
 
The supply of drybulk carriers is dependent on the delivery of new vessels and the removal of vessels from the global fleet, either through scrapping or loss.  As of February 1, 2012, the global drybulk carrier orderbook amounted to 189.2 million dwt, or 30.5% of the existing fleet at that time, with most vessels on the orderbook expected to be delivered within 48 months. The level of scrapping activity is generally a function of scrapping prices in relation to current and prospective charter market conditions, as well as operating, repair and survey costs. Drybulk carriers at or over 25 years old are considered to be scrapping candidate vessels.
 
Charterhire Rates
 
Charterhire rates paid for drybulk carriers are primarily a function of the underlying balance between vessel supply and demand, although at times other factors may play a role. Furthermore, the pattern seen in charter rates is broadly mirrored across the different charter types and between the different drybulk carrier categories. However, because demand for larger drybulk carriers is affected by the volume and pattern of trade in a relatively small number of commodities, charterhire rates (and vessel values) of larger ships tend to be more volatile than those for smaller vessels.
 
In the time charter market, rates vary depending on the length of the charter period and vessel specific factors such as age, speed and fuel consumption. In the voyage charter market, rates are influenced by cargo size, commodity, port dues and canal transit fees, as well as delivery and redelivery regions. In general, a larger cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with costly ports or canals generally command higher rates than routes with low port dues and no canals to transit.
 
Voyages with a load port within a region that includes ports where vessels usually discharge cargo or a discharge port within a region with ports where vessels load cargo also are generally quoted at lower rates, because such voyages generally increase vessel utilization by reducing the unloaded portion (or ballast leg) that is included in the calculation of the return charter to a loading area.
 
Within the drybulk shipping industry, the charterhire rate references most likely to be monitored are the freight rate indices issued by the Baltic Exchange, such as BDI. These references are based on actual charterhire rates under charter entered into by market participants as well as daily assessments provided to the Baltic Exchange by a panel of major shipbrokers. The Baltic Panamax Index is the index with the longest history. The Baltic Capesize Index and Baltic Handymax Index are of more recent origin.
 
The drybulk shipping industry is cyclical with attendant volatility in charterhire rates and profitability. The degree of charterhire rate volatility among different types of drybulk carriers varies widely, however, the abrupt and dramatic downturn in the drybulk charter market has severely affected the entire drybulk shipping industry.  The Baltic Dry Index, an index published by The Baltic Exchange of shipping rates for 20 key drybulk routes, fell 94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and remained volatile during 2009, reaching a low of 772 on January 5, 2009 and a high of 4,661 on November 19, 2009. The BDI continued its volatility in 2010, increasing from 3,235 in January 2010 to a high of 4,209 in May 2010 before subsequently decreasing to a low of 1,700 in July 2010. Following a short period of increase in the third quarter of 2010, the BDI fell to near July 2010 levels by the end of 2010. The BDI further decreased in 2011 to 1,043 in February 2011 and has continued to decline in 2012 to 753 as of January 26, 2012.As of March 23 the BDI stood at 908.
 

 
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Vessel Prices
 
Newbuilding prices are determined by a number of factors, including the underlying balance between shipyard output and capacity, raw material costs, freight markets and sometimes exchange rates. In the last few years high levels of new ordering were recorded across all sectors of shipping. As a result, most of the major shipyards in Japan, South Korea and China had full orderbooks until the end of 2011, although the downturn in freight rates and the lack of funding due to the wider global financial crisis has led, and is expected to continue to lead to some of these orders being cancelled or delayed.
 
Newbuilding prices have increased significantly since 2003, due to tightness in shipyard capacity, high steel prices, rising labor cost, high levels of new ordering and stronger freight rates. However, with the sudden and steep decline in freight rates after August 2008 and lack of new vessel ordering, newbuilding vessel values entered a downward trend and have continued to gradually decline. In the secondhand market, the steep increase in newbuilding prices and the strength of the charter market have also affected values, to the extent that prices rose sharply in 2004/2005, before dipping in the early part of 2006, only to rise thereafter to new highs in the first half of 2008. However, the sudden and sharp downturn in freight rates since August 2008 has also had a very negative impact on secondhand values. Currently newbuilding and secondhand values are below the lows reached during 2008.
 
Environmental and Other Regulations in the Drybulk Shipping Industry
 
Government regulation and laws significantly affect the ownership and operation of our fleet. We are subject to international conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate or are registered relating to safety and health and environmental protection including the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations and other requirements may entail significant expense, including vessel modifications and implementation of certain operating procedures.
 
A variety of government and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (applicable national authorities such as the United States Coast Guard, harbor master or equivalent), classification societies; flag state administrations (countries of registry) and charterers, particularly terminal operators. Certain of these entities require us to obtain permits, licenses, certificates and other authorizations 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 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 our officers and crews and compliance with United States and international regulations. We believe that the operation 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 that causes significant adverse environmental impact, such as the 2010 BP plc Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional legislation or regulations that could negatively affect our profitability.
 

 
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International Maritime Organization
 
The International Maritime Organization, the United Nations agency for maritime safety and the prevention of pollution by ships, or the IMO, has adopted the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the related Protocol of 1978 relating thereto, which has been updated through various amendments (collectively, "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 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.

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.
 
We believe that all our vessels are currently compliant in all material respects with these regulations. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems and could adversely affect our business, results of operations, cash flows and financial condition.
 

 
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Safety Management System Requirements
 
The IMO has 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. We believe that all our vessels are in substantial compliance with SOLAS and LL Convention standards.
 
Under Chapter IX of SOLAS, the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention, or ISM Code, our operations are also subject to environmental standards and requirements. The ISM Code requires the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety management system that we and our technical manager have developed for compliance with the ISM Code. The failure of a shipowner 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.
 
The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel's management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management certificate unless its manager has been awarded a document of compliance, issued by classification societies under the authority of each flag state, under the ISM Code. Starbulk S.A. has obtained documents of compliance for their offices and safety management certificates for all of our vessels for which the certificates are required by the IMO. The document of compliance, or the DOC, and safety management certificate, or the SMC, are renewed every five years but the DOC is subject to audit verification annually and the SMC at least every 2.5 years.  As of the date of this filing, each of our vessels is ISM code-certified.
 
Pollution Control and Liability Requirements
 
The IMO has negotiated international conventions that impose liability for oil pollution in international waters and the territorial waters of the signatory to such conventions. For example, IMO adopted an 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 become effective 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. To date, there has not been sufficient adoption of this standard for it to take force.  However, 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 1,500-5,000 cubic meters, or after such date in 2016, for vessels with ballast water capacity of greater than 5,000 cubic meters. If mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers. Although we do not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact of such a requirement on our operations.
 
Many countries have ratified and follow the liability plan adopted by the IMO and set out in 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 this convention 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. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by the IMO.
 

 
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The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability on shipowners 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.
 
IMO regulations also require owners and operators of vessels to adopt shipboard oil pollution emergency plans and/or shipboard marine pollution emergency plans for noxious liquid substances in accordance with the guidelines developed by the IMO.
 
Compliance Enforcement
 
The flag state, as defined by the United Nations Convention on Law of the Sea, has overall responsibility for implemening and enforceing a broad range of international maritime regulations with respect to all ships granted the right to fly its flag. The "Shipping Industry Guidelines on Flag State Performance" evaluates and reports on flag states based on factors such as sufficiency of infrastructure, ratification, implementation, and enforcement of principal international maritime treaties and regulations, supervision of statutory ship surveys, casualty investigations and participation at IMO and ILO meetings. All of our vessels are flagged in the Marshall Islands.  Marshall Islands flagged vessels have historically received a good assessment in the shipping industry. We recognize the importance of a credible flag state and do not intend to use flags of convenience or flag states with poor performance indicators.Noncompliance with the ISM Code or other IMO regulations may subject the shipowner or bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code by the applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively. As of the date of this report, each of our vessels is ISM Code certified. However, there can be no assurance that such certificate will be maintained.
 
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 U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response, Compensation and Liability Act
 
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all "owners and operators" whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States' territorial sea and its 200 nautical mile exclusive economic zone. 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.  Although OPA is primarily directed at oil tankers (which are not operated by us), it also applies to non-tanker ships with respect to the fuel oil, or bunkers, used to power such ships. CERCLA also applies to 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:
 

 
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·
Injury to, destruction or loss of, or loss of use of, natural resources and the costs of assessment thereof;
 
 
·
Injury to, or economic losses resulting from, the destruction of real and personal property;
 
 
·
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;
 
 
·
loss of subsistence use of natural resources that are injured, destroyed or lost;
 
 
·
lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources;
 
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.
 
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 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.
 
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.
 
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 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.
 
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.
 

 
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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.  Some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states, which have enacted such legislation, have not yet issued implementing regulations defining vessels owners' responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call. We believe that we are in substantial compliance with all applicable existing state requirements. In addition, we intend to comply with all future applicable state regulations in the ports where our vessels call.
 
Other Environmental Initiatives
 
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances 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. In addition, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.
 
The U.S. Environmental Protection Agency, or 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, authorizing discharges incidental to operations of commercial vessels. The draft permit also 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 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, and the Coast Guard has proposed new ballast water management standards and practices, including limits regarding ballast water releases.  As of November 2011, the Office of Management and Budget continues to review this proposed rule.  Compliance with the EPA and the U.S. Coast Guard regulations could require the installation of equipment on our vessels 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 of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or 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, or SIPs, designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Several SIPs regulate 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.
 
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.  Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims.  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.
 

 
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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 Marine Environmental Protection Committee of the IMO, the United Nations agency for maritime safety and the prevention of pollution, 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. 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, the EPA is considering a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels. 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.
 
International Labour Organization

The International Labour 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.
 
Vessel Security Regulations
 
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002, or the MTSA, came into effect. 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 EPA.
 
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 Facility Security Code, or the ISPS Code. The ISPS Code is designed to enhance the security of  ports and ships against terrorism. After July 1, 2004, 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;
 

 
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·
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 a ship security plan;
 
 
·
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, the ship may be detained at port until it obtains an ISSC, or it may be expelled from port, or refused entry at port.
 
The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt from MTSA vessel security measures non-U.S. vessels that have on board, as of July 1, 2004, a valid ISSC attesting to the vessel's compliance with SOLAS security requirements and the ISPS Code. Our managers intend to implement the various security measures addressed by MTSA, SOLAS and the ISPS Code, and we intend that our fleet will comply with applicable security requirements. We have implemented the various security measures addressed by the MTSA, SOLAS and the ISPS Code.
 
Inspection by Classification Societies
 
Every oceangoing vessel must be "classed" by a classification society. The classification society certifies that the vessel is "in class", signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
 
The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
 
For maintenance of the class certification, 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. Upon a shipowner's request, 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.
 

 
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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. Vessels under five years of age can waive drydocking in order to increase available days and decrease capital expenditures, provided the vessel is inspected underwater.
 
Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a "recommendation" which must be rectified by the 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 which is a member of the International Association of Classification Societies. All our vessels are certified as being "in class" by RINA, ABS and NKK, major classification societies.  All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard purchase contracts and memorandum of agreement. If the vessel is not certified on the date of closing, we have no obligation to take delivery of the vessel.
 
Risk of Loss and Liability Insurance
 
The operation of any drybulk vessel includes risks such as mechanical and structural failure, hull damage, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, piracy, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental incidents, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of vessels trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for shipowners and operators trading in the United States market.
 
We maintain hull and machinery insurance, war risks insurance, protection and indemnity cover, and freight, demurrage and defense cover for our fleet in amounts that we believe to be prudent to cover normal risks in our operations. However, we may not be able to achieve or maintain this level of coverage throughout a vessel's useful life. Furthermore, while we believe that the insurance coverage that we will obtain is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.
 
Hull & Machinery and War Risks Insurance
 
We maintain marine hull and machinery and war risks insurance, which include the risk of actual or constructive total loss, for all of our vessels. Our vessels are each covered up to at least fair market value with deductibles of $100,000—$150,000 per vessel per incident. We also maintain increased value coverage for most of our vessels. Under this increased value coverage, in the event of total loss of a vessel, we will be able to recover the sum insured under the increased value policy in addition to the sum insured under the hull and machinery policy. Increased value insurance also covers excess liabilities which are not recoverable under our hull and machinery policy by reason of under insurance.
 
Protection and Indemnity Insurance
 
Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, which insure liabilities to third parties in connection with our shipping activities. This includes third-party liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Our P&I coverage is subject to and in accordance with the rules of the P&I Association in which the vessel is entered. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or "clubs." Our coverage is limited to approximately $6.5 billion, except for pollution which is limited $1 billion and passenger and crew which is limited to $3 billion.
 

 
40

 

 
Our current protection and indemnity insurance coverage for pollution is $1 billion per vessel per incident. The thirteen P&I Associations that comprise the International Group insure approximately 90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's liabilities. Each P&I Association has capped its exposure to this pooling agreement at $6.5 billion. As a member of a P&I Association which is a member of the International Group, we are subject to calls payable to the associations based on the group's claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I Associations comprising the International Group.
 
Permits and Authorizations
 
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our vessels. The kinds of permits, licenses and certificates required depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel's crew and the age of a vessel. We have been able to obtain all permits, licenses and certificates currently required to permit our vessels to operate. Additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase the cost of us doing business.
 
C.           Organizational structure
 
As of December 31, 2011, we are the sole owner of all of the outstanding shares of the subsidiaries listed in Note 1 of our consolidated financial statements under Item 18. "Financial Statements."
 
D.           Property, plant and equipment
 
We do not own any real property. Our interests in the vessels in our fleet are our only material properties. See Item 4. "Information on the Company—Our Fleet."
 
Item 4A.  Unresolved Staff Comments
 
None.
 
Item 5.    Operating and Financial Review and Prospects
 
Overview
 
The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with "Item 3. Key Information – Selected Financial Data", "Item 4. Information on the Company" and our historical consolidated financial statements and accompanying notes included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth in the section entitled "Risk Factors" and elsewhere in this report.
 
We are an international company providing worldwide transportation solutions in the drybulk sector through our vessels-owning subsidiaries for a broad range of customers of major and minor bulk cargoes including iron ore, coal, grain, cement, and fertilizer, along worldwide shipping routes.
 

 
41

 
 
A.           Operating Results
 
Factors Affecting Our Results of Operations
 
We currently charter eight of our vessels on medium to long-term time charters with an average remaining term of approximately 2.6 years, and employ six of our vessels in the spot market.  Under our time charters, the charterer typically pays us a fixed daily charterhire rate and bears all voyage expenses, including the cost of bunkers (fuel oil) and port and canal charges. We remain responsible for paying the chartered vessel's operating expenses, including the cost of crewing, insuring, repairing and maintaining the vessel, the costs of spares and consumable stores, tonnage taxes and other miscellaneous expenses, and we also pay commissions to affiliated and unaffiliated ship brokers and to in-house brokers associated with the charterer for the arrangement of the relevant charter. In addition, we are also responsible for the drydocking costs related to our vessels.  During 2012 one of our Capesize vessels and two of our Supramax vessels are scheduled to undergo their routine drydocking surveys.
 
In addition, we had a contract of affreightment, or COA, to transport approximately 1.35 million metric tons of iron ore between Brazil and China for Vale International S.A., or Vale, which was completed in February of 2012.  COAs relate to the carriage of multiple cargoes over the same route and enables the COA holder to nominate different ships to perform individual voyages. Essentially, it constitutes a number of voyage charters to carry a specified amount of cargo during the term of the COA, which usually spans a number of years. All of the vessel's operating, voyage and capital costs are borne by the ship owner. The freight rate is generally set on a per cargo ton basis.  Although the majority of vessels in our fleet are employed on medium- to long-term time charters ranging from one to nine years, we may employ these and our other vessels under COAs, bareboat charters, in the spot market or in drybulk carrier pools in the future.
 
We believe that the important measures for analyzing trends in the results of operations consist of the following:
 
 
·
Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in that period.
 
 
·
Ownership days are the total calendar days each vessel in the fleet was owned by us for the relevant period.
 
 
·
Available days are the total calendar days the vessels were in possession for the relevant period after subtracting for off-hire days relating to drydocking or special or intermediate surveys.
 
 
·
Voyage days are the total days the vessels were in our possession for the relevant period after subtracting all off-hire days incurred for any reason (including off-hire for drydocking, major repairs, special or intermediate surveys).
 
 
·
Fleet utilization is calculated by dividing voyage days by available days for the relevant period and takes into account the dry-docking periods.
 

 

 

 

 

 
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The following table reflects our voyage days, ownership days, fleet utilization and TCE rates for the periods indicated:
 
 
(TCE rates expressed in U.S. dollars)
   
Year
Ended
December
31, 2009
     
Year
 Ended
December
31, 2010
     
Year
Ended
December
 31, 2011
 
Average number of vessels
    11.97       10.81       12.26  
Number of vessels in operation (as of the last day of the periods reported)
    11       11       15  
Average age of operational fleet (in years)
    10.0       10.4       10.6  
Ownership days
    4,370       3,945       4,475  
Available days
    4,240       3,847       4,377  
Voyage days for fleet
    4,117       3,829       4,336  
Fleet Utilization
    97 %     99 %     99 %
Time charter equivalent rate
  $ 29,450     $ 26,859     $ 19,989  

 
Time Charter Equivalent (TCE)
 
Time charter equivalent rate, or TCE rate, is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE rate is determined by dividing voyage revenues (net of voyage expenses and amortization of fair value of above/below market acquired time charter agreements) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract, as well as commissions. TCE rate 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 charters, time charters and bareboat charters) under which the vessels may be employed between the periods because charterhire rates for vessels on voyage charters are generally not expressed in per-day amounts while charterhire rates for vessels on time charters generally are expressed in such amounts.  We included below TCE revenues, a non-GAAP measure, as we believe it provides additional meaningful information in conjunction with voyage revenues, the most directly comparable U.S. GAAP measure, because it assists our management in making decisions regarding the deployment and use of our vessels and in evaluating their financial performance. Investors also consider TCE rate in order to compare our Company's earnings performance with our peer group of companies. Our calculation of TCE may not be comparable to that reported by other companies.
 
The following table reflects the calculation of our TCE rates and reconciliation of TCE revenue to voyage revenue as reflected in the consolidated statement of operations:
 
 
                         
(In thousands of U.S. Dollars, except as otherwise stated)
   
Year
Ended December 31, 2009
     
 Year
Ended December 31, 2010
     
 Year
Ended December 31, 2011
 
Voyage revenues
 
 
142,351
 
 
 
121,042
 
 
 
106,912
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Voyage expenses
 
 
(15,374
)
 
 
(16,839
)
 
 
(22,429
)
Amortization of fair value of above/below market acquired time charter agreements
 
 
(5,735
)
 
 
(1,360
)
 
 
2,187
 
 
Time Charter equivalent revenues
 
 
121,242
 
 
 
102,843
 
 
 
86,670
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Voyage days for fleet
 
 
4,117
 
 
 
3,829
 
 
 
4,336
 
Time charter equivalent (TCE) rate (in U.S. Dollars)
 
 
29,450
 
 
 
26,859
 
 
 
19,989
 


 
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Voyage Revenues
 
Voyage revenues are driven primarily by the number of vessels in our fleet, the number of voyage days and the amount of daily charterhire, or time charter equivalent, that our vessels earn under period charters, which, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and disposals, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in drydock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels, levels of supply and demand in the seaborne transportation market and other factors affecting spot market charter rates for vessels.
 
Vessels operating on time charters for a certain period of time provide more predictable cash flows over that period of time, but can yield lower profit margins than vessels operating in the spot charter market during periods characterized by favorable market conditions. Vessels operating in the spot charter market generate revenues that are less predictable but may enable us to capture increased profit margins during periods of improvements in charter rates although we would be exposed to the risk of declining vessel rates, which may have a materially adverse impact on our financial performance. If we employ vessels on period time charters, future spot market rates may be higher or lower than the rates at which we have employed our vessels on period time charters.
 
Vessel Voyage Expenses
 
Voyage expenses include hire paid for chartered-in vessels, port and canal charges, fuel (bunker) expenses and brokerage commissions payable to related and third parties.
 
Our voyage expenses primarily consist of hire paid for chartered-in vessels and commissions paid for the chartering of our vessels.
 
Vessel Operating Expenses
 
Vessel operating expenses include crew wages and related costs, the cost of insurance and vessel registry, expenses relating to repairs and maintenance, the costs of spares and consumable stores, tonnage taxes, regulatory fees, technical management fees and other miscellaneous expenses. Other factors beyond our control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for crew wages, bunkers and insurance, may also cause these expenses to increase. Technical vessel managers established an operating expense budget for each vessel and perform the day-to-day management of the vessels. Star Bulk Management monitors the performance of each of the technical vessel managers by comparing actual vessel operating expenses with the operating expense budget for each vessel. We are responsible for the costs of any deviations from the budgeted amounts.
 
Depreciation
 
We depreciate our vessels on a straight-line basis over their estimated useful lives determined to be 25 years from the date of their initial delivery from the shipyard. Depreciation is calculated based on a vessel's cost less the estimated residual value.
 
General and Administrative Expenses
 
We incur general and administrative expenses, including our onshore personnel related expenses, legal and accounting expenses.
 
Interest and Finance Costs
 
We defer financing fees and expenses incurred upon entering into our credit facility and amortize them to interest and financing costs over the term of the underlying obligation using the effective interest method.
 
Interest income
 
We earn interest income on our cash deposits with our lenders.
 

 
44

 
Inflation
 
Inflation does not have a material effect on our expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase our operating, voyage, administrative and financing costs.
 
Foreign Exchange Fluctuations
 
Please see Item 11.  "Quantitative and Qualitative Disclosures about Market Risk."
 
Special or Intermediate Survey and Drydocking Costs
 
We utilize the direct expense method, under which we expense all drydocking costs as incurred.
 
Lack of Historical Operating Data for Vessels before Their Acquisition by Us
 
Consistent with shipping industry practice, other than inspection of the physical condition of the vessels and examinations of classification society records, there is no historical financial due diligence process when we acquire vessels. Accordingly, we do not obtain the historical operating data for the vessels from the sellers because that information is not material to our decision to make vessel acquisitions, nor do we believe it would be helpful to potential investors in our stock in assessing our business or profitability. Most vessels are sold under a standardized agreement, which, among other things, provides the buyer with the right to inspect the vessel and the vessel's classification society records. The standard agreement does not give the buyer the right to inspect, or receive copies of, the historical operating data of the vessel. Prior to the delivery of a purchased vessel, the seller typically removes from the vessel all records, including past financial records and accounts related to the vessel. In addition, the technical management agreement between the seller's technical manager and the seller is automatically terminated and the vessel's trading certificates are revoked by its flag state following a change in ownership.
 
Consistent with shipping industry practice, we treat the acquisition of a vessel (whether acquired with or without charter) as the acquisition of an asset rather than a business, which we believe to be in accordance with applicable U.S. GAAP and Commission rules. Where a vessel has been under a voyage charter, the vessel is delivered to the buyer free of charter, and it is rare in the shipping industry for the last charterer of the vessel in the hands of the seller to continue as the first charterer of the vessel in the hands of the buyer. All of the vessels in our current fleet have been acquired with time charters attached, with the exception of the Star Sigma, the Star Aurora, the Star Omicron, the Star Borealis and the Star Polaris. In most cases, when a vessel is under time charter and the buyer wishes to assume that charter, the vessel cannot be acquired without the charterer's consent and the buyer entering into a separate direct agreement (called a "novation agreement") with the charterer to assume the charter. The purchase of a vessel itself does not transfer the charter because it is a separate service agreement between the vessel owner and the charterer.
 
Where we identify any intangible assets or liabilities associated with the acquisition of a vessel, we allocate the purchase price of acquired tangible and intangible assets based on their relative fair values. Where we have assumed an existing charter obligation or entered into a time charter with the existing charterer in connection with the purchase of a vessel with the time charter agreement at charter rates that are less than market charter rates, we record a liability, based on the difference between the assumed charter agreement rate and the market charter rate for an equivalent charter agreement. Conversely, where we assume an existing charter obligation or enter into a time charter with the existing charterer in connection with the purchase of a vessel with the charter agreement at charter rates that are above prevailing market charter rates, we record an asset, based on the difference between the market charter rate and the assumed contracted charter rate for an equivalent vessel. This determination is made at the time the vessel is delivered to us, and such assets and liabilities are amortized to revenue over the remaining period of the charter.
 
45

 
 
When we purchase a vessel and assume or renegotiate a related time charter, we must take the following steps before the vessel will be ready to commence operations:
 
 
·
obtain the charterer's consent to us as the new owner;
 
 
·
obtain the charterer's consent to a new technical manager;
 
 
·
in some cases, obtain the charterer's consent to a new flag for the vessel;
 
 
·
arrange for a new crew for the vessel, and where the vessel is on charter, in some cases, the crew must be approved by the charterer;
 
 
·
replace all hired equipment on board, such as gas cylinders and communication equipment;
 
 
·
negotiate and enter into new insurance contracts for the vessel through our own insurance brokers;
 
 
·
register the vessel under a flag state and perform the related inspections in order to obtain new trading certificates from the flag state;
 
 
·
implement a new planned maintenance program for the vessel; and
 
 
·
ensure that the new technical manager obtains new certificates for compliance with the safety and vessel security regulations of the flag state.
 
The following discussion is intended to help you understand how acquisitions of vessels affect our business and results of operations.
 
Our business is comprised of the following main elements:
 
 
·
employment and operation of our drybulk vessels; and
 
 
·
management of the financial, general and administrative elements involved in the conduct of our business and ownership of our drybulk vessels.
 
The employment and operation of our vessels require the following main components:
 
 
·
vessel maintenance and repair;
 
 
·
crew selection and training;
 
 
·
vessel spares and stores supply;
 
 
·
contingency response planning;
 
 
·
onboard safety procedures auditing;
 
 
·
accounting;
 
 
·
vessel insurance arrangement;
 
 
·
vessel chartering;
 
 
·
vessel security training and security response plans (ISPS);
 
 
46

 
 
 
·
obtain ISM certification and audit for each vessel within the six months of taking over a vessel;
 
 
·
vessel hire management;
 
 
·
vessel surveying; and
 
 
·
vessel performance monitoring.
 
The management of financial, general and administrative elements involved in the conduct of our business and ownership of our vessels requires the following main components:
 
 
·
management of our financial resources, including banking relationships (i.e., administration of bank loans and bank accounts);
 
 
·
management of our accounting system and records and financial reporting;
 
 
·
administration of the legal and regulatory requirements affecting our business and assets; and
 
 
·
management of the relationships with our service providers and customers.
 
The principal factors that affect our profitability, cash flows and shareholders' return on investment include:
 
 
·
rates and periods of charterhire;
 
 
·
levels of vessel operating expenses;
 
 
·
depreciation and amortization expenses;
 
 
·
financing costs; and
 
 
·
fluctuations in foreign exchange rates.
 
Critical Accounting Policies
 
We make certain estimates and judgments in connection with the preparation of our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
 
Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions. We have described below what it believes will be the most critical accounting policies that involve a high degree of judgment and the methods of their application.
 
 

 
47

 
 
Impairment of long-lived assets: We follow guidance related to Impairment or Disposal of Long-lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, we should evaluate the asset for an impairment loss. Measurement of the impairment loss is based on the fair value. In this respect, management regularly reviews the carrying amount of the vessels on vessel by vessel basis when events and circumstances indicate that the carrying amount of the vessels might not be recoverable.  As of December 31, 2009, 2010 and 2011, we performed an impairment review of our vessels due to the global economic downturn and the prevailing conditions in the shipping industry.  We compared undiscounted cash flows to the carrying values for our vessels to determine if the assets were impaired. The undiscounted projected net operating cash flows for each vessel are determined by considering the charter revenues from existing time charters for the fixed vessel days and an estimated daily time charter equivalent for the unfixed days (based on the most recent ten year historical average of similar size vessels for the period thereafter) over the remaining estimated life of the vessel net of brokerage commissions, expected outflows for vessel's maintenance and vessel operating expenses. For vessels over twenty years old the current FFA rates are also taken under consideration for the expected time charters rates, since these vessels are closer to the end of their useful lives. Our management's subjective judgment is required in making assumptions that are used in forecasting future operating results used in this method.  Such judgment is based on historical trends as well as future expectations regarding future charter rates, vessel operating expenses and fleet utilization that were applied over the remaining useful life of the vessel, which is assumed to be 25 years from the delivery of the vessel from the shipyard.  Expected expenditures for scheduled vessels' maintenance and vessels' operating expenses are based on our budgeted figures and adjusted annually for inflation rate of 2%. The estimated salvage value of the vessels is $200 per light weight ton.  These estimates are consistent with the plans and forecasts used by management to conduct our business.  As a result of this analysis, we determined that the carrying amount of the Star Sigma and the Star Ypsilon was not recoverable as of December 31, 2011 and thus an impairment loss, amounting to $62.0 million was recognized.
 
Vessel Acquisitions:  Vessels are stated at cost, which consists of the purchase price and any material expenses incurred upon acquisition, such as initial repairs, improvements, delivery expenses and other expenditures to prepare the vessel for its initial voyage. Financing costs incurred during the construction period of the vessels are also capitalized and included in the vessels' cost.
 
Depreciation: The cost of each of our vessels is depreciated beginning when the vessel is ready for its intended use, on a straight-line basis over the vessel's remaining economic useful life, after considering the estimated residual value. Management estimates the useful life of our vessels to be 25 years from the date of initial delivery from the shipyard. When regulations place limitations over the ability of a vessel to trade on a worldwide basis, its remaining useful life is adjusted at the date such regulations are adopted. Depreciation expense is calculated based on cost less the estimated residual scrap value. We estimate scrap value by taking the cost of steel times the weight of the ship noted in lightweight ton, or lwt. There was no change in this estimate during the years ending December 31, 2009, 2010 and 2011 and we believe there will be no change in the near future.
 
Fair value of above/below market acquired time charter:  We record all identified tangible and intangible assets or liabilities associated with the acquisition of a vessel, at fair value.  Fair value of above or below market acquired time charters is determined by discounting the difference between the existing charter rates in the acquired time charter agreements with the market rates for equivalent time charter agreements prevailing at the time the foregoing vessels are delivered, for the period until the expiration of the time charter. The discounted cash flow model of the Company is based on an estimate of the subject company's weighted-average cost of capital (WACC).  The present values representing the fair value of the above or below market acquired time charters are recorded as an intangible asset or liability, respectively.  Such intangible asset or liability is recognized ratably as an adjustment to revenues over the remaining term of the assumed time charter.
 
Due to early time charter terminations the remaining unamortized balances of the intangible assets and liabilities associated with such below or above market acquired time charters where recognized as "Gain on time charter agreement termination" or "Loss on time charter agreement termination" in the consolidated statements of operations for years ended December 31, 2009 and 2011. Refer to note 7 of our consolidated financial statements.
 
Equity incentive plan awards: Stock-based compensation represents vested and non-vested restricted shares granted to employees and directors, for their services as directors, and is included in "General and administrative expenses" in the consolidated statements of operations. These shares are measured at their fair value equal to the market value of our common stock on the grant date. The shares that do not contain any future service vesting conditions are considered vested shares and a total fair value of such shares is expensed on the grant date. The shares that contain a time-based service vesting conditions are considered non-vested shares on the grant date and a total fair value of such shares is recognized using the accelerated method.
 
 

 
48

 
We currently assume that all non-vested shares will vest. We do not include estimated forfeitures in determining the total stock-based compensation expense because we estimate the forfeitures of non-vested shares to be immaterial and we did not have forfeitures in the past. We will, however, re-evaluate the reasonableness of our assumption at each reporting period. We pay dividends on all issued shares regardless of whether they have vested and there is an obligation of the employee to return the dividend when employment ceases, prior to the date that shares vest.  The dividends declared and paid on issued and non -vested shares that are expected to vest are charged to retained earnings.
 
Trade accounts receivable, net:  The amount shown as trade accounts receivable, at each balance sheet date, includes estimated recoveries from each voyage or time charter. At each balance sheet date, the Company provides for doubtful accounts on the basis of specific identified doubtful receivables.
 
Results of Operations
 
Year ended December 31, 2011 compared to the year ended December 31, 2010
 
Voyage revenues: Voyage revenues for the years ended December 31, 2011 and 2010, were approximately $106.9 million and $121.0 million, respectively.  This decrease is mainly due to lower average TCE rates, a non-U.S. GAAP measure representing time charter equivalent daily cash rates earned from chartering of our vessels. During the year ended December 31, 2011, we earned $19,989 TCE rate per day as compared to $26,859 TCE rate per day for the year ended December 31, 2010 due to the decrease in prevailing charter rates at which our vessels were chartered. Charterhire rates were volatile in 2010 and 2011 and continue to be volatile. During 2010, the BDI reached a high on May 26, 2010 of 4,209 and fell to a low of 1,700 on July 15, 2010. During 2011, the BDI went from a low of 1,043 on February 4, 2011 to a high of 2,173 on November 14, 2011. On February 28, 2012, the index was at 738. This decrease is primarily due to increases in vessel supply. In addition, for the year ended December 31, 2011, total voyage revenues decreased by $2.2 million due to the amortization of the fair value of above/below market acquired time charters compared to an increase of $1.4 million total voyage revenues due to the amortization of the fair value of below market acquired time charters for the year ended December 31, 2010.
 
Voyage expenses: For the years ended December 31, 2011 and 2010, voyage expenses, were approximately $22.4 million and $16.8 million, respectively. Consistent with drybulk industry practice, we paid broker commissions ranging from 1.25% to 5.75% of the total daily charterhire rate of each charter to ship brokers associated with the charter, depending on the number of brokers involved with arranging the charter. Voyage expenses also consist of hire paid for chartered-in vessels, port, canal and fuel costs. There was an increase of $5.6 million in voyage expenses in 2011 as compared to 2010. The increase is mainly due to higher charter-in expenses during 2011 amounting to $17.9 million compared to $11.2 million for the year 2010 due to the fact that the voyage days of the chartered-in vessels, that served shipments under a Contract of Affreightment (COA), in 2011, were more than the respective days in 2010. The last shipment under the COA was completed in February 2012. All other voyage expenses such as bunkers, port expenses and commissions were lower in 2011, amounting to $4.5 million in aggregate as compared to $5.6 million in 2010, due to the decrease in the voyage days of our owned vessels during the year 2011 compared to the same period in 2010.
 
Vessel operating expenses: For the years ended December 31, 2011 and 2010, our vessel operating expenses were approximately $25.2 million and $22.3 million, respectively. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. The increase is mainly due to the increase in the average number of vessels that operated during the year ended December 31, 2011, compared to the same period of 2010.
 
Drydocking expenses: For the year ended December 31, 2011 and 2010, our drydocking expenses were $3.1 million and $6.6 million, respectively. The decrease is mainly due to the fact that in 2011, we had four Supramax vessels that underwent their periodic drydocking surveys, excluding the Star Big which underwent drydocking the same day that the vessel was delivered to us and the respective expenses were capitalized, as compared to 2010 when we had one Capesize vessel and three Supramax vessels that underwent their periodic drydocking survey.
 
 

 
49

 
Depreciation: We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on the cost of the vessel less its estimated residual value, which is estimated at $200 per lwt, at the date of the vessel's acquisition. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life. For the years ended December 31, 2011 and 2010, we recorded vessel depreciation charge of approximately $50.2 million and $46.9 million, respectively. The increase was primarily due to the increase in the average number of our vessels that operated during the year ended December 31, 2011 compared to the same period of 2010.
 
Vessel impairment loss: During the year ended December 31, 2011, we recognized an impairment loss of $62.0 million. We test for impairment of its long lived assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Due to unfavorable market conditions prevailing at the end of the reporting period that led to declining vessel values and charter rates, we performed an impairment analysis for all the vessels in its fleet by comparing undiscounted cash flows to the carrying values of vessels. As a result of this analysis we recorded an impairment loss to the book value of the oldest Capesize vessels in our fleet, the Star Sigma (built 1991) and the Star Ypsilon (built 1991), since the values of these vessels were considered to be non-recoverable.
 
On January 18, 2010, we agreed to sell the Star Beta, a vessel from our initial fleet, to a third party for a contracted sales price of $22.0 million.  We delivered this vessel to its new owners on July 7, 2010.  Star Beta was classified as vessel held for sale during the first quarter of 2010 which resulted in an impairment loss of $34.9 million as the vessel was recorded at the lower of its carrying amount or fair value less cost to sell.
 
Loss on derivative instruments: During the years ended December 31, 2011 and 2010, the change in fair market value and the settlements of our freight and bunker derivatives resulted in a loss of $0.4 million and a loss of $2.1 million, respectively. The decrease is mainly due to the fact that we reduced our exposure in derivative instruments during the year ended December 31, 2011, compared to the same period of 2010.
 
Gain on time charter agreement termination: During the year ended December 31, 2011:
 
 
i.
The Star Cosmo, with a time charter at a gross daily charter rate of $35,615 for the period from February 10, 2009 until May 1, 2011, was redelivered to us early on February 17, 2011. We recognized a gain for this time charter agreement termination of $0.273 million, which relates to the write-off of the unamortized fair value of below market acquired time charter on vessel redelivery date and a gain amounting to $0.324 million, which represents the deferred revenue from the terminated time charter contract.
 
 
ii.
The Star Omicron was on time charter at a gross daily charter rate of $43,000 per day for the period from April 22, 2008 until February 22, 2011 and was redelivered earlier to the Company on January 17, 2011. We recognized a gain amounting to $1.21 million representing the cash consideration received from its charterers relating to the early termination of this charter party.
 
 
iii.
The Star Sigma, with a time charter at a gross daily charter rate of $38,000 for the period from March 1, 2009 until October 29, 2013, was redelivered to us early on December 31, 2011.  We recognized a gain amounting to $0.2 million which represents the deferred revenue from the terminated time charter contract.  During the year ended December 31, 2010, we did not record any gain on time charter agreement termination.
 
Other operational gain: For the year ended December 31, 2011, we recognized a gain of $9.0 million regarding the settlement in 2011 of a commercial claim against Oldendorff Gmbh & Co. KG of Germany, the former charterer of the vessel Star Beta, and a gain of $0.3 million regarding a hull & machinery claim. For the year ended December 31, 2010, we recognized a gain of $21.6 million in connection with the settlement of a commercial claim, related to the vessel Star Ypsilon and an amount of $5.0 million from the sale of a 45% interest in the future proceeds related to the settlement of several commercial claims.
 
 

 
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Other operational loss: During the year ended December 31, 2011 we paid $4.05 million to the third party relating to the settlement of one of the legal claims included in the above mentioned agreement. This amount is presented in "Other operational loss" in our consolidated statements of operations.

Bad debt expense: For the year ended December 31, 2011, we recognized an aggregate provision for bad debts amounting to $3.1 million, which consists of $1.9 million related to unpaid hire from the charterer of two of our vessels, the Star Kappa and the Star Epsilon and an amount of $0.5 million related to unpaid hire from the charterer of two of our vessels, the Star Gamma and the Star Cosmo.  In addition, we recognized bad debt expense, amounting to $0.7 million in connection to the settlement, on February 20, 2012, of a commercial claim with the charterer of the vessel Star Beta which qualifies as an adjusting subsequent event. Bad debt expense for the year ended December 31, 2010 amounting to $2.1 million is related to unpaid hire from a charterer of the vessel Star Alpha that was written off during the year 2010.
 
General and administrative expenses: For the years ended December 31, 2011 and 2010, we incurred general and administrative expenses of approximately $12.5 million and $15.4 million, respectively. For the year ended December 31, 2011, our general and administrative expenses consist of salaries and other related costs of the executive officers and other employees ($7.6 million), office renovation costs and rents, legal, accounting costs and consultancy fees, regulatory compliance costs and other miscellaneous expenses ($3.5 million) and costs related to non-vested stock grants under the equity incentive plan ($1.4 million).  For the year ended December 31, 2010, our general and administrative expenses include the salaries and other related costs of the executive officers and other employees ($3.7 million), our office renovation costs and rents, legal, accounting costs and consultancy fees, regulatory compliance costs ($5.2 million) and costs related to non-vested stock grants under the equity incentive plan ($6.5 million).The decrease is attributed to the lower incentive plan charge in  2011 compared to 2010 by $5.1 million offset by the cash severance payment of $2.8 million related to the resignation of Company's former Chief Executive Officer and former Chief Financial Officer that took place in 2011 and an amount of $0.3 million related to expenses for an aborted public offering during the second quarter of 2011 that was not completed.
 
Interest and finance cost: For the year ended December 31, 2011 and 2010, our interest and finance costs under our term loan facilities totaled approximately $5.2 million and $5.9 million, respectively. This decrease is mainly due to lower average outstanding debt during 2011 amounting to $214.3 million compared to $220.1 million for 2010, other than the debt used for the financing of our two newbuilding vessels, the interest of which was capitalized until the delivery of the vessels and due to higher interest capitalized from the general debt in 2011 of $0.8 million compared to $0.6 million in 2010.
 
Interest and other income: For the years ended December 31, 2011 and 2010, interest income was $0.7 million and $0.5 million, respectively.
 
Loss on debt extinguishment: For the year ended December 31, 2011 we recorded an amount of $0.3 million under "Loss on debt extinguishment" in our consolidated statements of operations, regarding the write off of the unamortized balance of deferred financing fees relating to Piraeus loan facilities, which were fully repaid on October 6, 2011.
 
Year ended December 31, 2010 compared to the year ended December 31, 2009
 
Voyage revenues: Voyage revenues for the years ended December 31, 2010 and 2009, were approximately $121.0 million and $142.4 million, respectively.  This decrease is mainly due to lower average TCE rates, a non-US GAAP measure representing time charter equivalent daily cash rates earned from chartering of our vessels, during the year ended December 2010 as compared to the year ended December 31, 2009. During the year ended December 31, 2010, we earned $26,859 TCE rate per day as compared to $29,450 TCE rate per day for the year ended December 31, 2009 due to the decrease in prevailing charter rates at which a number of our vessels were chartered. Charterhire rates were volatile in 2009 and 2010 and continue to be volatile. During 2009, the BDI remained volatile, reaching a low of 772 on January 5, 2009 and a high of 4,661 on November 19, 2009. The BDI decreased to 2,571 on February 12, 2010 primarily due to uncertainty in the freight markets. The BDI experienced a modest recovery again in 2010 based on strong demand for commodities from Asia and a recovering global market. During 2010, the BDI went from a high on May 26, 2010 of 4,209 and fell to a low of 1,700 on July 15, 2010.  At December 31, 2010, the index was 1,773. This decrease is primarily due to increases in vessel supply. Furthermore the average number of vessels operated decreased from 11.97 in 2009 to 10.81 in 2010. In addition, total voyage revenues for the year ended December 31, 2010 increased by $1.4 million due to the amortization of the fair value of below market acquired time charters compared to an increase of $5.7 million to total voyage revenues due to the amortization of the fair value of above/below market acquired time charters for the year ended December 31, 2009.
 

 
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Voyage expenses: For the years ended December 31, 2010 and 2009, voyage expenses, were approximately $16.8 million and $15.4 million, respectively. Consistent with drybulk industry practice, we paid broker commissions ranging from 0% to 2.50% of the total daily charterhire rate of each charter to ship brokers associated with the charter, depending on the number of brokers involved with arranging the charter. Voyage expenses also consist of hire paid for chartered-in vessels, port, canal and fuel costs. There was an increase of $1.4 million in voyage expenses in 2010 as compared to 2009. The increase is mainly due to higher vessel charter-in  expenses during 2010 which amounted to $11.2 million as compared to $6.7 million for the year 2009. All other voyage expenses such as bunkers, port expenses and commissions were lower in 2010 amounting to $5.6 million in aggregate as compared to $8.7 million in 2009.
 
Vessel operating expenses: For the years ended December 31, 2010 and 2009, our vessel operating expenses were approximately $22.3 million and $30.2 million, respectively. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. The decrease is mainly due to more cost efficient in-house management which was fully implemented during the year ended December 31, 2010 and the decrease in the number of vessels that operated during the year ended December 31, 2010, compared to the same period of 2009.
 
Drydocking expenses: For the year ended December 31, 2010 and 2009, our drydocking expenses were $6.6 million and $6.1 million, respectively. Four vessels underwent their periodic drydocking survey during both years ended December 31, 2010 and 2009.
 
Depreciation: We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on the cost of the vessel less its estimated residual value, which is estimated at $200 per lwt, at the date of the vessel's acquisition. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life. For the years ended December 31, 2010 and 2009, we recorded vessel depreciation charges of approximately $46.9 million and $58.3 million, respectively. The decrease was primarily due to the operation of a smaller fleet.
 
Vessel impairment loss: On January 18, 2010, we agreed to sell the Star Beta, a vessel from our initial fleet, to a third party for a contracted sales price of $22.0 million.  We delivered this vessel to its purchasers on July 7, 2010.  Star Beta was classified as asset held for sale during the first quarter of 2010 which resulted in an impairment loss of $34.9 million as the vessel was recorded at the lower of its carrying amount or fair value less cost to sell.
 
On July 21, 2009, we agreed to sell the Star Alpha, a vessel from our initial fleet, to a third party for a contracted sale price of $19.9 million.  We delivered this vessel to its purchasers on December 21, 2009.  Star Alpha was classified as asset held for sale during the third quarter of 2009 which resulted in an impairment loss of $75.2 million as the vessel was recorded at the lower of its carrying amount or fair value less cost to sell.
 
Loss on derivative instruments: During the years ended December 31, 2010 and 2009, the change in fair market value and the settlements of our FFAs and bunker swaps resulted in a loss of $2.1 million and a loss of $2.2 million, respectively.
 
Gain on time charter agreement termination: During the year ended December 31, 2010, we did not record any gain on time charter agreement termination. For the year ended December 31, 2009, the Gain on time charter agreement termination consisted of:
 
 
 
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i)
The Star Alpha, which was on time charter at a gross daily charter rate of $47,500 for the period from January 9, 2008 until March 18, 2009, was redelivered to us by its charterers approximately two months prior to the earliest redelivery date per the time charter agreement. Under the accounting provisions applicable to intangible assets, we recognized a gain on a time charter agreement termination of $10.1 million, which relates to the unamortized fair value of below market acquired time charter on the vessel redelivery date.
 
 
ii)
 
The Star Theta was also redelivered to us by its charterers on March 15, 2009, approximately twenty-nine days prior to the earliest redelivery date per the time charter agreement. The Company, under the accounting provisions applicable to intangible assets, recognized a gain for this time charter agreement termination of $0.8 million, which relates to the write-off of the unamortized fair value of below market acquired time charter on vessel redelivery. In addition, we received $0.3 million from its charterers relating to the early termination of this charter party, which was also recorded as a gain on time charter termination in the consolidated statements of operations for the year ended December 31, 2009.
 
 
iii)
The Star Ypsilon, which was on time charter at an average gross daily charter rate of $91,932 for the period from September 18, 2008 until July 4, 2011, was redelivered to us by its charterers prior to the earliest redelivery date per the time charter agreement. We recognized a gain amounting to $5.0 million which represents the deferred revenue from the terminated time charter contract.
 
Loss on time charter agreement termination: During the year ended December 31, 2010 we did not record any loss on time charter agreement termination. For the year ended December 31, 2009, the Loss on time charter agreement termination consisted of:
 
 
i)
The Star Kappa, which was on time charter at an average gross daily charter rate of $25,500 for the period from April 12, 2009 until July 12, 2014, was redelivered to us by its charterers prior to the earliest redelivery date per the time charter agreement. We recognized the loss on time charter agreement termination of $0.9 million, which relates to the unamortized fair value of above-market acquired time charter on the vessel redelivery date.
 
 
ii)
The Star Ypsilon, which was on time charter at an average gross daily charter rate of $91,932 for the period from September 18, 2008 until July 4, 2011, was redelivered to us by its charterers prior to the earliest redelivery date per the time charter agreement. We recognized the loss on time charter agreement termination of $10.1 million, which relates to the unamortized fair value of above-market acquired time charter on the vessel redelivery date.
 
Other operational gain: For the year ended December 31, 2010, we recognized a gain of $21.6 million from a claim settlement in 2010, related to the early termination of the time charter of the vessel Star Ypsilon that occurred in July 2009 and $5 million from our sale of a 45% interest in the future proceeds related to the settlement of several commercial claims.
 
Bad debt expense: The amount of $2.1 million is related to unpaid hire from a charterer of the vessel Star Alpha that was written off during the year 2010.
 
General and administrative expenses: For the years ended December 31, 2010 and 2009, we incurred general and administrative expenses of approximately $15.4 million and $8.7 million, respectively. This increase is mainly due to higher professional fees and increased stock-based compensation expenses. For the year ended December 31, 2010, our general and administrative expenses include the salaries and other related costs of the executive officers and other employees ($3.7 million), rents, legal, accounting costs and consultancy fees, regulatory compliance costs and other miscellaneous expenses ($5.2 million) and costs related to non-vested stock grants under the equity incentive plan ($6.5 million).  For the year ended December 31, 2009, our general and administrative expenses include the salaries and other related costs of the executive officers and other employees ($3.3 million), our office renovation costs and rents, legal, accounting costs and consultancy fees, regulatory compliance costs ($3.6 million) and costs related to non-vested stock grants under the equity incentive plan ($1.8 million).
 
 
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Interest and finance cost: For the year ended December 31, 2010 and 2009, our interest and finance costs under our term loan facilities totaled approximately $5.9 million and $9.9 million, respectively. This decrease is mainly due to lower weighted average interest rates in 2010 amounting to 2.66% as compared to 3.33% for 2009, as well as due to lower average loan balances outstanding in 2010 amounting to $220.1 million as compared to $273.1 million for 2009.
 
Interest and other income: For the years ended December 31, 2010 and 2009, interest income was $0.5 million and $0.8 million, respectively.
 
B.           Liquidity and Capital Resources
 
Our principal source of funds has been equity provided by our shareholders, long-term borrowing, and operating cash flow.  Our principal use of funds has been capital expenditures to establish and grow our fleet, maintain the quality of our drybulk carriers, comply with international shipping standards and environmental laws and regulations, fund working capital requirements, make interest and principal repayments on outstanding loan facilities, and pay dividends.
 
Our short-term liquidity requirements relate to servicing our debt, payment of operating costs, funding working capital requirements and maintaining cash reserves against fluctuations in operating cash flows and paying cash dividends when permissible. Sources of short-term liquidity include our revenues earned from our charters.
 
We believe that our current cash balance and our operating cash flows will be sufficient to meet our 2012 liquidity needs despite that the drybulk charter market declined sharply beginning in the third quarter of 2008 and has remained at depressed levels throughout 2009, 2010, 2011 and 2012 to date. Our results of operations have been and may in the future be adversely affected if market conditions do not improve.
 
Our medium- and long-term liquidity requirements include funding the equity portion of any possible investments in additional vessels and repayment of long-term debt balances. Sources of funding for our medium- and long-term liquidity requirements include new loans or equity issuance or vessel sales. As of December 31, 2011, we had outstanding borrowings of $266.1 million. As of March 23, 2012, we had outstanding borrowings of $250.1 million under our loan facilities. If the current conditions in the credit market continue, we may not be able to refinance our existing credit facilities or secure new credit facilities at all or on terms agreeable to us.
 
We may fund possible growth through our cash balances, operating cash flows, additional long-term borrowing and the issuance of new equity.  Our practice has been to acquire drybulk carriers using a combination of funds from operations and bank debt secured by mortgages on our drybulk carriers. Our business is capital-intensive and its future success will depend on our ability to maintain a high-quality fleet through the acquisition of newer drybulk carriers and the selective sale of older drybulk carriers. These acquisitions will be principally subject to management's expectation of future market conditions as well as our ability to acquire drybulk carriers on favorable terms.  As of December 31, 2011, we had no capital commitments to acquire vessels.
 
As of December 31, 2011, we had cash and cash equivalents of approximately $15.1 million excluding $29.7 million of current and non-current restricted cash due to minimum liquidity covenants, cash collateral requirements contained in our loan agreements and margin related to our freight derivatives.
 
Cash Flows
 
For the year ended December 31, 2011, cash and cash equivalents increased to $15.1 million compared to $12.8 million for the year ended December 31, 2010. Our working capital is equal to current assets minus current liabilities, including the current portion of long-term debt.  Our working capital deficit was $20.8 million for the year ended December 31, 2011, compared to a working capital deficit of $19.3 million for the year ended December 31, 2010.
 
 
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If our working capital deficit continues to exist, lenders may be unwilling to provide future financing or will provide future financing at significantly increased interest rates, which will negatively affect our earnings, liquidity and capital position.
 
For the year ended December 31, 2011, current and non-current restricted cash increased to $29.7 million compared to $25.6 million as of December 31, 2010. For further information please see Item 5. "Operating and Financial Review and Prospects – Senior Secured Credit Facilities".  We believe that our current cash balance and our operating cash flow will be sufficient to meet our liquidity needs over the next twelve months.
 
Year ended December 31, 2011 compared to year ended December 31, 2010
 
Net Cash Provided By Operating Activities
 
Net cash provided by operating activities for the years ended December 31, 2011 and 2010 was $50.6 million and $87.9 million, respectively. The decrease in cash provided by operating activities was primarily due to a decrease in cash flows generated by the operation of our fleet due to lower average TCE rates as a result of the decline in the drybulk vessel shipping industry despite an increase in the average number of vessels to 12.26 for the year ended December 31, 2011 from 10.81 for the year ended December 31, 2010. During the year ended December 31, 2011, we earned $19,989 TCE rate per day compared to $26,859 TCE rate per day for the year ended December 31, 2010 mainly due to lower charter rates for most of our vessels as imposed by the market. In accordance with the terms of the charter parties for the vessels operating under time charters, hire is received approximately 15 days in advance, whereas freight voyages are settled during or at the end of the voyage. Collection terms have not changed compared to prior years.  Furthermore, vessel operating expenses increased by approximately 13% for the year ended December 31, 2011 mostly due to operation of a larger fleet. During the year ended December 31, 2010, we received $21.6 million in connection to the settlement of a commercial claim related to the vessel Star Ypsilon and $5.0 million from the sale of a 45% interest in future proceeds related to the settlement of several other commercial claims.  During the year ended December 31, 2011, (i) we received $9.0 million related to a commercial claim, (ii) we paid $4.05 million to a third party based on the agreement to sell the 45% interest in future proceeds of several commercial claims as stated above; and (iii) paid a severance to our former Chief Executive Officer and our former Chief Financial Officer of $2.3 million and $0.5 million, respectively.
 
Net Cash Used In Investing Activities
 
Net cash used in investing activities for the years ended December 31, 2011 and 2010 was $122.3 million and $60.2 million, respectively.  Net cash used in investing activities for the year ended December 31, 2011 consisted primarily of (i) $29.3 million related to the acquisition of two secondhand Capesize vessels, the Star Big and the Star Mega, plus cash consideration of $23.1 million paid for the acquisition of the above market time charters attached to the Star Big and Star Mega; (ii) $67.0 million related to the acquisition and delivery of two newbuilding vessels, the Star Borealis and the Star Polaris; and (iii) a net increase of $4.0 million in restricted cash, offset by insurance proceeds amounting to $1.1 million.  Net cash used in investing activities for the year ended December 31, 2010 consisted primarily of (i) $44.1 million related to the acquisition of the Star Aurora; (ii) an aggregate of $43.5 million relating to yard installment payments for our two newbuilding vessels, offset by a net decrease in restricted cash of $7.0 million, the proceeds from the sale of the Star Beta of $20.3 million and insurance proceeds amounting to $0.1 million.
 
Net Cash Provided By/Used In Financing Activities
 
Net cash provided by financing activities for the year ended December 31, 2011 was $74.0 million and net cash used in financing activities for the year ended December 31, 2010 was $55.1 million. For the year ended December 31, 2011, net cash provided by financing activities consisted of loan installment payments of $101.5 million, cash dividend payments of $14.4 million, financing fees of $1.5 million, offset by loan proceeds of $162.8 million and net proceeds from our underwritten public offering of $28.6 million. For the year ended December 31, 2010, net cash used in financing activities consisted of loan installment payments of $68.4 million, cash dividend payments of $12.4 million and financing fees of $0.3 million offset by proceeds from the new loan related to the acquisition of the Star Aurora of $26.0 million.
 
Year ended December 31, 2010 compared to year ended December 31, 2009
 
Net Cash Provided By Operating Activities
 
Net cash provided by operating activities for the years ended December 31, 2010 and 2009, was $87.9 million and $65.9 million, respectively. Cash flows generated by the operation of our fleet increased mainly due to $21.6 million in cash collected in connection with the settlement of the Star Ypsilon claim in 2010 and our sale of a 45% interest in the future proceeds related to the settlement of several commercial claims for $5 million. Furthermore, vessels operating expenses decreased by approximately 26% for the year ended December 31, 2010 mainly due to more efficient in-house management and the operation of a smaller fleet. This was offset by the operation of a lower average number of vessels of 10.81 for the year ended December 31, 2010 compared to 11.97 for the year ended December 31, 2009 and lower average TCE rates, as a result of the decline in the drybulk vessel shipping industry. During the year ended December 31, 2010, we earned $26,859 TCE rate per day as compared to $29,450 TCE rate per day for the year ended December 31, 2009.
 

 
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Net Cash Used In Investing Activities
 
Net cash used in investing activities for the years ended December 31, 2010 and 2009 was $60.2 million and $1.4 million, respectively.  Net cash used in investing activities for the year ended December 31, 2010, was primarily due to increased vessel costs mainly related to the acquisition of the Star Aurora amounting to $44.1 million plus installments related to our two newbuildings amounting to $43.5 million in aggregate and offset by a net decrease in restricted cash amounting to $7.0 million, by the proceeds from the sale of Star Beta amounting to $20.3 million and insurance proceeds amounting to $0.1 million. Net cash used in investing activities for the year ended December 31, 2009, was primarily a result of the proceeds from the sale of vessel Star Alpha amounting to $19.1 million offset by an increase in restricted cash of $20.5 million relating to the waivers obtained for existing loan agreements.
 
Net Cash Used In Financing Activities
 
Net cash used in financing activities for the year ended December 31, 2010 and 2009 was $55.1 million and $53.8 million respectively. For the year ended December 31, 2010, net cash used in financing activities consisted of loan installment payments amounting to $68.4 million, cash dividend payments of $12.4 million and financing fees amounting to $0.3 million offset by proceeds from new loans related to the acquisition of Star Aurora amounting to $26.0 million. For the year ended December 31, 2009, net cash used in financing activities consisted of loan installment payments amounting to $49.3 million,  cash dividend payments of $6.2 million and financing fees paid of $0.2 million offset by cash provided from our directors' dividend reinvestment of $1.9 million.
 
Senior Secured Credit Facilities
 
As of March 23, 2012 and December 31, 2011, we had total indebtedness of $250.1 million and $266.1 million, respectively.
 
Commerzbank AG Loan Facility dated December 27, 2007, as amended
 
On December 27, 2007, we entered into a loan agreement with Commerzbank AG, Commerzbank, in the amount of up to $120.0 million to partially finance the acquisition of the secondhand vessels the Star Gamma, the Star Delta, the Star Epsilon, the Star Zeta, and the Star Theta, which also provide the security for this loan agreement.  Under the terms of this loan facility, the repayment of $120.0 million is over a nine year term and divided into two tranches. The first tranche of up to $50.0 million is repayable in twenty-eight consecutive quarterly installments commencing twenty-seven months after the initial borrowings but no later than March 31, 2010 as follows: (i) the first four installments amount to $2.25 million each, (ii) the next thirteen installments amount to $1.0 million each (iii) the remaining eleven installments amount to $1.3 million each and a final balloon payment of $13.7 million is payable together with the last installment. The second tranche of up to $70.0 million is repayable in twenty-eight consecutive quarterly installments commencing twenty-seven months after draw down but no later than March 31, 2010 as follows: (i) the first four installments amount to $4.0 million each (ii) the remaining twenty-four installments amount to $1.75 million each and a final balloon payment of $12.0 million is payable together with the last installment. The loan bears interest at LIBOR plus a margin at a minimum of 0.8% per annum to a maximum of 1.25% per annum depending on whether the aggregate drawdown ranges from 60% up to 75% of the aggregate market value of the 'initial fleet'.
 

 
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This loan contains financial covenants, including requirements to maintain (i) a minimum liquidity of $10.0 million or $1.0 million per vessel, whichever is greater (ii) a market value adjusted equity ratio of not less than 25%, as defined therein and (iii) an aggregate market value of the vessels mortgaged as security under this loan agreement of not less than (a) 125% of the then outstanding borrowings for the first three years and (b) 135% of the then outstanding borrowings thereafter.
 
On June 10, 2009, we entered into a supplemental agreement with Commerzbank. Under the terms of this agreement during the waiver period from December 31, 2008 to January 31, 2010, the security cover requirement was reduced to 111% from 125%.  In connection with this waiver, as further security for this facility, we agreed to provide a first preferred mortgage on the Star Alpha and a pledge account containing $6.0 million.  During the waiver period LIBOR will be adjusted to the cost of funds, the interest spread was increased to 2%, and the payment of dividend and the repurchase of our common shares and warrants are subject to the prior written consent of the lenders.
 
On January 27, 2010, we entered into a second supplemental agreement with Commerzbank (we were committed to this agreement as of December 24, 2009). Under the terms of this agreement during the waiver period from February 1, 2010 to June 30, 2010 and from July 1, 2010 to January 31, 2011 the security cover was amended to 111% and 118%, respectively and 135% thereafter. Pursuant to the waiver agreement (i) the bank consented to the sale of the Star Alpha; (ii) we are permitted to pay dividends not exceeding $0.05 per share in each quarter; (iii) the minimum liquidity requirement was reduced from $1.0 million to $0.7 million per vessel (total minimum liquidity of $7.2 million); and (iv) the amount deposited in the pledged account was increased by $1.3 million from $6.0 million to $7.3 million. The interest spread was also maintained to 2.00% per annum for the duration of the waiver period. After the waiver period the minimum liquidity increased from $0.7 million to $1.0 million for each vessel in our fleet and the pledged amount of $7.3 million was released.
 
We determined that as of December 31, 2011, the market value of the vessels mortgaged under the $120.0 million loan agreement with Commerzbank AG was less than 135% of the amount of those borrowings as required. On January 30, 2012, we paid our next regularly scheduled quarterly payment of $2.75 million and as a result maintained the required ratio of the market value of the vessels mortgaged as collateral to the outstanding borrowings of not less than 135%.
 
As of March 23, 2012 and December 31, 2011, we had outstanding borrowings of $81.3 million and $84.0 million, respectively, which is the maximum amount of borrowings permitted under this loan facility.
 
Commerzbank AG Loan Facility dated September 3, 2010
 
On September 3, 2010 we entered into a loan agreement with Commerzbank AG in the amount of up to $26.0 million with a term of six years to partially finance the acquisition cost of the secondhand vessel, Star Aurora which was provided as security for this loan agreement.  The loan is payable in twenty-four consecutive quarterly installments of $950,000 commencing three months after the drawdown, and a final balloon payment of $3.2 million payable together with the last installment. The loan bears interest at LIBOR plus a margin of 2.6%.
 
The loan contains financial covenants, including requirements to maintain (i) a minimum liquidity of $10.0 million or $1.0 million per vessel, whichever is greater (ii) the market value adjusted equity ratio shall not be less than 25%, as defined therein (iii) an actual pledged amount of $ 0.65 million for this vessel that was increased to $1.0 million when the  pledged amount of $7.3 million was released after the waiver period, pursuant to the terms of the second supplemental agreement with Commerzbank signed on January 27, 210 as stated above and (iv) an aggregate market value of the vessel mortgaged as security under this loan agreement not less than 135% at all times.
 
We were in compliance with the financial covenants as of December 31, 2011.
 

 
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As of March 23 2012 and December 31, 2011, we had outstanding borrowings of $20.3 million and $21.3 million, respectively, which is the maximum amount of borrowings permitted under this loan facility.
 
Credit Agricole Corporate and Investment Bank Loan Facility dated January 20, 2011
 
On January 20, 2011, we entered into a term loan agreement with Credit Agricole Corporate and Investment Bank for up to $70.0 million to partially finance the construction costs of the Star Borealis and the Star Polaris, which have also been provided as security for this loan agreement. The loan is divided into two tranches.  One tranche relates to the Star Borealis and is repayable commencing three months following its delivery in twenty eight consecutive quarterly installments of $0.4854 million plus a final balloon payment, which is payable together with the last installment of $19.558 million.  The other tranche relates to Star Polaris and is repayable commencing three months following the delivery of the respective vessel in twenty eight consecutive quarterly installments of $0.4997 million plus a final balloon payment, which is payable together with the last installment of $20.134 million.  The loan bears interest at LIBOR plus a margin of 2.7% per annum.
 
The loan agreement contains financial covenants, including requirements to maintain (i) a minimum liquidity of $10.0 million or $500,000 per fleet vessel, whichever is greater (ii) the total indebtedness of the borrower over the market value of all vessels owned shall not be greater than 0.7:1 (iii) a pledged amount of $0.5 million per mortgaged vessel and (iv) the minimum asset cover ratio shall not be less than (a) 120% during the first two years from delivery of each vessel and (b) 125% of the then outstanding borrowings thereafter, unless a mortgaged vessel is subject to an approved charter with an unexpired duration at least 18 months, in which case the relevant percentage shall be 120% for the duration of such approved charter. We were in compliance with the financial covenants as of December 31, 2011.
 
As of March 23, 2012 and December 31, 2011, we had outstanding borrowings of $65.8 million and $66.8 million, respectively, which is the maximum outstanding borrowing permitted under this loan facility.
 
ABN AMRO Bank N.V. Loan Facility dated July 21, 2011
 
On July 21, 2011, we entered into a 31.0 million senior secured credit facility with ABN AMRO Bank N.V. to partially finance the purchase of the Star Big and the Star Mega.  As of December 31, 2011, the total amount of this loan facility has been drawn down.
 
Under this facility, our wholly-owned subsidiaries that own the Star Big and Star Mega will be the borrowers and Star Bulk Carriers Corp. will be the corporate guarantor.
 
This facility is repayable in 18 consecutive quarterly installments commencing three months after the initial borrowings. The first 14 installments amount to $1.4 million each, the remaining four installments amount to $625,000 each and a final balloon payment of $8.9 million will be payable together with the last installment. This new senior secured credit facility will bear interest at LIBOR plus a margin of 2.9%.
 
This facility contains financial covenants and other customary covenants, including requirements that we will maintain (i) a ratio of total indebtedness to the aggregate charter free fair market value of the vessels of no greater than 70%, (ii) a ratio of EBITDA to interest expense, of not less than 3.0:1.0, (iii) minimum liquidity of $10.0 million or $750,000 per vessel for each of the vessels in our fleet, whichever is greater, (iv) a minimum market adjusted net worth of not less than $100.0 million and (v) a maintenance reserve account up to $1.5 million which may only be used for the payment of the dry-docking of the vessel Star Mega. This facility also requires the borrowers to maintain an aggregate charter-free fair market value of the Star Big and the Star Mega of at least 135% of the amount outstanding under the facility until three months prior to the expiration of the existing time charter for the Star Mega and 150% thereafter.
 
Pursuant to this facility, among other things, we are required to charter the Star Big and the Star Mega to a multinational mining group.  The facility also requires that earnings from these vessels be applied first to amounts due under this facility. In addition, the facility requires the Company's Chairman, including members of his immediate family, to maintain minimum levels of beneficial ownership of our outstanding common shares.
 
 

 
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We determined as of December 31, 2011 that the market value of the vessels mortgaged under our $31.0 million loan agreement with ABN AMRO Bank was less than the minimum required security cover, which requires the value of the mortgaged vessel plus any additional security to be at least 135% of outstanding borrowings.  On January 26, 2012, we entered into an agreement with ABN AMRO Bank to amend (i) the minimum required security cover covenant from 135% to 100% and (ii) the leverage ratio, which is defined as the total liabilities of the borrower over the market value of all vessels owned, increased from 70% to 75%. Both amendments cover the period from January 26, 2012 to January 31, 2013.  In addition, the interest margin was increased from 2.9% to 3.4% per annum during this period.
 
As of March 23, 2012 and December 31, 2011, we had outstanding borrowings of $28.2 million and $29.6 million, respectively, which is the maximum amount of borrowings permitted under this loan facility.
 
HSH Nordbank AG Loan Facility dated October 3, 2011
 
On October 3, 2011, we entered into a $64.5 million secured term loan agreement with HSH Nordbank AG, which has up to a five year term and bears interest at LIBOR plus a margin.   The borrowings under this new loan agreement, together with $5.3 million of own cash, were used to repay in full the outstanding borrowings under our two loan facilities with Piraeus Bank.
 
Under this facility, our wholly-owned subsidiaries that own certain of our vessels will be the borrowers and Star Bulk Carriers Corp. will be the corporate guarantor.
 
This senior secured term loan facility consists of two tranches. The first tranche amounts to $48.5 million and is repayable in 20 consecutive installments of $1.250 million each and a final balloon payment of 23.5 million. The second tranche amounts to $16.0 million and is repayable in 12 consecutive installments of $1.333 million each. The first tranche bears interest at LIBOR or cost of funds whichever is greater, plus a margin of 2.75% and the second tranche bears interest at LIBOR or cost of funds whichever is greater, plus a margin of 3.00%.

This new loan agreement contains financial covenants including requirements that we will maintain (i) a ratio of indebtedness to the aggregate charter free fair market value of the vessels of no greater than 75% until December 31, 2013 and 70% thereafter, (ii) a minimum market adjusted net worth of not less than $100.0 million, (iii) a minimum interest coverage ratio of not less than 2.0:1.0; (iv)  a pledged amount of $2.0 million or $0.4 million for each pledged vessel under this credit facility, whichever is greater (v)  minimum liquidity of $10.0 million (vi) an actual pledged amount of $6.5 million representing the shortfall between the drawdown amount and the fair value of the collateral vessels on the drawdown date and (vii) an aggregate market value of the vessels mortgaged as security under this loan agreement should not be less than (a) 125% of the then outstanding borrowings until the repayment of second tranche and (b) 167% of the then outstanding borrowings thereafter.
We were in compliance with the financial covenants contained in this credit facility as of December 31, 2011.
 
As of March 23, 2012 and December 31, 2011, we had outstanding borrowings of $54.6 million and $61.9 million, respectively, which is the maximum amount of borrowings permitted under this loan facility.
 
Under our credit facilities, we have pledged the shares of our vessel owning subsidiaries that serve as security for those credit facilities, as follows: (i) a first priority pledge of the shares of the Star Gamma LLC, Star Delta LLC, Star Epsilon LLC, Star Zeta LLC and Star Theta LLC with respect to our term loan facility Commerzbank AG dated December 27, 2007, (ii) a first priority pledge of the shares of Star Aurora LLC and a second priority pledge of shares of Star Delta LLC, Star Epsilon LLC, Star Gamma LLC, Star Theta LLC and Star Zeta LLC with respect to our term loan facility with Commerzbank AG dated September 3, 2010, and (iii) a first priority pledge of the shares of the Star Borealis LLC and Star Polaris LLC with respect to our term loan facility with Credit Agricole Corporate and Investment Bank dated January 20, 2011(.iv) a first priority pledge of the shares of the Star Big LLC and Star Mega LLC with respect to our term loan facility with ABN AMRO Bank N.V dated July 21, 2011 These subsidiaries are subject to certain restrictions under our credit facilities, including among others, restrictions on the transfer of such subsidiary's property.
 

 
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Dividend Payments
 
Our dividend payments for 2011 are as follows: (i) in February 2011, we declared a dividend of $0.05 per outstanding share of our common stock for the three months ending December 31, 2010 that was paid on March 9, 2011 to shareholders of record as of March 4, 2011, (ii) in May 2011 we declared a dividend of $0.05 per outstanding share of our common stock for the three months ending March 31, 2011 that was paid on May  31, 2011 to shareholders of record as of May 23, 2011, (iii) in August 2011, we declared a dividend of $0.05 per outstanding share of our common stock for the three months ended June 30, 2011 that was paid on August 30, 2011 to shareholders of record as of August 25, 2011,  (iv) in November 2011, we declared a dividend of $0.05 per outstanding share of our common stock for the three months ending September 30, 2011 that was paid on December 2, 2011 to shareholders of record as of November 29, 2011, and (v) in February , 2012 we declared a dividend of $0.015 per outstanding share of our common stock for the three months ending December 31, 2011 that was paid on March 6, 2012 to shareholders of record as of February 28, 2012.
 
C.           Research and Development, Patents and Licenses
 
Not Applicable.
 
D.           Trend Information
 
Please see Item 5.A, "Operating Results Factors Affecting Our Results of Operations."
 
E.           Off-balance Sheet Arrangements
 
As of the date of this annual report, we do not have any off-balance sheet arrangements.
 
F.           Tabular Disclosure of Contractual Obligations
 
The following table presents our contractual obligations as of December 31, 2011
 

In thousands of Dollars
 
Payments due by period
 
Obligations
   
Total
       
Less than 1 year
(2012)
     
1-3 years
(2013 -2014)
     
 
3-5 years
(2015-2016)
     
More than 5 years (After January 1, 2017 )
 
Principal Loan Payments
    266,140       34,674       70,247       114,131       47,088  
Interest payments (1)
    33,050       8,553       13,350       8,408       2,739  
Operating lease obligation (2)
    894       78       156       156       504  
Total
    300,084       43,305       83,753       122,695       50,331  

 
 
 
  (1)  
Amounts shown reflect interest payments we expect to make with respect to our long term debt obligations. The interest payments reflect an assumed LIBOR based applicaple rate 0.58 % (the three month LIBOR rate as of December 31, 2011) plus the relevant margin of the applicable credit facility.
     
 
  (2)  
On July 4, 2011 Starbulk S.A., our in house vessel manager, entered into a 12-year lease agreement for office space with Combine Marine Inc., a company founded by our Chairman, with monthly rent payments of €5,000 ($6,470). This lease agreement may be terminated by Starbulk S.A after one year upon the payment of an amount equal to one months' rent.
     
 

 

 
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Our Fleet – Illustrative Comparison of Possible Excess of Carrying Value Over Estimated Charter-Free Market Value of Certain Vessels
 
In Item 5.A, "Critical Accounting Policies – Impairment of long-lived assets", we discuss our policy for impairing the carrying values of our vessels. During the past few years, the market values of vessels have experienced particular volatility, with substantial declines in many vessel classes.  As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below those vessels' carrying value, even though we would not impair those vessels' carrying value under our accounting impairment policy, due to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives would exceed such vessels' carrying amounts except for the carrying value of the vessels the Star Sigma and the Star Ypsilon, which was considered to be non-recoverable, since these vessels are the oldest vessels in Company's fleet and near to the end of their useful lives and an impairment charge of $62.0 million was recognized under "Vessel Impairment loss" in the accompanying consolidated statements of operations . The table set forth below indicates (i) the carrying value of each of our vessels as of December 31, 2011, (ii) the market value of each of our vessels as of December 31, 2011 (iii) which of our vessels we believe has a basic market value below its carrying value, and (iii) the difference between carrying value and market value represented by each vessel.  This aggregate difference represents the approximate analysis of the amount by which we believe we would have to reduce our net income if we sold all of such vessels in the current environment, on industry standard terms, in cash transactions, and to a willing buyer where we are not under any compulsion to sell, and where the buyer is not under any compulsion to buy.  For purposes of this calculation, we have assumed that the vessels would be sold at a price that reflects our estimate of their current basic market values. However, we are not holding our vessels for sale.
 
Our estimates of basic market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected would be certified in class without notations of any kind.  Our estimates are based on information available from various industry sources, including:
 
 
·
reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel values;
 
 
·
news and industry reports of similar vessel sales;
 
 
·
news and industry reports of sales of vessels that are not similar to our vessels where we have made certain adjustments in an attempt to derive information that can be used as part of our estimates;
 
 
·
approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;
 
 
·
offers that we may have received from potential purchasers of our vessels; and
 
 
·
vessel sale prices and values of which we are aware through both formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.
 
As we obtain information from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values are highly volatile; as such, our estimates may not be indicative of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them.
 
 
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Carrying Value as of December 31, 2011
 
Market Value  as of December 31, 2011
 
Difference between the Carrying Value  and the Market Value as of December 31, 2011
 
Vessel Name
 
Size
(dwt.)
 
Year Acquired
 
(in millions of U.S. dollars)
 
(in millions of U.S. dollars)
 
(in millions of U.S. dollars)
Star Aurora
 
171,199
2010
 
40.5*
 
28
 
12.5
Star Big
 
168,404
2011
 
15
 
17
 
(2.0)
Star Borealis
 
179,678
2011
 
54.6*
 
51
 
3.6
Star Mega
 
170,631
2011
 
13.3
 
15
 
(1.7)
Star Polaris
 
179,546
2011
 
55.2*
 
51
 
4.2
Star Sigma
 
184,403
2008
 
14.0**
 
14
 
0.0
Star Ypsilon
 
150,940
2008
 
11.5**
 
11.5
 
0.0
Star Cosmo
 
52,247
2008
 
62.3*
 
22.5
 
39.8
Star Delta
 
52,434
2008
 
50.5*
 
20.5
 
30.0
Star Epsilon
 
52,402
2007
 
52.4*
 
21.5
 
30.9
Star Gamma
 
53,098
2008
 
52.5*
 
22.5
 
30.0
Star Kappa
 
52,055