UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-51141
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report: Not applicable
DRYSHIPS INC.
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
Republic of the Marshall Islands
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(Jurisdiction of incorporation or organization)
80, Kifissias Avenue GR 15125 Amaroussion, Greece
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b)
of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
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Title of class
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
As of December 31, 2005, there were 30,350,000 shares of the registrant's
common stock outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
If this report is an annual report or transition report, indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which financial statement item the registrant
has elected to follow.
[ ] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
FORWARD-LOOKING STATEMENTS
DryShips Inc., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements made by us
or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe," "except," "anticipate," "intends," "estimate," "forecast," "project,"
"plan," "potential," "will," "may," "should," "expect" and similar expressions
identify forward-looking statements.
Please note in this annual report, "we," "us," "our," "The Company," all refer
to DryShips Inc. and its subsidiaries.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions, including fluctuations in charterhire rates and
vessel values, changes in demand in the dry-bulk shipping industry, changes in
the Company's operating expenses, including bunker prices, drydocking and
insurance costs, changes in governmental rules and regulations or actions taken
by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential
disruption of shipping routes due to accidents or political events, and other
important factors described from time to time in the reports filed by the
Company with the Securities and Exchange Commission.
TABLE OF CONTENTS
PART I.................................................................... 4
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Item 1 Identity of Directors, Senior Management and Advisers...........4
Item 2 Offer Statistics and Expected Timetable.........................4
Item 3 Key Information.................................................4
Item 4 Information on the Company.....................................15
Item 4A. Unresolved Staff Comments..................................... 27
Item 5. Financial Review and Prospects.................................26
Item 6. Directors and Senior Management................................40
Item 7. Major Shareholders and Related Party Transactions..............42
Item 8. Financial information..........................................44
Item 9. The offer and Listing..........................................45
Item 10. Additional Information........................................ 46
Item 11. Quantitative and Qualitative Disclosures about Market Risk.... 51
Item 12. Description of Securities Other than Equity Securities........ 51
PART II.................................................................. 51
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Item 13. Defaults, Dividend Arrearages and Delinquencies..................51
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds..................................................................51
Item 15. Controls and Procedures..........................................51
Item 16A. Audit Committee Financial Expert................................52
Item 16B. Code of Ethics..................................................52
Item 16C. Principal Accountant Fees and Services..........................52
Item 16D. Exemptions from the Listing Standards for Audit Committees......52
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers................................................................52
PART III....................................................................53
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Item 17. Financial Statements.............................................53
Item 18. Financial Statements.............................................53
Item 19. Exhibits.........................................................53
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following table sets forth our selected consolidated financial data and
other operating data for DryShips Inc. as of October 31, 2001, 2002, 2003 and
2004 and as of December 31, 2005 and for each of the four years in the period
ended October 31, 2004, for the two-month period ended December 31, 2004 and for
the year ended December 31, 2005. The following information should be read in
conjunction with Item 5 "Operating and Financial Review and Prospects" and the
consolidated financial statements and related notes included herein. The
following selected consolidated financial data of DryShips Inc. in the table are
derived from our consolidated financial statements and notes thereto which have
been prepared in accordance with U.S. generally accepted accounting principles
("US GAAP").
2-months Year
Ended Ended
Year Ended October 31, December December
31, 31,
-------------------------------------------- --------- ----------
2001 2002 2003 2004 2004 2005
---------- -------- ---------- ---------- --------- ----------
(Dollars in thousands,
except per share data
and average daily results)
INCOME STATEMENT
Voyage revenues 24,433 16,233 25,060 63,458 15,599 228,913
Voyage expenses 4,171 3,628 3,998 6,371 1,153 13,039
Bunkers - - (372) (890) (17) (3,447)
Vessel operating expenses 6,382 6,144 6,739 9,769 1,756 36,722
Depreciation and
amortization 4,877 4,853 5,244 6,451 1,134 42,610
Management fees charged by
a related party 1,102 1,094 1,101 1,261 240 4,962
General & administrative
expenses (1) 33 145 240 221 114 4,186
---------- -------- ---------- ---------- --------- ----------
Operating Income 7,868 369 8,110 40,275 11,219 130,841
Interest and finance costs (2,051) (983) (1,119) (1,515) (508) (20,398)
Interest income 8 - 4 12 8 749
Other, net 10 3 194 341 (6) (175)
---------- -------- ---------- ---------- --------- ----------
Net income (loss) 5,835 (611) 7,189 39,113 10,713 111,017
========== ======== ========== ========== ========= ==========
Basic and fully diluted
earnings (losses) per share 0.38 (0.04) 0.47 2.54 0.70 3.83
Weighted average basic and
diluted shares outstanding 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 28,957,397
BALANCE SHEET DATA
Current assets, including
cash 9,809 10,392 17,943 69,344 18,777
Total assets 86,214 67,937 73,902 183,259 910,559
Current liabilities,
including current portion
of long-term debt 10,331 11,703 11,889 98,124 135,745
Total long-term debt,
including current portion 65,583 47,294 46,479 114,908 525,353
Stockholders' equity
(deficit) 18,987 18,376 25,513 (4,374) 356,501
OTHER FINANCIAL DATA
Net cash provided by
operating activities 4,094 5,346 2,489 7,309 55,207 163,806
Net cash used in investing
activities (250) - (2,200) (20,119) - (847,649)
Net cash provided by (used
in) financing activities (3,912) (3,083) 416 15,985 (53,007) 680,656
EBITDA (2) 12,755 5,225 13,548 47,067 12,347 173,276
FLEET DATA
Average number of vessels (3) 5.0 5.0 5.0 5.9 6.0 21.6
Total voyage days for
fleet (4) 1,744 1,770 1,780 2,066 366 7,710
Total calendar days for
fleet (5) 1,825 1,825 1,825 2,166 366 7,866
Fleet utilization (6) 95.6% 97.0% 97.5% 95.4% 100.0% 98.0%
AVERAGE DAILY RESULTS
Time charter equivalent (7) 11,618 7,121 12,042 28,062 39,516 28,446
Vessel operating expenses (8) 3,497 3,367 3,693 4,510 4,798 4,668
Management fees 604 599 603 582 655 631
General and administrative
expenses (9) 18 79 131 102 311 532
Total vessel operating
expenses (10) 4,119 4,045 4,427 5,194 5,764 5,831
(1) We did not pay any compensation to members of our senior management or our
directors in the years ended October 31, 2001, 2002, 2003 and 2004 and for the
two month period ended December 31, 2004. Compensation to members of our senior
management and directors amounted to $1.4 million for the year ended December
31, 2005.
(2) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations, as determined by U.S.
GAAP and our calculation of EBITDA may not be comparable to that reported by
other companies. EBITDA is included in this annual report because it is a basis
upon which we assess our liquidity position, because it is used by our lenders
as a measure of our compliance with certain loan covenants and because we
believe that it presents useful information to investors regarding our ability
to service and/or incur indebtedness. The following table reconciles net cash
from operating activities, as reflected in the consolidated statements of cash
flows, to EBITDA:
2-month Year
Ended Ended
Year Ended October 31, December December
31, 31,
2004 2005
---------------------------------
2001 2002 2003 2004
------- ------ ------ ------ -------- ---------
Dollars in Thousands
Net Cash provided by Operating
Activities $4,094 $ 5,346 $ 2,489 $ 7,309 $ 55,207$ 163,806
Net increase (decrease) in
current assets 1,793 (2,341) 8,403 36,925 (42,322) 4,560
Net (increase) decrease in
current liabilities, excluding
current portion of long-term debt 2,807 (623) 357 (1,815) (927) (21,914)
Payments for dry docking costs 2,052 1,898 1,322 3,277 - 3,153
Amortization of deferred revenue - - - - - 5,224
Recognition of free lubricants
benefit - - - - - (928)
Change in fair values of
derivatives - - - - - 270
Net interest expense 2,043 983 1,115 1,503 500 19,649
Amortization and write-off of
deferred financing costs
included in interest expense (34) (38) (138) (132) (111) (544)
------- ------ ------ ------ ------ -----------
EBITDA $12,755 $ 5,225 $ 13,548$ 47,067$ 12,347$ 173,276
======= ====== ====== ====== ====== ===========
(3) Average number of vessels is the number of vessels that constituted the
fleet for the relevant period, as measured by the sum of the number of days each
vessel was a part of the fleet during the period divided by the number of
calendar days in that period.
(4) Total voyage days for the fleet are the total days the vessels were in the
Company's possession for the relevant period net of off-hire days associated
with major repairs, drydockings or special or intermediate surveys.
(5) Calendar days are the total days the vessels were in the Company's
possession for the relevant period including off-hire days associated with major
repairs, drydockings or special or intermediate surveys.
(6) Fleet utilization is the percentage of time that the vessels were available
for revenue generating voyage days, and is determined by dividing voyage days by
fleet calendar days for the relevant period.
(7) Time charter equivalent, or TCE, is a measure of the average daily revenue
performance of a vessel on a per voyage basis. The Company's method of
calculating TCE is consistent with industry standards and is determined by
dividing voyage revenues (net of voyage expenses) by voyage days for the
relevant time period. Voyage expenses primarily consist of port, canal and fuel
costs that are unique to a particular voyage, which would otherwise be paid by
the charterer under a time charter contract, as well as commissions. TCE is a
standard shipping industry performance measure used primarily to compare
period-to-period changes in a shipping company's performance despite changes in
the mix of charter types (i.e., spot charters, time charters and bareboat
charters) under which the vessels may be employed between the periods. The
following table reflects the calculation of our TCE rates for the periods
presented.
Year Ended October 31,
2-month
Ended Year
----------------------------------------- December December
2001 2002 2003 2004 31, 2004 31, 2005
------------ ------ ------- -------- -------------------
(in thousands of US dollars, except for
TCE rates, which are expressed in US dollars, and voyage days)
Voyage revenues $ 24,433 $ 16,233 $ 25,060 $ 63,458 $ 15,599 $ 228,913
Voyage expenses (4,171) (3,628) (3,998) (6,371) (1,153) (13,039)
Bunkers - - 372 890 17 3,447
--------- -------- ------- -------- -------- -------
Time charter
equivalent revenues $ 20,262 $ 12,605 $ 21,434 $ 57,977 $ 14,463 $ 219,321
========= ======== ======= ======== ======== =======
Total voyage days for
fleet 1,744 1,770 1,780 2,066 366 7,710
Time charter
equivalent (TCE) rate $ 11,618 $ 7,121 $ 12,042 $ 28,062 $ 39,516 $ 28,446
(8) Daily vessel operating expenses, which includes crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs is
calculated by dividing vessel operating expenses by fleet calendar days for the
relevant time period.
(9) Daily general and administrative expense is calculated by dividing general
and administrative expense by fleet calendar days for the relevant time period.
(10) Total vessel operating expenses or TVOE is a measurement of our total
expenses associated with operating our vessels. TVOE is the sum of vessel
operating expenses, management fees and general and administrative expenses.
Daily TVOE is calculated by dividing TVOE by fleet calendar days for the
relevant time period.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk factors
Some of the following risks relate principally to the industry in which we
operate and our business in general. Other risks relate principally to the
securities market and ownership of our common stock. The occurrence of any of
the events described in this section could significantly and negatively affect
our business, financial condition, operating results or cash available for
dividends or the trading price of our common stock.
Industry Specific Risk Factors
Charterhire rates for drybulk carriers are volatile, which may adversely affect
our earnings.
The drybulk shipping industry is cyclical with attendant volatility in
charterhire rates and profitability. The degree of charterhire rate volatility
among different types of drybulk carriers has varied widely. Because we
generally charter our vessels pursuant to short-term time or spot charters, we
are exposed to changes in spot market rates for drybulk carriers and such
changes may affect our earnings and the value of our drybulk carriers at any
given time. We cannot assure that we will be able to successfully charter our
vessels in the future at rates sufficient to allow us to meet our financial
obligations or to pay dividends to our stockholders. Because the factors
affecting the supply and demand for vessels are outside of our control and are
unpredictable, the nature, timing, direction and degree of changes in industry
conditions are also unpredictable.
Factors that influence demand for vessel capacity include:
o demand for and production of drybulk products;
o global and regional economic conditions;
o the distance dry bulk is to be moved by sea; and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of vessel capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o vessel casualties; and
o the number of vessels that are out of service.
We anticipate that the future demand for our drybulk carriers will be dependent
upon continued economic growth in the world's economies, including China,
seasonal and regional changes in demand, changes in the capacity of the global
drybulk carrier fleet and the sources and supply of drybulk cargo to be
transported by sea. The capacity of the global drybulk carrier fleet seems
likely to increase and there can be no assurance that economic growth will
continue. Adverse economic, political, social or other developments could have a
material adverse effect on our business and operating results.
The market values of our vessels may decrease, which could limit the amount of
funds that we can borrow under our credit facilities.
The fair market values of our vessels have generally experienced high
volatility. You should expect the market value of our vessels to fluctuate
depending on general economic and market conditions affecting the shipping
industry and prevailing charterhire rates, competition from other shipping
companies and other modes of transportation, types, sizes and age of vessels,
applicable governmental regulations and the cost of newbuildings. If the market
value of our fleet declines we may not be able to obtain other financing or
incur debt in the future on terms that are acceptable to us or at all.
The market values of our vessels may decrease, which could cause us to breach
covenants in our credit facilities and adversely affect our results of
operations, financial condition and our ability to pay dividends.
If the market values of our vessels decrease, we may breach some of the
covenants contained in the financing agreements relating to our indebtedness,
including covenants in our credit facilities. If we do breach such covenants and
we are unable to remedy the relevant breach, our lenders could accelerate our
debt and foreclose on our fleet. In addition, if the book value of a vessel is
impaired due to unfavorable market conditions or a vessel is sold at a price
below its book value, we would incur a loss that would adversely affect our
financial condition and could adversely affect our ability to pay dividends.
Terrorist attacks and international hostilities could affect our results of
operations and financial condition.
Terrorist attacks such as the attacks on the United States on September 11,
2001, and the continuing response of the United States to these attacks, as well
as the threat of future terrorist attacks, continue to cause uncertainty in the
world financial markets and may affect our business, financial condition and
results of operations. The war in Iraq may lead to additional acts of terrorism,
regional conflict and other armed conflict around the world, which may
contribute to further economic instability in the global financial markets.
These uncertainties could also adversely affect our ability to obtain additional
financing on terms acceptable to us or at all. In the past, political conflicts
have also resulted in attacks on vessels, mining of waterways and other efforts
to disrupt international shipping, particularly in the Arabian Gulf region. Acts
of terrorism and piracy have also affected vessels trading in regions such as
the South China Sea.
Terrorist attacks, such as the October 2002 attack on the VLCC Limburg, a vessel
not related to us, may in the future also negatively affect our operations and
financial condition and directly impact our vessels or our customers. Future
terrorist attacks could result in increased volatility of the financial markets
in the United States and globally and could result in an economic recession
affecting the United States or the entire world. Any of these occurrences could
have a material adverse impact on our revenues and costs.
Our revenues are subject to seasonal fluctuations, which may lead to volatility
in our operating results and limit the amount of available cash with which we
can pay dividends.
We operate our vessels in markets that have historically exhibited seasonal
variations in demand and, as a result, in charterhire rates. This seasonality
may result in quarter-to-quarter volatility in our operating results, which
could affect the amount of dividends that we pay to our stockholders from
quarter to quarter. The drybulk carrier market is typically stronger in the fall
and winter months in anticipation of increased consumption of coal and other raw
materials in the northern hemisphere during the winter months. In addition,
unpredictable weather patterns in these months tend to disrupt vessel scheduling
and supplies of certain commodities.
As a result, our revenues have historically been weaker during the fiscal
quarters ended June 30 and September 30, and, conversely, our revenues have
historically been stronger in fiscal quarters ended December 31 and March 31.
This seasonality could materially affect our operating results and cash
available for distribution to our stockholders as dividends in the future.
Rising fuel prices may adversely affect our profits.
Fuel is a significant, if not the largest, expense in our shipping operations
when vessels are not under period charter. Changes in the price of fuel may
adversely affect our profitability. The price and supply of fuel is
unpredictable and fluctuates based on events outside our control, including
geopolitical developments, supply and demand for oil and gas, actions by OPEC
and other oil and gas producers, war and unrest in oil producing countries and
regions, regional production patterns and environmental concerns. Further, fuel
may become much more expensive in the future, which may reduce the profitability
and competitiveness of our business versus other forms of transportation, such
as truck or rail.
We are subject to international safety regulations and the failure to comply
with these regulations may subject us to increased liability, may adversely
affect our insurance coverage and may result in a denial of access to, or
detention in, certain ports.
The operation of our vessels is affected by the requirements set forth in the
International Maritime Organization's International Management Code for the Safe
Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires
ship owners, ship managers and bareboat charterers to develop and maintain an
extensive "Safety Management System" that includes the adoption of a safety and
environmental protection policy setting forth instructions and procedures for
safe operation and describing procedures for dealing with emergencies. The
failure of a ship owner or bareboat charterer to comply with the ISM Code may
subject it to increased liability, may invalidate existing insurance or decrease
available insurance coverage for the affected vessels and may result in a denial
of access to, or detention in, certain ports. All of our vessels are currently
in compliance with the ISM Code.
Maritime claimants could arrest one or more of our vessels, which could
interrupt our cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek
to obtain security for its claim by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of money to have the
arrest or attachment lifted. In addition, in some jurisdictions, such as South
Africa, under the "sister ship" theory of liability, a claimant may arrest both
the vessel which is subject to the claimant's maritime lien and any "associated"
vessel, which is any vessel owned or controlled by the same owner. Claimants
could attempt to assert "sister ship" liability against one vessel in our fleet
for claims relating to another of our vessels.
Governments could requisition our vessels during a period of war or emergency,
resulting in a loss of earnings.
A government could requisition one or more of our vessels for title or for hire.
Requisition for title occurs when a government takes control of a vessel and
becomes her owner, while requisition for hire occurs when a government takes
control of a vessel and effectively becomes her charterer at charter rates
dictated by that government. Generally, requisitions occur during periods of war
or emergency, although governments may elect to requisition vessels in other
circumstances.
Although we would be entitled to compensation in the event of a requisition of
one or more of our vessels, the amount and timing of payment would be uncertain.
Government requisition of one or more of our vessels may negatively impact our
revenues and reduce the amount of cash we have available for distribution as
dividends to our stockholders.
Company Specific Risk Factors
We are dependent on short-term time or spot charters in a volatile shipping
industry and a decline in charterhire rates would affect our results of
operations and ability to pay dividends.
We charter our vessels primarily pursuant to short-term or spot time charters.
Although dependence on short-term or spot time charters is not unusual in the
dry bulk shipping industry, the short-term or spot time charter market is highly
competitive and spot market charterhire rates (which affect time charter rates)
may fluctuate significantly based upon available charters and the supply of, and
demand for, seaborne shipping capacity. While our focus on the short-term or
spot time charter market may enable us to benefit in periods of increasing
charterhire rates, we must consistently renew our charters and this dependence
makes us vulnerable to declining charter rates. Drybulk carrier charter rates
are volatile, and in the past short-term time charter and spot market charter
rates for drybulk carriers have declined below operating costs of vessels. We
cannot assure you that future charterhire rates will enable us to operate our
vessels profitably or pay dividends.
We depend entirely on Cardiff to manage and charter our fleet.
We have only two employees, our Chief Executive Officer and our Chief Financial
Officer, and currently have no plans to hire additional employees. We
subcontract the commercial and technical management of our fleet, including
crewing, maintenance and repair to Cardiff Marine Inc., an affiliated company
with which we are under common control, and the loss of Cardiff's services or
its failure to perform its obligations to us could materially and adversely
affect the results of our operations. Although we may have rights against
Cardiff if it defaults on its obligations to us, you will have no recourse
against Cardiff. Further, we are required to seek approval from our lenders to
change our manager.
Cardiff is a privately held company and there is little or no publicly available
information about it.
The ability of Cardiff to continue providing services for our benefit will
depend in part on its own financial strength. Circumstances beyond our control
could impair Cardiff's financial strength, and because it is privately held it
is unlikely that information about its financial strength would become public
unless Cardiff began to default on its obligations. As a result, an investor in
our shares might have little advance warning of problems affecting Cardiff, even
though these problems could have a material adverse effect on us.
Our Chairman and Chief Executive Officer has affiliations with Cardiff which
could create conflicts of interest.
Our majority shareholder is controlled by Mr. George Economou who controls a
company that owns 35.5% of us and a foundation that owns 70% of Cardiff. Mr.
Economou is also our Chairman and Chief Executive Officer, and a director of our
company. These responsibilities and relationships could create conflicts of
interest between us, on the one hand, and Cardiff, on the other hand. These
conflicts may arise in connection with the chartering, purchase, sale and
operations of the vessels in our fleet versus drybulk carriers managed by other
companies affiliated with Cardiff and Mr. Economou. In particular, Cardiff may
give preferential treatment to vessels that are beneficially owned by related
parties because Mr. Economou and members of his family may receive greater
economic benefits.
Companies affiliated with Cardiff own and may acquire vessels that compete with
our fleet.
McCallister Shipping S.A., Calypso Marine Corp. and Glorious Marine Co. Ltd. are
companies affiliated with Cardiff that each owns a Capesize drybulk carrier. The
three vessels owned by those companies, or the Bareboat Charter Vessels, are
currently employed under bareboat charters that end in the period from May 2006
to September 2007. Subject to the obligations of Mr. Economou set forth in a
letter agreement between him and the Company to use commercially reasonable
efforts to cause the sale of the Bareboat Charter Vessels, and to give us a
right of first refusal to acquire them, when the Bareboat Charter Vessels are
redelivered to the owners, they may be managed by Cardiff in competition with
our fleet. In addition, Cardiff affiliates may acquire additional drybulk
carriers in the future, subject to a right of first refusal that Mr. Economou
has granted to us in this letter agreement. Also Panatrade Shipping and
Management S.A., a company affiliated with Cardiff owns a Capesize drybulk
carrier. These vessels could be in competition with our fleet and Cardiff and
other companies affiliated with Cardiff might be faced with conflicts of
interest with respect to their own interests and their obligations to us.
We cannot assure you that our board of directors will declare dividends.
Our current dividend policy is to declare quarterly distributions to
stockholders of $0.20 per share by each January, April, July and October. The
payment of dividends will be subject at all times to the discretion of our board
of directors. The timing and amount of dividends will depend on our earnings,
financial condition, cash requirements and availability, restrictions in our
loan agreements, the provisions of Marshall Islands law affecting the payment of
dividends and other factors. Marshall Islands laws generally prohibit the
payment of dividends other than from surplus or while a company is insolvent or
would be rendered insolvent upon the payment of such dividends.
We may incur expenses or liabilities or be subject to other circumstances in the
future that reduce or eliminate the amount of cash that we have available for
distribution as dividends, including as a result of the risks described in this
section of the annual report. Our growth strategy contemplates that we will
finance the acquisition of additional vessels through a combination of debt and
equity financing on terms acceptable to us. If financing is not available to us
on acceptable terms, our board of directors may determine to finance or
refinance acquisitions with cash from operations, which would reduce or even
eliminate the amount of cash available for the payment of dividends. We can give
no assurance that dividends will be paid in accordance with our dividend policy
or at all.
We may have difficulty managing our planned growth properly.
We intend to continue to grow our fleet. Our growth will depend on:
o locating and acquiring suitable vessels;
o identifying and consummating acquisitions or joint ventures;
o integrating any acquired business successfully with our existing
operations;
o enhancing our customer base;
o managing expansion; and
o obtaining required financing.
Growing any business by acquisition presents numerous risks such as undisclosed
liabilities and obligations, difficulty in obtaining additional qualified
personnel, managing relationships with customers and suppliers and integrating
newly acquired operations into existing infrastructures. We cannot give any
assurance that we will be successful in executing our growth plans or that we
will not incur significant expenses and losses in connection therewith.
Our credit facilities impose operating and financial restrictions on us. These
restrictions limit our ability to, among other things:
o pay dividends or make capital expenditures if we do not repay amounts
drawn under the credit facilities, if there is a default under the
credit facilities or if the payment of the dividend or capital
expenditure would result in a default or breach of a loan covenant;
o incur additional indebtedness, including through the issuance of
guarantees;
o change the flag, class or management of our vessels;
o create liens on our assets;
o sell our vessels;
o enter into a time charter or consecutive voyage charters that have a
term that exceeds, or which by virtue of any optional extensions may
exceed, thirteen months;
o merge or consolidate with, or transfer all or substantially all our
assets to, another person; and
o enter into a new line of business.
Therefore, we will have to seek permission from our lenders in order to engage
in some corporate actions. Our lenders' interests may be different from ours and
yours, and we cannot guarantee that we will be able to obtain our lenders'
permission when needed. This may limit our ability to pay dividends to you,
finance our future operations, make acquisitions or pursue business
opportunities.
Our loan agreements may prohibit or impose certain conditions on the payment of
dividends.
Under our new credit facility we are restricted in our payments of dividends.
During 2006 dividend payments may not exceed $18.0 million; however we may
request our lender's consent for additional dividend payments. Thereafter
dividend payments are not to exceed 50% of net income as evidenced by the
relevant annual audited financial statements.
Purchasing and operating secondhand vessels may result in increased operating
costs and reduced fleet utilization.
While we have the right to inspect previously owned vessels prior to our
purchase of them, such an inspection does not provide us with the same knowledge
about their condition that we would have if these vessels had been built for and
operated exclusively by us. Generally, we do not receive the benefit of
warranties on secondhand vessels. A secondhand vessel may have conditions or
defects that were not known to us when we purchased the vessel and which may
require us to make costly repairs to the vessel. These repairs may require us to
put a vessel into dry-dock which would reduce our fleet utilization.
In the highly competitive international shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater
resources.
We employ our vessels in a highly competitive market that is capital intensive
and highly fragmented. Competition arises primarily from other vessel owners,
some of whom have substantially greater resources than we do. Competition for
the transportation of dry bulk cargo by sea is intense and depends on price,
location, size, age, condition and the acceptability of the vessel and its
operators to the charterers. Due in part to the highly fragmented market,
competitors with greater resources could enter the dry bulk shipping industry
and operate larger fleets through consolidations or acquisitions and may be able
to offer lower charter rates and higher quality vessels than we are able to
offer.
We may be unable to attract and retain key management personnel and other
employees in the shipping industry, which may negatively impact the
effectiveness of our management and results of operations.
Our success depends to a significant extent upon the abilities and efforts of
our management team and our ability to hire and retain key members of our
management team. The loss of any of these individuals, difficulty in hiring and
retaining personnel could adversely affect our business prospects, financial
condition and results of operations. We have entered into employment contracts
with our Chairman and Chief Executive Officer, George Economou, and our Chief
Financial Officer, Christopher Thomas. We do not currently, nor do we intend to,
maintain "key man" life insurance on any of our officers.
Risks associated with operating ocean-going vessels could affect our business
and reputation, which could adversely affect our revenues and stock price.
The operation of ocean-going vessels carries inherent risks. These risks include
the possibility of:
o marine disaster;
o environmental accidents;
o cargo and property losses or damage;
o business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions; and o piracy.
Any of these circumstances or events could increase our costs or lower our
revenues. The involvement of our vessels in an environmental disaster may harm
our reputation as a safe and reliable vessel owner and operator.
The shipping industry has inherent operational risks that may not be adequately
covered by our insurance.
We procure insurance for our fleet against risks commonly insured against by
vessel owners and operators. Our current insurance includes hull and machinery
insurance, war risks insurance and protection and indemnity insurance (which
include environmental damage and pollution insurance). We can give no assurance
that we are adequately insured against all risks or that our insurers will pay a
particular claim. Even if our insurance coverage is adequate to cover our
losses, we may not be able to timely obtain a replacement vessel in the event of
a loss.
Furthermore, in the future, we may not be able to obtain adequate insurance
coverage at reasonable rates for our fleet. We may also be subject to calls, or
premiums, in amounts based not only on our own claim records but also the claim
records of all other members of the protection and indemnity associations
through which we receive indemnity insurance coverage for tort liability. Our
insurance policies also contain deductibles, limitations and exclusions which,
although we believe are standard in the shipping industry, may nevertheless
increase our costs.
The aging of our fleet may result in increased operating costs in the future,
which could adversely affect our earnings.
In general, the cost of maintaining a vessel in good operating condition
increases with the age of the vessel. As of December 31, 2005, the twenty seven
vessels in our operating fleet had an average age of 11 years. As our fleet
ages, we will incur increased costs. Older vessels are typically less fuel
efficient and more costly to maintain than more recently constructed vessels due
to improvements in engine technology. Cargo insurance rates increase with the
age of a vessel, making older vessels less desirable to charterers. Governmental
regulations and safety or other equipment standards related to the age of
vessels may also require expenditures for alterations or the addition of new
equipment to our vessels and may restrict the type of activities in which our
vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.
We may have to pay tax on United States source income, which would reduce our
earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the
gross shipping income of a vessel owning or chartering corporation, such as
ourselves and our subsidiaries, that is attributable to transportation that
begins or ends, but that does not both begin and end, in the United States is
characterized as United States source shipping income and such income is subject
to a 4% United States federal income tax without allowance for any deductions,
unless that corporation qualifies for exemption from tax under Section 883 of
the Code and the Treasury Regulations promulgated thereunder in August of 2003
and effective for calendar year taxpayers such as us on January 1, 2005.
For the fiscal year 2005, the Company qualified for the exemption from U.S. tax
on its international shipping operation based on its satisfaction of the country
of organization test and the Publicly Traded Test, in each case in accordance
with the applicable regulations.
If we or our subsidiaries are not entitled to this exemption under Section 883
for any taxable year, we or our subsidiaries would be subject for those years to
a 4% United States federal income tax on our U.S.-source shipping income. The
imposition of this taxation could have a negative effect on our business and
would result in decreased earnings available for distribution to our
shareholders. For the 2005 taxable year, we estimate that our maximum United
States federal income tax liability would be $0.5 million if we were to be
subject to this taxation.
Our vessels may suffer damage and we may face unexpected drydocking costs, which
could adversely affect our cash flow and financial condition.
If our vessels suffer damage, they may need to be repaired at a drydocking
facility. The costs of drydock repairs are unpredictable and can be substantial.
The loss of earnings while our vessels are being repaired and repositioned, as
well as the actual cost of these repairs, would decrease our earnings and reduce
the amount of cash that we have available for dividends. We may not have
insurance that is sufficient to cover all or any of these costs or losses and
may have to pay drydocking costs not covered by our insurance.
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations and to make
dividend payments.
We are a holding company and our subsidiaries conduct all of our operations and
own all of our operating assets. We have no significant assets other than the
equity interests in our subsidiaries. As a result, our ability to make dividend
payments depends on our subsidiaries and their ability to distribute funds to
us. If we are unable to obtain funds from our subsidiaries, our board of
directors may exercise its discretion not to declare or pay dividends. We do not
intend to obtain funds from other sources to pay dividends.
As we expand our business, we may need to improve our operating and financial
systems and will need to recruit suitable employees and crew for our vessels.
Our current operating and financial systems may not be adequate as we implement
our plan to expand the size of our fleet and our attempts to improve those
systems may be ineffective. In addition, as we expand our fleet, we will need to
recruit suitable additional seafarers and shore side administrative and
management personnel. While we have not experienced any difficulty in recruiting
to date, we cannot guarantee that we will be able to continue to hire suitable
employees as we expand our fleet. If we or our crewing agent encounters business
or financial difficulties, we may not be able to adequately staff our vessels.
If we are unable to grow our financial and operating systems or to recruit
suitable employees as we expand our fleet, our financial performance may be
adversely affected and, among other things, the amount of cash available for
distribution as dividends to our stockholders may be reduced.
Risks Relating to Our Common Stock
There is no guarantee of a continuing public market for you to resell our common
stock.
Our common shares commenced trading on The Nasdaq National Market in February
2005. We cannot assure you that an active and liquid public market for our
common shares will continue. The price of our common stock may be volatile and
may fluctuate due to factors such as:
o actual or anticipated fluctuations in our quarterly and annual results
and those of other public companies in our industry;
o mergers and strategic alliances in the dry bulk shipping industry;
o market conditions in the dry bulk shipping industry and the general
state of the securities markets;
o changes in government regulation;
o shortfalls in our operating results from levels forecast by securities
analysts; and
o announcements concerning us or our competitors.
You may not be able to sell your shares of our common stock in the future at the
price that you paid for them or at all.
We are incorporated in the Marshall Islands, which does not have a
well-developed body of corporate law.
Our corporate affairs are governed by our amended and restated articles of
incorporation and bylaws and by the Marshall Islands Business Corporations Act,
or the BCA. The provisions of the BCA resemble provisions of the corporation
laws of a number of states in the United States. However, the rights and
fiduciary responsibilities of directors under the laws of the Marshall Islands
are not as clearly established as the rights and fiduciary responsibilities of
directors under statutes or judicial precedent in existence in the United
States. The rights of stockholders under Marshall Islands law may differ from
the rights of stockholders of companies incorporated in the United States. While
the BCA provides that it is to be interpreted according to the laws of the State
of Delaware and other states with substantially similar legislative provisions,
there have been few, if any, court cases interpreting the BCA in the Marshall
Islands and we can not predict whether Marshall Islands courts would reach the
same conclusions as United States courts. Thus, you may have more difficulty in
protecting your interests in the face of actions by management, directors or
controlling stockholders than would stockholders of a corporation incorporated
in a United States jurisdiction.
A small number of our stockholders effectively control the outcome of matters on
which our stockholders are entitled to vote.
Entities affiliated with our Chairman and Chief Executive Officer currently own,
directly or indirectly, approximately 44.65% of our outstanding common stock.
While those stockholders have no agreement, arrangement or understanding
relating to the voting of their shares of our common stock, they will
effectively control the outcome of matters on which our stockholders are
entitled to vote, including the election of directors and other significant
corporate actions. The interests of these stockholders may be different from
your interests.
Future sales of our common stock could cause the market price of our common
stock to decline.
Sales of a substantial number of shares of our common stock in the public
market, or the perception that these sales could occur, may depress the market
price for our common stock. These sales could also impair our ability to raise
additional capital through the sale of our equity securities in the future.
We may issue additional shares of our common stock in the future and our
stockholders may elect to sell large numbers of shares held by them from time to
time. Our amended and restated articles of incorporation authorize us to issue
75,000,000 shares of common stock, of which 30,350,000 shares are outstanding.
Our stockholders of record prior to our initial public offering in February 2005
own 15,400,000 shares, or approximately 50.7%, of our outstanding common stock.
The number of shares of common stock available for sale in the public market is
limited by restrictions applicable under securities laws.
Anti-takeover provisions in our organizational documents could make it difficult
for our stockholders to replace or remove our current board of directors or have
the effect of discouraging, delaying or preventing a merger or acquisition,
which could adversely affect the market price of our common stock.
Several provisions of our amended and restated articles of incorporation and
bylaws could make it difficult for our stockholders to change the composition of
our board of directors in any one year, preventing them from changing the
composition of management. In addition, the same provisions may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable.
These provisions include:
o authorizing our board of directors to issue "blank check" preferred
stock without stockholder approval;
o providing for a classified board of directors with staggered, three
year terms;
o prohibiting cumulative voting in the election of directors;
o authorizing the removal of directors only for cause and only upon the
affirmative vote of the holders of a majority of the outstanding
shares of our common stock entitled to vote for the directors;
o prohibiting stockholder action by written consent;
o limiting the persons who may call special meetings of stockholders;
and
o establishing advance notice requirements for nominations for election
to our board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
Item 4. Information on the Company
A. History and development of the Company
We are a Marshall Islands company that was formed in September 2004. Prior to
our initial public offering we issued 15,400,000 shares of our common stock to
our shareholders in October 2004. In February 2005 we completed our initial
public offering and issued an additional 14,950,000 common shares. Our executive
offices are located at Omega Building, 80 Kifissias Avenue, Amaroussion GR 151
25 Greece. Our telephone number is 011-30-210-809-0570.
B. Business overview
Our Fleet
We currently own and operate a fleet of 27 vessels with an aggregate
cargo-carrying capacity of 2.3 million dwt. Our fleet is comprised of four
Capesize drybulk carriers, 21 Panamax drybulk carriers and two Handymax drybulk
carriers. Our fleet carries a variety of drybulk commodities including major
bulks such as coal, iron ore, and grains, and minor bulks such as bauxite,
phosphate, fertilizers and steel products. In addition to our owned fleet, we
have also chartered-in a 2000 built Panamax bulkcarrier for a period of three
years commencing in December 2005.
The average age of the vessels in our fleet is 11 years.
We employ our vessels in the spot charter market, under period time charters and
in drybulk carrier pools. Ten of the Panamax drybulk carriers and one Handymax
drybulk carrier in our fleet are currently operated in a drybulk carrier pool.
Pools have the size and scope to combine spot market voyages, time charters and
contracts of affreightment with freight forward agreements for hedging purposes
and to perform more efficient vessel scheduling thereby increasing fleet
utilization. Eleven of our vessels are currently on time charter. We trade our
other six vessels in the spot market. The chartered-in vessel is on period time
charter that runs concurrently with the time charter-in period.
All of our vessels are managed by Cardiff. The Entrepreneurial Spirit
Foundation, a family foundation of Vaduz Liechtenstein, of which our Chief
Executive Officer and members of his family are beneficiaries, owns 70% of the
issued and outstanding capital stock of Cardiff. The remaining 30% of the issued
and outstanding capital stock of Cardiff is held by Prestige Finance S.A., a
Liberian corporation which is wholly owned by the sister of our Chief Executive
Officer. Each of our vessels is owned through a separate wholly-owned Maltese
subsidiary.
Our fleet is comprised of the following vessels:
Name Type Dwt Year Built
---- ---- --- ----------
Manasota Capesize Drybulk Carrier 171,061 2004
Alameda Capesize Drybulk Carrier 170,662 2001
Shibumi Capesize Drybulk Carrier 166,058 1984
Netadola Capesize Drybulk Carrier 149,475 1993
Conrad Oldendorff Panamax Drybulk Carrier 76,623 2002
Coronado Panamax Drybulk Carrier 75,706 2000
Waikiki Panamax Drybulk Carrier 75,473 1995
Mostoles Panamax Drybulk Carrier 75,395 1981
Linda Oldendorff Panamax Drybulk Carrier 75,100 1995
Sonoma Panamax Drybulk Carrier 74,786 2001
Catalina Panamax Drybulk Carrier 74,432 2005
Ocean Crystal Panamax Drybulk Carrier 73,688 1999
Belmonte Panamax Drybulk Carrier 73,601 2004
Toro Panamax Drybulk Carrier 73,034 1995
Xanadu Panamax Drybulk Carrier 72,270 1999
La Jolla Panamax Drybulk Carrier 72,126 1997
Lacerta Panamax Drybulk Carrier 71,862 1994
Panormos Panamax Drybulk Carrier 71,747 1995
Paragon Panamax Drybulk Carrier 71,250 1995
Iguana Panamax Drybulk Carrier 70,349 1996
Daytona Panamax Drybulk Carrier 69,703 1989
Lanikai Panamax Drybulk Carrier 68,676 1988
Tonga Panamax Drybulk Carrier 66,798 1984
Flecha Panamax Drybulk Carrier 65,081 1982
Striggla Panamax Drybulk Carrier 64,747 1982
Alona Handymax Drybulk Carrier 48,040 2002
Matira Handymax Drybulk Carrier 45,863 1994
We actively manage the deployment of our fleet between spot market voyage
charters, which generally last from several days to several weeks, and time
charters, which can last up to several years. A spot market voyage charter is
generally a contract to carry a specific cargo from a load port to a discharge
port for a specified total price. Under spot market voyage charters, we pay
voyage expenses such as port, canal and fuel costs. A time charter is generally
a contract to charter a vessel for a fixed period of time at a set daily rate.
Under time charters, the charterer pays voyage expenses such as port, canal and
fuel costs. Under both types of charters, we pay for vessel operating expenses,
which include crew costs, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, as well as for commissions. We are also
responsible for the drydocking costs relating to each vessel.
Our vessels operate worldwide within the trading limits imposed by our insurance
terms and do not operate in areas where United States, European Union or United
Nations sanctions have been imposed.
Competition
Demand for drybulk carriers fluctuates in line with the main patterns of trade
of the major drybulk cargoes and varies according to changes in the supply and
demand for these items. We compete with other owners of drybulk carriers in the
Capesize, Panamax and Handymax size sectors. Ownership of drybulk carriers is
highly fragmented and is divided among approximately 1,500 independent drybulk
carrier owners. We compete for charters on the basis of price, vessel location,
size, age and condition of the vessel, as well as on our reputation as an owner
and operator.
Customers
During the year ended December 31, 2005, two of our customers accounted for more
than ten percent of our voyage revenues: Baumarine AS (25%). and Oldendorff
Carriers Gmbh (12%). During the year ended October 31, 2004 three of our
customers accounted for more than ten percent of our voyage revenues: Transfield
Shipping ER, (11%), Brave Bulk Transport Ltd. (11%) and Baumarine AS (16%).
Baumarine AS is a pool operator and therefore we do not regard Baumarine as a
singular "customer." During 2003, approximately 37% of our revenue was derived
from two charterers, namely Bottiglieri Di Navigazione Spa. (17%) and Cobelfret
S.A. (20%) Given our exposure to, and focus on, the spot market and the
short-term time charter market, we do not foresee any one client providing a
significant percentage of our income over an extended period of time.
Management of the Fleet
We do not employ personnel to run our vessel operating and chartering business
on a day-to-day basis. All of our technical and commercial functions relating to
the operation and employment of our vessels have been outsourced to Cardiff,
which is our affiliate, pursuant to a fleet management agreement with an initial
term of five years. The agreement will automatically extend to successive five
year terms, unless at least one years' advance notice of termination is given by
either party. Our Chief Executive Officer and Chief Financial Officer, under the
guidance of our board of directors, manage our business as a holding company,
including our own administrative functions, and we monitor Cardiff's performance
under the fleet management agreement.
Pursuant to our fleet management agreement we pay Cardiff a technical management
fee of $650 per vessel per day on a monthly basis in advance pro rata for the
calendar days these vessels are owned by us. We also pay Cardiff 1.25% of the
gross freight, demurrage and charterhire collected from the employment of our
vessels that are not employed in pools and 0.625% for those vessels that are
operated by a pool. Cardiff also earns a fee equal to 1.0% calculated on the
price as stated in the relevant memorandum of agreement for any vessel bought or
sold on our behalf.
Additional vessels that we may acquire in the future may be managed by Cardiff
or other unaffiliated management companies. Cardiff has sub-contracted all of
the commercial management of our fleet i.e. chartering and sale and purchase of
vessels, to an affiliated company, Drybulk S.A. ("Drybulk"). Our fleet
management agreement has been approved by our Board of Directors, which is
comprised of two executive directors and three independent directors. Any new
vessel management agreements and any amendments to our existing management
agreements, or extensions thereof, will be approved by our Audit Committee.
Cardiff currently manages 52 vessels (nine of which are on bareboat charter)
representing approximately 3.0 million dwt. The vessels in Cardiff's managed
fleet consist of drybulk carriers, crude oil, oil products and chemical tankers.
In addition on November 8, 2005 and effective January 1, 2005, we entered into
an agreement with Cardiff under which we pay a quarterly fee of $250 for
services rendered by Cardiff in relation to our financial reporting requirements
and the establishment and monitoring of internal controls over financial
reporting.
Crewing and Employees
Cardiff employs approximately 120 people, all of whom are shore-based. In
addition, Cardiff is responsible for recruiting, either directly or through a
crewing agent, the senior officers and all other crew members for our vessels.
We believe the streamlining of crewing arrangements will ensure that all our
vessels will be crewed with experienced seamen that have the qualifications and
licenses required by international regulations and shipping conventions.
The International Dry Bulk Shipping Industry
Dry bulk cargo is cargo that is shipped in large quantities and can be easily
stowed in a single hold with little risk of cargo damage. In 2005, approximately
2.64 billion tons of dry bulk cargo was transported by sea, comprising more than
one-third of all international seaborne trade.
The demand for drybulk carrier capacity is determined by the underlying demand
for commodities transported in drybulk carriers, which in turn is influenced by
trends in the global economy. Between 1999 and 2005, trade in all dry bulk
commodities increased from 1.97 billion tons to 2.64 billion tons, an increase
of 34.0%. One of the main reasons for the resurgence in drybulk trade has been
the growth in imports by China of iron ore, coal and steel products during the
last five years. Chinese imports of iron ore alone increased from 55.3 million
tons in 1999 to more than 271 million tons in 2005. Demand for drybulk carrier
capacity is also affected by the operating efficiency of the global fleet, with
port congestion, which has been a feature of the market in 2004, absorbing
additional tonnage.
The global drybulk carrier fleet may be divided into four categories based on a
vessel's carrying capacity. These categories consist of:
o Capesize vessels, which have carrying capacities of more than 85,000
dwt. These vessels generally operate along long haul iron ore and coal
trade routes. There are relatively few ports around the world with the
infrastructure to accommodate vessels of this size.
o Panamax vessels have a carrying capacity of between 60,000 and 85,000
dwt. These vessels carry coal, grains, and, to a lesser extent, minor
bulks, including steel products, forest products and fertilizers.
Panamax vessels are able to pass through the Panama Canal making them
more versatile than larger vessels.
o Handymax vessels have a carrying capacity of between 35,000 and 60,000
dwt. These vessels operate along a large number of geographically
dispersed global trade routes mainly carrying grains and minor bulks.
Vessels below 60,000 dwt are sometimes built with on-board cranes
enabling them to load and discharge cargo in countries and ports with
limited infrastructure.
o Handysize vessels have a carrying capacity of up to 35,000 dwt. These
vessels carry exclusively minor bulk cargo. Increasingly, these
vessels have operated along regional trading routes. Handysize vessels
are well suited for small ports with length and draft restrictions
that may lack the infrastructure for cargo loading and unloading.
The supply of drybulk carriers is dependent on the delivery of new vessels and
the removal of vessels from the global fleet, either through scrapping or loss.
As of January 2006, the global drybulk carrier orderbook amounted to 49.7
million dwt, or 14.4% of the existing fleet, with most vessels on the orderbook
expected to be delivered within 36 months. The level of scrapping activity is
generally a function of scrapping prices in relation to current and prospective
charter market conditions, as well as operating, repair and survey costs.
The average age at which vessels were scrapped over the last five years was 26
years. However, due to recent strength in the drybulk shipping industry, the
average age at which the vessels are scrapped has increased.
Charterhire Rates
Charterhire rates paid for drybulk carriers are primarily a function of the
underlying balance between vessel supply and demand, although at times other
factors may play a role. Furthermore, the pattern seen in charter rates is
broadly mirrored across the different charter types and between the different
drybulk carrier categories. However, because demand for larger drybulk carriers
is affected by the volume and pattern of trade in a relatively small number of
commodities, charterhire rates (and vessel values) of larger ships tend to be
more volatile than those for smaller vessels.
In the time charter market, rates vary depending on the length of the charter
period and vessel specific factors such as age, speed and fuel consumption. In
the voyage charter market, rates are influenced by cargo size, commodity, port
dues and canal transit fees, as well as delivery and redelivery regions. In
general, a larger cargo size is quoted at a lower rate per ton than a smaller
cargo size. Routes with costly ports or canals generally command higher rates
than routes with low port dues and no canals to transit.
Voyages with a load port within a region that includes ports where vessels
usually discharge cargo or a discharge port within a region with ports where
vessels load cargo also are generally quoted at lower rates, because such
voyages generally increase vessel utilization by reducing the unloaded portion
(or ballast leg) that is included in the calculation of the return charter to a
loading area.
Within the dry bulk shipping industry, the charterhire rate references most
likely to be monitored are the freight rate indices issued by the Baltic
Exchange. These references are based on actual charterhire rates under charter
entered into by market participants as well as daily assessments provided to the
Baltic Exchange by a panel of major shipbrokers. The Baltic Panamax Index is the
index with the longest history. The Baltic Capesize Index and Baltic Handymax
Index are of more recent origin. In 2004 and 2005, rates for all sizes of
drybulk carriers strengthened appreciably to historically high levels, primarily
due to the high level of demand for raw materials imported by China. Recently
however, rates have declined from those historically high levels.
Vessel Prices
Vessel prices, both for new-buildings and secondhand vessels, have increased
significantly during the past two years as a result of the strength of the dry
bulk shipping industry. Because sectors of the shipping industry (drybulk
carrier, tanker and container ships) are in a period of prosperity, new-building
prices for all vessel types have increased significantly due to a reduction in
the number of berths available for the construction of new vessels in shipyards.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our
vessels. We are subject to international conventions, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered.
A variety of government and private entities subject our vessels to both
scheduled and unscheduled inspections. These entities include the local port
authorities (United States Coast Guard, harbor master or equivalent),
classification societies; flag state administrations (country of registry) and
charterers, particularly terminal operators. Certain of these entities require
us to obtain permits, licenses and certificates for the operation of our
vessels. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend the operation of one or more of
our vessels.
Increasing environmental concerns have created a demand for vessels that conform
to the stricter environmental standards. We are required to maintain operating
standards for all of our vessels that emphasize operational safety, quality
maintenance, continuous training of our officers and crews and compliance with
United States and international regulations. We believe that the operation of
our vessels is in substantial compliance with applicable environmental laws and
regulations applicable to us as of the date of this report.
International Maritime Organization
The International Maritime Organization, or IMO, has negotiated international
conventions that impose liability for oil pollution in international waters and
a signatory's territorial waters. Annex VI to the International Convention for
the Prevention of Pollution from Ships has been adopted by the IMO to address
air pollution from ships. Annex VI, which became effective in May 2005, set
limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and
prohibit deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. All of our vessels now comply with Annex VI.
The operation of our vessels is also affected by the requirements set forth in
the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires ship owners and bareboat
charterers to develop and maintain an extensive "Safety Management System" that
includes the adoption of a safety and environmental protection policy setting
forth instructions and procedures for safe operation and describing procedures
for dealing with emergencies. The failure of a ship owner or bareboat charterer
to comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels and may result in
a denial of access to, or detention in, certain ports. As of the date of this
report, each of our vessels is ISM code-certified.
The United States Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions or whose vessels
operate in United States waters, which includes the United States' territorial
sea and its two hundred nautical mile exclusive economic zone.
Under OPA, vessel owners, operators and bareboat charterers are "responsible
parties" and are jointly, severally and strictly liable (unless the spill
results solely from the act or omission of a third party, an act of God or an
act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels. OPA defines
these other damages broadly to include:
o natural resources damage and the costs of assessment thereof;
o real and personal property damage;
o net loss of taxes, royalties, rents, fees and other lost revenues;
o lost profits or impairment of earning capacity due to property or
natural resources damage; and
o net cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards, and loss of
subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $600 per gross
ton or $0.5 million per drybulk carrier that is over 300 gross tons (subject to
possible adjustment for inflation). These limits of liability do not apply if an
incident was directly caused by violation of applicable United States federal
safety, construction or operating regulations or by a responsible party's gross
negligence or willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with oil removal
activities.
We currently maintain pollution liability coverage insurance in the amount of $1
billion per incident for each of our vessels. If the damages from a catastrophic
spill were to exceed our insurance coverage it could have an adverse effect on
our business and results of operation.
OPA requires owners and operators of vessels to establish and maintain with the
United States Coast Guard evidence of financial responsibility sufficient to
meet their potential liabilities under the OPA. In December 1994, the United
States Coast Guard implemented regulations requiring evidence of financial
responsibility in the amount of $1,500 per gross ton, which includes the OPA
limitation on liability of $1,200 per gross ton and the United States
Comprehensive Environmental Response, Compensation, and Liability Act liability
limit of $300 per gross ton. Under the regulations, vessel owners and operators
may evidence their financial responsibility by showing proof of insurance,
surety bond, self-insurance or guaranty. Under OPA, an owner or operator of a
fleet of vessels is required only to demonstrate evidence of financial
responsibility in an amount sufficient to cover the vessels in the fleet having
the greatest maximum liability under OPA.
The United States Coast Guard's regulations concerning certificates of financial
responsibility provide, in accordance with OPA, that claimants may bring suit
directly against an insurer or guarantor that furnishes certificates of
financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defense that it may
have had against the responsible party and is limited to asserting those
defenses available to the responsible party and the defense that the incident
was caused by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of financial
responsibility under pre-OPA laws, including the major protection and indemnity
organizations have declined to furnish evidence of insurance for vessel owners
and operators if they are subject to direct actions or required to waive
insurance policy defenses.
The United States Coast Guard's financial responsibility regulations may also be
satisfied by evidence of surety bond, guaranty or by self-insurance. Under the
self-insurance provisions, the ship owner or operator must have a net worth and
working capital, measured in assets located in the United States against
liabilities located anywhere in the world, that exceeds the applicable amount of
financial responsibility. We have complied with the United States Coast Guard
regulations by providing a certificate of responsibility from third party
entities that are acceptable to the United States Coast Guard evidencing
sufficient self-insurance.
OPA specifically permits individual states to impose their own liability regimes
with regard to oil pollution incidents occurring within their boundaries, and
some states have enacted legislation providing for unlimited liability for oil
spills. In some cases, states which have enacted such legislation have not yet
issued implementing regulations defining vessels owners' responsibilities under
these laws. We intend to comply with all applicable state regulations in the
ports where our vessels call.
Other Environmental Initiatives
The European Union is considering legislation that will affect the operation of
vessels and the liability of owners for oil pollution. It is difficult to
predict what legislation, if any, may be promulgated by the European Union or
any other country or authority.
Although the United States is not a party thereto, many countries have ratified
and currently follow the liability plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, or
the 1969 Convention. Under this convention, and depending on whether the country
in which the damage results is a party to the 1992 Protocol to the International
Convention on Civil Liability for Oil Pollution Damage, a vessel's registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. Under an amendment that became effective in November 2003 for
vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total
enclosed spaces within a vessel), liability is limited to approximately $6.5
million plus approximately $913 for each additional gross ton over 5,000. For
vessels of over 140,000 gross tons, liability is limited to approximately $129.9
million. As the 1969 Convention calculates liability in terms of basket
currencies, these figures are based on currency exchange rates on March 20,
2006. Under the 1969 Convention, the right to limit liability is forfeited where
the spill is caused by the owner's actual fault; under the 1992 Protocol, a
ship-owner cannot limit liability where the spill is caused by the owner's
intentional or reckless conduct. Vessels trading in jurisdictions that are
parties to these conventions must provide evidence of insurance covering the
liability of the owner. In jurisdictions where the 1969 Convention has not been
adopted, including the United States, various legislative schemes or common law
govern, and liability is imposed either on the basis of fault or in a manner
similar to that convention. We believe that our protection and indemnity
insurance will cover the liability under the plan adopted by the IMO.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the
Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the United States Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the
convention dealing specifically with maritime security. The new chapter came
into effect in July 2004 and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
International Ship and Port Facilities Security Code or ISPS Code. Among the
various requirements are:
o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The United States Coast Guard regulations, intended to align with international
maritime security standards, exempt non-United States vessels from MTSA vessel
security measures provided such vessels have on board a valid International Ship
Security Certificate, or ISSC, that attests to the vessel's compliance with
SOLAS security requirements and the ISPS Code. We have implemented the various
security measures addressed by the MTSA, SOLAS and the ISPS Code.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society. The
classification society certifies that the vessel is "in class," signifying that
the vessel has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the
vessel's country of registry and the international conventions of which that
country is a member.
In addition, where surveys are required by international conventions and
corresponding laws and ordinances of a flag state, the classification society
will undertake them on application or by official order, acting on behalf of the
authorities concerned. The classification society also undertakes on request
other surveys and checks that are required by regulations and requirements of
the flag state. These surveys are subject to agreements made in each individual
case and/or to the regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of hull,
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:
o 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.
o 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.
o Class Renewal Surveys. Class renewal surveys, also known as special
surveys, are carried out for the ship's hull, machinery, including the
electrical plant and for any special equipment classed, at the
intervals indicated by the character of classification for the hull.
At the special survey the vessel is thoroughly examined, including
audio-gauging to determine the thickness of the steel structures.
Should the thickness be found to be less than class requirements, the
classification society would prescribe steel renewals. The
classification society may grant a one year grace period for
completion of the special survey. Substantial amounts of money may
have to be spent for steel renewals to pass a special survey if the
vessel experiences excessive wear and tear. In lieu of the special
survey every four or five years, depending on whether a grace period
was granted, a ship owner has the option of arranging with the
classification society for the vessel's hull or machinery to be on a
continuous survey cycle, in which every part of the vessel would be
surveyed within a five year cycle. At an owner's application, the
surveys required for class renewal may be split according to an agreed
schedule to extend over the entire period of class. This process is
referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are
required to be surveyed at least once per class period, unless shorter intervals
between surveys are prescribed elsewhere. The period between two subsequent
surveys of each area must not exceed five years. Most vessels are also
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 ship owner
within prescribed time limits. Most insurance underwriters make it a condition
for insurance coverage that a vessel be certified as "in class" by a
classification society which is a member of the International Association of
Classification Societies. All our vessels are certified as being "in class" by
[Lloyd's Register of Shipping]. All new and secondhand vessels that we purchase
must be certified prior to their delivery under our standard purchase contracts
and memorandum of agreement. If the vessel is not certified on the date of
closing, we have no obligation to take delivery of the vessel.
Risk of Loss and Liability Insurance
General
The operation of any drybulk carrier includes risks such as mechanical failure,
collision, property loss, cargo loss or damage and business interruption due to
political circumstances in foreign countries, hostilities and labor strikes. In
addition, there is always an inherent possibility of marine disaster, including
oil spills and other environmental incidents, and the liabilities arising from
owning and operating vessels in international trade. OPA, which imposes
virtually unlimited liability upon owners, operators and demise charterers of
vessels trading in the United States exclusive economic zone for certain oil
pollution accidents in the United States, has made liability insurance more
expensive for ship owners and operators trading in the United States market.
While we maintain hull and machinery insurance, war risks insurance, protection
and indemnity cover, increased value insurance and freight, demurrage and
defense cover for our operating fleet in amounts that we believe to be prudent
to cover normal risks in our operations, we may not be able to achieve or
maintain this level of coverage throughout a vessel's useful life. Furthermore,
while we believe that our present insurance coverage is adequate, not all risks
can be insured, and there can be no guarantee that any specific claim will be
paid, or that we will always be able to obtain adequate insurance coverage at
reasonable rates.
Hull & Machinery and War Risks Insurance
We maintain marine hull and machinery and war risks insurance, which cover the
risk of actual or constructive total loss, for all of our vessels. Our vessels
are each covered up to at least fair market value with deductibles of $100,000
per vessel per incident. We also maintain increased value coverage for each of
our vessels. Under this increased value coverage, in the event of total loss of
a vessel, we are entitled to recover amounts not recoverable under our hull and
machinery policy due to under-insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which insure our third party
liabilities in connection with our shipping activities. This includes
third-party liability and other related expenses resulting from the injury or
death of crew, passengers and other third parties, the loss or damage to cargo,
claims arising from collisions with other vessels, damage to other third-party
property, pollution arising from oil or other substances and salvage, towing and
other related costs, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or "clubs." Our coverage, except for pollution, is
unlimited.
Our current protection and indemnity insurance coverage for pollution is $1
billion per vessel per incident. The fourteen P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. Each P&I Association has capped its exposure to this pooling
agreement at $4.25 billion. As a member of a P&I Association which is a member
of the International Group, we are subject to calls payable to the associations
based on the group's claim records as well as the claim records of all other
members of the individual associations and members of the pool of P&I
Associations comprising the International Group.
Permits and Authorizations
We are required by various governmental and quasi-governmental agencies to
obtain certain permits, licenses and certificates with respect to our vessels.
The kinds of permits, licenses and certificates required depend upon several
factors, including the commodity transported, the waters in which the vessel
operates, the nationality of the vessel's crew and the age of a vessel. We have
been able to obtain all permits, licenses and certificates currently required to
permit our vessels to operate. Additional laws and regulations, environmental or
otherwise, may be adopted which could limit our ability to do business or
increase the cost of us doing business.
C. Organizational structure
DryShips Inc. is the sole owner of all of the outstanding shares of the
subsidiaries listed in Note 1 of our consolidated financial statements under
item 18.
D. Property, plant and equipment
We do not own any real property. We lease office space in Athens, Greece from
our Chief Executive Officer. Our interests in the vessels in our fleet are our
only material properties. See "Our Fleet" in this section.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following management's discussion and analysis should be read in conjunction
with our historical consolidated financial statements and accompanying notes
included elsewhere in this report. This discussion contains forward-looking
statements that reflect our current views with respect to future events and
financial performance. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
such as those set forth in the section entitled "Risk Factors" and elsewhere in
this report.
A. Operating Results
Factors Affecting Our Results of Operations
We believe that the important measures for analyzing trends in the results of
our operations consist of the following:
o Calendar days. We define calendar days as the total number of days in
a period during which each vessel in our fleet was in our possession
including off-hire days associated with major repairs, drydockings or
special or intermediate surveys. Calendar days are an indicator of the
size of our fleet over a period and affect both the amount of revenues
and the amount of expenses that we record during that period.
o Voyage days. We define voyage days as the total number of days in a
period during which each vessel in our fleet was in our possession net
of off-hire days associated with major repairs, drydockings or special
or intermediate surveys. The shipping industry uses voyage days (also
referred to as available days) to measure the number of days in a
period during which vessels actually generate revenues.
o Fleet utilization. We calculate fleet utilization by dividing the
number of our voyage days during a period by the number of our
calendar days during that period. The shipping industry uses fleet
utilization to measure a company's efficiency in finding suitable
employment for its vessels and minimizing the amount of days that its
vessels are off-hire for reasons such as scheduled repairs, vessel
upgrades, drydockings or special or intermediate surveys.
o Spot Charter Rates. Spot charter rates are volatile and fluctuate on a
seasonal and year to year basis. Fluctuations are caused by imbalances
in the availability of cargoes for shipment and the number of vessels
available at any given time to transport these cargoes.
Voyage Revenues
Our voyage revenues are driven primarily by the number of
vessels in our fleet, the number of voyage days during which our vessels
generate revenues and the amount of daily charterhire that our vessels earn
under charters, which, in turn, are affected by a number of factors, including
our decisions relating to vessel acquisitions and disposals, the amount of time
that we spend positioning our vessels, the amount of time that our vessels spend
in dry-dock undergoing repairs, maintenance and upgrade work, the age, condition
and specifications of our vessels, levels of supply and demand in the drybulk
transportation market and other factors affecting spot market charter rates for
drybulk carriers.
Vessels operating on period time charters provide more predictable cash flows,
but can yield lower profit margins than vessels operating in the spot charter
market during periods characterized by favorable market conditions. Vessels
operating in the spot charter market generate revenues that are less predictable
but may enable us to capture increased profit margins during periods of
improvements in charter rates although we are exposed to the risk of declining
charter rates, which may have a materially adverse impact on our financial
performance. If we employ vessels on period time charters, future spot market
rates may be higher or lower than the rates at which we have employed our
vessels on period time charters.
We have placed eleven of our vessels in a pool. We are paid a percentage of
revenues generated by the pool calculated in accordance with a "pool point
formula," which is determined by points awarded to each vessel based on the
vessel's age, dwt, speed, fuel consumption and certain other factors. For
example, a younger vessel with higher carrying capacity and greater fuel
efficiency would earn higher pool points than an older vessel with lower
carrying capacity and lesser fuel efficiency. Revenues are paid every 15 days in
arrears based on the points earned by each vessel.
We believe that by placing our vessels in a pool of similar vessels, we benefit
from certain economies of scale available to the pool relating to negotiations
with major charterers and flexibility in positioning vessels to obtain maximum
utilization.
Revenue from these pooling arrangements is accounted for on the accrual basis
and is recognized when the collectability has been reasonably assured. Revenue
from the pooling arrangements for the year ended December 31, 2005 accounted for
25%, of our voyage revenues.
A standard maritime industry performance measure used to evaluate performance is
the daily time charter equivalent, or daily TCE. Daily TCE revenues are voyage
revenues minus voyage expenses divided by the number of voyage days during the
relevant time period. Voyage expenses primarily consist of port, canal and fuel
costs that are unique to a particular voyage, which would otherwise be paid by a
charterer under a time charter, as well as commissions. We believe that the
daily TCE neutralizes the variability created by unique costs associated with
particular voyages or the employment of vessels on time charter or on the spot
market and presents a more accurate representation of the revenues generated by
our vessels.
Voyage Expenses
Voyage expenses primarily consist of port, canal and fuel costs that are unique
to a particular voyage, which would otherwise be paid by a charterer under a
time charter, as well as commissions. These expenses are not under our control
and therefore if we were to charter any of our vessels under a voyage charter,
whereby we would be responsible for these expenses, any increase would adversely
affect our results from operations.
Vessel Operating Expenses
Vessel operating expenses include crew wages and related costs, the cost of
insurance, expenses relating to repairs and maintenance, the costs of spares and
consumable stores, tonnage taxes and other miscellaneous expenses. Our vessel
operating expenses, which generally represent fixed costs, have historically
increased as a result of the increase in the size of our fleet. Other factors
beyond our control, some of which may affect the shipping industry in general,
including, for instance, developments relating to market prices for insurance,
may also cause these expenses to increase.
Depreciation and Amortization
We depreciate our vessels on a straight-line basis over their estimated useful
lives determined to be 25 years from the date of their initial delivery from the
shipyard. Depreciation is based on cost less the estimated residual value. We
capitalize the costs associated with a drydocking and amortize these costs on a
straight-line basis over the period when the next drydocking becomes due, which
is typically 30 months. Regulations and/or incidents may change the estimated
dates of next drydockings.
Management Fees - Related Party
We pay Cardiff a technical management fee of $650 (based on a Euro/Dollar
exchange rate of 1.30:1.00) per vessel per day on a monthly basis in advance,
pro rata for the calendar days these vessels are owned by us. The management fee
is adjusted quarterly based on the Euro/Dollar exchange rate as published by EFG
Eurobank Ergasias S.A. two days prior to the end of the previous calendar
quarter. In addition, we pay Cardiff any expenses incurred in connection with
any visit to a vessel by a superintendent engineer of Cardiff to evaluate or
supervise any repairs, drydockings or other activities and, for visits in excess
of five days per annum per vessel, we pay Cardiff $550 for each additional day.
General and Administrative Expenses and General Administrative Expenses -
Related Party
Our general and administrative expenses mainly include executive compensation
and the fees paid to Fabiana Services S.A. ("Fabiana") a related party entity
incorporated in Marshall Islands for providing consultation services with
respect to our Chief Executive Officer and Chief Financial Officer duties. The
shares of this company are beneficially held by Mr. Economou and Mr. Thomas.
Interest and Finance Costs
We have historically incurred interest expense and financing costs in connection
with vessel specific debt of our subsidiaries. We used a portion of the proceeds
of our initial public offering in February 2005 to repay all of our then
outstanding debt. We have incurred financing costs and we also expect to incur
interest expenses under our credit facilities in connection with debt incurred
to finance future acquisitions. However, we intend to limit the amount of these
expenses and costs by repaying our outstanding indebtedness from time to time
with the net proceeds of future equity issuances.
Inflation
Inflation has not had a material effect on our expenses given current economic
conditions. In the event that significant global inflationary pressures appear,
these pressures would increase our operating, voyage, administrative and
financing costs.
Lack of Historical Operating Data for Vessels Before Their Acquisition
Although vessels are generally acquired free of charter, we have acquired (and
may in the future acquire) some vessels with time charters. Where a vessel has
been under a voyage charter, the vessel is usually delivered to the buyer free
of charter. It is rare in the shipping industry for the last charterer of the
vessel in the hands of the seller to continue as the first charterer of the
vessel in the hands of the buyer. In most cases, when a vessel is under time
charter and the buyer wishes to assume that charter, the vessel cannot be
acquired without the charterer's consent and the buyer entering into a separate
direct agreement (called a "novation agreement") with the charterer to assume
the charter. The purchase of a vessel itself does not transfer the charter
because it is a separate service agreement between the vessel owner and the
charterer.
Where we identify any intangible assets or liabilities associated with the
acquisition of a vessel, we record all identified tangible and intangible assets
or liabilities at fair value. Fair value is determined by reference to market
data and the discounted amount of expected future cash flows. Where we have
assumed an existing charter obligation or entered into a time charter with the
existing charterer in connection with the purchase of a vessel at charter rates
that are less than market charter rates, we record a liability, based on the
difference between the assumed charter rate and the market charter rate for an
equivalent vessel to the extent the vessel's capitalized cost would not exceed
its fair value without a time charter. Conversely, where we assume an existing
charter obligation or enter into a time charter with the existing charterer in
connection with the purchase of a vessel at charter rates that are above market
charter rates, we record an asset, based on the difference between the market
charter rate and the contracted charter rate for an equivalent vessel. This
determination is made at the time the vessel is delivered to us, and such assets
and liabilities are amortized to revenue over the remaining period of the
charter.
During February and March 2005 we took delivery of eight second hand vessels,
the Matira, Tonga, Iguana, Ocean Crystal, Toro, Paragon, Xanadu, and La Jolla
with charter party arrangements attached, which we agreed to assume through
arrangements with the respective charterers. Upon delivery of the vessels we
evaluated the charter contract assumed and recognized deferred revenue of $6,581
with a corresponding increase in the vessels purchase price. The fair value of
the assumed charters was determined based on reference to current market rates
for similar contracts considering the remaining time charter period. Of the
above mentioned vessels, four (Iguana, Ocean Crystal, Toro and Paragon) were
acquired from companies that were beneficially owned by our Chief Executive
Officer's sister, while the remaining four were acquired from third parties.
When we purchase a vessel and assume or renegotiate a related time charter, we
must take the following steps before the vessel will be ready to commence
operations:
o obtain the charterer's consent to us as the new owner;
o obtain the charterer's consent to a new technical manager;
o in some cases, obtain the charterer's consent to a new flag for the
vessel;
o arrange for a new crew for the vessel, and where the vessel is on
charter, in some cases, the crew must be approved by the charterer;
o replace all hired equipment on board, such as gas cylinders and
communication equipment;
o negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
o register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the flag
state;
o implement a new planned maintenance program for the vessel; and
o ensure that the new technical manager obtains new certificates for
compliance with the safety and vessel security regulations of the flag
state. The following discussion is intended to help you understand how
acquisitions of vessels affect our business and results of operations.
Our business is comprised of the following main elements:
o employment and operation of our dry bulk vessels; and
o management of the financial, general and administrative elements
involved in the conduct of our business and ownership of our dry bulk
vessels.
The employment and operation of our vessels require the following main
components:
o vessel maintenance and repair;
o crew selection and training;
o vessel spares and stores supply;
o contingency response planning;
o onboard safety procedures auditing;
o accounting;
o vessel insurance arrangement;
o vessel chartering;
o vessel security training and security response plans (ISPS);
o obtain ISM certification and audit for each vessel within the six
months of taking over a vessel;
o vessel hire management;
o vessel surveying; and
o vessel performance monitoring.
The management of financial, general and administrative elements involved in the
conduct of our business and ownership of our vessels requires the following main
components:
o management of our financial resources, including banking
relationships, i.e., administration of bank loans and bank accounts;
o management of our accounting system and records and financial
reporting;
o administration of the legal and regulatory requirements affecting our
business and assets; and
o management of the relationships with our service providers and
customers.
The principal factors that affect our profitability, cash flows and
shareholders' return on investment include:
o rates and periods of charter hire;
o levels of vessel operating expenses;
o depreciation and amortization expenses;
o financing costs; and
o fluctuations in foreign exchange rates.
Results of Operations
Year ended December 31, 2005 compared to the year ended October 31, 2004
VOYAGE REVENUES--Voyage revenues increased by $165.4 million, or 260.5%, to
$228.9 million for 2005, compared to $63.5 million for 2004. This increase is
due to the delivery of 21 vessels during the period from February to August
2005, which increased voyage days to 7,710 in 2005 from 2,066 in 2004. In
addition the average fleet time charter equivalent rate increased marginally
from $28,062 in 2004 to $28,446 for 2005.
VOYAGE EXPENSES--Voyage expenses (including gains from bunkers on board relating
to vessels employed under time charter agreements) increased by $4.1 million, or
74.5%, to $9.6 million for 2005, compared to $5.5 million for 2004. This
increase is attributable to increased commissions. Commissions paid during 2005
and 2004 to Cardiff amounted to $2.9 million and $0.8 million, respectively, and
commissions paid to unaffiliated ship brokers amounted to $7.7 million and $2.5
million, respectively. The increase in commissions was primarily the result of
the increase in voyage days in 2005, which increased the amount of revenue we
reported. However, the increase in voyage expenses due to the increase in
commissions was partly offset by gains resulting from the difference between the
purchase and sale price of bunkers on the delivery and redelivery of the vessels
to and from their time charterers. Such gains amounted to $3.4 million and $0.9
million for 2005 and 2004, respectively.
VESSEL OPERATING EXPENSES--Vessel operating expenses, which include crew costs,
provisions, deck and engine stores, lubricating oil, insurance, maintenance and
repairs, increased by $26.9 million, or 274.5%, to $36.7 million for 2005
compared to $9.8 million for 2004. Daily vessel operating expenses per vessel
increased by $158, or 3.5%, to $4,668 for 2005 compared to $4,510 for 2004. This
increase is due to the increase in number of vessels from an average of 6 in
2004 to 21.6 in 2005 and a corresponding increase of calendar days from 2,166 in
2004 to 7,866 days in 2005.
DEPRECIATION AND AMORTIZATION--
Year ended
----------
October 31 2004 December 31, 2005
--------------- -----------------
Vessels depreciation expense $ 4,735 40,231
Amortization of drydockings 1,716 2,379
$ 6,451 42,610
Depreciation and amortization, which includes depreciation of vessels as well as
amortization of drydockings, increased by $36.1 million, or 555.4% to $42.6
million for 2005 compared to $6.5 million for 2004. This increase is due to the
delivery of 21 vessels during the period from February to August 2005.
MANAGEMENT FEES - relate to the fees paid to Cardiff for the management of our
vessels and increased by $3.7 million or 284.6% to $5.0 million in 2005 from
$1.3 million in 2004. This increase is due to the increase in number of vessels
from an average of 6 in 2004 to 21.6 in 2005 and a corresponding increase of
calendar days from 2,166 in 2004 to 7.866 days in 2005.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased by $4.0 million to $4.2 million for 2005 compared to $0.2 million for
2004. This increase is due to the additional administrative costs in connection
with the operation of our larger fleet and the duties typically associated with
public companies and to the compensation of our senior management and directors
which amounted $1.4 million. In addition, general and administrative expenses in
2005 include an amount of $1.6 million relating to remuneration paid to Cardiff
for additional services not contemplated by the management agreement and carried
out during the pre-delivery period of the 21 newly acquired vessels and for
services rendered by Cardiff in relation to our financial reporting requirements
and the establishment and monitoring of internal controls over financial
reporting.
INTEREST AND FINANCE COSTS--Interest and Finance costs increased by $18.9
million, or 1,260%, to $20.4 million for 2005 compared to $1.5 million for 2004.
This increase is primarily the result of the four new credit facilities entered
into in 2005 totaling $577.6 million for the acquisition of 21 vessels.
INTEREST INCOME--Interest income was $0.7 million during 2005 compared to $ 0.0
million during 2004.
OTHER NET--We recognized a loss of $0.2 million during 2005 compared to a gain
of $0.3 million during 2004. These gains and losses relate to amounts received
in connection with claims for damages to our vessels compared to the actual
costs associated with such repairs.
NET INCOME--Net income was $111.0 million for 2005 compared to net income of
$39.1 million for 2004. This increase is attributable to the increase in the
size of our fleet.
Two month period ended December 31, 2004.
VOYAGE REVENUES--Voyage revenues for the two month period were $15.6 million.
Our initial fleet of 6 vessels operated throughout the period, with no off-hire
days, generating an average TCE rate per vessel of $39,516. This is a
significantly higher rate than that of prior periods and the increase is
entirely due to higher charter rates at the end of 2004.
VOYAGE EXPENSES (Including Bunkers)--Voyage expenses for the two month period
were $1.1 million, of which $0.7 million related to commissions. The remaining
voyage expenses of $0.4 million relate almost entirely to the expenses incurred
by Mostoles which was the only vessel to operate on voyage charter during the
period.
VESSEL OPERATING EXPENSES--Vessel operating expenses were $1.8 million for the
two month period. Daily vessel operating expenses per vessel were $4,798.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization for the period was
$1.1 million. The vessels Striggla, Shibumi and Lacerta underwent drydockings as
of October 31, 2004 and the amortization charge for the period reflects the
resultant increase in deferred drydocking costs.
MANAGEMENT FEES-- Management fees totaled approximately $0.2 million for the two
month period.
INTEREST AND FINANCE COSTS--Interest and finance costs for the period were $0.5
million. Of this amount, $0.3 million relates to interest incurred on the
Company's outstanding loans for the period and $0.1 million relates to
amortization and write-off of financing fees, while another $0.1 million relates
to bank charges.
NET INCOME--Net income was $10.7 million for the two month period.
Year ended October 31, 2004 compared to the year ended October 31, 2003
VOYAGE REVENUES--Voyage revenues increased by $38.4 million, or 153.0% to $63.5
million for 2004, compared to $25.1 million for 2003. This increase is due to
the delivery of Panormos on December 1, 2003, which contributed $11.9 million in
voyage revenues and an overall increase in drybulk rates which increased the
revenues generated by the other five vessels in our fleet to $51.6 million in
2004 from $25.1 in 2003.
VOYAGE EXPENSES (Including Bunkers)--Voyage expenses, which primarily consist of
port, canal and fuel costs that are unique to a particular voyage which would
otherwise be paid by the charterer under a time charter contract, as well as
commissions, increased $1.9 million, or 52.8%, to $5.5 million for 2004,
compared to $3.6 million for 2003. This increase is primarily due to the
increase in the amount of commissions paid, which increased $2.0 million or
153.8% to $3.3 million for 2004, from $1.3 million for 2003. Commissions are
calculated as a percentage of voyage revenues.
This increase in commissions paid was partially offset by lower voyage expenses,
excluding commissions, which decreased by $0.1 million to $2.2 million for 2004,
from $2.3 million for 2003, due to the higher number of time charters performed
by our vessels during 2004, compared to 2003.
VESSEL OPERATING EXPENSES--Vessel operating expenses, which include crew costs,
provisions, deck and engine stores, lubricating oil, insurance, maintenance and
repairs, increased by $3.1 million, or 46.3%, to $9.8 million for 2004 compared
to $6.7 million for 2003. Daily vessel operating expenses per vessel increased
by $817, or 22.1%, to $4,510 for 2004 compared to $3,693 for 2003. This increase
is primarily due to (i) an increase in the cost of repairs and deck and engine
stores purchased from suppliers in more expensive geographical locations due to
some vessels' trading patterns, incurred during but not relating to the
drydockings on our vessels Shibumi, Striggla and Lacerta, (ii) an increase in
the cost of insurance on our vessels due to an increase in rates charged by
insurance companies throughout the shipping sector and (iii) an increase in crew
costs due to the appreciation of the Euro against the U.S. dollar.
DEPRECIATION AND AMORTIZATION--
Year ended October 31,
----------------------
2003 2004
---- ----
Vessels depreciation expense $ 3,580 $ 4,735
Amortization of drydockings 1,664 1,716
$ 5,244 $ 6,451
Depreciation and amortization, which includes depreciation of vessels as well as
amortization of drydockings, increased by $1.3 million, or 25.0% to $6.5 million
for 2004 compared to $5.2 million for 2003. This increase is primarily due to
the delivery of Panormos in December 2003 plus an increase in amortization of
drydocking expenses due to the drydocking of Striggla, Shibumi and Lacerta
during 2004.
MANAGEMENT FEES - relate to the fees that we pay to Cardiff for the management
of our vessels and increased by $0.2 million or 18.2% from $1.1 million in 2003
to $1.3 million in 2004. This increase was due to the delivery of Panormos.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses,
remained stable to $0.2 million in 2003 and 2004.
INTEREST AND FINANCE COSTS--Interest and finance cost increased by $0.4 million,
or 36.4%, to $1.5 million for 2004 compared to $1.1 million for 2003. This
increase is primarily the result of the $20.0 million debt we incurred in
December 2003 to partially finance the acquisition cost of the vessel Panormos.
OTHER NET--We recognized a gain of $0.3 million during 2004 compared to a gain
of $0.2 million during 2003. These gains relate to the excess amount we received
in connection with claims for damages to our vessels compared to the actual
costs associated with the repairs.
NET INCOME--Net income was $39.1 million for 2004 compared to net income of $7.2
million for 2003.
B. Liquidity and Capital Resources
Historically our principal source of funds has been equity provided by our
shareholders, operating cash flows and long-term borrowings. Our principal use
of funds has been capital expenditures to establish and grow our fleet, maintain
the quality of our drybulk carriers, comply with international shipping
standards and environmental laws and regulations, fund working capital
requirements, make principal repayments on outstanding loan facilities, and pay
dividends. We expect to rely upon operating cash flows, long-term borrowings, as
well as future equity financings to implement our growth plan.
We believe that our current cash balance as well as operating cash flows
will be sufficient to meet our liquidity needs for the next two to three years
assuming the charter market does not deteriorate to the low rate environment
that prevailed subsequent to the Asian financial crisis in 1999. If we do
acquire additional vessels, we will rely on new debt, proceeds from future
offerings and revenues from operation to meet our liquidity needs going forward.
Our practice has been to acquire drybulk carriers using a combination of
funds received from equity investors and bank debt secured by mortgages on our
drybulk carriers. Our business is capital intensive and its future success will
depend on our ability to maintain a high-quality fleet through the acquisition
of newer drybulk carriers and the selective sale of older drybulk carriers.
These acquisitions will be principally subject to management's expectation of
future market conditions as well as our ability to acquire drybulk carriers on
favorable terms.
In March 2006 we entered into a new loan agreement with a syndicate of
shipping banks for an amount of up to $628.7 million. The proceeds of the loan
will be used (i) to refinance existing loans; (ii) for general corporate
purposes; (iii) to finance up to the lower of $27.5 million or 76.5% of the
market value of Hille Oldendorff; and (iv) to finance the purchase of additional
vessels of up to 75% of the market value. The term of the loan under (i), (ii),
(iii) is 10 years while the term under (iv) is to be determined by the age of
the vessels acquired. The loan carries interest at LIBOR plus margins ranging
from 1.0% and 2.53% determined by prevailing loan to value ratios calculated
every quarter. The loan is secured by first priority ship mortgages on the
Company's fleet of vessels, assignment of earnings and insurances and a pledge
over a deposit of $5.0 million.
Cash Flows
Our cash and cash equivalents decreased to $5.2 million as of December 31,
2005, compared to $8.4 million as of December 31, 2004 and to $6.2 million as of
October 31, 2004. Working capital is current assets minus current liabilities,
including the current portion of long-term debt. Our working capital deficit was
$117.0 million as of December 31, 2005 due to the increase in the current
portion of long-term debt which increased to $107.7 million in 2005 compared to
$25.4 million as of October 31, 2004.
NET CASH FROM OPERATING ACTIVITIES-- was $163.8 million during 2005 compared to
net cash from operating activities of $7.3 million during the year ended October
31, 2004. This change is primarily attributable to an increase in net income of
$71.9 million as a result of the delivery of 21 vessels during the period from
February to August 2005 mitigated by the increase in depreciation of $35.5
million, deferred revenue of $5.2 million and changes to related parties of
$45.5 million
NET CASH USED IN INVESTING ACTIVITIES-- was $847.6 million for the year ended
December 31, 2005, which reflects the acquisition cost of the 21 vessels
delivered during the period from February to August 2005 compared to $20.1
million during the year ended October 31, 2004 representing the balance of the
purchase price of Panormos, following the advance payment of $2.2 million we
made in October 2003.
NET CASH FROM FINANCING ACTIVITIES-- was $680.7 million for the year ended
December 31, 2005, compared to $16.0 million during the year ended October 31,
2004. The change in cash provided by financing activities relates to the
following:
o Proceeds from borrowing under long-term debt were $577.6 million
during the year ended December 31, 2005 in connection with the
acquisition of the 21 vessels delivered between February and August
2005, compared to $26.0 million for the year ended October 31, 2004 in
connection with the acquisition of the vessel Panormos.
o Principal repayments of long-term debt of $90.0 million for the year
ended December 31, 2005, compared to $8.2 million for the year ended
October 31, 2004.
o Increase in restricted cash of $23.6 million in 2005 compared to an
increase of $1.6 million in the year ended October 31, 2004.
o Dividends of $30.1 million in 2005 compared to $0.0 million in the
year ended October 31, 2004.
As of December 31, 2004, we had a cash balance of $8.4 million. Working
capital is current assets minus current liabilities, including the current
portion of long-term debt. The working capital deficit was $13.7 million as of
December 31, 2004 due to the declaration of dividends to our existing
shareholders, which was given retroactive effect in our financial statements for
the fiscal year ended October 31, 2004, and prior to our initial public offering
which was completed in February 2005. Of the $69.0 million dividend declared,
$18.0 million was still payable as of December 31, 2004. An additional $10.7
million was paid on February 8, 2005 and the remainder was paid on May 24, 2005.
NET CASH FROM OPERATING ACTIVITIES - was $55.2 million for the two-month period
ended December 31, 2004. This is attributable to the improved trading conditions
which contributed net income of $10.7 million and the decrease by $40.6 million
of the amounts due from Cardiff that were settled and used to pay existing
shareholders a portion of the $69.0 million dividend outstanding as of October
31, 2004.
NET CASH USED IN FINANCING ACTIVITIES - was $53.0 million for the two-month
period ended December 31, 2004. This mainly relates to the dividend of $51.0
million that was paid to the existing shareholders on December 23, 2004. During
the period we also made principal payments of long term debt of $17.4 million,
while we incurred long term debt of $15.4 million.
NET CASH FROM OPERATING ACTIVITIES--increased by $4.8 million to $7.3 million
during the year ended October 31, 2004, compared to net cash from operating
activities of $2.5 million during 2003. This increase is primarily attributable
to net income of $39.1 million as a result of improved trading conditions in
combination with the increase in voyage days following our acquisition of the
drybulk vessel Panormos, mitigated by the increase in our related party balances
due from Cardiff, which maintains and handles the majority of the cash generated
from vessel operations, of $35.3 million. Furthermore payments for drydockings
in the year ended October 31, 2004, were $3.3 million compared to $1.3 million
in 2003 as vessels Striggla, Shibumi and Lacerta underwent their scheduled
drydockings in 2004.
NET CASH USED IN INVESTING ACTIVITIES--was $20.1 million during the year ended
October 31, 2004, which reflects the acquisition costs for the vessel Panormos,
following the advance payment of $2.2 million we made in October 2003.
NET CASH FROM FINANCING ACTIVITIES--was $16.0 million during the year ended
October 31, 2004, compared to net cash from financing activities of $0.4 million
during 2003. The change in cash provided by financing activities relates to the
following:
o Net proceeds from borrowing under long-term debt were $26.0 million in
connection with the refinancing of certain of our loans and the
acquisition of the vessel Panormos during the year ended October 31,
2004, compared to $3.4 million during 2003.
o Principal repayments of long-term debt of $8.2 million during the year
ended October 31, 2004, compared to $2.8 million during 2003.
o Dividends of $0.0 million in the year ended October 31, 2004 compared
to $2.3 million in 2003.
EBITDA, as defined in Footnote 2 to the "Selected Financial Data" increased
by $126.2 million, or 268%, to $173.3 million for 2005, compared to $47.1
million for the year ended October 31, 2004. This increase is primarily due to
the increase of net voyage revenue generated by our fleet as a result of the
delivery of 21 vessels during the period from February to August 2005.
EBITDA for the two month period ended December 31, 2004 was $12.3 million
and was a result of a strong drybulk market that prevailed during the period and
continued during the first quarter of 2005. During the two month period the
Company operated 6 vessels.
EBITDA increased by $33.6 million, or 248.9%, to $47.1 million for the year
ended October 31, 2004, compared to $13.5 million for 2003. This increase is
primarily due to the increase of net voyage revenue generated by our fleet as a
result of the overall stronger drybulk market during 2004 compared to 2003. The
increase was mitigated by the increase in vessel operating expenses and general
and administrative expenses for 2004 compared to 2003.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations and their maturity
dates as of December 31, 2005:
One to Three More
Within Three to Five than
One Year Years Years Five Years Total
-------- ----- ----- ---------- -----
(in thousands of U.S. dollars)
Bank loans (1) 108,218 169,744 114,743 135,620 528,325
Rental agreement
for office premises (2) 11 33 11 -- 55
Chartering commitments (3) 6,022 12,044 - -- 18,066
(1) As of December 31, 2005, we had five outstanding loans with a combined
outstanding balance of $528.3 million, which were refinanced on March 31, 2006
through two loan agreements (see subsequent events below). The original loans
have maturity dates between 2006 and 2011. The scheduled annual principal
payments for our outstanding loans are as follow:
LOANS 160m 200m 92.94m 120.6m 14m
A B C D E TOTAL
Year ended
December 31,
2006 22,000,000 42,732,373 23,510,000 15,976,252 4,000,000 108,218,625
2007 18,000,000 31,972,580 4,200,000 15,976,252 2,100,000 72,248,832
2008 13,500,000 22,072,801 4,200,000 15,976,252 1,200,000 56,949,053
2009 12,000,000 12,320,790 4,200,000 10,825,126 1,200,000 40,545,916
Thereafter 77,000,000 68,595,069 42,864,000 53,902,992 8,000,000 250,362,061
TOTAL $142,500,000 $177,693,613 78,974,000 $112,656,874 $16,500,000 $528,324,487
(2) We lease office space in Athens, Greece, from Mr. George Economou, our
Chairman and CEO. On October 1, 2005 and effective as of the same date, we
entered into a rental agreement with our Chief Executive Officer to lease office
space in Athens, Greece. The agreement is for duration of 5 years beginning
October 1, 2005 and expires on September 30, 2010. The annual rental for the
first two years is Euro 9,000 and thereafter it will be adjusted annually for
inflation increases. Prior to entering the above agreement, we agreed to cancel
without penalties from either party a previously existing rental agreement for
leasing office space from our Chief Executive Officer. That agreement had been
effective for a five year period beginning January 1, 2005 at an annual rental
of Euro 14,000 before any annual inflation increases.
(3) In November 2004 we entered into an agreement with Tara Shipping Limited, an
unrelated party, to charter-in the vessel "Darya Tara" for a minimum period of
36 months and a maximum of 38 months at a daily rate of $16,5 per day.
Concurrently with the aforementioned agreement, the Company concluded a charter
party agreement with an unrelated party for the charter-out of the vessel Darya
Tara over the same period and at a daily rate of $16,7.
Quantitative and Qualitative Disclosure of Market Risk
Interest Rate Fluctuation
The international drybulk industry is a capital intensive industry, requiring
significant amounts of investment. Much of this investment is provided in the
form of long term debt. Our debt usually contains interest rates that fluctuate
with LIBOR. Increasing interest rates could adversely impact future earnings.
Our interest expense is affected by changes in the general level of interest
rates. As an indication of the extent of our sensitivity to interest rate
changes, an increase of 100 basis points would have decreased our net income and
cash flows in the current year by approximately $338,650 based upon our debt
level at December 31, 2005.
The following table sets forth the sensitivity of loans A through E in U.S.
dollars to a 100 basis points increase in LIBOR during the next five years on
the same basis.
YEAR AMOUNT
---- ------
2006 4,674,359
2007 3,780,854
2008 3,134,865
2009 2,647,390
Foreign Exchange Rate Risk
We generate all of our revenues in U.S. dollars, but incur approximately 24% of
our expenses in currencies other than U.S. dollars. For accounting purposes,
expenses incurred in Euros are converted into U.S. dollars at the exchange rate
prevailing on the date of each transaction. At December 31, 2005, approximately
31% of our outstanding accounts payable were denominated in currencies other
than the U.S. dollar (mainly the Euro).
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States,
or U.S. GAAP. The preparation of those financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies that involve a high degree of judgment
and the methods of their application. For a description of all of the company's
significant accounting policies, see Note 2 to the Company's consolidated
financial statements.
Impairment of long-lived assets. We evaluate the carrying amounts of vessels to
determine if events have occurred which would require modification to their
carrying values. In evaluating carrying values of vessels, we review certain
indicators of potential impairment, such as undiscounted projected operating
cash flows, vessel sales and purchases, business plans and overall market
conditions. We determine undiscounted projected net operating cash flows for
each vessel and compare it to the vessel's carrying value. If our estimate of
undiscounted future cash flows for any vessel is lower than the vessel's
carrying value plus any unamortized drydocking costs, the carrying value is
written down, by recording a charge to operations, to the vessel's fair market
value if the fair market value is lower than the vessel's carrying value.. We
estimate fair market value primarily through the use of third party valuations
performed on an individual vessel basis.
Depreciation. We record the value of our vessels at their cost (which includes
acquisition costs directly attributable to the vessel and expenditures made to
prepare the vessel for its initial voyage) less accumulated depreciation. We
depreciate our vessels on a straight-line basis over their estimated useful
lives, estimated to be 25 years, with the exception of vessel Tonga, from date
of initial delivery from the shipyard. We believe that a 25-year depreciable
life is consistent with that of other ship owners. The useful life of Tonga is
estimated to 26 years, which coincides with the validity of the class
certificate. Depreciation is based on cost less the estimated residual scrap
value. A decrease in the useful life of a dry bulk vessel or in its residual
value would have the effect of increasing the annual depreciation charge. When
regulations place limitations on the ability of a vessel to trade on a worldwide
basis, the vessel's useful life is adjusted at the date such regulations are
adopted.
Deferred drydock costs. Our vessels are required to be drydocked for major
repairs and maintenance that cannot be performed while the vessel is operating
approximately every 30 months. We capitalize the costs associated with the
drydocks as they occur and amortize these costs on a straight line basis over
the period between drydocks. Costs capitalized as part of the drydock include
actual costs incurred at the drydock yard, and the cost of hiring a third party
to oversee a drydock.
Allowance for doubtful accounts. Revenue is based on contracted charter parties
and although our business is with customers who we believe to be of the highest
standard, there is always the possibility of dispute over terms and payment of
freight. In such circumstances, we assess the recoverability of amounts
outstanding and we estimate a provision if there is a possibility of
non-recoverability. Although we believe our provisions to be based on fair
judgment at the time of their creation, it is possible that an amount under
dispute is not recovered and the estimated provision for doubtful recoverability
is inadequate.
Subsequent Events
On March 31, 2006, we concluded two loan agreements for an aggregate amount of
up to $628.7 million with a syndicate of institutional lenders as follows:
o A term loan and short term credit facility of up to $518.7 million in
aggregate divided into a term loan of $460.0 million in order to
refinance our then outstanding balance under prior indebtedness
($528.3 million as at December 31, 2005), to partially finance the
acquisition cost of a second-hand vessel and for working capital and a
credit facility of $58.7 million in order to partially finance the
acquisition cost of additional vessels acceptable to the lenders. The
credit facility of $58.7 million is available for drawdown for 364
days after the signing of the agreement and each amount drawn down
will be included in the term loan and paid in equal consecutive
quarterly installments commencing on the next quarterly repayment of
the term loan and the length of repayment will depend on the age of
each of the additional vessels to be acquired. The term loan is
payable in forty variable consecutive quarterly installments
commencing six months after the drawdown date but not later than
August 31, 2006 and through May 2016 plus a balloon payment of $81.3
million, payable together with the last installment.
o A term loan and short term credit facility of up to $110.0 million in
aggregate divided into a term loan of $97.5 million in order to
refinance our then outstanding balance under prior indebtedness
($528.3 million as at December 31, 2005), to partially finance the
acquisition cost of a second-hand vessel and for working capital and a
credit facility of $12.5 million in order to partially finance the
acquisition cost of additional vessels acceptable to the lenders. The
credit facility of $12.5 million is available for drawdown for 364
days after the signing of the agreement and each amount drawn down
will be included in the term loan and paid in equal consecutive
quarterly installments commencing on the next quarterly repayment of
the term loan and the length of repayment will depend on the age of
each of the additional vessels to be acquired. The term loan is
payable in forty variable consecutive quarterly installments
commencing six months after the drawdown date but not later than
August 31, 2006 and through May 2016 plus a balloon payment of $17.2
million, payable together with the last installment.
The loans will bear interest at LIBOR plus a margin and will be secured by a
first priority mortgage over the vessels involved. We will be permitted to pay
dividends under the loans so long as such amount of dividends does not exceed
50% of our net income as evidenced by the relevant annual audited financial
statements. However, for the fiscal year 2006, the amount of dividends we may
pay cannot exceed the amount of $18.0 million. We may not make any additional
dividend payments without the lenders' prior written consent.
In March 2006 we exercised our purchase option for a second-hand drybulk
carrier, Hille Oldendorff, a 2005 built, 55,566 dwt, handymax drybulk carrier.
The vessel will be purchased with a bareboat charter at $19.7 per day, net of
commissions, until March 2007. The seller is an affiliated company of DryShips
that acquired the vessel in late October 2005, at which time DryShips was
granted an option to purchase the vessel. The vessel's purchase price ($40.76
million under a memorandum of agreement dated March 24, 2006) will be financed
in part by up to $27.5 million under our new credit facility and $3.25 million
pursuant to a sellers' credit for a period of nine to twelve months.
Dividend Payments
On January 11, 2006 the Company announced that its board of directors had
declared a quarterly cash dividend of $0.20 per common share, payable January
31, 2006 to stockholders of record on January 16, 2006. The cash dividend
amounted to $6.07 million. Furthermore, on April 4, 2006 the Company announced
that its board of directors declared a quarterly cash dividend of $0.20 per
common share, payable April 28, 2006 to stockholders of record on April 17,
2006. The cash dividend amounted to $6.07 million.
Foreign Exchange Transactions
In January 2006, the Company engaged in a total of 12 call options, maturing in
monthly intervals from February 2006 to January 2007, under two foreign exchange
transactions involving the US dollar against Euro. The strike rate under each
option is 1.21 US dollars to the Euro, for amounts of Euro 200,000 per month,
for each of the 12 months after the individual contract dates. In January 2006,
the Company engaged in a total of 12 Forward Foreign Exchange Agreements in
monthly intervals from February 2006 to January 2007. The strike rate under each
option ranges from 1.2101 to 1.2215 US Dollars to the Euro for amounts of Euro
200,000 per month for each of the 12 months from February 2006 to January 2007.
C. Research and Development, Patents and Licenses
Not Applicable.
D. Trend Information
Not Applicable
E. Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 6. Directors and Senior Management
A. Directors and Senior Management
Set forth below are the names, ages and positions of our directors, executive
officers and key employees. Our board of directors is elected annually on a
staggered basis, and each director elected holds office until his successor
shall have been duly elected and qualified, except in the event of his death,
resignation, removal or the earlier termination of his term of office. Officers
are elected from time to time by vote of our board of directors and hold office
until a successor is elected.
Name Age Position
---- --- --------
George Economou 52 Chairman, President and Chief Executive Officer;
Director
Christopher Thomas 46 Vice President, Treasurer Chief Financial Officer;
Director
Angelos Papoulias 51 Director
Nikolas P. Tsakos 42 Director
Prokopios (Akis)
Tsirigakis 50 Director
Eugenia Voulika 41 Secretary
----------
Biographical information with respect to each of our directors, executives and
key personnel is set forth below.
George Economou is our Chairman and Chief Executive Officer. Mr. Economou has
been actively involved in the shipping industry for over 25 years. After
graduating from the Massachusetts Institute of Technology in 1976 with a B.A. in
Naval Architecture and Marine Engineering and an M.S. in Shipping and
Shipbuilding Management, George Economou commenced working as a Superintendent
Engineer in Thenamaris Ship Management in Greece. From 1978 until 1981, he
worked as Sale and Purchase Manager at Brokerage and Management in New York.
From 1981 to 1986, he held the position of General Manager of Oceania Maritime
Agency in New York. In 1986, he invested and participated in the formation of
numerous individual shipping companies which involved, among others, the present
group of companies.
Christopher J. Thomas is our Chief Financial Officer. Since November 2001, Mr.
Thomas has been an independent financial consultant to numerous international
shipowning and operating companies. Mr. Thomas is also on the board of directors
of TOP Tankers Inc. which is a publicly traded company with securities
registered under the Securities Exchange Act of 1934. From 1999 to 2004, Mr.
Thomas was the Chief Financial Officer and a director of Excel Maritime Carriers
Ltd. which is also a publicly traded company with securities registered under
the Securities Exchange Act of 1934. Prior to joining Excel, he was Financial
Manager of Cardiff Marine Inc. Mr. Thomas holds a degree in Business
Administration from Crawley University, England.
Angelos Papoulias has served on our Board of Directors since our initial public
offering in February 2005. Since 1989, Mr. Papoulias has been a director of
Investments and Finance Ltd., a financial consulting firm specializing in
financial and structuring advice to the Greek maritime industry. From 1980 to
1987 Mr. Papoulias was with Chase Manhattan Bank N.A. in corporate and shipping
finance. From 1987 to 1988 Mr. Papoulias was the Director of Finance at Eletson
Holdings Inc., a product tanker company. Mr. Papoulias holds a B.S. in
Mathematics/Economics from Whitman College, Washington State, and a Master's
degree in International Management from the School of International Management,
Phoenix, Arizona.
Nikolas P. Tsakos has served on our Board of directors since our initial public
offering in February 2005. Since 1993, Mr. Tsakos has been the President, Chief
Executive Officer and a director of Tsakos Energy Navigation Limited, a provider
of international seaborne crude oil and petroleum product transportation
services whose common shares are listed on the New York Stock Exchange. Mr.
Tsakos is President of the Hellenic Marine Environment Protection Agency
(HELMEA). He is a member of the council of the Independent Tanker Owners
Association (INTERTANKO), a board member of the Union of Greek Shipowners (UGS),
a council member of the board of the Greek Shipping Co-operation Committee
(GSCC) and a council member of the American Bureau of Shipping (ABS), Bureau
Veritas (BV) and of the Greek Committee of Det norske Veritas (DNV). Mr. Tsakos
graduated from Columbia University in New York in 1985 with a degree in
Economics and Political Science and obtained a Masters Degree in Shipping, Trade
and Finance from the City of London University Business School in 1987. Mr.
Tsakos served as an officer in the Hellenic Navy in 1988.
Prokopios (Akis) N. Tsirigakis has served on our Board of Directors since our
initial public offering in February 2005. Mr. Tsirigakis has been the Joint
Managing Director of the Oceanbulk Group and concurrently, since 1998, has been
the Managing Director of Combine Marine Inc. Mr. Tsirigakis is also chairman and
CEO of Star Maritime Acquisition Corporation). Mr. Tsirigakis started up and
established Combine as a third-party ship management company. He has previously
owned and successfully operated bulk carriers. From 1991 to 1998, Mr. Tsirigakis
was the Vice-President and Technical Director of Konkar Shipping S.A. of Athens
and Technical Manager of Arcon Shipping Inc of New York. He participates in the
Intercargo Committee, Classification societies and the Union of Greek
Shipowners, SNAME. Mr. Tsirigakis is involved in the current development of
newbuilding rules. Mr. Tsirigakis received a Masters and BSC in Naval
Architecture from The University of Michigan, Ann Arbor and has three years of
seagoing experience.
Eugenia Th. Voulika is our Corporate Secretary. Ms. Voulika's principal
occupation for the past five years has been as an attorney at law. She is an
associate of Deverakis Law Office in Piraeus, Greece since 1991. Ms. Voulika
specializes in maritime and civil law.
B. Compensation of Directors and Senior Management
We paid an aggregate amount of $1.4 million as compensation to our
executive directors for the fiscal year ended December 31, 2005. Non-executive
directors received annual compensation in the aggregate amount of $24,000 plus
reimbursement of their out-of-pocket expenses. We do not have a retirement plan
for our officers or directors.
On February 3, 2005, we entered into two consultancy agreements with Fabiana
Services S.A. ("Fabiana") a related party entity incorporated in Marshall
Islands. The shares of this company are beneficially held by Mr. Economou and
Mr. Thomas. Under the agreements, Fabiana acts as consultant for the Company in
connection with the duties of the Chief Executive and Chief Financial Officers.
Each of the agreements has a term of three years beginning February 3, 2005, and
ending (unless terminated earlier pursuant to the terms of the agreement) on
February 2, 2008. The Company pays compensation for the above mentioned
consulting services of Euro 979,000 and Euro 147,000 for the Chief Executive and
Chief Financial Officers, per annum payable monthly on the last working day of
every month in twelve installments.
Equity Incentive Plan
We have adopted an equity incentive plan, or the Plan, which will entitle
our officers, key employees and directors to receive options to acquire common
stock. Under the Plan, a total of 1,000,000 shares of common stock has been
reserved for issuance under the Plan. The Plan is administered by our board of
directors. Under the terms of the Plan, our board of directors may grant new
options exercisable at a price per share equal to the average daily closing
price for our common stock over the 20 trading days prior to the date of
issuance of the shares. Under the terms of the Plan, no options can be exercised
until at least two years after the closing of our initial public offering in
February 2005. Any shares received on exercise of the options may not be sold
until three years after the closing of the offering. All options will expire 10
years from the date of grant. The Plan will expire 10 years from the closing of
the offering. As at December 31, 2005, no options were granted under the Plan.
C. Board Practices
The term of our Class B directors expires at the annual general
shareholders meeting in 2006 and the term of our Class C directors expires at
the annual general shareholders meeting in 2007. The Class B directors are
Angelos Papoulias and Prokopios (Akis) N. Tsirigakis. Class III directors are
Christopher J. Thomas and Nikolas P. Tsakos.
Committees of the Board of Directors
We have established an audit committee comprised of three independent
directors: Angelos Papoulias, Nikolas P. Tsakos and Prokopios (Akis) N.
Tsirigakis who are responsible for reviewing our accounting controls and
recommending to the board of directors the engagement of our outside auditors. A
majority of our board of directors is currently independent.
D. Employees
As of December 31, 2005 the Company employed two persons, namely our Chairman
and Chief Executive Officer, Mr. Economou, and our Chief Financial Officer, Mr.
Christopher Thomas both of whom are located in Athens.
E. Share Ownership
With respect to the total amount of common stock owned by all of our officers
and directors, individually and as a group, see Item 7 "Major Shareholders and
Related Party Transactions".
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information regarding the owners of more
than five percent of our common stock as at December 31, 2005. All of our
shareholders, including the shareholders listed in this table, are entitled to
one vote for each share of common stock held.
Identity of Amount Percentage of
Title of Class Person or Group Owned Common Stock
-------------- --------------- ----- ------ -----
Common Stock, par value Elios Investments
$.01 per share Inc.* 10,780,000 35.52%
George Economou** 13,552,000 44.65%
Neuberger Berman LLC 3,193,120 10.52%
Advice Investment
S.A.*** 2,772,000 9.13%
Magic Management
Inc.**** 1,848,000 6.09%
----------------
*Based on a share exchange agreement entered into as of February 14, 2006,
Entrepreneurial Spirit Foundation (former owner of 10,780,000 of the issued and
outstanding shares of the Company) transferred all of its shares to Elios
Investments Inc. ("Elios") in exchange for all of the shares of common stock of
Elios. Following the transfer and exchange, Entrepreneurial Spirit Foundation
owns 100% of the issued and outstanding shares of Elios.
** Mr. Economou is our Chairman and Chief Executive Officer and a Director.
Includes shares of common stock of DryShips Inc. owned of record by Elios and
Advice Investments S.A. Mr. Economou disclaims beneficial ownership of the
shares owned by Advice Investments S.A.
*** A corporation incorporated in the Republic of Liberia. Mr. George Economou's
wife, Ms. Elisavet Manola of Athens, Greece, is the beneficial owner of all of
the issued and outstanding capital stock of this corporation. Mr. Economou
disclaims beneficial ownership of these shares.
****A corporation incorporated in the Republic of Liberia. Mr. George Economou's
ex-wife, Ms. Rika Vosniadou of Athens, Greece, is the beneficial owner of all of
the issued and outstanding capital stock of this corporation.
B. Related Party Transactions
Mr. George Economou, our Chairman and Chief Executive Officer and director,
controls the Entrepreneurial Spirit Foundation, a Liechtenstein foundation that
owns 70.0% of the issued and outstanding capital stock of Cardiff, our manager.
The other shareholder of Cardiff is Prestige Finance S.A., a Liberian
corporation, all of the issued and outstanding capital of which is beneficially
owned by Mr. Economou's sister. The Foundation also owns 100% of the common
stock of Elios Investments Inc. which holds 35.5% of our common stock.
In October 2004, we issued 15,400,000 shares of our common stock to the
Foundation as consideration for causing certain of its affiliates to contribute
to us the capital stock of our subsidiaries. In particular the following
wholly-owned subsidiaries of the Foundation contributed to our company the
shares of the companies that own our vessel owning subsidiaries and effectively
their respective shipping assets:
Tradewinds Shipping Co. Ltd. of the Marshall Islands contributed all of the
shares of the two registered shareholders of Silicon Shipping Co. Ltd. of
Malta (registered owner of Flecha), all of the shares of the two registered
shareholders of Oxygen Shipping Co Ltd. of Malta (registered owner of
Shibumi) and all the shares of the two registered shareholders of Blueberry
Shipping Co. Ltd. of Malta (registered owner of Panormos) on or about
October 18, 2004;
Norge Investment Funds Co. S.A. of Panama contributed all of the shares of
the two registered shareholders of Helium Shipping Co. Ltd of Malta
(registered owner of Striggla) and all of the shares of the two registered
shareholders of Hydrogen Shipping Co. Ltd. of Malta (registered owner of
Mostoles) on or about October 18, 2004; and
Solid Shipping and Trading Inc. of Liberia contributed all of the shares of
the two registered shareholders of Annapolis Shipping Co. Ltd. of Malta
(registered owner of Lacerta).
Subsequently the Foundation instructed us to distribute 4,620,000 of these
shares to our two other shareholders prior to our initial public offering.
We outsource substantially all of our technical and commercial functions
relating to the operation and employment of our vessels to Cardiff pursuant to
management agreements with an initial term of five years. Cardiff is our
affiliate by virtue of being under common control with us. These agreements will
automatically extend to successive five year terms, unless in each case, at
least one year's advance notice of termination is given by either party. We pay
Cardiff a technical management fee of $650 (based on a Euro/Dollar exchange rate
of 1.30:1.00) per vessel per day on a monthly basis in advance, pro rata for the
calendar days these vessels are owned by us. The management fee is adjusted
quarterly based on the Euro/Dollar exchange rate as published by EFG Eurobank
Ergasias S.A. two days prior to the end of the previous calendar quarter. We
also pay Cardiff 1.25% of the gross freight, demurrage and charterhire collected
from the employment of our vessels. Cardiff also earns a fee equal to 1.0%
calculated on the price as stated in the relevant memorandum of agreement for
any vessel bought or sold on our behalf. Cardiff has subcontracted these
commercial management functions to its affiliated company, Drybulk S.A. who in
turn receives the aforementioned 1.25% chartering and 1.0% sale and purchase
fees.
In addition on November 8, 2005 and effective January 1, 2005 we concluded a
contract of ongoing services with Cardiff, under which we pay a quarterly fee of
$250 for services rendered by Cardiff in relation to our financial reporting
requirements and the establishment and monitoring of internal controls over
financial reporting.
We lease office space in Athens, Greece, from Mr. George Economou, our Chairman
and CEO. The initial term of our lease is five years. We believe that the rate
of our lease (14,160 Euros per year, adjusted yearly at the rate of inflation
published by the Greek Government) is no greater than would be incurred with a
third party in an arm's length transaction.
On February 3, 2005, we entered into two consultancy agreements with Fabiana
Services S.A. ("Fabiana") a related party entity incorporated in Marshall
Islands. The shares of this company are beneficially held by Mr. Economou and
Mr. Thomas. Under the agreements, Fabiana acts as consultant for the Company in
connection with the duties of the Chief Executive and Chief Financial Officers.
Each of the agreements has a term of three years beginning February 3, 2005 and
ending (unless terminated earlier on the basis of any other provisions as may be
defined in the agreement) on the day before the third anniversary of such date.
The Company will pay a compensation for the above mentioned services of Euro
979,000 and Euro 147,000 for the Chief Executive and Chief Financial Officers
consultation, per annum payable monthly on the last working day of every month
in twelve installments.
Further, Mr. Economou has entered into a letter agreement which includes a
provision requiring Mr. Economou to (i) use commercially reasonable efforts to
cause each company affiliated with Cardiff that owns a bareboat chartered vessel
(meaning a vessel for which the charterer bears all operating expense and risk)
to sell its vessels upon redelivery from its bareboat charterer and allow the
Company to exercise a right of first refusal to acquire that bareboat chartered
vessel once an agreement that sets forth the terms of the sale is entered into,
and (ii) allow the Company to exercise a right of first refusal to acquire any
drybulk carrier, after Mr. Economou, or any of his other affiliates, enters into
an agreement that sets forth terms upon which he or it would acquire that
drybulk carrier. Pursuant to this letter agreement, Mr. Economou will notify our
audit committee of any agreement that he or his other affiliates have entered
into to purchase a drybulk carrier (or to sell the bareboat chartered vessel)
and will provide the audit committee a 7 calendar day period in respect of a
single vessel transaction, or a 14 calendar day period in respect of a
multi-vessel transaction, from the date that he delivers such notice to our
audit committee of that opportunity, within which to decide whether or not to
accept the opportunity and nominate a subsidiary of DryShips to become the
purchaser of such drybulk carrier, before Mr. Economou will accept the
opportunity or offer it to any of his other affiliates. Our audit committee,
which consists of our independent directors, will require a simple majority vote
to accept or reject this offer.
C. Interests of Experts and Counsel
Not Applicable.
Item 8. Financial information
A. Consolidated statements and other financial information.
See Item 18.
Legal Proceedings
We have not been involved in any legal proceedings which may have, or have had,
a significant effect on our business, financial position, results of operations
or liquidity, nor are we aware of any proceedings that are pending or threatened
which may have a significant effect on our business, financial position, results
of operations or liquidity. From time to time, we may be subject to legal
proceedings and claims in the ordinary course of business, principally personal
injury and property casualty claims. We expect that these claims would be
covered by insurance, subject to customary deductibles. Those claims, even if
lacking merit, could result in the expenditure of significant financial and
managerial resources.
Dividend policy
Our current dividend policy is to declare and pay quarterly dividends from our
net profits of $0.20 per common share to shareholders each January, April, July
and October. However, we may have to make provisions for vessel acquisition and
other liabilities that would reduce or eliminate the cash available for
distribution as dividends. However, we may incur other expenses or liabilities
that would reduce or eliminate the cash available for distribution as dividends.
Also, from time to time, the Board of Directors may determine to declare and pay
quarterly dividends in an amount up to 50% of our net quarterly income as the
Board of Directors deems appropriate.
Declaration and payment of any dividend is subject to the discretion of our
Board of Directors. The timing and amount of dividend payments will be dependent
upon our earnings, financial condition, cash requirements and availability,
fleet renewal and expansion, restrictions in our loan agreements, the provisions
of Marshall Islands law affecting the payment of distributions to shareholders
and other factors.
The payment of dividends is not guaranteed or assured, and may be discontinued
at any time at the discretion of our Board of Directors. Because we are a
holding company with no material assets other than the stock of our
subsidiaries, our ability to pay dividends will depend on the earnings and cash
flow of our subsidiaries and their ability to pay dividends to us. If there is a
substantial decline in the drybulk charter market, our earnings would be
negatively affected thus limiting our ability to pay dividends. Marshall Islands
law generally prohibits the payment of dividends other than from surplus or
while a company is insolvent or would be rendered insolvent upon the payment of
such dividend.
We believe that, under current law, our dividend payments from earnings and
profits will constitute "qualified dividend income" and as such will generally
be subject to a 15% United States federal income tax rate with respect to
non-corporate individual stockholders. Distributions in excess of our earnings
and profits will be treated first as a non-taxable return of capital to the
extent of a United States stockholder's tax basis in its common stock on a
dollar-for-dollar basis and thereafter as capital gain. Please see the section
of this report entitled "Tax Considerations" for additional information relating
to the tax treatment of our dividend payments.
The dry bulk shipping industry is highly volatile, and we cannot accurately
predict the amount of cash distributions that we may make in any period. Factors
beyond our control may affect the charter market for our vessels and our
charterers' ability to satisfy their contractual obligations to us, and we
cannot assure you that we will pay dividends.
B. Significant Changes
Not Applicable.
Item 9. The Offer and Listing
A. Offer and listing details
Our common stock currently trades on The NASDAQ National Market under the symbol
"DRYS". Since our initial public offering in February 2005, the price history of
our common stock was as follows:
2005 High Low
1st Quarter ended March 31, 2005 $23.39 $19.36
2nd Quarter ended June 30, 2005 $19.50 $15.46
3rd Quarter ended September 30, 2005 $17.35 $13.95
4th Quarter ended December 31, 2005 $17.22 $12.11
High Low
October 2005 $16.57 $14.44
November 2005 $14.45 $12.50
December 2005 $12.83 $11.74
January 2006 $13.18 $ 9.79
February 2006 $11.52 $10.57
March 2006 $11.20 $10.31
Item 10. Additional Information
A. Share Capital
Not Applicable.
B. Memorandum and articles of association
Directors
Our directors are elected by a majority of the votes cast by stockholders
entitled to vote. There is no provision for cumulative voting. Our board of
directors must consist of at least one member. Stockholders may change the
number of directors only by the affirmative vote of holders of a majority of the
outstanding common stock. The board of directors may change the number of
directors only by a majority vote of the entire board.
Each director shall be elected to serve until the next annual meeting of
stockholders and until his successor shall have been duly elected and qualified,
except in the event of his death, resignation, removal, or the earlier
termination of his term of office. Our board of directors has the authority to
fix the amounts which shall be payable to the members of the board of directors
for attendance at any meeting or for services rendered to us.
Stockholder Meetings
Under our bylaws, annual stockholder meetings will be held at a time and place
selected by our board of directors. The meetings may be held in or outside of
the Marshall Islands. Special meetings may be called by stockholders holding not
less than one-fifth of all the outstanding shares entitled to vote at such
meeting. Our board of directors may set a record date between 15 and 60 days
before the date of any meeting to determine the stockholders that will be
eligible to receive notice and vote at the meeting.
Dissenters' Rights of Appraisal and Payment
Under the BCA, our stockholders have the right to dissent from various corporate
actions, including any merger or consolidation sale of all or substantially all
of our assets not made in the usual course of our business, and receive payment
of the fair value of their shares. In the event of any further amendment of our
amended and restated articles of incorporation, a stockholder also has the right
to dissent and receive payment for his or her shares if the amendment alters
certain rights in respect of those shares. The dissenting stockholder must
follow the procedures set forth in the BCA to receive payment. In the event that
we and any dissenting stockholder fail to agree on a price for the shares, the
BCA procedures involve, among other things, the institution of proceedings in
the high court of the Republic of the Marshall Islands or in any appropriate
court in any jurisdiction in which the Company's shares are primarily traded on
a local or national securities exchange.
Stockholders' Derivative Actions
Under the BCA, any of our stockholders may bring an action in our name to
procure a judgment in our favor, also known as a derivative action, provided
that the stockholder bringing the action is a holder of common stock both at the
time the derivative action is commenced and at the time of the transaction to
which the action relates.
Limitations on Liability and Indemnification of Officers and Directors
The BCA authorizes corporations to limit or eliminate the personal liability of
directors and officers to corporations and their stockholders for monetary
damages for breaches of directors' fiduciary duties. Our bylaws includes a
provision that eliminates the personal liability of directors for monetary
damages for actions taken as a director to the fullest extent permitted by law.
Our bylaws provide that we must indemnify our directors and officers to the
fullest extent authorized by law. We are also expressly authorized to advance
certain expenses (including attorneys' fees and disbursements and court costs)
to our directors and offices and carry directors' and officers' insurance
providing indemnification for our directors, officers and certain employees for
some liabilities. We believe that these indemnification provisions and insurance
are useful to attract and retain qualified directors and executive offices.
The limitation of liability and indemnification provisions in our amended and
restated articles of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. In addition, your
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions.
There is currently no pending material litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought.
Anti-takeover Provisions of our Charter Documents.
Several provisions of our articles of incorporation and by-laws may have
anti-takeover effects. These provisions are intended to avoid costly takeover
battles, lessen our vulnerability to a hostile change of control and enhance the
ability of our board of directors to maximize stockholder value in connection
with any unsolicited offer to acquire us. However, these anti-takeover
provisions, which are summarized below, could also discourage, delay or prevent
(1) the merger or acquisition of our company by means of a tender offer, a proxy
contest or otherwise, that a stockholder may consider in its best interest and
(2) the removal of incumbent officers and directors.
Blank Check Preferred Stock
Under the terms of our articles of incorporation, our board of directors has
authority, without any further vote or action by our stockholders, to issue up
to 30.0 million shares of blank check preferred stock. Our board of directors
may issue shares of preferred stock on terms calculated to discourage, delay or
prevent a change of control of our company or the removal of our management.
Classified Board of Directors
Our articles of incorporation provide for a board of directors serving
staggered, three-year terms. Approximately one-third of our board of directors
will be elected each year. The classified board provision could discourage a
third party from making a tender offer for our shares or attempting to obtain
control of our company. It could also delay stockholders who do not agree with
the policies of the board of directors from removing a majority of the board of
directors for two years.
Election and Removal of Directors
Our articles of incorporation and by-laws prohibit cumulative voting in the
election of directors. Our by-laws require parties other than the board of
directors to give advance written notice of nominations for the election of
directors. Our by-laws also provide that our directors may be removed only for
cause and only upon affirmative vote of the holders of at least two-thirds of
the outstanding shares of our capital stock entitled to vote for those
directors. These provisions may discourage, delay or prevent the removal of
incumbent officers and directors.
Limited Actions by Stockholders
Our articles of incorporation and our by-laws provide that any action required
or permitted to be taken by our stockholders must be effected at an annual or
special meeting of shareholders or by the unanimous written consent of our
shareholders. Our by-laws provide that only our Board of directors, or our
Chairman of the Board, or our President may call special meetings of our
stockholders and the business transacted at the special meeting is limited to
the purposes stated in the notice.
Advance Notice Requirements for Shareholder Proposals and Director Nominations
Our bylaws provide that shareholders seeking to nominate candidates for election
as directors or to bring business before an annual meeting of shareholders must
provide timely notice of their proposal in writing to the corporate secretary.
Generally, to be timely, a shareholder's notice must be received at our
principal executive offices not less than 150 days nor more than 180 days prior
to the one year anniversary of the preceding year's annual meeting. Our bylaws
also specify requirements as to the form and content of a shareholder's notice.
These provisions may impede shareholders' ability to bring matters before an
annual meeting of shareholders or make nominations for directors at an annual
meeting of shareholders.
C. Material Contracts
We have no material contracts, other than contracts entered into in the ordinary
course of business, to which the Company or any member of the group is a party.
D. Exchange Controls
Under Marshall Islands and Greek law, there are currently no restrictions on the
export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to
non-resident holders of our common stock.
E. Taxation
United States Taxation
The following discussion is based upon the provisions of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed U.S.
Treasury Department regulations, administrative rulings, pronouncements and
judicial decisions, all as of the date of this Annual Report. This discussion
assumes that we do not have an office or other fixed place of business in the
United States.
Taxation of the Company's Shipping Income: In General
The Company anticipates that it will derive substantially all of its gross
income from the use and operation of vessels in international commerce and that
this income will principally consist of freights from the transportation of
cargoes, hire or lease from time or voyage charters and the performance of
services directly related thereto, which the Company refers to as "shipping
income."
Shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States will be considered to be
50% derived from sources within the United States. Shipping income attributable
to transportation that both begins and ends in the United States will be
considered to be 100% derived from sources within the United States. The Company
does not engage in transportation that gives rise to 100% U.S. source income.
Shipping income attributable to transportation exclusively between non-U.S.
ports will be considered to be 100% derived from sources outside the United
States. Shipping Income derived from sources outside the United States will not
be subject to U.S. federal income tax.
Based upon the Company's anticipated shipping operations, the Company's vessels
will operate in various parts of the world, including to or from U.S. ports.
Unless exempt from U.S. taxation under Section 883 of the Code, the Company will
be subject to U.S. federal income taxation, in the manner discussed below, to
the extent its shipping income is considered derived from sources within the
United States.
Application of Code Section 883
Under the relevant provisions of Section 883 of the Code and the final
regulations interpreting Section 883, as promulgated by the U.S. Treasury
Department, which the Company refers to as the "final regulations," the Company
will be exempt from U.S. taxation on its U.S. source shipping income if:
(i) It is organized in a qualified foreign country which is one that grants
an equivalent exemption from tax to corporations organized in the United States
in respect of the shipping income for which exemption is being claimed under
Section 883 and which the Company refers to as the "country of organization
requirement"; and
(ii) It can satisfy any one of the following two (2) stock ownership
requirements:
o more than 50% of the Company's stock, in terms of value, is
beneficially owned by individuals who are residents of a qualified
foreign country, which the Company refers to as the "50% Ownership
Test"; or
o the Company's stock is "primarily and regularly" traded on an
established securities market located in the United States, which the
Company refers to as the "Publicly Traded Test".
The U.S. Treasury Department has recognized (i) the Marshall Islands, the
Company's and one of its subsidiaries' country of incorporation and (ii) Malta,
the country of incorporation of the Company's ship-owning subsidiaries, as
qualified foreign countries. Accordingly, the Company and its subsidiaries
satisfy the country of organization requirement.
Therefore, the Company's eligibility to qualify for exemption under Section 883
is wholly dependent upon being able to satisfy one of the stock ownership
requirements. For the 2005 taxable year, the Company satisfied the 50% Ownership
Test since more than 50% of its stock in terms of value was owned by one or more
individuals who are residents of a qualified foreign country for more than half
the days of the taxable year, and such individuals have committed to the Company
to substantiate such ownership in compliance with the final regulations. Even if
the Company did not satisfy the 50% Ownership Test, the Company believes that it
would be able to satisfy the Publicly-Traded Test for the 2005 taxable year.
Taxation in Absence of Internal Revenue Code Section 883 Exemption
To the extent the benefits of Section 883 are unavailable with respect to any
item of U.S. source income, the Company's U.S. source shipping income, would be
subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without
the benefit of deductions. Since under the sourcing rules described above, no
more than 50% of the Company's shipping income would be treated as being derived
from U.S. sources, the maximum effective rate of U.S. federal income tax on the
Company's shipping income would never exceed 2% under the 4% gross basis tax
regime.
For the taxable year ended December 31, 2005, approximately 24%, of the
Company's shipping income was attributable to the transportation of cargoes
either to or from a U.S. port. Accordingly, 12% respectively, of the Company's
shipping income would be treated as derived from U.S. sources for the taxable
year ended December 31, 2005. In the absence of exemption from tax under Section
883, the Company would have been subject to a 4% tax on its gross U.S. source
shipping income earned equal to approximately $0.5 million for the taxable year
ended December 31, 2005.
Gain on Sale of Vessel
Regardless of whether we qualify for exemption under Section 883, we will not be
subject to United States federal income taxation with respect to gain realized
on a sale of a vessel, provided the sale is considered to occur outside of the
United States under U.S. federal income tax principles. In general, a sale of a
vessel will be considered to occur outside of the United States for this purpose
if title to the vessel, and risk of loss with respect to the vessel, pass to the
buyer outside of the United States. It is expected that any sale of a vessel by
us will be considered to occur outside of the United States.
Marshall Islands Tax Considerations
We are incorporated in the Marshall Islands. Under current Marshall Islands law,
we are not subject to tax on income or capital gains, and no Marshall Islands
withholding tax will be imposed upon payments of dividends by us to our
stockholders.
F. Dividends and paying agents
Not Applicable.
G. Statement by experts
Not Applicable.
H. Documents on display
We file reports and other information with the SEC. These materials, including
this annual report and the accompanying exhibits, may be inspected and copied at
the public reference facilities maintained by the Commission at 100 F Street,
N.E., Washington, D.C. 20549, or from the SEC's website http://www.sec.gov. You
may obtain information on the operation of the public reference room by calling
1 (800) SEC-0330 and you may obtain copies at prescribed rates.
I. Subsidiary information
Not Applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
Historically, we have been subject to market risks relating to changes in
interest rates, because we have had significant amounts of floating rate debt
outstanding. During 2004 and 2005, we paid interest on this debt based on LIBOR
plus an average spread of one and one-quarter percent (1.25%) on our bank loans.
A one percent (1%) increase in LIBOR would have increased our interest expense
for the period ended December 31, 2005 from $2.0 million to $3.0 million. A one
percent (1%) increase in LIBOR would have increased our interest expense for the
year ended December 31, 2004 from $1.8 million to $2.5 million.
Currency and Exchange Rates
We generate all of our revenues in U.S. dollars but currently incur over half of
our operating expenses and the majority of our management expenses in currencies
other than the U.S. dollar, primarily the Euro. For accounting purposes,
expenses incurred in Euros are converted into U.S. dollars at the exchange rate
prevailing on the date of each transaction. Because a significant portion of our
expenses are incurred in currencies other than the U.S. dollar, our expenses may
from time to time increase relative to our revenues as a result of fluctuations
in exchange rates, particularly between the U.S. dollar and the Euro, which
could affect the amount of net income that we report in future periods. While we
historically have not mitigated the risk associated with exchange rate
fluctuations through the use of financial derivatives, we may determine to
employ such instruments from time to time in the future in order to minimize
this risk. Our use of financial derivatives would involve certain risks,
including the risk that losses on a hedged position could exceed the nominal
amount invested in the instrument and the risk that the counterparty to the
derivative transaction may be unable or unwilling to satisfy its contractual
obligations, which could have an adverse effect on our results.
Item 12. Description of Securities Other than Equity Securities
Not Applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
None.
Item 15. Controls and Procedures
We evaluated the effectiveness of the Company's disclosure controls and
procedures as December 31, 2005. Based on that evaluation, the chief executive
officer and the chief financial officer concluded that the Company's disclosure
controls and procedures were effective to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. The
Company believes that a system of controls, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
There have been no changes in internal controls over financial reporting
(identified in connection with management's evaluation of such internal controls
over financial reporting) that occurred during the year covered by this annual
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal controls over financial reporting.
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Angelos Papoulias, the chairman
of our Audit Committee, qualifies as financial expert and he is considered to be
independent according to the SEC rules.
Item 16B. Code of Ethics
We have adopted a code of ethics that applies to officers and employees. Our
code of ethics is posted in our website:
http://www.dryships.com, under
Corporate Governance.
Item 16C. Principal Accountant Fees and Services.
Our principal Accountants for the year ended October 31, 2004, the two-month
period ended December 31, 2004 and the year ended December 31, 2005 were Ernst &
Young (Hellas), Certified Auditors Accountants S.A. For the audit of the two
month period ended December 31, 2004 and the year ended December 31, 2005 they
billed us Euro 350,175. There were no tax, audit-related, or other fees billed
in 2005.
The audit for the year ended October 31, 2004 was conducted in conjunction with
the audits for the years ended October 31, 2003 and 2002, as part of our initial
public offering and their billing comprises part of our offering expenses. For
their services in connection of our initial public offering Ernst & Young
(Hellas), Certified Auditors Accountants S.A billed us Euro 398,853.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not Applicable.
PART III
Item 17. Financial Statements
See Item 18
Item 18. Financial Statements
The following financial statements, beginning on page F-1, together with the
report of Ernst & Young (Hellas) Certified Auditors Accountants S.A. thereon,
are filed as a part of this report.
Item 19. Exhibits
(a) Exhibits
Exhibit
Number Description
------ -----------
1.1 Amended and Restated Articles of Incorporation of DryShips
Inc.the Company (1)
1.2 Amended and restated by-laws of the Company (1)
2.1 Form of Share Certificate (2)
4.1 Form of 2005 Stock Incentive Plan (2)
4.2 Form of Management Agreement (1)
4.3 Loan Agreement with Commerzbank (1)
4.4 Senior Loan Agreement with HSH Nordbank AG
4.5 Junior Loan Agreement with HSH Nordbank AG
8.1 Subsidiaries of the Company
12.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
12.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
----------------
(1) Filed as an Exhibit to the Company's Registration Statement (File No.
333-122008) on January 13, 2005.
(2) Filed as an Exhibit to the Company's Amended Registration Statement (File
No. 333-122008) on January 31, 2005.
DRYSHIPS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of October 31, 2004 and F-3
December 31, 2005
Consolidated Statements of Income for the years ended October 31, 2003
and 2004, for the two-month period ended December 31, 2004, and for
the year ended December 31, 2005 F-4
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 2003 and 2004, for the two-month period ended December 31,
2004, and for the year ended December 31, 2005 F-5
Consolidated Statements of Cash Flows for the years ended October 31,
2003 and 2004, for the two-month period ended December 31, 2004, and
for the year ended December 31, 2005 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
DRYSHIPS INC.
We have audited the accompanying consolidated balance sheets of DryShips
Inc. (the "Company") as of October 31, 2004 and December 31, 2005 and the
related consolidated statements of income, stockholders' equity and cash flows
for the years ended October 31, 2003 and 2004, for the two-month period ended
December 31, 2004, and for the year ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DryShips Inc.
at October 31, 2004 and December 31, 2005 and the consolidated results of its
operations and its cash flows for the years ended October 31, 2003 and 2004, for
the two-month period ended December 31, 2004, and for the year ended December
31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/Ernst & Young (Hellas) Certified Auditors Accountants S.A.
Athens, Greece,
March 31, 2006
DRYSHIPS INC.
Consolidated Balance Sheets
October 31, 2004 and December 31, 2005
(Expressed in thousands of U.S. Dollars - except for share and per share
data)
October December
31, 31,
2004 2005
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 6,171 5,184
Restricted cash 1,570 3,040
Accounts receivable trade, net 2,168 5,514
Insurance claims 13 107
Due from related parties 58,121 --
Inventories 300 1,326
Prepayments and advances 1,001 3,336
Financial instruments -- 270
-------- --------
Total current assets 69,344 18,777
-------- --------
FIXED ASSETS, NET:
Vessels, net 51,688 864,733
-------- --------
Total fixed assets, net 51,688 864,733
-------- --------
OTHER NON CURRENT ASSETS:
Deferred charges, net 3,333 3,781
Due from related parties 58,894 --
Restricted cash -- 21,011
Other -- 2,257
-------- --------
Total assets 183,259 910,559
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt 25,399 107,738
Dividends payable 69,000 --
Accounts payable 1,171 8,479
Due to related parties 2 6,460
Accrued liabilities 1,631 6,529
Deferred revenue 921 6,309
Other current liabilities -- 230
-------- --------
Total current liabilities 98,124 135,745
-------- --------
LONG-TERM DEBT, net of current portion 89,509 417,615
-------- --------
OTHER NON CURRENT LIABILITIES -- 698
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $ 0.01 par value;
30,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value;
45,000,000 shares authorized;
15,400,000 and 30,350,000 shares issued and
outstanding at October 31, 2004 and December
31, 2005, respectively 154 304
Additional paid-in capital 13,465 264,600
Retained earnings (deficit) (17,993) 91,597
-------- --------
Total stockholders' equity (deficit) (4,374) 356,501
-------- --------
Total liabilities and stockholders' equity 183,259 910,559
======== ========
The accompanying notes are an integral part of these consolidated statements.
DRYSHIPS INC.
Consolidated Statements of Income
For the years ended October 31, 2003 and 2004, for the two-month period ended
December 31, 2004, and for the year ended December 31, 2005
(Expressed in thousands of U.S. Dollars - except for share and per share data)
Two-month
Year ended October 31, period ended Year ended
2003 2004 December 31, 2004 December 31, 2005
----------- ----------- ----------- -----------
REVENUES:
Voyage revenues 25,060 63,458 15,599 228,913
----------- ----------- ----------- -----------
EXPENSES:
Voyage expenses 3,688 5,578 954 10,185
Voyage expenses - related party 310 793 199 2,854
Bunkers (372) (890) (17) (3,447)
Vessel operating expenses 6,739 9,769 1,756 36,722
Depreciation 3,580 4,735 808 40,231
Amortization of deferred
drydocking costs 1,664 1,716 326 2,379
Management fees - related party 1,101 1,261 240 4,962
General and administrative
expenses 240 221 114 1,218
General and administrative
expenses - related party -- -- -- 2,968
----------- ----------- ----------- -----------
Operating income 8,110 40,275 11,219 130,841
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest and finance costs (1,119) (1,515) (508) (20,398)
Interest income 4 12 8 749
Other, net 194 341 (6) (175)
----------- ----------- ----------- -----------
Total other income (expenses), net (921) (1,162) (506) (19,824)
----------- ----------- ----------- -----------
Net income 7,189 39,113 10,713 111,017
=========== =========== =========== ===========
Net income per share, basic and
diluted 0.47 2.54 0.70 3.83
=========== =========== =========== ===========
Weighted average number of shares,
basic and diluted 15,400,000 15,400,000 15,400,000 28,957,397
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
DRYSHIPS INC.
Consolidated Statements of Stockholders' Equity
For the years ended October 31, 2003 and 2004, for the two-month period ended
December 31, 2004, and for the year ended December 31, 2005
(Expressed in thousands of U.S. Dollars - except for share and per share data)
Additional Retained Total
Comprehensive Capital Stock Paid-in Earnings Stockholders'
------------------------
Equity
Income # of Shares Par Value Capital (Deficit) (Deficit)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, October 31, 2002 -- 15,400,000 154 11,265 6,957 18,376
Net income 7,189 -- -- -- 7,189 7,189
Contributions to additional paid-in
capital -- -- -- 2,200 -- 2,200
Dividends paid (US dollars 0.15 per
share) -- -- -- -- (2,252) (2,252)
----------
Comprehensive income 7,189
========== ---------- ---------- ---------- ---------- ----------
BALANCE, October 31, 2003 -- 15,400,000 154 13,465 11,894 25,513
Net income 39,113 -- -- -- 39,113 39,113
Dividends declared (US dollars 4.48
per share) -- -- -- -- (69,000) (69,000)
----------
Comprehensive income 39,113
========== ---------- ---------- ---------- ---------- ----------
BALANCE, October 31, 2004 -- 15,400,000 154 13,465 (17,993) (4,374)
Net income 10,713 -- -- -- 10,713 10,713
----------
Comprehensive income 10,713
========== ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2004 -- 15,400,000 154 13,465 (7,280) 6,339
Net income 111,017 -- -- -- 111,017 111,017
Issuance of common stock -- 14,950,000 150 251,135 -- 251,285
Dividends paid (US dollars 0.40 per
share) -- -- -- -- (12,140) (12,140)
----------
Comprehensive income 111,017
========== ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2005 -- 30,350,000 304 264,600 91,597 356,501
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
DRYSHIPS INC
Consolidated Statements of Cash Flows
For the years ended October 31, 2003 and 2004, for the two-month period ended
December 31, 2004, and for the year ended December 31, 2005
(Expressed in thousands of U.S. Dollars)
Two-month
period ended Year ended
Year ended October 31, December 31, December 31,
2003 2004 2004 2005
-------- -------- -------- --------
Cash Flows from Operating
Activities:
Net income 7,189 39,113 10,713 111,017
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation 3,580 4,735 808 40,231
Amortization of deferred
drydocking costs 1,664 1,716 326 2,379
Amortization and write-off of
deferred financing costs 138 132 111 544
Amortization of deferred
revenue -- -- -- (5,224)
Change in fair value of
derivatives -- -- -- (270)
Recognition of free lubricants
benefit -- -- -- 928
Changes in operating assets and liabilities:
Accounts receivable trade 866 (1,443) 1,061 (4,407)
Insurance claims (180) 350 -- (94)
Due from related parties (9,271) (35,292) 40,563 4,000
Inventories (74) 113 (109) (917)
Prepayments and advances 256 (653) 807 (3,142)
Accounts payable (266) 326 297 7,011
Due to related parties (258) (33) 196 6,262
Accrued liabilities (88) 979 (950) 5,848
Deferred revenue 255 543 1,384 2,793
Payments for drydocking (1,322) (3,277) -- (3,153)
-------- -------- -------- --------
Net Cash provided by Operating
Activities 2,489 7,309 55,207 163,806
-------- -------- -------- --------
Cash Flows from Investing
Activities:
Advances for vessel acquisition (2,200) -- -- --
Additions to vessel cost -- (20,119) -- (847,649)
-------- -------- -------- --------
Net Cash used in Investing
Activities (2,200) (20,119) -- (847,649)
-------- -------- -------- --------
Cash Flows from Financing
Activities:
Proceeds from long-term debt 11,100 26,000 15,431 577,585
Payments of long-term debt (10,481) (8,230) (17,431) (90,010)
(Increase) decrease in
restricted cash -- (1,570) 1,107 (23,588)
Advances to Baumarine Pool -- -- (1,025) (1,232)
Capital contributions 2,200 -- -- --
Proceeds from public offering,
net of related issuance costs -- -- -- 251,285
Dividends paid (2,252) -- (51,007) (30,133)
Payment of financing costs (151) (215) (82) (3,251)
-------- -------- -------- --------
Net Cash provided by (used in)
Financing Activities 416 15,985 (53,007) 680,656
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 705 3,175 2,200 (3,187)
Cash and cash equivalents at
beginning of year/period 2,291 2,996 6,171 8,371
-------- -------- -------- --------
Cash and cash equivalents at end of
year/period 2,996 6,171 8,371 5,184
======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year/period
for:
Interest payments 709 1,351 236 17,636
======== ======== ======== ========
Non cash financing activities:
Liabilities assumed in
connection with joint and
several borrowings with related
parties 1,434 (50,953) 4,343 68,109
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31, 2005
(Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
1. Basis of Presentation and General Information:
The accompanying consolidated financial statements include the accounts of
DryShips Inc. and its subsidiaries (collectively, the "Company" or
DryShips). DryShips Inc. was formed on September 9, 2004, under the laws of
Marshall Islands. On October 18, 2004, all of the outstanding shares of the
vessel owning companies listed under 1 through 6 in the table below
(collectively, the "Contributed Companies"), were contributed to the
Company through Entrepreneurial Spirit Foundation (the "Foundation"), a
family foundation of Vaduz, Liechtenstein. The Company's Chief Executive
Officer, Mr. George Economou and members of his immediate family (the
"Family") control and are beneficiaries of the Foundation. The transaction
described above constituted a reorganization of companies under common
control, and has been accounted for in a manner similar to a pooling of
interests and the Contributed Companies are presented at historical cost as
control of the Contributed Companies before and after the reorganization
was with the Family. Effective November 1, 2004, the Company changed its
fiscal reporting year-end from October 31st to December 31st. In February
2005 the Company completed its initial public offering in the United States
under the United States Securities Act of 1933 (Note 8). Since the
consummation of its initial public offering and through December 31, 2005,
the Company took delivery of twenty-one dry bulk carrier vessels, through
newly established wholly owned subsidiaries. The Company is engaged in the
ocean transportation services of dry bulk cargoes worldwide through the
ownership and operation of the bulk carrier vessels mentioned below. With
the exception of Wealth Management Inc. which is established under the laws
of Marshall Islands, all the Company's wholly-owned subsidiaries listed
below are established under the laws of Malta.
Ship-owning Company Vessel
-------------------- ------
1. Helium Shipping Company Ltd. ("Helium") Striggla
2. Hydrogen Shipping Company Ltd. ("Hydrogen") Mostoles
3. Silicon Shipping Company Ltd. ("Silicon") Flecha
4. Oxygen Shipping Company Ltd. ("Oxygen") Shibumi
5. Annapolis Shipping Company Ltd. ("Annapolis") Lacerta
6. Blueberry Shipping Company Ltd. ("Blueberry") Panormos
7. Lancat Shipping Company Ltd. ("Lancat") Matira
8. Tolan Shipping Company Limited ("Tolan") Tonga
9. Malvina Shipping Company Limited ("Malvina") Coronado
10. Arleta Navigation Company Limited ("Arleta") Xanadu
11. Selma Shipping Company Limited ("Selma") La Jolla
12. Royerton Shipping Company Limited ("Royerton") Netadola
13. Samsara Shipping Company Limited ("Samsara") Ocean Crystal
14. Lansat Shipping Company Limited ("Lansat") Paragon
15. Farat Shipping Company Limited ("Farat") Toro
16. Madras Shipping Company Limited ("Madras") Alona
17. Iguana Shipping Company Limited ("Iguana") Iguana
18. Borsari Shipping Company Limited ("Borsari") Catalina
19. Onil Shipping Company Limited ("Onil") Belmonte
20. Zatac Shipping Company Limited ("Zatac") Waikiki
21. Fabiana Navigation Company Limited ("Fabiana") Alameda
22. Fago Shipping Company Limited ("Fago") Lanikai
23. Felicia Navigation Company Limited ("Felicia") Linda
Oldendorff
24. Platan Shipping Company Limited ("Platan") Daytona
25. Karmen Shipping Company Limited ("Karmen") Sonoma
26. Thelma Shipping Company Limited ("Thelma") Manasota
27. Celine Shipping Company Limited ("Celine") Conrand
Oldendorff
Other company Activity
28. Wealth Management Inc. ("Wealth") Cash Manager
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31, 2005
(Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
1. Basis of Presentation and General Information - (continued):
The operations of the Company's vessels are managed by Cardiff Marine Inc.
(the "Manager"), a related party entity incorporated in Liberia.
Furthermore, Drybulk S.A, a related party Liberian corporation acts as the
charter and sales and purchase broker for the Company (Note 3). The
majority shareholding (70%) of the Manager and Drybulk S.A., is owned by
Entrepreneurial Spirit Foundation, a family foundation of Vaduz,
Liechtenstein, of which the Company's Chief Executive Officer, Mr. George
Economou and members of his family are beneficiaries. The 30% shareholding
of the Manager and Drybulk S.A is held by Prestige Finance S.A., a Liberian
corporation which is wholly owned by the sister of the Company's Chief
Executive Officer.
Charterers individually accounting for more than 10% of the Company's
voyage revenues during the years ended October 31, 2003 and 2004, the
two-month period ended December 31, 2004 and the year ended December 31,
2005, are as follows:
Two-month
Year ended October 31, period ended Year ended
---------------------- December 31, December 31,
Charterer 2003 2004 2004 2005
------ ------ ------ ------
Oldendorff Carriers Gmbh -- -- -- 12%
Cargill International Ltd. -- -- 18% --
Clearlake Shipping Ltd -- -- 12% --
Transfield Shipping ER -- 11% -- --
Brave Bulk Transport Ltd. -- 11% -- --
Bottiglieri Di Navigazoni 17% -- -- --
Cobelfret S.A 20% -- -- --
In addition, of the Company's voyage revenues during the year ended October 31,
2004, the two-month period ended December 31, 2004 and the year ended December
31, 2005, 16%, 42% and 25%, respectively, were derived from the participation of
certain Company's vessels in a drybulk pool.
2. Significant Accounting Policies:
(a) Principles of Consolidation: The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles and include in the years ended October
31, 2003 and 2004, the two-month period ended December 31, 2004 and
the year ended December 31, 2005, the accounts and operating results
of DryShips Inc. and its wholly-owned subsidiaries referred to in Note
1 above. All significant intercompany balances and transactions have
been eliminated in consolidation.
(b) Use of Estimates: The preparation of consolidated financial statements
in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Other Comprehensive Income: The Company follows the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which requires separate presentation
of certain transactions, which are recorded directly as components of
stockholders' equity. The Company has no such transactions which
affect comprehensive income and, accordingly, comprehensive income
equals net income for all periods presented.
(d) Concentration of Credit Risk: Financial instruments, which potentially
subject the Company to significant concentrations of credit risk,
consist principally of cash and cash equivalents, trade accounts
receivable and derivative contracts (interest rate swaps). The Company
places its cash and cash equivalents, consisting mostly of deposits,
with high credit qualified financial institutions. The Company
performs periodic evaluations of the relative credit standing of those
financial institutions. The Company is exposed to credit risk in the
event of non-performance by counter parties to derivative instruments;
however, the Company limits its exposure by diversifying among counter
parties with high credit ratings.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
The Company limits its credit risk with accounts receivable by performing
ongoing credit evaluations of its customers' financial condition. The
Company does not obtain rights to collateral to reduce its credit risk. The
off-balance sheet risk in outstanding option agreements involves the risk
of a counter party not performing under the terms of the contract. The
Company monitors its positions, the credit ratings of counterparties and
the level of contracts it enters into with any one party. The Company has a
policy of entering into contracts with parties that meet stringent
qualifications and, given the high level of credit quality of its
derivative counterparty, the Company does not believe it is necessary to
obtain collateral for such arrangements.
(e) Foreign Currency Translation: The functional currency of the Company
is the U.S. Dollar because the Company's vessels operate in
international shipping markets, and therefore primarily transact
business in U.S. Dollars. The Company's books of accounts are
maintained in U.S. Dollars. Transactions involving other currencies
during the year are converted into U.S. Dollars using the exchange
rates in effect at the time of the transactions. At the balance sheet
dates, monetary assets and liabilities, which are denominated in other
currencies, are translated into U.S. Dollars at the year-end exchange
rates. Resulting gains or losses are included in General and
administrative expenses in the accompanying consolidated statements of
income.
(f) Cash and Cash Equivalents: The Company considers highly liquid
investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash equivalents.
(g) Restricted Cash: Restricted cash includes bank deposits that are
required under the Company's borrowing arrangements which are used to
fund the loan installments coming due. The funds can only be used for
the purposes of loan repayment. Restricted cash also includes
additional minimum cash deposits required to be maintained with
certain banks under the Company's borrowing arrangements.
(h) Trade Accounts Receivable, Net: The amount shown as accounts
receivable, trade, at each balance sheet date, includes receivables
from charterers for hire, freight and demurrage billings, net of a
provision for doubtful accounts. At each balance sheet date, all
potentially uncollectible accounts are assessed individually for
purposes of determining the appropriate provision for doubtful
accounts. The provision for doubtful accounts at October 31, 2004 and
December 31, 2005, was $50 and $0, respectively.
(i) Insurance Claims: The Company records insurance claim recoveries for
insured losses incurred on damage to fixed assets. Insurance claim
recoveries are recorded, net of any deductible amounts, at the time
the Company's fixed assets suffer insured damages and the Company can
make an estimate of the amount to be reimbursed following the
insurance claim.
(j) Inventories: Inventories consist of consumable bunkers (if any),
lubricants and victualling stores, which are stated at the lower of
cost or market value. Cost is determined by the first in, first out
method.
(k) Fixed Assets, Net: Fixed assets, net consists of vessels. Vessels are
stated at cost, which consists of the contract price and any material
expenses incurred upon acquisition (initial repairs, improvements,
delivery expenses and other expenditures to prepare the vessel for her
initial voyage). Subsequent expenditures for conversions and major
improvements are also capitalized when they appreciably extend the
life, increase the earning capacity or improve the efficiency or
safety of the vessels. Otherwise these amounts are charged to expense
as incurred.
The cost of each of the Company'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 (vessel's residual value is
equal to the product of its lightweight tonnage and estimated scrap
rate). With the exception of vessel Tonga, Management estimates the
useful life of the Company's vessels to be 25 years from the date of
initial delivery from the shipyard. The useful life of vessel Tonga is
estimated to 26 years, which coincides with the validity of the class
certificate. When regulations place limitations over the ability of a
vessel to trade on a worldwide basis, its remaining useful life is
adjusted at the date such regulations are adopted.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(l) Prepaid/Deferred charter revenue: Where the Company identifies any
assets or liabilities associated with the acquisition of a vessel, the
Company records all such identified assets or liabilities at fair
value. Fair value is determined by reference to market data. The
Company values any asset or liability arising from the market value of
the time charters assumed when a vessel is acquired. The amount to be
recorded as an asset or liability at the date of vessel delivery is
based on the difference between the current fair value of a charter
with similar characteristics as the time charter assumed and the net
present value of future contractual cash flows from the time charter
contract assumed. When the present value of the time charter assumed
is greater than the current fair value of such charter, the difference
is recorded as prepaid charter revenue. When the opposite situation
occurs, the difference is recorded as deferred revenue. Such assets
and liabilities, respectively, are amortized as a reduction of, or an
increase in, revenue over the period of the time charter assumed.
(m) Impairment of Long-Lived Assets: The Company uses SFAS No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets",
which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The standard requires that
long-lived assets and certain identifiable intangibles held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. When the estimate of undiscounted cash flows,
excluding interest charges, expected to be generated by the use of the
asset is less than its carrying amount, the Company should evaluate
the asset for an impairment loss. Measurement of the impairment loss
is based on the fair value of the asset as provided by third parties.
In this respect, management regularly reviews the carrying amount of
the vessels in comparison with the fair value of the asset as provided
by third parties for each of the Company's vessels. The Company
regularly reviews its vessels for impairment on a vessel by vessel
basis. Furthermore, in the period a long-lived asset meets the "held
for sale" criteria of SFAS No. 144, a loss is recognized for any
reduction of the long-lived asset's carrying amount to its fair value
less cost to sell. No such impairment losses were recorded in the
years ended October 31, 2003 and 2004, the two-month period ended
December 31, 2004 and the year ended December 31, 2005.
(n) Accounting for Drydocking Costs: The Company follows the deferral
method of accounting for drydocking costs whereby actual costs
incurred are deferred and are amortized on a straight-line basis over
the period through the date the next drydocking is scheduled to become
due. Unamortized drydocking costs of vessels that are sold are written
off and included in the calculation of the resulting gain or loss in
the year of the vessel's sale.
(o) Financing Costs: Fees paid to lenders or required to be paid to third
parties on the lender's behalf for obtaining new loans or refinancing
existing ones are recorded as deferred charges and classified as a
contra to debt. Such fees are deferred and amortized to interest and
finance costs over the life of the related debt using the effective
interest method. Unamortized fees relating to loans repaid or
refinanced are expensed as interest and finance costs in the period
the repayment or refinancing is made.
(p) Accounting for Revenue and Related Expenses: The Company generates its
revenues from charterers for the charterhire of its vessels. Vessels
are chartered using either voyage charters, where a contract is made
in the spot market for the use of a vessel for a specific voyage for a
specified charter rate, or time charters, where a contract is entered
into for the use of a vessel for a specific period of time and a
specified 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. A voyage is deemed to commence upon the
completion of discharge of the vessel's previous cargo and is deemed
to end upon the completion of discharge of the current cargo.
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 its is earned ratably over the
duration of the period of each voyage charter . Deferred revenue
includes cash received prior to the balance sheet date and is related
to revenue earned after such date. Deferred revenue also includes the
unamortized balance of the liability associated with the acquisition
of second-hand vessels with time charters attached which were acquired
at values below fair market value at the date the acquisition
agreement is consummated.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
For vessels operating in pooling arrangements, the Company earns a
percentage of total revenues generated by the pool, net of expenses
incurred by the pool. The amount allocated to each pool's participant,
including the Company, is determined in accordance with an agreed-upon
formula, which is determined by points awarded to each vessel in the
pool based on the vessel's age, design and other performance
characteristics. Net revenue under pooling arrangements is accounted
for on the accrual basis and is recognized when the collectibility has
been reasonably assured. The allocation of such net revenue may be
subject to future adjustments by the pool however, historically, such
changes have not been material.
Voyage related expenses and vessel operating expenses are accounted
for on the accrual basis.
(q) Earnings per Common Share: Basic earnings per common share are
computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the
year. Diluted earnings per common share, reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised. The Company had no dilutive securities
during the years ended October 31, 2003 and 2004, the two-month period
ended December 31, 2004 and the year ended December 31, 2005.
(r) Segment Reporting: The Company reports financial information and
evaluates its operations by charter revenues and not by the length of
ship employment for its customers, i.e. spot or time charters. The
Company does not use discrete financial information to evaluate the
operating results for each such type of charter. Although revenue can
be identified for these types of charters, management cannot and does
not identify expenses, profitability or other financial information
for these charters. As a result, management, including the chief
operating decision maker, reviews operating results solely by revenue
per day and operating results of the fleet and thus the Company has
determined that it operates under one reportable segment. Furthermore,
when the Company charters a vessel to a charterer, the charterer is
free to trade the vessel worldwide and, as a result, the disclosure of
geographic information is impracticable.
(s) Derivatives: The Company enters into interest rate swap agreements to
partially hedge the exposure of interest rate fluctuations associated
with its borrowings. Such swap agreements are recorded at fair value
in accordance with the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" (as amended) which
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value, with changes
in the derivatives' fair value recognized currently in earnings unless
specific hedge accounting criteria are met.
During the year ended December 31, 2005, the Company concluded six
interest rate cap and floor agreements in order to partially hedge the
exposure of interest rate fluctuations associated with its variable
rate borrowings (Note 14). These interest rate cap and floor
agreements did not meet hedge accounting criteria and the change in
their fair value has been included in Interest and finance costs, in
the accompanying 2005 consolidated statement of income.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(t) Variable Interest Entities: In December 2003, the FASB issued
Interpretation No. 46R, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51 (the "Interpretation"), which revised
Interpretation No. 46, issued in January 2003. The Interpretation
addresses the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The Interpretation focuses
on financial interests that indicate control. It concludes that in the
absence of clear control through voting interests, a company's
exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are
the best evidence of control. Variable interests are rights and
obligations that convey economic gains or losses from changes in the
value of the variable interest entity's assets and liabilities.
Variable interests may arise from financial instruments, service
contracts, and other arrangements. If an enterprise holds a majority
of the variable interests of an entity, it would be considered the
primary beneficiary. The primary beneficiary would be required to
include assets, liabilities, and the results of operations of the
variable interest entity in its financial statements. The Company was
required to adopt the provisions of FIN 46R for entities created prior
to February 2003, in 2004. The adoption of FIN 46R in 2004 and 2005
did not have any impact on the Company's consolidated financial
position, results of operations or cash flows.
(u) Recent Accounting Pronouncements: In May 2005, the FASB issued FASB
Statement No. 154, "Accounting Changes and Error Corrections" (SFAS
No. 154). SFAS No. 154 is a replacement of APB Opinion No. 20,
"Accounting Changes" (APB 20) and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements" (SFAS No. 3). SFAS
No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective
application as the required method for reporting a voluntary change in
accounting principle. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing
to the new accounting principle. SFAS No. 154 provides guidance for
determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. SFAS No. 154 also requires
that a change in method of depreciation, amortization, or depletion
for long-lived, nonfinancial assets be accounted for as a change in
accounting estimate that is effected by a change in accounting
principle. APB 20 previously required that such a change be reported
as a change in accounting principle. SFAS No. 154 carries forward many
provisions of APB 20 without change, including the provisions related
to the reporting of a change in accounting estimate, a change in the
reporting entity, and the correction of an error. SFAS No. 154 also
carries forward the provisions of SFAS No. 3 that govern reporting
accounting changes in interim financial statements. SFAS No. 154 is
effective for accounting changes and corrections of errors made in
fiscal years beginning after December 31, 2005. The Company will adopt
this pronouncement beginning in fiscal year 2006.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
3. Transactions with Related Parties:
Transactions with related parties are analyzed as follows:
October December
31, 31,
Current assets: 2004 2005
------ ------
Cardiff Marine Inc. (a) 44,563 --
Joint and several borrowers (c) 13,558 --
------ ------
58,121 --
====== ======
Non-current assets:
Joint and several borrowers (c) 58,894 --
====== ======
Current liabilities:
Cardiff Marine Inc. (a) -- 1,434
Drybulk S.A. (a) 2 5,026
------ ------
2 6,460
====== ======
(a) Cardiff Marine Inc. and Drybulk S.A: The operations of the Company's
vessels are managed by Cardiff Marine Inc. (the "Manager"), a related
party entity incorporated in Liberia which is under common control
with the Company. The Manager has an office in Greece located at 80,
Kifissias Avenue 151 25 Athens Greece. The Manager provides the
Company a wide range of shipping services such as technical support
and maintenance, insurance consulting, chartering, financial and
accounting services, in exchange for a daily fixed fee of U.S. dollars
650 per vessel, which is adjusted quarterly according to the currency
fluctuation between the U.S. dollar and the Euro if the U.S.
dollar/Euro exchange rate exceeds 1.30 per Euro, plus U.S. dollars 550
for superintendents visits on board vessels in excess of five days per
annum, per each additional day, per superintendent. Up to January
2005, financial and accounting services provided by the Manager
included handling cash generated by the Company's vessels and as such,
the amount due from the Manager at October 31, 2004, primarily
represents cash held by the Manager on behalf of the Company. In
addition, under the management agreement with Cardiff Marine Inc.,
Drybulk S.A, a related party Liberian corporation also under common
control with the Company, acts as the charter and sales and purchase
broker for the Company in exchange for a commission of 1.25% on all
freight, hire, demurrage revenues and a commission of 1.00% on all
gross sale proceeds or purchase price paid of vessels. The management
agreements were renewed on October 18, 2004, with an initial term of
five years and will automatically be extended to successive five-year
terms. Notice to terminate shall not be effective until 30 days
following its having been delivered, unless otherwise mutually agreed
in writing.
The fees charged by the Manager for the years ended October 31, 2003
and 2004, the two-month period ended December 31, 2004 and the year
ended December 31, 2005, amounted to $1,131, $1,322, $240 and $4,962,
respectively. Of the above amounts $30, $61, $0 and $0 for the years
ended October 31, 2003 and 2004, the two-month period ended December
31, 2004 and the year ended December 31, 2005, respectively were
included in deferred drydocking costs and the remaining amounts are
separately reflected in the accompanying consolidated statements of
income. Chartering commissions charged by Drybulk S.A for the years
ended October 31, 2003 and 2004, the two-month period ended December
31, 2004 and the year ended December 31, 2005, totaled $310, $793,
$199 and $2,854, respectively, and are separately reflected as voyage
expenses - related party in the accompanying consolidated statements
of income. In addition, during the years ended October 31, 2004 and
December 31, 2005, $220 and $ 8,400, respectively were charged by
Drybulk S.A relating to the acquisition of vessels. These amounts are
capitalized as a vessel acquisition cost and included in Vessels, net
in the accompanying consolidated balance sheets.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
3. Transactions with Related Parties - (continued):
During the year ended December 31, 2005 the Company also paid an
amount of $600 to the Manager as remuneration for additional services
not contemplated by the management agreement and carried out during
the pre-delivery period of the newly acquired vessels. In addition on
November 8, 2005 and effective January 1, 2005 the Company concluded a
contract of ongoing services with the Manager, under which the Company
pays a quarterly fee of $250 for services rendered by the Manager in
relation to the financial reporting requirements of the Company under
the Securities and Exchange Commission Rules and the establishment and
monitoring of internal controls over financial reporting. The above
amounts, totaling $ 1,600 are included in General and administrative
expenses - related party in the accompanying 2005 consolidated
statement of income.
(b) Lease Agreement: On October 1, 2005 and effective as of the same date,
the Company entered into a rental agreement with its Chief Executive
Officer to lease office space in Athens, Greece. The agreement is for
duration of 5 years beginning October 1, 2005 and expires on September
30, 2010. The annual rental for the first two years is approximately
$11 (Euro 9,000) and thereafter it will be adjusted annually for
inflation increases. Prior to entering the above agreement both
parties agreed to cancel without penalties a previously existing
rental agreement for leased office space. That agreement had been
effective for a five years period beginning January 1, 2005 at an
annual rental of approximately $ 17 (Euro 14,000) before any annual
inflation increases.
(c) Joint and several borrowers: As of October 31, 2004, the Company
participated in three loan agreements (Notes 7(a), 7(b) and 7(c)) for
which it had joint and several liability with several other related
party companies each under common control with the Company. A portion
of the proceeds from those loans was received by and used to fund the
sister companies' vessel acquisitions. The Company is considered a
primary obligor for the loans and accordingly, has recorded the full
obligation with a corresponding receivables due from the related party
sister companies for the portions of the loan proceeds which they
received. In December 2004 and May 2005, the loans discussed above
were restructured and the Company's subsidiaries refinanced their
loans' balances by other loans as further discussed in Note 7 and were
released from their obligations under the loans for which it had joint
and several liability.
(d) Consultancy Agreements: On February 3, 2005, the Company concluded two
agreements with Fabiana Services S.A. ("Fabiana") a related party
entity incorporated in Marshall Islands. Fabiana is beneficially owned
by the Company's Chief Executive Officer and Chief Financial Officer.
Under the agreements, Fabiana provides the services of the individuals
who serve in the positions of Chief Executive and Chief Financial
Officers of the Company. The duration of the agreements is for three
years beginning February 3rd, 2005 and ending (unless terminated
earlier on the basis of any other provisions as may be defined in the
agreement) on the day before the third anniversary of such date. The
Company pays approximately $1,175 (Euro 979,000) and $176 (Euro
147,000) per annum payable monthly on the last working day of every
month in twelve installments for the services of the Chief Executive
and Chief Financial Officers respectively. The related expense for the
year ended December 31, 2005 amounted to $1,351 and is included in
General and administrative expenses - related party in the
accompanying 2005 consolidated statement of income.
4. Inventories:
The amounts shown in the accompanying consolidated balance sheets are
analyzed as follows:
October December
31, 31,
2004 2005
----- -----
Lubricants 239 1,148
Victualling stores 61 178
----- -----
300 1,326
===== =====
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
5. Vessels, Net:
The amounts in the accompanying consolidated balance sheets are analyzed as
follows:
Vessel Accumulated Net Book
Cost Depreciation Value
-------- -------- --------
Balance, October 31, 2002 47,487 (9,803) 37,684
- Depreciation -- (3,580) (3,580)
-------- -------- --------
Balance, October 31, 2003 47,487 (13,383) 34,104
- Vessel acquisitions 22,319 -- 22,319
- Depreciation -- (4,735) (4,735)
-------- -------- --------
Balance, October 31, 2004 69,806 (18,118) 51,688
- Depreciation -- (808) (808)
-------- -------- --------
Balance, December 31, 2004 69,806 (18,926) 50,880
- Vessel acquisitions 854,084 -- 854,084
- Depreciation -- (40,231) (40,231)
-------- -------- --------
Balance, December 31, 2005 923,890 (59,157) 864,733
======== ======== ========
The Company's vessels, having total carrying value of $864,733 at December
31, 2005, have been pledged as collateral to secure the bank loans
discussed in Note 7.
During the year ended December 31, 2005, the Company acquired twenty-one
dry bulk carrier vessels for an aggregate consideration of $847,649. Eight
of the above vessels, acquired for aggregate cash consideration of
$257,670, were under existing time charter contracts which the Company
agreed to assume through arrangements with the respective charterers. The
Company upon delivery of each of the above vessels and in accordance with
its accounting policy described in Note 2(l) evaluated the charter
contracts assumed and recognized a liability of $6,435 with a corresponding
increase in the vessels' purchase price. As at December 31, 2005, the
unamortized balance of the liability amounted to $1,211 and is included in
deferred revenue in the accompanying 2005 consolidated balance sheet.
6. Deferred Charges, Net:
The unamortized amounts included in the accompanying consolidated balance
sheets represent drydocking costs, and are analyzed as follows:
Balance, October 31, 2002 2,114
- Additions 1,322
- Amortization (1,664)
------
Balance, October 31, 2003 1,772
- Additions 3,277
- Amortization (1,716)
------
Balance, October 31, 2004 3,333
- Amortization (326)
------
Balance, December 31, 2004 3,007
- Additions 3,153
- Amortization (2,379)
------
Balance, December 31, 2005 3,781
======
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
7. Long-term Debt:
The amounts in the accompanying consolidated balance sheets are analyzed as
follows:
October 31, 2004 December 31, 2005
------------------------------------ -----------------------------
Related Related
Borrower(s) Company Parties Total Company Parties Total
----------- -------- -------- -------- -------- -- --------
(a) Hydrogen and Helium 3,329 2,849 6,178 -- -- --
(b) Silicon and Oxygen 7,284 4,370 11,654 -- -- --
(c) Annapolis and 27,312 65,233 92,545 -- -- --
Blueberry
(d) Silicon 4,531 -- 4,531 -- -- --
(e) Royerton, Lansat,
Samsara, Fago,
Tolan, Farat,
Madras, Lancat,
Zatac, Oxygen,
Silicon and
Hydrogen -- -- -- 141,638 -- 141,638
(f) Karmen, Borsari, Onil,
Platan,
Celine, Helium,
Annapolis and
Blueberry -- -- -- 176,606 -- 176,606
(g) Thelma, Malvina
and Arleta -- -- -- 112,169 -- 112,169
(h) Fabiana, Felicia
and Selma -- -- -- 78,475 -- 78,475
(i) Iguana -- -- -- 16,465 -- 16,465
-------- -------- -------- -------- -- --------
Total 42,456 72,452 114,908 525,353 -- 525,353
Less- current
portion (11,841) (13,558) (25,399) (107,738) -- (107,738)
-------- -------- -------- -------- -- --------
Long-term portion 30,615 58,894 89,509 417,615 -- 417,615
======== ======== ======== ======== == ========
Loan (a): In October 2002, Hydrogen and Helium together with a related
ship-owning company, Lithium Shipping Co Ltd ("Lithium)), concluded a bank
loan for $11,000 to refinance the companies' previous indebtedness and to
provide the companies with working capital. In April 2004, in exchange for
a payment of $2,186 received from Cardiff Marine Inc., the vessel Manager
for Helium which handles the majority of cash generated from Helium's
operations, Hydrogen assumed $1,612 of the obligation under the outstanding
loan and Lithium assumed the balance of the loan obligation of $574.The
loan bears interest at LIBOR plus a margin and the interest rate (including
the margin) at October 31, 2003 and 2004 was 2.74% and 3.46%, respectively.
In December 2004, the loan was restructured and the Company refinanced its
then outstanding balance by the loan discussed under (e) below.
Loan (b): In April 2000, Silicon and Oxygen together with six other related
ship-owning companies, concluded a bank loan for $39,100 to partially
finance the acquisition cost of the vessels Flecha and Shibumi by Silicon
and Oxygen, respectively, as well as the cost of a vessel acquired by one
of the related companies and to refinance previous indebtedness of the
other five related ship-owning companies. In March 2004, Silicon was
released from its obligations under the loan and the outstanding balance of
the loan at that date amounting to $13,320 was restructured in two tranches
of $8,280 for Oxygen and $5,040 for the related companies. The Silicon loan
balance was assumed by Oxygen in exchange for a payment of $13,320 received
from Cardiff Marine Inc, the vessel manager for Silicon which maintains and
handles the majority of the cash generated from Silicon's operations. The
loan bears interest at LIBOR plus a margin and the interest rate (including
the margin) at October 31, 2004 was 3.34%. In December 2004, the loan was
restructured and the Company refinanced its then outstanding balance by the
loan discussed under (e) below. The related parties involved are Rominvest
Shipping Co. Ltd., Merchant Princess S.A., Seabulk Investments S.A., Siena
Shipping Co. Ltd., Rainbow Shipping Co. Ltd. and Agrari Shipping Co. Ltd.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2004 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
7. Long-term Debt - (continued):
Loan (c): In November 2003, Annapolis and Blueberry together with three
other related ship-owning companies concluded a bank loan agreement for an
amount of up to $85,733 in order to refinance prior indebtedness of the
vessel Lacerta, to partially finance the acquisition cost of the vessel
Panormos ($20,000 drawn in December 2003) and to refinance prior
indebtedness of the related companies. In March 2004 the loan was
restructured by a loan agreement concluded by Annapolis and Blueberry
together with four other related ship-owning companies for an amount of up
to $104,233 to partially finance the acquisition cost of a vessel acquired
by one of the related companies. In September 2004, the loan was further
restructured by a loan agreement concluded by Annapolis and Blueberry
together with four other related ship-owning companies for an amount of up
to $123,519 to partially finance the acquisition cost of a vessel acquired
by one of the related companies. The loan bears interest at LIBOR plus a
margin and the interest rate (including the margin) at October 31, 2004 was
3.11%. In May 2005, the loan was restructured and the Company refinanced
its then outstanding balance by the loan discussed under (f) below. The
related parties involved are Sidoti Shipping Company Ltd., Musk Shipholding
Inc., Sea Glory Navigation Ltd. and Rivel Camel Shipping Company Ltd.
Loan (d): In March 2004, Silicon concluded a loan agreement for an amount
of $6,000 for working capital purposes. The loan bears interest at LIBOR
plus a margin and the interest rate (including the margin) at October 31,
2004 was 3.71%, respectively. In December 2004, the loan was restructured
and the Company refinanced its then outstanding balance by the loan
discussed under (e) below.
Loan (e): In December 2004, Iguana, Lansat, Samsara, Zatac, Fago, Tolan,
Farat, Madras, Lancat, Hydrogen, Oxygen, and Silicon concluded a loan
agreement for an original amount of $185,000 to partly finance the
acquisition cost of nine dry bulk vessels, to refinance previous
indebtedness of vessels Mostoles, Shibumi and Flecha, discussed above under
(a), (b) and (d), respectively and to provide working capital. The loan was
divided into two tranches $160,000 and $25,000. The tranche A of $160,000
was drawn down from December 2004 through April 2005 in accordance with the
vessels' delivery dates and the refinancing dates as discussed above. In
February 2005, the second tranche of $ 25,000 was cancelled. In addition,
in March 2005, based on a supplemental agreement, Iguana was replaced by
Royerton and was released from its obligations under the agreement. The
amount outstanding at December 31, 2005 of $142,500 (gross of unamortized
deferred financing fees of $862) is repayable in 33 variable quarterly
installments from February 2006 through February 2014 plus a balloon
payment of $26,000 payable together with the last installment. The loan
bears interest at LIBOR plus a margin and the interest rate (including the
margin) at December 31, 2005 was 5.40%.
Loan (f): In March 2005, Karmen, Borsari, Onil, Platan, Celine, Helium,
Annapolis and Blueberry concluded a bank loan for $200,000 to partly
finance the acquisition cost of the vessels Sonoma, Catalina, Belmonte,
Daytona and Conrand Oldendorff, to refinance the then outstanding
indebtedness of the vessels Lacerta and Panormos and to provide working
capital to vessel Striggla. The loan was drawn down from March 2005 through
August 2005. The amount outstanding at December 31, 2005 of $ 177,694
(gross of unamortized deferred financing fees of $1,088) is repayable in 20
variable quarterly installments from March 2006 through December 2010 plus
a balloon payment of $ 58,143 payable in March 2011. The loan bears
interest at LIBOR plus a margin and the interest rate (including the
margin) at December 31, 2005 was 5.49%.
Loan (g): In March 2005, Thelma, Malvina and Arleta concluded a bank loan
for $120,645 to partly finance the acquisition cost of the vessels
Manasota, Coronado and Xanadu. The loan was drawn down in March and May
2005. The amount outstanding at December 31, 2005, of $112,657 (gross of
unamortized deferred financing fees of $488) is repayable in thirty eight
variable consecutive quarterly installments from February 2006 through May
2015 plus a balloon installment of $22,696 payable together with the last
installment. The loan bears interest at LIBOR plus a margin and the
interest rate (including the margin) at December 31, 2005 was 5.40%.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
7. Long-term Debt - (continued):
Loan (h): In March 2005, Fabiana, Felicia and Selma concluded a bank loan
for $92,940 to partly finance the acquisition cost of the vessels Alameda,
Linda Oldendorff and La Jolla. The loan was drawn down in three tranches
from March 2005 through April 2005. The amount outstanding at December 31,
2005, of $78,974 (gross of unamortized deferred financing fees of $499) is
repayable in thirty eight variable consecutive quarterly installments, from
January 2006 through April 2015 plus three balloon installments amounting
to $ 26,964 and payable with the last instalment of each tranche. The loan
bears interest at LIBOR plus a margin and the interest rate (including the
margin) at December 31, 2005 was 5.27%.
Loan (i): In March 2005, Iguana concluded a bank loan for $19,000 to partly
finance the acquisition cost of the vessel Iguana. The amount outstanding
at December 31, 2005, of $16,500 (gross of unamortized deferred financing
fees of $35) is repayable in nineteen variable consecutive semi-annual
installments, from March 2006 through March 2015 plus a balloon installment
of $1,400 payable together with the last installment. The loan bears
interest at LIBOR plus a margin and the interest rate (including the
margin) at December 31, 2005 was 5.62%.
The loans are secured as follows:
o First priority mortgages over the borrowers vessels;
o First priority assignment of all insurances and earnings of the
mortgaged vessels;
o Pledge over the borrowers earnings account;
o Corporate guarantee of Dryships Inc.
The loan agreements contain ship finance covenants including restrictions
as to changes in management and ownership of the vessels, additional
indebtedness and mortgaging of vessels without the lender's prior consent
as well as minimum requirements regarding hull cover ratio. In addition,
the Company must maintain minimum cash deposits, as defined in the loan
agreements, which at December 31, 2005 amounted to $21,011. Furthermore,
the Company will not without the banks' prior written consent pay any
dividends or make any other distributions to shareholders which exceed 50%
of the net profit of the related period if after any such dividend is paid
or such distribution is made the Total Liabilities exceed 60% of market
adjusted Total Assets, as defined in the agreements.
Interest expense for the years ended October 31, 2003 and 2004, the
two-month period ended December 31, 2004 and the year ended December 31,
2005, amounted to $758, $1,278, $257 and $19,797, respectively and is
included in interest expense and finance costs in the accompanying
consolidated statements of income.
The annual principal payments required to be made after December 31, 2005,
are as follows:
2006 108,218
2007 72,249
2008 56,949
2009 40,546
2010 33,526
2011 and thereafter 216,837
--------
528,325
Less- Financing fees (2,972)
--------
525,353
========
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
8. Common Stock and Additional Paid-In Capital:
On December 23, 2004 and within the context of the initial public offering
discussed above ("below"), the Company declared dividends totaling $69,000
($4.48 per share) after obtaining the consents from its respective lending
banks. As the above transaction represents distributions to existing
shareholders prior to the initial public offering, the transaction was
given retroactive effect in the accompanying October 31, 2004 consolidated
balance sheet. The amount of $69,000 was paid in three tranches, in
December 2004 ($51,007), in February 2005 ($10,743) and in May 2005
($7,250). Furthermore, the Company during 2005 declared and paid dividends
of $12,140 ($0.40 per share).
In February 2005, the Company completed its initial public offering in the
United States under the United States Securities Act of 1933, as amended.
In this respect, 14,950,000 shares of common stock at par value $0.01 were
issued for $18.00 per share. The net proceeds of the initial public
offering amounted to $251,285.
The amounts shown in the accompanying consolidated balance sheets, as
additional paid-in capital, represent (i) payments made by the stockholders
at various dates to finance vessel acquisitions in excess of the amounts of
bank loans obtained and advances for working capital purposes and (ii) the
difference between the par value of the shares issued in the initial public
offering in February 2005 and the net proceeds obtained for those shares.
9. Commitments and Contingencies:
Various claims, suits, and complaints, including those involving government
regulations and product liability, arise in the ordinary course of the
shipping business. In addition, losses may arise from disputes with
charterers, agents, insurance and other claims with suppliers relating to
the operations of the Company's vessels. Currently, management is not aware
of any such claims or contingent liabilities, which should be disclosed, or
for which a provision should be established in the accompanying
consolidated financial statements.
The Company accrues for the cost of environmental liabilities when
management becomes aware that a liability is probable and is able to
reasonably estimate the probable exposure. Currently, management is not
aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the
accompanying consolidated financial statements. A minimum of up to $1
billion of the liabilities associated with the individual vessels actions,
mainly for sea pollution, are covered by the Protection and Indemnity (P&I)
Club insurance.
10. Income taxes:
Marshall Islands and Malta do not impose a tax on international shipping
income. Under the laws of Marshall Islands and Malta, the countries of the
companies' incorporation and vessels' registration, the companies are
subject to registration and tonnage taxes, which have been included in
Vessels' operating expenses in the accompanying consolidated statements of
income.
Pursuant to the Internal Revenue Code of the United States (the "Code"),
U.S. source income from the international operations of ships is generally
exempt from U.S. tax if the company operating the ships meets both of the
following requirements, (a) the Company is organized in a foreign country
that grants an equivalent exception to corporations organized in the United
States and (b) either (i) more than 50% of the value of the Company's stock
is owned, directly or indirectly, by individuals who are "residents" of the
Company's country of organization or of another foreign country that grants
an "equivalent exemption" to corporations organized in the United States
(50% Ownership Test) or (ii) the Company's stock is "primarily and
regularly traded on an established securities market" in its country of
organization, in another country that grants an "equivalent exemption" to
United States corporations, or in the United States (Publicly-Traded Test).
Under the regulations, a Company's stock will be considered to be
"regularly traded" on an established securities market if (i) one or more
classes of its stock representing 50% or more of its outstanding shares, by
voting power and value, is listed on the market and is traded on the
market, other than in minimal quantities, on at least 60 days during the
taxable year; and (ii) the aggregate number of shares of stock traded
during the taxable year is at least 10% of the average number of shares of
the stock outstanding during the taxable year.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
10. Income taxes-(continued):
Treasury regulations under the Code were promulgated in final form in
August 2003. These regulations apply to taxable years beginning after
September 24, 2004. As a result, such regulations became effective for
calendar year taxpayers, like the Company, beginning with the calendar year
2005. The Marshall Islands and Malta, the jurisdictions where the Company
and its ship-owning subsidiaries are incorporated, grant an "equivalent
exemption" to United States corporations. Therefore, the Company is exempt
from United States federal income taxation with respect to U.S.-source
shipping income if either the 50% Ownership Test or the Publicly-Traded
Test is met. The Company believes that it satisfies the 50% Ownership Test
and, therefore, the Company and its subsidiaries are entitled to exemption
from U.S. federal income tax, in respect of their U.S. source shipping
income. Even if the Company did not satisfy the 50% Ownership Test, the
Company believes that it would be able to satisfy the Publicly - Traded
Test for the 2005 taxable year. If the Company and its subsidiaries are not
entitled to this exemption under Section 883 for 2005 taxable year, it will
be subject to a 4% tax on its United States source shipping income. The
Company estimates that since no more than the 50% of its shipping income
would be treated as being United States source income, the effective tax
rate is expected to be 2% and accordingly it would impact the results of
operations by approximately $500.
11. Voyage and Vessel Operating Expenses:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
Year ended October 31,
---------------------
Voyage Expenses 2003 2004
--------------- ------ ------
Port charges 1,054 1,317
Bunkers 1,617 1,741
Commissions charged by third
parties 1,017 2,520
------ ------
3,688 5,578
Commissions charged by a
related party 310 793
------ ------
3,998 6,371
====== ======
Two-month
period ended Year ended
December 31, December 31,
Voyage Expenses 2004 2005
--------------- ----------- ----------
Port charges 222 1,407
Bunkers 245 851
Commissions charged by third 487
parties -- 7,719
Charter in - hire expense -- 208
------ ------
954 10,185
Commissions charged by a
related party 199 2,854
------ ------
1,153 13,039
====== ======
Year ended October 31,
---------------------
Voyage Operating Expenses 2003 2004
------------------------- ------ ------
Crew wages and related costs 3,516 4,170
Insurance 935 1,254
Repairs and maintenance 527 998
Spares and consumable stores 1,730 3,296
Tonnage taxes 31 51
------ ------
6,739 9,769
====== ======
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
11. Voyage and Vessel Operating expenses-(continued):
Two-month
period ended Year ended
December 31, December 31,
Voyage Operating Expenses 2004 2005
------------------------- ----------- ----------
Crew wages and related costs 782 15,194
Insurance 217 3,853
Repairs and maintenance 192 5,864
Spares and consumable stores 557 11,616
Tonnage taxes 8 195
------ ------
1,756 36,722
====== ======
Voyage expenses for the year ended December 31, 2005 include an amount of $208,
representing hire paid to an unrelated party for the charter-in of vessel Darya
Tara. Based on the charter party agreement concluded on November 24, 2005, the
vessel was chartered-in by the Company for a period of thirty six to thirty
eight months at a daily hire rate of $16.5. As of December 31, 2005, the annual
charter hire to be paid by the Company under this agreement for the years ended
December 31, 2006, 2007 and 2008 are approximately $6,022 per year..
Concurrently with the aforementioned agreement, the Company concluded a charter
party agreement with an unrelated party for the charter-out of the vessel Darya
Tara over the same period and at a daily rate of $16.7. The revenue recognized
on the above agreement as of December 31, 2005 amounted to $211 is included in
Voyage Revenues in the accompanying 2005 consolidated statement of income.
In 2005, the Manager concluded twenty one agreements with an unrelated,
international supplier for the exclusive supply of lubricants to certain fleet
vessels. Under the terms of this agreement a fixed quantity of main engine oils
for each vessel will be supplied free of charge. The above discount offer
assumes that the Company will remain exclusively supplied by the specific
supplier for at least four to five years following the date of the first supply.
In the event contract does not run for its full contractual term, the free
lubricants acquired until the date of the premature termination will be charged
at market prices to the Company at 100% of their volume if the contract is
terminated within the first year, then reducing by 20% each year until the
fourth or fifth year, the year the contract expires. The Company classifies
lubricants expense in spares and consumable stores in the aforementioned table
of Vessel Operating expenses. During free lubricant periods, the Company records
the market value of the lubricants consumed as an expense and amortizes the
benefit of the free lubricants consumed on a straight-line basis to vessel
operating expenses over the periods from the first supply through the date of
their expiration as provided in the related contracts. The unamortized balance
of the above benefits at December 31, 2005 amounted to $928, and is reflected in
other current liabilities ($230) and non-current liabilities ($698) in the
accompanying 2005 consolidated balance sheet.
12. Bunkers:
The amounts in the accompanying consolidated statements of income represent gain
resulted from the difference between the purchase and sale price of bunkers on
board relating to vessels employed under time charter agreements.
13. Interest and Finance Costs:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
Year ended October 31,
----------------------
2003 2004
----- -----
Interest on long-term debt 758 1,278
Bank charges 223 105
Amortization and write-off of 138 132
financing fees
----- -----
1,119 1,515
===== =====
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
13. Interest and Finance costs-(continued):
Two-month
period ended Year ended
December 31, December 31,
2004 2005
----------- ----------
Interest on long-term debt 257 19,797
Bank charges 140 327
Amortization and write-off of 111
financing fees 544
Derivatives fair value (Note 14) -- (270)
------- -------
508 20,398
======= =======
14. Derivatives:
In May, June and July 2005, the Company concluded six interest rate cap and
floor agreements with three of its lending banks as follows:
(a) In May 2005, for a period of nine years through February 2014,
for a notional amount of $154,167. Under the cap provisions of
the agreement the Company pays interest at 5.59% if three-month
LIBOR is between 5.59% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.59%;
(b) In May 2005, for a period of ten years through May 2015, for a
notional amount of $120.6 million. Under the cap provisions of
the agreement the Company pays interest at 5.8% if three-month
LIBOR is between 5.8% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.8%;
(c) In June 2005, for a period of eight years through March 2013, for
a notional amount of $22.0 million. Under the cap provisions of
the agreement the Company pays interest at 5.66% if three-month
LIBOR is between 5.66% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.66%;
(d) In June 2005, for a period of six years through March 2011, for a
notional amount of $194.3 million. Under the cap provisions of
the agreement the Company pays interest at 5.85% if three-month
LIBOR is between 5.85% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.85%;
(e) In July 2005, for a period of ten years through April 2015, for a
notional amount of $42.4 million. Under the cap provisions of the
agreement the Company pays interest at 5.66% if three-month LIBOR
is between 5.66% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.66%; and
(f) In July 2005, for a period of seven years through April 2012, for
a notional amount of $22.3 million. Under the cap provisions of
the agreement the Company pays interest at 5.64% if three-month
LIBOR is between 5.64% and 8.0% and at three-month LIBOR if LIBOR
exceeds 8.0% or if it is between 3.0% and 5.64%.
Under the floor provisions of all the above agreements, the Company pays
3.0% if three-month LIBOR is equal or less than 3.0%. The fair value of the
six interest rate cap and floor agreements equates to the amount that would
be received by the Company upon canceling the agreements. Such fair value
at December 31, 2005, was an asset of $270. Gain of $270 has been recorded
in Interest and finance costs in the accompanying 2005 consolidated
statement of income.
15. Financial Instruments:
The carrying values of temporary cash investments, accounts receivable and
accounts payable are reasonable estimates of their fair value due to the
short-term nature of these financial instruments. The fair values of
long-term bank loans approximate the recorded values, due to their variable
interest rates.
DRYSHIPS INC.
Notes to Consolidated Financial Statements
October 31, 2004 and December 31,
2005 (Expressed in thousands of United States Dollars - except for share and per
share data, unless otherwise stated)
16. Subsequent Events:
o Declaration of Dividends: On January 11, 2006, the Company declared
dividends amounting to $6,070 or $0.20 per share, which were paid on
January 31, 2006, to the stockholders of record as of January 16,
2006.
o Conclusion of Foreign Exchange Transactions: In January 2006, the
Company engaged in a total of 12 call options, maturing in monthly
intervals from February 2006 to January 2007, under two foreign
exchange transactions involving the US dollar against the Euro. The
strike rate under each option is 1.21 US dollars per Euro, for amounts
of Euro 200,000 per month, for each of the 12 months after the
individual contract dates. In January 2006, the Company engaged in a
total of 12 Forward Foreign Exchange Agreements in monthly intervals
from February 2006 to January 2007. The strike rate under each option
ranges from 1.2101 to 1.2215 US Dollars to the Euro for amounts of
Euro 200,000 per month for the 12 months after the individual
contracts dates.
o Restructuring of Bank Loans: On March 31, 2006, the Company concluded
two loan agreements for an aggregate amount of up to $628,750 with a
syndicate of institutional Lenders as follows:
1. A term loan and short term credit facility of up to $518,750 in
aggregate divided into a term loan of $460,000 in order to
refinance the then outstanding balance of the Company's prior
indebtedness ($528,325 as at December 31, 2005), to partially
finance the acquisition cost of the second-hand vessel Hille
Oldendorff ($40,760 under a memorandum of agreement dated March
24, 2005) and provide the Company with working capital and a
credit facility of $58,750 in order to partially finance the
acquisition cost of additional vessels acceptable to the lenders.
The credit facility of $58,750 is available for drawdown for 364
days after the signing of the agreement and each amount drawn
down will be included in the term loan and paid in equal
consecutive quarterly installments commencing on the next
quarterly repayment of the term loan and the length of repayment
will depend on the age of each of the additional vessels to be
acquired. The term loan is payable in forty variable consecutive
quarterly installments commencing six months after the drawdown
date but not later than August 31, 2006 and through May 2016 plus
a balloon payment of $81,274, payable together with the last
installment.
2. A term loan and short term credit facility of up to $110,000 in
aggregate divided into a term loan of $97,500 in order to
refinance the then outstanding balance of the Company's prior
indebtedness ($528,325 as at December 31, 2005), to partially
finance the acquisition cost of the second-hand vessel Hille
Oldendorff ($40,760 under a memorandum of agreement dated March
24, 2005) and provide the Company with working capital and a
credit facility of $12,500 in order to partially finance the
acquisition cost of additional vessels acceptable to the lenders.
The credit facility of $12,500 is available for drawdown for 364
days after the signing of the agreement and each amount drawn
down will be included in the term loan and paid in equal
consecutive quarterly installments commencing on the next
quarterly repayment of the term loan and the length of repayment
will depend on the age of each of the additional vessels to be
acquired. The term loan is payable in forty variable consecutive
quarterly installments commencing six months after the drawdown
date but not later than August 31, 2006 and through May 2016 plus
a balloon payment of $17,226, payable together with the last
installment.
The loans will bear interest at LIBOR plus a margin and will be secured by
a first priority mortgage over the vessels involved. The Company will be
permitted to pay dividends under the loans so long as such amount of
dividends does not exceed 50% of the Company's net income as evidenced by
its relevant annual audited financial statements. However, for the fiscal
year 2006, the amount of dividends the Company may pay cannot exceed the
amount of $18,000. The Company may not make any additional dividend
payments without the lenders' prior written consent. The Company will be
required to pay quarterly in arrears on the last day of each fiscal quarter
a commitment fee in the amount of 0.40% per annum of the unutilized portion
of the term loans and 0.25% of the unutilized portion of the credit
facilities, a non-refundable arrangement fee of 0.40% and structuring fee
of 0.025% on the aggregate loan amount, payable 50% upon acceptance of the
lenders' offer letter and 50% on signing of the loan agreements, and a
non-refundable annual agency fee in the amount of $45,000 payable to the
agent for the first time on signing of the loan agreements and on every
anniversary thereafter. Furthermore, the Company will pay a draw-down fee
of 0.075% on each drawdown amount under the credit facilities.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf.
DryShips, Inc.
---------------------------------
(Registrant)
Dated: April 20, 2006 /s/Christopher J. Thomas
------------------------
Christopher Thomas
Chief Financial Officer