Filed
Pursuant to Rule 424(b)(2)
Registration
No. 333-146540
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of Securities to be Registered
|
|
Amount
to be Registered
|
|
Amount
of Registration Fee (3)
|
|
|||
|
Common
Stock, par value $0.01 per share
|
|
$500,000,000
|
|
$19,650.00
|
|
|
(1)
|
Calculated
in accordance with Rule 457(o) under the Securities Act of 1933, as the
average of the high and low price of our common shares on the Nasdaq
Global Market on December 12, 2008.
|
|
(2)
|
Estimated
solely for purposes of determining the registration fee pursuant to Rule
457(a) under the Securities Act of
1933.
|
|
(3)
|
Calculated
in accordance with Rule 457(r) under the Securities Act of
1933.
|
|
PROSPECTUS
SUPPLEMENT
|
Filed
Pursuant to 424(b)(2)
|
|
(To
Prospectus dated October 17, 2008)
|
Registration
No. 333-146540
|
$500,000,000
Common
Shares
We
have entered into an ATM Equity OfferingSM Sales
Agreement with Merrill Lynch, Pierce Fenner & Smith Incorporated, or Merrill
Lynch, for the offer and sale of up to $500,000,000 of our common shares, par
value $0.01 per share, offered by this prospectus supplement and the
accompanying prospectus dated October 17, 2008. The Company
previously filed a prospectus supplement pursuant to Rule 424(b), dated November
5, 2008, or the November 5, 2008 Prospectus Supplement, relating to the offer
and sale of up to 25,000,000 common shares. The Company issued and
sold a total of 24,980,300 common shares pursuant to the November 5, 2008
Prospectus Supplement, the net proceeds of which were $167.1 million after
deducting expenses of the offering. The Company does not intend to
offer any remaining shares under the November 5, 2008 Prospectus
Supplement.
In accordance with the terms of the
sales agreement, we may offer and sell our common shares at any time and from
time to time through Merrill Lynch as our sales agent. Sales of the
common shares, if any, will be made by means of ordinary brokers’ transactions
on The Nasdaq Global Select Market or otherwise at market prices prevailing at
the time of sale, at prices related to the prevailing market prices, or at
negotiated prices.
Our common stock is listed on The
Nasdaq Global Select Market under the symbol “DRYS.” The last reported sale
price of our common stock on The Nasdaq Global Select Market on January 26, 2009
was $11.40 per share.
Investing in our common
stock involves a high degree of risk.
See the
risk factors beginning on page S-9 of this prospectus supplement and the risk
factors beginning on page 20 of the accompanying prospectus dated October 17,
2008 to read about the risks you should consider before purchasing our common
stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
Merrill Lynch will receive from us a
commission equal to 2.5% of the gross sales price per share for any common
shares sold through it as our sales agent under the sales
agreement. Subject to the terms and conditions of the sales
agreement, Merrill Lynch will use its commercially reasonable efforts to sell on
our behalf any common shares to be offered by us under the sales
agreement.
Merrill Lynch &
Co.
The date
of this prospectus supplement is January 28, 2009
This
document is in two parts. The first part is this prospectus supplement, which
describes the specific terms of this offering and the securities offered hereby,
and also adds to and updates information contained in the accompanying base
prospectus and the documents incorporated by reference into this prospectus
supplement and the base prospectus. The second part, the base prospectus, gives
more general information and disclosure. When we refer only to the prospectus,
we are referring to both parts combined, and when we refer to the accompanying
prospectus, we are referring to the base prospectus.
If the
description of this offering varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement. This prospectus supplement, the accompanying prospectus and the
documents incorporated into each by reference include important information
about us, the common shares being offered and other information you should know
before investing. You should read this prospectus supplement and the
accompanying prospectus together with the additional information described under
the heading, “Where You Can Find Additional Information” before investing in our
common shares.
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This
document includes assumptions, expectations, projections, intentions and beliefs
about future events. These statements are intended as “forward-looking
statements.” We caution that assumptions, expectations, projections, intentions
and beliefs about future events may and often do vary from actual results and
the differences can be material.
All
statements in this document that are not statements of historical fact are
forward-looking statements. Forward-looking statements include, but are not
limited to, such matters as:
|
●
|
future
operating or financial results;
|
|
●
|
statements
about planned, pending or recent acquisitions, business strategy and
expected capital spending or operating expenses, including drydocking and
insurance costs;
|
|
●
|
statements
about drybulk shipping market trends, including charter rates and factors
affecting supply and demand;
|
|
●
|
our
ability to obtain additional
financing;
|
|
●
|
expectations
regarding the availability of vessel acquisitions;
and
|
|
●
|
anticipated
developments with respect to pending
litigation.
|
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
DryShips Inc. believes 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, DryShips Inc. cannot assure you that it will achieve or accomplish
these expectations, beliefs or projections described in the forward looking
statements contained in this prospectus.
Important
factors that, in our view, could cause actual results to differ materially from
those discussed in the forward-looking statements include the strength of world
economies and currencies, general market conditions, including changes in
charter rates and vessel values, failure of a seller to deliver one or more
vessels, failure of a buyer to accept delivery of a vessel, inability to procure
acquisition financing, default by one or more charterers of our ships, changes
in demand for drybulk commodities, changes in demand that may affect attitudes
of time charterers, scheduled and unscheduled drydocking, changes in DryShips
Inc.’s voyage and operating expenses, including bunker prices, dry-docking and
insurance costs, changes in governmental rules and regulations, potential
liability from pending or future litigation, domestic and international
political conditions, potential
disruption of shipping routes due to accidents, international hostilities and
political events or acts by terrorists.
When used
in this document, the words “anticipate,” “estimate,” “project,” “forecast,”
“plan,” “potential,” “may,” “should,” and “expect” reflect forward-looking
statements.
i
This section summarizes some of the information that is contained later in this
prospectus supplement or in other documents incorporated by reference into the
registration statement of which this prospectus supplement is a part. As an
investor or prospective investor, you should review carefully the risk factors
and the more detailed information that appears later in this prospectus
supplement or is contained in the documents that we incorporate by reference
into the registration statement of which this prospectus supplement is a
part.
PROSPECTUS
SUMMARY
Unless
the context otherwise requires, as used in this prospectus supplement, the terms
“Company,” “we,” “us,” and “our” refer to DryShips Inc. and all of its
subsidiaries, and “DryShips Inc.” refers only to DryShips Inc. and not to its
subsidiaries.
We use
the term deadweight ton, or dwt, in describing the size of vessels. Dwt,
expressed in metric tons each of which is equivalent to 1,000 kilograms, refers
to the maximum weight of cargo and supplies that a vessel can
carry.
Our
Company
We are a
Marshall Islands corporation with our principal executive offices in Athens,
Greece. We were incorporated in September 2004. As of January 26, 2009, we own,
through our subsidiaries, a fleet of 43 drybulk carriers comprised of seven
Capesize, 29 Panamax, two Supramax, and five newbuilding drybulk vessels,
which have a combined deadweight tonnage of approximately 3.9 million
dwt. Our drybulk fleet principally 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. The average
age of the vessels in our drybulk fleet is 8.0 years. We are also an
owner and operator of two ultra-deep water semi-submersible drilling rigs and
two ultra deep-water newbuilding drillships, which are discussed in greater
detail below.
We employ
our drybulk vessels under period time charters, on bareboat charters, in the
spot charter market and in drybulk carrier pools. Twenty of our
vessels are currently employed on time charter, with an average remaining
duration of five years, and three of our vessels are currently employed on
bareboat charters. Twelve of our vessels are currently trading in the
spot market. Two of our vessels are currently unfixed, as a result of cancelled
contracts for sale, and we intend to charter these vessels in the spot
market. One of our Panamax drybulk carriers is currently operated in
a Panamax 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.
All of
our drybulk carriers are managed by Cardiff Marine Inc., or Cardiff, under
separate ship management agreements. Mr. George Economou, our
Chairman, Chief Executive Officer and Interim Chief Financial Officer, has been
active in shipping since 1976 and formed Cardiff in 1991. We are affiliated with
Cardiff. Cardiff, a Liberian corporation with offices in Greece, is
responsible for all technical and commercial management functions of our drybulk
fleet. We believe that Cardiff has established a reputation in the international
shipping industry for operating and maintaining a fleet with high standards of
performance, reliability and safety. Seventy percent of the issued and
outstanding capital stock of Cardiff is owned by a foundation which is
controlled by Mr. Economou. The remaining 30% of the issued and
outstanding capital stock of Cardiff is owned by a company controlled by Mr.
Economou’s sister, who is also a member of our board of
directors.
Cardiff
provides comprehensive ship management services including technical supervision,
such as repairs, maintenance and inspections, safety and quality, crewing and
training, as well as supply provisioning. Cardiff’s commercial management
services include operations, chartering, sale and purchase, post-fixture
administration, accounting, freight invoicing and insurance. Cardiff completed
early implementation of the International Maritime Organization’s, or IMO,
International Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code, in 1996. Cardiff has obtained documents
of compliance for its office and safety management certificates for its vessels
as required by the ISM Code and has been ISO 14001 certified since 2003, in
recognition of its commitment to overall quality.
S-1
In
addition, through our acquisition of Ocean Rig ASA, or Ocean Rig, a Norwegian
offshore drilling services company whose shares were listed on the Oslo Stock
Exchange, we own and operate two ultra-deep water, harsh environment,
semi-submersible drilling rigs, the Leiv Eiriksson and the Eirik Raude. In
April 2008, we, through our subsidiary, DrillShips Investment Inc., or
DrillShips Investment, exercised an option to acquire two newbuilding advanced
capability drillships for use in ultra-deep water locations, identified as Hull
1865 and Hull 1866, for an expected cost of approximately $800 million per
drillship. We expect to take delivery of Hulls 1865 and 1866 in July
2011 and September 2011, respectively. Our subsidiary Primelead
Shareholders Inc., or Primelead Shareholders, entered into a share
purchase agreement with related parties to acquire Drillships Holdings, Inc., or
Drillships Holdings, which has contracts for construction of two newbuilding
ultra-deep water drillships, identified as Hulls 1837 and 1838, to be delivered
in December 2010 and March 2011, respectively, in exchange for 25% of the
then-outstanding shares of Primelead Shareholders. Drillships
Holdings is controlled by clients of Cardiff including Mr.
Economou.
We have
announced our intention to spin off to our shareholders our interests in our
subsidiary, Primelead Shareholders, which owns the stock of Ocean Rig
ASA. Prior to or concurrently with the spin off of Primelead
Shareholders, it will acquire (i) our existing subsidiary, DrillShips
Investment, which has contracts for construction of the two drillships, Hulls
1865 and 1866, and (ii) Drillships Holdings, an entity not currently owned by
us, which has contracts for construction of Hulls 1837 and 1838. Due to
the disruptions in the credit markets worldwide and weakness in the energy
sector, we do not expect to complete the spin off until the second half of
2009. If the spin
off does not occur, we currently anticipate that we will not close on our
acquisitions of Hulls 1837 and 1838. Our investment in Ocean Rig ASA
amounts to $1.4 billion, which our subsidiary, Primelead Limited, financed in
part with approximately $800.0 million of borrowings, which DryShips Inc. has
guaranteed. We are currently discussing with our lenders being released from our
guarantee in the event the spin off proceeds. However, unless our
lenders agree and assuming the spin off proceeds as announced, we will retain
liability for the indebtedness that was incurred to acquire Ocean Rig ASA but
will no longer have an equity interest in Primelead Shareholders and,
accordingly, will not share in the revenues or profits of its offshore drilling
operations. Currently, $650 million of the $800 million of
acquisition indebtedness is outstanding.
The Leiv Eiriksson, one of our
two drilling rigs, is currently operating under a two-year contract expiring in
September 2009 with Shell U.K. Limited, A/S Norske Shell and Shell E&P
Ireland Limited for drilling operations in Irish, UK and Norwegian waters,
which we refer to as the Shell contract. The rig operated in Irish
waters in the second quarter of 2008 and relocated to Norwegian waters in the
third quarter of 2008. On July 11, 2008, we obtained the requisite approvals
from the Norwegian authorities and commenced operations in Norwegian
waters. In 2008, a dayrate of $476,000 applied while the rig was
operating in Ireland and in the UK, and a dayrate of $517,000 applied while the
rig was operating in Norwegian waters. We have not yet secured subsequent
employment for the Leiv
Eiriksson after the current contract expires in September
2009.
In
October 2008, our other drilling rig, the Eirik Raude, commenced a
contract entered in for a three-year term with Tullow Oil PLC for
development drilling in offshore Ghana at an average dayrate over the contract
period of $637,000, based upon 100% utilization, expiring in October 2011, which
we refer to as the Tullow Oil contract. Tullow Oil has an option through March
31, 2009 to extend the contract for one or two additional
years.
Various
subsidiaries of Ocean Rig ASA directly manage the Eirik Raude and the
Leiv
Eiriksson. The supervision of the construction of the two
newbuilding drillships identified as Hulls 1865 and 1866 is performed by our
subsidiary, Ocean Rig AS, pursuant to three separate management
agreements. On August 1, 2008, the owning companies of the two
newbuilding drillships identified as Hulls 1837 and 1838, which we entered into
a share purchase agreement to acquire, each entered into a separate management
agreement with Ocean Rig AS for the supervision of the construction of these
drillships on the same terms as the agreements by and between the owning
companies of drillship hulls 1865 and 1866 and Ocean Rig AS. We
expect to enter into separate management agreements with Cardiff prior to the
spin off, pursuant to which Cardiff will provide additional supervisory services
in connection with the newbuilding drillships, Hull 1837, Hull 1838, Hull 1865
and Hull 1866.
S-2
The
Effect Of Recent Developments In The International Drybulk Shipping Industry On
Our Business
The Baltic Dry Index, or BDI, a daily average of charter rates in 26 shipping
routes measured on a time charter and voyage basis and covering Supramax,
Panamax and Capesize drybulk carriers, declined from a high of 11,793 in May
2008 to a low of 663 in December 2008, which represents a decline of
94%. The BDI fell over 70% during the month of October
alone. Over the comparable period of May through December 2008, the
high and low of the Baltic Panamax Index and the Baltic Capesize Index represent
a decline of 96% and 99%, respectively. The general decline in the drybulk
carrier charter market is due to various factors, including the lack of trade
financing for purchases of commodities carried by sea, which has resulted in a
significant decline in cargo shipments, and the excess supply of iron ore in
China, which has resulted in falling iron ore prices and increased stockpiles in
Chinese ports.
The general decline in the drybulk carrier charter market has resulted in lower
charter rates for some of our vessels exposed to the spot market and our time
charters and bareboat charter linked to the BDI. Specifically, we
have 12 vessels trading in the spot market that are currently exposed to the
downturn in the drybulk charter rates, five newbuilding drybulk carriers that we
expect will operate on spot charters when delivered in 2009 to 2010, as well as
two vessels on time charter and one vessel on bareboat charter at rates
that adjust with the BDI. The duration of our spot charters is between 60 and 90
days. Eleven spot charters expire in the period January 28, 2009 through
February 28, 2009. Should drybulk charter rates continue to decline
or remain at their current low level, our charter revenue with respect to these
vessels will remain low or decline even further.
In addition, the general decline in the
drybulk carrier charter market has resulted in lower drybulk vessel values. We
previously entered into contracts for the sale of the M/V La Jolla, the M/V Paragon and the M/V Toro for an aggregate
purchase price of $190.4 million. Due to the steep decline in the
drybulk market, we do not expect to deliver these vessels to the sellers. As a
result, we will retain the current indebtedness on these
vessels. Only the M/V Toro is chartered, and
therefore we will have to seek employment for the vessels M/V Paragon and M/V La Jolla at the current
low charter rates in the spot market.
Our
Fleet
Please see the fleet table below, which reflects information on our fleet
development and employment as of January 26, 2009. Drybulk charter
rates have deteriorated significantly from the rates set forth as of October 17,
2008, contained in Post-Effective Amendment No. 1 to our Registration Statement
on Form F-3ASR, filed on October 20, 2008.
S-3
|
Fleet Employment Data
|
Redelivery
|
||||||
|
Year
Built
|
DWT
|
Type
|
Current
Employment
|
Gross
rate
per day |
Earlier
|
Latest
|
|
|
Period Employment
Capesize:
|
|||||||
|
Brisbane
|
1995
|
151,066
|
Capesize
|
T/C
|
$57,000
|
Dec-11
|
Apr-12
|
|
Capri
|
2001
|
172,579
|
Capesize
|
T/C
|
$61,000
|
Apr-18
|
Jun-18
|
|
Flecha
|
2004
|
170,012
|
Capesize
|
T/C
|
$55,000
|
Jul-18
|
Nov-18
|
|
Manasota
|
2004
|
171,061
|
Capesize
|
T/C
|
$67,000
|
Feb-13
|
Apr-13
|
|
Mystic
|
2008
|
170,500
|
Capesize
|
T/C
|
$52,310
|
Aug-18
|
Dec-18
|
|
Samsara
|
1996
|
150,393
|
Capesize
|
T/C
|
$57,000
|
Dec-11
|
Apr-12
|
|
Panamax:
|
|||||||
|
Avoca
|
2004
|
76,500
|
Panamax
|
T/C
|
$45,500
|
Aug-13
|
Dec-13
|
|
Bargara
|
2002
|
74,832
|
Panamax
|
T/C
|
$43,750
|
May-12
|
Jul-12
|
|
Capitola
|
2001
|
74,832
|
Panamax
|
T/C
|
$39,500
|
Jun-13
|
Aug-13
|
|
Catalina
|
2005
|
74,432
|
Panamax
|
T/C
|
$40,000
|
Jun-13
|
Aug-13
|
|
Ecola
|
2001
|
73,931
|
Panamax
|
T/C
|
$43,500
|
Jun-12
|
Aug-12
|
|
Ligari
|
2004
|
75,583
|
Panamax
|
T/C
|
$55,500
|
Jun-12
|
Aug-12
|
|
Majorca
|
2005
|
74,364
|
Panamax
|
T/C
|
$43,750
|
Jun-12
|
Aug-12
|
|
Mendocino
|
2002
|
76,623
|
Panamax
|
T/C
|
$56,500
|
Jun-12
|
Sep-12
|
|
Padre
|
2004
|
73,601
|
Panamax
|
T/C
|
$46,500
|
Sep-12
|
Dec-12
|
|
Positano
|
2000
|
73,288
|
Panamax
|
T/C
|
$42,500
|
Sept-13
|
Dec-13
|
|
Redondo
|
2000
|
74,716
|
Panamax
|
T/C
|
$34,500
|
Apr-13
|
Jun-13
|
|
Saldanha
|
2004
|
75,500
|
Panamax
|
T/C
|
$52,500
|
Jun-12
|
Sep-12
|
|
Samatan
|
2001
|
74,823
|
Panamax
|
T/C
|
$39,500
|
May-13
|
Jul-13
|
|
Xanadu
|
1999
|
72,270
|
Panamax
|
T/C
|
$39,750
|
Jul-13
|
Sep-13
|
|
Heinrich
Oldendorff
|
2001
|
73,931
|
PaPanamax
|
BB**
|
$0
|
Mar-09
|
Jun-09
|
|
Supramax:
|
|
||||||
|
Clipper
Gemini
|
2003
|
51,201
|
Supramax
|
BB
|
$27,000
|
Oct-11
|
May-12
|
|
Pachino
|
2002
|
51,201
|
Supramax
|
BB
|
$20,250
|
Sept-10
|
Feb-11
|
S-4
|
Spot Vessels
|
|||||||
|
Capesize
:
|
|||||||
|
Alameda
|
2001
|
170,269
|
Capesize
|
Spot***
|
*
|
||
|
Newbuildings:
|
|||||||
|
N/B-Hull
No: 2089
|
Q2
2009
|
180,000
|
Capesize
|
Spot
|
N/A
|
||
|
Panamax:
|
|||||||
|
Conquistador
|
2001
|
75,607
|
Panamax
|
Spot**
|
*
|
||
|
Coronado
|
2000
|
75,706
|
Panamax
|
Spot
|
*
|
||
|
Iguana
|
1996
|
70,349
|
Panamax
|
Spot
|
*
|
||
|
La
Jolla
|
1997
|
72,126
|
Panamax
|
Unfixed
|
*
|
****
|
|
|
Delray
|
1994
|
71,862
|
Panamax
|
Spot
|
*
|
||
|
Maganari
|
2001
|
75,941
|
Panamax
|
Spot
|
*
|
||
|
Ocean
Crystal
|
1999
|
73,688
|
Panamax
|
Spot
|
*
|
||
|
Oregon
|
2002
|
74,204
|
Panamax
|
Spot
|
*
|
||
|
Paragon
|
1995
|
71,259
|
Panamax
|
Unfixed
|
*
|
****
|
|
|
Primera
|
1998
|
72,495
|
Panamax
|
Spot
|
*
|
||
|
Sonoma
|
2001
|
74,786
|
Panamax
|
Baumarine
|
*
|
||
|
Sorrento
|
2004
|
76,633
|
Panamax
|
Spot
|
*
|
||
|
Toro
|
1995
|
73,034
|
Panamax
|
Spot
|
*
|
****
|
|
|
Marbella
|
2000
|
72,561
|
Panamax
|
Spot
|
*
|
|
Newbuildings:
|
|||||||
|
N/B-Hull
No: SS058
|
Q2
2010
|
82,100
|
Panamax
|
Spot
|
N/A
|
||
|
N/B-Hull
No: SS059
|
Q3
2010
|
82,100
|
Panamax
|
Spot
|
N/A
|
||
|
N/B-Hull
No: 1518A
|
Q3
2009
|
75,000
|
Panamax
|
Spot
|
N/A
|
||
|
N/B-Hull
No: 1519A
|
Q4
2010
|
75,000
|
Panamax
|
Spot
|
N/A
|
|
Rigs
|
|||
|
Contract
with Shell U.K Limited, A/S Norske Shell
|
|||
|
Leiv
Eiriksson
|
2001
|
Fifth-generation
semi
|
and
Shell E&P Ireland for a two-year term at day rates
|
|
submersible
drilling unit
|
ranging
between $476,000 and $517,000 and expiring
|
||
| in September 2009 | |||
|
Fifth-generation
semi-submersible
|
Contract
with Tullow Oil PLC for a three-year term at
|
||
|
Eirik
Raude
|
2002
|
drilling
unit
|
a
day rate of $637,000 and expiring in October
2011
|
S-5
|
Newbuilding
Drillships:
|
|||||||
|
N/B-Hull
No: 1865
|
Q3
2011
|
UDW
Drillship
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|||||
|
N/B-Hull
No: 1866
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Q3
2011
|
UDW
Drillship
|
|||||
|
N/B-Hull
No: 1837
|
Q4
2010
|
UDW
Drillship*****
|
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|
N/B-Hull
No: 1838
|
Q1
2011
|
UDW
Drillship*****
|
|
*
|
For
spot vessels, we have calculated an average TCE rate of $5,000 per day for
January 2009. Our 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. See our Annual
Report on Form 20-F for the year ended December 31, 2007 for further
information with respect to calculation of this performance
measure.
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|
**
|
The
gross rate per day is 100% of the average of the TC routes of the Baltic
Panamax Index (PM4TC).
|
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***
|
The
gross rate per day is 100% of the average of the TC routes of the Baltic
Capesize Index .
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****
|
We
previously entered into contracts for the sale of these vessels for an
aggregate purchase price of $190.4 million. Due to the steep
decline in the drybulk market, we do not expect to deliver these vessels
to the sellers and therefore we expect to trade these vessels in the spot
market.
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|
*****
|
If
the spin off of Primelead Shareholders does not occur, we currently do not
anticipate that we will close on our acquisition of these newbuilding
drillships.
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|
1.
|
For
vessels trading in the Baumarine pool, the TCE rate is the pool’s estimate
for earnings in the month of December.
|
|
2.
|
For
vessels trading in the spot market or the Baumarine pool, the quoted rates
are not indications of future earnings and the Company gives no assurance
or guarantee of future rates.
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|
3.
|
The
M/V Heinrich
Oldendorff, M/V
Clipper Gemini and M/V Pachino (ex M/V VOC Galaxy) are employed under bareboat
charter.
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4.
|
We
previously entered into an agreement to purchase the Panamax drybulk
carrier the M/V Maple
Valley for $61.0 million. We have entered into arbitration
proceedings with the seller for breach of contract and are seeking legal
remedies under the memorandum of agreement in order to complete return of
our purchase
deposit.
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RECENT
DEVELOPMENTS
Cancellation
of Purchases of Four Panamax Vessels
We
previously entered into separate agreements to acquire four Panamax vessels,
including two newbuildings, for an aggregate purchase price of $400 million,
from companies beneficially owned by George Economou, our Chairman, Chief
Executive Officer and Interim Chief Financial Officer. In December
2008, we agreed to cancel these transactions in exchange for a cash payment by
us of $105.0 million in addition to the sellers’ retaining the deposits totaling
$55.0 million we previously paid for the four vessels. The vessels
were: (i) a 75,228 dwt Panamax vessel built in 2008, (ii) a 75,204 dwt Panamax
vessel built in 2007, (iii) a 75,000 dwt Panamax vessel under construction in
China scheduled to be delivered during the fourth quarter of 2008 and (iv) a
75,000 dwt Panamax vessel under construction in China scheduled to be delivered
during the first quarter of 2009. As part of the termination
agreement, we will have the exclusive option to purchase the abovementioned four
Panamax drybulk carriers on an en bloc basis at a fixed purchase price of $160.0
million. The exclusive purchase option granted to us by the selling companies
will terminate on December 31, 2009. The agreement was negotiated and approved
by a committee consisting of the independent members of our board of
directors.
S-6
Cancellation
of Purchases of Nine Capesize Vessels
In
October 2008, we agreed to purchase nine Capesize drybulk carriers for
consideration aggregating $1.17 billion, consisting of 19.4 million of our
common shares and the assumption of an aggregate of $470.4 million in debt and
future commitments. The sellers were clients of Cardiff Marine Inc.,
including affiliates of George Economou, our Chairman, Chief Executive Officer
and Interim Chief Financial Officer, and unaffiliated parties. In
light of the considerable decrease in asset values of the nine Capesize vessels,
we have reached an agreement with the sellers to cancel this
transaction. The consideration to cancel the transaction will consist
of the issuance of 6.5 million of our common shares to entities that are
unaffiliated with us nominated by the third-party sellers, which will be subject
to a six month lock-up period. The consideration received by entities
controlled by George Economou will consist solely of 3.5 million warrants with
strike prices, depending on the relevant tranches, of between $20 to $30 per
share. Each warrant entitles the holder to purchase one share of our
common stock. The warrants will vest over an 18-month period and will
expire after five years. This transaction has been approved by the
independent
members of the board of directors and is subject to negotiation and execution of
definitive documentation.
Disposal
of Three Capesize Newbuildings
In July
2007 and April 2008, we entered into separate agreements to acquire three
Capesize newbuildings from unaffiliated third parties for an aggregate purchase
price of $364.0 million. We have agreed to transfer our interests in
the owning companies of these vessels to an entity that is not affiliated with
us. In connection with this transfer of interest, the sellers will
release us and our relevant subsidiaries from the purchase agreements for these
vessels. This release reduces our aggregate obligations in the amount of $364.0
million in exchange for a total consideration of $116.4 million. The
consideration consists of $36.4 million in deposits toward the acquisition of
the three vessels already made by us, $30.0 million in cash that has been paid
to the purchaser, and two additional tranches of $25.0 million each payable to
the purchaser within 30 and 60 days, respectively. The two additional tranches
may be paid in cash or, at our option, by issuing 2.6 million shares of our
common stock for each tranche.
Cancellation
of Vessel Sale
On March
15, 2008, we entered into a memorandum of agreement to sell the M/V Delray (ex M/V Lacerta), a
1994 built, 71,862 dwt Panamax drybulk carrier, to an unaffiliated third party
for a sale price of $55.5 million. The sale will not close due to the
buyer’s repudiation of its obligations under the memorandum of agreement. A
deposit on the vessel in the amount of $5.6 million was made by the buyer. We
intend to pursue all legal remedies against the buyer.
Sale
of Vessel
In
November 2008, we delivered the M/V Tonga, a 1984 built,
66,798 dwt Panamax drybulk carrier, to her new owners for the sale price of $3.8
million, resulting in a loss of $3.0 million.
Suspension
of the Payment of Dividends
In light of a lower freight rate environment and a highly challenged financing
environment, our board of directors, beginning with the fourth quarter of 2008,
has suspended our common share dividend. Our dividend policy will be assessed by
the board of directors from time to time. The suspension allows us to preserve
capital and use the preserved capital to enhance our liquidity. The payment of
dividends to our shareholders in the future is subject to limitations imposed by
our lenders.
Adjustment
in Contract Price for Two Panamax Newbuildings
We
previously agreed to acquire two Panamax newbuildings, identified as Hulls 1518A
and 1519A, for a purchase price in the amount of $33.6 million
each. These vessels are scheduled for delivery from Hudong
Shipbuilding in the second quarter of 2009 and the third quarter of 2010,
respectively. An affiliated client of our manager, Cardiff, with
which we are affiliated, has agreed to purchase Hull 1569A, a sister vessel to
Hulls 1518A and 1519A. We have agreed to increase the purchase price for Hulls
1518A and 1519A by $5.0 million each in consideration of (i) a corresponding
$10.0 million decrease in the purchase price of Hull 1569A and (ii) an
undertaking that on delivery of Hulls 1518A and 1519A, the owner of Hull 1569A
will repay us by effecting payment of $10.0 million to Hudong
Shipbuilding. We will issue a guarantee to the shipyard for this
increase in the purchase price of Hulls 1518A and
1519A. This transaction has been approved by the independent members
of the board of directors as an accommodation to our manager.
S-7
Appointment
of New Director
On December 19, 2008, Mr. Angelos
Papoulias resigned as a member of our board of directors, effective December 19,
2008. This resignation was accepted by us on December 22, 2008, on
which day our board of directors appointed Mr. Evangelos Mytilinaios as a member
of the board and as the chairman of our
audit committee to succeed Mr. Papoulias. Mr. Mytilinaios has
extensive experience in the shipping industry. He served as a senior
executive in the Peraticos and Inlessis Group of Companies, which are involved
in the drybulk and tanker shipping sectors. He presently heads a
diversified group of companies involved in tourism and real estate development
in Greece and the United Kingdom. After attending the Athens
University of Economics, he started his career by joining and heading his
family’s aluminum production enterprise, Mytilineos Holdings S.A., one of the
largest aluminum product manufacturers in Greece.
Discussions
Concerning Waiver and Amendment of our Loan Agreement Covenants
Two of our leading banks, which
collectively held $751.8 million of our indebtedness as of December 31, 2008,
have notified us that we are in breach of certain financial covenants contained
in our loan agreements, and we have been in communication with another lender
that currently holds $650 million of our outstanding indebtedness regarding
breach of loan covenants. Currently, we are in discussions with these and other
lenders for waivers and amendment of certain financial and other covenants
contained in our loan agreements. There can be no assurance that we will be
successful in obtaining such waivers and amendments. In addition, in connection
with any waivers and/or amendments to our loan agreements, our lenders may
impose additional operating and financial restrictions on us and/or modify the
terms of our existing loan agreements. These restrictions may limit
our ability to, among other things, pay dividends, make capital expenditures
and/or incur additional indebtedness, including through the issuance of
guarantees. In addition, our lenders may require the payment of
additional fees, require prepayment of a portion of our indebtedness to them,
accelerate the amortization schedule for our indebtedness and increase the
interest rates they charge us on our outstanding indebtedness. We may
be required to use a significant portion of the net proceeds from this offering
to repay a portion of our outstanding indebtedness. If our lenders declare an
event of default, our lenders have the right to accelerate our outstanding
indebtedness under the relevant agreement and foreclose the liens on the vessels
mortgaged thereunder.
Acquisition
of Newbuilding Drillships Identified as Hulls 1837 and 1838
On
October 3, 2008, we entered into a share purchase agreement to acquire the
equity interests of DrillShips Holdings, which owns two newbuilding advanced
capability drillships for use in ultra deepwater drilling locations, identified
as Hull 1837 and Hull 1838, and is controlled by clients of Cardiff, including
Mr. Economou. The drillships are sister vessels to drillship hulls 1865 and 1866
and are also being constructed by Samsung Heavy Industries. The expected cost of
construction is approximately $747.5 million per unit. As of January
26, 2009, $413.0 million has been paid in installments for these hulls. In
connection with the acquisition of these drillships, we will assume installment
payments totaling $1.1 billion and will assume or have incurred total debt
obligations of $261.1 million. We have not yet obtained financing for
this $1.1 billion of installment payments for Hulls 1837 and 1838, which amounts
to approximately 70% of the purchase price of these drillships.
The
consideration payable to the sellers of DrillShips Holdings for these two ultra
deepwater drillships will be in the form of newly issued shares of Primelead
Shareholders. Primelead Shareholders will issue to the sellers of DrillShips
Holdings such number of shares that will be equal to 25% of its then issued and
outstanding shares. The percentage of common shares to be issued to the sellers
of DrillShips Holdings was determined based on valuations of the two newbuilding
drillships prepared by third party appraisers. If the spin off of
Primelead Shareholders does not occur, we currently anticipate that we will not
close on our acquisitions of Hulls 1837 and 1838. In October 2008, we
advanced on behalf of the owning companies of newbuilding Hulls 1837 and 1838
installment payments in the aggregate amount of $5.0 million. In
conjunction with these payments, we entered into an indemnity agreement with
these owning companies, pursuant to which such owning companies undertook to
reimburse us for such installment payments, plus interest at a fixed rate of
five percent, if the spin off does not occur.
S-8
RISK
FACTORS
Investment
in our shares involves a high degree of risk.
The abrupt and dramatic downturn in the drybulk charter market, from which we
derive the large majority of our revenues, has severely affected the drybulk
shipping industry and has harmed our business. The BDI fell 94% from
May 2008 through December 2008, and there is no indication that the drybulk
charter market will experience any significant recovery over the next several
months. These circumstances, which result from the economic
dislocation worldwide and the disruption of the credit markets, have had a
number of adverse consequences for drybulk shipping, including, among other
things:
|
●
|
an
absence of financing for vessels;
|
|
●
|
no
active second-hand market for the sale of vessels;
|
|
●
|
extremely
low charter rates, particularly for vessels employed in the spot
market;
|
|
●
|
charterers'
seeking to renegotiate the rates for existing time charters;
and
|
|
●
|
widespread
loan covenant defaults in the drybulk shipping
industry.
|
Two of our leading banks, which collectively held $751.8 million of our
indebtedness as of December 31, 2008, have notified us that we are in breach of
certain financial covenants contained in our loan agreements, and we have been
in communication with another lender that currently holds $650 million of our
outstanding indebtedness regarding breach of loan covenants. Currently, we are
in discussions with these and other lenders for waivers and amendments of
certain financial and other covenants contained in our loan
agreements. Given the depressed charter market, the values of our
vessels could fall even further and be below our outstanding debt. If
we are unable to obtain waivers or covenant amendments from our banks, our
lenders could accelerate our indebtedness and foreclose on our vessels. In
addition, if conditions in the drybulk charter market remain depressed, we may
seek to restructure our outstanding indebtedness.
Accordingly, your investment in our shares could lose most or all of its
value. Please read the risk factors described herein, in the base
prospectus and in the documents incorporated by reference herein.
The
drybulk carrier charter market has continued to deteriorate since October 2008,
which has adversely affected our revenues, earnings and profitability and our
ability to comply with our loan covenants.
The BDI declined from a high of 11,793 in May 2008 to a low of 663 in December
2008, which represents a decline of 94%. The BDI fell over 70% during the month
of October alone. Over the comparable period of May through December
2008, the high and low of the Baltic Panamax Index and the Baltic Capesize Index
represent a decline of 96% and 99%, respectively. The decline in charter rates
is due to various factors, including the lack of trade financing for purchases
of commodities carried by sea, which has resulted in a significant decline in
cargo shipments, and the excess supply of iron ore in China, which has resulted
in falling iron ore prices and increased stockpiles in Chinese
ports. The decline in charter rates in the drybulk market also
affects the value of our drybulk vessels, which follows the trends of drybulk
charter rates, and earnings on our charters, and similarly, affects our cash
flows, liquidity and compliance with the covenants contained in our loan
agreements.
S-9
We currently employ 12 vessels
in the spot market with their charters scheduled to expire in the next ninety
days, by which time we will have to negotiate new employment for all of these 12
vessels in the currently very depressed charter market. In addition,
two of our vessels are employed on time charters and one of our vessels is
employed on a bareboat charter at rates that adjust with the BDI. If
the very low charter rates in the drybulk market continue through any
significant period in 2009, this would have an adverse effect on our revenues,
profitability, cash flows and our ability to comply with the financial covenants
in our loan agreements. In such a situation, unless our lenders are
willing to provide waivers of covenant compliance or modifications to our
covenants, our lenders could accelerate our debt and we could face the loss of
our vessels.
We
have received notices from certain of our lenders that we are in breach of
certain financial covenants contained in our loan agreements and are currently
in discussions with these and other lenders for waivers and amendments of
certain financial and other covenants contained in our loan agreements, and if
we are not successful in obtaining such waivers and amendments, our lenders may
declare an event of default and accelerate our outstanding indebtedness under
the relevant agreement, which would impair our ability to continue to conduct
our business.
Our loan agreements require that we maintain loan to value ratios ranging from
120% to 200% of the total amount outstanding under the relevant agreement. The
current low drybulk charter rates and drybulk vessel values have affected our
ability to comply with these covenants. In addition, if the value of
our vessels deteriorates significantly, we may have to record an impairment
adjustment to our financial statements, which would adversely affect our
financial results and further hinder our ability to raise capital. We
have received notices from certain of our lenders that we are not in compliance
with our loan to value covenants and we are currently in discussions with these
and other lenders for waivers and amendments of certain financial and other
covenants contained in our loan agreements. There can be no assurance
that we will be successful in obtaining such waivers and
amendments.
If
we are not in compliance with our financial covenants, and are unable to obtain
waivers, our lenders could require us to post additional collateral, enhance our
equity and liquidity, increase our interest payments or pay down our
indebtedness to a level where we are in compliance with our loan covenants, sell
vessels in our fleet, or they could accelerate our indebtedness, which would
impair our ability to continue to conduct our business. In addition,
if we are unable to obtain waivers, we may be required to reclassify all of our
indebtedness as current liabilities, which would be significantly in excess of
our cash and other current assets. In addition, we may be unable to obtain a
report of our independent registered public accounting firm relating to our
annual audited financial statements without a “going concern” qualification,
which may trigger further defaults under our loan agreements.
If
our indebtedness is accelerated, it would be very difficult in the current
financing environment for us to refinance our debt or obtain additional
financing and we could lose our vessels if our lenders foreclose their
liens.
If
we receive waivers and/or amendments to our loan agreements, our lenders may
impose additional operating and financial restrictions on us and/or modify the
terms of our existing loan agreements.
Our lenders may impose the following restrictions that limit our ability to,
among other things:
|
●
|
pay
dividends to investors,
|
|
●
|
make
capital expenditures,
|
|
●
|
incur
additional indebtedness, including through the issuance of
guarantees,
|
|
●
|
create
liens on our assets, and/or
|
|
●
|
drop
below certain minimum cash deposits, as defined in our credit
facilities.
|
S-10
Therefore,
our ability to engage in some corporate actions may be restricted. In
addition to the above restrictions, our lenders may require the payment of
additional fees, require prepayment of a portion of our indebtedness to them,
accelerate the amortization schedule for our indebtedness and increase the
interest rates they charge us on our outstanding indebtedness. We may
be required to use a significant portion of the net proceeds from this offering
to repay a portion of our outstanding indebtedness. These potential
restrictions and requirements may limit our ability to pay dividends to you,
finance our future operations, make acquisitions or pursue business
opportunities.
We
are dependent upon key management personnel, particularly our Chairman, Chief
Executive Officer and Interim Chief Financial Officer, Mr. George
Economou.
Our continued
operations depend to a significant extent upon the abilities and efforts of
our management team, particularly our Chairman, Chief Executive Officer and
Interim Chief Financial Officer, Mr. George Economou. The loss of Mr.
Economou’s service to our Company could adversely affect our discussions with
our lenders and management of our fleet during this difficult economic period
and, therefore, could adversely affect our business prospects, financial
condition and results of operations. We do not currently, nor do we
intend to, maintain "key man" life insurance on any of our personnel, including
Mr. Economou.
The
failure of our counterparties to meet their obligations under our time charter
agreements could cause us to suffer losses or otherwise adversely affect our
business.
Twenty of
our vessels are currently employed under time charters, while three of our
vessels are currently employed on bareboat charter, with 11 customers, with 85%
of our revenues for the nine months ended September 30, 2008 generated from 30
customers chartering our drybulk carriers. The ability and willingness of each
of our counterparties to perform its obligations under a time charter agreement
with us will depend on a number of factors that are beyond our control and may
include, among other things, general economic conditions, the condition of the
drybulk shipping industry and the overall financial condition of the
counterparties. In addition, in depressed market conditions, there have been
reports of charterers, including some of our charterers, renegotiating their
charters or defaulting on their obligations under charters and our customers may
fail to pay charterhire or attempt to renegotiate charter rates. The time
charters on which we deploy 20 of the vessels in our fleet provide for charter
rates that are significantly above current market rates. Should a counterparty
fail to honor its obligations under agreements with us, it may be difficult to
secure substitute employment for such vessel, and any new charter arrangements
we secure in the spot market or on time charters would be at lower rates given
currently decreased charter rate levels, particularly in the drybulk carrier
market. If our charterers fail to meet their obligations to us or attempt to
renegotiate our charter agreements, we could sustain significant losses which
could have a material adverse effect on our business, financial condition,
results of operations and cash flows, as well as our ability to pay dividends,
if any, in the future, and comply with covenants in our credit
facilities.
We
may be unable to fulfill our obligations under our agreements to acquire one
vessel and to complete the construction of five newbuilding drybulk vessels that
are expected to be delivered to us in 2009 and 2010.
We
currently have contracts to acquire one vessel and to complete the construction
of five newbuilding vessels, for which we will be required to procure additional
financing of approximately $280.5 million. Our ability to obtain
financing in the current economic environment, particularly for the acquisition
of drybulk vessels, which are experiencing low charter rates and depressed
vessel values, is limited and unless there is an improvement in our cash flow
from operations and we are successful in obtaining debt financing, we may not be
able to complete these transactions and we could lose our deposit money, which
amounts to $70.6 million for the drybulk carriers as of January 26, 2009 and we
may incur additional liability and costs.
S-11
If
the spin off of our subsidiary, Primelead Shareholders Inc., is delayed or does
not occur, we will have significant additional indebtedness and payment
obligations relating to the two drillships under construction that it will
acquire.
Prior
to or concurrently with the spin off of our subsidiary, Primelead Shareholders,
which now owns the stock of Ocean Rig ASA, it will acquire (i) our existing
subsidiary, DrillShips Investment, which has contracts for construction of the
two drillships, Hulls 1865 and 1866, to be delivered in July 2011 and September
2011, respectively, and (ii) DrillShips Holdings, an entity not currently owned
by us, which has contracts for construction of Hulls 1837 and 1838, to be
delivered in December 2010 and March 2011, respectively, in exchange for 25% of
the then-outstanding shares of Primelead Shareholders. Drillships Holdings
is controlled by clients of Cardiff, including Mr. Economou. Due to the
disruptions in the credit markets worldwide and weakness in the energy sector,
we do not expect to complete the spin off until the second half of 2009. If the
spin off is delayed or does not occur, we will retain liability for the $173.4
million of indebtedness for Hulls 1865 and 1866 already incurred to finance
payments made under the drillship newbuilding contracts, with no newbuilding
installment payments due within the next year and $1.2 billion of newbuilding
installment payments due thereafter. We have signed contracts to purchase two
additional newbuilding ultra-deep water drillships, identified as Hulls 1837 and
1838, for which there are $1.1 billion in remaining installment payments.
Financing has not been arranged for these installment payments. If the spin off
does not occur, we currently anticipate that we will not close our acquisitions
of Hulls 1837 and 1838. This indebtedness would be in addition to the
indebtedness we have incurred and will incur to finance our drybulk fleet and
its operations, would adversely affect our ability to comply with our loan
covenants and service our indebtedness and would adversely impact our
profitability and cash flows. If for any reason we fail to take
delivery of the two newbuilding drillships, Hulls 1865 and 1866, we could lose
our deposit money, which amounts to $430.8 million as of January 26,
2009.
An impairment of goodwill and
intangible assets could reduce our earnings.
At
September 30, 2008, our balance sheet reflected approximately
$692.6 million of goodwill associated with the acquisition of Ocean Rig
ASA. Goodwill is recorded when the purchase price of a business exceeds the fair
market value of the tangible and separately measurable intangible net assets.
U.S. generally accepted accounting principles require us to test goodwill for
impairment on an annual basis or when events or circumstances occur indicating
that goodwill might be impaired. Long-lived assets such as intangible assets
with finite useful lives are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If we
determine that any of our goodwill or intangible assets were impaired, we would
be required to take an immediate charge to earnings with a correlative effect on
our equity and balance sheet leverage as measured by debt to total
capitalization.
We
cannot be assured that we will be able to raise equity and debt financing
sufficient to meet our future capital and operating needs.
We expect
that the net proceeds of this offering will be $487.2 million; however we cannot
assure you that we will be able to sell such amount of common
shares. Furthermore, even if we raise these net proceeds, we cannot
be assured that the proceeds will be sufficient to meet our capital and
operating needs, particularly if the charter rates in the drybulk charter market
remain low for a prolonged period of time. Based on an assumed
offering price of $11.40 per share, which was the last reported closing price of
our common shares on the Nasdaq Global Select Market on January 26, 2009,
this offering of $500 million of our common shares would result in an offer and
sale of 43,859,649 common shares. While we have recently sold 27.05 million
common shares since October 2008 and are offering up to $500 million of our
common shares pursuant to this prospectus supplement, we may have to attempt to
sell additional shares in the future to satisfy our capital and operating needs.
As our working capital deficit continues to grow, lenders may be unwilling to
provide future financing or will provide future financing at significantly
increased rates. If we sell shares in the future, the prices at which we
sell these future shares will vary, and these variations may be
significant. Purchasers of the shares we sell pursuant to future
offerings, as well as our existing shareholders, will experience significant
dilution if we sell these future shares at prices significantly below the price
at which previous shareholders invested.
S-12
Our
board of directors has determined to suspend the payment of cash dividends as a
result of market conditions in the international shipping industry, and until
such market conditions improve, it is unlikely that we will reinstate the
payment of dividends.
As previously
mentioned, in light of a lower freight rate environment and a highly challenged
financing environment, our board of directors, beginning with the fourth quarter
of 2008, has suspended our common share dividend. Our dividend policy will be
assessed by the board of directors from time to time. The suspension allows us
to preserve capital and use the preserved capital to capitalize on market
opportunities
as they may arise. Until market conditions improve, it is unlikely
that we will reinstate the payment of dividends. In addition, other
external factors, such as our lenders imposing restrictions on our ability to
pay dividends under the terms of our loan agreements, may limit our ability to
pay dividends. Further, we may not be permitted to pay dividends if
we are in breach of the covenants contained in our loan agreements.
The
continued steep decline in the price of crude oil may affect the revenues that
we are able to earn from our drilling rigs and the rates we are able to
negotiate for our newbuilding drillships.
The price of
crude oil is volatile and has continued to fall sharply over the past few months
despite significant reductions in crude production announced by
OPEC. Changes in crude oil prices often affect oil exploration and
drilling activities that, in turn, drive changes in the contract rates for oil
drilling equipment, such as deep sea oil rigs and drillships, or, possibly, the
suspension of exploration and drilling programs. Such changes and any
such suspension could affect the rates which we receive for these rigs when
their contracts expire, with the result that we will recognize less revenue from
their operations. The employment contract for the Leiv Eiriksson, which
currently earns $517,000 per day, expires in September 2009. We have
not yet secured subsequent employment for the Leiv Eiriksson after the
current contract expires. The contract for the Eirik Raude, which earns
$637,000 on average over the contract period per day, expires in October
2011. The counterparty to the contract, Tullow Oil, has an option
through March 31, 2009 to extend the contract for one or two additional years.
Similarly, were the spin off of our subsidiary, Primelead Shareholders Inc., not
to occur, and if the price of crude oil were to fall, we may not be able to
negotiate charter agreements for the four newbuilding drillships that are
scheduled to be delivered to us in 2010 through 2011 at attractive rates or at
all. If the spin off does not occur, we currently anticipate that we will not
close the acquisition of the additional two newbuilding drillships identified as
Hulls 1837 and 1838.
Acts
of piracy on ocean-going vessels have recently increased in frequency, which
could adversely affect our business.
Acts of
piracy have historically affected ocean-going vessels trading in regions of the
world such as the South China Sea and in the Gulf of Aden off the coast of
Somalia. Throughout 2008, the frequency of piracy incidents has
increased significantly, particularly in the Gulf of Aden off the coast of
Somalia. For example, in November 2008, the M/V Sirius Star, a tanker
vessel not affiliated with us, was captured by pirates in the Indian Ocean while
carrying crude oil estimated to be worth $100 million. If these
piracy attacks result in regions in which our vessels are deployed being
characterized by insurers as “war risk” zones, as the Gulf of Aden temporarily
was in May 2008, or Joint War Committee (JWC) “war and strikes” listed areas,
premiums payable for such coverage could increase significantly and such
insurance coverage may be more difficult to obtain. In addition, crew
costs, including due to employing onboard security guards, could increase in
such circumstances. We may not be adequately insured to cover losses
from these incidents, which could have a material adverse effect on
us. In addition, detention hijacking as a result of an act of piracy
against our vessels, or an increase in cost, or unavailability of insurance for
our vessels, could have a material adverse impact on our business, financial
condition and results of operations.
United
States tax authorities could treat us as a "passive foreign investment company,"
which could have adverse United States federal income tax consequences to United
States holders
A foreign
corporation will be treated as a "passive foreign investment company," or PFIC,
for United States federal income tax purposes if either (1) at least 75% of its
gross income for any taxable year consists of certain types of "passive income"
or (2) at least 50% of the average value of the corporation's assets produce or
are held for the production of those types of "passive income." For
purposes of these tests, "passive income" includes dividends, interest, and
gains from the sale or exchange of investment property and rents and royalties
other than rents and royalties which are received from unrelated parties in
connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income." United States shareholders of a PFIC
are subject to a disadvantageous United States federal income tax regime with
respect to the income derived by the PFIC, the distributions they receive from
the PFIC and the gain, if any, they derive from the sale or other disposition of
their shares in the PFIC.
S-13
Based on
our method of operation, we do not believe that we will be a PFIC with respect
to any taxable year. In this regard, we intend to treat the gross income we
derive or are deemed to derive from our time chartering activities as services
income, rather than rental income. Accordingly, we believe that our
income from our time chartering activities does not constitute "passive income,"
and the assets that we own and operate in connection with the production of that
income do not constitute passive assets.
There is,
however, no direct legal authority under the PFIC rules addressing our proposed
method of operation. Accordingly, no assurance can be given that the United
States Internal Revenue Service, or IRS, or a court of law will accept our
position, and there is a risk that the IRS or a court of law could determine
that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in
the nature and extent of our operations.
If the
IRS were to find that we are or have been a PFIC for any taxable year, our
United States shareholders will face adverse United States tax
consequences. Under the PFIC rules, unless those shareholders make an
election available under the Code (which election could itself have adverse
consequences for such shareholders, as discussed below under “Taxation – United
States Federal Income Tax Considerations – United States Federal Income Taxation
of Holders – United States Federal Income Taxation of United States Holders”),
such shareholders would be liable to pay United States federal income tax at the
then prevailing income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of our common shares, as if
the excess distribution or gain had been recognized ratably over the
shareholder's holding period of our common shares. See "Taxation –
United States Federal Income Tax Considerations – United States Federal Income
Taxation of Holders – United States Federal Income Taxation of United States
Holders “ for a more comprehensive discussion of the United States federal
income tax consequences to United States shareholders if we are treated as a
PFIC.
We
may have to pay tax on United States source shipping income, which would reduce
our earnings.
Under the
United States Internal Revenue Code of 1986, or the Code, 50% of the gross
shipping income of a vessel-owning or -chartering corporation, such as ourselves
and our subsidiaries, that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States may be subject
to a 4% United States federal income tax without allowance for any deductions,
unless that corporation qualifies for exemption from tax under Section 883 of
the Code and the Treasury Regulations promulgated thereunder.
We expect
that we and each of our subsidiaries qualify for this statutory tax exemption
and we have taken and intend to continue to take this position for United States
federal income tax return reporting purposes. However, there are factual
circumstances beyond our control that could cause us to lose the benefit of this
tax exemption and thereby become subject to United States federal income tax on
our United States source shipping income. Due to the factual nature
of the issues involved, it is possible that our tax-exempt status or that of any
of our subsidiaries may change.
If we or
our subsidiaries are not entitled to this exemption under Section 883 for any
taxable year, we or our subsidiaries could be subject for those years to an
effective 2% (i.e., 50% of 4%) United States federal income tax on our gross
shipping income attributable to transportation that begins or ends, but that
does not both begin and end, in the United States. 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.
Our
subsidiaries that engage in drilling activities may be subject to taxation in
the jurisdictions in which they conduct activities.
Our subsidiaries that provide services relating to drilling may be
subject to taxation in the jurisdictions in which such activities are
conducted. Such taxation would result in decreased earnings
available to our shareholders.
The
spin off of our subsidiary, Primelead Shareholders Inc., may have adverse tax
consequences to shareholders.
The
proposed spin off of our subsidiary, Primelead Shareholders Inc., may be a
taxable transaction to our shareholders depending upon their country of
residence. As a result, a shareholder may recognize gain and be
subject to tax as a result of receiving shares of Primelead Shareholders Inc. in
the spin off, notwithstanding that cash had not been received. In
addition, after the spin off, Primelead Shareholders Inc. may be treated as a
passive foreign investment company, which would have adverse United States
federal income tax consequences to a United States holder of shares of Primelead
Shareholders Inc. Under the passive foreign investment company rules,
unless those shareholders make an election available under the Code (which
election could itself have adverse consequences for such shareholders), such
shareholders would be liable to pay United States federal income tax at the then
prevailing income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of shares of Primelead
Shareholders Inc., as if the excess distribution or gain had been recognized
ratably over the shareholder's holding period in such shares.
S-14
USE
OF PROCEEDS
We
will use the net proceeds from the sale of securities offered by this prospectus
supplement for working capital, capital expenditures, repayment of indebtedness,
general corporate purposes and, as needed, to enhance our liquidity and to
assist us in complying with our loan covenants.
CAPITALIZATION
The
following table sets forth our consolidated capitalization as of September 30,
2008:
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●
|
on
an actual basis;
|
|
●
|
on
an adjusted basis to give effect to (i) the additional drawdown of $157.5
million for the two drillships under construction; (ii) the additional
drawdown of $250.0 million for Ocean Rig which was used for general
corporate purposes; (iii) loan installment payments and loan repayments of
$192.7 million made in October, November, December 2008 and January 2009;
(iv) our issuance and sale of 2,069,700 common shares pursuant to our
prospectus supplement dated October 21, 2008, resulting in net proceeds of
$41.9 million after deducting issuance costs of $0.7 million; and (v) our
issuance and sale of 24,980,300 common shares pursuant to our prospectus
supplement dated November 5, 2008, resulting in net proceeds of $167.1
million after deducting issuance costs of $4.6
million;
|
|
●
|
on
a further adjusted basis, giving effect to (i) our issuance and sale of
$500,000,000 of our common shares pursuant to this prospectus supplement,
or 43,859,649 common shares, at an assumed offering price of $11.40 per
share, which was the last reported closing price of our common stock on
January 26, 2009, resulting in net proceeds of $487.2 million after
deducting estimated issuance costs of $12.8 million; and (ii) the issuance
of 19,431,840 shares that were to be issued in exchange for the shares of
the single purpose companies owning the nine Capesize drybulk carriers
that we had agreed to acquire, amounting to $581.0 million. We would have
assumed $217.7 million of existing debt in connection with the acquisition
of these nine Capesize
vessels.
|
S-15
|
As
of September 30, 2008
|
||||||||||||
|
Actual
|
As
Adjusted (1)
|
As
Further Adjusted (2)(4)(5)
|
||||||||||
|
(in thousands of U.S.
dollars)
|
||||||||||||
|
Total
debt, including current portion
|
$ | 2,942,013 | $ | 3,156,838 | $ | 3,374,555 | ||||||
|
Shareholders’
equity
|
||||||||||||
|
Preferred
stock, $0.01 par value; 500,000,000 shares authorized, none
issued
|
- | - | - | |||||||||
|
Common
stock, $0.01 par value; 1,000,000,000 shares authorized, 43,550,000 shares
issued and outstanding at September 30, 2008; 70,600,000 shares issued as
adjusted; 133,891,489 shares as further adjusted
|
435 | 706 | 1,338 | |||||||||
|
Additional
paid-in capital (3)
|
930,835 | 1,139,513 | 2,207,102 | |||||||||
|
Accumulated
other comprehensive income
|
1,906 | 1,906 | 1,906 | |||||||||
|
Retained
earnings
|
1,204,718 | 1,204,718 | 1,204,718 | |||||||||
|
Total
shareholders’ equity
|
2,137,894 | 2,346,843 | 3,415,064 | |||||||||
|
Total
capitalization
|
$ | 5,079,907 | $ | 5,503,681 | $ | 6,789,619 | ||||||
|
(1)
|
There
have been no significant adjustments to our capitalization since January
26, 2009, as so adjusted.
|
|
(2)
|
Assumes
a sale price of $11.40 per share, which was the last reported closing
price of our common stock on January 26, 2009.
|
|
(3)
|
The
difference in the assumed average share price and the par value of the
shares that were to be issued for the nine Capesize drybulk carriers is
included in Additional paid-in capital. This table assumes an average
share price $29.90 for the shares that would have been issued in
connection with the acquisition of the nine Capesize vessels, which was
the average share price before and after the date the agreements were
executed and the announcement date.
|
|
(4)
|
Pursuant
to our cancellation of the purchase agreements for these nine Capesize
drybulk carriers, we will issue 6,500,000 common shares and 3,500,000
warrants to the nominees of the sellers. These common shares
and warrants have not been included in the above table.
|
|
(5)
|
Two
of the tranches to be paid in connection with our disposal of the owning
companies of three Capesize newbuildings may be paid at our option in
common shares. This potential issuance of an aggregate of
5,200,000 common shares has not been included in the table
above.
|
The table
above does include debt incurred in respect of the drillship newbuilding
contracts for Hulls 1865 and 1866 which are owned by the Company. However, the
table above does not include $413.0 million already incurred to finance payments
made under the drillship newbuilding contracts for Hulls 1837 and 1838, which
have not yet been acquired, and an additional $1.1 billion of newbuilding
installment payments due in 2009 and afterwards, the financing for which has not
yet been arranged.
S-16
Our
common stock currently trades on the NASDAQ Global Select Market under the
symbol “DRYS”. Since the filing of our Annual Report on Form 20-F for the fiscal
year ended December 31, 2007, the high and low closing price of our
common stock were as follows:
|
Sales
Price
|
||||||||
|
For
the Period
|
High
|
Low
|
||||||
|
2009
|
||||||||
|
January 1-January
26
|
$ |
16.58
|
$ |
10.49
|
||||
|
2008
|
||||||||
|
Fourth
quarter
|
$ |
35.45
|
$ |
3.54
|
||||
|
December
|
12.43
|
3.71
|
||||||
|
November
|
21.94
|
3.54
|
||||||
|
October
|
35.45
|
14.05
|
||||||
|
Third
quarter
|
$
|
79.61
|
$
|
33.15
|
||||
|
September
|
68.78
|
33.15
|
||||||
|
August
|
79.61
|
66.30
|
||||||
|
July
|
79.13
|
70.58
|
||||||
|
Second
quarter
|
$
|
110.74
|
$
|
59.98
|
||||
|
First
quarter
|
$
|
87.45
|
$
|
52.18
|
||||
On
January 26, 2009, the closing price for our common stock on the Nasdaq Global
Select Market was $11.40 per share.
S-17
TAXATION
The
following is a discussion of the material Marshall Islands and United States
federal income tax considerations relevant to an investment decision by a United
States Holder or a Non-United States Holder, each as defined below, with respect
to the common stock. This discussion does not purport to deal with the tax
consequences of owning common stock to all categories of investors, some of
which, such as dealers in securities, investors whose functional currency is not
the United States dollar and investors that own, actually or under applicable
constructive ownership rules, 10% or more of our common stock, may be subject to
special rules. This discussion deals only with holders who hold the common stock
as a capital asset. Potential investors are encouraged to consult their own tax
advisors concerning the overall tax consequences arising in their own particular
situation under United States federal, state, local or foreign law of the
ownership of common stock.
United
States Federal Income Tax Considerations
The
following are the material United States federal income tax consequences to us
of our activities and to United States Holders and Non-United States Holders,
each as defined below, of our common stock. The following discussion of United
States federal income tax matters is based on the United States Internal Revenue
Code of 1986, or the Code, judicial decisions, administrative pronouncements,
and existing and proposed regulations issued by the United States Department of
the Treasury, all of which are subject to change, possibly with retroactive
effect. The discussion below is based, in part, on the description of
our business as described herein and assumes that we conduct our business as
described therein. References in the following discussion to “we” and “us” are
to DryShips Inc. and its subsidiaries on a consolidated basis.
United
States Taxation of Our Shipping Income
In
General
We
anticipate that we will derive a substantial amount of our 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 we refer 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. We are not permitted
by law to engage in transportation that gives rise to 100% United States source
income. Shipping income attributable to transportation exclusively between
non-United States 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 United States federal income
tax.
Based
upon our anticipated shipping operations, our vessels will operate in various
parts of the world, including to or from United States ports. Unless exempt from
United States taxation under Section 883 of the Code, we will be subject to
United States federal income taxation, in the manner discussed below, to the
extent our 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 United States Treasury
Department, we will be exempt from United States taxation on our United
States-source shipping income if:
|
|
(i)
|
We
are 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 each category of shipping income for which exemption
is being claimed under Section 883 and which we refer to as the “country
of organization requirement,”
and
|
S-18
|
|
(ii)
|
We
can satisfy any one of the following two (2) stock ownership
requirements:
|
|
●
|
more
than 50% of our stock, in terms of value, is beneficially owned by
individuals who are residents of a qualified foreign country, which we
refer to as the “50% Ownership Test,”
or
|
|
●
|
our
stock is “primarily and regularly” traded on an established securities
market located in the United States or in a qualified foreign country,
which we refers to as the “Publicly Traded
Test.”
|
The
United States Treasury Department has recognized the Marshall Islands, Liberia,
Panama and Malta, the countries of incorporation of ourselves and our
ship-owning subsidiaries, as qualified foreign countries. Accordingly, we
and each our subsidiaries that derive income from international transportation
are expected to satisfy the country of organization requirement.
Therefore,
our eligibility to qualify for exemption under Section 883 is wholly dependent
upon being able to satisfy one of the stock ownership requirements. Given that
our shares are widely held and the ownership certification procedures that must
be complied with in connection with the 50% Ownership Test, we do not expect to
be able to satisfy the 50% Ownership Test for any taxable year. For the 2008
taxable year, we believe that we satisfied the Publicly-Traded Test since, for
more than half the days of our 2008 taxable year, our stock was “primarily and
regularly traded” on the Nasdaq Global Select Market which is an “established
securities market” in the United States within the meaning of the Section 883
regulations. We intend to take this position on our 2008 United
States income tax returns. There are factual circumstances beyond our control
that could cause us to fail to qualify for the benefit of this exemption and
thereby become subject to United States federal income taxation on our United
States source shipping income. For instance, we and our subsidiaries
may not be able to satisfy the Publicly Traded Test for any taxably year if,
during more than half the days during such taxable year, shareholders who each
owned, actually or under applicable constructive ownership rules, at least 5% of
our common shares in the aggregate (“5% shareholders”) own, actually or under
applicable constructive ownership rules, 50% or more of our common shares (the
“closely-held rule”). If we were subject to the closely-held rule,
then we would not qualify for the Publicly-Traded Test, unless we could
substantiate, that a sufficient portion of the common shares within the
closely-held block were owned by 5% shareholders who were residents of one or
more “qualified foreign countries” in order to prevent non-qualified 5%
shareholders from owning 50% or more of our common shares. These
substantiation rules are onerous and there is no assurance that we would be able
to satisfy them for any 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
United States-source shipping income, our United States-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 our shipping income would be treated as
being derived from United States sources, the maximum effective rate of United
States federal income tax on our shipping income would never exceed 2% under the
4% gross basis tax regime.
To the
extent the benefits of the Section 883 exemption are unavailable and our
United States-source shipping income is considered to be “effectively connected”
with the conduct of a United States trade or business, as described below, any
such “effectively connected” United States-source shipping income, net of
applicable deductions, would be subject to the United States federal corporate
income tax currently imposed at rates of up to 35%. In addition, we may be
subject to the 30% “branch profits” taxes on earnings effectively connected with
the conduct of such trade or business, as determined after allowance
for
certain adjustments, and on certain interest paid or deemed paid attributable to
the conduct of our United States trade or business.
S-19
Our
United States-source shipping income would be considered “effectively connected”
with the conduct of a United States trade or business only if:
|
●
|
we
have, or are considered to have, a fixed place of business in the United
States involved in the earning of shipping income;
and
|
|
●
|
in
the case of income from time or voyage charters, substantially all of our
United States-source shipping income from time or voyage charters is
attributable to regularly scheduled transportation, such as the operation
of a vessel that follows a published schedule with repeated sailings at
regular intervals between the same points for voyages that begin or end in
the United States or, in the case or bareboat charters, substantially all
of our United States-source shipping income from bareboat charters is
attributable to a fixed place of business maintained by us in the United
States.
|
Based on
the foregoing and on the expected mode of our shipping operations and other
activities, we believe that none of our United States-source shipping income
will be “effectively connected” with the conduct of a United States trade or
business.
Gain
on Sale of Vessels
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 United States 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.
United
States Taxation of Our Other Income
In
addition to our shipping operations, we provide drilling services to third
parties on the United States Outer Continental Shelf through our indirect
wholly-owned subsidiary, Ocean Rig USA LLC. Ocean Rig USA LLC is
engaged in a trade or business in the United States. Therefore, Ocean
Rig USA LLC is subject to United States federal income tax on a net basis on its
taxable income. The amount of such taxable income and such United
States federal income tax liability will vary depending upon the level of Ocean
Rig USA LLC’s operations in the United States in any given taxable year.
Distributions from Ocean Rig USA LLC to our subsidiary that owns the interests
in Ocean Rig USA LLC may be subject to United States federal withholding tax at
a 30% rate.
United
States Federal Income Taxation of Holders
United
States Federal Income Taxation of United States Holders
As used
herein, the term “United States Holder” means a beneficial owner of common stock
that is a United States citizen or resident, United States corporation or other
United States entity taxable as a corporation, an estate the income of which is
subject to United States federal income taxation regardless of its source, or a
trust if a court within the United States is able to exercise primary
jurisdiction over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the
trust.
If a
partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.
S-20
Distributions
Subject
to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our common stock to a United States
Holder will generally constitute dividends, which may be taxable as ordinary
income or “qualified dividend income” as described in more detail below, to the
extent of our current or accumulated earnings and profits, as determined under
United States federal income tax principles. Distributions in excess of our
earnings and profits will be treated first as a nontaxable return of capital to
the extent of the United States Holder's tax basis in his common stock on a
dollar-for-dollar basis and thereafter as capital gain. Because we are not a
United States corporation, United States Holders that are corporations will not
be entitled to claim a dividends received deduction with respect to any
distributions they receive from us. Dividends paid with respect to our common
stock will generally be treated as “passive category income” or, in the case of
certain types of United States Holders, “general category income” for purposes
of computing allowable foreign tax credits for United States foreign tax credit
purposes.
Dividends paid on our common
stock to a United States Holder who is an individual, trust or estate (a “United
States Individual Holder”) will generally be treated as “qualified dividend
income” that is taxable to such United States Individual Holders at preferential
tax rates (through 2010) provided that (1) the common stock is readily
tradable on an established securities market in the United States (such as the
Nasdaq National Market, on which our common stock will be listed); (2) we
are not a passive foreign investment company for the taxable year during which
the dividend is paid or the immediately preceding taxable year (which we do not
believe we are, have been or will be); and (3) the United States Individual
Holder has owned the common stock for more than 60 days in the 121-day
period beginning 60 days before the date on which the common stock becomes
ex-dividend. There is no assurance that any dividends paid on our common stock
will be eligible for these preferential rates in the hands of a United States
Individual Holder. Legislation has been previously introduced in the
United States Congress which, if enacted, would preclude our dividends from
qualifying for such preferential rates prospectively from the date of the
enactment. Any dividends paid by the Company which are not eligible
for these preferential rates will be taxed as ordinary income to a United States
Holder.
Special
rules may apply to any “extraordinary dividend” generally, a dividend in an
amount which is equal to or in excess of ten percent of a stockholder's adjusted
basis (or fair market value in certain circumstances) in a share of common stock
paid by us. If we pay an “extraordinary dividend” on our common stock that is
treated as “qualified dividend income,” then any loss derived by a United States
Individual Holder from the sale or exchange of such common stock will be treated
as long-term capital loss to the extent of such dividend.
Sale,
Exchange or other Disposition of Common Stock
Assuming
we do not constitute a passive foreign investment company for any taxable year,
a United States Holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of our common stock in an amount equal to
the difference between the amount realized by the United States Holder from such
sale, exchange or other disposition and the United States Holder's tax basis in
such stock. Such gain or loss will be treated as long-term capital gain or loss
if the United States Holder's holding period is greater than one year at the
time of the sale, exchange or other disposition. Such capital gain or loss will
generally be treated as United States-source income or loss, as applicable, for
United States foreign tax credit purposes. A United States Holder's ability to
deduct capital losses is subject to certain limitations.
Passive
Foreign Investment Company Status and Significant Tax Consequences
Special
United States federal income tax rules apply to a United States Holder that
holds stock in a foreign corporation classified as a passive foreign investment
company for United States federal income tax purposes. In general, we will be
treated as a passive foreign investment company with respect to a United States
Holder if, for any taxable year in which such holder held our common stock,
either:
S-21
|
●
|
at
least 75% of our gross income for such taxable year consists of passive
income (e.g., dividends, interest, capital gains and rents derived other
than in the active conduct of a rental business);
or
|
|
●
|
at
least 50% of the average value of the assets held by the corporation
during such taxable year produce, or are held for the production of,
passive income.
|
For purposes of determining whether we are a passive foreign investment company,
we will be treated as earning and owning our proportionate share of the income
and assets, respectively, of any of our subsidiary corporations in which we own
at least 25 percent of the value of the subsidiary's stock. Income earned,
or deemed earned, by us in connection with the performance of services would not
constitute passive income. By contrast, rental income would generally constitute
“passive income” unless we were treated under specific rules as deriving our
rental income in the active conduct of a trade or business.
Based on our current operations and future projections, we do not believe that
we are, nor do we expect to become, a passive foreign investment company with
respect to any taxable year. Although there is no legal authority directly on
point, and we are not relying upon an opinion of counsel on this issue, our
belief is based principally on the position that, for purposes of determining
whether we are a passive foreign investment company, the gross income we derive
or are deemed to derive from the time chartering and voyage chartering
activities of our wholly-owned subsidiaries should constitute services income,
rather than rental income. Correspondingly, such income should not constitute
passive income, and the assets that we or our wholly-owned subsidiaries own and
operate in connection with the production of such income, in particular, the
tankers, should not constitute passive assets for purposes of determining
whether we are a passive foreign investment company. We believe there is
substantial legal authority supporting our position consisting of case law and
Internal Revenue Service pronouncements concerning the characterization of
income derived from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal authority specifically
relating to the statutory provisions governing passive foreign investment
companies, the Internal Revenue Service or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner to
avoid being classified as a passive foreign investment company with respect to
any taxable year, we cannot assure you that the nature of our operations will
not change in the future.
As
discussed more fully below, if we were to be treated as a passive foreign
investment company for any taxable year, a United States Holder would be subject
to different taxation rules depending on whether the United States Holder makes
an election to treat us as a “Qualified Electing Fund,” which election we refer
to as a “QEF election.” As an alternative to making a QEF election, a United
States Holder should be able to make a “mark-to-market” election with respect to
our common stock, as discussed below.
Taxation of United States Holders Making a Timely QEF Election
If a United States Holder makes a timely QEF election, which United States
Holder we refer to as an “Electing Holder,” the Electing Holder must report each
year for United States federal income tax purposes his pro rata share of our
ordinary earnings and our net capital gain, if any, for our taxable year that
ends with or within the taxable year of the Electing Holder, regardless of
whether or not distributions were received from us by the Electing Holder. The
Electing Holder's adjusted tax basis in the common stock will be increased to
reflect taxed but undistributed earnings and profits. Distributions of earnings
and profits that had been previously taxed will result in a corresponding
reduction in the adjusted tax basis in the common stock and will not be taxed
again once distributed. An Electing Holder would generally recognize capital
gain or loss on the sale, exchange or other disposition of our common stock. A
United States Holder would make a QEF election with respect to any year that our
company is a passive foreign investment company by filing IRS Form 8621
with his United States federal income tax return. If we were aware that we were
to be treated as a passive foreign investment company for any taxable year, we
would provide each United States Holder with all necessary information in order
to make the QEF election described above.
S-22
Taxation of United States
Holders Making a “Mark-to-Market” Election
Alternatively, if we were to be treated as a passive foreign investment company
for any taxable year and, as we anticipate, our stock is treated as “marketable
stock,” a United States Holder would be allowed to make a “mark-to-market”
election with respect to our common stock, provided the United States Holder
completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury Regulations. If that election is made, the
United States Holder generally would include as ordinary income in each taxable
year the excess, if any, of the fair market value of the common stock at the end
of the taxable year over such holder's adjusted tax basis in the common stock.
The United States Holder would also be permitted an ordinary loss in respect of
the excess, if any, of the United States Holder's adjusted tax basis in the
common stock over its fair market value at the end of the taxable year, but only
to the extent of the net amount previously included in income as a result of the
mark-to-market election. A United States Holder's tax basis in his common stock
would be adjusted to reflect any such income or loss amount. Gain realized on
the sale, exchange or other disposition of our common stock would be treated as
ordinary income, and any loss realized on the sale, exchange or other
disposition of the common stock would be treated as ordinary loss to the extent
that such loss does not exceed the net mark-to-market gains previously included
by the United States Holder.
Taxation of United States Holders Not Making a Timely QEF or Mark-to-Market
Election
Finally, if we were to be treated as a passive foreign investment company for
any taxable year, a United States Holder who does not make either a QEF election
or a “mark-to-market” election for that year, whom we refer to as a
“Non-Electing Holder,” would be subject to special rules with respect to
(1) any excess distribution (i.e., the portion of any distributions
received by the Non-Electing Holder on our common stock in a taxable year in
excess of 125 percent of the average annual distributions received by the
Non-Electing Holder in the three preceding taxable years, or, if shorter, the
Non-Electing Holder's holding period for the common stock), and (2) any
gain realized on the sale, exchange or other disposition of our common stock.
Under these special rules:
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the
excess distribution or gain would be allocated ratably over the
Non-Electing Holders' aggregate holding period for the common
stock;
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the
amount allocated to the current taxable year and any taxable year before
we became a passive foreign investment company would be taxed as ordinary
income; and
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the
amount allocated to each of the other taxable years would be subject to
tax at the highest rate of tax in effect for the applicable class of
taxpayer for that year, and an interest charge for the deemed deferral
benefit would be imposed with respect to the resulting tax attributable to
each such other taxable year.
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These
penalties would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize leverage
in connection with its acquisition of our common stock. If a Non-Electing Holder
who is an individual dies while owning our common stock, such holder's successor
generally would not receive a step-up in tax basis with respect to such
stock.
United
States Federal Income Taxation of “Non-United States Holders”
A beneficial owner of common stock that is not a United States Holder is
referred to herein as a “Non-United States Holder.”
S-23
Dividends on Common
Stock
Non-United States Holders generally will not be subject to United States federal
income tax or withholding tax on dividends received from us with respect to our
common stock, unless that income is effectively connected with the Non-United
States Holder's conduct of a trade or business in the United States.
If the Non-United States Holder is entitled to the benefits of a United States
income tax treaty with respect to those dividends, that income is taxable only
if it is attributable to a permanent establishment maintained by the Non-United
States Holder in the United States.
Sale, Exchange or Other Disposition of Common Stock
Non-United States Holders generally will not be subject to United States federal
income tax or withholding tax on any gain realized upon the sale, exchange or
other disposition of our common stock, unless:
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the
gain is effectively connected with the Non-United States Holder's conduct
of a trade or business in the United States. If the Non-United States
Holder is entitled to the benefits of an income tax treaty with respect to
that gain, that gain is taxable only if it is attributable to a permanent
establishment maintained by the Non-United States Holder in the United
States; or
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the
Non-United States Holder is an individual who is present in the United
States for 183 days or more during the taxable year of disposition
and other conditions are met.
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If the Non-United States Holder is engaged in a United States trade or business
for United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of
the stock that is effectively connected with the conduct of that trade or
business will generally be subject to regular United States federal income tax
in the same manner as discussed in the previous section relating to the taxation
of United States Holders. In addition, if you are a corporate Non-United States
Holder, your earnings and profits that are attributable to the effectively
connected income, which are subject to certain adjustments, may be subject to an
additional branch profits tax at a rate of 30%, or at a lower rate as may be
specified by an applicable income tax treaty.
Backup
Withholding and Information Reporting
In
general, dividend payments, or other taxable distributions, made within the
United States to a holder of common shares will be subject to information
reporting requirements. Such payments will also be subject to backup withholding
tax if paid to a non-corporate United States Holder who:
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fails
to provide an accurate taxpayer identification
number;
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is
notified by the Internal Revenue Service that he has failed to report all
interest or dividends required to be shown on his federal income tax
returns; or
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in
certain circumstances, fails to comply with applicable certification
requirements.
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Non-United States Holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on IRS
Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If a Non-United States Holder sells common stock to or through a United States
office or broker, the payment of the proceeds is subject to both United States
backup withholding and information reporting unless the Non-United States Holder
certifies that you are a non-United States person, under penalties of perjury,
or you otherwise establish an exemption. If a Non-United States Holder sell
common stock through a non-United States office of a non-United States broker
and the sales proceeds are paid to the Non-United States Holder outside the
United States then information reporting and backup withholding generally will
not apply to that payment. However, United States information reporting
requirements, but not backup withholding, will apply to a payment of sales
proceeds, even if that payment is made to the Non-United States Holder outside
the United States, if the Non-United States Holder sells common stock through a
non-United States office of a broker that is a United States person or has some
other contacts with the United States.
S-24
Backup withholding tax is not an additional tax. Rather, a taxpayer generally
may obtain a refund of any amounts withheld under backup withholding rules that
exceed the taxpayer’s income tax liability by filing a refund claim with the
Internal Revenue Service.
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. Our dividend has been suspended by our board of
directors.
Other
Tax Considerations
In addition to the tax consequences discussed above, we may be subject to tax in
one or more other jurisdictions where we conduct activities. The
amount of any such tax imposed upon our operations may be material.
S-25
PLAN OF
DISTRIBUTION
We have entered into a sales agreement
with Merrill Lynch under which we may issue and sell from time to time up to
$500,000,000 of our common shares through Merrill Lynch as our sales agent.
Sales of our common shares, if any, will be made by means of ordinary brokers’
transactions on The Nasdaq Global Select Market, or Nasdaq, otherwise
at market prices prevailing at the time of sale, at prices related to prevailing
market prices, or at negotiated prices. As agent, Merrill Lynch will not engage
in any transactions that stabilize our common shares.
Merrill Lynch will offer the common
shares subject to the terms and conditions of the sales agreement on a daily
basis or as otherwise agreed upon by us and Merrill Lynch. We will designate the
maximum amount and minimum price of common shares to be sold through Merrill
Lynch on a daily basis or otherwise determine such amounts together with Merrill
Lynch. Subject to the terms and conditions of the sales agreement, Merrill Lynch
will use its commercially reasonable efforts to sell on our behalf all of the
designated common shares. We may instruct Merrill Lynch not to sell common
shares if the sales cannot be effected at or above the price designated by us in
any such instruction. We or Merrill Lynch may suspend the offering of common
shares being made through Merrill Lynch under the sales agreement upon proper
notice to the other party.
Merrill Lynch will receive from us a
commission equal to 2.5% of the gross sales price per share for any common
shares sold through it as our sales agent under the sales agreement. The
remaining sales proceeds, after deducting any expenses payable by us and any
transaction fees imposed by any governmental, regulatory, or self-regulatory
organization in connection with the sales, will equal our net proceeds for the
sale of such common shares.
Merrill Lynch will provide written
confirmation to us following the close of trading on The Nasdaq Global Select
Market each day in which common shares are sold by it for us under the sales
agreement. Each confirmation will include the number of common shares sold on
that day, the gross sales price per common share, the net proceeds to us, and
the compensation payable by us to Merrill Lynch.
Settlement for sales of common shares
will occur, unless the parties agree otherwise, on the third business day that
is also a trading day following the date on which any sales were made in return
for payment of the net proceeds to us. There is no arrangement for funds to be
received in an escrow, trust, or similar arrangement.
We will report at least quarterly the
number of common shares sold through Merrill Lynch under the sales agreement,
the net proceeds to us, and the compensation paid by us to Merrill Lynch in
connection with the sales of common shares.
In connection with the sale of the
common shares on our behalf, Merrill Lynch may be deemed to be an “underwriter”
within the meaning of the Securities Act of 1933, as amended, or the Securities
Act, and the compensation paid to Merrill Lynch may be deemed to be underwriting
commissions or discounts. We have agreed in the sales agreement to provide
indemnification and contribution to Merrill Lynch against certain civil
liabilities, including liabilities under the Securities Act.
If Merrill Lynch or we have reason to
believe that the exemptive provisions set forth in Rule 101(c)(1) of
Regulation M under the Securities Exchange Act of 1934 are not satisfied,
that party will promptly notify the other and sales of common shares under the
sales agreement will be suspended until that or other exemptive provisions have
been satisfied in the judgment of Merrill Lynch and us.
S-26
We estimate that the total expenses of
the offering payable by us, excluding discounts and commissions payable to
Merrill Lynch under the sales agreement, will be approximately
$290,000.
The offering of common shares pursuant
to the sales agreement will terminate upon the earlier of (1) thirty days
from the date of the sales agreement (unless extended by the mutual written
consent of Merrill Lynch and us), (2) the sale of up to $500,000,000 of our
common shares offered by this prospectus supplement and the accompanying
prospectus and (3) the termination of the sales agreement by either Merrill
Lynch or us.
No
Sales of Similar Securities
We and Mr. George Economou, our Chairman, Chief
Executive Officer and Interim Chief Financial Officer, have agreed that for 60
days from the date of the sales agreement, we will not issue and sell, and he
will not sell or transfer, any shares of our common stock without first
obtaining the written consent of Merrill Lynch. Specifically, we and Mr.
Economou have agreed, subject to certain exceptions, not directly or indirectly,
to:
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offer, pledge, sell or contract to sell any shares of common stock; |
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sell
any option or contract to purchase any shares of common
stock;
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purchase
any option or contract to sell any shares of common
stock;
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grant
any option, right or warrant for the sale of any shares of common
stock;
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lend
or otherwise dispose of or transfer any shares of common
stock;
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request
or demand that we file a registration statement related to the common
stock; or
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enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of any shares of common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or
otherwise.
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These lock-up provisions
apply to our common stock and to securities convertible into or exchangeable or
exercisable for or repayable with our common stock. These provisions
also apply to common stock owned now or acquired later by such persons or for
which such persons later acquire the power of disposition. In the
event that either (a) during the last 17 days of the 60-day period referred to
above, we issue an earnings release or material news or a material event
relating to us occurs or (b) prior to the expiration of the 60-day restricted
period, we announce that we will release earnings results or become aware that
material news or a material event will occur during the 16-day period beginning
on the last day of the 60-day restricted period, the restrictions described
above will continue to apply until the expiration of the 18-day period beginning
on the issuance of the earnings release or the occurrence of the material news
or material event. The lock-up provisions do not apply to transfers
to immediate family or donees who receive such securities as bona fide gifts;
provided that such transferees agree to substantially the same transfer
restrictions on the securities they
receive.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus supplement with respect to
Marshall Islands law and certain other legal matters relating to United States
and Marshall Islands law will be passed upon for us by Seward & Kissel LLP,
New York, New York. The sales agent is being represented by Morgan, Lewis &
Bockius LLP, New York, New York.
EXPENSES
The
following are the estimated expenses of the issuance and distribution of the
securities registered under the Registration Statement of which this prospectus
supplement forms a part, all of which will be paid by us.
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SEC
registration fee
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$
19,650
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Legal
fees and expenses
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$200,000
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Accounting
fees and expenses
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$
65,000
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Miscellaneous
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$
5,350
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Total:
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$290,000
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S-27