EX-99.1 2 d741354dex991.htm PROXY STATEMENT DATED JUNE 20, 2014 Proxy Statement dated June 20, 2014
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Exhibit 99.1

Proxy Statement


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LOGO

June 20, 2014

Dear Stockholders:

You are invited to attend a special meeting (the “Special Meeting”) of the stockholders of Star Bulk Carriers Corp. (the “Company” or “Star Bulk”), to be held on July 11, 2014, at the Hotel Grande Bretagne, Syntagma Square, Athens 10564, Greece at 11:00 a.m. (local time).

At the Special Meeting you will be asked to approve the Agreement and Plan of Merger, dated as of June 16, 2014 (as amended from time to time, the “Merger Agreement”) among Star Bulk, Star Synergy LLC, a Marshall Islands limited liability company and a wholly-owned subsidiary of Star Bulk (“Oaktree Holdco Merger Sub”), Star Omas LLC, a Marshall Islands limited liability company and a wholly-owned subsidiary of Star Bulk (“Pappas Holdco Merger Sub” and together with Oaktree Holdco Merger Sub, the “Merger Subs”), Oaktree OBC Holdings LLC, a Marshall Islands limited liability company controlled by investment funds managed by Oaktree Capital Management, L.P. (the “Oaktree Holdco”), Millennia Limited Liability Company, a Marshall Islands limited liability company controlled by certain immediate family members of Star Bulk non-Executive Chairman Mr. Petros Pappas, including Milena Maria Pappas, who is also one of our directors (the “Pappas Holdco” and, together with the Oaktree Holdco, the “Oceanbulk Holdcos”), Oaktree Dry Bulk Holdings LLC, a Marshall Islands limited liability company (the “Oaktree Seller”) and Millennia Holdings LLC, a Marshall Islands limited liability company (the “Pappas Seller” and, together with the Oaktree Seller, the “Sellers”), pursuant to which each of the Oceanbulk Holdcos will merge with and into one of the Merger Subs (the “Merger”), with the Merger Subs continuing as the surviving companies and wholly-owned subsidiaries of Star Bulk.

The Oceanbulk Holdcos collectively own all of the outstanding equity interests in Oceanbulk Shipping LLC, a Marshall Islands limited liability company (“Oceanbulk Shipping”) and Oceanbulk Carriers LLC, a Marshall Islands limited liability company (“Oceanbulk Carriers” and, together with Oceanbulk Shipping, “Oceanbulk”), which, through their subsidiaries, either own and operate a fleet of 12 dry bulk carrier vessels, with an average age as of May 31, 2014 of 5.3 years, including five Capesize vessels, two Post-Panamax vessels, three Kamsarmax vessels and two Supramax vessels and own contracts for the construction of 25 newbuilding dry bulk vessels with fuel efficiency specifications at shipyards in Japan and China. Currently, investment funds affiliated with the Oaktree Seller beneficially own approximately 19.6% of the outstanding common shares of Star Bulk and, indirectly through Oaktree Holdco, also beneficially own 90% of the equity interests in Oceanbulk. As part of the Merger, Star Bulk has agreed to acquire two Kamsarmax vessels (the “Heron Vessels”) from Heron Ventures Ltd. (the “Heron JV”), a joint venture in which Oceanbulk owns indebtedness that is convertible into 50% of the equity of the Heron JV, for an aggregate of 2,115,706 shares of common stock (“common shares”) of the Company (the “Heron Consideration”).

In addition, at the Special Meeting you will be asked to approve the Share Purchase Agreement, dated as of June 16, 2014 (as amended from time to time, the “Pappas Agreement”) among Star Bulk, Mirabel Shipholding & Invest Limited (“Mirabel”), Mirach Shipping Company Limited (“Mirach”) and Bluesea Invest and Holding Limited (together with Mirabel and Mirach, the “Pappas Entities”), entities controlled by certain members of the family of our non-Executive Chairman, Mr. Petros Pappas, including Milena Maria Pappas, who is also one of our directors, pursuant to which Star Bulk has agreed to, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, substantially concurrently with the completion of the Merger, acquire all of the issued and outstanding shares of Dioriga Shipping Co. (“Dioriga”) and Positive Shipping Company (“Positive Shipping”), which own and operate a dry bulk carrier vessel and a contract for the construction of a newbuilding drybulk carrier with fuel efficient specifications, respectively (such vessels being the “Pappas Vessels”, and the acquisition of the Pappas Entities being the “Pappas Companies Acquisition”).

Your vote is very important. Whether or not you plan to attend the Special Meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy over the Internet or by telephone. If you attend the Special Meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.


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If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive an aggregate of 48,395,766 common shares (the “Merger Consideration”), together with the Heron Consideration and certain distributions from the Heron JV, on the terms and subject to the conditions set forth in the Merger Agreement. The closing of the Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain of the Pappas Entities will receive 3,592,728 common shares (the “Pappas Consideration”). The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration, will represent 64.7% of the outstanding common shares immediately after the closing thereof.

By virtue of the Merger and the Pappas Companies Acquisition, the Company has agreed to assume, including by way of refinance, all of the outstanding indebtedness of Oceanbulk, Dioriga and Positive Shipping. The Company has also agreed to refinance the indebtedness of the Heron JV applicable to the Heron Vessels as of the date the Company acquires such Heron Vessels. If the Merger, including the acquisition of the Heron Vessels and the Pappas Vessels, had closed on March 31, 2014, we would have had total outstanding indebtedness of $383.99 million and the book value of our assets would have been $1,364.97 million.

Pursuant to resolutions of a Special Committee of the Company’s Board of Directors (the “Board”) consisting of two disinterested directors who are not officers, employees, representatives, agents or affiliates of the Sellers, the Oceanbulk Holdcos or the Pappas Entities, and who do not have an economic interest in the Sellers, the Oceanbulk Holdcos or the Pappas Entities (the “Special Committee”), the Special Committee unanimously determined that the Merger Agreement, the Pappas Agreement, and the transactions contemplated thereby (the “Transactions” and collectively with the Merger Agreement and the Pappas Agreement, the “Merger Agreement Proposal”) as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the stockholders of the Company, other than the Sellers and their respective affiliates (the “Unaffiliated Stockholders”). The Special Committee also unanimously declared advisable the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger, and unanimously recommended to the Board that the Merger Agreement Proposal be approved by the Board and submitted for a vote at a meeting of the Company’s stockholders. The Special Committee made its determination after consultation with its independent legal and financial advisors and consideration of a number of factors, including a fairness opinion presented to the Special Committee by its independent financial advisors.

Following the recommendation of the Special Committee, all of the members of the Board, other than Mr. Petros Pappas and Ms. Milena Maria Pappas, who recused themselves from the Board’s vote based on the reasons set forth below, pursuant to resolutions adopted at a meeting of the Board held on June 15, 2014, (i) determined that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the Unaffiliated Stockholders, (ii) approved, adopted and declared advisable the Merger Agreement, the Pappas Agreement and the Transactions as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration, (iii) resolved to recommend that the Merger Agreement Proposal be submitted at a meeting of the Company’s stockholders for approval and (iv) adopted the recommendation by the Special Committee that the Company’s stockholders approve the Merger Agreement Proposal. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board’s vote authorizing the Transactions due to their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities.

The Board, acting upon the unanimous recommendation of the Special Committee and after consultation with its independent legal and financial advisors and consideration of a number of factors including a fairness opinion presented by its independent financial advisors, has determined that the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger, the Pappas Companies Acquisition, the Merger Consideration, the Pappas Consideration and the Heron Consideration, are in the best interests of the Company and the Unaffiliated Stockholders, and has approved, adopted and declared advisable the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger, the Pappas Companies Acquisition, the Merger Consideration, the Pappas Consideration and the Heron Consideration, and recommends that you vote “FOR” the Merger Agreement Proposal.


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The Company is holding the Special Meeting so that our stockholders may vote with respect to the adoption of the Merger Agreement Proposal. The proposed Transactions are very important and will have a transformative impact on the capitalization, balance sheet, ownership and governance of the Company. The Transactions also include proposed agreements with affiliates of the Company and two of our Directors, Mr. Petros Pappas and Ms. Milena Maria Pappas, who have a financial interest in the Transactions and who, collectively with their affiliates, will own approximately 12.6% of the outstanding common shares after giving effect to the Transactions. Moreover, the Oaktree Seller and its affiliates will own approximately 61.3% of the outstanding common shares after giving effect to the Transactions. Because of these and other considerations, the Special Committee and the Board of Directors, other than Mr. Petros Pappas and Ms. Milena Maria Pappas, unanimously determined that the Company seek approval of the Unaffiliated Stockholders for the Merger Agreement Proposal in the manner set forth in the following paragraph. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board of Directors’ vote authorizing this transaction due to their financial interest in the Transactions and their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities. In addition, the Oaktree Seller, the Pappas Seller, and certain affiliates and related parties thereof (including Mr. Petros Pappas and Milena Pappas) agreed to voting restrictions, ownership limitations and standstill provisions, as the result of discussions between the Special Committee and other relevant parties, in order to mitigate the possibility that the transaction might be deemed a change of control of the Company for certain purposes.

Accordingly, the parties to the Merger Agreement and the Pappas Agreement have agreed to (i) seek the vote of the Company’s stockholders with respect to the Merger Agreement Proposal, and (ii) require that the approval of the Merger Agreement Proposal by the Company’s stockholders be a closing condition to the Transactions, which approval requires the affirmative vote of the holders of a majority of the common shares present (in person or by proxy) and voting at the Special Meeting. Each of the Sellers has agreed to cause themselves and their respective affiliates, including Ms. Milena Maria Pappas, to vote all common shares owned by them in favor of the Merger Agreement Proposal in the same proportion as the number of common shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders entitled to vote at the Special Meeting, or any postponement or adjournment thereof. This means that the voting rights of each of the Sellers, the Pappas Entities and their respective affiliates would effectively be redistributed pro rata among the Unaffiliated Stockholders entitled to vote at the Special Meeting.

Certain stockholders of the Company affiliated with Monarch Alternative Capital LP (the “Monarch Stockholders”), which collectively own approximately 20.9% of the outstanding common shares and represent 28.2% of Unaffiliated Stockholders, have entered into a voting agreement with the Sellers and Mirabel pursuant to which, among other things and subject to certain conditions, the Monarch Stockholders have agreed to vote their shares in favor of approval of the Merger Agreement Proposal (the “Voting Agreement”).

The Board recommends that you vote “FOR” the proposal to approve the Merger Agreement Proposal.

The Company will also transact any other business that may properly come before the Special Meeting, or any adjournment or postponement of the Special Meeting, by or at the direction of the Board.

The obligation of the Company to complete the Merger is subject to the satisfaction or waiver of substantial conditions set forth in the Merger Agreement, including, without limitation, the conditions specified above. The obligation of the Company to complete the Pappas Companies Acquisition is subject to the satisfaction or waiver of substantial conditions set forth in the Pappas Agreement, including, without limitation, the completion of the Merger.

The accompanying proxy statement provides you with detailed information about the Special Meeting, the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger. A copy of the Merger Agreement is attached as Annex A to the proxy statement. A copy of the Pappas Agreement is attached as Annex B to the proxy statement. We encourage you to carefully read the entire proxy statement and its annexes, including the Merger Agreement and the Pappas Agreement.


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If you have any questions or need assistance voting your shares, please call Advantage Proxy Inc., the Company’s proxy solicitor in connection with the Special Meeting, toll-free at (877) 870-8565 or if you are a bank or broker, (206) 870-8565.

Sincerely,

LOGO

Spyros Capralos

Chief Executive Officer, President and Director

The accompanying proxy statement is dated June 20, 2014, and is first being mailed to the Company’s stockholders on or about June 20, 2014.


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LOGO

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on July 11, 2014

Dear Stockholder:

You are cordially invited to attend a special meeting (the “Special Meeting”) of the stockholders of Star Bulk Carriers Corp. (the “Company” or “Star Bulk”), to be held on July 11, 2014, at Hotel Grande Bretagne, Syntagma Square, Athens 10564, Greece at 11:00 a.m.(local time), for the following purposes:

To consider and vote on a proposal to approve:

(i) the Agreement and Plan of Merger, dated as of June 16, 2014, (as amended from time to time, the “Merger Agreement”), among Star Bulk, Star Synergy LLC, a Marshall Islands limited liability company and a wholly-owned subsidiary of Star Bulk (“Oaktree Holdco Merger Sub”), Star Omas LLC, a Marshall Islands limited liability company and wholly-owned subsidiary of Star Bulk (“Pappas Holdco Merger Sub” and, together with Oaktree Holdco Merger Sub, the “Merger Subs”), Oaktree OBC Holdings LLC, a Marshall Islands limited liability company controlled by investment funds managed by Oaktree Capital Management, L.P. (the “Oaktree Holdco”), Millennia Limited Liability Company, a Marshall Islands limited liability company controlled by certain immediate family members of Star Bulk non-Executive Chairman Mr. Petros Pappas, including Milena Maria Pappas, who is also one of our directors (the “Pappas Holdco” and, together with the Oaktree Holdco, the “Oceanbulk Holdcos”), Oaktree Dry Bulk Holdings LLC, a Marshall Islands limited liability company (the “Oaktree Seller”) and Millennia Holdings LLC, a Marshall Islands limited liability company (the “Pappas Seller” and, together with the Oaktree Seller, the “Sellers”), pursuant to which each of the Oceanbulk Holdcos will merge with and into one of the Merger Subs (the “Merger”), with the Merger Subs continuing as the surviving companies and wholly-owned subsidiaries of Star Bulk;

(ii) the Share Purchase Agreement, dated as of June 16, 2014 (as amended from time to time, the “Pappas Agreement”) among Star Bulk, Mirabel Shipholding & Invest Limited (“Mirabel”), Mirach Shipping Company Limited (“Mirach”) and Bluesea Invest and Holding Limited (together with Mirabel and Mirach, the “Pappas Entities”), entities controlled by certain members of the family of our non-Executive Chairman, Mr. Petros Pappas, including Milena Maria Pappas, one of our directors, pursuant to which Star Bulk has agreed to, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, substantially concurrently with the completion of the Merger, acquire all of the issued and outstanding shares of Dioriga Shipping Co. (“Dioriga”) and Positive Shipping Company (“Positive Shipping”), which own and operate a dry bulk carrier vessel and a contract for the construction of a newbuilding drybulk carrier with fuel efficient specifications, respectively (such vessels being the “Pappas Vessels” and the acquisition of the Pappas Vessels being the “Pappas Companies Acquisition”); and

(iii) the transactions contemplated by each of the Merger Agreement and the Pappas Agreement (the “Transactions” and collectively with the Merger Agreement and the Pappas Agreement, the “Merger Agreement Proposal”).

The Oceanbulk Holdcos collectively own all of the outstanding equity interests in Oceanbulk Shipping LLC, a Marshall Islands limited liability company (“Oceanbulk Shipping”) and Oceanbulk Carriers LLC, a Marshall Islands limited liability company (“Oceanbulk Carriers” and, together with Oceanbulk Shipping, “Oceanbulk”), which, through their subsidiaries, own and operate a fleet of dry bulk carrier vessels and contracts for the construction of newbuilding dry bulk vessels. As part of the Merger, Star Bulk has agreed to acquire two


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Kamsarmax vessels (the “Heron Vessels”) from Heron Ventures Ltd. (the “Heron JV”), a joint venture in which Oceanbulk owns indebtedness that is convertible into 50% of the equity of the Heron JV, for an aggregate of 2,115,706 common shares of the Company (the “Heron Consideration”). Currently, investment funds affiliated with the Oaktree Sellers beneficially own approximately 19.6% of the outstanding common shares of Star Bulk and, indirectly through Oaktree Holdco, also beneficially own 90% of the membership interests in Oceanbulk. A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement. A copy of the Pappas Agreement is attached as Annex B to the accompanying proxy statement.

The Company will also transact any other business that may properly come before the Special Meeting, or any adjournment or postponement of the Special Meeting, by or at the direction of the Company’s Board of Directors (the “Board”).

If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive an aggregate of 48,395,766 shares of common stock (“common shares”) of the Company (the “Merger Consideration”), together with the Heron Consideration and certain distributions from the Heron JV, on the terms and subject to the conditions set forth in the Merger Agreement. The closing of the Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain of the Pappas Entities will receive 3,592,728 common shares (the “Pappas Consideration”). The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration, will represent 64.7% of the outstanding common shares immediately after the closing.

By virtue of the Merger and the Pappas Companies Acquisition, the Company has agreed to assume, including by way of refinance, all of the outstanding indebtedness of Oceanbulk, Dioriga and Positive Shipping. The Company has also agreed to refinance the indebtedness of the Heron JV applicable to the Heron Vessels as of the date the Company acquires such Heron Vessels. If the Merger, including the acquisition of the Heron Vessels and the Pappas Vessels, had closed on March 31, 2014, we would have had total outstanding indebtedness $383.99 million and the book value of our assets would have been $1,364.97 million.

These items of business are more fully described in the proxy statement accompanying this notice.

The Company is holding the Special Meeting so that our stockholders may vote with respect to the adoption of the Merger Agreement Proposal. The proposed Transactions are very important and will have a transformative impact on the capitalization, balance sheet, ownership and governance of the Company. The Transactions also include proposed agreements with affiliates of the Company and two of our Directors, Mr. Petros Pappas and Ms. Milena Maria Pappas, who have a financial interest in the Transactions and who, collectively with their affiliates, will own approximately 12.6% of the outstanding common shares after giving effect to the Transactions. Moreover, the Oaktree Seller and its affiliates will own approximately 61.3% of the outstanding common shares after giving effect to the Transactions. Because of these and other considerations, the Special Committee and the Board of Directors, other than Mr. Petros Pappas and Ms. Milena Maria Pappas, unanimously determined that the Company seek approval of the Unaffiliated Stockholders for the Merger Agreement Proposal in the manner set forth in the following paragraph. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board of Directors’ vote authorizing this transaction due to their financial interest in the Transactions and their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities. In addition, the Oaktree Seller, the Pappas Seller, and certain affiliates and related parties thereof (including Mr. Petros Pappas and Milena Pappas) agreed to voting restrictions, ownership limitations and standstill provisions, as the result of discussions between the Special Committee and other relevant parties, in order to mitigate the possibility that the transaction might be deemed a change of control of the Company for certain purposes.

Accordingly, the parties to the Merger Agreement and the Pappas Agreement have agreed to (i) seek the vote of the Company’s stockholders with respect to the Merger Agreement Proposal, and (ii) require that the approval of the Merger Agreement Proposal by the Company’s stockholders is a closing condition to the Transactions, which approval requires the affirmative vote of the holders of a majority of the common shares present (in person or by proxy) and voting at the Special Meeting. Each of the Sellers has agreed to cause


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themselves and their respective affiliates, including Ms. Milena Maria Pappas, to vote all common shares owned by them in favor of the Merger Agreement Proposal in the same proportion as the number of common shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders entitled to vote at the Special Meeting, or any postponement or adjournment thereof. This means that the voting rights of each of the Sellers, the Pappas Entities and their respective affiliates would effectively be redistributed pro rata among the Unaffiliated Stockholders entitled to vote at the Special Meeting.

Certain stockholders of the Company affiliated with Monarch Alternative Capital LP (the “Monarch Stockholders”), which collectively own approximately 20.9% of the outstanding common shares and represent 28.2% of Unaffiliated Stockholders, have entered into a voting agreement with the Sellers and Mirabel pursuant to which, among other things and subject to certain conditions, the Monarch Stockholders have agreed to vote their shares in favor of approval of the Merger Agreement Proposal (the “Voting Agreement”).

The Board recommends that you vote “FOR” the proposal to approve the Merger Agreement Proposal.

The record date for the Special Meeting is June 17, 2014 (the “Record Date”). Only stockholders of record at the close of business on that date are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof. Any stockholder entitled to attend and vote at the Special Meeting is entitled to appoint a proxy to attend and act on such stockholder’s behalf. Such proxy need not be a stockholder of the Company.

Your vote is very important. To ensure your representation at the Special Meeting, please complete and return the enclosed proxy card or submit your proxy by telephone or through the Internet. Please vote promptly whether or not you expect to attend the Special Meeting. Submitting a proxy now will not prevent you from being able to vote in person at the Special Meeting. The Board, acting upon the unanimous recommendation of the Special Committee, has (i) determined that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the Unaffiliated Stockholders, (ii) approved, adopted and declared advisable the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger Consideration, the Pappas Consideration and the Heron Consideration and recommends that you vote “FOR” the Merger Agreement Proposal.

Submitting your proxy over the Internet or by telephone is fast and convenient, and your proxy is immediately confirmed and tabulated. Using the Internet or telephone helps save the Company money by reducing postage and proxy tabulation costs. Please submit your proxy via the internet at the website www.proxyvote.com and via the telephone at phone number 1-800-690-6903.

On Behalf of the Board,

LOGO

Georgia Mastagaki

General Counsel and Corporate Secretary

Athens, Greece

Dated: June 20, 2014


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE TRANSACTIONS

     1   

SUMMARY

     10   

RISK FACTORS

     17   

THE COMBINED COMPANY

     27   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     34   

SUMMARY HISTORICAL COMBINED FINANCIAL AND OTHER OPERATING DATA OF OCEANBULK

     47   

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

     52   

BUSINESS OVERVIEW OF OCEANBULK

     75   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     90   

PARTIES TO THE TRANSACTIONS

     92   

THE TRANSACTION

     94   

THE SPECIAL MEETING

     119   

OTHER IMPORTANT INFORMATION REGARDING STAR BULK

     120   

DESCRIPTION OF CAPITAL STOCK OF STAR BULK

     123   

MATERIAL TAX CONSEQUENCES OF THE MERGER

     130   

THE MERGER AGREEMENT

     132   

OAKTREE SHAREHOLDERS AGREEMENT

     159   

PAPPAS SHAREHOLDER AGREEMENT

     167   

PAPPAS AGREEMENT

     170   

VOTING AGREEMENT

     185   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

     186   

INDEX TO OCEANBULK FINANCIAL STATEMENTS

     F-1   

ANNEX A—AGREEMENT AND PLAN OF MERGER

     A-1   

ANNEX B—OAKTREE SHAREHOLDER AGREEMENT

     B-1   

ANNEX C—PAPPAS SHAREHOLDER AGREEMENT

     C-1   

ANNEX D—PAPPAS AGREEMENT

     D-1   

ANNEX E—REGISTRATION RIGHTS AGREEMENT

     E-1   

ANNEX F—VOTING AGREEMENT

     F-1   

ANNEX G—OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE

     G-1   


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE TRANSACTIONS

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger Agreement, the Pappas Agreement, the transactions and the Special Meeting. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the “Summary” beginning on page 10 of this proxy statement and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, all of which you should read carefully.

 

Q. Why am I receiving this document?

 

A. At the Special Meeting you will be asked to approve the Agreement and Plan of Merger, dated as of June 16, 2014 (as amended from time to time, the “Merger Agreement”) among Star Bulk, Star Synergy LLC, a Marshall Islands limited liability company and a wholly-owned subsidiary of Star Bulk (“Oaktree Holdco Merger Sub”), Star Omas LLC, a Marshall Islands limited liability company and a wholly-owned subsidiary of Star Bulk (“Pappas Holdco Merger Sub” and together with Oaktree Holdco Merger Sub, the “Merger Subs”), Oaktree OBC Holdings LLC, a Marshall Islands limited liability company controlled by investment funds managed by Oaktree Capital Management, L.P. (the “Oaktree Holdco”), Millennia Limited Liability Company, a Marshall Islands limited liability company controlled by certain immediate family members of Star Bulk non-Executive Chairman Mr. Petros Pappas, including Milena Maria Pappas, who is also one of our directors (the “Pappas Holdco” and, together with the Oaktree Holdco, the “Oceanbulk Holdcos”), Oaktree Dry Bulk Holdings LLC, a Marshall Islands limited liability company (the “Oaktree Seller”) and Millennia Holdings LLC, a Marshall Islands limited liability company (the “Pappas Seller” and, together with the Oaktree Seller, the “Sellers”), pursuant to which each of the Oceanbulk Holdcos will merge with and into one of the Merger Subs (the “Merger”), with the Merger Subs continuing as the surviving companies and wholly-owned subsidiaries of Star Bulk.

The Oceanbulk Holdcos collectively own all of the outstanding equity interests in Oceanbulk Shipping LLC, a Marshall Islands limited liability company (“Oceanbulk Shipping”) and Oceanbulk Carriers LLC, a Marshall Islands limited liability company (“Oceanbulk Carriers” and, together with Oceanbulk Shipping, “Oceanbulk”), which, through their subsidiaries, either own and operate a fleet of 12 dry bulk carrier vessels, with an average age as of May 31, 2014 of 5.3 years and an aggregate capacity of approximately 1.4 million dwt, including five Capesize vessels, two Post-Panamax vessels, three Kamsarmax vessels and two Supramax vessels or own contracts for the construction of 25 newbuilding dry bulk vessels with fuel efficiency specifications at shipyards in Japan and China. As of June 17, 2014, the Record Date, investment funds affiliated with the Oaktree Seller beneficially own approximately 19.6% of the outstanding common shares of Star Bulk (the “common shares”) and, indirectly through Oaktree Holdco, also beneficially own 90% of the equity interests in Oceanbulk. As part of the Merger, Star Bulk has agreed to acquire two Kamsarmax vessels (the “Heron Vessels”) from Heron Ventures Ltd. (the “Heron JV”), a joint venture in which Oceanbulk owns indebtedness that is convertible into 50% of the equity of the Heron JV, for an aggregate of 2,115,206 common shares of the Company (the “Heron Consideration”).

In addition, at the Special Meeting you will be asked to approve the Share Purchase Agreement, dated as of June 16, 2014 (as amended from time to time, the “Pappas Agreement”) among Star Bulk, Mirabel Shipholding & Invest Limited (“Mirabel”), Mirach Shipping Company Limited (“Mirach”) and Bluesea Invest and Holding Limited (together with Mirabel and Mirach, the “Pappas Entities”), entities controlled by certain members of the family of our non-Executive Chairman, Mr. Petros Pappas, including Milena Maria Pappas, who is also one of our directors, pursuant to which Star Bulk has agreed to, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, substantially concurrently with the completion of the Merger, acquire all of the issued and outstanding shares of Dioriga Shipping Co. (“Dioriga”) and Positive Shipping Company (“Positive Shipping”), which own and operate a dry bulk carrier vessel and a contract for the construction of a newbuilding drybulk carrier with fuel efficient specifications, respectively (such vessels being the “Pappas Vessels”, and the acquisition of the Pappas Vessels being the “Pappas Companies Acquisition”).

 

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Pursuant to resolutions of a Special Committee of the Company’s Board of Directors (the “Board”) consisting of two disinterested directors who are not officers, employees, representatives, agents or affiliates of the Sellers, the Oceanbulk Holdcos or the Pappas Entities, and who do not have an economic interest in the Sellers, the Oceanbulk Holdcos or the Pappas Entities (the “Special Committee”), the Special Committee unanimously determined that the Merger Agreement, the Pappas Agreement, and the transactions contemplated thereby (the “Transactions” and collectively with the Merger Agreement and the Pappas Agreement, the “Merger Agreement Proposal”) as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the stockholders of the Company, other than the Sellers and their respective affiliates (the “Unaffiliated Stockholders”). The Special Committee also unanimously declared advisable the Merger Agreement, the Pappas Agreement and the Transactions, including the Merger, and unanimously recommended to the Board that the Merger Agreement Proposal be approved by the Board and submitted for a vote at a meeting of the Company’s stockholders. The Special Committee made its determination after consultation with its independent legal and financial advisors and consideration of a number of factors, including a fairness opinion presented to the Special Committee by its independent financial advisors.

Following the recommendation of the Special Committee, all of the members of the Board, other than Mr. Petros Pappas and Ms. Milena Maria Pappas, who recused themselves from the Board’s vote based on the reasons set forth below, pursuant to resolutions adopted at a meeting of the Board held on June 15, 2014, (i) determined that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the Unaffiliated Stockholders, (ii) approved, adopted and declared advisable the Merger Agreement, the Pappas Agreement and the Transactions as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration, (iii) resolved to recommend that the Merger Agreement Proposal be submitted at a meeting of the Company’s stockholders for approval and (iv) adopted the recommendation by the Special Committee that the Company’s stockholders approve the Merger Agreement Proposal. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board’s vote authorizing the Transactions due to their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities.

If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive an aggregate of 48,395,766 shares of common shares (the “Merger Consideration”), together with the Heron Consideration and certain distributions from the Heron JV, on the terms and subject to the conditions set forth in the Merger Agreement. The closing of the Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain of the Pappas Entities will receive 3,592,728 common shares (the “Pappas Consideration”). The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration will represent 64.7% of the outstanding common shares immediately after the closing.

By virtue of the Merger and the Pappas Companies Acquisition, the Company will assume, including by way of refinance, all of the outstanding indebtedness of Oceanbulk, Dioriga and Positive Shipping. The Company has also agreed to refinance the indebtedness of the Heron JV applicable to the Heron Vessels as of the date the Company acquires such Heron Vessels. If the Merger, including the acquisition of the Heron Vessels and the Pappas Vessels, had closed on March 31, 2014, we would have had total outstanding indebtedness $383.99 million and the book value of our assets would have been $1,364.97 million.

The Company is soliciting proxies for the Special Meeting. You are receiving this proxy statement because you own common shares. This proxy statement contains important information about the proposed Transactions and the Special Meeting, and you should read it carefully. The enclosed proxy allows you to vote your shares without attending the Special Meeting in person.

The Company is holding the Special Meeting so that our stockholders may vote with respect to the adoption of the Merger Agreement Proposal. The proposed Transactions are very important and will have a transformative impact on the capitalization, balance sheet, ownership and governance of the Company. The

 

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Transactions also include proposed agreements with affiliates of the Company and two of our Directors, Petros Pappas and Milena Maria Pappas, who have a financial interest in the Transactions and who, collectively with their affiliates, will own approximately 12.6% of the outstanding common shares after giving effect to the Transactions. Moreover, the Oaktree Seller and its affiliates will own approximately 61.3% of the outstanding common shares after giving effect to the Transactions. Because of these and other considerations, the Special Committee and the Board of Directors, other than Mr. Petros Pappas and Ms. Milena Maria Pappas, unanimously determined that the Company seek stockholder approval for the Merger Agreement Proposal. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board of Directors’ vote authorizing this transaction due to their financial interest in the Transactions and their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities.

Your vote is extremely important, and we encourage you to submit your proxy as soon as possible. For more information on how to vote your shares, please see the section of this proxy statement entitled “The Special Meeting.”

 

Q. What are the proposed Transactions and what effects will they have on the Company?

 

A. The proposed Transactions consist of: (i) the merger of each of the Oceanbulk Holdcos with and into one of each of the Merger Subs pursuant to the Merger Agreement, (ii) the acquisition of the Heron Vessels pursuant to the Merger Agreement, and (iii) the acquisition of all of the issued and outstanding shares of Dioriga and Positive Shipping pursuant to the Pappas Agreement. If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive the Merger Consideration, the Heron Consideration and certain distributions from the Heron JV. The closing of the Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain of the Pappas Entities will receive the Pappas Consideration, which will represent 4.3% of the outstanding common shares. The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration will represent 64.7% of the outstanding common shares of the Company immediately after the closing thereof.

By virtue of the Merger and the Pappas Companies Acquisition, the Company will assume including by way of refinance, all of the outstanding indebtedness of Oceanbulk, Dioriga and Positive Shipping. The Company has also agreed to refinance the indebtedness of the Heron JV applicable to the Heron Vessels as of the date the Company acquires such Heron Vessels. If the Merger, including the acquisition of the Heron Vessels and the Pappas Vessels, had closed on March 31, 2014, we would have had total outstanding indebtedness $383.99 million and the book value of our assets would have been $1,364.97 million.

The Transactions will affect both the business and governance of the Company. Following the completion of the Merger, Star Bulk will own Oceanbulk which is composed of two international shipping companies that are formed under the laws of the Republic of the Marshall Islands, and their respective subsidiaries. Oceanbulk’s fleet includes 12 existing vessels and 25 vessels currently under construction at shipyards in Japan and China. Oceanbulk’s vessels transport a broad range of major and minor bulk commodities, including ores, coal, grains and fertilizers, along worldwide shipping routes. On a fully delivered basis, Oceanbulk will have a fleet of 37 vessels consisting primarily of Capesize as well as Kamsarmax and Ultramax vessels with carrying capacities between 55,000 dwt and 209,000 dwt. For more information about Oceanbulk, please see the sections of this proxy statement entitled “Oceanbulk Summary” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oceanbulk.” In addition, Star Bulk will also own the Pappas Vessels and the rights to the Heron Vessels, which will add one vessel under construction and three existing vessels to our fleet.

In terms of the Company’s governance, the Oaktree Seller, the Pappas Seller, and certain affiliates and related parties thereof (including Mr. Petros Pappas and Milena Pappas) agreed to voting restrictions, ownership limitations and standstill provisions, as the result of discussions between the Special Committee and other relevant parties, in order to mitigate the possibility that the transaction might be deemed a change of control of the Company for certain purposes. In particular:

 

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The Oaktree Seller and its affiliates will have the right to nominate a maximum of four out of nine members of the Company’s board, subject to certain additional limitations. Oaktree will be entitled to nominate fewer directors as the number of shares it holds in the Company decreases.

The Oaktree Seller and its affiliates will be required to vote their voting securities in excess of a 33% of the outstanding voting securities “voting cap” (subject to adjustment as provided in the Oaktree Shareholders Agreement) proportionately with the votes cast by the other stockholders with certain exceptions. The exceptions to the 33% voting cap include (x) voting against a change of control transaction with an unaffiliated buyer and (y) voting in favor of a change of control transaction with an unaffiliated buyer, but only if such transaction is approved by a majority of disinterested directors.

The Pappas Seller and its affiliates are also subject to a “voting cap” of 14.9% of the outstanding voting securities.

The Sellers and their affiliates are subject to standstill restrictions, which in the case of the Oaktree Seller includes acquiring a percentage of voting securities in excess of 2.5% of their percentage ownership as of the closing. Please see the sections of this proxy statement entitled “Oaktree Shareholders Agreement” and “Pappas Shareholders Agreement”.

 

Q. When do you expect the Transactions to be completed?

 

A. We are working to complete the Transactions as promptly as practicable. In order to complete the Transactions, the Company must obtain the stockholders approval described in this proxy statement, and the other conditions to the Transactions must be satisfied or waived. Assuming timely satisfaction of necessary closing conditions, we anticipate that the Transactions, including the Merger, will be completed before the end of the third quarter of 2014. The Company, however, cannot assure completion of the Transactions by any particular date, if at all.

 

Q. What are the Company’s growth plans assuming the Transactions are completed?

 

A. In addition to our previously established growth strategy, we will seek to expand our business within our sector of the shipping industry after we complete the merger with Oceanbulk. We have been searching for additional assets to acquire, have been and may continue to engage in discussions with respect to such acquisitions, and we may enter into transactions at any time either with third parties or with affiliates. We can provide no assurances that we will be able to identify or complete the acquisition of additional assets.

 

Q. Do any of the Company’s directors or executive officers or the Company’s major stockholders have interests in the Transactions that may differ from or be in addition to my interests as a stockholder?

 

A.

Yes. In considering the recommendation of the Board that you vote to approve the Merger Agreement Proposal, you should be aware that Mr. Petros Pappas, our non-Executive Chairman, is the father of Milena Maria Pappas, who is also one of our directors, and also provides services to Oceanbulk pursuant to a services agreement as are generally associated with the office of the Chief Executive Officer. Mr. Pappas’ family, including Milena Maria Pappas, controls the Pappas Holdco and the Pappas Entities. In addition, the Oaktree Seller owns approximately 90% of Oceanbulk and, as of the Record Date, affiliated investment funds of the Oaktree Seller own approximately 19.6% of our outstanding common shares. Mr. Pappas, Ms. Pappas and the Oaktree Seller have interests in the Transactions that are different from, or in addition to, your interests as a stockholder. Upon the closing of the Transactions, the Sellers and the Pappas Entities will receive an aggregate of 54,104,200 common shares, representing 64.7% of the outstanding common shares immediately after the closing thereof. Please see the section of this proxy statement entitled “Other Important Information Regarding Star Bulk—Security Ownership of Certain Beneficial Owners and Management of Star Bulk.” The Board was aware of and considered these interests, among other matters, in establishing the Special Committee and in evaluating and negotiating the Merger Agreement, the Pappas Agreement and the Transactions, and in recommending that the Merger Agreement Proposal be approved by

 

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  our stockholders. Please see the section of this proxy statement entitled “The Transaction— Interests of the Sellers and Star Bulk’s Directors and Officers in the Merger.” Also, each of the Sellers has agreed to cause themselves and their respective affiliates to vote all shares owned by them in favor of the Merger Agreement Proposal in the same proportion as the number of shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders entitled to vote at the Special Meeting, or any postponement or adjournment thereof. This means that the voting rights of each of the Sellers and their respective affiliates would effectively be redistributed pro rata among the Unaffiliated Stockholders voting at the Special Meeting.

 

Q. How will our directors and executive officers vote on the proposal to approve the Merger Agreement, the Pappas Agreement and the Transactions?

 

A. The directors (other than Mr. Pappas and Ms. Pappas) and executive officers of the Company have informed the Company that, as of the date of the filing of this proxy statement, they intend to vote in favor of the proposal to adopt the Merger Agreement, the Pappas Agreement and the Transactions. As of June 17, 2014, the Record Date, the directors (other than Mr. Pappas and Ms. Pappas) and executive officers of the Company directly owned, in the aggregate, 490,137 common shares entitled to vote at the Special Meeting, or collectively approximately 1.66% of the outstanding common shares entitled to vote at the Special Meeting.

The Sellers, as part of the terms of the Merger, have agreed to vote and cause their affiliates, which include family members of Mr. Pappas and Ms. Pappas, to vote in favor of the Merger Proposal in the same proportion as the number of common shares voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders entitled to vote at the Special Meeting. Mr. Pappas does not own any of our common shares.

In addition, certain stockholders of the Company affiliated with Monarch Alternative Capital LP (the “Monarch Stockholders”), which collectively own approximately 20.9% of the outstanding common shares and represent 28.2% of Unaffiliated Stockholders, have entered into a Voting Agreement with the Sellers and Mirabel pursuant to which, among other things and subject to certain conditions, the Monarch Stockholders have agreed to vote their shares in favor of approval of the Merger Agreement Proposal.

 

Q. When and where is the Special Meeting?

 

A. The Special Meeting of stockholders of the Company will be held on July 11, 2014, at Hotel Grande Bretagne, Syntagma Square, Athens 10564, Greece at 11:00 a.m. (local time).

 

Q. What am I being asked to vote on at the Special Meeting?

 

A. You are being asked to consider and vote on the proposal to approve the Merger Agreement, the Pappas Agreement and the Transactions. A copy of the Merger Agreement is attached to this proxy statement as Annex A. A copy of the Pappas Agreement is attached to this proxy statement as Annex B.

 

Q. What vote is required for the Company’s stockholders to approve the Merger Agreement Proposal?

 

A. Because of the structure of the Transactions and the status of the Company as a “foreign private issuer” for purposes of the U.S. federal securities laws, there is no requirement under the Marshall Islands Business Corporations Act, the U.S. federal securities laws or the applicable Nasdaq listing rules for the Transactions to be approved by a vote of the Company’s stockholders.

However, the Special Committee, during the course of negotiations with respect to the Transactions, required that the Merger Agreement provide that the Transactions would be conditioned upon the approval of the Company’s stockholders, notwithstanding the lack of a legal or regulatory requirement for such a vote. The Special Committee believed that, given the relative sizes of Oceanbulk and the Company and the transformative nature of the Transactions, the Company’s stockholders should have the opportunity to review the material terms of the Transactions, and the opportunity to approve or reject the Transactions.

 

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Furthermore, because Oaktree, the Pappas family and the affiliates thereof (the “Affiliated Parties”) hold in excess of 26.03% of the outstanding common shares and have economic interests in and control of Oceanbulk and the Pappas Entities, the Special Committee required that the Merger Agreement provide that the Affiliated Parties vote the common shares that they own on a pass-through basis in accordance with the vote of the Unaffiliated Stockholders. As a result, the required stockholder vote under the Merger Agreement will only be satisfied if a majority of the votes cast by the Unaffiliated Stockholders vote in favor of the Transactions.

 

Q. How does the Board recommend that I vote?

 

A. The Board recommends that you vote

FOR” the Merger Agreement Proposal

You should read “The Transaction—Interests of the Sellers and Star Bulk’s Directors and Officers in the Transactions” beginning on page 117 of this proxy statement for a discussion of the factors that the Board considered in deciding to recommend the approval of the Merger Agreement Proposal. Please see the section of this proxy statement entitled “The Transaction—Interests of the Sellers and Star Bulk’s Directors and Officers in the Transactions.”

 

Q. What was the role of the Special Committee and did the Special Committee recommend the Merger Agreement Proposal?

 

A. The Special Committee, composed solely of members of the Board who are not officers or employees of the Company and are not affiliated with the Sellers or the Pappas Entities, was formed on February 6, 2014, following an expression of interest from Oceanbulk with respect to a business combination transaction with the Company for the purpose of, among other things, reviewing the transactions proposed by Oceanbulk and possible alternatives thereto, and evaluating, negotiating and making recommendations to the Board of Directors in connection with any proposed transaction. Since its formation and throughout this process, the Special Committee, together with its advisors, has been meeting separately from management of the Company and the rest of the Board on a frequent basis to evaluate and make important decisions relating to this process, including deciding to commence this process; negotiating certain terms of the Merger Agreement, the Pappas Agreement and related agreements, including the Oaktree Shareholders Agreement, Registration Rights Agreement and Pappas Shareholders Agreement; and recommending to the Board that it approve the Merger Agreement, the Pappas Agreement and related agreements. Throughout this period, the Board and management of the Company, as well as their advisors, conferred frequently with the Special Committee and its advisors, and management of the Company and provided the Special Committee and its advisors with access to requested information. The Special Committee unanimously voted to recommend to the Board that the Board approve and declare advisable the Merger Agreement, the Pappas Agreement and the transactions contemplated thereby, including the Merger. You should read “The Transaction—Company’s reasons for the Transactions; Recommendation of the Company’s Special Committee and Board of Directors” beginning on page 100 of this proxy statement.

 

Q. Who can vote at the Special Meeting?

 

A.

Stockholders of record as of the close of business on June 17, 2014 the Record Date for the Special Meeting, are entitled to receive notice of and to attend and vote at, the Special Meeting, or any adjournment or postponement thereof. Each record holder of common shares as of the Record Date is entitled to cast one vote on each matter properly brought before the Special Meeting for each common share that such holder owns of record as of the Record Date. If you are a stockholder of record and you wish to attend the Special Meeting in person, please be prepared to provide proper identification at the Special Meeting, such as a driver’s license. If you wish to attend the Special Meeting and your common shares are held in “street name” by your broker, bank or other nominee, you will need to provide proof of ownership,

 

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  such as a recent account statement or letter from your bank, broker or other nominee, along with proper identification. “Street name” holders who wish to vote at the Special Meeting will need to obtain a proxy executed in such holder’s favor from the broker, bank or other nominee that holds their common shares of record. Seating will be limited at the Special Meeting.

 

Q. What is a quorum?

 

A. The representation of the holders of a majority of the common shares outstanding and entitled to vote, present in person or represented by proxy, at the Special Meeting will constitute a quorum for the purposes of the Special Meeting. Abstentions, if any, are counted as present for the purpose of establishing a quorum but broker “non-votes” will not be treated as common shares that are present.

 

Q. How do I vote?

 

A. If you are a stockholder of record as of the Record Date, you may vote your common shares on matters presented at the Special Meeting in any of the following ways:

 

    in person—you may attend the Special Meeting and cast your vote there;

 

    by proxy—stockholder of record have a choice of voting by proxy:

 

    over the Internet (the website address for Internet voting is printed on your proxy card);

 

    by using the toll-free telephone number noted on your proxy card; or

 

    by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

If you are a beneficial owner of common shares as of the Record Date, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the Special Meeting, you must have a legal proxy from your bank, brokerage firm or other nominee.

The control number located on your proxy card is designed to verify your identity and allow you to vote your common shares, and to confirm that your voting instructions have been properly recorded when submitting a proxy over the Internet or by telephone.

Please note that if you attend the Special Meeting in person, cameras, recording devices, cell phones and certain other electronic devices will not be permitted at the Special Meeting.

 

Q. What is the difference between being a “stockholder of record” and a “beneficial owner”?

 

A. If your common shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, LLC, you are considered, with respect to those common shares, the “stockholder of record.” In that case, this proxy statement and your proxy card have been sent directly to you by the Company.

If your common shares are held through a bank, brokerage firm or other nominee, you are considered the “beneficial owner” of shares held in “street name.” In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee which may be, with respect to those common shares, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee as to how to vote your common shares by following their instructions for voting.

 

Q. If my shares are held in “street name” by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares for me?

 

A.

Your bank, brokerage firm or other nominee will only be permitted to vote your common shares if you instruct your bank, brokerage firm or other nominee as to how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your common shares. If

 

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  you do not instruct your bank, brokerage firm or other nominee as to how to vote your common shares, your common shares will not be voted and will not be counted for purposes of determining whether a quorum exists.

 

Q. What is a proxy?

 

A. A proxy is your legal designation of another person to vote your common shares. This written document describing the matters to be considered and voted on at the Special Meeting is called a proxy statement. The document used to designate a proxy to vote your common shares is called a proxy card.

 

Q. If a stockholder gives a proxy, how are the shares voted?

 

A. Regardless of the method you choose to submit a proxy, the individuals named on the enclosed proxy card will vote your common shares in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares should be voted “FOR” or “AGAINST,” or to “ABSTAIN” from voting on, all, some or none of the specific items of business to come before the Special Meeting.

If you properly sign your proxy card but do not mark the boxes indicating how your shares should be voted on a matter, the common shares represented by your properly signed proxy will be voted “FOR” the Merger Agreement Proposal.

 

Q. Can I change or revoke my vote?

 

A. Yes. You have the right to revoke a proxy, including any proxy you may have given whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by submitting another proxy, including a proxy card, at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with our Corporate Secretary by the time the Special Meeting begins, or by attending the Special Meeting and voting in person. If your common shares are held in street name by your bank, broker or other nominee, please refer to the information forwarded by your bank, broker or other nominee for procedures on changing or revoking your proxy.

Only your last submitted proxy card will be considered. Please cast your vote “FOR” the proposal listed in this proxy statement, following the instructions in your proxy card, as promptly as possible.

 

Q. What happens if I do not vote or submit a proxy card, or do not instruct my bank, broker or other nominee as to how to vote, or abstain from voting?

 

A. If you do not vote or submit a proxy card, or do not instruct your bank, broker or other nominee as to how to vote, your common shares will not be voted at the Special Meeting and will not be counted for purposes of determining whether a quorum exists.

 

Q. What do I do if I receive more than one proxy or set of voting instructions?

 

A. If you hold shares in “street name,” or through more than one bank, brokerage firm or other nominee, and also directly as a record holder or otherwise, you may receive more than one proxy or set of voting instructions relating to the Special Meeting. These should each be executed and returned separately in accordance with the instructions provided in this proxy statement in order to ensure that all of your common shares are voted.

 

Q. What happens if I sell my common shares before the Special Meeting?

 

A.

The Record Date for stockholders entitled to vote at the Special Meeting is prior to both the date of the Special Meeting and the consummation of the Transactions. If you transfer your shares before the Record Date, you will not be entitled to vote at the Special Meeting. If you transfer your shares after the Record

 

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  Date but before the Special Meeting you will retain your right to vote at the Special Meeting. The person to whom you transfer your common shares after the Record Date will not have a right to vote those common shares at the Special Meeting.

 

Q. What do I need to do now?

 

A. Even if you plan to attend the Special Meeting, after carefully reading and considering the information contained in this proxy statement, please submit your proxy promptly to ensure that your common shares are represented at the Special Meeting. If you hold your common shares in your own name as the stockholder of record, please submit your proxy for your common shares by completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope, by using the telephone number printed on your proxy card or by following the Internet proxy instructions printed on your proxy card. If you decide to attend the Special Meeting and vote in person, your vote by ballot at the Special Meeting will revoke any proxy previously submitted. If you are a beneficial owner of common shares, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

 

Q. Who can help answer my other questions?

 

A. If you have additional questions about the Merger Agreement, the Pappas Agreement and/or the Transactions, need assistance in submitting your proxy or voting your common shares, or need additional copies of the proxy statement or the enclosed proxy card, please contact:

Advantage Proxy Inc.

P.O. BOX 13581

Des Moines, WA 98198

All Holders: (877) 870-8565

Banks and Bankers: (206) 870-8565

ksmith@advantageproxy.com

 

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SUMMARY

This summary highlights selected information from this proxy statement. It does not contain all of the information that may be important to you. You should carefully read this entire document, including the annexes and the other documents to which this document refers including our annual report on Form 20-F for the year ended December 31, 2013 and our other public filings for a more complete understanding of the matters being considered at the Special Meeting. Additionally, some of the statements contained in this proxy statement are forward-looking statements. See the section entitled “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 186. All references in this proxy statement to “dollars” or “$” are to U.S. dollars. In this proxy statement, unless otherwise indicated, we refer to accounting principles generally accepted in the United States as “GAAP.” Except as the context otherwise requires, references in this proxy statement to the “Company,” “Parent,” “Star Bulk,” “we,” “our” or “us” are to Star Bulk Carriers Corp. and references to “Oaktree” or “Oaktree Seller” are to Oaktree Dry Bulk Holdings LLC. We use the term deadweight tons, or dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, in describing the size of vessels.

The Transactions

On June 16, 2014, Star Bulk and the Merger Subs entered into the Merger Agreement with the Oceanbulk Holdcos and the Sellers, pursuant to which each of the Oceanbulk Holdcos will merge with and into each of one of the Merger Subs, with the Merger Subs continuing as the surviving companies and wholly-owned subsidiaries of the Company. The Oceanbulk Holdcos collectively own all of the outstanding equity interests in Oceanbulk. The Oaktree Seller, through Oaktree Holdco, owns 90% of the outstanding equity of Oceanbulk. In addition, investment funds affiliated with the Oaktree Seller currently beneficially own a portion of the outstanding common shares of Star Bulk.

Oceanbulk consists of two privately held shipping companies, formed under the laws of the Republic of the Marshall Islands, and their respective subsidiaries, which own contracts for the construction of 25 newbuilding vessels with fuel efficiency specifications at shipyards in Japan and China. Oceanbulk’s fleet also includes 12 existing vessels with an average age as of May 31, 2014 of 5.3 years and an aggregate capacity of over 1.4 million dwt, including five Capesize vessels, two Post-Panamax vessels, three Kamsarmax vessels and two Supramax vessels. Currently, Oceanbulk primarily employs vessels under spot or voyage charters. Also as part of the Merger, we have agreed to acquire the Heron Vessels, which consist of two Kamsarmax vessels, from the Heron JV, a joint venture in which Oceanbulk owns indebtedness that is convertible into 50% of the equity of the Heron JV.

In addition, on June 16, 2014, we and the Pappas Entities, entities controlled by certain members of the Pappas family, entered into the Pappas Agreement, pursuant to which Star Bulk has agreed to, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, substantially concurrently with the completion of the Merger acquire all of the issued and outstanding shares of Dioriga and Positive Shipping. Dioriga and Positive Shipping own a dry bulk carrier vessel and a contract for a newbuilding vessel, respectively.

If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive the Merger Consideration, together with the Heron Consideration and certain cash distributions from the Heron JV, on the terms and subject to the conditions set forth in the Merger Agreement. The closing of Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain of the Pappas Entities will receive the Pappas Consideration. The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration, will represent 64.7% of the outstanding common shares of the Company immediately after the closing.

 

 

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By virtue of the Merger and the Pappas Companies Acquisition, the Company will assume all of the outstanding indebtedness of Oceanbulk, Dioriga and Positive Shipping. The Company has also agreed to refinance the indebtedness of the Heron JV applicable to the Heron Vessels as of the date the Company acquires such Heron Vessels. If the Merger, including the acquisition of the Heron Vessels and the Pappas Vessels, had closed on March 31, 2014, we would have had total outstanding indebtedness of $383.99 million and the book value of our assets would have been $1,364.97 million.

Opinion of Star Bulk’s Financial Advisor

At a meeting of the Special Committee on June 15, 2014, Evercore Group L.L.C., or Evercore, delivered to the Special Committee its oral opinion, which was subsequently confirmed in writing on June 15, 2014, to the effect that, as of the date of the opinion, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in its opinion, the Merger Consideration, the Pappas Consideration and the Heron Consideration (collectively, for purposes of this section, the “Transaction Consideration”) was fair, from a financial point of view, to Star Bulk.

The full text of the written opinion of Evercore, dated as of June 15, 2014, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex G to this proxy statement and is incorporated by reference in its entirety into this proxy statement. You are urged to read this opinion carefully and in its entirety. Evercore’s opinion was addressed to, and provided for the information and benefit of, the Special Committee in connection with its evaluation of the Transaction Consideration from a financial point of view and did not address any other aspects or implications of the Transactions. Evercore’s written opinion provides that the opinion may be relied on by the other members of the board of directors of Star Bulk solely in their capacity as members of board of directors of Star Bulk in connection with, and for the purposes of, the evaluation of the Transactions. The opinion does not constitute a recommendation to the Special Committee or to any other persons in respect of the Transactions, including as to how any holder of common shares of Star Bulk should vote or act in respect of the Transactions. Evercore’s opinion does not address the relative merits of the Transactions as compared to other business or financial strategies that might be available to Star Bulk, nor does it address the underlying business decision of Star Bulk to engage in the Transactions.

Interests of the Sellers and Star Bulk’s Directors and Officers in the Transactions

In considering the recommendation of the Board with respect to the Transactions, you should be aware that Mr. Petros Pappas, our non-Executive Chairman, is the father of Milena Maria Pappas, who is also one of our directors, and also provides services to Oceanbulk pursuant to a services agreement as are generally associated with the office of the Chief Executive Officer. The Pappas family, including Ms. Milena Maria Pappas, controls the Pappas Holdco and the Pappas Entities. In addition, the Oaktree Seller owns approximately 90% of the equity of Oceanbulk and, as of the Record Date, affiliated investment funds of the Oaktree Seller own approximately 19.6% of the outstanding common shares. Mr. and Ms. Pappas and the Oaktree Seller have interests in the Transactions that are different from, or in addition to, your interests as a stockholder. Upon the closing of the Transactions, the Pappas Entities will receive an aggregate of 3,592,728 common shares, representing 4.3% of the outstanding common shares of the Company immediately after the closing thereof. Please see the section of this proxy statement entitled “Other Important Information Regarding Star Bulk—Security Ownership of Certain Beneficial Owners and Management of Star Bulk.” The Board were aware of and considered these interests, among other matters, in establishing the Special Committee and in evaluating and negotiating the Merger Agreement, the Pappas Agreement and the Transactions, and in recommending that the Merger Agreement, the Pappas Agreement and the Transactions be approved by our stockholder. Please see the section of this proxy statement entitled “The Transaction—Interests of the Sellers and Star Bulk’s Directors and Officers in the Transactions.” Also, each of the Sellers has agreed to cause themselves and their respective affiliates to vote all shares owned by them in favor of the Merger Agreement Proposal in the same proportion as

 

 

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the number of shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders voting at the Special Meeting, or any postponement or adjournment thereof. This means that the voting rights of each of the Sellers and their respective affiliates would effectively be redistributed pro rata among the Unaffiliated Stockholders voting at the Special Meeting.

You should also be aware that the Monarch Stockholders, which collectively own approximately 20.9% of the common shares and represent 28.2% of Unaffiliated Stockholders, have entered into a Voting Agreement with the Sellers and Mirabel pursuant to which, among other things and subject to certain conditions, the Monarch Stockholders have agreed to vote their common shares in favor of approval of the Merger Agreement Proposal.

The Merger Agreement

A summary of the material provisions of the Merger Agreement, which is attached as Annex A to this proxy statement, is included in “The Merger Agreement” beginning on page 132 of this proxy statement.

Oaktree Shareholders Agreement

In connection with the Merger Agreement, at the closing of the Merger, the Oaktree Seller and certain of its affiliated investment funds that currently own common shares will enter into a stockholders agreement to reflect certain agreements relating to the Company and the common shares that the Oaktree Seller and such affiliated investment funds beneficially own (the “Oaktree Shareholders Agreement”), including, among other things, increasing the size of the Board from six (6) directors to nine (9) directors, the Oaktree Seller’s right to appoint up to four (4) directors of the Company, certain restrictions on the Oaktree Seller’s rights to vote or dispose of its common shares, and certain standstill restrictions. A summary of the material provisions of the Oaktree Shareholders Agreement, which is attached as Annex C to this proxy statement, is included in “The Oaktree Shareholders Agreement” beginning on page 159 of this proxy statement.

Pappas Shareholder Agreement

In connection with the Merger Agreement, at the closing of the Merger, the Pappas Seller and certain of its related parties that currently own common shares will enter into a stockholders agreement to reflect certain agreements relating to the Company and the common shares that the Pappas Seller and such related parties beneficially owns (the “Pappas Shareholder Agreement”), including, among other things, certain restrictions on such stockholders’ rights to vote and certain standstill restrictions. A summary of the material provisions of the Pappas Shareholder Agreement, which is attached as Annex D to this proxy statement, is included in “The Pappas Shareholders Agreement” beginning on page 167 of this proxy statement.

The Pappas Agreement

A summary of the material provisions of the Pappas Agreement, which is attached as Annex B to this proxy statement, is included in “The Pappas Agreement” beginning on page 170 of this proxy statement.

Registration Rights Agreement

In connection with the Merger Agreement, at the closing of the Merger, the Oaktree Seller, the Pappas Seller, the Monarch Stockholders and certain affiliates thereof will enter into an Amended and Restated Registration Rights agreement with the Company (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, which is attached as Annex E to this proxy statement, the Company has, among other things, committed to prepare and file a resale registration statement within 30 days of the closing date of the Transactions, which shall cover the resale of shares owned by such stockholders. In addition, the Registration Rights Agreement also provides the Oaktree Seller and its affiliates with certain demand registration

 

 

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rights and the Oaktree Seller, Pappas Seller, the Monarch Stockholders, and certain affiliates thereof with certain shelf registration rights in respect of any common shares held by them, subject to certain conditions, including those shares acquired pursuant to the Merger Agreement. In addition, in the event that the Company registers additional common shares for sale to the public following the closing of the Transactions, the Company will be required to give notice to the Oaktree Seller, Pappas Seller, Monarch Stockholders, and certain affiliates thereof of its intention to effect such registration and, subject to certain limitations, the Company will be required to include common shares held by those holders in such registration. The Company will be required to bear the registration expenses, other than underwriting discounts and commissions and transfer taxes, if any, attributable to the sale of any holder’s securities pursuant to the Registration Rights Agreement. The Registration Rights Agreement will include customary indemnification provisions in favor of the stockholders party thereto, any person who is or might be deemed a control person (within the meaning of the Securities Act and the Exchange Act) and related parties against certain losses and liabilities (including reasonable costs of investigation and legal expenses) arising out of or relating to any filing or other disclosure made by us under the securities laws relating to any such registration.

Parties to the Transactions

Star Bulk Carriers Corp. is a global shipping company incorporated in the Republic of the Marshall Islands. Our principal executive office is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece and the telephone number of our principal executive office is 011-30-210-617-8400.

The Merger Subs consist of two Marshall Islands limited liability companies that are wholly-owned subsidiaries of the Company. The Merger Subs were formed solely for the purpose of entering into the Merger Agreement and consummating the transactions contemplated by the Merger Agreement. The Merger Subs have not engaged in any business except for the activities incident to its formation and in connection with the transactions contemplated by the Merger Agreement. The Merger Subs’ registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

The Sellers consist of two Marshall Islands limited liability companies that were formed for the purpose of owning, investing and disposing of the membership interests in the Oceanbulk Holdcos and entering into the Merger Agreement and consummating the transactions contemplated by the Merger Agreement. The Oaktree Seller’s principal office is located at 333 S. Grand Avenue, 30th Floor, Los Angeles, CA 90071 and the telephone number of its principal office is (213) 830-6300. The Pappas Seller’s principal place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

The Oceanbulk Holdcos consist of two Marshall Islands limited liability companies. The Oceanbulk Holdcos were formed for the purpose of owning, investing and disposing of the membership interests in Oceanbulk. At the effective time of the Merger, each of the Oceanbulk Holdcos will be merged with and into each of one of the Merger Subs, and Merger Subs will continue as the surviving companies and wholly-owned subsidiaries of the Company. The Oaktree Holdco’s principal office is located at 333 S. Grand Avenue, 30th Floor, Los Angeles, CA 90071 and the telephone number of its principal office is (213) 830-6300. The Pappas Holdco’s principal place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

Oceanbulk consists of two international shipping companies that are formed under the laws of the Republic of the Marshall Islands. On a fully delivered basis, Oceanbulk will have a fleet of 37 vessels consisting primarily of Capesize as well as Kamsarmax and Ultramax vessels with a carrying capacity between 55,000 dwt and 209,000 dwt. Oceanbulk’s fleet includes 12 existing vessels and 25 vessels currently under construction at leading shipyards in Japan and China. Oceanbulk’s vessels transport a broad range of major and minor bulk commodities, including ores, coal, grains and fertilizers, along worldwide shipping routes. Oceanbulk’s principal

 

 

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place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960. Oceanbulk conducts its business through its commercial manager Oceanbulk Maritime S.A., of Liberia whose Greek branch is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece, and the telephone number is 011-30-210-638-7200.

The Pappas Entities consist of three companies limited by shares and incorporated in the British Virgin Islands and which own the entire issued and outstanding registered shares of Dioriga and Positive Shipping. At the effective time of the Pappas Agreement, the Company shall purchase and acquire the relevant Pappas Entities’ rights, title and interest in and to the whole of the issued and outstanding registered shares in each of Dioriga and Positive Shipping. The Pappas Entities’ principal place of business and registered office is located at P.O. Box 3321, Drake Chambers, Road Town Tortola, British Virgin Islands.

Dioriga and Positive Shipping are each a corporation incorporated in the Marshall Islands that were formed for the purposes of owning and operating vessels. Dioriga is the owner of a bulk carrier vessel of approximately 80,800 dwt registered under the flag of the Marshall Islands with the name “TSU EBISU”. Positive Shipping is party to a contract for the construction of a newbuilding drybulk carrier of approximately 182,000 dwt, currently under construction at Japan Marine United Corproration having Hull No. 5016 and which, on delivery, will be registered in the ownership of Positive Shipping under the flag of the Marshall Islands with the name “INDOMITABLE”. At the effective time of the Pappas Agreement, the Company shall purchase and acquire the rights, title and interest in and to the whole of the issued and outstanding registered shares in each of Dioriga and Positive Shipping. The principal place of business and registered offices of Dioriga and Positive Shipping are located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960. The management of the business of Dioriga and Positive Shipping is conducted through their technical and commercial manager Oceanbulk Maritime S.A., of Liberia whose Greek branch is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece, and the telephone number is 011+30-210-638-7200.

The Special Meeting

Time, Place and Purpose of the Special Meeting. The Special Meeting will be held on July 11, 2014, at the offices of Seward & Kissel LLP, Hotel Grande Bretagne, Syntagma Square, Athens 10564, Greece at 11:00 a.m. (local time).

 

  At the Special Meeting you will be asked to approve the Merger Agreement Proposal.

Record Date and Quorum. We have fixed June 17, 2014 as the Record Date for the Special Meeting, and only record holders of common shares on the Record Date are entitled to vote at the Special Meeting. You are entitled to receive notice of, and to vote (in person or by proxy) at, the Special Meeting if you are a record holder of common shares at the close of business on the Record Date. You will have one vote for each common share that you owned on the Record Date. As of the Record Date, there were 29,493,769 common shares outstanding and entitled to vote at the Special Meeting.

 

  The representation of the holders of a majority of the common shares outstanding and entitled to vote, present in person or represented by proxy, at the Special Meeting will constitute a quorum for the purposes of the Special Meeting.

Vote Required.

 

 

The approval of the Merger Agreement Proposal by the Company’s stockholder, which is a closing condition to the Transactions, requires the affirmative vote of the holders of a majority of the common shares present (in person or by proxy) and voting at the Special Meeting. Because each of the Sellers has agreed to cause themselves and their respective affiliates, including Ms. Milena Maria Pappas, to vote all common shares owned by them in favor of the Merger Agreement Proposal in the same proportion as the number of common shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated

 

 

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Stockholders entitled to vote at the Special Meeting, the voting rights of each of the Sellers, the Pappas Entities and their respective affiliates will effectively be redistributed pro rata among the Unaffiliated Stockholders entitled to vote at the Special Meeting and the affirmative vote of a majority of the common shares held by the Unaffiliated Stockholders will satisfy such requirement.

Proxies and Revocation. Any stockholder of record entitled to vote at the Special Meeting may submit a proxy over the Internet, by telephone or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the Special Meeting. If your common shares are held in “street name” by your bank, broker or other nominee, you should instruct your bank, broker or other nominee, on how to vote your common shares using the instructions provided by your bank, broker or other nominee. If you fail to submit a proxy or to vote in person at the Special Meeting, or you do not provide your bank, broker or other nominee, with instructions, as applicable, your shares will not be voted at the Special Meeting.

 

  You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by submitting another proxy, including a proxy card, at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with our Corporate Secretary before the Special Meeting begins, or by attending the Special Meeting and voting in person. If your common shares are held in “street name” by your bank, broker or other nominee, please refer to the information forwarded by your bank, broker or other nominee for procedures on revoking your proxy.

 

  Only your last submitted proxy card will be considered. Please cast your vote “FOR” the proposal, following the instructions in your proxy card, as promptly as possible.

Effective Time of Merger and other Transactions

The closing of the Merger is expected to take place no later than three (3) business days following the date on which the last of the conditions to the closing of the Merger Agreement (described in this proxy statement under the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” and in this proxy statement under the section entitled “The Pappas Agreement”) has been satisfied or waived other than the conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or written waiver of those conditions. The closing of the Pappas Companies Acquisition is expected to take place, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, substantially concurrently with the closing of the Merger.

The effective time of the Merger will occur as soon as practicable following the closing of the Merger upon the filing of certificates of merger with the Registrar or Deputy Registrar of Corporations of the Marshall Islands (or at such later date as we, the Sellers and the Merger Subs agree and specify in such certificates of merger).

Payment of Consideration

If the Merger is completed, all of the membership interests of the Oceanbulk Holdcos that are outstanding immediately prior to the effective time of the Merger will automatically be converted into the right to receive an aggregate of 48,395,766 common shares. The closing of the Pappas Companies Acquisition will, subject to the satisfaction or waiver of the conditions set forth in the Pappas Agreement, occur substantially concurrently with the completion of the Merger, at which time certain Pappas Entities will receive an aggregate of 3,592,728 common shares. The 50,511,472 common shares issued pursuant to the Merger Agreement, including the Heron Consideration, together with the Pappas Consideration, will represent 64.7% of the outstanding common shares immediately after the closing.

 

 

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Provisions for Unaffiliated Stockholders

Each of the Sellers has agreed to, and to cause its affiliates to, vote in favor of the Merger Agreement Proposal in the same proportion as the number of common shares that are voted in favor of the Merger Agreement Proposal by the Unaffiliated Stockholders at the Special Meeting, or any postponement or adjournment thereof. This means that the voting rights of each of the Sellers and their respective affiliates would effectively be redistributed pro rata among the Unaffiliated Stockholders voting at the Special Meeting. The Monarch Stockholders, which collectively own approximately 20.9% of common shares and represent 28.2% of Unaffiliated Stockholders, have entered into a Voting Agreement with the Sellers and Mirabel pursuant to which, among other things and subject to certain conditions, the Monarch Stockholders have agreed to vote their shares in favor of approval of the Merger Agreement Proposal.

Tax Considerations

See “Material Tax Consequences of the Merger” for a discussion of certain material U.S. federal income tax consequences of the Transactions.

Risk Factors

In evaluating the Merger Agreement, the Pappas Agreement or the Transactions, you should carefully read this proxy statement and especially consider the factors discussed in the section entitled “Risk Factors.

 

 

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RISK FACTORS

Set forth below are various risks relating to the Transactions. The following is not intended to be an exhaustive list of the risks relating to the Transactions, and should be read in conjunction with the other information in this proxy statement. In addition, you should refer to the section entitled “Risk Factors” in our annual report on Form 20-F for the fiscal year ended December 31, 2013 filed with the SEC on March 21, 2014, and other risk factors detailed from time to time in the Company’s reports filed with the SEC for risks relating to our business.

Certain of the Company’s directors and major stockholders have interests in the Transactions that may be different from, or are in addition to, the interests of the Company’s other stockholders.

Certain of the Company’s directors and major stockholders have financial interests in the Transactions that may be different from, or in addition to, the interests of the Company’s other stockholders. In particular, two of our directors, Mr. Petros Pappas and Ms. Milena Pappas, collectively with their affiliates, will own approximately 12.6% of the outstanding common shares after giving effect to the Transactions. Entities affiliated with the Oaktree Seller currently own approximately 19.6% of the outstanding common shares and will own, together with the Oaktree Seller, approximately 61.3% of the outstanding common shares after giving effect to the Transactions. In light of this, the Company’s Board of Directors established a Special Committee of the Company’s Board of Directors consisting of two disinterested directors who are not officers, employees, representatives, agents or affiliates of the Sellers, the Oceanbulk Holdcos or the Pappas Entities, and who do not have an economic interest in the Sellers, the Oceanbulk Holdcos or the Pappas Entities (the “Special Committee”). The Special Committee unanimously determined that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are advisable, fair to and in the best interests of the Company and the stockholders of the Company other than the Sellers and their respective affiliates (the “Unaffiliated Stockholders”). The Special Committee also unanimously recommended that the Board (i) determine that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the Unaffiliated Stockholders, (ii) approve, adopt and declare advisable the Merger Agreement, the Pappas Agreement and the Transactions as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration, and (iii) resolve to recommend that the Company’s stockholders approve the Merger Agreement Proposal. The Special Committee made its determination after consultation with its independent legal and financial advisors and consideration of a number of factors including a fairness opinion presented to the Special Committee by its independent financial advisors. Following the recommendation of the Special Committee, all of the members of the Board other than Mr. Petros Pappas and Ms. Milena Maria Pappas, pursuant to resolutions adopted at a meeting of the Board held on June 15, 2014, (i) determined that the Merger Agreement Proposal as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration are fair to and in the best interests of the Company and the Unaffiliated Stockholders, (ii) approved, adopted and declared advisable the Merger Agreement, the Pappas Agreement and the Transactions as well as the Merger Consideration, the Pappas Consideration and the Heron Consideration, (iii) resolved to recommend that the Merger Agreement Proposal be submitted at a meeting of the Company’s stockholders for approval and (iv) adopted the recommendation by the Special Committee that the Company’s stockholders approve the Merger Agreement Proposal. Mr. Petros Pappas and Ms. Milena Maria Pappas recused themselves from the Board’s vote authorizing the Transactions due to their relationships with the Sellers, Dioriga, Positive Shipping and the Pappas Entities. For a detailed discussion of the interests that the Company’s directors and executive officers may have in the Transactions, please see “The Transaction—Interests of the Sellers and Star Bulk’s Directors and Officers in the Transactions.

 

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After the closing of the Transactions, affiliates of Oaktree Capital Management, L.P. will own a majority of the Company’s common shares, subject to certain restrictions on voting, acquisitions and dispositions thereof.

Immediately after the closing of the Merger, the Oaktree Seller and its affiliates are expected to own 51,234,231 common shares (assuming issuance of the Heron Consideration to the Sellers at the closing of the Merger), which will represent approximately 61.3% of our outstanding common shares after giving effect to the issuance. However, pursuant to the Oaktree Shareholders Agreement, the Oaktree Seller and certain affiliates thereof have agreed to voting restrictions, ownership limitations and standstill restrictions which were included, as the result of discussions between the Special Committee and other relevant parties, in order to mitigate the possibility that the transaction might be deemed a change of control of the Company for certain purposes. For instance, Oaktree and its affiliates will be entitled to nominate a maximum of four out of nine members of the Board, subject to certain additional limitations. In addition, Oaktree and its affiliates will be required to vote their voting securities in excess of 33% of the outstanding voting securities (subject to adjustment as set forth in the Oaktree Shareholders Agreement) proportionately with the votes cast by the other stockholders, subject to certain exceptions, which include (i) voting against a change of control transaction with an unaffiliated buyer and (ii) voting in favor of a change of control transaction with an unaffiliated buyer (but only if such transaction is approved by a majority of disinterested directors). In addition, the Oaktree Seller and affiliates thereof will be subject to certain standstill restrictions, and may not receive a control premium for their common shares as part of a change of control transaction. See “The Oaktree Shareholders Agreement—Standstill Restrictions” beginning on page 161 of this Proxy Statement. Despite the foregoing limitations, the Oaktree Seller and its affiliates will likely exert considerable influence over the Company. The Oaktree Seller and its affiliates may be able to prevent or delay a change of control of the Company and could preclude any unsolicited acquisition of the Company.

Additionally, Oaktree is in the business of making investments in companies and currently holds, and may from time to time in the future acquire, interests in the shipping industry that directly or indirectly compete with certain portions of the Company’s business. Further, if Oaktree pursues acquisitions or makes further investments in the shipping industry, those acquisitions and investment opportunities may not be available to the Company, and the Company has agreed to renounce any interest or expectancy in, or in being offered an opportunity to participate in, any corporate opportunities that may be presented to or become known to Oaktree or any of its affiliates.

In addition, the members of the Board nominated by Oaktree will have fiduciary duties to the Company and in addition may have duties to Oaktree. As a result, such circumstances may entail real or apparent conflicts of interest with respect to matters affecting both us and Oaktree, whose interests, in some circumstances, may be adverse to ours.

Mr. Petros Pappas, the Company’s Chief Executive Officer following the completion of the Transactions, and certain members of his family have affiliations with Oceanbulk Maritime S.A (“Oceanbulk Maritime”) and other ventures, which could create conflicts of interest. Certain members of the Company’s senior management also have affiliations with Oceanbulk Maritime and other ventures that could create conflicts of interest.

While we do not expect Mr. Pappas to have any material relationships with any companies in the dry bulk shipping industry other than the Company after the closing of the Transactions, he will continue to be involved in other areas of the shipping industry, including as the founder of Oceanbulk Maritime, as a member of the management of Oceanbulk Container Carriers LLC and PST Tankers LLC, which are other joint ventures between Oaktree and the Pappas family involved in the container shipping and product tanker businesses, respectively, and as a member of the management of Madison Crude Carriers LLC, a joint venture between Monarch and the Pappas family involved in the crude oil tanker business. Ms. Pappas is a significant equityholder of Oceanbulk Maritime and an equityholder in various other entities, some of which are involved in the dry bulk shipping industry. These other affiliations and ventures could cause distraction to Mr. Pappas as the Company’s Chief Executive Officer if he focuses a substantial portion of his time on them, and the involvement of Ms. Pappas with other ventures could cause conflicts of interest with the Company.

 

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Following completion of the Transactions, certain members of the Company’s senior management, Messrs. Hamish Norton, Christos Begleris and Nikos Rescos and Ms. Sofia Damigou, will also continue to be members of the management of Oceanbulk Maritime, Oceanbulk Container Carriers LLC and PST Tankers LLC. These other affiliations and ventures could cause distraction to such members of senior management if they focus a substantial portion of their time on such affiliations and ventures.

Any of these affiliations and relationships of Mr. Pappas, certain members of his family and certain members of the Company’s post-Transactions senior management may create conflicts of interest not in the best interest of the Company or its stockholders from time to time. This could result in an adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Some of our key executive officers will not devote all of their time to our business, which may hinder our ability to operate successfully.

Our executive officers participate in business activities not associated with us, including serving as members of the management teams of Oceanbulk Maritime, Oceanbulk Container Carriers LLC and PST Tankers LLC (all of which are affiliated with Oaktree and/or the Pappas family), and are not required to work full-time on our affairs. Initially, we expect that each of our executive officers will devote a substantial portion of his business time to the completion of our newbuilding program and management of the Company. Our executive officers may devote less time to us than if they were not engaged in other business activities and may owe fiduciary duties to the stockholders of other companies with which they may be affiliated, including those companies listed above. In particular, we expect that the amount of time Mr. Pappas allocates to managing our company will vary from time to time depending on the needs of the business and the level of strategic activity at the time. This structure may create conflicts of interest in matters involving or affecting us and our customers and it is not certain that any of these conflicts of interest will be resolved in our favor. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

You will experience a reduction in percentage ownership and voting power with respect to the common shares you currently own as a result of the Transactions.

In connection with the Transactions, we will issue 54,104,200 common shares, which will represent approximately 64.72% of our outstanding common shares after giving effect to the issuance. Therefore, following the completion of the Transactions, you will experience a substantial reduction in your respective percentage ownership interests and effective voting power relative to your respective percentage ownership interests in our common shares and effective voting power prior to the Transactions. In addition, the issuance of common shares could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If the common shares are issued, you may experience dilution in your claim to our earnings per share.

Certain benefits we expect from the Transactions are based on projections and assumptions, which are uncertain and subject to change.

The Company has made certain estimates and assumptions with respect to certain benefits that it expects from the Transactions that affect the reported amounts of earnings, assets, liabilities, revenues, expenses, earnings per share and related information included in our and Oceanbulk’s historical combined financial statements and the pro forma financial information included herein, as well as EBITDA and other measures derived from that information. These estimates and assumptions may prove to be inaccurate or may change in the future, and actual results could differ materially from those estimates or assumptions. There can be no assurance that we will realize these benefits, including anticipated synergistic benefits, if any, as a result of the Transactions. The market price of our common shares may decline if the estimates are not realized or we do not achieve the perceived benefits of the Transactions, including perceived benefits to our cash flows and EBITDA, earnings and earnings per share, as rapidly or to the extent anticipated.

 

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Oceanbulk has a limited history of operations on which investors may assess its performance and has experienced net losses since its inception.

Oceanbulk commenced business operations in the fourth quarter of 2012. They have a limited performance record and operating history and, therefore, limited historical financial information on which you can evaluate its operating performance, its ability to implement and achieve its business strategy or its ability to generate cash flow or earnings in the future. Oceanbulk has generated $10.4 million of net loss during the year ended December 31, 2013, $7.6 million of net loss during the three month period ended March 31, 2014 and accumulated deficit of $20.1 million as of March 31, 2014.

Although we expect that the Transactions will result in benefits to us, we may not realize those benefits because of integration difficulties.

Integrating the operations of Oceanbulk successfully or otherwise realizing any of the anticipated benefits of the Transactions, including anticipated cost savings and additional revenue opportunities, involves a number of challenges. The failure to meet these integration challenges could seriously harm our results of operations and the market price of our common shares may decline as a result.

Realizing the benefits of the Transactions will depend in part on the integration of information technology, vessel remote monitoring systems, operations, personnel and sales force. These integration activities are complex and time—consuming and we may encounter unexpected difficulties or incur unexpected costs, including:

 

    our inability to achieve the cost savings and operating synergies anticipated with the Transactions, which would prevent us from achieving the positive earnings gains expected as a result of the Transactions;

 

    diversion of management attention from ongoing business concerns to integration matters; and

 

    possible cash flow interruption or loss of revenue as a result of change of ownership transitional matters related to the Transactions.

We may not successfully integrate the operations of the businesses of Oceanbulk in a timely manner, and we may not realize the anticipated net reductions in costs and expenses and other benefits of the Transactions to the extent, or in the timeframe, anticipated. In addition to the integration risks discussed above, our ability to realize these net reductions in costs and expenses and other benefits and synergies could be adversely impacted by practical or legal constraints on our ability to combine operations.

If the Transactions are completed and we are unable to manage our growth profitably, our business, financial results and share price could suffer.

Our future financial results will depend in part on our ability to profitably manage our growth on a combined basis with Oceanbulk. The Company will need to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems. If expenses related to integration and capital expenditure requirements are greater than anticipated, or if we are unable to manage our growth profitably after the merger, our financial results and the market price of our common shares may decline.

The pro forma financial statements included in this proxy statement are presented for illustrative purposes only and may not be an indication of our financial condition or results of operations following the closing of the Transactions.

The pro forma financial statements included in this proxy statement are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates, and may not be an indication of our financial condition or results of operations following the closing of the Transactions for several reasons. Our

 

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actual financial condition and results of operations following the completion of the Transactions may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the merger. Investors should not place any undue reliance on the pro forma information.

After the closing of the Transactions, we may have to pay tax on United States source income, which would reduce our earnings.

Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under section 883 of the Code and the applicable Treasury Regulations recently promulgated thereunder.

Before the closing of the Transactions, we qualify for this statutory tax exemption and we take this position for United States federal income tax return reporting purposes. We would no longer qualify for exemption under Code section 883 for a particular taxable year if stockholders with a five percent or greater interest in our stock own 50% or more of our outstanding shares of our stock on more than half the days during the taxable year. After the closing of the Transactions, former members of the Oceanbulk Holdcos may own 50% or more of our stock. Therefore, following the closing of the Transactions, we may lose the benefit of this tax exemption thereby become subject to United States federal income tax on our United States source income.

If we are not entitled to exemption under Section 883 for any taxable year, we could be subject for those years to an effective 2% United States federal income tax on the shipping income these companies derive during the year that are attributable to the transport or cargoes to or from the United States. The imposition of this taxation would have a negative effect on our business and would result in decreased earnings available for distribution to our stockholders. For example, if we had not qualified for this exemption in 2013, we would have owed approximately $150,000 in U.S. federal income tax.

The business of the Company after completion of the Transactions will have increased capital requirements compared to stand-alone Star Bulk.

The dry bulk shipping business is highly capital-intensive because of the significant investment in vessels that is required. As of June 1, 2014, the Company had contracts for 11 newbuilding vessels with total capital requirements of $487.4 million (for which it had obtained financing for $93.6 million). As of June 1, 2014, on a pro forma basis, giving effect to the Transactions, the total payments for the Company’s 37 newbuilding vessels would be $1,599.1 million, of which we had already paid $229.4 million. As of June 1, 2014, on a pro forma basis, the Company had already obtained commitments for $530.7 million of debt financing for 15 vessels and was in the final stages of negotiations for $225.5 million of debt financing for nine additional vessels. These increased capital requirements potentially increase existing risks relating to the Company’s ability to obtain financing to satisfy such capital requirements. In addition, each individual financing source may be reluctant to lend larger sums to the Company instead of smaller sums to Star Bulk and Oceanbulk separately.

If the Company is not able to borrow additional funds, raise other capital or utilize available cash on hand, it may not be able to acquire its newbuilding vessels, which could have a material adverse effect on its business, financial condition, results of operations and cash flows. The Company expects to fund its remaining newbuilding commitments through credit facilities, the proceeds of equity issuances, bareboat charters and other fixed income securities, but it may not be able to do so. There can be no assurance that the Company will be able to obtain such financings on a timely basis or on terms it deems reasonable or acceptable. To the degree the Company raises equity financing to fund its capital expenditures, such equity raises will dilute the ownership of

 

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existing stockholders and may be dilutive to the Company’s earnings per share. If for any reason the Company fails to make a payment when due, which may result in a default under its newbuilding contracts, or otherwise fails to take delivery of its newbuilding vessels, the Company would be prevented from realizing potential revenues from these vessels, the Company could also lose all or a portion of its yard payments that were paid by the Company and the Company could be liable for penalties and damages under such contracts.

We will assume, including by way of refinance, the existing indebtedness of Oceanbulk and other entities controlled by the Sellers if the Transactions are completed, which may impose additional operating and financial restrictions on us (beyond those that currently exist) which, together with the resulting debt services obligations, could significantly limit our ability to execute our business strategy and increase the risk of default under our debt obligations once the Transactions are completed.

We intend to assume, including by way of refinance, existing indebtedness in an aggregate amount of approximately $124.11 million in connection with the Transactions, including $25.0 million of indebtedness we intend to procure in order to finance the acquisition of the Heron Vessels. Our current credit facilities require us to comply with certain financial maintenance covenants.

The additional credit facilities would also impose operating and financial restrictions on us. These restrictions would limit our ability, or the ability of our subsidiaries party thereto, to:

 

    pay dividends and make capital expenditures if we do not repay amounts drawn under our credit facilities or if there is another default under our credit facilities;

 

    incur additional indebtedness, including the issuance of guarantees;

 

    create liens on our assets;

 

    change the flag, class or management of our vessels or terminate or materially amend the management agreement relating to each vessel;

 

    sell our vessels;

 

    merge or consolidate with, or transfer all or substantially all our assets to, another person; or

 

    enter into a new line of business.

In addition, the additional credit facilities require us or our subsidiaries to maintain various financial ratios, including:

 

    a minimum percentage of aggregate vessel value to loans secured;

 

    a maximum ratio of total liabilities to market value adjusted total assets;

 

    a minimum EBITDA coverage ratio; and

 

    a minimum liquidity.

Because some of these ratios are dependent on the market value of our vessels, should our charter rates or vessel values materially decline in the future, we may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet any such financial ratios and satisfy any such financial covenants. Events beyond our control, including changes in the economic and business conditions in the shipping markets in which we operate, may affect our ability to comply with these covenants. We cannot assure you that we will meet these ratios or satisfy our financial or other covenants or that our lenders will waive any failure to do so.

These additional covenants may adversely affect our ability to finance future operations or limit our ability to pursue certain business opportunities or take certain corporate actions. The covenants may also restrict our flexibility in planning for changes in our business and the industry and make us more vulnerable to economic

 

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downturns and adverse developments. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our credit facilities would prevent us from borrowing additional money under our credit facilities and could result in a default under our credit facilities. If a default occurs under our credit facilities, the lenders could elect to declare the outstanding debt, together with accrued interest and other fees, to be immediately due and payable and foreclose on the collateral securing that debt, which could constitute all or substantially all of our assets.

Following the completion of the Transactions, our ability to meet our cash requirements, including our debt service obligations, will be dependent upon our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are or may be beyond our control. We cannot provide assurance that our business operations will generate sufficient cash flows from operations to fund these cash requirements and debt service obligations. If our operating results, cash flow or capital resources prove inadequate, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt and other obligations. If we are unable to service our debt, we could be forced to reduce or delay planned expansions and capital expenditures, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our debt agreements may limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debts or to successfully undertake any of these actions could have a material adverse effect on us. These risks may be increased as a result of the increased amount of indebtedness of the Company following the completion of the Transactions.

In addition, the degree to which we may be leveraged as a result of the indebtedness assumed, including by way of refinance, in connection with the Transactions or otherwise could materially and adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or other purposes, could make us more vulnerable to general adverse economic, regulatory and industry conditions, could limit our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete.

Following completion of the Transactions, we will be exposed to volatility in the LIBOR and intend to selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income.

The loans under our credit facilities are generally advanced at a floating rate based on LIBOR, which has been recently stable, but was volatile in prior years, which can affect the amount of interest payable on our debt, and which, in turn, could have an adverse effect on our earnings and cash flow. In addition, in recent years, LIBOR has been at relatively low levels, and may rise in the future as the current low interest rate environment comes to an end. Our financial condition could be materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our exposure to the interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future, including those we enter into to finance a portion of the amounts payable with respect to newbuildings. Moreover, even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest rate exposure, our hedging strategies may not be effective and we may incur substantial losses.

We and Oceanbulk have entered and intend to selectively enter into additional derivative contracts to hedge our overall exposure to interest rate risk exposure. Entering into swaps and derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs.

 

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The Company and Oceanbulk will be subject to business uncertainties and contractual restrictions while the Transactions are pending.

Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on us and Oceanbulk and consequently on the combined company after the merger. These uncertainties may impair our or Oceanbulk’s ability to retain and motivate key personnel and could cause customers and others that deal with us or Oceanbulk to defer entering into contracts with us or Oceanbulk or making other decisions concerning us or Oceanbulk or seek to change existing business relationships with us or Oceanbulk. Certain of the Company’s and Oceanbulk’s agreements require consent for us to assume the obligations thereunder or to effectuate a change of control transaction. If we are unable to obtain such required consents, we may be required to pay termination fees associated with these agreements upon consummation of the merger which could subject us to prepayment penalties. If key employees depart because of uncertainty about their future roles and the potential complexities of the business combination, our and Oceanbulk’s business could be harmed. In addition, the Merger Agreement restricts us and Oceanbulk from taking certain specified actions until the merger occurs without the consent of the other party. These restrictions may prevent us and Oceanbulk from pursuing attractive business opportunities that may arise prior to the completion of the merger. See the section entitled “The Merger Agreement—Covenants of the Company and the Sellers” beginning on page 144 for a description of the restrictive covenants applicable to the Company and Oceanbulk. Similar risks will apply in relation to Dioriga, Positive Shipping and the Pappas Agreement.

The number of our common shares to be issued in connection with the Transactions will not be adjusted in the event of any increase or decrease in the market price of our common shares before the closing of the Transactions. As a result, the market value of the common shares to be issued in connection with the Transactions, as reflected in the market price of our common shares, may be substantially higher at the time of the closing of the Transactions than the market value at the time we received an opinion from Evercore that, as of the date of the opinion, and based upon the various assumptions made, procedures followed, matters considered and limitations on the review undertaken as set forth therein, the consideration to be paid by the Company pursuant to the Merger Agreement and Pappas Agreement was fair to and in the best interest of the Company and its Unaffiliated Stockholders, from a financial point of view, and our Board of Directors approved the Merger Agreement, the Pappas Agreement and the Transactions. The market price of our common shares may fluctuate due to, among other things, changes in our business, operations or prospects, market assessments of the likelihood of completion of the merger, the timing of the completion of the Transactions, general market and economic conditions and certain other factors. As of June 13, 2014, the last trading day before the public announcement of the proposed Transactions, the closing price of our common shares was $12.07 per share.

The completion of the Transactions will expose the Company to increased risks relating to the construction of its newbuilding vessels because of the increased number of newbuilding vessels.

As of June 1, 2014, the Company had contracts for 11 newbuilding vessels. As of June 1, 2014, on a pro forma basis, giving effect to the Transactions, the Company had contracts for 37 newbuilding vessels. These vessels are scheduled to be delivered to the Company through September 2016. Vessel construction projects are generally subject to risks of delay or cost overruns that are inherent in any large construction project, which may be caused by numerous factors, including shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment or shipyard construction, failure of equipment to meet quality and/or performance standards, financial or operating difficulties experienced by equipment vendors or the shipyard, unanticipated actual or purported change orders, inability to obtain required permits or approvals, unanticipated cost increases between order and delivery, design or engineering changes and work stoppages and other labor disputes, adverse weather conditions or any other events of force majeure. Significant cost overruns or delays could adversely affect the Company’s financial position, results of operations and cash flows. Additionally, failure to complete a project on time may result in the delay of revenue from that vessel, and the Company will continue to incur costs and expenses related to delayed vessels, such as supervision expense and interest expense for the outstanding debt. These risks will be potentially exacerbated by the greater number of newbuilding vessels that the Company will have after completion of the Transactions.

 

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The business of the Company after completion of the Transactions will be dependent on spot charters and any decrease in spot charter rates in the future may adversely affect our earnings.

The spot charter market may fluctuate significantly based upon supply and demand for drybulk carriers. The successful operation of our vessels in the competitive spot charter market depends on, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. The spot market is very volatile, and, in the past, there have been periods when spot charter rates have declined below the operating cost of vessels. If future spot charter rates decline, then we may be unable to operate our vessels trading in the spot market profitably, meet our obligations, including payments on indebtedness, or pay dividends in the future. Furthermore, as charter rates for spot charters are fixed for a single voyage which may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.

Our ability to renew expiring charters or obtain new charters will depend on the prevailing market conditions at the time. If we are not able to obtain new charters in direct continuation with existing charters, or if new charters are entered into at charter rates substantially below the existing charter rates or on terms otherwise less favorable compared to existing charter terms, our revenues and profitability could be adversely affected.

As part of the Merger Agreement we are acquiring a 50% interest from the Oceanbulk Holdcos in the Heron JV which may expose us to liabilities. Also, Oceanbulk and the other entities we are acquiring in the Merger may have liabilities that are not known, probable or estimable at this time.

As a result of the Transactions, we are indirectly acquiring Oceanbulk Shipping’s 50% interest in the Heron JV, which currently owns seven vessels. The Heron JV plans to sell two of its vessels before or after the closing of the Merger, and then distribute the remaining five vessels to its JV partners. As part of the Merger Agreement, Oceanbulk has agreed to indemnify Star Bulk for certain liabilities that may arise in connection with the Heron JV as well as any winding up costs associated with dissolving the Heron JV after the sale and distribution of the its vessels. The intended purpose of acquiring this 50% interest in the Heron JV is the purchase by the Company of two vessels from the Heron JV’s fleet in connection with the intended distribution of vessels to the JV partners. The indemnification provisions relating to the Heron JV contained in the Merger Agreement may not cover all of the liabilities and costs associated with the Heron JV and we may have liabilities that exceed our indemnification protection. For more information see “The Merger Agreement—Dissolution and Winding Up of Heron” beginning on page 144 of this proxy statement.

Also, the Oceanbulk Holdcos, Oceanbulk and its subsidiaries, Dioriga, Positive Shipping and the Heron JV, until it is dissolved, will become our subsidiaries and we will indirectly assume all of their liabilities, whether or not asserted. There could be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing due diligence investigations of the Oceanbulk Holdcos and their subsidiaries, Dioriga, Positive Shipping and the Heron JV. In addition, there may be liabilities that are neither probable nor estimable at this time which may become probable and estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business. We may learn additional information about Oceanbulk and the Heron JV that adversely affects us, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable laws.

Failure to retain key employees and skilled workers could adversely affect our business following the closing of the Transactions.

The Company’s performance following the closing of the Transactions could be adversely affected if it is unable to retain certain key employees and skilled workers of the Company and Oceanbulk. 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

 

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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 and financial condition. 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.

Upon the closing of the Transactions, the management of the Company will consist of Petros Pappas, Hamish Norton, Christos Begleris, Nicos Rescos, Sophia Damigou, Simos Spyrou, Zenon Kleopas and Georgia Mastagaki subject to such individuals, to the extent not already party to existing employment agreements, agreeing to employment agreements prior to the Closing Date on terms reasonably acceptable to the Company. In particular, Mr. Petros Pappas, the Company’s Chief Executive Officer following completion of the Transactions, will be integral to the Company’s business, and the Company’s success will depend significantly on his abilities, industry knowledge and relationships. We do not expect to maintain “key man” life insurance on any of the Company’s officers, and the loss of any of these individuals could adversely affect the Company’s business prospects and financial condition. If any such individual is unable or unwilling to serve (including as a result of a failure to enter into employment agreements reasonably acceptable to the Company), the Special Committee will appoint an initial replacement for such office as of the closing date of the Transactions. Please see the section entitled “The Merger Agreement—Company Management.

As the Company expands its fleet, it will also need to expand its operational and financial systems and hire new shoreside staff and seafarers to crew its vessels; if the Company cannot expand these systems or recruit suitable employees, its performance may be adversely affected.

 

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THE COMBINED COMPANY

In this section, references to “we”, “us” and “our” and to the “Combined Company” are references to the combined company resulting from the Transactions. All statistics and other financial information in this section are presented on a pro forma basis, giving effect to the Transactions. References to “eco-vessels” are to vessels that are designed to be more fuel-efficient than standard vessels of similar size and age.

Overview

Following the Transactions, we will be an international shipping company that will own and operate a fleet of dry bulk carrier vessels. On a fully delivered basis, we will have a fleet of 69 vessels, with an aggregate capacity of 8.7 million dwt, consisting primarily of Capesize as well as Kamsarmax, Ultramax and Supramax vessels with carrying capacities between 52,000 dwt and 209,000 dwt. Our fleet will include 32 operating vessels and 37 vessels currently under construction at shipyards in Japan and China. Our vessels will transport a broad range of major and minor bulk commodities, including ores, coal, grains and fertilizers, along worldwide shipping routes. Our executive management team will be led by Mr. Petros Pappas, who will be our Chief Executive Officer.

Our operating fleet of 32 vessels, including two eco-vessels, will have an aggregate carrying capacity of approximately 3.3 million dwt, and we have contracts for the construction of 37 eco-vessels. By the end of the second quarter of 2016, we expect our 69-vessel fleet to have an average age of 5.1 years and an aggregate carrying capacity of 8.7 million dwt.

With respect to our newbuildings, we have focused on vessels built at leading Japanese and Chinese shipyards. Because of prevailing market conditions, we expect that, after completion of the Transactions, we will primarily employ our vessels under spot or voyage charters. While spot or voyage chartering may require more management attention than time chartering, the vessel owner benefits from any fuel savings it can achieve in a spot or voyage charter (particularly eco-vessels, such as our newbuilding vessels) because fuel is paid for by the vessel owner.

We will have significant capital requirements for our newbuilding vessels. As of June 1, 2014, the total payments for our 37 newbuilding vessels were expected to be $1,599.1 million, of which we had already paid $229.4 million. As of June 1, 2014, we had already obtained commitments for $530.7 million of debt financing for 15 vessels and were in the final stages of negotiations for $225.5 million of debt financing for eight vessels. We intend to finance the remaining 14 vessels with a combination of proceeds from debt and equity financings, as market conditions permit. There can be no assurance that we will be able to obtain such financings on a timely basis or on terms we deem reasonable or acceptable. See “Risk Factors—The completion of the Transactions will expose the Company to increased risks relating to the construction of its newbuilding vessels because of the increased number of newbuilding vessels.”

Our Combined Fleet

We believe that owning a modern, well-maintained fleet, with multiple sister vessels, reduces operating costs, improves the quality of service we are able to deliver. We expect that each of our newbuilding vessels will be equipped with a vessel remote monitoring system that will provide data to a central location in order to monitor fuel and lubricant consumption and efficiency on a real-time basis. We expect to retrofit substantially all of our existing vessels with a similar monitoring system.

Our fleet, which emphasizes large Capesize vessels, will primarily transport minerals from the Americas and Australia to East Asia, particularly China, but also Japan, Korea, Taiwan, Indonesia and Malaysia. Our smaller vessels will carry minerals, grain products and steel between the Americas, Europe, Africa, Australia and Indonesia and from these areas to China, Korea, Japan, Taiwan, the Philippines and Malaysia.

 

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The following table summarizes key information about our fully delivered fleet:

 

Vessel Name

  Type   Capacity
(dwt)
    Yard   Year Built or
Scheduled
Delivery
Date(1)
 

Employment/
Expiration Date

  Current
Owner

Existing Fleet

         

1.

 

Star Mega

  Capesize     170,631      Mitsubishi HI,
Japan
  1994  

Time charter/

August 2014

  Star Bulk

2.

 

Star Big

  Capesize     168,404      Halla Samho,
South Korea
  1996  

Time charter/

November 2015

  Star Bulk

3.

 

Star Aurora

  Capesize     171,199      Koyo, Japan   2000  

Time charter/

August 2014

  Star Bulk

4.

 

Star Delta

  Supramax     52,434      Tsuneishi,
Japan
  2000  

Time charter/

September 2014

  Star Bulk

5.

 

Star Epsilon

  Supramax     52,402      Tsuneishi
Cebu, The
Philippines
  2001  

Time charter/

June 2014

  Star Bulk

6.

 

Star Kappa

  Supramax     52,055      Sanoyas HM,
Japan
  2001  

Time charter/

June 2014

  Star Bulk

7.

 

Star Gamma

  Supramax     53,098      Oshima,
Japan
  2002  

Time charter/

June 2014

  Star Bulk

8.

 

Star Theta

  Supramax     52,425      Tsuneishi
Cebu, The
Philippines
  2003  

Time charter/

July 2014

  Star Bulk

9.

 

Star Zeta

  Supramax     52,994      Oshima,
Japan
  2003  

Time charter/

July 2014

  Star Bulk

10.

 

Pantagruel(2)

  Capesize     180,181      Imabari,
Japan
  2004   Time charter/ July 2014   Oceanbulk

11.

 

Big Fish(2)

  Capesize     177,662      Mitsui, Japan   2004   Time charter/ July 2014   Oceanbulk

12.

 

Star Cosmo

  Supramax     52,247      Yangzhou
Dayang,
China
  2005  

Time charter/

June 2014

  Star Bulk

13.

 

Star Omicron

  Supramax     53,489      Imabari,
Japan
  2005  

Time charter/

June 2014

  Star Bulk

14.

 

Strange Attractor(2)

  Supramax     55,742      Mitsui, Japan   2006   Time charter/ July 2014   Oceanbulk

15.

 

Pendulum(3)

  Kamsarmax     82,619      Tsuneishi,
Japan
  2006   Time charter/ July 2014   Oceanbulk

16.

 

Kymopolia(3)

  Capesize     176,990      Namura,
Japan
  2006   —     Oceanbulk

17.

 

Big Bang(2)

  Capesize     174,109      SWS, China   2007   Time charter/ July 2014   Oceanbulk

18.

 

Star Borealis

  Capesize     179,678      Hanjin Subic,
The
Philippines
  2011  

Voyage charter/

May 2014

  Star Bulk

19.

 

Star Polaris

  Capesize     179,600      Hanjin Subic,
The
Philippines
  2011   —     Star Bulk

20.

 

Star Sirius

  Post Panamax     98,681      Tsuneishi
Zoushan,
China
  2011  

Time charter/

June 2016

  Star Bulk

21.

 

Star Vega

  Post Panamax     98,681      Tsuneishi
Zoushan,
China
  2011  

Time charter/

June 2016

  Star Bulk

22.

 

Obelix(2)

  Capesize     181,433      Imabari,
Japan
  2011   Time charter/ July 2014   Oceanbulk

23.

 

Amami(3)(4)

  Post-Panamax     98,681      Tsuneishi
Zhousan,
China
  2011   Time charter/ April 2016   Oceanbulk

 

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Vessel Name

  Type   Capacity
(dwt)
    Yard   Year Built or
Scheduled
Delivery
Date(1)
 

Employment/
Expiration Date

  Current
Owner

24.

 

Madredeus(3)(4)

  Post-Panamax     98,681      Tsuneishi
Zhousan,
China
  2011   Time charter/ June 2016   Oceanbulk

25.

 

Star Challenger

  Ultramax     61,462      Imabari,
Japan
  2012  

Time charter/

July 2014

  Star Bulk

26.

 

Maiden Voyage(2)

  Supramax     58,722      Kawasaki,
Japan
  2012   Time charter/ June 2014   Oceanbulk

27.

 

Star Fighter

  Ultramax     61,455      Imabari,
Japan
  2013  

Time charter/

April 2014

  Star Bulk

28.

 

Mercurial Virgo(3)

  Kamsarmax     81,545      Longxue,
China
  2013   Time charter/ August 2014   Oceanbulk

29.

 

Magnum Opus(5)

  Kamsarmax     81,022      JMU, Japan   2014   Time charter/ July 2014   Oceanbulk

30.

 

Tsu Ebisu(6)

  Kamsarmax     81,001      JMU, Japan   2014   Time charter/ July 2014   Dioriga
Shipping Co.

31.

 

Two of the following:

           

32.

             
 

ABYO Gwyneth

  Kamsarmax     82,790      Tsuneishi,
Japan
  2006   Time charter/ July 2014   Heron
 

ABYO Oprah

  Kamsarmax     82,551      Tsuneishi,
Japan
  2006   Time charter/ July 2014   Heron
 

ABYO Angelina

  Kamsarmax     82,987      Tsuneishi,
Japan
  2006   Time charter/ July 2014   Heron
    Total dwt:    

 

3,304,664-

3,305,100

  

  

       

Newbuilding

           

33.

 

HN 213-JMU (tbr Peloreus)(5)

  Capesize     182,000      JMU, Japan   July
2014(1)
  N/A   Oceanbulk

34.

 

HN 214-JMU (tbr Leviathan)(5)

  Capesize     182,000      JMU, Japan   August
2014
  N/A   Oceanbulk

35.

 

HN 5016 (tbr Indomitable)

  Capesize     182,160      JMU, Japan   October
2014
  N/A   Positive
Shipping
Company

36.

 

HN 1061(7)

  Ultramax     64,000      New
Yangzijiang,
China
  January
2015
  N/A   Oceanbulk

37.

 

HN 1063(7)

  Ultramax     64,000      New
Yangzijiang,
China
  January
2015(1)
  N/A   Oceanbulk

38.

 

HN 1062(7)

  Ultramax     64,000      New
Yangzijiang,
China
  February
2015(1)
  N/A   Oceanbulk

39.

 

HN 5017-JMU

  Capesize     182,000      JMU, Japan   March
2015
  N/A   Oceanbulk

40.

  HN NE164-NACKS (tbr Honey Badger)   Ultramax     61,000      NACKS,
China
  March
2015(1)
  N/A   Oceanbulk

41.

 

HN NE 165-NACKS

  Ultramax     61,000      NACKS,
China
  March
2015(1)
  N/A   Oceanbulk

42.

 

HN NE 166-NACKS

  Newcastlemax     209,000      NACKS,
China
  April
2015(1)
  N/A   Oceanbulk

43.

 

HN 1064(7)

  Ultramax     64,000      New
Yangzijiang,
China
  April
2015(1)
  N/A   Oceanbulk

44.

 

HN 1312-SWS(8)

  Capesize     180,000      SWS, China   April
2015(1)
  N/A   Oceanbulk

45.

 

HN NE167-NACKS

  Newcastlemax     209,000      NACKS,
China
  May
2015(1)
  N/A   Oceanbulk

 

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Table of Contents

Vessel Name

  Type   Capacity
(dwt)
    Yard   Year Built or
Scheduled
Delivery
Date(1)
 

Employment/
Expiration Date

  Current
Owner

46.

 

Star Acquarius-Hull 5040

  Ultramax     60,000      JMU, Japan   June 2015   N/A   Star Bulk

47.

 

HN 1313-SWS(8)

  Capesize     180,000      SWS, China   June
2015(1)
  N/A   Oceanbulk

48.

 

HN 1080

  Ultramax     64,000      New
Yangzijiang,
China
  July 2015   N/A   Oceanbulk

49.

 

HN 5055-JMU

  Capesize     182,000      JMU, Japan   July 2015   N/A   Oceanbulk

50.

 

HN NE184-NACKS

  Newcastlemax     209,000      NACKS,
China
  July 2015   N/A   Oceanbulk

49.

 

HN 5055-JMU

  Capesize     182,000      JMU, Japan   July 2015   N/A   Oceanbulk

51.

 

HN 1081

  Ultramax     64,000      New
Yangzijiang,
China
  August
2015
  N/A   Oceanbulk

52.

 

HN 5056-JMU

  Capesize     182,000      JMU, Japan   August
2015
  N/A   Oceanbulk

53.

 

Star Pisces-Hull 5043

  Ultramax     60,000      JMU, Japan   September
2015
  N/A   Star Bulk

54.

 

HN 1082

  Ultramax     64,000      New
Yangzijiang,
China
  September
2015
  N/A   Oceanbulk

55.

 

HN 1359(9)

  Newcastlemax     208,000      SWS, China   September
2015(1)
  N/A   Oceanbulk

56.

 

Star Aries-Hull 1338

  Capesize     180,000      SWS, China   October
2015
  N/A   Star Bulk

57.

 

Hull NE 196

  Ultramax     61,000      NACKS,
China
  October
2015
  N/A   Star Bulk

58.

 

Star Libra-Hull 1372(10)

  Newcastlemax     208,000      SWS, China   November
2015
  N/A   Star Bulk

59.

 

Hull NE 197

  Ultramax     61,000      NACKS,
China
  November
2015
  N/A   Star Bulk

60.

 

HN 1083

  Ultramax     64,000      New
Yangzijiang,
China
  November
2015(1)
  N/A   Oceanbulk

61.

 

HN 1360(9)

  Newcastlemax     208,000      SWS, China   December
2015
  N/A   Oceanbulk

62.

 

Star Gemini-Hull 1342

  Newcastlemax     208,000      SWS, China   January
2016
  N/A   Star Bulk

63.

 

Star Taurus-Hull 1339

  Capesize     180,000      SWS, China   January
2016
  N/A   Star Bulk

64.

 

Star Virgo-Hull 1371(10)

  Newcastlemax     208,000      SWS, China   February
2016
  N/A   Star Bulk

65.

 

Hull NE 198

  Newcastlemax     209,000      NACKS,
China
  March
2016
  N/A   Star Bulk

66.

 

HN 1361(9)

  Newcastlemax     208,000      SWS, China   March
2016(1)
  N/A   Oceanbulk

67.

 

Star Leo-Hull 1343

  Newcastlemax     208,000      SWS, China   April
2016
  N/A   Star Bulk

68.

 

HN 1362(9)

  Newcastlemax     208,000      SWS, China   May
2016(1)
  N/A   Oceanbulk

69.

 

HN 1363(9)

  Newcastlemax     208,000      SWS, China   June
2016(1)
  N/A   Oceanbulk
    Total dwt:     5,396,160           

 

(1)

The indicated expected delivery date of Oceanbulk’s newbuilding vessels is either the contracted delivery date or the expected delivery date that Oceanbulk has been advised of by the relevant shipyards. The indicated expected delivery date for each of hull numbers HN NE164-NACKS (tbr Honey Badger), HN NE165-NACKS, HN NE166-NACKS, HN 1062, HN 1064, HN NE167-NACKS, HN 1361 and HN 1362 reflects a delivery date that is one month earlier than the contracted delivery date. The

 

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  indicated expected delivery dates for hull numbers HN 1063, HN 1312-SWS, HN 1313-SWS, HN 1359 and HN 1363 reflect delivery dates that are three, four, three, two and three months earlier than the respective contracted delivery dates.
(2) These vessels secure the ABN Facility, which requires balloon payments with respect to the individual vessels from September 2017 to December 2018.
(3) These vessels will secure the HSBC Facility, for which Oceanbulk executed a binding term sheet on April 1, 2014. The facility is expected to mature 59 months after the drawdown date.
(4) Two of Oceanbulk’s Post-Panamax vessels, Amami and Madredeus, were acquired subject to long-term charters to Glocal Japan Inc. through April and June 2016, respectively, at a gross charterhire rate of $15,000 per day.
(5) Financing for these vessels is expected to be provided pursuant to the Deutsche Bank Facility, for which Oceanbulk executed an agreement on May 20, 2014. Loans under the facility are able to be drawn to finance payments on each vessel and mature five years after the drawdown date of each loan. An amount of $20 million was drawn in May upon delivery of Magnum Opus.
(6) Financing for this vessel is provided pursuant to a $20.0 million ship financing facility. This financing will mature in March 2019.
(7) Oceanbulk has entered into bareboat charters with affiliates of New Yangzijiang for these vessels with the option to purchase the vessels at any time and a purchase obligation upon the completion of the eighth year of the bareboat charterparty.
(8) Financing for these vessels is expected to be provided pursuant to a $57.4 million Oceanbulk ship financing facility, for which Oceanbulk executed a binding term sheet on March 21, 2014. Loans under the facility are able to be drawn to finance payments on each vessel and mature ten years after the drawdown date of each loan.
(9) Oceanbulk has entered into bareboat charters with affiliates of New Yangzijiang for these vessels with the option to purchase the vessels at any time and a purchase obligation upon the completion of the tenth year of the bareboat charterparty.
(10) Star Bulk has entered into bareboat charters for these vessels with the option to purchase the vessels at any time and a purchase obligation upon the completion of the tenth year of the bareboat charterparty.

Our Expected Business Strategies

Our primary objectives are to grow our business profitably and to continue to grow as a successful owner and operator of dry bulk vessels. The key elements of our strategy are:

Capitalize on any increases in demand for dry bulk shipping

To the extent that charterhire rates improve in the near to medium term, we will be positioned to capitalize on any such increases in rates, coinciding with our expected fleet expansion. While the charter market remains at current levels, we intend to operate our vessels in the spot and short-term time charter market in order to benefit from future increases in charter rates.

Charter our vessels in an active and sophisticated manner

Our business strategy will be centered on arranging voyage and short-term time charters for our vessels, an approach that is designed to give us the opportunity to take advantage of the fuel efficiency of our fleet, particularly our newbuilding vessels. While this process will be more difficult and labor-intensive than placing our vessels on longer-term time charters, it can lead to greater profitability, particularly for vessels that have lower fuel consumption than typical vessels. When operating a vessel on a voyage charter, we (as owner of the vessel) will incur fuel costs, and therefore we are in a position to benefit from fuel savings (particularly for our eco-vessels). If charter market levels rise, we may employ our existing fleet in the time charter market, while we may be able to more advantageously employ our newbuilding fleet in the spot market in order to capture the benefit of available fuel cost savings. For a time charter, a rate based in part on the projected fuel consumption of our ship must be negotiated, and we may not be given full credit by the chartering party for the fuel efficiency of our vessels.

Expand our fleet through opportunistic acquisitions of high-quality vessels at attractive prices

We have contracts for 37 additional newbuilding vessels with an aggregate capacity of approximately 5.4 million dwt. We intend to continue to opportunistically acquire high-quality vessels at attractive prices. When evaluating acquisitions, we will consider and analyze, among other things, our expectation of fundamental developments in the dry bulk shipping industry sector, the level of liquidity in the resale and charter market, the cash flow earned by the vessel in relation to its value, its condition and technical specifications with particular regard to fuel consumption, expected remaining useful life, the credit quality of the charterer and duration and terms of charter contracts for vessels acquired with charters attached, as well as the overall diversification of our fleet and customers.

 

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Leverage our customer base and customer relationships and the experience and expertise of our management team in the international shipping industry

We intend to leverage our existing operational history, customer base and customer relationships and the operational expertise of our management team in order to further expand these relationships with consistent delivery of superior customer service.

Minimize operating and corporate expenses

We will seek to minimize our operating and corporate expenses, leveraging our senior management team’s extensive operational experience and strong relationships with key suppliers. We also believe that our fully delivered combined fleet of 69 vessels will provide us with opportunities to take advantage of economies of scale. We also expect to use our vessel remote monitoring system to enhance our ability to manage the operations of our vessels, thereby increasing operational efficiency and reducing maintenance costs and off-hire time.

Maintain a strong balance sheet through moderate use of leverage

We plan to finance our fleet, including future vessel acquisitions and newbuildings, with a mix of debt and equity, and we intend to maintain moderate levels of leverage over time, even though we may have the capacity to obtain additional financing. By maintaining moderate levels of leverage, we expect to retain greater flexibility than our more leveraged competitors to operate our vessels under shorter spot or period charters.

Management of Our Business

Our management team will be led by Mr. Pappas, who will be our Chief Executive Officer. While he expects that he will spend substantially all of such time as he devotes to the dry bulk shipping industry managing our company, Mr. Pappas is not required to work full-time on our affairs. We expect that the amount of time Mr. Pappas allocates to managing our company will vary from time to time depending on the needs of the business and the level of strategic activity at the time.

After completion of the Transactions, we expect to continue to provide our own technical and operational management services, which include managing crew issues, safety issues, risk management, environmental compliance, operational logistics, vessel maintenance and dry docking and special surveys and supervising the execution of the voyage plans specified in charters or that are required to complete any contracts.

Following the Transactions, we expect to provide our own commercial management services and procurement services, but we may also outsource such services.

Summary Risk Factors

Investing in the Combined Company will entail a high degree of risk. After the Transactions, you will be subject to the risks to which you are already subject as an investor in Star Bulk, which are set forth in detail in the “Risk Factors” section of Star Bulk’s Annual Report on Form 20-F for the year ended December 31, 2013, which is incorporated by reference in this Proxy Statement. You should read such Risk Factors in their entirety before making your voting decision.

In addition, as more fully described in the “Risk Factors” section of this proxy statement, the Transactions will expose you, as an investor in the Combined Company, to additional risks beyond those to which you are subject as an investor in Star Bulk. Our ability to implement our business strategies and achieve favorable results of operations is subject to such risks. You should carefully consider such risks before deciding to invest in our common stock. These risks include, among others, that:

 

 

our business is by nature capital-intensive, and because we will have 26 more newbuilding vessels than Star Bulk, we may not be able to generate or obtain sufficient capital to pay for our newbuilding vessels and

 

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satisfy our other capital needs, and each individual bank may be reluctant to lend larger sums to the Combined Company instead of smaller sums to Star Bulk and Oceanbulk separately;

 

  Oceanbulk has a limited operating history and has generated $10.4 million of net loss during the year ended December 31, 2013, $7.6 million of net loss during the three month period ended March 31, 2014 and accumulated deficit of $20.1 million as of March 31, 2014;

 

  the risk of delays or cancellations of our newbuilding vessels is exacerbated because we will have 26 additional newbuilding vessels;

 

  our Chief Executive Officer and certain members of his family may have interests in various shipping companies, and certain members of our management are also members of management of other shipping companies, which could cause additional conflicts of interest;

 

  the Sellers, who will be significant stockholders of the Combined Company may have interests that are not aligned with yours, and they may have a negative effect on your ability to influence our governance;

 

  some of the significant stockholders of the Combined Company, including Oaktree, are in the business of investing in companies that may compete directly or indirectly with us, as well as companies that may provide services to our business, and their interests may not be aligned with yours;

 

  we may not realize the expected benefits of the Transactions;

 

  the additional indebtedness of the Combined Company will impose certain additional operating and financial restrictions on the Combined Company that were not applicable to Star Bulk as a stand-alone entity;

 

  we may not be able to manage our growth profitably;

 

  we may experience integration difficulties, which could hamper our ability to realize the expected benefits of the Transactions;

 

  we will be substantially dependent on our senior management, particularly Mr. Petros Pappas, and we may not be able to retain key employees and skilled workers following the Transactions;

 

  you will experience a reduction in your percentage ownership as a result of the Transactions;

 

  after the closing of the Transactions, we may have to pay a tax on United States sourced income, which could reduce our earnings; and

 

  the Combined Company will be exposed to additional liabilities of Oceanbulk, which may not be known, probable or estimable at this time.

 

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STAR BULK CARRIERS CORP.

UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed combined financial statements of Star Bulk reflect:

 

    the Merger of the Oceanbulk Holdcos into one or more merger subsidiaries of Star Bulk, as a result of which they will become wholly-owned subsidiaries of Star Bulk; and

 

    the purchase (the “Pappas Company Acquisition”) of all of the outstanding shares of Dioriga and Positive Shipping (including any outstanding indebtedness of such entities and any vessel charters in effect at the time of such purchase) by Star Bulk (the “Pappas Companies”).

In addition, the unaudited pro forma condensed combined balance sheet gives effect to changes in stockholders equity, debt issued and vessel acquisitions of Star Bulk, the Oceanbulk Companies and the Pappas Companies and the purchase of the two Heron Vessels, subsequent to March 31, 2014, as if such transactions occurred on March 31, 2014, all of which are discussed in Note 2a and Note 2i. We refer to all of the foregoing transactions as the “Pro Forma Transactions.”

The Merger and the Pappas Company Acquisition have been reflected in the unaudited pro forma condensed combined financial information as purchases of businesses pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 805, “Business Combinations” (“ASC Topic 805”). In addition Star Bulk will purchase two vessels from the Heron JV (the “Heron Vessel Acquisition). The Heron Vessel Acquisition has been reflected in the Pro Forma Adjustments in the unaudited pro forma condensed combined financial information as a purchase of assets.

The unaudited pro forma condensed combined balance sheet as of March 31, 2014 is presented in thousands of U.S. dollars and gives effect to the Merger, the Pappas Company Acquisition and the Heron Vessel Acquisition as if such transactions were consummated on March 31, 2014. The unaudited pro forma condensed combined statements of income for the year ended December 31, 2013, and three months ended March 31, 2014, are presented in thousands of U.S. dollars and give effect to the Merger and the Pappas Company Acquisition as if such transactions closed on January 1, 2013.

These unaudited pro forma condensed combined financial statements are being presented for illustrative purposes only and, therefore, are not necessarily indicative of the financial position or results of operations that might have been achieved had the Pro Forma Transactions actually occurred on March 31, 2014 and January 1, 2013, respectively. They are not necessarily indicative of the results of operations or financial position of Star Bulk that may, or may not be expected to occur in the future. The unaudited pro forma condensed combined financial statements do not reflect any special items such as payments pursuant to change-of-control provisions or restructuring and integration costs that may be incurred as a result of the Pro Forma Transactions.

The following unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with Star Bulk’s audited consolidated financial statements and the related notes included in Star Bulk’s Annual Report on Form 20-F for the year ended December 31, 2013, filed with the SEC on March 21, 2014, Star Bulk’s press release announcing the financial results for the first quarter ended March 31, 2014, furnished with the SEC on Form 6-K on May 29, 2014 and in conjunction with Oceanbulk’s audited and unaudited combined financial statements and the related notes included in this proxy statement.

The cost of the acquisition of the Oceanbulk Companies and the Pappas Companies has been allocated to the estimated fair values of the identifiable assets and liabilities of the Oceanbulk Companies and the Pappas Companies pursuant to the acquisition method of accounting prescribed by ASC Topic 805, and is based on preliminary estimates of such respective fair values. Therefore, the cost of the business combination and the cost of the Heron Vessel Acquisition are based on the average closing market price of Star Bulk’s common share, as

 

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determined over a period of two days before and two days after the date that the terms of the acquisition are agreed to and announced on June 16, 2014, (the “Market Price Per Common Share”). Accordingly, the purchase price allocation and resulting pro forma adjustments have been made solely for the purpose of preparing the unaudited pro forma condensed combined financial statements for this proxy. As a consequence, the purchase price and the purchase price allocation are preliminary and subject to revision based on the final determination of the fair values of the identifiable assets and liabilities of the Oceanbulk Companies and the Pappas Companies and potential changes in the price of Star Bulk’s common shares. All the other pro forma adjustments and reclassifications are also preliminary.

 

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STAR BULK CARRIERS CORP

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 31, 2014

 

    AS OF MARCH 31, 2014  
    Star Bulk
Carriers
    Oceanbulk
Companies
    Pappas
Companies
    Pro forma
Adjustments
          Pro Forma  
    (in thousands of U.S. Dollars, except for share and per share data)  

ASSETS

            Note     

CURRENT ASSETS

           

Cash and cash equivalents

  $ 37,686        1,667        1      $ (6,107     2c      $ 33,247   

Restricted cash, current

    2,448        190        —          —            2,638   

Trade accounts receivable

    4,870        7,547        —          —            12,417   

Inventories

    5,000        5,674        —          —            10,674   

Due from managers

    81        —          —          —            81   

Due from related parties

    1,727        —          —          (1,436     2d        291   

Prepaid expenses and other receivables

    2,679        969        3        —            3,651   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Current Assets

    54,491        16,047        4        (7,543       62,999   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

FIXED ASSETS

           

Advances for vessels under construction and acquisition of vessels

    80,605        149,465        22,342        190,718        2j        443,130   

Vessels and other fixed assets, net

    382,295        287,604        —          158,229        2k        828,128   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Fixed Assets

    462,900        437,069        22,342        348,947          1,271,258   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

OTHER NON-CURRENT ASSETS

           

Goodwill

    —          —          —          14,491        2b        14,491   

Long term Investment

    527                527   

Convertible loans receivable

      23,680        —          (23,680     2i        —     

Deferred finance charges, net

    1,901        695        80        1,365        2c        4,041   

Restricted cash, non-current

    13,370        6,000        —          —            19,370   

Fair value of above market acquired time charter

    6,412        —          —          2,359        2e        8,771   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

TOTAL ASSETS

  $ 539,601        483,491        22,426      $ 335,939        $ 1,381,457   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Current portion of long term debt

  $ 26,999        9,897        —        $ 2,733        2c      $ 39,629   

Accounts payable

    5,796        4,342        40        —            10,178   

Due to related parties

    1,799        676        300        (1,436     2d      $ 1,339   

Accrued liabilities

    4,644        2,536        50        —            7,230   

Deferred revenue

    1,019        538        —          —            1,557   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Current Liabilities

    40,257        17,989        390        1,297          59,933   

NON-CURRENT LIABILITIES

           

Long term debt

    232,877        74,214        —          37,267        2c        344,358   

Derivative liability

    67        2,539        —          4,156        2b        6,762   

Other non-current liabilities

    275        —          —          —            275   

Members’ Loans

    —          408,838        —          (408,838     2c        —     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES

    273,476        503,580        390        (366,118       411,328   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

STOCKHOLDERS’ EQUITY

    266,125        (20,089     22,036        702,057        2c        970,129   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 539,601        483,491        22,426      $ 335,939        $ 1,381,457   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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STAR BULK CARRIERS CORP

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2014

 

    THREE MONTHS ENDED MARCH 31, 2014      
    Star Bulk
Carriers
    Oceanbulk
Companies
    Pappas
Companies
    Pro forma
Adjustments
        Pro Forma      
    (in thousands of U.S. Dollars, except for share and per share data)      

Revenues:

          Note     Note

Voyage revenues

  $ 19,381        10,613        —        $ (284   2e   $ 29,710     

Management fee income

    798          —          (548   2f     250     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
    20,179        10,613        —          (832       29,960     

Expenses

             

Voyage expenses

    2,445        4,919        —          —            7,364     

Vessel operating expenses

    8,005        5,533        47        —           13,585     

Dry docking expenses

    690        725        —          —            1,415     

Depreciation

    4,679        2,153        —          1,251      2g     8,083     

General and administrative expenses

    3,790        1,233        7        —            5,030     

Management fees

    —          548        —          (548   2f     —       

Other operational loss

    90        —          —          —            90     

Other operational gain

    (169     —          —          —            (169  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
    19,530        15,111        54        703          35,398     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating income / (loss)

    649        (4,498     (54     (1,535       (5,438  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other Income / (Expenses):

             

Interest and finance costs

    (1,363     (964     (65     —            (2,392  

Interest on Members’ Loans

    —          (966     —          966      2h     —       

Loss on derivative financial instruments, net

    (158     (1,116     —          —            (1,274  

Interest and other income

    (11     (17     (1     —            (29  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total other expenses, net

    (1,532     (3,063     (66     966          (3,695  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

LOSS BEFORE EQUITY IN INCOME OF INVESTEE

    (883     (7,561     (120     (569       (9,133  

Equity in income of investee

    5        —          —          —            5     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Loss

  $ (878     (7,561     (120   $ (569     $ (9,128  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Loss per share, basic

  $ (0.03           $ (0.11  
 

 

 

           

 

 

   

Loss per share, diluted

  $ (0.03           $ (0.11  
 

 

 

           

 

 

   

Weighted average number of shares outstanding, basic

    28,849,559                82,953,759      2l
 

 

 

           

 

 

   

Weighted average number of shares outstanding, diluted

    28,849,559                82,953,759      2l
 

 

 

           

 

 

   

 

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STAR BULK CARRIERS CORP

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2013

 

    YEAR ENDED DECEMBER 31, 2013      
    Star Bulk
Carriers
    Oceanbulk
Companies
    Pappas
Companies
    Pro forma
Adjustments
        Pro Forma      
    (in thousands of U.S. Dollars, except for share and per share data)      

Revenues:

          Note     Note

Voyage revenues

  $ 68,296        14,021        —       $ (1,151   2e   $ 81,166     

Management fee income

    1,598        —         —         (660   2f     938     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
    69,894        14,021        0        (1,811       82,104     

Expenses

             

Voyage expenses

    7,549        4,017        —         —           11,566     

Vessel operating expenses

    27,087        6,142        —         —           33,229     

Dry docking expenses

    3,519        3,248        —         —           6,767     

Depreciation

    16,061        2,656        —         1,753      2g     20,470     

General and administrative expenses

    9,910        4,097        14        —           14,021     

Management fees

    —         660        —         (660   2f     —       

Loss on sale of vessel

    87        —         —         —           87     

Other operational loss

    1,125        —         —         —           1,125     

Other operational gain

    (3,787     —         —         —           (3,787  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
    61,551        20,820        14        1,093          83,478     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating income/(loss)

    8,343        (6,799     (14     (2,904       (1,374  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other Income / (Expenses):

             

Interest and finance costs

    (6,814     (786     (30     —            (7,630  

Interest on Members’ Loans

    —         (1,412     —         1,412      2h     —       

Loss on derivative financial instruments, net

    91        (1,423     —         —            (1,332  

Interest and other income

    230        5        —         —            235     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total other expenses, net

    (6,493     (3,616     (30     1,412          (8,727  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Income / (loss)

  $ 1,850        (10,415     (44     (1,492     $ (10,101  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Preferential Deemed Dividend

    —         (705           (705  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Income / (loss) available to common shareholders / Members

    1,850        (11,120     (44     (1,492       (10,806  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Earnings / (loss) per share, basic

  $ 0.13              $ (0.16  
 

 

 

           

 

 

   

Earnings / (loss) per share, diluted

  $ 0.13              $ (0.16  
 

 

 

           

 

 

   

Weighted average number of shares outstanding, basic

    14,051,344                68,155,544      2l
 

 

 

           

 

 

   

Weighted average number of shares outstanding, diluted

    14,116,389                68,155,544      2l
 

 

 

           

 

 

   

 

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Note 1—Description of transactions and basis of presentation:

 

Description   of Merger and Heron Vessel Acquisition

On June 16, 2014, Star Bulk announced that it had entered into a definitive agreement to acquire the Oceanbulk Companies (the “Merger Agreement”) and the Pappas Companies (the “Pappas Agreement”) and two vessels (the “Heron Vessels”) from Heron Ventures Ltd (the “Heron JV”), for consideration amounting to 48,395,766, 3,592,728 and 2,115,706 common shares, respectively, of Star Bulk. The Merger Agreement and the Pappas Agreement are fully described in the sections entitled “The Merger Agreement” and “The Pappas Agreement” contained elsewhere in this proxy statement and should be read in conjunction with these unaudited pro forma condensed combined financial statements. The “Heron Vessel Acqusition” is fully described also in the section entitled “The Merger Agreement”.

Assumptions

The unaudited pro forma condensed combined balance sheet as of March 31, 2014, are presented in thousands of U.S. dollars and gives effect to the Merger, the Pappas Company Acquisition and the Heron Vessel Acquisition as if such transactions were consummated on March 31, 2014. The unaudited pro forma condensed combined statements of income for the year ended December 31, 2013 and three months ended March 31, 2014, are presented in thousands of U.S. dollars and give effect to the Merger and the Pappas Company Acquisition as if such transactions closed on January 1, 2013. All of the pro forma adjustments, including those related to the Heron Vessel Acquisition, made to the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of income are discussed in Note 2, below.

With respect to the pro forma adjustments related to the unaudited pro forma condensed combined statements of income, only adjustments that are expected to have a continuing effect on the combined financial statements are taken into consideration. For example, the unaudited pro forma condensed combined financial statements do not reflect any restructuring expenses, payments pursuant to change-of-control provisions or integration costs that may be incurred as a result of the Merger.

Only adjustments that are factually supportable and that can be estimated reliably are taken into consideration. For example, the unaudited pro forma condensed combined financial statements do not reflect any cost savings potentially realizable from the elimination of certain expenses or from potential synergies, if any.

The cost of the acquisition of the Oceanbulk Companies and the Pappas Companies has been allocated to the estimated fair values of the identifiable assets and liabilities of the Oceanbulk Companies and the Pappas Companies pursuant to the acquisition method of accounting prescribed by ASC Topic 805, and is based on preliminary estimates of such respective fair values. Therefore, the cost of the business combination and the cost of the Heron Vessel Acquisition are based on the average closing market price of Starbulk’s common share, as determined over a period of two days before and two days after the date that the terms of the acquisition are agreed to and announced, on June 16, 2014, (the “Market Price Per Common Share”). Accordingly, the purchase price allocation and resulting pro forma adjustments have been made solely for the purpose of preparing the unaudited pro forma condensed combined financial statements for this proxy. As a consequence, the purchase price and the purchase price allocation are preliminary and subject to revision based on the final determination of the fair values of the identifiable assets and liabilities of the Oceanbulk Companies and the Pappas Companies and potential changes in the price of the Company’s common share. All other pro forma adjustments and reclassifications are also preliminary.

Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement:

 

a.   Events subsequent to March 31, 2014 up to the date of this Proxy Statement

On May 27, 2014, the vessel Magnum Opus, a 81,022 dwt, Kamsarmax dry bulk carrier, was delivered to Oceanbulk Companies from the shipyard Japan Marine United Corporation. The delivery installment of

 

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Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

a.   Events subsequent to March 31, 2014 up to the date of this Proxy Statement – (continued)

 

$18,620 was financed by a new loan facility with Deutsche Bank AG of $85,000, concluded on May 20, 2014, under which the Oceanbulk Companies drew down an amount of $20,000, representing the first available tranche relating to the delivered vessel. In connection with the new loan agreement, Oceanbulk Companies paid arrangement fees amounting to $1,285, in May 2014. As of March 31, 2014, Oceanbulk Companies had paid as advances and capitalized costs amounted to $12,552. The pro forma adjustments to vessels and other fixed assets, net, amount to $31,201 and reflect the accounting for subsequent delivery of the vessel to Oceanbulk Companies.

On April 25, 2014, the vessel Tsu Ebisu, a 81,001 dwt Kamsarmax dry bulk carrier, was delivered to Pappas Companies from the shipyard Japan Marine United Corporation. The delivery installment of $18,622 was financed by a new loan facility with HSBC Bank plc of $20,000, concluded on April 14, 2014, under which Pappas Companies drew down the amount of $20,000. In connection with the new loan agreement, Pappas Companies paid arrangement fees amounting to $80, in April 2014. As of March 31, 2014, for the respective vessel Pappas Companies had paid as advances and capitalized costs amounted to $12,448. The pro forma adjustments to vessels and other fixed assets, net, amount to $31,070 and reflect the accounting for subsequent delivery of the vessel to Pappas Companies.

The above-described transactions relating to the Magnum Opus and Tsu Ebisu resulted in an increase in long-term debt and various corresponding changes to Advances for vessels under construction and acquisition of vessels and Vessels and other fixed assets, net, which are described in Notes 2c, 2j and 2k and are reflected in the Purchase Price Allocation as described in Note 2b.

On May 28, 2014, the entire $415,037 aggregate principal and interest of the Members’ Loans (which were loans made by the members of the Oceanbulk Companies to the Oceanbulk Companies), was converted into 415,037 Class A Units issued by Oceanbulk Companies to the respective members. As of March 31, 2014, there was $408,838 of accrued principal and interest with respect to the Members’ Loans. Subsequent to March 31, 2014 and before the conversion of the loan into equity an additional amount of $6,199 was recorded, consisting of an additional $4,870 of Members’ Loans incurred to finance the scheduled yard installment (described below) and accrued interest of $1,329, as further described in Notes 2c and 2j.

During May 2014, Oceanbulk Companies paid $4,870 for scheduled yard installments with respect to a newbuilding Capesize vessel (Hull HN 214—to be renamed Leviathan).

 

b.   Preliminary Purchase Price Allocation

Upon the completion of the Merger and the Pappas Company Acquisition, all of the outstanding membership interests of the Oceanbulk Companies and all of the membership interests of the Pappas Companies will automatically be converted into the right to receive an aggregate of 48,395,766 and 3,592,728, respectively, common shares of Star Bulk. In addition, at the closing of the Merger, the Company will issue and deposit into escrow an aggregate of 2,115,706 common shares, representing a portion of consideration for the acquisition of the two Heron Vessels. The shares issued for the two Heron vessels will go into escrow and will be released as described in the section entitled “The Merger Agreement—Dissolution and Winding Up of Heron” contained elsewhere in this proxy statement.

 

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Table of Contents

Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

b.   Preliminary Purchase Price Allocation – (continued)

 

In accordance with ASC Topic 805, the cost of the acquisition has been allocated to the estimated fair value of the identifiable assets of the Oceanbulk Companies and the Pappas Companies pursuant to the acquisition method under ASC Topic 805, “Business Combinations” and is based on preliminary estimates of their respective fair values. The fair value of the share consideration is based on the average closing market price of Starbulk’s common share, as determined over a period of two days before and two days after the date that the terms of the acquisition are agreed to and announced, on June 16, 2014, (the “Market Price Per Common Share”) of $13.012. The share price at the consummation of the Transactions may differ from the Market Price Per Common Share, which may impact the final amounts recorded as goodwill or gain from bargain purchase.

 

     Oceanbulk Companies     Pappas Companies     Total      
     (in thousands of U.S. Dollars)      

Preliminary Purchase Consideration

        

Amount to be paid in Star Bulk’s shares

   $ 629,726      $ 46,748      $ 676,474      (i)

Estimated transaction costs

     6,982        518        7,500      (ii)
  

 

 

   

 

 

   

 

 

   

Total Preliminary Purchase Consideration

   $ 636,708      $ 47,266      $ 683,974     

Less: Net Assets as of 31/03/2014 adjusted as follows:

        

Net Assets as of 31/03/2014

   $ (20,089   $ 22,036      $ 1,947     

Adjustment to cash & cash equivalents for delivery of Tsu Ebisu and Magnum Opus (Note 2c)

     95        1,298        1,393      (iii)

Additions to Deferred Charges in connection with the two new loans of $85,000 and $20,000, respectively (Note 2a)

     1,285        80        1,365      (iv)

Reclassify amounts advanced for Tsu Ebisu and Magnum Opus to vessels and other fixed assets, net, since the vessels delivered (Note 2a)

     (12,552     (12,448     (25,000   (iv)

Additions to advances for installment paid in connection to Oceanbulk Companies vessels under construction (Note 2a)

     4,870        —          4,870      (iv)

Record to Vessels and other fixed assets, net, the amounts for the delivery of Tsu Ebisu and Magnum Opus, since the vessels delivered (Note 2a)

     31,201        31,070        62,271      (iv)

Drawdown amounts under the new loan agreements of $85,000 and $20,000, respectively (Note 2a)

     (20,000     (20,000     (40,000   (iv)

Members Loan Conversion to Equity (Note 2a)

     408,838        —          408,838      (iv)

Adjustment for the Convertible loan receivable from the Heron JV (Note 2i)

     (23,680     —          (23,680   (v)
  

 

 

   

 

 

   

 

 

   

Adjusted Net Assets

     369,968        22,036        392,004     
  

 

 

   

 

 

   

 

 

   
   $ 266,740      $ 25,230      $ 291,970     
  

 

 

   

 

 

   

 

 

   

Allocation of Purchase Consideration to reflect estimated Fair Value

        

Advances for vessels under construction

   $ 170,168      $ 13,150      $ 183,318      (vi)

Vessels

     92,028        3,930        95,958      (vi)

Fair value of above market acquired time charter

     2,359        —          2,359      Note 2e

Interest rate swap as of June 2, 2014

     (4,156     —          (4,156   (vii)
  

 

 

   

 

 

   

 

 

   
   $ 260,399      $ 17,080      $ 277,479     
  

 

 

   

 

 

   

 

 

   

Fair Value of Net Assets

     630,367        39,116        669,483     
  

 

 

   

 

 

   

 

 

   

Preliminary Estimated Goodwill

   $ 6,341      $ 8,150      $ 14,491     
  

 

 

   

 

 

   

 

 

   

 

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Table of Contents

Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

b.   Preliminary Purchase Price Allocation – (continued)

 

  i The total amount to be paid in Star Bulk’s common shares is calculated based on the number of shares to be issued in the Transactions, as stated above, and the Market Price Per Common Share of $13.012.

 

  ii. These costs represent estimated costs directly related to the Transactions and consist of fees to be paid to financial and legal advisors and for accounting services and appraisals.

 

  iii. This amount represents the difference between the loan proceeds of the two facilities secured by vessels Tsu Ebisu and Magnum Opus (See Note 2a) and the last installment paid to the shipyard upon their delivery minus the financing fees paid in connection to the aforementioned loan facilities.

 

  iv. See Note 2a, which describes events occurring subsequent to March 31, 2014.

 

  v. This amount represents the adjustment of a convertible loan receivable provided to the Heron JV by Oceanbulk Companies, since the total purchase consideration for the Oceanbulk Companies does not include this convertible loan receivable (See Note 2i).

 

  vi. The amount indicates the preliminary estimated fair value of the vessels and newbuilding contracts of the Oceanbulk Companies and the Pappas Companies as quoted by three independent vessel appraisers as of June 2, 2014, June 9, 2014 and June 10, 2014.

 

  vii. The amount represents the market value of the Oceanbulk Companies’ interest rate swap agreement as of June 2, 2014.

Based on the aforementioned assumptions and adjustments and the preliminary allocation of the purchase price, the Company estimates that the Transactions will result in a goodwill of $14,491. This goodwill is based on the excess of the aggregate purchase consideration of $683,974 (which includes an estimated transaction costs of $7,500 over the $669,482 estimated fair value of net assets acquired). Approximately 51% of the resulting goodwill is attributed to the transaction costs ($7,500) which are a customary expense in transactions similar to the Transactions. Furthermore the substantial increase in the price of common shares of Star Bulk over the last five business days (13.57% on a cumulative basis) has resulted in a Market Price Per Common Share above the estimated fair value per share of net assets acquired and ultimately in an estimated preliminary goodwill of $14,491.

 

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Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

c.   Cash, Deferred Finance Charges, Long-Term Debt, Members’ loan and Stockholders Equity

 

    DR/ (CR)  
                Long Term Debt              
    Cash and cash
equivalents
    Deferred
finance
charges,
net
                Members’
loans
    Stockholders’
equity
 
        Current portion     Long term      
    (in thousands of U.S. Dollars)  

As per Star Bulk unaudited balance sheet as of March 31, 2014

  $ 37,686      $ 1,901      $ (26,999   $ (232,877     —        $ (266,125

As per Oceanbulk Companies unaudited balance sheet as of March 31, 2014

    1,667        695        (9,897     (74,214     (408,838     20,089  

As per Pappas Companies unaudited balance sheet as of March 31, 2014

    1        80        —          —          —          (22,036

Pro forma adjustments:

           

Estimated transaction costs (Note 2bii)

    (7,500     —          —          —          —          —     

Pappas Companies—Arrangement fees paid in relation to new loan of $20,000 in April 2014 (Note 2a)

    (80     80        —          —          —          —     

Oceanbulk Companies—Arrangement Fees paid in relation to new loan of $85,000 in May 2014 (Note 2a)

    (1,285     1,285        —          —          —          —     

Oceanbulk Companies—Additional Members’ Loans (for Leviathan installment, Note 2a) and accrued interest

    —          —          —          —          (6,199     —     

Oceanbulk Companies—Conversion of Members’ Loans to Equity (Note 2a)

    —          —          —          —          415,037        —     

Oceanbulk Companies—Drawdown of $20,000 from the new loan facility of $85,000 in order to finance the delivery installment for Magnum Opus (Note 2a)

    1,380        —          (1,333     (18,667     —          —     

Pappas Companies—Drawdown amount under the new loan of $20,000 in order to finance the delivery installment for vessel Tsu Ebisu (Note 2a)

    1,378        —          (1,400     (18,600     —          —     

Reflect the consideration to be settled in Star Bulk’s Common Shares which will be held in escrow for Heron Vessels

    —          —          —          —          —          (27,530 )(1) 

Reflect the consideration to be settled in Star Bulk’s Common Shares for the acquisition of Oceanbulk and Pappas Companies

    —          —          —          —          —          (676,474 )(2) 

Reversal of Oceanbulk’s net assets as of March 31, 2014

    —          —          —          —          —          (20,089

Reversal of Pappas Companies’ net assets as of March 31, 2014

    —          —          —          —          —          22,036  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma Adjustments

  $ (6,107   $ 1,365      $ (2,733   $ (37,267   $ 408,838      $ (702,057
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Pro forma amounts as of March 31, 2014

  $ 33,247      $ 4,041      $ (39,629   $ (344,358   $ —        $ (970,129
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) This amount is calculated based on the 2,115,706 Star Bulk common shares to be issued at the Market Price Per Common Share of $13.012, for the acquisition of the Heron Vessels. Such shares will be deposited into escrow. Refer to Note 2i below.

 

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Table of Contents

Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

c.   Cash, Deferred Finance Charges, Long-Term Debt, Members’ loan and Stockholders Equity – (continued)

 

  (2) This amount is calculated based on the 51,988,494 Star Bulk common shares to be issued at the Market Price Per Common Share of $13.012, for the acquisition of Oceanbulk Companies and the Pappas Companies.

 

d.   Due from related parties / Due to related parties

All intercompany balances arising from the management of Oceanbulk Companies vessels from Star Bulk are eliminated.

 

e.   Fair value of above market acquired time charter

The amount relates to assets arising from the fair value of Oceanbulk Companies’ long term time charter contracts (“Charters Assumed”) at above market terms to be assumed by Star Bulk upon consummation of the Transactions. Fair value is determined by reference to market data. The preliminary estimated amounts reflected as an asset in the unaudited pro forma condensed combined balance sheet are based on the difference between the current fair value of charters with similar characteristics as the Charters Assumed and the net present value of future contractual cash flows from the Charters Assumed. The respective assets are amortized as a reduction of revenue over the period of the charters assumed. The remaining useful life of the Charters Assumed is two years. This reduction for the twelve months ended December 31, 2013, and three months ended March 31, 2014, was $1,151 and $284, respectively.

 

f.   Management fee income/ Management fee

All intercompany revenues and expenses arising from Star Bulk’s management of Oceanbulk Companies’ vessels are eliminated.

 

g.   Depreciation

To record increased depreciation of vessels based on the preliminary fair values assigned to the vessels using Star Bulk’s estimated useful life of 25 years and net of adjustment of scrap value price of $200 per ton in line with Star Bulk’s accounting policy.

 

h.   Interest on Members’ Loans

Interest expense with respect to the Members’ Loans is eliminated as a result of the conversion of the Members’ Loans into equity as if it has occurred on January 1, 2013.

 

i.   Convertible loan receivable and acquisition of HeronVessels

Reflects the assumption by Star Bulk (through its acquisition of the Oceanbulk Companies) of an outstanding loan receivable that is convertible into 50% of the equity interests of the Heron JV. Pursuant to the Merger Agreement, Star Bulk will pay $25,000 in cash and the Heron Consideration, consisting of 2,115,706 Star Bulk common shares, which will be released from escrow to the Sellers at the time the Heron JV distributes its Core Vessels to Oceanbulk and ABY, whereupon the two Heron Vessels will be transferred to Star Bulk. The completion of this transaction will ultimately result in a decrease in the convertible loan receivable and an increase in vessels and other fixed assets, net. Based on the provisions of the Merger Agreement, Star Bulk expects that the transfer of the two Heron Vessels will be completed within the third quarter of 2014, with the following key milestones occurring after the closing of the Merger:

 

    Star Bulk will exercise its option to convert the convertible loan into a 50% equity interest in the Heron JV, where the Oceanbulk Sellers will remain as ultimate beneficial owners of the Heron JV, until the Heron JV is dissolved.

 

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Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

i.   Convertible loan receivable and acquisition of HeronVessels – (continued)

 

    The two Heron Vessels will be distributed to Star Bulk from the Heron JV. Upon such distribution, Star Bulk will instruct the escrow agent to release the 2,115,706 common shares held in Escrow and to disburse $25,000 in cash to the Sellers. Star Bulk expects that the $25,000 cash payment will be financed by a debt facility with CIT.

 

    Giving effect to all of the above transactions by the end of the third quarter of 2014, Star Bulk will have acquired:

      a) The two Heron Vessels in exchange for 2,115,706 common shares and $25,000 in cash; and

      b) 50% of the equity capital of the Heron JV. This investment is estimated to have zero value for Starbulk since the $5,000 in cash that will be retained by the Heron JV will be used to satisfy future liabilities. The Heron JV will have no vessels or other operating expenses.

 

    Heron JV will be liquidated, and any remaining cash will be distributed to Star Bulk and further transferred to the Oceanbulk Sellers as per the Merger Agreement.

Based on the above expected sequence of events, Star Bulk assessed that after the completion of the aforementioned events and prior to the final liquidation of Heron JV, the accounting effect on its financial position will be:

 

    Star Bulk will have acquired the two Heron Vessels for a total consideration of 2,115,706 common shares and $25,000 in cash;

 

    Under the Merger Agreement, Star Bulk has agreed to incur new debt of $25,000 to finance the $25,000 cash payment in respect of the two Heron Vessels; and

 

    Star Bulk will also own the 50% of the equity capital of the Heron JV, and per the provision of the Merger Agreement any cash left after the final liquidation of the Heron JV will be transferred to the Oceanbulk Sellers, and Star Bulk will have no economic benefit from the Heron JV liquidation process.

Consequently for the purposes of preparation of these unaudited pro forma condensed combined financial statements and the allocation of the purchase price in the Transactions, Star Bulk has elected to make the following pro forma adjustments to reflect:

 

    the acquisition by Star Bulk of the two Heron Vessels; and

 

    the conversion of the $23,680 outstanding convertible loan into a 50% equity interest in the Heron JV, for which based on the sequence of events stated above Star Bulk estimates that has a fair value equal to $0, as no economic benefit will be provided to Star Bulk from the process described above.

 

j.   Advances for vessels under construction and acquisition of vessels

The pro forma adjustments to Advances for vessels under construction and acquisition of vessels are as follows:

 

Pro forma adjustment to reflect fair values of Advances for vessels under construction

   $ 183,318      Note 2b 

Reclassify amounts advanced for Tsu Ebishu and Magnum Opus to Vessels and other fixed assets, net, since the vessels delivered

     (25,000 )    Note 2b 

Additions to advances for installment paid in connection to Oceanbulk Companies vessels under construction

     4,870      Note 2b 

Advances for Heron Vessels paid in shares held in escrow

     27,530      Note 2c and 2i 
  

 

 

   

Total adjustments

   $ 190,718     
  

 

 

   

 

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Note 2—Pro forma adjustments related to the Merger Agreement and Pappas Agreement – (continued):

 

k.   Vessels and other fixed assets, net

The pro forma adjustments to Vessels and other fixed assets, net are as follows:

 

Pro forma adjustment to reflect fair values of vessels

   $ 95,958        Note 2b   

Record to Vessels and other fixed assets, net, the amounts for the delivery of Tsu Ebisu and Magnum Opus

     62,271        Note 2b   
  

 

 

   

Total adjustments

   $ 158,229     
  

 

 

   

 

l.   Pro forma weighted average number of shares outstanding, basic and diluted

Pro forma weighted average number of shares outstanding, basic and diluted for the three months ended March 31, 2014 and for the year ended December 31, 2013, includes (i) 51,988,494 Star Bulk common shares to be issued upon the consummation of the Merger Agreement and Pappas Agreement and (ii) 2,115,706 common shares to be issued and will be held in escrow pending the transfer of the Heron Vessels from the Heron JV.

Pro forma weighted average number of shares outstanding, diluted for the year ended December 31, 2013, does not include the dilutive effect of 65,045 non vested issuable under Star Bulk’s equity incentive plan which was included in the historical year ended December 31, 2013, since the pro forma result is net loss and therefore their effect would be anti-dilutive.

 

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SUMMARY HISTORICAL COMBINED FINANCIAL AND OTHER OPERATING DATA OF OCEANBULK

The financial statements that are discussed in this Summary Historical Combined Financial and Other Operating Data of Oceanbulk are the combined results of Oceanbulk Shipping and Oceanbulk Carriers and their wholly owned, consolidated subsidiaries for the periods and as of the dates indicated. The historical results of operations, assets and liabilities of Oceanbulk Shipping and Oceanbulk Carriers have been combined because they were under common control by the members of the Oceanbulk Holdcos.

The summary historical combined financial data of Oceanbulk as of and for the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012 were derived from the audited historical financial statements of Oceanbulk, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Oceanbulk’s summary historical combined financial data presented below as of and for the three month periods ended March 31, 2014 and 2013 have been prepared on the same basis as its audited combined financial statements. Such data are derived from Oceanbulk’s unaudited interim condensed combined financial statements included in this proxy statement and, in the opinion of management, include all adjustments (consisting of only normal, recurring adjustments) necessary for a fair presentation thereof. The historical results of operations, assets and liabilities of Oceanbulk have been combined because they were under common control by the members of the Oceanbulk Holdcos.

Oceanbulk’s historical results are not necessarily indicative of future operating results. The summary combined financial data presented below is qualified in its entirety by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oceanbulk” and the historical combined financial statements of Oceanbulk included elsewhere in this proxy statement.

 

    Three month
period ended
March 31, 2014
    Three month
period ended
March 31, 2013
    Year ended
December 31, 2013
    Period from
October 4, 2012
through
December 31, 2012
 
    ($ in thousands, except per day amounts)  

Income Statement Data:

       

Voyage revenues

  $ 10,613      $ 2,100      $ 14,021      $ 1,975   

Voyage expenses

    (4,919     (1,678     (4,017     (1,431

Vessel operating expenses

    (5,533     (476     (6,142     (574

Management fees(1)

    (548     (68     (660     (76

Depreciation

    (2,153     (329     (2,656     (271

Dry docking and special survey costs

    (725     —          (3,248     —     

General and administrative expenses to related parties(2)

    (1,207     (920     (3,683     (860

General and administrative expenses

    (26     (2     (414     (4
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,498     (1,373     (6,799     (1,241

Interest on long-term debt

    (879     —          (628     —     

Amortization of deferred financing fees

    (58     —          (23     —     

Other bank and financing charges

    (27     (4     (135     —     

Interest on Members’ Loans(3)

    (966     (212     (1,412     (167

Loss on derivative financial instruments

    (1,116     —          (1,423     —     

Other income, net

    (17     3        5        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (7,561   $ (1,586   $ (10,415   $ (1,408
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three month
period ended
March 31, 2014
    Three month
period ended
March 31, 2013
    Year ended
December 31, 2013
    Period from
October 4, 2012
through
December 31, 2012
 
    ($ in thousands, except per day amounts)  

Cash Flow Data:

       

Net Cash used in Operating activities

  $ (6,989     (679   $ (3,895   $ (4,352

Net Cash used in Investing activities

    (200,052     (9,840     (202,229     (62,302

Net Cash provided by Financing activities

    178,729        9,840        234,955        67,802   

Other Data:

       

Number of vessels at the end of the year

    11        1        6        1   

Average number of vessels in operation(4)

    8.0        1.0        2.4        0.2   

Average age of vessels in operation at end of period (years)

    5.6        1.8        6.3        1.5   

Ownership Days(5)

    723        90        880        73   

Available Days(6)

    712        90        797        73   

Time Charter Equivalent Rate per day(7)

  $ 7,995      $ 4,684      $ 12,552      $ 7,442   

Fleet Utilization(8)

    98     100     91     100

Operating Expenses per day(9)

  $ 5,547      $ 5,245      $ 5,264      $ 5,783   

Adjusted EBITDA(10)

  $ (1,620   $ (1,044   $ (895   $ (970

 

     March 31,
2014
    December 31,
2013
 
     ($in thousands)  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 1,667      $ 29,979   

Restricted cash

     6,190        6,193   

Total current assets

     16,264        38,002   

Advances for vessel acquisition and vessels under construction

     149,465        110,189   

Vessels, net

     287,604        151,994   

Total assets

     483,491        306,713   

Total current liabilities

     19,467        15,953   

Long-term debt, excluding current portion

     74,214        76,688   

Members’ Loans

     408,838        226,005   

Total Members’ / Stockholders equity

     (20,089     (12,528

 

(1) Management fees include technical management fees that were paid to Star Bulk by Oceanbulk for the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012 of $0.7 million and $0.1 million, respectively, as well as for the three month periods ended March 31, 2014 and 2013 of $0.6 million and $0.1 million, respectively.
(2) Oceanbulk Maritime has historically provided commercial management and administrative services to Oceanbulk. During the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, $3.7 million and $0.9 million, respectively, as well as for the three month periods ended March 31, 2014 and 2013 of $1.2 million and $0.9 million, respectively, of fees were recorded as general administrative expenses. In addition $0.1 million and $nil, respectively, relating to the supervision of Oceanbulk’s newbuilding vessels, by Oceanbulk Maritime, during the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012 as well as $0.1 million and $nil, respectively, for the three month periods ended March 31, 2014 and 2013, were capitalized within advances for vessels under construction.
(3) Represents interest on loans (provided in the form of convertible notes) by the Oceanbulk Holdcos. On May 28, 2014 such loans (together with accrued interest) were converted into membership units of Oceanbulk. Accordingly no further interest on Members’ Loans will be recorded following May 28, 2014.
(4) Represents the average number of vessels that constituted Oceanbulk’s fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of Oceanbulk’s fleet during the period divided by the number of calendar days in the period.

 

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(5) Ownership Days are the total calendar days each vessel was owned by Oceanbulk for the relevant period. Ownership Days are an indicator of the size of Oceanbulk’s fleet over a period and affect both the amount of revenues and the amount of expenses that Oceanbulk records during a period.
(6) Available Days are the total number of Oceanbulk’s Ownership Days less the aggregate number of days that Oceanbulk’s vessels were off-hire due to scheduled repairs or repairs under guarantees, vessel upgrades or special surveys and the aggregate amount of time that Oceanbulk spends positioning its vessels for such events. The shipping industry uses Available Days to measure the number of days in a period during which vessels should be capable of generating revenues.
(7) Time Charter Equivalent Rate per day is a measure of the average daily revenue performance of a vessel. For time charters, this is calculated by dividing total voyage revenues, less any voyage expenses, by the number of Available Days during that period. Under a time charter, the charterer pays substantially all of the vessel voyage-related expenses. However, Oceanbulk may incur voyage-related expenses when positioning or repositioning vessels before or after the period of a time charter, during periods of commercial waiting time or while off-hire during dry-docking or due to other unforeseen circumstances. The TCE rate is not a measure of financial performance under U.S. GAAP (non-GAAP measure), and should not be considered as an alternative to voyage revenues, the most directly comparable U.S. GAAP measure, or any other measure of financial performance presented in accordance with U.S. GAAP. However, TCE rate is a standard shipping industry performance measure used primarily to compare period-to-period changes in a company’s performance and assists Oceanbulk’s management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance. Oceanbulk’s calculation of TCE rates may not be comparable to that reported by other companies. The following table reflects the calculation of Oceanbulk’s TCE rates for the periods indicated (amounts in thousands of U.S. dollars, except for TCE rates, which are expressed in U.S. dollars and Available Days):

 

    Three month
period ended
March 31, 2014
    Three month
period ended
March 31, 2013
    Year ended
December 31, 2013
    Period from
October 4, 2012
through
December 31, 2012
 

Voyage Revenues

  $ 10,613      $ 2,100      $ 14,021      $ 1,975   

Voyage Expenses

    (4,919     (1,678     (4,017     (1,431
 

 

 

   

 

 

   

 

 

   

 

 

 

Time charter equivalent revenues

  $ 5,694      $ 422      $ 10,004      $ 544   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Available Days

    712        90        797        73   

Time charter equivalent rate per day

  $ 7,995      $ 4,684      $ 12,552      $ 7,442   

 

(8) Fleet Utilization (which reflects off-hire days during which vessels are unavailable due to scheduled maintenance and dry docking) is the percentage of time that Oceanbulk’s vessels were available for revenue generation, and is determined by dividing Available Days by fleet Ownership Days during that period. The shipping industry uses Fleet Utilization to measure a company’s efficiency in finding employment for its vessels.
(9) Operating Expenses include crew costs, provisions, deck and engine stores, lubricating oil, insurance, and maintenance and repairs, and are calculated by dividing vessel operating expenses, excluding any one-off expenses incurred in the period of the vessel’s delivery, by fleet Ownership Days for the relevant time period.
(10) EBITDA is a non-GAAP performance measure that is calculated by adding depreciation and amortization expense, interest and taxes to net income (loss). Adjusted EBITDA is calculated by further adjusting EBITDA to exclude dry docking and special survey costs (for comparability purposes, as a number of Oceanbulk’s peers use the deferral method of accounting for such costs, which records them as amortization expense for the respective period), other bank and financing charges and the effects of various items that in Oceanbulk’s management’s opinion do not directly reflect the ordinary-course of operations of Oceanbulk’s, such as gain (loss) on derivative financial instruments and other income (expense). Oceanbulk expects in the future that it may further adjust EBITDA to eliminate the effects of other such items, including non-cash compensation expense.

 

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Oceanbulk believes that Adjusted EBITDA assists its management and investors by providing useful information that increases the comparability of its operating performance from period to period and against the operating performance of other companies in its industry that provide EBITDA-based information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income/loss between periods. In addition, Oceanbulk presents Adjusted EBITDA as a supplemental measure of its performance because Oceanbulk believes it represents a meaningful presentation of the financial performance of its core operations, without the impact of the various items excluded, in order to provide period-to-period comparisons that are more consistent and more easily understood. Oceanbulk believes that including Adjusted EBITDA as a measure of operating performance may help investors in (a) selecting between investing in Oceanbulk and other investment alternatives and (b) monitoring Oceanbulk’s ongoing financial and operational strength in assessing whether to continue to hold interests in Oceanbulk.

EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP. Oceanbulk’s EBITDA-based measures have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of Oceanbulk’s results as reported under U.S. GAAP. Some of these limitations are:

 

    they do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;

 

    they do not reflect the significant interest expense or the amounts necessary to service interest or principal payments on Oceanbulk’s debt;

 

    they do not reflect income tax expense, and because the payment of taxes is part of Oceanbulk’s operations, tax expense is a necessary element of Oceanbulk’s costs and ability to operate;

 

    although depreciation and amortization are eliminated in the calculation of EBITDA-based measures, the assets being depreciated and amortized will often have to be replaced or will require improvements in the future, and Oceanbulk’s EBITDA-based measures do not reflect any costs of such replacements or improvements;

 

    they do not reflect the impact of earnings or charges resulting from matters Oceanbulk considers not to be indicative of its ongoing operations; and

 

    other companies in Oceanbulk’s industry may calculate these measures differently from the way it does, limiting their usefulness as comparative measures.

Oceanbulk compensates for these limitations by using its EBITDA-based measures along with other comparative tools, together with U.S. GAAP measures, to assist in the evaluation of operating performance. Such U.S. GAAP measures include operating income/loss, net income/loss, cash flows from operations and other cash flow data. Oceanbulk has significant uses of cash, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in its EBITDA-based measures.

Oceanbulk’s EBITDA-based measures are not measures of financial performance under U.S. GAAP and are not intended as alternatives to net income/loss as indicators of its operating performance or as alternatives to any other measure of performance in conformity with U.S. GAAP.

 

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The following table reconciles EBITDA and Adjusted EBITDA to Oceanbulk’s net income (loss), the most directly comparable U.S. GAAP measure, for the periods presented:

 

    Three month
period ended
March 31, 2014
    Three month
period ended
March 31, 2013
    Year ended
December 31, 2013
    Period from
October 4, 2012
through
December 31, 2012
 

Net loss

  $ (7,561   $ (1,586   $ (10,415   $ (1,408

Interest on long-term debt

    879        —          628        —     

Interest on Members’ Loans

    966        212        1,412        167   

Depreciation

    2,153        329        2,656        271   

Amortization of deferred financing fees

    58        —          23        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ (3,505   $ (1,045   $ (5,696   $ (970

Loss on derivative financial instruments

    1,116        —          1,423        —     

Dry docking and special survey costs

    725        —          3,248        —     

Other bank and financing costs

    27        4        135        —     

Other (income)

    17        (3     (5     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (1,620   $ (1,044   $ (895   $ (970
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF OCEANBULK

The following discussion and analysis should be read in conjunction with the “Selected Historical Combined Financial and Other Operating Data of Oceanbulk” and the accompanying combined financial statements and related notes included elsewhere in this proxy statement. The following discussion contains forward-looking statements that reflect Oceanbulk’s future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside Oceanbulk’s control. Oceanbulk’s actual results could differ materially from those discussed in these forward-looking statements. Please read “Risk Factors” and “Forward-Looking Statements.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.

The financial statements that are discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oceanbulk are the combined results of Oceanbulk Shipping and Oceanbulk Carriers and their wholly owned, consolidated subsidiaries for the periods and as of the dates indicated. The historical results of operations, assets and liabilities of Oceanbulk Shipping and Oceanbulk Carriers have been combined because they were under common control by the Sellers. All vessel statistics discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oceanbulk do not include the vessels owned by the Heron JV. References to “eco-vessels” are to vessels that are designed to be more fuel-efficient than standard vessels of similar size.

Overview

On a fully delivered basis, Oceanbulk will have a fleet of 37 vessels consisting primarily of Newcastlemax / Capesize as well as Kamsarmax and Ultramax vessels with a carrying capacity between 55,000 dwt and 209,000 dwt. Oceanbulk’s fleet will include 12 existing vessels, including a newly built and delivered vessel, Magnum Opus, and 25 vessels currently under construction in Japan and China. Oceanbulk’s vessels transport a broad range of bulk commodities along worldwide shipping routes.

Oceanbulk’s existing fleet of 12 vessels has an aggregate capacity of approximately 1.4 million dwt, and Oceanbulk has under contract 25 eco-vessels, 22 of which are scheduled to be delivered during 2014 and 2015. By the end of the second quarter of 2016, Oceanbulk expects its fleet to consist of 37 wholly owned vessels, with an average age of 3.1 years and an aggregate capacity of 5.0 million dwt.

Currently, because of prevailing market conditions, Oceanbulk primarily employs its vessels under spot or voyage charters. The vessel owner benefits from any fuel savings that can be achieved in a spot or voyage charter (particularly for eco-vessels) because fuel is paid for by the vessel owner. Two of Oceanbulk’s Post-Panamax vessels, Amami and Madredeus, were acquired subject to long-term charters to Glocal Japan Inc. through April and June 2016, respectively, at a gross charterhire rate of $15,000 per day.

Oceanbulk Shipping was formed in October 2012, and Oceanbulk Carriers was formed in April 2013. While Oceanbulk did have historical vessel operations during the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, as well as during the three month periods ended March 31, 2014 and 2013, such operations are likely not to be indicative of Oceanbulk’s vessel operations once its fleet is fully built. The following table indicates the number of wholly owned vessels (and the aggregate capacity of those vessels) that were in operation as of the dates specified:

 

Date

   Number of
Vessels in Operation
     Aggregate
Capacity (dwt)
 

December 31, 2012(1)

     1         181,433   

September 30, 2013

     4         470,006   

December 31, 2013

     6         827,849   

March 31, 2014(2)

     11         1,366,365   

 

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(1) There was one vessel in operation until two additional vessels were acquired in July 2013.
(2) As of March 31, 2014, Oceanbulk also had a 50% interest in Heron, a joint venture owning 12 vessels,.

In addition, because all of Oceanbulk’s 25 newbuilding vessels will be eco-vessels, depending on charterhire rates and cost of bunkers, Oceanbulk will be better able to take advantage of fuel efficiency savings when those vessels are chartered than is the case with its existing, as of March 31, 2014, 11 vessels.

Management fees include technical management fees that were paid to Star Bulk by Oceanbulk of $0.7 million and $0.1 million, respectively, in the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, as well as for the three month periods ended March 31, 2014 and 2013 of $0.6 million and $0.1 million, respectively. Oceanbulk Maritime has historically provided commercial management and administrative services to Oceanbulk. During the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, $3.7 million and $0.9 million, respectively, as well as for the three month periods ended March 31, 2014 and 2013 of $1.2 million and $0.9 million, respectively, of fees charged by Oceanbulk Maritime were recorded as general administrative expenses. In addition, $0.1 million and $nil, respectively, relating to the supervision of Oceanbulk’s newbuilding vessels, by Oceanbulk Maritime, during the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012 as well as $0.1 million and $nill, respectively, for the three month periods ended March 31, 2014 and 2013 were capitalized within advances for vessels under construction.

Profits Interests

Pursuant to an agreement (the “Profits Interest Agreement”) among affiliates of Oaktree, Oceanbulk Maritime S.A. and Messrs. Pappas and Norton, Messrs. Pappas and Norton are eligible for a share of the profits of Oaktree, subject to Oaktree and its affiliates achieving certain internal rate of return and capital multiples on their original investment in Oceanbulk. This award will be payable only by affiliates of Oaktree and not by Oceanbulk. As of March 31, 2014 and December 31, 2013, no awards had vested, and no payments had yet been made under the Profits Interest Agreement. While Oceanbulk is, as of March 31, 2014, a party to a side letter to the Profits Interest Agreement, the Agreement will be amended prior to the proposed Transactions, to remove Oceanbulk as a party.

Key Performance Indicators

Oceanbulk believes that the following are the most important measures for analyzing its results of operations:

 

    Average number of vessels: Average number of vessels is the average number of vessels that constituted Oceanbulk’s fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of Oceanbulk’s fleet during the period divided by the number of calendar days in the period.

 

    Ownership Days: Ownership Days are the total calendar days each vessel in Oceanbulk’s fleet was owned by it for the relevant period. Ownership Days are an indicator of the size of Oceanbulk’s fleet over a period and affect both the amount of revenues and the amount of expenses that Oceanbulk records during a period.

 

    Available Days: Available Days are the total number of Oceanbulk’s Ownership Days less the aggregate number of days that Oceanbulk’s vessels were off-hire due to scheduled repairs or repairs under guarantees, vessel upgrades or special surveys and the aggregate amount of time that Oceanbulk spends positioning its vessels for such events. The shipping industry uses Available Days to measure the number of days in a period during which vessels should be capable of generating revenues.

 

   

Time charter equivalent rates: Time charter equivalent rate per day is a measure of the average daily revenue performance of a vessel. For time charters, this is calculated by dividing total voyage revenues,

 

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less any voyage expenses, by the number of Available Days during that period. Under a time charter, the charterer pays substantially all of the vessel voyage-related expenses. However, Oceanbulk may incur voyage-related expenses when positioning or repositioning vessels before or after the period of a time charter, during periods of commercial waiting time or while off-hire during dry-docking or due to other unforeseen circumstances. The TCE rate is not a measure of financial performance under U.S. GAAP (non-GAAP measure), and should not be considered as an alternative to voyage revenues, the most directly comparable U.S. GAAP measure, or any other measure of financial performance presented in accordance with U.S. GAAP. However, TCE rate is a standard shipping industry performance measure used primarily to compare period-to-period changes in a company’s performance and assists Oceanbulk’s management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance. Oceanbulk’s calculation of TCE rates may not be comparable to that reported by other companies. The following table reflects the calculation of Oceanbulk’s TCE rates for the periods indicated (amounts in thousands of U.S. dollars, except for TCE rates, which are expressed in U.S. dollars, and Available Days):

 

     3 month
period
ended
March 31,
2014
    3 month
period
ended
March 31,
2013
    Year ended
December 31,
2013
    Period from
October 4,
2012 through
December 31,
2012
 

Voyage Revenues

   $ 10,613      $ 2,100      $ 14,021      $ 1,975   

Voyage Expenses

     (4,919     (1,678     (4,017     (1,431
  

 

 

   

 

 

   

 

 

   

 

 

 

Time charter equivalent revenues

   $ 5,694      $ 422      $ 10,004      $ 544   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Available Days

     712        90        797        73   

Time charter equivalent rate per day

   $ 7,995      $ 4,684      $ 12,552      $ 7,442   

 

    Fleet Utilization: Fleet Utilization (which reflects off-hire days during which vessels are unavailable due to scheduled maintenance and dry docking) is the percentage of time that Oceanbulk’s vessels were available for revenue generating, and is determined by dividing Available Days by fleet Ownership Days during that period. The shipping industry uses Fleet Utilization to measure a company’s efficiency in finding employment for its vessels.

 

    Daily Vessel Operating expenses: Daily vessel operating expenses include crew costs, provisions, deck and engine stores, lubricating oil, insurance, and maintenance and repairs, and are calculated by dividing vessel operating expenses, excluding any one-off expenses incurred in the period of the vessel’s delivery, by fleet Ownership Days for the relevant time period.

 

    Adjusted EBITDA: EBITDA is a non-GAAP performance measure that is calculated by adding depreciation and amortization expense, interest and taxes to net income (loss). Adjusted EBITDA is calculated by further adjusting EBITDA to exclude dry docking and special survey costs (for comparability purposes, as a number of Oceanbulk’s peers use the deferral method of accounting for such costs, which records them as amortization expense for the respective period), other bank and financing charges and the effects of various items that in Oceanbulk’s management’s opinion do not directly reflect the ordinary-course of operations of Oceanbulk, such as gain/(loss) on derivative financial instruments and other income/(expense). Oceanbulk expects in the future that it may further adjust EBITDA to eliminate the effects of other such items, including non-cash compensation expense. For more information regarding the uses and limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, see note 10 to “Summary Historical Combined Financial and Other Operating Data of Oceanbulk.”

 

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Presentation of Financial information

Voyage Revenues

Voyage revenues consist primarily of revenues from voyage and time charters of Oceanbulk’s vessels. Oceanbulk’s revenues are driven primarily by the number of vessels in its fleet, the number of days during which its vessels operate and the daily charterhire rates that its vessels earn under charters, which, in turn, are affected by a number of factors, including:

 

    the duration of its charters;

 

    its decisions relating to vessel acquisitions and disposals;

 

    the amount of time that it spends positioning its vessels;

 

    the amount of time that its vessels spend in dry dock undergoing repairs and maintenance;

 

    maintenance and upgrade work;

 

    the age, condition and specifications of its vessels;

 

    levels of supply and demand in the dry bulk shipping industry; and

 

    other factors affecting spot market charter rates for dry bulk carriers.

Oceanbulk charters its vessels to charterers primarily under voyage or time charters. A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed freight per ton of cargo or a specified total amount. Under spot market voyage charters, Oceanbulk pays specific voyage expenses, such as port, canal and bunker fuel costs, as well as operating expenses, such as crew, insurance, repair services, spares, stores and lubricants. As a result of this arrangement, any cost savings due to reduced fuel consumption are directly for the account of the shipowner, and therefore spot market voyage charters may be more advantageous for more fuel-efficient vessels. Spot charter rates are volatile and fluctuate on a seasonal and year-to-year basis. Fluctuations may result from imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Vessels operating in the spot market generate revenue that is less predictable, but operating in this market may enable Oceanbulk to capture increased profit margins during periods of improvements in dry bulk vessel charter rates.

Time charters give Oceanbulk fixed revenue for a known period of time and stable cash flows. Under time charters, Oceanbulk covers operating expenses, but the charterer covers voyage expenses, including port, canal and bunker fuel costs. As a result, negotiation of a time charter rate depends in part on the anticipated fuel consumption of a vessel, and there is no guarantee that a time charter will fully compensate Oceanbulk for the savings realized by the charterer when chartering a ship that is more fuel efficient than a typical vessel. Oceanbulk may also enter into time charter contracts with profit-sharing agreements, which enable it to benefit if the spot market increases.

Voyage Expenses

Voyage expenses, primarily consisting of port, canal and bunker fuel expenses that are unique to a particular charter, are paid for by the charterer under the time charter arrangements or by the owner under voyage charter arrangements, except for commissions, which are always paid by the owner, regardless of charter type. Voyage expenses are also paid by Oceanbulk during periods when its ships are off-hire, and such voyage expenses are recognized when incurred. Oceanbulk may incur voyage-related expenses for a vessel when positioning or repositioning the vessel before or after the period of a charter, during periods of commercial waiting time or while the vessel is off-hire during a period of dry docking.

Vessel Operating Expenses

Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, lubricant costs, statutory and classification expenses,

 

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forwarding and communications expenses and other miscellaneous expenses. Vessel operating expenses also include all peripheral expenses incurred while vessels perform their classification special survey and dry docking, such as spare parts, port dues, tugs, service engineer attendance etc. Vessel operating expenses are paid by Oceanbulk for its vessels under spot and time charters and are recognized when incurred.

Dry docking and special survey costs

Oceanbulk must periodically dry dock each of its vessels for inspection, repairs and maintenance and any modifications required to comply with industry certification or governmental requirements. Oceanbulk dry docks its vessels at least once every 60 months until the vessel is 15 years old, after which it dry docks its vessels at least once every 30 months, as required for the renewal of certifications required by classification societies. The number of dry dockings undertaken in a given period and the nature of the work performed during that period determine the level of dry docking expenditures.

Two of Oceanbulk’s wholly owned vessels underwent dry docking during 2013 and none did during the first three months of 2014. Oceanbulk’s dry docking schedule for its existing wholly owned vessels as of May 1, 2014 is as follows (in number of vessels):

 

Remainder of 2014

   2015    2016    2017    2018

3

   2    7    4    2

Oceanbulk estimates the cost to dry dock a vessel is between $0.5 million and $1.5 million, depending on the size and condition of the vessel.

Depreciation

Oceanbulk’s depreciation expenses include a depreciation charge for the acquisition cost of each of its vessels, less an estimated residual value. Oceanbulk depreciates its vessels on a straight-line basis over the their remaining economic useful life from the time when they are ready for their intended use.

Interest and Finance Costs

Oceanbulk incurs interest expense on outstanding indebtedness under its existing credit facilities, including ship financing. The amount of interest expense depends on Oceanbulk’s overall level of borrowings and may significantly increase when it acquires or refinances ships. During construction of a newbuilding vessel, interest expense incurred related to the financing of these newbuilding vessels is capitalized in the cost of the newbuilding. Oceanbulk’s bank loan arrangements provide for a variable interest rate per annum. Interest expense relating to Oceanbulk’s bank loan arrangements may change depending on the prevailing interest rates. Oceanbulk has entered into interest rate swap agreements, in order to manage exposure to variable interest-rate expenses related to its bank loan arrangements. Oceanbulk also incurs financing costs and legal costs in connection with establishing credit facilities, which are deferred and amortized to interest and finance costs using the effective interest method. Oceanbulk will incur additional interest expense in the future on its outstanding borrowings and under future borrowings. For a description of Oceanbulk’s existing credit facilities see “—Oceanbulk’s Borrowing Activities.”

Interest on Members’ Loans

Pursuant to the constituent documents of Oceanbulk Shipping and Oceanbulk Carriers, the Oceanbulk Holdcos have been permitted, as members, to lend amounts to them as Members’ Loans, evidenced by Convertible Notes due December 2042 (the “Convertible Notes”). There were $404.3 million and $223.1 million aggregate principal amount of Convertible Notes outstanding as of March 31, 2014 and December 31, 2013, respectively. During the period after March 31, 2014 and up to May 28, 2014 (when the Members’ Loans were

 

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converted) Oceanbulk incurred an additional $4.9 million of Convertible Notes. The Convertible Notes bore interest at a rate of 2.0% per annum, accruing quarterly in arrears. There was $4.5 million and $2.9 million of total accrued interest outstanding as of March 31, 2014 and December 31, 2013 while an additional $1.3 million was accrued for the period between April 1, 2014 and May 28, 2014, when the total outstanding Members’ Loans of $415.0 million were converted into 373,533 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Oaktree and 41,504 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Millennia. During construction of a newbuilding vessel, interest on the Members’ Loans incurred related to the financing of these newbuilding vessels was capitalized in the cost of the newbuilding. During the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, Oceanbulk incurred $2.7 million and $0.2 million, respectively, of interest accrued on the Convertible Notes, of which $1.3 million and $0.04 million was capitalized to vessel cost and the remaining $1.4 million and $0.17 million was expensed in Oceanbulk’s historical results of operations. In addition, during the three month periods ended March 31, 2014 and 2013, Oceanbulk incurred $1.6 million and $0.3 million, respectively, of interest accrued on the Convertible Notes, of which $0.6 million and $0.1 million was capitalized to vessel cost and the remaining $1.0 million and $0.2 million was expensed in Oceanbulk’s historical results of operations. Out of the $1.3 million of accrued interest expense incurred from April 1, 2014 until the May 28, 2014 conversion of the Members’ Loans, an $0.5 million of interests was capitalized to vessel cost, while the remaining $0.9 million was expensed.

Vessel Lives and Impairment

Vessels are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, Oceanbulk compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds the asset’s fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals. To date, Oceanbulk has not recorded any vessel impairment charges.

Critical Accounting Policies

The discussion and analysis of Oceanbulk’s financial condition and results of operations is based upon Oceanbulk’s combined financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires Oceanbulk to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of Oceanbulk’s financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. Oceanbulk has described below what it believes are its most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application.

Voyage Revenues and related expenses

Oceanbulk generates revenues from charterers for the charterhire of its vessels. Vessels are chartered using either voyage charters, under which parties contract in the spot market for the use of a vessel for a specific voyage for a specified charter rate, or time charters, under which parties contract for the use of a vessel for a specific period of time at a specified daily charterhire rate and, where applicable, such parties agree to any profit share over the daily charterhire rate. If a charter agreement exists and collection of the related revenue is reasonably assured, revenue is recognized as it is earned ratably over the duration of the period of each voyage or time charter. Revenue on any profit share is recognized following the same criteria. Time charter revenues are

 

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recorded over the term of the charter as service is provided. Under a voyage charter, the revenues are recognized proportionately over the duration of the voyage. A voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and the vessel’s sail to the next fixed loading port and is deemed to end upon the completion of discharge of the current cargo. A voyage charter contract with a charterer consists of sailing to the load port (the positioning leg), loading the cargo, sailing to the discharge port and discharging the cargo. The charter contract therefore requires the relevant vessel to proceed to the port or place as ordered by the charterer and is not cancellable in the positioning leg, provided that Oceanbulk fulfils its contractual commitment. Performance under the contract begins upon sailing to the load port (the positioning leg). Non-cancelable voyage contracts are generally arranged prior to the completion of an existing contract. Assuming, therefore, that a non-cancelable voyage charter agreement is in place, voyage revenue recognition, under the discharge-to-discharge method, commences once the discharge of the previous charter’s cargo is complete and the vessel sails for loading. The voyage is deemed complete at the point the vessel has left the discharge terminal. Demurrage income represents payments by the charterer to the vessel owner when loading or discharging time exceeded the stipulated time in the voyage charter and is recognized as it is earned. Unearned revenue includes cash received prior to the balance sheet date that is related to revenue earned after such date. Voyage expenses, primarily consisting of port, canal and bunker expenses that are unique to a particular charter, are paid for by the charterer under the time charter arrangements or by Oceanbulk under voyage charter arrangements, except for commissions, which are always paid for by Oceanbulk, regardless of charter type. All voyage and vessel operating expenses are expensed as incurred, except for commissions. Commissions paid to brokers are deferred and amortized over the related voyage charter period to the extent revenue has been deferred because commissions are earned as Oceanbulk’s revenues are earned.

Depreciation

The cost of each of Oceanbulk’s 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, which is equal to the product of its lightweight tonnage and estimated scrap rate. Effective January 1, 2013 and following Oceanbulk’s reassessment of the residual value of the vessels, the estimated scrap value per light weight ton was increased to $300 from $200, which is based on the historical average demolition prices prevailing in the market. The effect of this change in accounting estimate, which did not require retrospective application as per ASC 250 “Accounting Changes and Error Corrections,” was to decrease net loss for the year ended December 31, 2013 by $0.2 million. Oceanbulk estimates the useful life of its vessels to be 25 years from the date of initial delivery from the shipyard. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, her remaining useful life is adjusted at the date such regulations become effective.

Dry docking and special survey costs

Oceanbulk must periodically dry dock each of its vessels for inspection, repairs and maintenance and any modifications required to comply with industry certification or governmental requirements. Special survey and dry docking costs (mainly shipyard costs, paints and class renewal expense) are expensed as incurred. The number of dry dockings undertaken in a given period and the nature of the work performed determine the level of dry docking expenditures. Oceanbulk expenses costs related to routine repairs and maintenance performed during dry docking or as otherwise incurred.

Impairment of Long-lived Assets

The carrying value of Oceanbulk’s vessels represents their historical acquisition or construction cost, including capitalized interest, supervision, technical and delivery cost, net of accumulated depreciation and impairment loss, if any. Expenditures for subsequent conversions and major improvements are capitalized provided that such costs increase the earnings capacity or improve the efficiency or safety of the vessels. Oceanbulk depreciates the original cost, less an estimated residual value, of its vessels on a straight-line basis

 

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over their estimated useful lives. The carrying values of its vessels may not represent their market value at any point in time because the market prices of secondhand vessels tend to fluctuate with changes in charterhire rates and the cost of newbuilding vessels. Both charterhire rates and newbuilding costs tend to be cyclical in nature.

Oceanbulk reviews vessels for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, which occurs when the asset’s carrying value is greater than the future undiscounted net operating cash flows the asset is expected to generate over its remaining useful life. Oceanbulk determines undiscounted projected net operating cash flows for each vessel and compares it to the vessel’s carrying value. In developing estimates of future cash flows, Oceanbulk must make assumptions about future charter rates, vessel operating expenses, fleet utilization, and the estimated remaining useful life of the vessels. These assumptions are based on historical trends as well as future expectations. The projected net operating cash flows are determined by considering the charter revenues from existing charters for the fixed fleet days and the historical 10-year average of charter rates for the unfixed days. If the estimated future undiscounted cash flows of an asset exceed the asset’s carrying value, no impairment is recognized even though the fair value of the asset may be lower than its carrying value. If the estimated future undiscounted cash flows of an asset are less than the asset’s carrying value and the fair value of the asset is less than its carrying value, the asset is written down to its fair value.

Oceanbulk determines the fair value of its vessels based on its estimates and assumptions and by making use of available market data and taking into consideration third-party valuations. As of March 31, 2014 and December 31, 2013, Oceanbulk believes there were no indications for impairment for any of its vessels. Oceanbulk’s estimates of basic market value are inherently uncertain because it obtains information from various industry and other sources. In addition, vessel values are highly volatile and, as such, Oceanbulk’s estimates may not be indicative of the current or future basic market value of its vessels or prices that Oceanbulk could achieve if it were to sell them.

Illustrative Comparison of Possible Excess of Carrying Value Over Estimated Charter-Free Market Value of its Vessels

Oceanbulk’s policy for impairing the carrying values of its vessels is discussed under the caption “—Impairment of Long-Lived Assets.” During the past few years, the market values of vessels have experienced particular volatility, with substantial declines in many vessel classes also affecting their charter-free market value, or basic market value. Oceanbulk’s estimates of basic market value assume that its vessels are all in good and seaworthy condition without the need for repair and, if inspected, would be certified in class without notations of any kind. The fair values are determined through Level 2 inputs of the fair value hierarchy as defined in ASC 820 “Fair value measurements and disclosures” and are derived principally from various industry sources, including:

 

    reports by industry analysts and data providers that focus on Oceanbulk’s 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 Oceanbulk’s vessels, which can be used, after certain adjustments, to derive information used to inform Oceanbulk’s estimates;

 

    approximate market values for Oceanbulk’s vessels or similar vessels that Oceanbulk has received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;

 

    offers that Oceanbulk may have received from potential purchasers of its vessels; and

 

    vessel sale prices and values of which Oceanbulk becomes aware through both formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.

 

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The carrying value of Oceanbulk vessels as of March 31, 2014 and December 31, 2013 was $287.6 million and $152.0 million, respectively:

Oceanbulk believes that none of its vessels showed an indication for impairment for the three month period ended March 31, 2014 and the year ended December 31, 2013, as further discussed in “Critical Accounting Policies—Impairment of Long-lived Assets.”

Oceanbulk’s estimates of basic market value are inherently uncertain because it obtains information from various industry and other sources. In addition, vessel values are highly volatile and, as such, Oceanbulk’s estimates may not be indicative of the current or future basic market value of its vessels or prices that Oceanbulk could realize if it were to sell them. The market values of Oceanbulk’s vessels may decline, which could limit the amount of funds that it can borrow, cause a breach of certain financial covenants in its credit facilities (including ship financing facilities) or result in an impairment charge, and Oceanbulk may incur a loss if it sells vessels following a decline in their market value.

Recent Accounting Pronouncements

There are no recent accounting pronouncements issued in 2013 and 2014, whose adoption would have a material impact on Oceanbulk’s financial position and results of operations or are expected to have a material impact in future years.

Results of Operations of Oceanbulk for the three month periods ended March 31, 2014 and 2013

As of March 31, 2014 and March 31, 2013, Oceanbulk’s fleet consisted of eleven vessels and one vessel, respectively, and on an average basis during the three month periods ended March 31, 2014 and 2013, Oceanbulk had 8.0 vessels and 1.0 vessel, respectively. In the three month period ended March 31, 2014 its fleet Available Days totaled 712 days, compared to 90 days in the three month period ended March 31, 2013. In the three month period ended March 31, 2014, its fleet Ownership Days totaled 723 days, compared to 90 days in the three month period ended March 31, 2013. Ownership Days are the primary driver of vessel operating expenses.

Voyage revenues

Voyage revenues increased by $8.5 million to $10.6 million in the three month period ended March 31, 2014, compared to $2.1 million for the three month period ended March 31, 2013, which was primarily attributable to the growth of Oceanbulk’s fleet, which resulted in more Available Days, and the improved charter agreements Oceanbulk entered into, reflecting both the implementation of Oceanbulk’s chartering strategy and improved prevailing market conditions compared to the period in 2013. The TCE per vessel for the three month period ended March 31, 2014 was $7,995, compared to TCE rate per vessel of $4,684 for the three month period ended March 31, 2013.

Voyage expenses

Voyage expenses increased by $3.2 million to $4.9 million for the three month period ended March 31, 2014, compared to $1.7 million for the three month period ended March 31, 2013. This increase was primarily driven by the increase in Available Days as well as the different mix of spot and time charters used between 2014 and 2013. In particular, in 2013 almost all of Oceanbulk’s revenues were derived from voyage charter agreements, while in 2014 65% of its revenues were derived from short-term time charter agreements and 35% were derived from voyage charter agreements, leading to lower voyage expenses as a percentage of revenue in 2014 (46%) as compared to 2012 (80%). Bunkering costs and port expenses, which are at the expense of the owner when the vessel is under a voyage charter and at the expense of the chartering party when the vessel is under a time charter, decreased as a percentage of total revenues from 70% in 2013 to 39% in 2014, reflecting the effects of the different chartering mix. Commissions remained at the same levels as a percentage of total revenues, approximately 4%, in both periods.

 

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Vessel operating expenses

Vessel operating expenses increased by $5.0 million to $5.5 million for the three month period ended March 31, 2014 as compared to $0.5 million for the three month period ended March 31, 2013, due to the growth of Oceanbulk’s fleet, which resulted in an increase in Ownership Days and expenses for initial supplies acquired upon delivery of Oceanbulk’s vessels. Daily vessel operating expenses per vessel demonstrated a slight increase by $302 per day, or 6%, to $5,547 for the three month period ended March 31, 2014, compared to $5,245 for the three month period ended March 31, 2013.

Management fees

Management fees increased by $0.4 million to $0.5 million for the three month period ended March 31, 2014 from $0.1 million for the three month period ended March 31, 2013, which was directly attributable to the growth of Oceanbulk’s fleet, which resulted in an increase in its fleet Ownership Days in 2014.

Depreciation

Depreciation expenses increased by $1.9 million to $2.2 million for the three month period ended March 31, 2014 from $0.3 million for the three month period ended March 31, 2013, which was due to the growth of Oceanbulk’s fleet, which resulted in an increase in its fleet Ownership Days in 2014.

Dry docking and special survey costs

During the three month period ended March 31, 2014, Oceanbulk incurred dry docking and special survey costs of approximately $0.7 million relating to the additional 11 days of dry docking of its vessel Pantagruel which had began in 2013. None of Oceanbulk’s vessels underwent dry docking in the three month period ended March 31, 2013.

General and administrative expenses, including general and administrative expenses to related parties

General and administrative expenses increased to $1.2 million in the three month period ended March 31, 2014 from $0.9 million in the three month period ended March 31, 2013 due to the increased fees charged by Oceanbulk Maritime as part of Oceanbulk’s growth and additional requirements for administrative services.

Interest and finance costs

Interest and finance costs increased to $1.0 million in the three month period ended March 31, 2014 from $0.04 in the three month period ended March 31, 2013 due to the debt financing incurred in mid 2013 for six of Oceanbulk’s operating vessels. Interest and finance costs in 2014 included interest on $0.9 million of long-term debt (bank financing), $0.06 million of amortization of deferred finance fees and $0.03 million of other bank and finance charges.

Interest on Members’ Loans

Interest on Members’ Loans during the three month period ended March 31, 2014 was $1.0 million, compared to $0.2 million in the three month period ended March 31, 2013. The amount of interest on Members’ Loans increased during 2014 due to an increase in the outstanding amount of Members’ Loans, from $78.2 million as of March 31, 2013 to $408.8 million as of March 31, 2014. On May 28, 2014 the total outstanding amount of Members’ Loans of $415.0 million (together with accrued interest) were converted into membership units of Oceanbulk Shipping and Oceanbulk Carriers. Accordingly, no further interest on Members’ Loans will be recorded following May 28, 2014.

 

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Loss on derivative financial instruments

Loss on derivative financial instruments was $1.1 million for the three month period ended March 31, 2014 and was related to the unrealized loss attributable to the mark-to-market valuation of Oceanbulk’s derivative financial instruments. Oceanbulk had no corresponding losses in the three month period ended March 31, 2013.

Results of Operations of Oceanbulk for the Year Ended December 31, 2013 and the Period from October 4, 2012 (date of Oceanbulk’s inception) through December 31, 2012

As of December 31, 2013 and December 31, 2012, Oceanbulk’s fleet consisted of six vessels and one vessel, respectively, and on an average basis during the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, Oceanbulk had 2.4 vessels and 0.2 vessels, respectively. In the year ended December 31, 2013, Oceanbulk’s fleet Available Days totaled 797 days, compared to 73 days in the period from October 4, 2012 through December 31, 2012. In the year ended December 31, 2013, Oceanbulk’s fleet Ownership Days totaled 880 days, compared to 73 days in the period from October 4, 2012 through December 31, 2012. Ownership Days are the primary driver of vessel operating expenses.

Voyage revenues

Voyage revenues increased by $12.0 million to $14.0 million in the year ended December 31, 2013, compared to $2.0 million for the period from October 4, 2012 through December 31, 2012, which was primarily attributable to the growth of Oceanbulk’s fleet, which resulted in more Available Days, and the improved charter agreements Oceanbulk entered into, reflecting both its management’s core competences and improved prevailing market conditions compared to the period in 2012. TCE per vessel for the year ended December 31, 2013 was $12,552, compared to TCE rate per vessel of $7,442 for the period from October 4, 2012 through December 31, 2012.

Voyage expenses

Voyage expenses increased by $2.6 million to $4.0 million for the year ended December 31, 2013, compared to $1.4 million for the period from October 4, 2012 through December 31, 2012. This increase was primarily driven by the increase in Oceanbulk’s fleet Available Days as well as the different mix of spot and time charters Oceanbulk used between 2013 and 2012. In particular, in 2012 almost all of Oceanbulk’s revenues were derived from voyage charter agreements, while in 2013 68% of Oceanbulk’s revenues were derived from short-term time charter agreements and 32% were derived from voyage charter agreements, leading to lower voyage expenses as a percentage of revenue in 2013 (28%) as compared to 2012 (72%). Bunkering costs and port expenses, which are at the expense of the owner when the vessel is under a voyage charter and at the expense of the chartering party when the vessel is under a time charter, decreased as a percentage of total revenues from 69% in 2012 to 24% in 2013, reflecting the effects of the different chartering mix. Commissions remained at the same levels as a percentage of total revenues, approximately 4%, in both periods.

Vessel operating expenses

Vessel operating expenses increased by $5.5 million to $6.1 million for the year ended December 31, 2013 as compared to $0.6 million for the period from October 4, 2012 through December 31, 2012, due to the growth of Oceanbulk’s fleet, which resulted in an increase in Ownership Days and expenses for initial supplies acquired upon delivery of its vessels. Daily vessel operating expenses per vessel decreased by $519 per day, or 9%, to $5,264 for the year ended December 31, 2013, compared to $5,783 for the period from October 4, 2012 through December 31, 2012, despite the increase in the average age of the fleet, due to efficiency gains from its cost management programs.

Management fees

Management fees increased by $0.6 million to $0.7 million for the year ended December 31, 2013 from $0.1 million for the period from October 4, 2012 through December 31, 2012, which was directly attributable to the growth of Oceanbulk’s fleet, which resulted in an increase in its fleet Ownership Days in 2013.

 

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Depreciation

Depreciation expenses increased by $2.4 million to $2.7 million for the year ended December 31, 2013 from $0.3 million for the period from October 4, 2012 through December 31, 2012, which was due to the growth of Oceanbulk’s fleet, which resulted in an increase in its fleet Ownership Days in 2013.

Dry docking and special survey costs

During the year ended December 31, 2013, Oceanbulk incurred dry docking and special survey costs of approximately $3.2 million relating to its vessels Pantagruel and Strange Attractor, which lasted 61 and 22 days, respectively. None of Oceanbulk’s vessels underwent dry docking in the period from October 4, 2012 through December 31, 2012.

General and administrative expenses, including general and administrative expenses to related parties

General and administrative expenses increased to $4.1 million in the year ended December 31, 2013 from $0.9 million in the period from October 4, 2012 through December 31, 2012 due to the increased fees charged by Oceanbulk Maritime as part of Oceanbulk’s growth and additional requirements for administrative services.

Interest and finance costs

Interest and finance costs increased to $0.8 million in the year ended December 31, 2013 from $nil in the period from October 4, 2012 through December 31, 2012 due to the debt financing incurred in 2013 for Oceanbulk’s operating vessels. Interest and finance costs in 2013 included interest on $0.6 million of long-term debt (bank financing), $0.02 million of amortization of deferred finance fees and $0.1 million of other bank and finance charges.

Interest on Members’ Loans

Interest on Members’ Loans during the year ended December 31, 2013 was $1.4 million, compared to $0.2 million in the period from October 4, 2012 through December 31, 2012. The amount of interest on Members’ Loans increased during 2013 due to an increase in the outstanding amount of Members’ Loans, from $67.8 million as of December 31, 2012 to $223.1 million as of December 31, 2013.

Loss on derivative financial instruments

Loss on derivative financial instruments was $1.4 million for the year ended December 31, 2013 and was related to the unrealized loss attributable to the mark-to-market valuation of its derivative financial instruments. Oceanbulk had no corresponding losses in the period from October 4, 2012 through December 31, 2012.

Liquidity and Capital Resources

Oceanbulk has historically financed the purchase of dry bulk carriers through a combination of Members’ Loans and borrowings from commercial banks. As a stand-alone entity, Oceanbulk would intend to finance its capital and other cash requirements from borrowings under ship financing and other credit facilities (including acquisition facilities), other debt or equity financings and cash from operations. Oceanbulk’s liquidity requirements relate to servicing its debt and funding capital expenditures and working capital. Oceanbulk’s revenues are generated from chartering its vessels, and Oceanbulk receives charter payments monthly and in advance when it employs vessels under time charter arrangements or in partial installments during the voyage period when it employs the vessels in the spot market. The majority of Oceanbulk’s operating costs are paid on a monthly basis. Oceanbulk’s short-term liquidity requirements relate to funding working capital, including vessel operating expenses and payments under its management agreements. Oceanbulk’s long-term liquidity requirements relate to

 

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funding capital expenditures, including the acquisition of its newbuilding and secondhand vessels or any possible future acquisition of additional vessels and the service of its long-term debt and capital leases under bareboat charter agreements.

Oceanbulk’s principal uses of funds have been capital expenditures to establish and grow its fleet, comply with international shipping standards, environmental laws and regulations and fund working capital requirements. In monitoring its working capital needs, Oceanbulk projects its charterhire income and vessel maintenance and running expenses, capital expenditures, debt and bareboat-service obligations and seeks to maintain adequate cash reserves in order to address any budget overruns. Oceanbulk’s funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. Cash and cash equivalents are held primarily in U.S. dollars.

As of June 1, 2014, the total payments for Oceanbulk’s 25 newbuilding vessels were expected to be $1,060 million, of which Oceanbulk had already paid $139 million from cash from operations and proceeds of past investments by the Sellers. As of June 1, 2014, Oceanbulk had already obtained commitments for $437.1 million of debt financing for vessels and was in the final stages of negotiations for $225.5 million of debt financing for 8 vessels. Oceanbulk expects to pay for its newbuildings with a combination of the proceeds from debt and equity financings, as market conditions permit. Because Oceanbulk’s newbuilding construction contracts are generally non-cancelable except in the case of breach by the shipyard, if it fails to generate or obtain sufficient cash to meet its payment obligations under such contracts, Oceanbulk could be subject to legal action for breach of contract (and be required to pay monetary damages or settlement payments) and could lose its rights to such newbuilding vessels.

Through May 31, 2015, Oceanbulk’s total yard payments with respect to all vessels under construction are expected to be $444 million (of which $305 million is subject to vessel debt financing that has been committed or is in the final stages of negotiation), and it anticipates that it will require $5.5 million for scheduled dry docking and special surveys.

As of March 31, 2014, Oceanbulk had cash and cash equivalents of $1.7 million which decreased by $28.3 million compared to $30.0 million, as of December 31, 2013, due primarily to capital payments towards its newbuilding pipeline as well as its investment in Heron. In addition, as of March 31, 2014, Oceanbulk had restricted cash, relating to bank balances that are required under its borrowing arrangements, of $6.2 million.

As of March 31, 2014 and December 31, 2013, Oceanbulk had an aggregate of $408.8 million and $226.0 million, respectively of indebtedness outstanding under Members’ Loans, including principal and capitalized accrued interest. The increase was due primarily to additional investments by the Sellers for financing Oceanbulk’s newbuilding contract installment payments. On May 28, 2014, the entire $415.0 million principal amount of Members’ Loans was converted into 373,533 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Oaktree and 41,504 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Millennia. In addition, as of March 31, 2014 and December 31, 2013, Oceanbulk had an aggregate of $84.1 million and $86.6 million, respectively, of indebtedness outstanding under credit agreements with commercial banks. See “—Oceanbulk’s Borrowing Activities.”

As of March 31, 2014 Oceanbulk had a working capital deficit of $3.2 million primarily due to the fact that newly delivered in 2014 operating vessels were fully financed by cash from operations and Members’ Loan while the debt financing agreed for these vessels under the HSBC Facility of $86.6 million has not yet been drawn as of March 31, 2014. See “—Oceanbulk’s Borrowing Activities.” As of December 31, 2013, Oceanbulk had a working capital surplus of $22.0 million, respectively.

 

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Cash Flows

The following table summarizes Oceanbulk’s net cash flows from operating, investing and financing activities and its cash and cash equivalents for the three month periods ended March 31, 2014 and 2013:

 

     Year ended
December 31,
2013
    Year ended
December 31,
2013
    Three month
period ended
March 31,
2014
    Three month
period ended
March 31,
2013
 
     ($ in thousands)     ($ in thousands)  

Cash Flow Data:

        

Net Cash used in Operating activities

   $ (3,895   $ (4,352   $ (6,989   $ (679

Net Cash used in Investing activities

     (202,229     (62,302     (200,052     (9,840

Net Cash provided by Financing activities

     234,955        67,802        178,729        9,840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     28,831        1,148        (28,312     (679

Cash and cash equivalents at beginning of year

     1,148        —          29,979        1,148   
      

 

 

   

 

 

 

Cash and cash equivalents at end of the year

     29,979        1,148      $ 1,667      $ 469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

Net cash used in operating activities increased by $6.3 million to $7.0 million for the three month period ended March 31, 2014, compared to $0.7 million for the three month period ended March 31, 2013. The increase was primarily attributable to the increased needs of Oceanbulk’s newly delivered vessels for initial supplies upon delivery and costs of dry docking surveys incurred during the first quarter of 2014.

Net cash flows used in operating activities decreased by $0.5 million to $3.9 million for the year ended December 31, 2013, compared to $4.4 million for the period from October 4, 2012 through December 31, 2012. The decrease was primarily attributable to the increased needs of Oceanbulk’s newly delivered vessels for initial supplies upon delivery in 2013 and costs of dry docking surveys incurred in 2013.

Net cash used in investing activities

Net cash used in investing activities increased by $190.3 million to $200.1 million for the three month period ended March 31, 2014, compared to $9.8 million for the three month period ended March 31, 2013. Net cash used in investing activities for the three month period ended March 31, 2014 consisted of $135.0 million in acquisitions of secondhand vessels, $41.4 million payments for newbuilding vessels and $23.7 million investment in Heron. Net cash used in investing activities for the three month period ended March 31, 2013 consisted of $9.8 million of payments for newbuilding vessels.

Net cash flows used in investing activities increased by $139.9 million to $202.2 million for the year ended December 31, 2013, compared to $62.3 million for the period from October 4, 2012 through December 31, 2012. Net cash flows used in investing activities for the year ended December 31, 2013 consisted of $119.0 million in acquisitions of secondhand vessels, $80.3 million in advances paid for newbuilding vessels, $0.1 million in capitalized expenses and $2.8 million in advances for acquisition of secondhand vessels. Net cash flows used in investing activities for the period from October 4, 2012 through December 31, 2012 consisted of $36.6 million in acquisitions of secondhand vessels and $25.7 million in advances paid for newbuilding vessels.

Net cash provided by financing activities

Net cash provided by financing activities increased by $168.9 million to $178.7 million for the three month period ended March 31, 2014, compared to $9.8 million for the three month period ended March 31, 2013. Net cash provided by financing activities for the three month period ended March 31, 2014 consisted primarily of a $2.5 million repayment of long term debt and $181.2 million of proceeds from Members’ Loans.

 

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Net cash provided by financing activities for the three month period ended March 31, 2013 consisted only of proceeds from Members’ Loans of $9.8 million.

Net cash flows provided by investing activities increased by $167.2 million to $235.0 million for the year ended December 31, 2013, compared to $67.8 million for the period from October 4, 2012 through December 31, 2012. Net cash flows provided by financing activities for the year ended December 31, 2013 consisted of:

 

    a $6.2 million increase in restricted cash;

 

    $87.5 million of proceeds from long term debt;

 

    a $0.9 million repayment of long term debt;

 

    $173.3 million of proceeds from Members’ Loans;

 

    an $18.0 million repayment of Members’ Loans; and

 

    a $0.8 million payment of financing fees.

Net cash flows provided by financing activities for the period from October 4, 2012 through December 31, 2012 consisted only of proceeds from Members’ Loans of $67.8 million.

Oceanbulk’s Borrowing Activities

Loan financings from commercial banks

ABN Facility. On August 1, 2013, Oceanbulk entered into a $34.5 million credit facility with ABN Amro N.V. (the “ABN Facility”) in order to partially finance the acquisition cost of the vessels Obelix and Maiden Voyage. On August 6, 2013, Oceanbulk drew down the available amount fully in order to finance the vessel acquisitions and pay an arrangement fee of $0.2 million.

On December 18, 2013, the ABN Facility was amended to add an additional credit facility of $53.0 million to partially finance the acquisition cost of the vessels Big Bang, Strange Attractor, Big Fish and Pantagruel. On December 20, 2013, Oceanbulk drew down the entire available amount to finance the vessel acquisitions and pay an arrangement fee of $0.6 million.

The following table describes the various tranches of loans under the ABN Facility as of March 31, 2014 (expressed in thousands of United States Dollars):

 

Vessel

   Date Drawn    Principal
Amount
     Quarterly
Installments
   Balloon Payment

Obelix

   August 2013    $ 19,596       18 x $377 through
August 2018
   $12,813 due August
2018

Maiden Voyage

   August 2013    $ 13,365       14 x $248 through
September 2017
   $9,900 due
September 2017

Big Bang

   December 2013    $ 15,550       19 x $450 through
December 2018
   $7,000 due
December 2018

Strange Attractor

   December 2013    $ 9,700       19 x $300 through
December 2018
   $4,000 due
December 2018

Big Fish

   December 2013    $ 12,950       19 x $550 through
December 2018
   $2,500 due
December 2018

Pantagruel

   December 2013    $ 12,950       19 x $550 through
December 2018
   $2,500 due
December 2018

Loans outstanding under the ABN Facility bear interest at three-month LIBOR plus a margin ranging from 3.75% to 3.9% per annum.

 

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The ABN Facility is secured by a first-priority ship mortgage on the financed vessels, general assignments, charter assignments, operating account assignments and a corporate guarantee executed by Oceanbulk Shipping (the “Guarantor”). The ABN Facility contains a number of negative covenants, including limitations on additional indebtedness, additional liens on the collateral, restricted payments and changes in management and ownership. In addition, the ABN Facility contains the following financial maintenance covenants:

 

    aggregate vessel value must exceed 140% of the aggregate principal amount of outstanding loans under the ABN Facility;

 

    maximum consolidated adjusted market value leverage ratio of the Guarantor (defined as the Guarantor’s total liabilities to market value adjusted total assets, excluding Members’ Loans and available cash) of 70%;

 

    minimum consolidated EBITDA to interest coverage ratio of 2.0x, applicable after September 30, 2016; and

 

    minimum liquidity of the higher of $1.0 million per collateral vessel or $0.5 million per other vessel owned by the Guarantor.

The ABN Facility also prohibits the Guarantor from paying dividends while a default has occurred and is continuing. The ABN Facility also contains cross-default provisions triggered by a payment default or the acceleration or cancelation by reason of default of indebtedness in excess of $5.0 million for the Guarantor’s indebtedness and $1.0 million for any borrower’s indebtedness.

As of March 31, 2014 and December 31, 2013, Oceanbulk was in compliance with the applicable covenants under the ABN Facility.

Deutsche Bank Facility. On May 20, 2014, Oceanbulk entered into a loan agreement with Deutsche Bank AG Filiale Deutschlandgeschäft for financing in an aggregate amount of $85.0 million, which will partially finance the construction cost of one Kamsarmax bulk carrier Magnum Opus, which was delivered on May 27, 2014, and two Capesize bulk carriers currently under construction at JMU (Hulls HN 213-JMU (tbr Peloreus) and HN 214-JMU (tbr Leviathan)), with expected deliveries in July and August 2014, respectively. One loan, which matures five years after the drawdown date, can be drawn for each vessel being financed. Each loan is subject to 19 quarterly amortization payments equal to 1/60th of the loan amount, with the 20th payment equal to the remaining amount outstanding on the loan. The loans will bear interest at three-month LIBOR plus a margin of 3.4% per annum. The Deutsche Bank Facility is secured by first priority cross-collateralized ship mortgages on the financed vessels, charter assignments, insurance and earnings assignments and a corporate guarantee executed by the Guarantor. The Deutsche Bank Facility includes certain negative covenants, including limitations on changes of ownership or control, additional indebtedness and the payment of dividends or other distributions until March 31, 2015, after which Oceanbulk may only pay dividends if no event of default has occurred or is continuing. The Deutsche Bank Facility also requires that the aggregate fair market value of the financed vessels exceeds 130% of the outstanding loans under the Deutsche Bank Facility. The Deutsche Bank Facility includes also the following financial maintenance covenants, which are applicable to the Guarantor:

 

    maximum ratio of total liabilities to total assets (on a market value adjusted basis) of less than 70%;

 

    minimum EBITDA to interest ratio of 2.0x, tested annually for 2014 and 2015, and 2.5x thereafter; and

 

    minimum liquidity of the greater of (x) $10 million and (y) $0.5 million in unencumbered cash per vessel directly or indirectly owned by the Guarantor.

HSBC Facility Term Sheet. On April 1, 2014, Oceanbulk executed a binding term sheet with HSBC Bank plc. for financing in an aggregate amount of $86.6 million, to partially finance the acquisition cost of the secondhand vessels Kymopolia, Mercurial Virgo, Pendulum, Amami and Madredeus, all of which have been delivered. The loan will be available in five tranches, will mature 59 months from the drawdown date and will be

 

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repayable in 20 quarterly installments, commencing three months after the drawdown, of $1.6 million plus a balloon payment of $55.5 million due together with the last installment. The loan will bear interest at LIBOR plus a margin of 3.3% per annum, as long as the ACR exceeds 143% or 4.10% per annum, as long as the ACR falls below 143%. The HSBC Facility will be secured by first priority mortgage over the financed vessels, general and specific assignments and a corporate guarantee executed by the Guarantor. The HSBC Facility will include certain negative covenants, including limitations on changes of ownership or control, other than as part of an initial public offering and as long as the borrowers are not in an event of default and shareholding thresholds applicable to the Pappas family interests. It will also include dividend restrictions if the ACR falls below 143% while it will also require that the aggregate ACR exceeds 135% and minimum free liquidity to be maintained by the borrowers in the aggregate of $2.5 million. In addition, a portion of 10% of the initial HSBC Facility shall be prepaid from the proceeds of the first capital increase of the Guarantor after January 1, 2016. The HSBC Facility will include the following financial maintenance covenants, which are applicable to the Guarantor:

 

    maximum leverage ratio (calculated based on long term debt net of any free deposit balances divided by total assets) not to exceed 70%;

 

    minimum EBITDA to interest ratio of 2.0x, in relation to the preceeding four fiscal quarters, effective from the second anniversary of the execution date; and

 

    minimum liquidity to exceed $0.5 million in free cash balances per vessel owned by the Guarantor.

CEXIM Facility Term Sheet. On March 21, 2014, Oceanbulk executed a binding term sheet with the Export-Import Bank of China for financing in an aggregate amount of $57.4 million, which will be available in two tranches of $28.7 million to partially finance the construction cost of two Capesize bulk carriers currently under construction at SWS (HN 1312-SWS and HN 1313-SWS), with expected delivery in April and June 2015. Each tranche will mature 10 years from the delivery date of the last delivered vessel and will be repayable in 20 semi-annual installments of $1.1 million plus a balloon payment of $5.7 million, the first installment being due on the first January 21 or July 21 six months after the delivery of each vessel. The loans will bear interest at six-month LIBOR plus a margin of 3.25% per annum. The CEXIM Facility will be secured by first priority cross-collateralized ship mortgages on the financed vessels, charter assignments, insurance and earnings assignments and a corporate guarantee executed by the Guarantor. The CEXIM Facility will include certain negative covenants, including limitations on changes of ownership or control. The CEXIM Facility also requires that the aggregate value of the financed vessels exceeds 125% of the outstanding loans under the CEXIM Facility and that each vessel owning subsidiary must maintain minimum cash of not less than $0.5 million. The CEXIM Facility will include the following financial maintenance covenants, which are applicable to the Guarantor:

 

    minimum equity ratio calculated based on book value of equity to total book value of assets of no less than 30%;

 

    minimum book value of equity of not less than $250 million after December 31, 2015; and

 

    minimum liquidity of $0.5 million in unencumbered cash per vessel directly or indirectly owned by the Guarantor.

Members’ Loans

According to the provisions of the limited liability agreements of Oceanbulk Shipping and Oceanbulk Carriers, the Oceanbulk Holdcos, as members, could, from time to time, make investments in Oceanbulk Shipping and Oceanbulk Carriers either in the form of capital contributions in exchange for the companies’ Class A Units or in the form of Members’ Loans, evidenced by Convertible Notes. The Convertible Notes bore fixed interest at 2% per annum, accruing quarterly in arrears and maturing on December 31, 2042. On May 28, 2014, the entire $415.0 million principal amount of Members’ Loans was converted into 373,533 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Oaktree Holdco and 41,504 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to Pappas Holdco.

 

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During the year ended December 31, 2013 and the period from October 4, 2012 through December 31, 2012, Oceanbulk incurred $2.7 million and $0.2 million, respectively, of interest accrued on the Convertible Notes, of which $1.3 million and $0.04 million was capitalized to vessel cost and the remaining $1.4 million and $0.2 million was expensed in its historical results of operations.

In addition, during the three month periods ended March 31, 2014 and 2013, Oceanbulk incurred $1.6 million and $0.3 million, respectively, of interest accrued on the Convertible Notes, of which $0.6 million and $0.1 million was capitalized to vessel cost and the remaining $1.0 million and $0.2 million was expensed in its historical results of operations.

Bareboat charters

On May 17, 2013, Oceanbulk entered into separate bareboat charter party contracts with affiliates of New Yangzijiang shipyards for eight-year bareboat charters of four newbuilding 64,000 dwt Ultramax vessels (HN 1061, HN 1062, HN 1063 and HN 1064) being built at New Yangzijiang. The vessels are being constructed pursuant to four shipbuilding contracts entered into between four pairings of affiliates of New Yangzijiang. Each pair has one shipyard party (each, a “New YJ Builder”) and one ship-owning entity (each a “New YJ Owner”). Delivery to Oceanbulk of each vessel is deemed to occur upon delivery of the vessel to the New YJ Owner from the corresponding New YJ Builder. An amount of $20.7 million for each vessel will be financed by the relevant New YJ Owner, to whom Oceanbulk will pay a pre-agreed daily bareboat charter hire rate. After each vessel’s delivery, Oceanbulk has monthly purchase options to acquire the vessel at pre-determined, amortizing-during-the-charter-period prices. On the eighth anniversary of the delivery of a vessel, Oceanbulk has the obligation to purchase the vessel at a purchase price of $6.0 million.

On December 27, 2013, Oceanbulk entered into separate bareboat charter party contracts with affiliates of SWS shipyards for ten-year bareboat charters of five newbuilding 208,000 dwt Newcastlemax vessels (Hulls HN 1359, HN 1360, HN 1361, HN 1362 and HN 1363) being built at SWS. The vessels are being constructed pursuant to shipbuilding contracts entered into between five pairings of affiliates of SWS. Each pair has one shipyard party (each, an “SWS Builder”) and one ship-owning entity (each an “SWS Owner”). Delivery to Oceanbulk of each vessel is deemed to occur upon delivery of the vessel to the SWS Owner from the corresponding SWS Builder. An amount of $46.4 million for each vessel will be financed by the relevant SWS Owner, to whom Oceanbulk will pay a daily bareboat charter hire rate payable monthly plus a variable amount corresponding to the LIBOR rate payable every six months and a one-time handling fee of $0.5 million. After each vessel’s delivery, Oceanbulk has monthly purchase options to acquire the vessel at pre-determined, amortizing-during-the-charter-period prices. At the end of the ten-year charter period for each vessel, Oceanbulk has the obligation to purchase the vessel at a purchase price of $13.9 million.

Off-balance sheet arrangements

Investment in Heron Ventures and Guarantee of CIT Facility by Oceanbulk Shipping. On February 19, 2014, Oceanbulk Shipping provided $3.1 million and €14.9 million of capital in the form of a convertible loan (each a “Convertible Loan”) to Heron Ventures Ltd. a limited liability company incorporated in Malta whose sole stockholder was ABY Group Holding Limited (itself a joint venture between Augustea-Bunge and York). The Convertible Loan is convertible into 50% of the outstanding equity of Heron, so upon conversion of the Convertible Loan, Heron would be a 50-50 joint venture between Oceanbulk Shipping and ABY Group Holding Limited. The purpose of the Convertible Loan was to partially finance the acquisition out of bankruptcy of Deiulemar Shipping S.p.A., an operator of 12 dry bulk vessels, for which Heron had bid €82.5 million and was the sole and winning bidder. On February 13, 2014, Heron entered into a $95.2 million loan agreement with CIT Finance LLC, which is severally guaranteed on a 50-50, unsecured basis by Oceanbulk Shipping and ABY Group Holding Limited.

The CIT Facility is divided into two portions, a “Core Portion” of $65.2 million and a “Non-Core Portion” of $30.0 million. The Core Portion is secured by four vessels (the “Core Heron Vessels”), consisting of three

 

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Kamsarmax vessels and one Capesize vessel intended to be retained by Heron (or its equityholders), and matures in June 2019. The Non-Core Portion is secured by eight vessels (the “Non-Core Heron Vessels”) of various sizes, and matures in June 2015. Interest accrues on the CIT Facility at a rate of 5.50% per annum so long as the Non-Core Portion is outstanding and 4.25% per annum if the Non-Core Portion is no longer outstanding. The Core Portion is subject to scheduled quarterly amortization payments of $1.6 million, beginning on June 30, 2014, and the Non-Core Portion is not subject to scheduled amortization. Heron may voluntarily prepay the outstanding principal amount of the loans under the CIT Facility at any time, subject to a prepayment premium of 2% during the first year and 1% during the second year. As of May 31, 2014, Heron had entered into contracts to sell five of the eight Non-Core Heron Vessels for proceeds of $33.3 million, a portion of which is expected to be used to prepay the Non-Core Portion. See “Business Overview of Oceanbulk—Management of Oceanbulk’s Business—Purchase of the Deiulemar Fleet” for a list of the vessels that were owned by Heron as of March 31, 2014.

Upon a sale or loss of a Core Heron Vessel, the Core Portion must be prepaid based on a scheduled release price for the Core Heron Vessel. Upon a sale or loss of a Non-Core Heron Vessel, the net proceeds must be used to prepay the Non-Core Portion and then applied to the budgeted cost of intermediate surveys during 2014 of the Core Heron Vessels. The CIT Facility contains the following financial covenants that Heron must comply with:

 

    a minimum cash balance at all times of $1.0 million per Core Heron Vessel;

 

    minimum liquidity at all times of $185,000 per Non-Core Heron Vessel;

 

    a minimum Fixed Charge Coverage Ratio (as defined therein and calculated based on annualized EBITDA less capital expenditures divided by the debt service for the relevant period) of 1.10x, measured quarterly after the quarter ending March 31, 2015;

 

    Core Portion minimum asset coverage test (tested semiannually starting on September 30, 2014), which requires that each Core Heron Vessel’s charter-free fair market value be not less than 140% (150% after the quarter ending March 31, 2016) of the Core Portion balance outstanding against it; and

 

    Non-Core Portion minimum asset coverage test (tested semiannually starting on September 30, 2014), which requires that the aggregate of the charter-free fair market value of the Core Heron Vessels be not less than 140% of the Non-Core Portion outstanding.

Under the CIT Facility, Heron may only make quarterly distributions to its members from accumulated unrestricted excess cash in operating accounts so long as no event of default has occurred and is continuing or would occur as a result of such distribution, so long as (i) the Non-Core Portion has been paid in full, (ii) an amount corresponding to the budgeted cost of all 2014 Core Heron Vessel intermediate surveys has been deposited in a restricted account at CIT and (iii) the outstanding amount under the CIT Facility does not exceed 60% of the combined fair market value of the vessels owned by Heron.

On March 10, 2014, deeds of transfer in respect of the vessels in the Ex-Deiulemar Fleet were executed in favor of Heron. Heron, having earlier deposited €8.1 million with the bankruptcy court in connection with its bid for Deiulemar, used $76.3 million of borrowings under the CIT Facility to deposit with the bankruptcy court €74.4 million in respect of the remaining bid price and court fees of €2.9 million. An additional $18.9 million is available for borrowing by Heron under the CIT Facility.

 

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Contractual obligations

The following table sets forth Oceanbulk’s contractual obligations and their maturity dates as of December 31, 2013 on an historical basis.

 

Historical contractual obligation as of December 31, 2013

 
    2014     2015     2016     2017     2018     2019 and
thereafter
    Total  
    ($ in thousands)  

Long term debt(1)

  $ 9,897      $ 9,897      $ 9,897      $ 19,550      $ 37,344      $ —        $ 86,585   

Interest on long term debt(2)

    3,469        3,049        2,633        2,095        1,093        —          12,339   

Members’ Loans(3)

    226,005        —          —          —          —          —          226,005   

Management fees(4)

    287        —          —          —          —          —          287   

Purchase commitments(5)

    219,069        454,370        —          —          —          —          673,439   

Bareboat commitments—upfront fee(6)

    49,515        24,315        —          —          —          —          73,830   

Bareboat commitments—charterhire(6)

  $ —        $ 9,033      $ 25,304      $ 31,444      $ 31,413      $ 318,732      $ 415,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 508,242      $ 500,664      $ 37,834      $ 53,089      $ 69,850      $ 318,732      $ 1,488,411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth Oceanbulk’s contractual obligations and their maturity dates as of December 31, 2013 on an as-adjusted basis, giving effect to (i) the incurrence of the HSBC Facility, the Deutsche Bank Facility and the CEXIM Facility and the interest thereon that were entered into subsequent to December 31, 2013 and (ii) the conversion of all outstanding Members’ Loans and interest thereon (which occurred on May 28, 2014) into membership units of the Oceanbulk Entities:

 

Pro forma contractual obligations as of December 31, 2013

 
    2014     2015     2016     2017     2018     2019 and
thereafter
    Total  
    ($ in thousands)  

Long term debt(1)

  $ 14,792      $ 23,001      $ 26,443      $ 36,095      $ 53,889      $ 161,326      $ 315,546   

Interest on long term debt(2)

    5,977        9,416        9,988        8,831        7,231        7,890        49,333   

Management fees(4)

    287        —          —          —          —          —          287   

Purchase commitments(5)

    100,955        381,635        —          —          —          —          482,590   

Bareboat commitments—upfront fee(6)

    49,515        24,315        —          —          —          —          73,830   

Bareboat commitments—charterhire(6)

  $ —        $ 9,033      $ 25,304      $ 31,444      $ 31,413      $ 318,732      $ 415,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 171,526      $ 447,400      $ 61,735      $ 76,370      $ 92,533      $ 487,948      $ 1,337,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The outstanding balance of Oceanbulk’s long-term debt with commercial banks at December 31, 2013 was $86.6 million.

The as-adjusted contractual obligations table includes also the expected repayment of the obligations arising under the HSBC Facility, the Deutsche Bank Facility and the CEXIM Facility discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oceanbulk—Oceanbulk’s Borrowing Activities—Loan financings from commercial banks,” that were entered into subsequent to December 31, 2013 and will be fully utilized to pay part of the purchase obligations discussed in footnote (5). Such expected repayment is based on the assumption that (i) the drawdown of the HSBC Facility will occur within the second quarter of 2014 and (ii) the financed newbuilding vessels’ expected delivery dates are as set forth under “Business—Oceanbulk’s fleet.”

 

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(2) Oceanbulk’s long-term debt outstanding as of December 31, 2013 bears interest at a variable rate of three-month LIBOR plus a margin. The calculation of interest payments has been made assuming interest rates based on the 3-month LIBOR as of December 31, 2013 and Oceanbulk’s various applicable margin rates under its historical debt as of December 31, 2013 ranging from 3.75% to 3.9% per annum.

The as-adjusted contractual obligations table includes also the expected interest payments under the HSBC Facility, the Deutsche Bank Facility and the CEXIM Facility. The calculation of such interest payments has been made assuming interest rates based on the 3-month LIBOR as of December 31, 2013 and Oceanbulk’s various applicable margin rates under the respective facilities ranging from 3.2% to 4.3% per annum.

 

(3) The amounts presented in the historical contractual obligations table above give effect to the conversion of all outstanding Members’ Loans (and interest thereon) into membership units of Oceanbulk Shipping and Oceanbulk Carriers in 2014 rather than settlement of these loans (including interest thereto) at maturity following the conversion of these loans in May 2014. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations of Oceanbulk—Oceanbulk’s Borrowing Activities—Members’ Loans”.

The as-adjusted contractual obligations table assumes the conversion of all outstanding Members’ Loans had occurred on December 31, 2013.

 

(4) The amounts presented in the historical contractual obligations table represent amounts payable within two months under Oceanbulk’s management agreements with Star Bulk. The management agreements are terminable at either party’s option upon two months’ notice.
(5) The amounts presented in the historical contractual obligations table represent Oceanbulk’s remaining obligations as of December 31, 2013 with respect to the acquisition of secondhand vessels Kymopolia, Mercurial Virgo and Pendulum and the pipeline of its newbuilding program, excluding those applicable under the bareboat lease agreements classified as capital leases.
(6) The amounts presented in the historical and as-adjusted contractual obligations table represent Oceanbulk’s commitments under the bareboat lease arrangements under the upfront fee and the charterhire, gross of any address commissions Oceanbulk may be entitled to.

Quantitative and Qualitative Disclosures About Market Risk

Oceanbulk is exposed to various market risks, including changes in interest rates, foreign-currency fluctuations, inflation and credit risk. Other than interest rate risk, Oceanbulk does not currently hedge its exposure to those risks through derivative contracts, but its management monitors fluctuations on a continuous basis and will seek to enter into hedge transactions when appropriate.

Interest Rate Risk

The international shipping industry is capital intensive, requiring significant amounts of capital provided in the form of long-term debt. Oceanbulk’s debt from commercial banks bears interest at floating rates based on LIBOR. Increasing interest rates could increase Oceanbulk’s interest expense and adversely impact its future earnings. Oceanbulk uses interest rate swaps to manage net exposure to interest rate fluctuations related to these borrowings and to lower its overall borrowing costs.

During the third quarter of 2013, Oceanbulk entered into five interest rate swaps with Goldman Sachs Bank USA, effective from October 1, 2014 and maturing on April 1, 2018. Under their terms, Oceanbulk will make quarterly payments to the counterparty at fixed rates for each swap, ranging from 1.79% to 2.07% per annum, based on a changing notional amount beginning, in the aggregate of the five swaps at $186.3 million and extending up to $461.3 million, during the life of the instruments. The counterparty will make quarterly floating rate payments at three-month U.S. dollar LIBOR to Oceanbulk based on the same notional amount. Up to March 31, 2014, these swaps were not designated as accounting hedges for financial reporting purposes, and accordingly changes in their market value are directly reported as loss or gain on derivative financial instruments.

 

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As an indication of the extent of Oceanbulk’s sensitivity to interest rate changes, an increase in three-month LIBOR of 1% would have increased its net loss and decreased its cash flows during the period ended March 31, 2014 by approximately $0.2 million based upon its debt level during 2014.

Inflation and Cost Increases

Although inflation has had a moderate impact on operating expenses, interest costs, dry docking expenses and overhead, Oceanbulk does not expect inflation to have a significant impact on direct costs in the current and foreseeable economic environment, other than potentially affecting insurance costs and crew costs. It is anticipated that insurance costs will continue to rise over the next few years and rates may increase at a rate that exceeds the general rate of inflation. Recently, there has been an increased demand for qualified crews, which has, and may continue to, put inflationary pressure on crew costs.

Foreign Currency Exchange Risk

Oceanbulk generates all of its revenue in U.S. dollars, and the majority of its expenses are denominated in U.S. dollars. However, a portion of Oceanbulk’s ship operating and administrative expenses are denominated in currencies other than U.S. dollars. For the year ended December 31, 2013 and the three month period ended March 31, 2014, Oceanbulk incurred approximately 20% of its operating expenses and the majority of its general and administrative expenses in currencies other than U.S. dollars. For accounting purposes, expenses incurred in currencies other than U.S. dollars are converted into U.S. dollars at the exchange rate prevailing on the date of each transaction. Because a significant portion of Oceanbulk’s expenses are incurred in currencies other than U.S. dollars, its expenses may, from time to time, increase relative to its revenues as a result of fluctuations in exchange rates, which could affect the amount of net income/loss that Oceanbulk reports in future periods. As of March 31, 2014 and December 31, 2013, the net effect of a 1% adverse movement in U.S. dollar/Euro exchange rates would not have had a material effect on Oceanbulk’s net loss.

Oceanbulk does not currently hedge movements in currency exchange rates, but its management monitors exchange-rate fluctuations on a continuous basis. It may seek to hedge this currency fluctuation risk in the future.

Concentration of Credit Risk

During the three month periods ended March 31, 2014 and 2013, charterers that individually accounted for more than 10% of Oceanbulk’s voyage revenues were as follows:

 

Charterer

   2014     2013  

A

     55     2

B

     12     —     

C

     —          98

As Oceanbulk continues to get delivery of its new building vessels and its fleet expands, its credit risk arising for concentration to a few number of charterers will spread out.

Oceanbulk performs ongoing credit evaluations of its charterers, and it generally does not require collateral in its business agreements. Oceanbulk maintains provisions for potential credit losses when necessary.

In addition, Oceanbulk has bank deposits that expose it to credit risk arising from possible default by the counterparty. It manages the risk by using credit-worthy financial institutions.

Lack of Historical Operating Data for Vessels Before Their Acquisition

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

 

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Oceanbulk acquires vessels. Accordingly, Oceanbulk will not obtain the historical operating data for the vessels from the sellers because that information is not material to its decision to make acquisitions, nor does Oceanbulk believes it would be helpful to potential investors in its common shares in assessing its 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, Oceanbulk treats the acquisition of a vessel (whether acquired with or without charter) as the acquisition of an asset rather than a business. Although vessels are generally acquired free of charter, Oceanbulk may, in the future, acquire vessels with existing time charters, such as the two Post-Panamax vessels Oceanbulk acquired in 2014. 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. 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’s entering into a separate direct 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.

When Oceanbulk purchases a vessel and assumes or renegotiates a related time charter, Oceanbulk must take the following steps before the vessel will be ready to commence operations:

 

    obtain the charterer’s consent to Oceanbulk as the new owner;

 

    obtain the charterer’s consent to a new technical manager;

 

    obtain the charterer’s consent to a new flag for the vessel;

 

    arrange for a new crew for the vessel;

 

    replace all hired equipment on board, such as gas cylinders and communication equipment;

 

    negotiate and enter into new insurance contracts for the vessel through Oceanbulk’s 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.

 

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BUSINESS OVERVIEW OF OCEANBULK

Oceanbulk is an international shipping company with extensive operational experience that owns and operates a fleet of dry bulk carrier vessels. On a fully delivered basis, Oceanbulk will have a fleet of 37 vessels consisting primarily of Capesize as well as Kamsarmax and Ultramax vessels with a carrying capacity between 55,000 dwt and 209,000 dwt. Oceanbulk’s fleet will include 12 existing vessels and 25 vessels currently under construction in Japan and China. Oceanbulk’s vessels transport a broad range of bulk commodities along worldwide shipping routes. Oceanbulk’s executive management team is led by Mr. Petros Pappas.

Oceanbulk’s existing fleet of 12 vessels has an aggregate capacity of approximately 1.4 million dwt, and Oceanbulk has under contract 25 eco-vessels, 22 of which are scheduled to be delivered during 2014 and 2015. By the end of the second quarter of 2016, Oceanbulk expects its fleet to consist of 37 wholly owned vessels, with an average age of 3.1 years and an aggregate capacity of 5.1 million dwt.

Currently, because of prevailing market conditions, Oceanbulk primarily employs its vessels under spot or voyage charters. The vessel owner benefits from any fuel savings it can achieve in a spot or voyage charter (particularly for eco-vessels) because fuel is paid for by the vessel owner.

As of May 31, 2014, the total payments for its 25 newbuilding vessels, one of which was delivered in May 2014, were expected to be $1,060 million, of which Oceanbulk had already paid $139 million from cash from operations and proceeds of past investments by its principal equityholders. As of May 31, 2014, Oceanbulk had already obtained commitments for $437.1 million of debt financing for 13 vessels and was in the final stages of negotiations for $225.5 million of debt financing for eight vessels. Oceanbulk intends to finance the remaining four vessels with a combination of the proceeds from debt and equity financings, as market conditions permit.

Oceanbulk’s Fleet

Oceanbulk built its fleet through acquisitions of secondhand and newbuilding vessels. Oceanbulk has been able to contract for its newbuilding vessels at prices that it believes reflect the recent bulk shipping downturn. Each of its newbuilding vessels is scheduled to be equipped with a vessel remote monitoring system that will provide data to a central location in order to monitor fuel and lubricant consumption and efficiency on a real-time basis. Oceanbulk expects to retrofit all of its existing vessels with a similar monitoring system.

Oceanbulk’s fleet, which emphasizes large Capesize vessels, primarily transports minerals from the Americas and Australia to East Asia, particularly China, but also Japan, Korea, Taiwan, Indonesia and Malaysia. Its Supramax vessels carry minerals, grain products and steel between the Americas, Europe, Africa, Australia and Indonesia and from these areas to China, Korea, Japan, Taiwan, the Phillipines and Malaysia. Oceanbulk’s newbuilding vessels are being built at Japanese and Chinese shipyards.

The following table summarizes key information about Oceanbulk’s fully delivered fleet:

 

Vessel Name

   Type    Capacity
(dwt)
    

Yard

   Year Built or
Expected
Delivery Date(1)
   Financing(2)
Existing Fleet         
1    Pantagruel    Capesize      180,181       Imabari, Japan    2004    Yes(4)
2    Big Fish    Capesize      177,662       Mitsui, Japan    2004    Yes(4)
3    Strange Attractor    Supramax      55,742       Mitsui, Japan    2006    Yes(4)
4    Pendulum    Kamsarmax      82,619       Tsuneishi, Japan    2006    Yes(5)
5    Kymopolia    Capesize      176,990       Namura, Japan    2006    Yes(5)
6    Big Bang    Capesize      174,109       SWS, China    2007    Yes(4)
7    Obelix    Capesize      181,433       Imabari, Japan    2011    Yes(4)
8    Amami(3)    Post-Panamax      98,681       Tsuneishi Zhousan, China    2011    Yes(5)

 

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Vessel Name

   Type    Capacity
(dwt)
    

Yard

   Year Built or
Expected
Delivery Date(1)
  Financing(2)  
9    Madredeus(3)    Post-Panamax      98,681       Tsuneishi Zhousan, China    2011     Yes(5)   
10    Maiden Voyage    Supramax      58,722       Kawasaki, Japan    2012     Yes(4)   
11    Mercurial Virgo    Kamsarmax      81,545       Longxue, China    2013     Yes(5)   
12    Magnum Opus    Kamsarmax      81,022       JMU, Japan    2014     Yes(6)   
Newbuilding              
13    HN 213-JMU (tbr Peloreus)    Capesize      182,000       JMU, Japan    July 2014     Yes (6) 
14    HN 214-JMU (tbr Leviathan)    Capesize      182,000       JMU, Japan    August 2014     Yes (6) 
15    HN 1061    Ultramax      64,000       New Yangzijiang, China    January 2015     Yes (8) 
16    HN 1063    Ultramax      64,000       New Yangzijiang, China    January 2015(1)     Yes (8) 
17    HN 1062    Ultramax      64,000       New Yangzijiang, China    February 2015(1)     Yes (8) 
18    HN 5017-JMU    Capesize      182,000       JMU, Japan    March 2015     Yes (2) 
19    HN NE164-NACKS (tbr Honey Badger)    Ultramax      61,000       NACKS, China    March 2015(1)     Yes (2) 
20    HN NE165-NACKS    Ultramax      61,000       NACKS, China    March 2015(1)     Yes (2) 
21    HN NE166-NACKS    Newcastlemax      209,000       NACKS, China    April, 2015(1)     Yes (2) 
22    HN 1064    Ultramax      64,000       New Yangzijiang, China    April 2015(1)     Yes (8) 
23    HN 1312-SWS    Capesize      180,000       SWS, China    April 2015(1)     Yes (7) 
24    HN NE167-NACKS    Newcastlemax      209,000       NACKS, China    May 2015(1)     Yes (2) 
25    HN 1313-SWS    Capesize      180,000       SWS, China    June 2015(1)     Yes (7) 
26    HN 1080    Ultramax      64,000       New Yangzijiang, China    July 2015     No (10) 
27    HN 5055-JMU    Capesize      182,000       JMU, Japan    July 2015     Yes (2) 
28    HN NE184-NACKS    Newcastlemax      209,000       NACKS, China    July 2015     Yes (2) 
29    HN 1081    Ultramax      64,000       New Yangzijiang, China    August 2015     No (10) 
30    HN 5056-JMU    Capesize      182,000       JMU, Japan    August 2015     Yes (2) 
31    HN 1082    Ultramax      64,000       New Yangzijiang, China    September 2015     No (10) 
32    HN 1359    Newcastlemax      208,000       SWS, China    September 2015(1)     Yes (9) 
33    HN 1083    Ultramax      64,000       New Yangzijiang, China    November 2015(1)     No (10) 
34    HN 1360    Newcastlemax      208,000       SWS, China    December 2015     Yes (9) 
35    HN 1361    Newcastlemax      208,000       SWS, China    March 2016(1)     Yes (9) 
36    HN 1362    Newcastlemax      208,000       SWS, China    May 2016(1)     Yes (9) 
37    HN 1363    Newcastlemax      208,000       SWS, China    June 2016(1)     Yes (9) 

  Total wholly owned dwt:

     5,018,609           

 

(1) The indicated expected delivery date of Oceanbulk’s newbuilding vessels is either the contracted delivery date or the expected delivery date that it has been advised of by the relevant shipyards. The indicated expected delivery date for each of hull numbers HN NE164-NACKS (tbr Honey Badger), HN NE165-NACKS, HN NE166-NACKS, HN 1062, HN 1064, HN NE167-NACKS, HN 1361 and HN 1362 reflects a delivery date that is one month earlier than the contracted delivery date. The indicated expected delivery dates for hull numbers HN 1063, HN 1312-SWS, HN 1313-SWS, HN 1359 and HN 1363 reflect delivery dates that are three, four, three, two and three months earlier than the respective contracted delivery dates.
(2) Indicates either that committed or funded financing for the vessel has been obtained or Oceanbulk is in the final stages of negotiations with a lender with respect to such committed financing.

 

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(3) Two of Oceanbulk’s Post-Panamax vessels, Amami and Madredeus, were acquired subject to long-term charters to Glocal Japan Inc. through April and June 2016, respectively, at a gross charterhire rate of $15,000 per day.
(4) These vessels secure the ABN Facility, which requires balloon payments with respect to the individual vessels from September 2017 to December 2018.
(5) These vessels will secure the HSBC Facility, for which Oceanbulk executed a binding term sheet on April 1, 2014. The HSBC Facility is expected to mature 59 months after the drawdown date.
(6) Financing for these vessels is expected to be provided pursuant to the Deutsche Bank Facility, for which Oceanbulk executed a loan agreement on May 20, 2014. Loans under the Deutsche Bank Facility are able to be drawn to finance payments on each vessel and mature five years after the drawdown date of each loan. An amount of $20 million was drawn in May upon delivery of Magnum Opus.
(7) Financing for these vessels is expected to be provided pursuant to the $57.4 million CEXIM Facility, for which we executed a binding term sheet on March 21, 2014. Loans under the CEXIM Facility are able to be drawn to finance payments on each vessel and mature ten years after the drawdown date of each loan.
(8) These vessels are subject to bareboat charters with eight-year terms with affiliates of New Yangzijiang.
(9) These vessels are subject to bareboat charters with ten-year terms with affiliates of SWS.
(10) Debt financing for these vessels is expected to amount to $64 million.

Management of Oceanbulk’s Business

History and Development of the Company

Oceanbulk Shipping LLC and Oceanbulk Carriers LLC, were formed in October 2012 and April 2013, respectively, as joint ventures between the Pappas Holdco (a subsidiary of Oceanbulk Maritime) and the Oaktree Holdco to acquire and operate dry bulk vessels. Oceanbulk Maritime provides commercial management services pursuant to a commercial management agreement.

Purchase of the Deiulemar Fleet

On March 10, 2014, Heron purchased the business of Deiulemar, which consists of 12 vessels and the associated assets and contracts. The total purchase price was $120.8 million, of which $44.5 million was provided in the form of equity or convertible note financing by Oceanbulk Shipping LLC and ABY Group Holding Limited on a 50-50 basis and $95.2 million (including $76.3 million available for financing the acquisition and $18.9 million available for working capital borrowings) was provided by lenders pursuant to the CIT Facility that is guaranteed on a several (not joint) 50-50 basis by Oceanbulk Shipping LLC and ABY Group Holding Limited.

As of March 31, 2014, the following vessels were owned by Heron:

 

    

Vessel Name

   Type    Capacity
(dwt)
    

Yard

   Year
Built
 

1

   ABYO Gwyneth    Kamsarmax      82,790       Tsuneishi (Japan)      2006   

2

   ABYO Oprah    Kamsarmax      82,551       Tsuneishi (Japan)      2006   

3

   ABYO Angelina    Kamsarmax      82,981       Tsuneishi (Japan)      2006   

4

   ABYO Audrey    Capesize      175,125       New Times (China)      2011   

5

   ABYO One    Panamax      64,796       Fincatieri (Italy)      1987   

6

   ABYO Two    Capesize      122,760       Hyundai (Korea)      1990   

7

   ABYO Three    Capesize      122,760       Hyundai (Korea)      1990   

8

   ABYO Natalie    Panamax      75,473       Fincatieri (Italy)      1996   

9

   ABYO Jennifer    Panamax      75,473       Fincatieri (Italy)      1996   

10

   ABYO Sienna    Panamax      75,473       Fincatieri (Italy)      1997   

11

   ABYO Charlize    Panamax      75,473       Fincatieri (Italy)      1997   

12

   ABYO Four    Capesize      172,632       Santierul (Romania)      1999   
      Total      1,208,287         

 

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As of March 31, 2014, Heron had total debt of $92.5 million and total cash of $19.2 million. Since March 31, 2014 Heron has sold ABYO One, ABYO Two, ABYO Three, ABYO Sienna and ABYO Charlize for total consideration of $33.3 million. Part of these proceeds were used to repay part of the CIT Facility which as of June 3 2014 stands at $65.2 million. Oceanbulk expects that ABYO Gwyneth, ABYO Oprah, ABYO Angelina, ABYO Audrey and ABYO Four will be retained by Heron, and the remaining vessels will be sold during 2014.

Officers and Crewing

Oceanbulk had no onshore employees at the end of 2013 and 2012. As of March 31, 2014, Oceanbulk had 249 seagoing employees and no onshore employees. Its seagoing employees are currently employed by its subsidiaries and its onshore personnel are employed by its affiliates. None of Oceanbulk’s employees is currently covered by collective bargaining agreements and Oceanbulk believes that its relations with its employees are good.

Oceanbulk’s Customers

Oceanbulk believes that its vessel employment strategy and high-quality operations position it to be the transportation partner of choice for its customers. By employing its vessels in the spot and short-term time charter market, Oceanbulk maintains regular dialogue with charterers and brokers that help it identify valuable chartering opportunities, as well as longer-term trends that may benefit it. Developing strong relationships with the end users of its services allows Oceanbulk to better satisfy their needs with appropriate and capable vessels. A prospective charterer’s financial condition, creditworthiness and track record are important factors in negotiating Oceanbulk’s vessels’ employment. As of March 31, 2014, Oceanbulk’s vessels were subject to charters with Cargill, Glocal Marine, Western Bulk Carriers and Noble. Historically Oceanbulk have also chartered with L. Dreyfus, NYK, Vale, ABT, CISA, Glencore and other major charterers. During 2013, Oceanbulk had significant portions of its revenues come from specific charterers who are major players in the dry bulk market. As its fleet expands, Oceanbulk expects to spread the counterparty risk across more charterers and will continue to evaluate these charterers and its chartering strategy for credit risk.

During 2013, charterers that individually accounted for more than ten percent of Oceanbulk’s voyage reveneues were as follows:

 

Charterer

   2013  

A

     22

B

     19

C

     18

D

     15

E

     11

Because, on a fully delivered basis, its fleet did not expand to four vessels until the middle of the third quarter of 2013 and did not expand to six vessels until late in the fourth quarter of 2013, Oceanbulk expects that the concentration of charterers during 2013 will not be indicative of the future operations of its fleet during 2014 or of its fully delivered fleet.

Competition

Oceanbulk operates in markets that are highly competitive and based primarily on supply and demand. Oceanbulk competes for charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on its reputation and that of its commercial manager. Oceanbulk competes primarily with other independent and state-owned dry bulk vessel-owners. Its competitors may have more resources than Oceanbulk and may operate vessels that are newer, and, therefore, more attractive to charterers, than its vessels. Ownership of dry bulk vessels is highly fragmented and is divided among publicly listed companies, state-controlled owners and private shipowners.

 

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Seasonality

Oceanbulk operates its vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charterhire rates. This seasonality may result in quarter-to-quarter volatility in its operating results, which could affect the amount of dividends, if any, that Oceanbulk pays to its equityholders from quarter to quarter. The dry bulk carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, revenues of dry bulk carrier operators in general have historically been weaker during the fiscal quarters ended June 30 and September 30 and stronger during the fiscal quarters ended December 31 and March 31. This seasonality may materially affect Oceanbulk’s operating results and cash available for dividends.

Environmental and Other Regulations in the International Shipping Industry

Government regulation significantly affects the ownership and operation of its fleet. Oceanbulk is subject to international conventions and treaties and national, state and local laws and regulations relating to safety, security, health and environmental protection in force in the countries in which its vessels may operate or are registered. These regulations include requirements relating to the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, the security of the vessel, cargoes and crew, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws and legal requirements may entail significant expense, including vessel modifications, equipment acquisitions or modifications, crew training and certification and implementation of certain operating procedures.

A variety of government and private entities subject its vessels to both scheduled and unscheduled inspections. These entities include 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 Oceanbulk to obtain permits, licenses, certificates and other authorizations for the operation of its vessels. Failure to maintain necessary permits or approvals could require Oceanbulk to incur substantial costs or temporarily suspend the operation of one or more of its vessels.

Oceanbulk believes that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection, safety, environmental and other 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 existing strict environmental standards and planned stricter standards. Oceanbulk is required to maintain operating standards for all of its vessels that emphasize operational safety, quality maintenance, continuous training of its officers and crews and compliance with all applicable laws and legal requirements. Oceanbulk is not aware of any material failure of its vessels to comply with applicable environmental laws and regulatory requirements and is not aware of any of its vessels that do not have all material permits, licenses, certificates or other authorizations necessary for the conduct of its operations. However, because such laws and regulations may change frequently and have tended to impose stricter requirements over time, Oceanbulk cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on its operations or the resale value or useful lives of its vessels. Laws and other requirements may be adopted or come into force that could require the installation of equipment, changes in operations, or have other impacts that could adversely affect its business, results of operations, cash flows and financial condition. In addition, a future serious marine incident that causes significant adverse environmental impact, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional laws or legal requirements that could also have such adverse effects.

International Maritime Organization

The International Maritime Organization, the United Nations agency for maritime safety and the prevention of pollution by ships, has adopted the International Convention for the Prevention of Pollution from Ships, 1973,

 

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as modified by the Protocol of 1978. MARPOL became effective on October 2, 1983. It has been adopted by over 150 nations, including many of the jurisdictions in which its vessels operate.

MARPOL has six Annexes. 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 relates to air emissions.

Air Emissions

In September 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective in May 2005, Annex VI sets limits on nitrogen oxide emissions from marine diesel engines with a power output of more than 130 kilowatts that 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 vessels, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls) are also prohibited.

The IMO’s Maritime Environment Protection Committee adopted amendments to Annex VI on October 10, 2008, which 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 sulfur contained in any fuel oil used on board ships. As of January 1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur (from the previous 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,” than in other waters. By July 1, 2010, ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 1.0% (from 1.50%), which will be further reduced to 0.10% on January 1, 2015. Amended Annex VI establishes procedures for designating new ECAs. Currently, the Baltic Sea, the North Sea certain coastal areas of North America and areas of the Caribbean Sea are designated ECAs. 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 United States Environmental Protection Agency (the “EPA”), or other jurisdictions where Oceanbulk operates, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of its 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 EPA promulgated equivalent (and in some senses stricter) emissions standards in late 2009.

As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for ships. This included the requirement that all new ships utilize the Energy Efficiency Design Index and all ships use the Ship Energy Management Plan.

As of January 1, 2010, the Directive 2005/33/EC of the European Parliament and of the Council of July 6, 2005, amending Directive 1999/32/EC, came into force. The objective of the directive is to reduce emission of sulfur dioxide and particulate matter caused by the combustion of certain petroleum derived fuels. The directive imposes limits on the sulfur content of such fuels as a condition of their use within a Member State territory. The maximum sulfur content for marine fuels used by inland waterway vessels and ships at berth in ports in EU countries after January 1, 2010, is 0.10% by mass. On November 21, 2012, the European Parliament and of the Council issued Directive 2012/33/EU, which amended Directives 1999/32/EC and 2005/33/EC and brought EU regulations into line with the stricter sulfer emission requirements imposed by the revised MARPOL Annex VI.

 

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Ballast Water Management

The IMO adopted the International Convention for the Control and Management of Ships’ Ballast Water and Sediments 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 living organism concentration limits. The BWM Convention will not become effective until 12 months after it has been ratified 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, the ratifications have not been sufficient for the BWM convention to enter into force. Although the United States has not ratified the BWM Convention, the U.S. Coast Guard has adopted regulations imposing requirements similar to those the BWM Convention calls for. Upon entry into force of the BWM Convention, mid-ocean ballast exchange would be mandatory for all of Oceanbulk’s vessels. Such exchanges are already required for vessels entering the waters of certain countries such as the United States. In addition, Oceanbulk’s 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 for all trades, the cost of compliance could increase for ocean carriers. Although Oceanbulk does 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 its operations. If the BWM Convention concentration limits become mandatory, vessel owners may have to install expensive ballast water treatment systems and modify existing vessels to accommodate those systems. To date, many of these systems are unproven and not yet certified for use by any government. Oceanbulk cannot predict whether the BWM Convention will be ratified by enough countries to enter into force or whether other countries will adopt it or similar requirements unilaterally. Despite this uncertainty, all of Oceanbulk’s newbuildings are being equipped with BMW treatment systems.

Safety Management System Requirements

The IMO has also adopted the SOLAS and the LL Convention, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises the SOLAS and LL Convention standards. The Convention on Limitation of Liability for Maritime Claims was recently amended and the amendments are expected to go into effect on June 8, 2015. The amendments alter the limits of liability for loss of life or personal injury claims and property claims against shipowners. Oceanbulk believes that all its vessels will be 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, Oceanbulk’s 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. Oceanbulk relies upon the safety management system that it’s 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 (“SMC”) for each vessel they operate. This certificate evidences compliance (“DOC”) by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can obtain a SMC 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. Oceanbulk has obtained or will obtain DOCs for its offices and will obtain SMCs for all of its vessels for which the certificates are required by the IMO. The DOC and the SMC are renewed every five years,

 

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but the DOC is subject to audit verification annually and the SMC at least every 2.5 years. As of this date, each of Oceanbulk’s vessels is ISM Code certified, and Oceanbulk expects that each of its newbuilding vessels will also be 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, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage (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

Vessels are primarily regulated by their country of registry, known as the flag state, and the countries vessels visit, known as port states. Under international law, the flag state has overall responsibility for implementing and enforcing a broad range of safety, health, environmental and other laws and legal requirements with respect to all vessels it registers. When enforcing international, national or other requirements, port states tend to take into account the safety reputation of the flag state in determining inspection frequency and severity. All of its existing vessels are flagged in the Marshall Islands, and Oceanbulk expects that its newbuilding vessels will also be flagged in the Marshall Islands. According to an internationally recognized guide of flag state performance—the “Shipping Industry Guidelines on Flag State Performance,” which 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 (as defined below)—the Marshall Islands has an overall favorable assessment. Oceanbulk recognizes the importance of a credible flag state and does not intend to register vessels with countries which have poor performance indicators. Noncompliance with the ISM Code or other IMO regulations may subject the shipowner or bareboat charterer to more frequent inspections, more intrusive inspections, increased liability, decreases in available insurance coverage for affected vessels and 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. Each of its existing vessels is ISM Code certified, and Oceanbulk expects that each of its newbuilding vessels will also be ISM Code certified. However, there can be no assurance that such certification will be maintained or can be maintained without adversely affecting vessel profitability.

The IMO continues to review and introduce new conventions and regulations. It is difficult to predict reliably what additional requirements, if any, may be passed by the IMO and adopted by particular countries or the international community and what effect, if any, such conventions, regulations or other legal requirements might have on Oceanbulk’s operations.

 

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The U.S. Oil Pollution Act of 1990 and the U.S. Comprehensive Environmental Response, Compensation and Liability Act

The U.S. Oil Pollution Act of 1990 established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills applicable to vessels and facilities. 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 U.S. Comprehensive Environmental Response, Compensation and Liability Act 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. OPA applies to oil tankers (which are not operated by us), as well as non-tanker ships with respect to the fuel oil, or bunkers, used to power such ships. CERCLA also applies to Oceanbulk’s 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:

 

    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 earnings capacity due to injury, destruction or loss of real or personal property or natural resources; and

 

    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 responsible 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 Clean Water Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.

CERCLA contains a liability regime similar to OPA 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.

 

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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, or qualification as a self-insurer. Oceanbulk plans to comply with the U.S. Coast Guard’s financial responsibility regulations by providing a certificate of responsibility evidencing sufficient self-insurance.

Oceanbulk currently maintains pollution liability coverage insurance in the amount of $1.0 billion per incident for each of Oceanbulk’s vessels, subject to exclusions and other qualifications. If the damages from a catastrophic spill were to exceed or fall outside of Oceanbulk’s insurance coverage, it could have an adverse effect on Oceanbulk’s business and results of operation.

OPA specifically permits individual states in the United 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 vessel owners’ responsibilities under these laws. Oceanbulk intends to comply with all existing and future applicable state or other regulations in the ports where its vessels call.

Other Environmental Laws and Requirements

The U.S. Clean Water Act (the “CWA”), prohibits the discharge of oil or hazardous substances in a “harmful quantity” 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 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 or VGP authorizing ballast water discharges and other discharges incidental to the operation of vessels. The current VGP issued on March 28, 2013 expires on December 19, 2018. The VGP imposes technology and water-quality based effluent limits for certain types of discharges and establishes specific inspection, monitoring, record keeping and reporting requirements to ensure the effluent limits are met. The VGP also contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters, and stringent requirements for exhaust gas scrubbers and requires the use of environmentally acceptable lubricants. The EPA has the authority to provide for more stringent emission and discharge limits when promulgating the VGP.

U.S. Coast Guard regulations adopted under the U.S. National Invasive Species Act also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters, including restrictions on the allowable concentration of living organisms in ballast water discharged from ships in U.S. waters. The U.S. Coast Guard ballast water standards are similar to those adopted by the IMO in the BWM Convention in 2004. Compliance with the EPA and the U.S. Coast Guard regulations could require the installation of equipment on Oceanbulk’s 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 Oceanbulk’s 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 (the “CAA”), requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Oceanbulk’s vessels are subject to vapor control and recovery requirements for certain

 

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cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Oceanbulk’s vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these requirements, and Oceanbulk expects that its newbuilding vessels that will operate in such port areas will also be so equipped. The CAA also requires states to adopt State Implementation Plans (“SIPs”) designed to attain national health-based air quality standards, including in 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, its existing vessels operating in covered port areas are equipped with vapor recovery systems that satisfy these existing requirements, and Oceanbulk expects that its newbuilding vessels will also satisfy these requirements.

European Union Regulations

In October 2009, the European Union amended a directive (Directive 2009/123/EC amended Directive 2005/35/EC) 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.

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 MEPC adopted two new sets of mandatory requirements to address greenhouse gas emissions from ships that entered into force in January 2013. Currently, operating ships are required to develop SEEMPs and minimum energy efficiency levels per capacity mile will apply to new ships. These requirements could cause Oceanbulk to incur additional compliance costs. The IMO is considering the implementation 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, has adopted regulations to limit greenhouse gas emissions from certain mobile sources and has proposed regulations to limit greenhouse gas emissions from large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, the EPA was petitioned in 2007 by the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels. In June 2012, the EPA responded to the petition by stating that its regulation of vessel emissions would require significant time and resources which it is not currently prepared to expend. Any passage of climate change legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where Oceanbulk operates, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require Oceanbulk to make significant financial expenditures that Oceanbulk cannot predict with certainty at this time. Even in the absence of such legislation or regulation, Oceanbulk’s business may be indirectly affected to the extent that climate change may result in sea level changes or more intense weather events.

International Labor Organization

The United Nations International Labour Organization (“ILO”) adopted the Maritime Labour Convention 2006 (“MLC 2006”) on February 23, 2006. MLC 2006, sometimes referred to as the “seafarers’ bill of rights,” came into force for the initial group of countries which had ratified it on August 20, 2013. MLC 2006 requires vessels over 500 gross tons, visiting countries which ratified the convention to have on board a Maritime Labor

 

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Certificate and a Declaration of Maritime Labor Compliance. As the name of the document indicates, it certifies compliance with the labor standards contained in MLC 2006 such as minimum seafarer age, hours or work and rest, paid annual leave and onboard medical care. Oceanbulk believes it is in substantial compliance with the MLC 2006 requirements for all of its vessels.

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 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.

Similarly, in December 2002, the IMO amended SOLAS adopting, effective July 2004, the International Ship and Port Facility Security Code (“ISPS Code”), which imposes various detailed security obligations on vessels and port authorities and is designed to enhance the security of ports and ships against terrorism. After July 1, 2004, to trade internationally, a vessel must have an International Ship Security Certificate (“ISSC”) from a recognized security organization approved by the vessel’s flag state. Among the various requirements are:

 

    on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;

 

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

 

    the development of 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.

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

The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S.-flag vessels from MTSA provided such vessels have on board a valid ISSC that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. Oceanbulk intends to implement the various security measures required by MTSA, SOLAS and the ISPS Code across its entire fleet.

Inspection by Classification Societies

The vast majority of oceangoing vessels are “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.

 

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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.

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 dry docking in order to increase Available Days and decrease capital expenditures, provided the vessel is inspected underwater.

Most vessels are also dry docked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a “recommendation” 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 (the “IACS”). In 2013, the IACS adopted harmonized Common Structure Rules for oil tankers and bulk carriers, that align with the IMO goals standards. The new rules will apply to all oil tankers over 150 meters and bulk carriers over 90 meters in length contracted for construction on or after July 1, 2015. All newbuilding and secondhand vessels that Oceanbulk acquires must be certified prior to their delivery under its standard purchase contracts and memorandum of agreement. If the vessel is not certified on the date of closing, Oceanbulk has no obligation to take delivery of the vessel.

Risk of Loss and Liability Insurance

The operation of any dry bulk 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

 

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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.

Oceanbulk maintains hull and machinery insurance, war risks insurance, protection and indemnity cover, and freight, demurrage and defense cover for its fleet in amounts that Oceanbulk believes to be prudent to cover normal risks in its operations. However, Oceanbulk may not be able to achieve or maintain this level of coverage throughout a vessel’s useful life. In addition, while Oceanbulk believes that the insurance coverage that Oceanbulk has is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that Oceanbulk will always be able to obtain adequate insurance coverage at reasonable rates.

Hull and Machinery and War Risks Insurance

Oceanbulk maintains marine hull and machinery and war risks insurance, which includes coverage of the risk of actual or constructive total loss for all of its vessels. Each of its current vessels is covered up to at least the fair market value with deductibles of $100,000-$175,000 per vessel per incident and Oceanbulk expects to have equivalent coverage on its newbuilding vessels. Oceanbulk also maintain increased value coverage for most of its current vessels and expects to do so for all of its newbuilding vessels. Under this increased value coverage, in the event of total loss of a vessel, Oceanbulk 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 that are not recoverable under its 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 (“P&I Associations”), which insure liabilities to third parties in connection with Oceanbulk’s 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. Oceanbulk’s 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.” There is no express limit of liability for the risks covered, although there is an overall limit currently based on 2.5% of the property limitation funds under the 1976 Limitation Convention, save for:

 

    oil pollution, $1.0 billion per event;

 

    passenger and seaman risks, $3.0 billion per event, with a sub-limit of $2.0 billion per event for passenger claims only;

 

    P&I Excess War Risks, $500.0 million per event and in the aggregate; and

 

    in respect of certain war and terrorist risks the liabilities arising from biological and chemical attacks, $30.0 million per event.

The 13 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. A Pooling Agreement defines the risks that can be pooled and how losses are to be shared between the participating clubs. The pool provides a mechanism for sharing all claims in excess of $9 million up to, currently, approximately $7.5 billion.

As a member of a P&I Association which is a member of the International Group, Oceanbulk is 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.

 

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Permits and Authorizations

Oceanbulk is required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to its 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. Oceanbulk expects to be able to obtain all permits, licenses and certificates currently required to permit its vessels to operate. Additional laws and regulations, environmental or otherwise, may be adopted which could limit Oceanbulk’s ability to do business or increase the cost of Oceanbulk doing business.

Legal Proceedings

To its knowledge, Oceanbulk is not currently a party to any lawsuit that, if adversely determined, would have a material adverse effect on its financial position, results of operations or liquidity. As such, Oceanbulk does not believe that pending legal proceedings, taken as a whole, should have any significant impact on its financial statements. From time to time in the future, Oceanbulk may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. While Oceanbulk expects that these claims would be covered by its existing insurance policies, those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. Oceanbulk has not been involved in any legal proceedings which may have, or have had, a significant effect on its financial position, results of operations or liquidity, nor is Oceanbulk aware of any proceedings that are pending or threatened which may have a significant effect on its financial position, results of operations or liquidity.

Exchange Controls

Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of Oceanbulk’s equity interests.

Properties

Other than its vessels (including the contracts for the construction thereof), Oceanbulk does not own any material property.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Set forth below are certain relationships and related party transactions of Oceanbulk. The following should be read in conjunction with the other information in this proxy statement.

Oceanbulk’s relationship with its Managers

Technical management. Each of Oceanbulk’s existing vessels has entered (or will enter) into a vessel management and operating agreement with StarBulk S.A., a subsidiary of Star Bulk, which was founded by Star Bulk’s non-Executive Chairman, Mr. Pappas (who currently is the Chief Executive Officer of Oceanbulk). In addition, affiliates of Oaktree beneficially own approximately 19.6% of Star Bulk’s outstanding voting shares. Pursuant to the terms of these agreements, StarBulk S.A. provides management services, including technical, crew and accounting services, to Oceanbulk’s vessels in exchange for a fixed daily management fee of $750 per vessel, for a period beginning upon the vessel’s delivery and until the termination of the agreement. The agreement will terminate upon the expiration of a two-month period from the execution of a written notice by either party to the other. During 2013 and the period from October 4, 2012 through December 31, 2012, management fees under these agreements amounted to $0.7 million and less than $0.1 million, respectively. During the three month periods ended March 31, 2014 and 2013, management fees under these agreements amounted to $0.5 million and $0.1 million, respectively.

Provision of certain guarantees by Oceanbulk Maritime

Oceanbulk Maritime has provided performance guarantees under the bareboat charter agreements of HN 1061, HN 1062, HN 1063 and HN 1064, which are four vessels being built in the NewYangzijiang shipyard. Oceanbulk Maritime has also provided performance guarantees under the shipbuilding contracts for HN 213-JMU (tbr Peloreus), HN 214-HMU (tbr Leviathan), HN 5017-JMU, HN 5055-JMU and HN 5056-JMU, which are five vessels being built at JMU, and HN NE164-NACKS (tbr Honey Badger), HN NE165-NACKS, HN NE166-NACKS, HN NE167-NACKS and HN NE184-NACKS, which are five vessels being built at NACKS. All of the performance guarantees described above have been counter-guaranteed by Oceanbulk.

Vessel Purchase from MaidenVoyage LLC

In August 2013, Oceanbulk purchased a Supramax dry bulk carrier, Maiden Voyage, from Maiden Voyage LLC, which was a company under common control by the Pappas Holdco and Oaktree. The purchase price was $27.3 million.

Profit Interests

Pursuant to the Profits Interest Agreement among affiliates of Oaktree, Oceanbulk Maritime S.A. and Messrs. Pappas and Norton, Messrs. Pappas and Norton are eligible for a share of the profits of Oaktree, subject to Oaktree and its affiliates achieving certain internal rate of return and capital multiples on their original investment in Oceanbulk. Mr. Hamish Norton is the Chief Financial Officer of Oceanbulk Maritime. This award will be payable only by affiliates of Oaktree and not by Oceanbulk. As of December 31, 2013 and 2012, no awards had vested and no payments have yet been made under the Profits Interest Agreement. While Oceanbulk is, as of March 31, 2014, a party to a side letter to the Profits Interest Agreement, the Agreement will be amended prior to the proposed Transactions, to remove Oceanbulk from being a party.

Members’ Loans

Pursuant to the constituent documents of Oceanbulk Shipping and Oceanbulk Carriers, the Oceanbulk Holdcos have been permitted, as members, to lend amounts to them as Members’ Loans, evidenced by Convertible Notes due December 2042 (the “Convertible Notes”). There were $404.3 million and $223.1 million

 

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aggregate principal amount of Convertible Notes outstanding as of March 31, 2014 and December 31, 2013, respectively. During the period after March 31, 2014 and up to May 28, 2014 (when the Members’ Loans were converted) Oceanbulk incurred an additional $4.9 million of Convertible Notes. The Convertible Notes bore interest at a rate of 2.0% per annum, accruing quarterly in arrears. There was $4.5 million and $2.9 million total accrued interest outstanding as of March 31, 2014 and December 31, 2013 respectively, while an additional $1.3 million was accrued from the period between April 1, 2014 and May 28, 2014, when the total outstanding Members’ Loans of $415.0 million were converted into 373,533 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to the Oaktree Holdco and 41,504 Class A Units issued by Oceanbulk Shipping and Oceanbulk Carriers to the Pappas Holdco.

Certain Relationships and Related Party Transactions of Star Bulk

Set forth below are certain relationships and related party transactions of Star Bulk. The following should be read in conjunction with the other information in this proxy statement. In addition, you should refer to the section entitled “Major Stockholders and Related Party Transactions” in our annual report on Form 20-F for the fiscal year ended 2013 filed with the SEC on March 21, 2014, for an overview of the related party transactions of Star Bulk.

Following the closing of the Merger, Star Bulk will be obligated to make payments to Spyros Capralos, Star Bulk’s current chief executive officer, which would be triggered by the Transactions under his employment and consultancy arrangements with us.

 

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PARTIES TO THE TRANSACTIONS

Star Bulk Carriers Corp. is a global shipping company incorporated in the Republic of the Marshall Islands. Our principal executive office is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece and the telephone number of our principal executive office is 011 30 210 617 8400.

The Merger Subs consist of two Marshall Islands limited liability companies that are wholly-owned subsidiaries of the Company. The Merger Subs were formed solely for the purpose of entering into the Merger Agreement and consummating the transactions contemplated by the Merger Agreement. The Merger Subs have not engaged in any business except for the activities incident to its formation and in connection with the transactions contemplated by the Merger Agreement. The Merger Subs’ registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

The Sellers consist of two Marshall Islands limited liability companies that were formed for the purpose of owning, investing and disposing of the membership interests in the Oceanbulk Holdcos and entering into the Merger Agreement and consummating the transactions contemplated by the Merger Agreement. The Oaktree Seller’s principal office is located at 333 S. Grand Avenue, 30th Floor, Los Angeles, CA 90071 and the telephone number of its principal office is (213) 830-6300. The Pappas Seller’s principal place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

The Oceanbulk Holdcos consist of two Marshall Islands limited liability companies. The Oceanbulk Holdcos were formed for the purpose of owning, investing and disposing of the membership interests in Oceanbulk. At the effective time of the Merger, each of the Oceanbulk Holdcos will be merged with and into each of one of the Merger Subs, and Merger Subs will continue as the surviving companies and wholly-owned subsidiaries of the Company. The Oaktree Holdco’s principal office is located at 333 S. Grand Avenue, 30th Floor, Los Angeles, CA 90071 and the telephone number of its principal office is (213) 830-6300. The Pappas Holdco’s principal place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960.

Oceanbulk consists of two international shipping companies that are formed under the laws of the Republic of the Marshall Islands. On a fully delivered basis, Oceanbulk will have a fleet of 39 vessels consisting primarily of Capesize as well as Kamsarmax and Ultramax vessels with a carrying capacity between 55,000 dwt and 209,000 dwt. Oceanbulk’s fleet includes 12 existing vessels and 25 vessels currently under construction at leading shipyards in Japan and China. Oceanbulk’s vessels transport a broad range of major and minor bulk commodities, including ores, coal, grains and fertilizers, along worldwide shipping routes. Oceanbulk’s principal place of business and registered office is located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960. Oceanbulk conducts its business through its commercial manager Oceanbulk Maritime S.A., of Liberia whose Greek branch is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece, and the telephone number is 011-30-210-638-7200.

The Pappas Entities consist of three companies limited by shares and incorporated in the British Virgin Islands and which own the entire issued and outstanding registered shares of Dioriga and Positive Shipping. At the effective time of the Pappas Agreement, the Company shall purchase and acquire the relevant Pappas Entities’ rights, title and interest in and to the whole of the issued and outstanding registered shares in each of Dioriga and Positive Shipping. The Pappas Entities’ principal place of business and registered office is located at P.O. Box 3321, Drake Chambers, Road Town Tortola, British Virgin Islands

Dioriga and Positive Shipping are each a corporation incorporated in the Marshall Islands that were formed for the purposes of owning and operating vessels. Dioriga is the owner of a bulk carrier vessel of approximately 80,800 dwt registered under the flag of the Marshall Islands with the name “TSU EBISU”. Positive Shipping is party to a contract for the construction of a newbuilding drybulk carrier of approximately 182,000 dwt with fuel

 

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efficient specifications, currently under construction at Japan Marine United Corproration having Hull No. 5016 and which, on delivery, will be registered in the ownership of Positive Shipping under the flag of the Marshall Islands with the name “INDOMITABLE”. At the effective time of the Pappas Agreement, the Company shall purchase and acquire the rights, title and interest in and to the whole of the issued and outstanding registered shares in each of Dioriga and Positive Shipping. The principal place of business and registered offices of Dioriga and Positive Shipping are located at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands, MH 96960. The management of the business of Dioriga and Positive Shipping is conducted through their technical and commercial manager Oceanbulk Maritime S.A., of Liberia whose Greek branch is located at 40 Agiou Konstantinou Str., Maroussi 15124, Athens, Greece, and the telephone number is 011-30-210-638-7200.

 

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THE TRANSACTION

Background of the Transactions

In October 2012 and April 2013, Pappas Holdco, an affiliate of certain immediate family members of Mr. Petros Pappas, our founder and our current non-Executive Chairman, established joint ventures with Oaktree Holdco, forming Oceanbulk Shipping and Oceanbulk Carriers, respectively.

In May 2013, the Company entered into stock purchase agreements with certain investment funds controlled by Monarch and Oaktree Capital Management, L.P. (the “Existing Oaktree Shareholders”), respectively, to backstop its equity rights offering that was completed in July 2013. Pursuant to the terms of the purchase agreements, the Board increased the number of directors constituting the Board to six (6) and appointed Mr. Roger Schmitz as a Class B director to fill the vacancy created thereby. The Existing Oaktree Shareholders also received the right to appoint a Class B director, but elected not to exercise such right. In the Company’s October 2013 common share public offering, each of Monarch and the Existing Oaktree Shareholders purchased an additional 2.272 million common shares.

In December 2013, upon being informed by Mr. Pappas and Mr. Hamish Norton, an officer of an Oceanbulk affiliate, of Oceanbulk’s plans to explore an initial public offering, Mr. Schmitz suggested to Messrs. Pappas and Norton that Oceanbulk consider exploring a potential combination of the Company and Oceanbulk in lieu of an IPO.

On December 20, 2013, representatives of Oaktree and Mr. Schmitz, each in their capacities as significant shareholders of the Company, had a discussion exploring a potential combination of the Company and Oceanbulk.

During the course of January 2014, members of the Board and senior management of the Company had discussions to begin to consider whether Oceanbulk and its vessels would be attractive to the Company.

On February 2, 2014, Mr. Norton informed Spyros Capralos, the Chief Executive Officer of the Company, that Oceanbulk was interested in investigating a possible strategic transaction between Oceanbulk and the Company.

On February 3, 2014, the Company agreed to enter into a Mutual Confidentiality Agreement with Oceanbulk Shipping and Oceanbulk Carriers which, among other things, contained a one (1) year standstill agreement of Oceanbulk Shipping and Oceanbulk Carriers.

On February 6, 2014, the Company held a Board meeting during which Mr. Capralos informed the Board that he received a preliminary expression of interest in a potential transaction from Oceanbulk. At the meeting, the Board constituted a transaction committee comprised of Tom Søfteland and Roger Schmitz, who are each disinterested directors and are not officers, employees, representatives, agents or affiliates of the Sellers, Oceanbulk or the Pappas Entities and who do not have an economic interest in the Sellers, Oceanbulk or the Pappas Entities (the “Special Committee”) to evaluate, discuss and negotiate any proposal to be made by Oceanbulk for a possible strategic transaction, and, at the appropriate time, either to reject such a transaction or to make a recommendation to the Board to enter into such a transaction.

On February 6, 2014, a due diligence request list was provided to Oceanbulk, and on February 24, 2014 Seward & Kissel LLP (“Seward & Kissel”), legal advisor for the Company, was granted access to a dataroom containing the requested due diligence materials.

On February 7, 2014, Mr. Norton sent to Simos Spyrou, Chief Financial Officer of the Company, a framework for a possible transaction involving a stock-for-stock merger of the Company with Oceanbulk (which would include the convertible debt or the corresponding equity interest, if converted, in the Heron JV, as well as

 

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the Pappas Companies), with each business being valued at its net asset value for purposes of the combination. Based on Mr. Norton’s framework, Oaktree would own approximately 63% of the common shares of the combined company.

On February 11, 2014, the Special Committee retained Evercore Group L.L.C. (“Evercore”) to act as the Special Committee’s financial advisor with respect to a possible transaction with Oceanbulk. Evercore was chosen based on its qualifications, experience and reputation. Evercore is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses in connection with mergers and acquisitions, leveraged buyouts, competitive biddings, private placements and valuations for corporate and other purposes.

On February 12, 2014, the Company began to provide the Special Committee and its advisors with due diligence materials along with preliminary information on the Company’s and Oceanbulk’s fleets, and over the next few days, representatives of the Special Committee commenced a due diligence investigation of the Company and Oceanbulk. On February 13, 2014, the Special Committee was granted access to an electronic data room containing selected confidential information about the Company and Oceanbulk, including summary financial projections. On February 15 and February 16, 2014, representatives of Evercore held due diligence meetings by telephone with the Company and with Oceanbulk, respectively.

O