e424b5
CALCULATION OF
REGISTRATION FEE
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Proposed maximum
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Proposed maximum
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Title of each class of
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Amount to be
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offering price
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aggregate offering
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Amount of
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securities to be registered
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registered
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per unit
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price
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registration fee(1)
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5.00% Convertible Senior Notes due 2014
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$460,000,000(2)
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100
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%
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$460,000,000
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(2)
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$25,668
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(1)
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Common Stock par value $.01 per share
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55,632,840(4)
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(3)
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(3)
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(3)
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Total
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$460,000,000
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$25,668
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(1)
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(1)
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Calculated in accordance with Rule 457(o) and
Rule 457(r) of the Securities Act of 1933, as amended and
relates to the registration statement on Amendment No. 1 to
Form F-3
(File No. 333 146540) filed by DryShips
Inc.
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(2)
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Includes $60,000,000 in aggregate principal amount of
5.00% Convertible Senior Notes due 2014 that may be offered
and sold if the underwriter exercise in full its option to
purchase additional such notes to cover any over-allotments.
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(3)
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Pursuant to Rule 457(i), there is no additional filing fee
with respect to the shares of common stock issuable upon
conversion of the convertible senior notes because no additional
consideration will be received in connection with the exercise
of the conversion privilege.
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(4)
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This number represents the number of shares of common stock that
are initially issuable upon conversion of the
5.00% Convertible Senior Notes due 2014 registered hereby
at a conversion price of $7.19 per share of common stock
(equivalent to a conversion rate of approximately
139.0821 shares per $1,000 principal amount of such notes).
The conversion price is subject to adjustment upon the
occurrence of stock dividends, stock splits and other events
described in this prospectus supplement and as set forth in the
indenture under which the notes will be issued at closing.
Pursuant to Rule 416 under the Securities Act, the amount
to be registered includes an indeterminable number of shares of
common stock that may become issuable upon conversion of the
notes as a result of such adjustments.
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Filed Pursuant to
Rule 424(b)(5)
Registration No. 146540
Prospectus Supplement (to the Prospectus Dated
October 17, 2008)
DryShips Inc.
$400,000,000
5.00% Convertible Senior
Notes due December 1, 2014
We will pay interest on the notes
on June 1 and December 1 of each year, beginning June 1,
2010.
We are offering $400,000,000 aggregate principal amount of our
5.00% Convertible Senior Notes due December 1, 2014.
The notes are convertible into shares of our common stock as
described in more detail below. The notes will be our senior
unsecured obligations, will rank equal in right of payment to
all other senior unsecured debt, and will rank senior to all of
our future subordinated debt. The notes will be effectively
subordinated to all present and future unsecured debt and other
obligations of our subsidiaries. The notes will not be
guaranteed by any of our subsidiaries. Holders may convert their
notes based on a conversion rate of 139.0821 shares of
common stock per $1,000 principal amount of notes (which is
equal to an initial conversion price of approximately $7.19 per
share of common stock), subject to adjustment, on or prior to
the close of business on the business day immediately preceding
the maturity date for the notes only under the following
circumstances: (1) if the closing price of our common stock
reaches and remains at or above a specified threshold for a
specified period, (2) during the ten consecutive
trading-day
period after any five consecutive
trading-day
period in which the trading price per $1,000 principal amount of
notes for each day of that period was less than 98% of the
product of the closing price of our common stock and the then
applicable conversion rate, (3) if specified distributions
to holders of our common stock are made or specified corporate
transactions occur, or (4) during the last six months prior
to the maturity date of the notes. If a holder elects to convert
its notes in connection with a make-whole adjustment event (as
defined in this prospectus supplement), we will, in certain
circumstances, pay a make-whole adjustment amount by increasing
the conversion rate for notes converted in connection with such
make-whole adjustment event. Holders may require us to
repurchase for cash all or a portion of their notes upon a
fundamental change (as defined in the prospectus supplement).
We have granted the underwriter the right to purchase up to an
additional $60,000,000 principal amount of the notes to cover
over-allotments.
For a more detailed description of the notes, see
Description of Notes beginning on
page S-65.
Concurrently with this offering of notes, we are offering, by
means of a separate prospectus supplement and accompanying
prospectus, from time to time up to an aggregate of
26,100,000 shares of our common stock, which we refer to as
the borrowed shares, which are being borrowed by
Deutsche Bank AG, London Branch, an affiliate of Deutsche Bank
Securities Inc., the underwriter in this offering, which
affiliate we refer to as the share borrower. We have
been informed by Deutsche Bank Securities Inc. that it or its
affiliates intend to use the short position created by the share
loan and the concurrent short sales of the borrowed shares to
facilitate transactions by which investors in the notes offered
hereby may hedge their investments. The share borrower or its
affiliates will receive all of the proceeds from the sale of the
borrowed shares pursuant to the share lending agreement and we
will not receive any of those proceeds, but the share borrower
will pay us a nominal lending fee for the use of those shares.
See Description of Share Lending Agreement. The
delivery of the notes is contingent upon the delivery of
borrowed shares pursuant to the share lending agreement. We
expect to make delivery of such borrowed shares concurrently
with the closing of this offering on or about November 25,
2009.
The notes will not be listed on any securities exchange nor
included in any automatic quotation system. Our common stock is
listed on The Nasdaq Global Select Market under the symbol
DRYS. On November 19, 2009, the last reported
sale price of our common stock was $6.53 per share.
Investing in the notes involve significant risks. See
Risk Factors beginning on
page S-16.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Note
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Total
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Public offering price
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100.00
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%
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$
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400,000,000
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Underwriting discounts and commissions
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3.00
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%
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$
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12,000,000
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Proceeds, before expenses, to DryShips Inc.
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97.00
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%
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$
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388,000,000
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The public offering price set forth above does not include
accrued interest, if any. Interest on the notes will accrue from
November 25, 2009.
SOLE BOOK RUNNING MANAGER
Deutsche Bank
Securities
The date of this prospectus supplement is November 19, 2009
TABLE OF
CONTENTS
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Page
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PROSPECTUS SUPPLEMENT
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S-ii
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S-iii
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S-1
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S-12
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S-16
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S-53
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S-54
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S-55
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S-56
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S-57
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S-58
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S-65
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S-94
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S-100
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S-102
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S-114
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S-118
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S-118
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S-118
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PROSPECTUS
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1
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19
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35
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36
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37
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38
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40
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41
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46
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47
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47
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57
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57
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58
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58
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58
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58
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S-i
IMPORTANT
INFORMATION ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement is based on information provided by
us and other sources that we believe to be reliable. The
underwriter is not responsible for, and is not making any
representation or warranty to you concerning, our future
performance or the accuracy or completeness of this prospectus
supplement. This prospectus supplement summarizes certain
documents and other information, and we refer you to them for a
more complete understanding of what we discuss in this
prospectus supplement. To the extent information contained in
this prospectus supplement is inconsistent with information
contained in the accompanying prospectus, you should rely on the
information contained in this prospectus supplement.
You should rely only on the information contained and
incorporated by reference in this prospectus supplement, the
accompanying prospectus and any free writing prospectus that we
authorize to be delivered to you. We have not, and the
underwriter has not, authorized any person to provide you with
additional or different information. If anyone provides you with
additional, different or inconsistent information, you should
not rely on it.
You should not assume that the information contained in this
prospectus supplement is accurate as of any date other than the
date appearing on the front cover of this prospectus supplement.
You should assume that the information contained in the
documents incorporated by reference in this prospectus
supplement is accurate only as of the respective dates of those
documents.
In making an investment decision regarding the notes we are
offering, you must rely on your own examination of our company
and the terms of this offering, including the potential merits
and risks involved. We are offering the notes on the basis of
this prospectus supplement only. Accordingly, you must base any
decision to purchase notes in this offering only on the
information contained and incorporated by reference in this
prospectus supplement.
S-ii
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides
safe harbor protections for forward-looking statements in order
to encourage companies to provide prospective information about
their business. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events
or performance, and underlying assumptions and other statements,
which are other than statements of historical facts.
We desire to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe
harbor legislation. This document and any other written or oral
statements made by us or on our behalf may include
forward-looking statements, which reflect our current views with
respect to future events and financial performance. The words
believe, anticipate,
intends, estimate, forecast,
project, plan, potential,
will, may, should,
expect and similar expressions identify
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:
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future operating or financial results;
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statements about planned, pending or recent acquisitions;
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business strategy and expected capital spending or operating
expenses, including drydocking and insurance costs;
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statements about drybulk shipping market trends, including
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charter rates and factors affecting supply and demand;
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our ability to obtain additional financing;
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expectations regarding the availability of vessel
acquisitions; and
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anticipated developments with respect to pending litigation.
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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,
managements examination of historical operating trends,
data contained in our records and other data available from
third parties. Although we believe that these assumptions were
reasonable when made, because these assumptions are inherently
subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond our control,
we cannot assure you that it will achieve or accomplish these
expectations, beliefs or projections described in the forward
looking statements contained in this report.
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 our 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.
S-iii
Matters discussed in this document may constitute
forward-looking statements.
We refer you to the section entitled Risk Factors,
beginning on
page S-16,
for a more complete discussion of these risks and uncertainties
and for other risks and uncertainties. These factors and the
other risk factors described in this prospectus supplement are
not necessarily all of the important factors that could cause
actual results or developments to differ materially from those
expressed in any of our forward-looking statements. Other
unknown or unpredictable factors also could harm our results.
Consequently, there can be no assurance that actual results or
developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected
consequences to, or effects on, us. Given these uncertainties,
prospective investors are cautioned not to place undue reliance
on such forward-looking statements.
S-iv
SUMMARY
This summary highlights information and consolidated
financial data that appear elsewhere in this prospectus
supplement or are incorporated by reference herein and is
qualified in its entirety by the more detailed information and
financial statements that appear later. This summary may not
contain all of the information that may be important to you. As
an investor or prospective investor, you should review carefully
the entire prospectus supplement, including the risk factors and
the more detailed information and consolidated financial
statements that are included herein.
Unless otherwise indicated, references in this prospectus
supplement to DryShips Inc., we,
us, our and the Company
refer to DryShips Inc. and our subsidiaries. All amounts in this
prospectus supplement are expressed in U.S. dollars, and
the financial information has been prepared in accordance with
generally accepted accounting principles in the
United States, or GAAP. All references in this prospectus
supplement to $, U.S.$ and
Dollars refer to United States dollars.
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 November 16, 2009, we own, through
our various wholly-owned subsidiaries, a fleet of 39 drybulk
carriers comprised of 7 Capesize, 30 Panamax and 2 Supramax
vessels, which have a combined deadweight tonnage of
approximately 3.5 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
7.6 years. We are also an owner and operator of two
ultra-deep water semi-submersible drilling rigs and the owner of
four ultra-deep water newbuilding advanced capability drillships
contracts, which are further discussed below.
We employ our drybulk vessels under period time charters, on
bareboat charters, in the spot charter market and in drybulk
carrier pools. Thirty-four of our vessels are currently employed
on time charter, with an average remaining duration of three
years, and two of our vessels are currently employed on bareboat
charters with an average remaining duration of 1.5 years.
Three of our vessels are currently trading in the spot market.
All of our drybulk carriers are managed by Cardiff Marine Inc.,
or Cardiff, under separate ship management agreements.
Mr. George Economou, our Chairman and Chief Executive
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. Economous 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. Cardiffs commercial
management services include operations, chartering, sale and
purchase, post-fixture administration, accounting, freight
invoicing and insurance.
S-1
Cardiff completed early implementation of the 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.
In addition, through our acquisition of Ocean Rig ASA in 2008, a
Norwegian offshore drilling services company, we own and operate
two ultra-deep water, harsh environment, semi-submersible
drilling rigs, the Leiv Eiriksson and the Eirik
Raude. In April 2008, our subsidiary DrillShips Investment
Inc., or DrillShips Investment, exercised an option to acquire
from entities affiliated with our Chief Executive Officer 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 Ocean Rig UDW
Inc., or Ocean Rig UDW, formerly known as Primelead Shareholders
Inc., completed a share purchase agreement with related parties
affiliated with our Chief Executive Officer to acquire
Drillships Holdings, Inc., or Drillships Holdings, which has
contracts for the construction of two additional 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 Ocean Rig
UDW.
In October 2009, the Leiv Eiriksson, one of our two
drilling rigs, commenced a three-year contract with Petroleo
Brasileiro S.A. for exploration drilling in the Black Sea at a
dayrate maximum of $583,000 including an 8% bonus and assuming
100% utilization, expiring in October 2012, which we refer to as
the Petroleo Brasileiro contract.
In October 2008, our other drilling rig, the Eirik Raude,
commenced a three-year contract with Tullow Oil PLC for
development drilling in offshore Ghana expiring in October 2011,
which we refer to as the Tullow Oil contract. Tullow Oil did not
exercise an option that expired March 31, 2009 to extend
the contract for an additional one or two years. As of
September 30, 2009, the maximum dayrate assuming 100%
utilization, was $629,000 which is effective until the
expiration of the contract.
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 separate management
agreements. On August 1, 2008, the owning companies of the
two newbuilding drillships identified as Hulls 1837 and 1838,
which on October 3, 2008 we had 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. The transaction was
completed on May 15, 2009. We have entered into a
management agreement with Cardiff for supervisory services in
connection with the newbuilding drillships, Hull 1837 and Hull
1838.
We may sell a minority voting and economic interest in our
wholly-owned subsidiary Ocean Rig UDW in a public offering
sometime in 2010. Ocean Rig UDW comprises our entire offshore
drilling segment, which represented 56.4% of our total assets as
of September 30, 2009 and 48.8% of our total revenues for
the nine months ended September 30, 2009. Alternatively, we
may distribute, or spin-off, a minority voting and economic
interest in Ocean Rig UDW to holders of our voting stock
(including holders of our preferred shares), or complete some
combination of a public offering and distribution to holders of
our voting stock. There can be no assurance, however, that we
will complete any such transaction, which, among other things,
will be subject to market conditions.
S-2
Our
Fleet
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Gross
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Year
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Current
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Rate
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Redelivery
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Built
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DWT
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Type
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Employment
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per Day
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Earliest
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Latest
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Capesize:
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Alameda
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2001
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170,269
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Capesize
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T/C
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$21,000
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Feb-2011
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May-2011
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Brisbane
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1995
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151,066
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Capesize
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T/C
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$25,000
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Dec-2011
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Apr-2012
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Capri
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2001
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172,579
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Capesize
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T/C
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$61,000
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Apr-2018
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Jun-2018
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Flecha
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2004
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170,012
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Capesize
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T/C
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$55,000
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Jul-2018
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Nov-2018
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Manasota
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2004
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171,061
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Capesize
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T/C
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$67,000
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Feb-2013
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Apr-2013
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Mystic
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2008
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170,500
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Capesize
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T/C
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$52,310
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Aug-2018
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Dec-2018
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Samsara
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1996
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150,393
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Capesize
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T/C
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$57,000
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Dec-2011
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Apr-2012
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7.7 years
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1,155,880
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7
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Panamax:
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Avoca
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2004
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76,500
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Panamax
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T/C
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$45,500
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Aug-2013
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Dec-2013
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Bargara
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2002
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74,832
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Panamax
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T/C
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$43,750
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May-2012
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Jul-2012
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Capitola
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2001
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74,832
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Panamax
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T/C
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$39,500
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Jun-2013
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Aug-2013
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Catalina
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2005
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74,432
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Panamax
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T/C
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$40,000
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Jun-2013
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Aug-2013
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Conquistador
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2001
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75,607
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Panamax
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T/C
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$17,750
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Aug-2011
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Nov-2011
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Coronado
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2000
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75,706
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Panamax
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T/C
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$18,250
|
|
Sep-2011
|
|
Nov-2011
|
Delray ex Lacerta
|
|
1994
|
|
71,862
|
|
Panamax
|
|
Spot
|
|
$18,218
|
|
|
|
|
Ecola
|
|
2001
|
|
73,931
|
|
Panamax
|
|
T/C
|
|
$43,500
|
|
Jun-2012
|
|
Aug-2012
|
Iguana* *
|
|
1996
|
|
70,349
|
|
Panamax
|
|
T/C*
|
|
$18,168
|
|
|
|
|
La Jolla
|
|
1997
|
|
72,126
|
|
Panamax
|
|
T/C
|
|
$14,750
|
|
Aug-2011
|
|
Nov-2011
|
Levanto ex Heinrich Oldendorff
|
|
2001
|
|
73,931
|
|
Panamax
|
|
T/C
|
|
$16,800
|
|
Sep-2011
|
|
Nov-2011
|
Ligari
|
|
2004
|
|
75,583
|
|
Panamax
|
|
T/C
|
|
$55,500
|
|
Jun-2012
|
|
Aug-2012
|
Maganari
|
|
2001
|
|
75,941
|
|
Panamax
|
|
T/C
|
|
$14,500
|
|
Jul-2011
|
|
Sep-2011
|
Majorca
|
|
2005
|
|
74,364
|
|
Panamax
|
|
T/C
|
|
$43,750
|
|
Jun-2012
|
|
Aug-2012
|
Marbella
|
|
2000
|
|
72,561
|
|
Panamax
|
|
T/C
|
|
$14,750
|
|
Aug-2011
|
|
Nov-2011
|
Mendocino
|
|
2002
|
|
76,623
|
|
Panamax
|
|
T/C
|
|
$56,500
|
|
Jun-2012
|
|
Sep-2012
|
Ocean Crystal
|
|
1999
|
|
73,688
|
|
Panamax
|
|
T/C
|
|
$15,000
|
|
Aug-2011
|
|
Nov-2011
|
Oliva
|
|
2009
|
|
75,000
|
|
Panamax
|
|
T/C
|
|
$17,850
|
|
Oct-2011
|
|
Dec-2011
|
Oregon
|
|
2002
|
|
74,204
|
|
Panamax
|
|
T/C
|
|
$16,350
|
|
Aug-2011
|
|
Oct-2011
|
Padre
|
|
2004
|
|
73,601
|
|
Panamax
|
|
T/C
|
|
$46,500
|
|
Sept-2012
|
|
Dec-2012
|
Positano
|
|
2000
|
|
73,288
|
|
Panamax
|
|
T/C
|
|
$42,500
|
|
Sept-2013
|
|
Dec-2013
|
Primera
|
|
1998
|
|
72,495
|
|
Panamax
|
|
Spot
|
|
$19,889
|
|
|
|
|
Rapallo
|
|
2009
|
|
75,000
|
|
Panamax
|
|
T/C
|
|
$15,400
|
|
Aug-2011
|
|
Oct-2011
|
Redondo
|
|
2000
|
|
74,716
|
|
Panamax
|
|
T/C
|
|
$34,500
|
|
Apr-2013
|
|
Jun-2013
|
Saldanha
|
|
2004
|
|
75,500
|
|
Panamax
|
|
T/C
|
|
$52,500
|
|
Jun-2012
|
|
Sep-2012
|
Samatan
|
|
2001
|
|
74,823
|
|
Panamax
|
|
T/C
|
|
$39,500
|
|
May-2013
|
|
Jul-2013
|
Sonoma
|
|
2001
|
|
74,786
|
|
Panamax
|
|
Baumarine
|
|
$18,422
|
|
Dec-2009
|
|
|
Sorrento
|
|
2004
|
|
76,633
|
|
Panamax
|
|
T/C
|
|
$17,300
|
|
Sep-2011
|
|
Dec-2011
|
Toro
|
|
1995
|
|
73,034
|
|
Panamax
|
|
T/C
|
|
$16,750
|
|
May-2011
|
|
Jul-2011
|
Xanadu
|
|
1999
|
|
72,270
|
|
Panamax
|
|
T/C
|
|
$39,750
|
|
Jul-2013
|
|
Sep-2013
|
|
|
7.7 years
|
|
2,228,218
|
|
30
|
|
|
|
|
|
|
|
|
Supramax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paros I ex Clipper Gemini
|
|
2003
|
|
51,201
|
|
Supramax
|
|
BB
|
|
$27,135
|
|
Oct-2011
|
|
May-2012
|
Pachino ex VOC Galaxy
|
|
2002
|
|
51,201
|
|
Supramax
|
|
BB
|
|
$20,250
|
|
Sept-2010
|
|
Feb-2011
|
|
|
6.5 years
|
|
102,402
|
|
2
|
|
|
|
|
|
|
|
|
Totals
|
|
7.6 years
|
|
3,486,500
|
|
39
|
|
|
|
|
|
|
|
|
Rig:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leiv Eiriksson
|
|
2001
|
|
Fifth-generation semi-submersible drilling unit
|
|
Contract with Petroleo Brasiliero S.A. for a three-year term
beginning at a maximum dayrate of $583,000, including an 8%
bonus.
|
Eirik Raude
|
|
2002
|
|
Fifth-generation semi-submersible drilling unit
|
|
Contract with Tullow Oil PLC for a three-year term at a dayrates
of $629,000.
|
N/B Drillships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1865
|
|
Q3 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1866
|
|
Q3 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1837
|
|
Q4 2010
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1838
|
|
Q1 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
S-3
|
|
|
*
|
|
Linked to the Baltic Index
|
|
**
|
|
On November 11, 2009, we
entered into a MOA for the sale of the vessel Iguana for
$23.35 million. The expected date of delivery, is first
quarter 2010.
|
|
(1)
|
|
For vessels trading in the spot
market, the TCE rate is for the current voyage.
|
|
(2)
|
|
For vessel trading in the Baumarine
pool the TCE rate is the pools estimate for earnings in
the month of September.
|
|
(3)
|
|
For vessels trading in the spot
market or in the Baumarine pool, the quoted rates are not
indications of future earnings and the company gives no
assurance or guarantee of future rates.
|
|
(4)
|
|
The MV Paros I and MV
Pachino are employed under a bareboat charter.
|
Recent
Developments
Additional Time
Charters
During the second and third quarters of 2009, we contracted 13
of our drybulk vessels under time charters with minimum
durations of 21 to 26 months. As of November 16, 2009,
34 of our vessels are employed on time charter, with an
average remaining duration of three years, and two of our
vessels are currently employed on bareboat charters with an
average remaining duration of 1.5 years. Three of our
vessels are currently trading in the spot market.
West LB
waiver
On October 8, 2009, we entered into a supplemental
agreement with WestLB AG on waiver and amendment terms on this
loan facility providing for a waiver of certain covenants. This
supplemental agreement, among other things, waives (i) the
security cover provisions; (ii) market adjusted equity
ratio; (iii) market value adjusted net worth and
(iv) our financial covenants as guarantor through
April 8, 2011.
Nord LB
waiver
On October 12, 2009, we entered into a supplemental
agreement with Nordeutsche Landesbank Girozentrale, as agent, on
waiver and amendment terms on this loan facility providing for a
waiver of certain covenants, including the security cover
provisions, through October 9, 2011.
Cancellation of
Hulls SS058 and SS059
On October 16, 2009, we entered into two separate
agreements with a third-party seller to cancel Hulls SS058 and
SS059. Under the terms of each agreement, we agreed to pay
$3.5 million to the seller and to waive our right to an
advance previously paid to the seller of $10.85 million. We
paid the $7 million cancellation fees on October 19,
2009.
Appointment of
Ziad Nakhleh as the Chief Financial Officer
On October 16, 2009, we appointed Ziad Nakhleh as our Chief
Financial Officer effective November 1, 2009. This position
was previously occupied on an interim basis by our Chairman.
Payment of H1838
Yard Installment
On October 20, 2009, we paid $47.8 million,
representing the first installment of the steel cutting payment,
for Hull 1838.
S-4
Commerzbank AG
Waiver
On October 22, 2009, we reached an agreement with
Commerzbank AG on waiver and amendment terms on the
$90 million loan facility, providing for a waiver of
certain covenants through September 30, 2010. This
agreement, among other things, (i) revises the security
cover for the duration of the waiver period; and
(ii) amends the minimum requirements for the market
adjusted equity ratio and market value adjusted new worth of the
group. Furthermore, the waiver agreement increases the interest
margin for the duration of the waiver period and it includes
various dividend and capital expenditure restrictions by us or
our subsidiary, Dallian Star Owners Inc.
EFG Eurobank
Waiver
In February 2009, we entered in a supplemental agreement with
EFG Eurobank on waiver and amendment terms on a $47 million
loan facility, providing for a waiver of certain covenants
through December 31, 2009. On November 11, 2009, we
entered into an agreement with EFG to confirm that the
conditions in such waivers remain satisfied, and that the
waivers extend to certain financial covenants in our guarantee
of this loan facility through December 31, 2009.
Deutsche
Schiffsbank Aktiengesellschaft Waiver
On November 13, 2009, we entered into supplemental
agreements with Deutsche Schiffsbank Aktiengesellschaft,
providing for a waiver of certain covenants. These covenant
waivers and amendment agreements, among other things,
(i) increases the applicable margin on the facilities from
January 1, 2009 until December 31, 2010;
(ii) waives additional securities; and (iii) amends
our financial covenants as guarantor until December 31,
2010.
Iguana
Sale
On November 11, 2009, we entered into MOA for the vessel
Iguana for $23.35 million. The expected date of delivery is
first quarter 2010.
HSH
Waiver
On November 17, 2009 we entered into a supplemental
agreement with HSH Nordbank AG waiving and amending terms of our
Senior and Junior loan facilities. These supplemental
agreements, among other things, amend the (i) market
adjusted equity ratios; (ii) market value adjusted net
worth; (iii) interest coverage ratios; (iv) minimum
liquidity; (v) applicable margins on the facilities from
December 22, 2008 until September 30, 2010; and
(vi) security cover requirements during the waiver period.
Vessel
Acquisitions
On November 18, 2009, we entered in an agreement to acquire
two Panamax vessels for an aggregate purchase price of
$75.76 million. The expected date of delivery is first
quarter 2010. This acquisition is subject to approval from our
board of directors.
Dividend
Policy
In light of a lower freight rate environment and a highly
challenging financing environment, our board of directors,
beginning with the fourth quarter of 2008, 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, the waivers of our non-
S-5
compliance with covenants in our loan agreements that we
received from our lenders prohibit us from paying dividends.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
condition, cash requirements and availability, fleet renewal and
expansion, restrictions in our loan agreements, the provisions
of Marshall Islands law affecting the payment of distributions
to shareholders and other factors. The payment of dividends
would also result in a conversion rate adjustment under the
terms of the convertible notes.
Because we are a holding company with no material assets other
than the stock of our subsidiaries, our ability to pay
dividends, if any, in the future, will depend on the earnings
and cash flow of our subsidiaries and their ability to pay
dividends to us. If there is a substantial decline in the
drybulk charter market, our earnings would be negatively
affected thus limiting our ability to pay dividends, if any, in
the future. Marshall Islands law generally prohibits the payment
of dividends other than from surplus or while a company is
insolvent or would be rendered insolvent upon the payment of
such dividend.
We believe that, under current law, our dividend payments from
earnings and profits will constitute qualified dividend
income and as such will generally be subject to a 15%
United States federal income tax rate with respect to
non-corporate individual stockholders (for taxable years
beginning on or before December 31, 2010). Distributions in
excess of our earnings and profits will be treated first as a
non-taxable return of capital to the extent of a United States
stockholders tax basis in its common stock on a
dollar-for-dollar
basis and thereafter as capital gain. Please see the section of
this report entitled Tax Considerations for
additional information relating to the tax treatment of our
dividend payments.
Corporate
Information
We maintain our principal executive offices at 80 Kifissias
Avenue, Amaroussion 15125, Athens, Greece. Our telephone number
at that address is (011) (30) (210) 809 0570. Our corporate
website address is www.dryships.com. The information
contained in or accessible from our corporate website is not
part of this prospectus supplement.
S-6
The
Offering
The following is a brief summary of the principal terms of the
notes being offered hereunder. Certain terms and conditions
described below are subject to important limitations and
exceptions. For a more complete description of the terms of the
notes, see Description of Notes in this prospectus.
|
|
|
Issuer |
|
DryShips Inc., a company incorporated under the laws of the
Marshall Islands. |
|
Notes Offered |
|
$400,000,000 principal amount of 5.00% Convertible Senior
Notes due December 1, 2014. We have also granted the
underwriter the right to purchase up to an additional
$60,000,000 principal amount of the notes, solely to cover
over-allotments. |
|
Use of Proceeds |
|
We estimate that the net proceeds from the notes offered hereby,
after deducting discounts and commissions payable to the
underwriter and other expenses related to the offering, will be
approximately $388.0 million (or approximately
$446.2 million if the underwriter exercises its
overallotment option in full). |
|
|
|
We intend to use the net proceeds for vessel acquisitions,
acquisitions of vessel owning companies, and other acquisitions
in shipping and related industries, and for general corporate
purposes such as scheduled capital expenditures for our newbuild
drillships. |
|
Maturity Date |
|
The notes will mature on December 1, 2014, subject to
earlier repurchase or conversion. |
|
Ranking |
|
The notes will be our senior unsecured obligations and will rank
pari passu with all of our other senior unsecured debt
and senior to all of our present and future subordinated debt.
The notes will be structurally subordinated to all present and
future debt and other obligations of our subsidiaries, including
trade payables. The notes are not guaranteed by any of our
subsidiaries. In addition, the notes are effectively
subordinated to all of our present and future secured debt to
the extent of the collateral securing that debt. As of
September 30, 2009, we had outstanding secured debt of
approximately $2.5 billion under our various secured credit
facilities. We expect from time to time to incur additional |
S-7
|
|
|
|
|
secured indebtedness and other liabilities. The indenture
pursuant to which the notes are issued does not limit the amount
of indebtedness that we or any of our subsidiaries may incur. |
|
Interest and Payment Dates |
|
5.00% per annum on the principal amount accruing from November
25, 2009, and payable semiannually in arrears on June 1 and
December 1 of each year, beginning June 1, 2010. |
|
Conversion Rights |
|
Holders may convert their notes at any time prior to the close
of business on the business day immediately preceding the
maturity date for the notes only under any of the following
circumstances: |
|
|
|
during any calendar quarter beginning after
December 31, 2009 (and only during such calendar quarter),
if the closing price of our common stock for at least 20
scheduled trading days in the period of 30 consecutive trading
days ending on the last trading day of the immediately preceding
calendar quarter is more than 130% of the then applicable
conversion price per share of the notes on the last trading day
of such preceding calendar quarter;
|
|
|
|
during the ten consecutive trading days after
any five consecutive trading day period (the measurement
period) in which the trading price per $1,000 principal
amount of notes for each trading day of that measurement period
was less than 98% of the product of the closing price of our
common stock and the then applicable conversion rate of the
notes;
|
|
|
|
if certain significant distributions to
holders of our common stock are made, or specified corporate
transactions occur; or
|
|
|
|
any time on or after June 1, 2014 until
the close of business on the business day immediately preceding
the maturity date for the notes.
|
|
|
|
The initial conversion rate for the notes is shares of common
stock per $1,000 principal amount of notes. This is equivalent
to an initial conversion price of approximately $7.19 per
share of common stock. The conversion rate is subject |
S-8
|
|
|
|
|
to adjustment under certain circumstances. See Description
of NotesConversion Price Adjustments. |
|
|
|
Upon conversion, we will have the right to deliver, in lieu of
shares of our common stock, cash or a combination of cash and
shares of our common stock to satisfy our conversion obligation,
in each case calculated as described under Description of
NotesConversion of NotesSettlement Upon
Conversion. Upon any conversion, subject to certain
exceptions, you will not receive any cash payment representing
accrued and unpaid interest. See Description of
NotesConversion Rights. |
|
|
|
Holders who convert their notes in connection with a make-whole
adjustment event, as defined herein, may be entitled to a
make-whole adjustment amount in the form of an increase in the
conversion rate for notes converted in connection with such
make-whole adjustment event. See Description of
NotesAdjustment to Conversion RateAdjustment to
Conversion Rate Upon a Make-Whole Adjustment Event. |
|
Fundamental Change Repurchase |
|
Upon a fundamental change, as defined herein, the holders may
require us to repurchase for cash all or a portion of their
notes at a repurchase price equal to 100% of the principal
amount of the notes, plus accrued and unpaid interest, if any,
to the repurchase date. See Description of
NotesRepurchase at the Option of the Holder Upon a Change
in Control. |
|
Book-Entry Form |
|
The notes will be issued in fully registered book-entry form and
will be represented by permanent global notes without coupons.
The global notes will be deposited with a custodian for and
registered in the name of a nominee of The Depository
Trust Company, or DTC. Beneficial interests in global notes
will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its direct and indirect
participants. Your interest in any global note may not be
exchanged for certificated notes, except in limited
circumstances described herein. See |
S-9
|
|
|
|
|
Description of NotesGlobal Notes; Book-Entry;
Form. |
|
Form and Denomination |
|
The notes will be issued in minimum denominations of $1,000 and
any integral multiple of $1,000. |
|
U.S. Federal Income Tax Considerations |
|
For U.S. federal income tax consequences of the holding,
disposition and conversion of the notes, and the holding and
disposition of shares of our common stock, see
Taxation, Risk FactorsCompany Specific
Risk FactorsUnited 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 and Risk FactorsRisk
Relating to the NotesIf you are a U.S. holder, you may
have to pay taxes with respect to distributions on our common
stock that you do not receive. |
|
Trading Symbol for our Common Stock |
|
Our common stock is traded on The Nasdaq Global Select Market
under the symbol DRYS. |
|
Additional Notes |
|
We may, without the consent of the holders, reopen the notes and
issue additional notes under the indenture with the same terms
and with the same CUSIP number as the notes offered hereby in an
unlimited aggregate principal amount, provided that no such
additional notes may be issued unless they are fungible with the
notes issued hereby for U.S. federal income tax purposes.
The notes offered hereby, and any such additional notes, would
be treated as a single class for all purposes under the
indenture and would vote together as one class on all matters
with respect to the notes. |
|
Trustee |
|
The trustee for the notes is Law Debenture Trust Company of
New York. |
|
Governing Law |
|
The indenture and the notes will be governed by the laws of the
State of New York. |
|
Risk Factors |
|
Investing in the notes involves substantial risks. In evaluating
an investment in the notes, prospective investors should
carefully consider, along with the other information set forth
in this prospectus supplement, the specific factors set forth
under Risk Factors beginning on |
S-10
|
|
|
|
|
page S-16
for risks involved with an investment in the notes. |
|
Description of Concurrent Offering |
|
Concurrently with the offering of the notes, we are offering
from time to time up to an aggregate of 26,100,000 shares
of our common stock by means of a separate prospectus supplement
and accompanying prospectus (collectively, the common
stock prospectus). The shares will be loaned pursuant to a
share lending agreement to Deutsche Bank AG, London Branch, an
affiliate of the underwriter in this offering, which affiliate
we refer to as the share borrower. These shares are
referred to in this prospectus supplement as the borrowed
shares. An affiliate of the share borrower has informed us
that it intends to use the short position created by the share
loan and the short sales of the borrowed shares by means of the
common stock prospectus for purposes reasonably designed to
facilitate transactions by which investors in the notes may
hedge their investments through short sales or privately
negotiated derivative transactions. Up to approximately
26,100,000 of the borrowed shares are expected to be offered for
this purpose, including both the shares delivered at closing and
additional shares that may be borrowed from us under the share
lending agreement from time to time. The share borrower or its
affiliates will receive all of the proceeds from the sale of the
borrowed shares pursuant to the share lending agreement and we
will not receive any of those proceeds, but the share borrower
will pay us a nominal lending fee for the use of those shares.
See Description of Share Lending Agreement. |
|
|
|
The delivery of the borrowed shares under the share lending
agreement is contingent upon the closing of this offering, and
the closing of this offering of notes is contingent upon the
delivery of the borrowed shares pursuant to the share lending
agreement. We expect that delivery of up to 26,100,000 of the
borrowed shares will be made concurrently with the closing of
this offering. |
S-11
SUMMARY
CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth the selected consolidated
financial data and other operating data for the Company as of
and for the year ended October 31, 2004, as of and for the
two-month period ended December 31, 2004, for the years
ended December 31, 2005, 2006, 2007 and 2008 and the
nine-months ended September 30, 2008 and 2009, (as adjusted
for the Companys change in accounting policy in the first
quarter of 2008 for dry docking costs from the deferral method
to the direct expense method). The following information should
be read in conjunction with Item 5Operating and
Financial Review and Prospects and the consolidated
financial statements and related notes in our Annual Report on
Form 20-F/A
for the year ended December 31, 2008 filed with the SEC on
April 3, 2009 and incorporated by reference herein. The
following selected consolidated financial data of the Company
are derived from our audited consolidated financial statements
and the notes thereto which have been prepared in accordance
with U.S. generally accepted accounting principles
(US GAAP). The summary consolidated financial data
set forth below as of September 30, 2008 and 2009 have been
derived from our unaudited interim consolidated financial
statements for such periods incorporated by reference into this
prospectus. The results of these interim periods are not
necessarily indicative of the results to be expected for the
full year ending December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenues
|
|
|
63,458
|
|
|
|
15,599
|
|
|
|
228,913
|
|
|
|
248,431
|
|
|
|
582,561
|
|
|
|
861,296
|
|
|
|
730,954
|
|
|
|
325,052
|
|
Revenue from drilling contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,406
|
|
|
|
131,859
|
|
|
|
310,251
|
|
Loss on forward freight agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
|
|
5,481
|
|
|
|
1,136
|
|
|
|
9,592
|
|
|
|
15,965
|
|
|
|
31,647
|
|
|
|
53,172
|
|
|
|
39,899
|
|
|
|
21,447
|
|
Vessel operating expenses
|
|
|
13,046
|
|
|
|
1,756
|
|
|
|
39,875
|
|
|
|
54,164
|
|
|
|
63,225
|
|
|
|
79,662
|
|
|
|
57,287
|
|
|
|
55,680
|
|
Drilling rig operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,229
|
|
|
|
52,079
|
|
|
|
105,924
|
|
Depreciation and amortization
|
|
|
4,735
|
|
|
|
808
|
|
|
|
40,231
|
|
|
|
58,011
|
|
|
|
76,511
|
|
|
|
157,979
|
|
|
|
108,313
|
|
|
|
146,569
|
|
Gain on sale of vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,845
|
)
|
|
|
(137,694
|
)
|
|
|
(223,022
|
)
|
|
|
(226,024
|
)
|
|
|
(2,432
|
)
|
Gain on contract cancellation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,098
|
)
|
|
|
|
|
|
|
(15,270
|
)
|
Contract termination fees and forfeiture of vessel deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
|
|
|
|
230,802
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,457
|
|
|
|
|
|
|
|
|
|
General and administrative expenses (1)
|
|
|
1,482
|
|
|
|
354
|
|
|
|
9,148
|
|
|
|
12,540
|
|
|
|
17,072
|
|
|
|
89,358
|
|
|
|
53,142
|
|
|
|
66,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
38,714
|
|
|
|
11,545
|
|
|
|
130,067
|
|
|
|
94,123
|
|
|
|
531,800
|
|
|
|
(14,035
|
)
|
|
|
778,117
|
|
|
|
26,270
|
|
Interest and finance costs
|
|
|
(1,515
|
)
|
|
|
(508
|
)
|
|
|
(20,668
|
)
|
|
|
(42,392
|
)
|
|
|
(51,231
|
)
|
|
|
(113,194
|
)
|
|
|
(73,388
|
)
|
|
|
(72,114
|
)
|
Interest income
|
|
|
12
|
|
|
|
8
|
|
|
|
749
|
|
|
|
1,691
|
|
|
|
5,073
|
|
|
|
13,085
|
|
|
|
7,400
|
|
|
|
7,184
|
|
Gain/(loss) on interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
676
|
|
|
|
(3,981
|
)
|
|
|
(207,936
|
)
|
|
|
(30,918
|
)
|
|
|
20,988
|
|
Other, net
|
|
|
341
|
|
|
|
(6
|
)
|
|
|
(175
|
)
|
|
|
214
|
|
|
|
(3,037
|
)
|
|
|
(12,640
|
)
|
|
|
103
|
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes and equity in loss of investee
|
|
|
37,552
|
|
|
|
11,039
|
|
|
|
110,243
|
|
|
|
54,312
|
|
|
|
478,624
|
|
|
|
(334,720
|
)
|
|
|
681,314
|
|
|
|
(16,368
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,844
|
)
|
|
|
(1,508
|
)
|
|
|
(9,859
|
)
|
Equity in loss of investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
(6,893
|
)
|
|
|
(6,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(loss)
|
|
|
37,552
|
|
|
|
11,039
|
|
|
|
110,243
|
|
|
|
54,312
|
|
|
|
478,325
|
|
|
|
(344,457
|
)
|
|
|
672,913
|
|
|
|
(26,227
|
)
|
Net income attributable to non controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,825
|
)
|
|
|
(16,825
|
)
|
|
|
(7,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(loss) attributable to Dryships Inc.
|
|
|
37,552
|
|
|
|
11,039
|
|
|
|
110,243
|
|
|
|
54,312
|
|
|
|
478,325
|
|
|
|
(361,282
|
)
|
|
|
656,088
|
|
|
|
(33,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
Basic and diluted earnings/(loss) per share
|
|
$
|
2.44
|
|
|
$
|
0.72
|
|
|
$
|
3.81
|
|
|
$
|
1.68
|
|
|
$
|
13.40
|
|
|
$
|
(8.11
|
)
|
|
$
|
15.73
|
|
|
$
|
(0.19
|
)
|
Weighted average basic and diluted shares outstanding
|
|
|
15,400,000
|
|
|
|
15,400,000
|
|
|
|
28,957,397
|
|
|
|
32,348,194
|
|
|
|
35,700,182
|
|
|
|
44,598,585
|
|
|
|
41,029,206
|
|
|
|
193,621,270
|
|
Dividends declared per share (1)
|
|
$
|
4.48
|
|
|
$
|
0.00
|
|
|
$
|
0.40
|
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
|
|
|
Current assets
|
|
|
69,344
|
|
|
|
|
|
|
|
18,777
|
|
|
|
25,875
|
|
|
|
153,035
|
|
|
|
720,427
|
|
|
|
456,249
|
|
|
|
773,365
|
|
Total assets
|
|
|
179,926
|
|
|
|
|
|
|
|
906,778
|
|
|
|
1,161,973
|
|
|
|
2,344,432
|
|
|
|
4,842,680
|
|
|
|
5,191,346
|
|
|
|
5,404,843
|
|
Current liabilities, including current portion of long-term debt
|
|
|
98,124
|
|
|
|
|
|
|
|
135,745
|
|
|
|
129,344
|
|
|
|
239,304
|
|
|
|
2,525,048
|
|
|
|
637,063
|
|
|
|
1,900,444
|
|
Total long-term debt, including current portion
|
|
|
114,908
|
|
|
|
|
|
|
|
525,353
|
|
|
|
658,742
|
|
|
|
1,243,778
|
|
|
|
3,158,870
|
|
|
|
2,899,423
|
|
|
|
2,457,673
|
|
Number of shares outstanding
|
|
|
15,400,000
|
|
|
|
|
|
|
|
30,350,000
|
|
|
|
35,490,097
|
|
|
|
36,681,097
|
|
|
|
70,600,000
|
|
|
|
43,550,000
|
|
|
|
254,225,821
|
|
Stockholders (deficit)/equity
|
|
|
(7,707
|
)
|
|
|
|
|
|
|
352,720
|
|
|
|
444,692
|
|
|
|
1,021,729
|
|
|
|
1,291,572
|
|
|
|
2,137,894
|
|
|
|
2,667,639
|
|
OTHER FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,309
|
|
|
|
55,207
|
|
|
|
163,806
|
|
|
|
99,082
|
|
|
|
407,899
|
|
|
|
540,129
|
|
|
|
582,301
|
|
|
|
192,235
|
|
Net cash used in investing activities
|
|
|
(20,119
|
)
|
|
|
|
|
|
|
(847,649
|
)
|
|
|
(287,512
|
)
|
|
|
(955,749
|
)
|
|
|
(2,110,852
|
)
|
|
|
(1,676,481
|
)
|
|
|
(122,659
|
)
|
Net cash provided by (used in) financing activities
|
|
|
15,985
|
|
|
|
(53,007
|
)
|
|
|
680,656
|
|
|
|
185,783
|
|
|
|
656,381
|
|
|
|
1,762,769
|
|
|
|
1,312,088
|
|
|
|
(81,107
|
)
|
EBITDA (2)
|
|
|
43,790
|
|
|
|
12,347
|
|
|
|
170,393
|
|
|
|
153,024
|
|
|
|
600,994
|
|
|
|
(100,350
|
)
|
|
|
831,897
|
|
|
|
187,953
|
|
|
|
|
(1)
|
|
We did not pay any compensation to
members of our senior management or our directors in the year
ended October 31, 2004, and for the two month period ended
December 31, 2004. Cash compensation to members of our
senior management and directors amounted to $1.4 million,
$1.4 million, $1.5 million, $9.7 million and
$2.7 million for each of the years ended December 31,
2005, 2006, 2007, 2008, and the nine-month period ended
September 30, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
DRYBULK FLEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of vessels (3)
|
|
|
5.9
|
|
|
|
6
|
|
|
|
21.6
|
|
|
|
29.76
|
|
|
|
33.67
|
|
|
|
38.56
|
|
|
|
38.56
|
|
|
|
37.82
|
|
Total voyage days for drybulk carrier fleet (4)
|
|
|
2,066
|
|
|
|
366
|
|
|
|
7,710
|
|
|
|
10,606
|
|
|
|
12,130
|
|
|
|
13,896
|
|
|
|
10,485
|
|
|
|
10,125
|
|
Total calendar days for drybulk carrier fleet (5)
|
|
|
2,166
|
|
|
|
366
|
|
|
|
7,866
|
|
|
|
10,859
|
|
|
|
12,288
|
|
|
|
14,114
|
|
|
|
10,567
|
|
|
|
10,326
|
|
Fleet utilization for drybulk carrier fleet (6)
|
|
|
95.40
|
%
|
|
|
100.00
|
%
|
|
|
98.00
|
%
|
|
|
97.70
|
%
|
|
|
98.71
|
%
|
|
|
98.46
|
%
|
|
|
99.23
|
%
|
|
|
98.05
|
%
|
(In Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE DAILY RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent (7)
|
|
|
28,062
|
|
|
|
39,516
|
|
|
|
28,446
|
|
|
|
21,918
|
|
|
|
45,417
|
|
|
|
58,155
|
|
|
|
65,909
|
|
|
|
29,986
|
|
Vessel operating expenses (8)
|
|
|
6,023
|
|
|
|
4,798
|
|
|
|
5,069
|
|
|
|
4,988
|
|
|
|
5,145
|
|
|
|
5,644
|
|
|
|
5,421
|
|
|
|
5,392
|
|
General and administrative expenses (9)
|
|
|
684
|
|
|
|
966
|
|
|
|
1,163
|
|
|
|
1,155
|
|
|
|
1,390
|
|
|
|
3,107
|
|
|
|
2,934
|
|
|
|
2,353
|
|
Total vessel operating expenses(10)
|
|
|
6,707
|
|
|
|
5,764
|
|
|
|
6,232
|
|
|
|
6,143
|
|
|
|
6,535
|
|
|
|
8,751
|
|
|
|
8,355
|
|
|
|
7,745
|
|
DRILLING RIG FLEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of drilling rigs (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
1.0
|
|
|
|
2.0
|
|
Total voyage days for drilling rig fleet (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410
|
|
|
|
246
|
|
|
|
516
|
|
Total calendar days for drilling rig fleet (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
278
|
|
|
|
546
|
|
Drilling rig fleet utilization (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.74
|
%
|
|
|
88.5
|
%
|
|
|
94.51
|
%
|
S-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
(In Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE DAILY RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,643
|
|
|
|
190,069
|
|
|
|
189,761
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,290
|
|
|
|
43,259
|
|
|
|
49,728
|
|
Total rig operating expenses (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,933
|
|
|
|
233,328
|
|
|
|
239,489
|
|
|
|
|
(2)
|
|
EBITDA represents net income
attributable to Dry Ships Inc. before interest, income taxes,
depreciation and amortization. EBITDA does not represent and
should not be considered as an alternative to net income or cash
flow from operations, as determined by U.S. GAAP and our
calculation of EBITDA may not be comparable to that reported by
other companies. EBITDA is included in this annual report
because it is a basis upon which we assess our liquidity
position, because it is used by our lenders as a measure of our
compliance with certain loan covenants and because we believe
that it presents useful information to investors regarding our
ability to service and/or incur indebtedness. The following
table reconciles net cash provided by operating activities, as
reflected in the consolidated statements of cash flows, to
EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Two-Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
Net Cash provided by operating activities
|
|
|
7,309
|
|
|
|
55,207
|
|
|
|
163,806
|
|
|
|
99,082
|
|
|
|
407,899
|
|
|
|
540,129
|
|
|
|
582,301
|
|
|
|
192,235
|
|
Net increase/(decrease) in current assets
|
|
|
36,925
|
|
|
|
(42,322
|
)
|
|
|
4,560
|
|
|
|
5,067
|
|
|
|
23,291
|
|
|
|
33,914
|
|
|
|
12,047
|
|
|
|
11,739
|
|
Net (increase)/decrease in current liabilities, excluding
current portion of long-term debt
|
|
|
(1,815
|
)
|
|
|
(927
|
)
|
|
|
(21,914
|
)
|
|
|
2,015
|
|
|
|
(18,873
|
)
|
|
|
(9,904
|
)
|
|
|
7,140
|
|
|
|
41,160
|
|
Increase in non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,112
|
|
Decrease in non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,712
|
)
|
Interest income on restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,919
|
|
Gain on sale of vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,845
|
|
|
|
137,694
|
|
|
|
223,022
|
|
|
|
226,024
|
|
|
|
2,432
|
|
Contract termination fees and forfeiture of vessel deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,000
|
)
|
|
|
|
|
|
|
(172,708
|
)
|
Gain on contract cancellation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,098
|
|
|
|
|
|
|
|
15,270
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(700,457
|
)
|
|
|
|
|
|
|
|
|
Amortization of stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,502
|
)
|
|
|
(22,142
|
)
|
|
|
(28,465
|
)
|
Accrued commitments on undrawn lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,855
|
)
|
|
|
|
|
|
|
(4,320
|
)
|
Amortization of fair value of acquired time charters
|
|
|
|
|
|
|
|
|
|
|
5,224
|
|
|
|
2,967
|
|
|
|
7,185
|
|
|
|
34,638
|
|
|
|
25,897
|
|
|
|
14,901
|
|
(Recognition)/amortization of free lubricants benefit
|
|
|
|
|
|
|
|
|
|
|
(928
|
)
|
|
|
119
|
|
|
|
257
|
|
|
|
276
|
|
|
|
276
|
|
|
|
24
|
|
Interest on credit facility from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of loss of investees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
(6,893
|
)
|
|
|
(6,893
|
)
|
|
|
|
|
Change in fair values of derivatives
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
(1,910
|
)
|
|
|
(128
|
)
|
|
|
(204,964
|
)
|
|
|
(30,795
|
)
|
|
|
45,846
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,844
|
|
|
|
1,508
|
|
|
|
9,859
|
|
Net income attributable to non controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,825
|
)
|
|
|
(16,825
|
)
|
|
|
(7,178
|
)
|
Interest and finance costs, net
|
|
|
1,503
|
|
|
|
500
|
|
|
|
19,919
|
|
|
|
40,701
|
|
|
|
46,158
|
|
|
|
100,109
|
|
|
|
65,988
|
|
|
|
64,930
|
|
Amortization and write-off of deferred financing costs included
in interest and finance costs
|
|
|
(132
|
)
|
|
|
(111
|
)
|
|
|
(544
|
)
|
|
|
(3,785
|
)
|
|
|
(2,190
|
)
|
|
|
(15,980
|
)
|
|
|
(12,629
|
)
|
|
|
(11,091
|
)
|
EBITDA(3)(4)(5)(6)(7)
|
|
|
43,790
|
|
|
|
12,347
|
|
|
|
170,393
|
|
|
|
153,024
|
|
|
|
600,994
|
|
|
|
(100,350
|
)
|
|
|
831,897
|
|
|
|
187,953
|
|
|
|
|
(3)
|
|
Average number of vessels is the
number of vessels that constituted the respective fleet for the
relevant period, as measured by the sum of the number of days
each vessel in that fleet was a part of the fleet during the
period divided by the number of calendar days in that period.
|
S-14
|
|
|
(4)
|
|
Total voyage days for the
respective fleet are the total days the vessels in that fleet
were in the Companys possession for the relevant period
net of off-hire days associated with major repairs, dry dockings
or special or intermediate surveys.
|
|
(5)
|
|
Calendar days are the total days
the vessels in that fleet were in the Companys possession
for the relevant period including off-hire days associated with
major repairs, dry dockings or special or intermediate surveys.
|
|
(6)
|
|
Fleet utilization is the percentage
of time that the vessels in that fleet were available for
revenue-generating voyage days, and is determined by dividing
voyage days by fleet calendar days for the relevant period.
|
|
(7)
|
|
Time charter equivalent, or
TCE, is a measure of the average daily revenue
performance of a vessel in our drybulk carrier segment on a per
voyage basis. The Companys method of calculating TCE is
determined by dividing voyage revenues (net of voyage expenses)
by voyage days for the relevant time period. Voyage expenses
primarily consist of port, canal and fuel costs that are unique
to a particular voyage, which would otherwise be paid by the
charterer under a time charter contract, as well as commissions.
TCE revenues, a non-GAAP measure, provides additional meaningful
information in conjunction with revenues from our vessels, the
most directly comparable GAAP measure, because it assists
Company management in making decisions regarding the deployment
and use of its vessels and in evaluating their financial
performance. TCE is also a standard shipping industry
performance measure used primarily to compare period -to-period
changes in a shipping companys performance despite changes
in the mix of charter types (i.e., spot charters, time charters
and bareboat charters) under which the vessels may be employed
between the periods. The following table reflects the
calculation of our TCE rates for our drybulk carrier segment for
the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Months
|
|
|
Nine-Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
Drybulk Carrier Segment
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
in thousands of dollars, except for TCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenues
|
|
|
63,458
|
|
|
|
15,599
|
|
|
|
228,913
|
|
|
|
248,431
|
|
|
|
582,561
|
|
|
|
861,296
|
|
|
|
730,954
|
|
|
|
325,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
|
|
(5,481
|
)
|
|
|
(1,136
|
)
|
|
|
(9,592
|
)
|
|
|
(15,965
|
)
|
|
|
(31,647
|
)
|
|
|
(53,172
|
)
|
|
|
(39,899
|
)
|
|
|
(21,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent revenues
|
|
|
57,977
|
|
|
|
14,463
|
|
|
|
219,321
|
|
|
|
232,466
|
|
|
|
550,914
|
|
|
|
808,124
|
|
|
|
691,055
|
|
|
|
303,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total voyage days for drybulk fleet
|
|
|
2,066
|
|
|
|
366
|
|
|
|
7,710
|
|
|
|
10,606
|
|
|
|
12,130
|
|
|
|
13,896
|
|
|
|
10,485
|
|
|
|
10,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time charter equivalent (TCE) rate
|
|
|
28,062
|
|
|
|
39,516
|
|
|
|
28,446
|
|
|
|
21,918
|
|
|
|
45,417
|
|
|
|
58,155
|
|
|
|
65,909
|
|
|
|
29,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine-Months
|
|
|
|
October 31,
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from drilling contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,406
|
|
|
|
131,859
|
|
|
|
310,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling rig operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,229
|
|
|
|
52,079
|
|
|
|
105,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,177
|
|
|
|
79,780
|
|
|
|
204,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employment days for drilling rigs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410
|
|
|
|
246
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
|
Daily vessel operating expenses,
which includes crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, is
calculated by dividing vessel operating expenses by drybulk
carrier fleet calendar days for the relevant time period.
|
|
(9)
|
|
Daily general and administrative
expense is calculated by dividing general and administrative
expense less stock-based compensation by drybulk carrier fleet
calendar days for the relevant time period.
|
|
(10)
|
|
Total vessel operating expenses or
TVOE is a measurement of our total expenses
associated with operating our vessels. TVOE is the sum of vessel
operating expenses, management fees and general and
administrative expenses less stock-based compensation. Daily
TVOE is calculated by dividing TVOE by drybulk carrier fleet
calendar days for the relevant time period.
|
S-15
RISK
FACTORS
You should carefully consider the risk factors set forth
below as well as the other information included in this
prospectus supplement in evaluating us or our business before
deciding to purchase any notes. Additional risk factors are
included in the accompanying prospectus, beginning on
page 18. The occurrence of any of the events described in
this section or any of these risks may have a material adverse
effect on our business, financial condition, results of
operations and cash flows. In that case, you may lose all or
part of your investment in the notes.
Industry Specific
Risk Factors
While the drybulk
carrier charter market has recently strengthened, it remains
significantly below the high in 2008, which has adversely
affected our revenues, earnings and profitability and our
ability to comply with our loan covenants.
The Baltic Drybulk Index, or BDI, declined from a high of 11,793
in May 2008 to a low of 663 in December 2008, which represents a
decline of 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. During 2009 the BDI increased from a low of 772
and reached a maximum of 4,291 in June of 2009. The decline and
volatility 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 and volatility 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.
Charter hire
rates for drybulk carriers have decreased, which have continued
to adversely affect our earnings.
The drybulk shipping industry is cyclical with attendant
volatility in charter hire rates and profitability. For example,
the degree of charter hire rate volatility among different types
of drybulk carriers has varied widely. After reaching historical
highs in mid-2008, charter hire rates for Panamax and Capesize
drybulk carriers reached near historically low levels in
December 2008 began improving in January and February 2009 and
after a volatile year, BDI rates have risen to over 4,000 in
November 2009, the high levels for the year, although still well
below the historic highs of recent years. Because we charter
some of our vessels pursuant to spot market voyage charters, or
spot charters, we are exposed to changes in spot market charter
rates for drybulk carriers and such changes may affect our
earnings and the value of our drybulk carriers at any given
time. We may not be able to successfully charter our vessels in
the future or renew existing charters at rates sufficient to
allow us to meet our obligations. Because the factors affecting
the supply and demand for vessels are outside of our control and
are unpredictable, the nature, timing, direction and degree of
changes in industry conditions are also unpredictable.
If charter rates in the drybulk market decline and remain at low
levels for any significant period in 2010, this could have an
adverse affect on our revenues, profitability, cash flows and
our ability to comply with the financial covenants in our loan
agreements.
S-16
Factors that influence demand for vessel capacity include:
|
|
|
|
|
supply and demand for energy resources, commodities,
semi-finished and finished consumer and industrial products;
|
|
|
|
changes in the exploration or production of energy resources,
commodities, semi-finished and finished consumer and industrial
products;
|
|
|
|
the location of regional and global exploration, production and
manufacturing facilities;
|
|
|
|
the location of consuming regions for energy resources,
commodities, semi-finished and finished consumer and industrial
products;
|
|
|
|
the globalization of production and manufacturing;
|
|
|
|
global and regional economic and political conditions, including
armed conflicts, terrorist activities, embargoes and strikes;
|
|
|
|
developments in international trade;
|
|
|
|
changes in seaborne and other transportation patterns, including
the distance cargo is transported by sea;
|
|
|
|
environmental and other regulatory developments;
|
|
|
|
currency exchange rates; and
|
|
|
|
weather.
|
The factors that influence the supply of vessel capacity include:
|
|
|
|
|
the number of newbuilding deliveries;
|
|
|
|
port and canal congestion;
|
|
|
|
the scrapping rate of older vessels;
|
|
|
|
vessel casualties; and
|
|
|
|
the number of vessels that are out of service.
|
We anticipate that the future demand for our drybulk carriers
will be dependent upon continued economic growth in the
worlds economies, including China and India, seasonal and
regional changes in demand, changes in the capacity of the
global drybulk carrier fleet and the sources and supply of
drybulk cargoes to be transported by sea. The capacity of the
global drybulk carrier fleet seems likely to increase and
economic growth may not continue. Adverse economic, political,
social or other developments could have a material adverse
effect on our business and operating results.
An over-supply of
drybulk carrier capacity may lead to reductions in charter hire
rates and profitability.
The market supply of drybulk carriers has been increasing, and
the number of drybulk carriers on order is near historic highs.
These newbuildings were delivered in significant numbers
starting at the beginning of 2006 and continuing through 2008.
As of October 2009, newbuilding orders had been placed for an
aggregate of more than 63.7% of the existing global drybulk
fleet, with deliveries expected during the next 36 months.
An over-supply of drybulk carrier capacity may result in a
further reduction of charter hire rates. If such a reduction
occurs, upon the expiration or termination of our vessels
current charters we may only be able to re-charter our vessels
at reduced or unprofitable rates or we may not be able to
charter these vessels at all.
S-17
We recently cancelled the acquisition of a total of thirteen
Capesize vessels, nine of which were newbuildings, five Panamax
vessels, two of which were newbuildings, from third party and
related party sellers and two newbuilding Kamsarmax vessels.
An economic
slowdown in the Asia Pacific region could exacerbate the effect
of recent slowdowns in the economies of the United States and
the European Union and may have a material adverse effect on our
business, financial condition and results of
operations.
We anticipate a significant number of the port calls made by our
vessels will continue to involve the loading or discharging of
drybulk commodities in ports in the Asia Pacific region. As a
result, further negative changes in economic conditions in any
Asia Pacific country, particularly in China, may exacerbate the
effect of recent slowdowns in the economies of the United States
and the European Union and may have a material adverse effect on
our business, financial condition and results of operations, as
well as our future prospects. In recent years, China has been
one of the worlds fastest growing economies in terms of
gross domestic product, which has had a significant impact on
shipping demand. For the period ended September 30, 2009,
the growth of Chinas gross domestic product from the prior
year ended December 31, 2008 was approximately 9.05%,
compared with a growth rate of 11.03% over the same two year
period ended December 31, 2008. It is possible that China
and other countries in the Asia Pacific region will continue to
experience slowed economic growth in the near future. Moreover,
the current economic slowdown in the economies of the United
States, the European Union and other Asian countries may further
adversely affect economic growth in China and elsewhere. Our
business, financial condition and results of operations, as well
as our future prospects, will likely be adversely affected by a
further economic downturn in any of these countries.
Changes in the
economic and political environment in China and policies adopted
by the government to regulate its economy may have a material
adverse effect on our business, financial condition and results
of operations.
The Chinese economy differs from the economies of most countries
belonging to the Organization for Economic Cooperation and
Development, or OECD, in such respects as structure, government
involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and
balance of payments position. Prior to 1978, the Chinese economy
was a planned economy. Since 1978, increasing emphasis has been
placed on the utilization of market forces in the development of
the Chinese economy. Annual and five-year state plans are
adopted by the Chinese government in connection with the
development of the economy. Although state-owned enterprises
still account for a substantial portion of the Chinese
industrial output, in general, the Chinese government is
reducing the level of direct control that it exercises over the
economy through state plans and other measures. There is an
increasing level of freedom and autonomy in areas such as
allocation of resources, production, pricing and management and
a gradual shift in emphasis to a market economy and
enterprise reform. Limited price reforms were undertaken, with
the result that prices for certain commodities are principally
determined by market forces. Many of the reforms are
unprecedented or experimental and may be subject to revision,
change or abolition based upon the outcome of such experiments.
If the Chinese government does not continue to pursue a policy
of economic reform, the level of imports to and exports from
China could be adversely affected by changes to these economic
reforms by the Chinese government, as well as by changes in
political, economic and social conditions or other relevant
policies of the Chinese government, such as changes in laws,
regulations or export and import restrictions, all of which
could adversely affect our business, operating results and
financial condition.
S-18
Disruptions in
world financial markets and the resulting governmental action in
the United States and in other parts of the world could have a
further material adverse impact on our results of operations,
financial condition and cash flows, and could cause the market
price of our common stock to further decline.
The United States and other parts of the world are exhibiting
deteriorating economic trends and have been in a recession. For
example, the credit markets in the United States have
experienced significant contraction, de-leveraging and reduced
liquidity, and the United States federal government and state
governments have implemented and are considering a broad variety
of governmental action
and/or new
regulation of the financial markets. Securities and futures
markets and the credit markets are subject to comprehensive
statutes, regulations and other requirements. The
U.S. Securities and Exchange Commission, or the SEC, other
regulators, self-regulatory organizations and exchanges are
authorized to take extraordinary actions in the event of market
emergencies, and may effect changes in law or interpretations of
existing laws.
Recently, a number of financial institutions have experienced
serious financial difficulties and, in some cases, have entered
bankruptcy proceedings or are in regulatory enforcement actions.
The uncertainty surrounding the future of the credit markets in
the United States and the rest of the world has resulted in
reduced access to credit worldwide. As of September 30,
2009, we had total outstanding indebtedness of $2.5 billion
under our various secured credit facilities.
We face risks attendant to changes in economic environments,
changes in interest rates, and instability in the banking and
securities markets around the world, among other factors. Major
market disruptions and the current adverse changes in market
conditions and regulatory climate in the United States and
worldwide may adversely affect our business or impair our
ability to borrow amounts under our credit facilities or any
future financial arrangements. We cannot predict how long the
current market conditions will last. However, these recent and
developing economic and governmental factors, together with the
concurrent decline in charter rates and vessel values, may have
a material adverse effect on our results of operations,
financial condition or cash flows, have caused the price of our
common stock on the Nasdaq Global Select Market to decline and
could cause the price of our common stock to decline further.
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. For example, in November 2008,
the MV 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. In February
2009, the vessel Saldanha, which is owned by our subsidiary,
Team-Up
Owning Company Limited, was seized by pirates while transporting
coal through the Gulf of Aden. 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 insurance coverage could increase significantly and such
insurance coverage may be more difficult to obtain. Crew costs,
including those due to employing onboard security guards, could
increase in such circumstances. In addition, while we believe
the charterer remains liable for charter payments when a vessel
is seized by pirates, the charterer may dispute this and
withhold charter hire until the vessel is released. A charterer
may also claim that a vessel seized by pirates was not
on-hire for a certain number of days and it is
therefore entitled to cancel the charter party, a claim that we
would dispute. We may not be adequately insured to
S-19
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, results of operations and cash flows.
World events
could affect our results of operations and financial
condition.
Terrorist attacks such as those in New York on
September 11, 2001 and in London on July 7, 2005 and
the continuing response of the United States to these attacks,
as well as the threat of future terrorist attacks in the United
States or elsewhere, continues to cause uncertainty in the
worlds financial markets and may affect our business,
operating results and financial condition. The continuing
conflict in Iraq may lead to additional acts of terrorism and
armed conflict around the world, which may contribute to further
economic instability in the global financial markets. These
uncertainties could also adversely affect our ability to obtain
additional financing on terms acceptable to us or at all. In the
past, political conflicts have also resulted in attacks on
vessels, mining of waterways and other efforts to disrupt
international shipping, particularly in the Arabian Gulf region.
Acts of terrorism and piracy have also affected vessels trading
in regions such as the South China Sea. Any of these occurrences
could have a material adverse impact on our operating results,
revenues and costs.
Terrorist attacks on vessels, such as the October 2002 attack on
the VLCC Limburg, a vessel not related to us, may in the future
also negatively affect our operations and financial condition
and directly impact our vessels or our customers. Future
terrorist attacks could result in increased volatility of the
financial markets in the United States and globally and may
impact the economic recession in the United States and other
countries. Any of these occurrences could have a material
adverse impact on our revenues and costs.
Our revenues are
subject to seasonal fluctuations, which could affect our
operating results and our ability to pay dividends, if any, in
the future.
We operate our vessels in markets that have historically
exhibited seasonal variations in demand and, as a result, in
charter hire rates. This seasonality may result in
quarter-to-quarter
volatility in our operating results, which could affect our
ability to pay dividends, if any, in the future from quarter to
quarter. The drybulk carrier market is typically stronger in the
fall and winter months in anticipation of increased consumption
of coal and other raw materials in the northern hemisphere
during the winter months. In addition, unpredictable weather
patterns in these months tend to disrupt vessel scheduling and
supplies of certain commodities. As a result, our revenues have
historically been weaker during the fiscal quarters ended June
30 and September 30, and, conversely, our revenues have
historically been stronger in fiscal quarters ended December 31
and March 31. This seasonality may adversely affect our
operating results and our ability to pay dividends, if any, in
the future.
Rising fuel
prices may adversely affect our profits.
While we do not bear the cost of fuel or bunkers, under our time
and bareboat charters, fuel is a significant, if not the
largest, expense in our shipping operations when vessels are
under spot charter. Changes in the price of fuel may adversely
affect our profitability. The price and supply of fuel is
unpredictable and fluctuates based on events outside our
control, including geopolitical developments, supply and demand
for oil and gas, actions by the Organization of Petroleum
Exporting Countries, or OPEC, and other oil and gas producers,
war and unrest in oil producing countries and regions, regional
production patterns and environmental concerns. Further, fuel
may become much more expensive in the future, which may reduce
the profitability and competitiveness of our business versus
other forms of transportation, such as truck or rail.
S-20
We are subject to
international safety regulations and the failure to comply with
these regulations may subject us to increased liability, may
adversely affect our insurance coverage and may result in our
vessels being denied access to, or detained in, certain
ports.
Our business and the operation of our vessels are materially
affected by government regulation in the form of international
conventions, national, state and local laws and regulations in
force in the jurisdictions in which the vessels operate, as well
as in the country or countries of their registration. Because
such conventions, laws, and regulations are often revised, we
cannot predict the ultimate cost of complying with such
conventions, laws and regulations or the impact thereof on the
resale prices or useful lives of our vessels. Additional
conventions, laws and regulations may be adopted which could
limit our ability to do business or increase the cost of our
doing business and which may materially adversely affect our
operations. We are required by various governmental and quasi
governmental agencies to obtain certain permits, licenses,
certificates, and financial assurances with respect to our
operations.
In addition, vessel classification societies also impose
significant safety and other requirements on our vessels. In
complying with current and future environmental requirements,
vessel-owners and operators may also incur significant
additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for
potential spills and in obtaining insurance coverage. Government
regulation of vessels, particularly in the areas of safety and
environmental requirements, can be expected to become stricter
in the future and require us to incur significant capital
expenditures on our vessels to keep them in compliance.
The operation of our vessels is also affected by the
requirements set forth in the United Nations
International Maritime Organizations International
Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires shipowners, ship
managers and bareboat charterers to develop and maintain an
extensive Safety Management System that includes the
adoption of a safety and environmental protection policy setting
forth instructions and procedures for safe operation and
describing procedures for dealing with emergencies. Each of the
vessels that has been delivered to us is ISM Code-certified and
we expect that any vessels that we acquire in the future will be
ISM Code-certified when delivered to us. The failure of a
shipowner or bareboat charterer to comply with the ISM Code may
subject it to increased liability, may invalidate existing
insurance or decrease available insurance coverage for the
affected vessels and may result in a denial of access to, or
detention in, certain ports. If we are subject to increased
liability for non-compliance or if our insurance coverage is
adversely impacted as a result of non-compliance, it may
negatively affect our ability to pay dividends, if any, in the
future. If any of our vessels are denied access to, or are
detained in, certain ports, this may decrease our revenues.
We are subject to
complex laws and regulations, including environmental
regulations that can adversely affect the cost, manner or
feasibility of doing business.
Our operations are subject to numerous laws and regulations in
the form of international conventions and treaties, national,
state and local laws and national and international regulations
in force in the jurisdictions in which our vessels operate or
are registered, which can significantly affect the ownership and
operation of our vessels. These requirements include, but are
not limited to, the International Convention on Civil Liability
for Oil Pollution Damage of 1969, the International Convention
for the Prevention of Pollution from Ships of 1975, the
International Maritime Organization, or IMO, International
Convention for the Prevention of Marine Pollution of 1973, the
IMO International Convention for the Safety of Life at Sea of
1974, the International Convention on Load Lines of 1966, the
U.S. Oil Pollution Act of 1990, or OPA, the U.S. Clean
Air Act, U.S. Clean Water Act and the U.S. Marine
Transportation Security
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Act of 2002. Compliance with such laws, regulations and
standards, where applicable, may require installation of costly
equipment or operational changes and may affect the resale value
or useful lives of our vessels. We may also incur additional
costs in order to comply with other existing and future
regulatory obligations, including, but not limited to, costs
relating to air emissions, the management of ballast waters,
maintenance and inspection, elimination of tin-based paint,
development and implementation of emergency procedures and
insurance coverage or other financial assurance of our ability
to address pollution incidents. These costs could have a
material adverse effect on our business, results of operations,
cash flows and financial condition. A failure to comply with
applicable laws and regulations may result in administrative and
civil penalties, criminal sanctions or the suspension or
termination of our operations. Environmental laws often impose
strict liability for remediation of spills and releases of oil
and hazardous substances, which could subject us to liability
without regard to whether we were negligent or at fault. Under
OPA, for example, owners, operators and bareboat charterers are
jointly and severally strictly liable for the discharge of oil
within the
200-mile
exclusive economic zone around the United States. An oil spill
could result in significant liability, including fines,
penalties and criminal liability and remediation costs for
natural resource damages under other federal, state and local
laws, as well as third-party damages. We are required to satisfy
insurance and financial responsibility requirements for
potential oil (including marine fuel) spills and other pollution
incidents. Although we have arranged insurance to cover certain
environmental risks, such insurance may not be sufficient to
cover all such risks or any claims will not have a material
adverse effect on our business, results of operations, cash
flows and financial condition and our ability to pay dividends,
if any, in the future.
Increased
inspection procedures and tighter import and export controls
could increase costs and disrupt our business.
International shipping is subject to various security and
customs inspection and related procedures in countries of
origin, destination and trans-shipment points. Inspection
procedures may result in the seizure of the contents of our
vessels, delays in the loading, offloading or delivery and the
levying of customs duties, fines or other penalties against us.
It is possible that changes to inspection procedures could
impose additional financial and legal obligations on us. Changes
to inspection procedures could also impose additional costs and
obligations on our customers and may, in certain cases, render
the shipment of certain types of cargo uneconomical or
impractical. Any such changes or developments may have a
material adverse effect on our business, financial condition and
results of operations.
Maritime
claimants could arrest one or more of our vessels, which could
interrupt our cash flow.
Crew members, suppliers of goods and services to a vessel,
shippers of cargo and other parties may be entitled to a
maritime lien against a vessel for unsatisfied debts, claims or
damages. In many jurisdictions, a claimant may seek to obtain
security for its claim by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our
vessels could interrupt our cash flow and require us to pay
large sums of money to have the arrest or attachment lifted. In
addition, in some jurisdictions, such as South Africa, under the
sister ship theory of liability, a claimant may
arrest both the vessel which is subject to the claimants
maritime lien and any associated vessel, which is
any vessel owned or controlled by the same owner. Claimants
could attempt to assert sister ship liability
against a vessel in our fleet for claims relating to another of
our vessels.
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Governments could
requisition our vessels during a period of war or emergency,
resulting in a loss of earnings.
A government could requisition one or more of our vessels for
title or for hire. Requisition for title occurs when a
government takes control of a vessel and becomes her owner,
while requisition for hire occurs when a government takes
control of a vessel and effectively becomes her charterer at
dictated charter rates. Generally, requisitions occur during
periods of war or emergency, although governments may elect to
requisition vessels in other circumstances. Although we would be
entitled to compensation in the event of a requisition of one or
more of our vessels, the amount and timing of payment would be
uncertain. Government requisition of one or more of our vessels
may negatively impact our revenues and reduce the amount of
dividends, if any, in the future.
In the highly
competitive international shipping industry, we may not be able
to compete for charters with new entrants or established
companies with greater resources and as a result, we may be
unable to employ our vessels profitability.
We employ our vessels in a highly competitive market that is
capital intensive and highly fragmented. Competition arises
primarily from other vessel owners, some of whom have
substantially greater resources than we do. Competition for the
transportation of drybulk cargo by sea is intense and depends on
price, location, size, age, condition and the acceptability of
the vessel and its operators to the charterers. Due in part to
the highly fragmented market, competitors with greater resources
could enter the drybulk shipping industry and operate larger
fleets through consolidations or acquisitions and may be able to
offer lower charter rates and higher quality vessels than we are
able to offer. If we are unable to successfully compete with
other drybulk shipping companies, this would have an adverse
impact on our results of operations.
Risks associated
with operating ocean-going vessels could affect our business and
reputation, which could adversely affect our revenues and stock
price.
The operation of ocean-going vessels carries inherent risks.
These risks include the possibility of:
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marine disaster;
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environmental accidents;
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cargo and property losses or damage;
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business interruptions caused by mechanical failure, human
error, war, terrorism, political action in various countries,
labor strikes or adverse weather conditions; and
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piracy.
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The involvement of our vessels in an environmental disaster may
harm our reputation as a safe and reliable vessel owner and
operator. Any of these circumstances or events could increase
our costs or lower our revenues.
The shipping
industry has inherent operational risks that may not be
adequately covered by our insurance.
We procure insurance for our fleet against risks commonly
insured against by vessel owners and operators. Our current
insurance includes hull and machinery insurance, war risks
insurance and protection and indemnity insurance (which includes
environmental damage and pollution insurance). We may not be
adequately insured against all risks or our insurers may not pay
a particular claim. Even if our insurance coverage is adequate
to cover our losses, we may not be able to timely obtain a
replacement vessel in the event of a loss. Furthermore, in
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the future, we may not be able to obtain adequate insurance
coverage at reasonable rates for our fleet. We may also be
subject to calls, or premiums, in amounts based not only on our
own claim records but also the claim records of all other
members of the protection and indemnity associations through
which we receive indemnity insurance coverage for tort
liability. Our insurance policies also contain deductibles,
limitations and exclusions which, although we believe are
standard in the shipping industry, may nevertheless increase our
costs.
The operation of
drybulk carriers has certain unique operational risks.
The operation of certain ship types, such as drybulk carriers,
has certain unique risks. With a drybulk carrier, the cargo
itself and its interaction with the ship can be a risk factor.
By their nature, drybulk cargoes are often heavy, dense, easily
shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during
unloading operations with grabs, jackhammers (to pry encrusted
cargoes out of the hold), and small bulldozers. This treatment
may cause damage to the vessel. Vessels damaged due to treatment
during unloading procedures may be more susceptible to breach to
the sea. Hull breaches in drybulk carriers may lead to the
flooding of the vessels holds. If a drybulk carrier suffers
flooding in its forward holds, the bulk cargo may become so
dense and waterlogged that its pressure may buckle the vessels
bulkheads leading to the loss of a vessel. If we are unable to
adequately maintain our vessels we may be unable to prevent
these events. Any of these circumstances or events could
negatively impact our business, financial condition, results of
operations and our ability to pay dividends, if any, in the
future. In addition, the loss of any of our vessels could harm
our reputation as a safe and reliable vessel owner and operator.
Offshore Drilling
IndustrySpecific Risk Factors
Our business in
the offshore drilling sector depends on the level of activity in
the offshore oil and gas industry, which is significantly
affected by, among other things, volatile oil and gas prices and
may be materially and adversely affected by a decline in the
offshore oil and gas industry.
The offshore contract drilling industry is cyclical and
volatile. Our business in the offshore drilling sector depends
on the level of activity in oil and gas exploration, development
and production in offshore areas worldwide. The availability of
quality drilling prospects, exploration success, relative
production costs, the stage of reservoir development and
political and regulatory environments affect customers
drilling campaigns. Oil and gas prices and market expectations
of potential changes in these prices also significantly affect
this level of activity and demand for drilling units.
Oil and gas prices are extremely volatile and are affected by
numerous factors beyond our control, including the following:
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worldwide demand for oil and gas;
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the cost of exploring for, developing, producing and delivering
oil and gas;
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expectations regarding future energy prices;
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advances in exploration and development technology;
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the ability of OPEC to set and maintain levels and pricing;
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the level of production in non-OPEC countries;
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government regulations;
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local and international political, economic and weather
conditions;
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domestic and foreign tax policies;
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development and exploitation of alternative fuels;
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the policies of various governments regarding exploration and
development of their oil and gas reserves; and
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the worldwide military and political environment, including
uncertainty or instability resulting from an escalation or
additional outbreak of armed hostilities or other crises in the
Middle East or other geographic areas or further acts of
terrorism in the United States, or elsewhere.
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Declines in oil and gas prices for an extended period of time
could negatively affect our business in the offshore drilling
sector. Sustained periods of low oil prices typically result in
reduced exploration and drilling because oil and gas
companies capital expenditure budgets are subject to their
cash flow and are therefore sensitive to changes in energy
prices. These changes in commodity prices can have a dramatic
effect on rig demand, and periods of low demand can cause excess
rig supply and intensify the competition in the industry which
often results in drilling units, particularly lower
specification drilling units, being idle for long periods of
time. We cannot predict the future level of demand for our
services or future conditions of the oil and gas industry. Any
decrease in exploration, development or production expenditures
by oil and gas companies could reduce our revenues and
materially harm our business and results of operations.
In addition to oil and gas prices, the offshore drilling
industry is influenced by additional factors, including:
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the availability of competing offshore drilling vessels;
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the level of costs for associated offshore oilfield and
construction services;
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oil and gas transportation costs;
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the discovery of new oil and gas reserves; and
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the cost of non-conventional hydrocarbons, such as the
exploitation of oil sands.
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The offshore
drilling industry is highly competitive and there is intense
price competition, and as a result, we may be unable to compete
successfully with other providers of contract drilling services
that have greater resources than we have.
The offshore contract drilling industry is highly competitive
with numerous industry participants, none of which has a
dominant market share. Drilling contracts are traditionally
awarded on a competitive bid basis. Intense price competition is
often the primary factor in determining which qualified
contractor is awarded the drilling contract, although rig
availability, location, and the quality and technical capability
of service and equipment are key factors which are considered.
Some of our competitors in the drilling industry are larger than
we are and have more diverse fleets, or fleets with generally
higher specifications, and greater resources than us. In
addition, because of the relatively small size of our offshore
drilling segment, we may be unable to take advantage of
economies of scale to the same extent as some of our larger
competitors. Given the high capital requirements that are
inherent in the offshore drilling industry, we may also be
unable to invest in new technologies or expand our fleet in the
future as may be necessary for us to succeed in this industry,
while our larger competitors with superior financial resources
may be able to respond more rapidly to changing market demands.
In addition, mergers among oil and natural gas exploration and
production companies have reduced the number of available
customers, resulting in increased competition for projects. We
may not be able to maintain our competitive position, and we
believe that
S-25
competition for contracts will continue to be intense in the
foreseeable future. Our inability to compete successfully may
reduce our revenues and profitability.
An over-supply of
drilling units may lead to a reduction in dayrates and therefore
may materially impact our profitability in our offshore drilling
segment.
During the recent period of high utilization and high dayrates,
industry participants have increased the supply of drilling
units by ordering the construction of new drilling units.
Historically, this has resulted in an over-supply of drilling
units and has caused a subsequent decline in utilization and
dayrates when the drilling units enter the market, sometimes for
extended periods of time until the units have been absorbed into
the active fleet. According to industry sources, the worldwide
fleet of ultra-deepwater drilling units currently consists of
51 units, comprised of 29 semi-submersible rigs and 22
drillships. An additional 30 semi-submersible rigs and 37
drillships are under construction or on order, which would bring
the total fleet to 118 drilling units by the end of 2012. Not
all of the drilling units currently under construction have been
contracted for future work, which may intensify price
competition as scheduled delivery dates occur. The entry into
service of these new, upgraded or reactivated drilling units
will increase supply and could curtail a further strengthening,
or trigger a reduction, in dayrates as drilling units are
absorbed into the active fleet. Any further increase in the
construction of new drilling units could have a negative impact
on utilization and dayrates. In addition, the new construction
of high-specification rigs, as well as changes in our
competitors drilling rig fleets, could require us to make
material additional capital investments to keep our fleet
competitive. Lower utilization and dayrates could adversely
affect our revenues and profitability. Prolonged periods of low
utilization and dayrates could also result in the recognition of
impairment charges on our drilling units if future cash flow
estimates, based upon information available to management at the
time, indicate that the carrying value of these drilling units
may not be recoverable.
The market value
of our current drilling units and drilling units we may acquire
in the future may decrease, which could cause us to incur losses
if we decide to sell them following a decline in their market
values.
If the offshore contract drilling industry suffers adverse
developments in the future, the fair market value of our
drilling units may decline. The fair market value of the
drilling units we currently own or may acquire in the future may
increase or decrease depending on a number of factors, including:
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prevailing level of drilling services contract dayrates;
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general economic and market conditions affecting the offshore
contract drilling industry, including competition from other
offshore contract drilling companies;
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types, sizes and ages of drilling units;
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supply and demand for drilling units;
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costs of newbuildings;
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governmental or other regulations; and
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technological advances.
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If we sell any drilling unit when drilling unit prices have
fallen and before we have recorded an impairment adjustment to
our financial statements, the sale may be at less than the
drilling units carrying amount on our financial
statements, resulting in a loss. Additionally, our lenders may
accelerate loan repayments should there be a loss in the market
value of our drilling units. Such loss or repayment could
materially and adversely affect our business
S-26
prospects, financial condition, liquidity, results of
operations, and our ability to pay dividends to our shareholders.
Consolidation of
suppliers may limit our ability to obtain supplies and services
at an acceptable cost, on our schedule or at all, which may have
a material adverse effect on our results of operations and
financial condition.
We rely on certain third parties to provide supplies and
services necessary for our offshore drilling operations,
including but not limited to drilling equipment suppliers,
catering and machinery suppliers. Recent mergers have reduced
the number of available suppliers, resulting in fewer
alternatives for sourcing key supplies. We may not be able to
obtain supplies and services at an acceptable cost, at the times
we need them or at all. Such consolidation, combined with a high
volume of drilling units under construction, may result in a
shortage of supplies and services thereby potentially inhibiting
the ability of suppliers to deliver on time. These cost
increases or delays could have a material adverse affect on our
results of operations and financial condition.
Our international
operations in the offshore drilling sector involve additional
risks.
We operate in the offshore drilling sector in various regions
throughout the world, including Ghana, that may expose us to
political and other uncertainties, including risks of:
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terrorist acts, war and civil disturbances;
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seizure, nationalization or expropriation of property or
equipment;
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political unrest;
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foreign and U.S. monetary policy and foreign currency
fluctuations and devaluations;
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the inability to repatriate income or capital;
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complications associated with repairing and replacing equipment
in remote locations;
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import-export quotas, wage and price controls, imposition of
trade barriers and other forms of government regulation and
economic conditions that are beyond our control;
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regulatory or financial requirements to comply with foreign
bureaucratic actions; and
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changing taxation policies.
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In addition, international contract drilling operations are
subject to various laws and regulations in countries in which we
operate, including laws and regulations relating to:
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the equipping and operation of drilling units;
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repatriation of foreign earnings;
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oil and gas exploration and development;
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taxation of offshore earnings and earnings of expatriate
personnel; and
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use and compensation of local employees and suppliers by foreign
contractors.
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One of our two existing drilling rigs is currently operating
offshore Ghana and the other drilling rig is mobilizing in
Norway to go to the Black Sea. In the past we have operated our
drilling rig the Eirik Raude in the Gulf of Mexico,
offshore Canada, Cuba and Norway while the drilling rig Leiv
Eiriksson has operated offshore in West Africa and in the
North Sea. Some foreign governments favor or effectively require
the awarding of drilling contracts to local contractors, require
use of a local agent or require foreign contractors to employ
citizens of, or purchase supplies from, a particular
jurisdiction. These practices may adversely affect our ability
to compete in those regions. It is difficult to predict what
governmental regulations may
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be enacted in the future that could adversely affect the
international drilling industry. The actions of foreign
governments, including initiatives by OPEC, may adversely affect
our ability to compete.
We are indemnified to some extent against loss of capital
assets, but generally not loss of revenue, from most of these
risks through provisions in our drilling contracts.
Governmental laws
and regulations, including environmental laws and regulations,
may add to our costs or limit our drilling activity.
Our business in the offshore drilling industry is affected by
public policy and laws and regulations relating to the energy
industry and the environment in the geographic areas where we
operate.
The offshore drilling industry is dependent on demand for
services from the oil and gas exploration and production
industry, and accordingly, we are directly affected by the
adoption of laws and regulations that for economic,
environmental or other policy reasons curtail exploration and
development drilling for oil and gas. We may be required to make
significant capital expenditures to comply with governmental
laws and regulations. It is also possible that these laws and
regulations may in the future add significantly to our operating
costs or significantly limit drilling activity. Governments in
some countries are increasingly active in regulating and
controlling the ownership of concessions, the exploration for
oil and gas, and other aspects of the oil and gas industries. In
recent years, increased concern has been raised over protection
of the environment. Offshore drilling in certain areas has been
opposed by environmental groups, and has in certain cases been
restricted.
To the extent new laws are enacted or other governmental actions
are taken that prohibit or restrict offshore drilling or impose
additional environmental protection requirements that result in
increased costs to the oil and gas industry in general or the
offshore drilling industry in particular, our business or
prospects could be materially adversely affected. The operation
of our drilling units will require certain governmental
approvals, the number and prerequisites of which cannot be
determined until we identify the jurisdictions in which we will
operate upon securing contracts for the drilling units.
Depending on the jurisdiction, these governmental approvals may
involve public hearings and costly undertakings on our part. We
may not obtain such approvals or such approvals may not be
obtained in a timely manner. If we fail to timely secure the
necessary approvals or permits, our customers may have the right
to terminate or seek to renegotiate their drilling contracts to
our detriment. The amendment or modification of existing laws
and regulations or the adoption of new laws and regulations
curtailing or further regulating exploratory or development
drilling and production of oil and gas could have a material
adverse effect on our business, operating results or financial
condition. Future earnings may be negatively affected by
compliance with any such new legislation or regulations. In
addition, we may become subject to additional laws and
regulations as a result of future rig operations or
repositioning.
We may be subject
to liability under environmental laws and regulations, which
could have a material adverse effect on our results of
operations and financial condition.
Our operations in the offshore drilling industry may involve the
use or handling of materials that may be classified as
environmentally hazardous substances. Environmental laws and
regulations applicable in the countries in which we conduct
operations have generally become more stringent. Such laws and
regulations may expose us to liability for the conduct of or for
conditions caused by others, or for our acts that were in
compliance with all applicable laws at the time such actions
were taken.
During our drilling operations in the past, we have caused the
release of oil, waste and other pollutants into the sea and into
protected areas, such as the Barents Sea. While we
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conduct maintenance on our drilling rigs in an effort to prevent
such releases, future releases could occur, especially as our
rigs age. Such releases may be large in quantity, above our
permitted limits or in protected or other areas in which public
interest groups or governmental authorities have an interest.
These releases could result in fines and other costs to us, such
as costs to upgrade our drilling rigs, costs to clean up the
pollution, and costs to comply with more stringent requirements
in our discharge permits. Moreover, these releases may result in
our customers or governmental authorities suspending or
terminating our operations in the affected area, which could
have a material adverse effect on our business, results of
operation and financial condition.
We expect that we will be able to obtain some degree of
contractual indemnification from our customers in most of our
drilling contracts against pollution and environmental damages,
but such indemnification may not be enforceable in all
instances, the customer may not be financially capable in all
cases of complying with its indemnity obligations and we may not
be able to obtain such indemnification agreements in the future.
We currently maintain insurance coverage against certain
environmental liabilities, including pollution caused by sudden
and accidental oil spills. However, such insurance may not
continue to be available or carried by us or, if available and
carried, may not be adequate to cover any liability in all
circumstances, which could have a material adverse effect on our
business, operating results and financial conditions.
Acts of terrorism
and political and social unrest could affect the markets for
drilling services, which may have a material adverse effect on
our results of operations.
Acts of terrorism and political and social unrest, brought about
by world political events or otherwise, have caused instability
in the worlds financial and insurance markets in the past
and may occur in the future. Such acts could be directed against
companies such as ours. In addition, acts of terrorism and
social unrest could lead to increased volatility in prices for
crude oil and natural gas and could affect the markets for
drilling services and result in lower dayrates. Insurance
premiums could increase and coverages may be unavailable in the
future. U.S. government regulations may effectively
preclude us from actively engaging in business activities in
certain countries. These regulations could be amended to cover
countries where we currently operate or where we may wish to
operate in the future. Increased insurance costs or increased
cost of compliance with applicable regulations may have a
material adverse effect on our results of operations.
Company Specific
Risk Factors
We have not been
in compliance with financial covenants contained in our credit
facilities.
Our credit facilities, which are secured by mortgages on our
vessels, require us to comply with specified collateral coverage
ratios and satisfy certain financial and other covenants. The
current low drybulk charter rates and drybulk vessel values, and
even lower rates and values experienced over the past year, have
affected our ability to comply with these covenants. As a result
of the recent drop in vessel values, we were in breach of
covenants contained in certain of our loan agreements, for each
of which we have obtained waivers expiring between
December 31, 2009 and October 31, 2011. Charter rates
and vessel values, particularly in the drybulk sector, may
remain at low levels for an extended period of time, in which
case it may be difficult for us to comply with the financial and
other covenants in our loan agreements absent extensions of the
existing waivers. There can be no assurance that our lenders
will extend these waivers, if we are not in compliance with our
secured loan agreements, as they expire. In which case, or if we
otherwise fail to comply with the covenants in our secured loan
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agreements, our lenders could accelerate our indebtedness and
foreclose their liens on our vessels, which would impair our
ability to continue as a going concern. If this secured debt
were to be accelerated it would effectively rank senior to the
notes offered hereby.
Because of the presence of cross default provisions in all of
our loan agreements, the refusal of any one lender to grant or
extend a waiver could result in all of our indebtedness being
accelerated even if our other lenders have waived covenant
defaults under the respective loan agreements. A cross default
provision means that if we default on one loan we would then
default on all of our other loans. In addition, if conditions in
the drybulk charter market decline from current levels and the
market value of our vessels declines even further, we may seek
to restructure our outstanding indebtedness.
As a result of
our inability to comply with certain financial and other
covenants under our loan agreements a significant amount of our
indebtedness was reclassified as current liabilities as of
September 30, 2009.
A total of $1.8 billion and $1.4 billion of our
indebtedness as of December 31, 2008 and September 30,
2009, respectively, was reclassified as current liabilities as a
result of our non-compliance with the financial covenants
contained in our loan agreements, for which we had not yet
obtained waivers or were subject to cross default provisions. As
a result of this reclassification we had a working capital
deficit of $1.8 billion as of December 31, 2008 and
$1.1 billion as of September 30, 2009. Consequently,
our independent registered public accounting firm included an
explanatory paragraph in its opinion on our most recently
audited financial statements, for the year ended
December 31, 2008, that expressed substantial doubt about
our ability to continue as a going concern and the notes to our
financial statements for the nine months ended
September 30, 2009 included disclosure as to the
substantial doubt of our ability to continue as a going concern.
Although we now have obtained waivers of our covenant breaches
not previously waived, there can be no assurance that our
lenders will extend these waivers, if we are not in compliance
with our covenants in our loan agreements, as they expire.
Charter rates and vessel values, particularly in the drybulk
sector, may remain at low levels for an extended period of time,
in which case it may be difficult for us to comply with the
financial and other covenants in our loan agreements absent
extensions of the existing waivers.
The failure of
our counterparties to meet their obligations under our time
charter agreements or drilling contracts could cause us to
suffer losses or otherwise adversely affect our
business.
Thirty-four of our vessels are currently employed under time
charters, two of our vessels are currently employed on bareboat
charters and our two drill rigs are under contracts for two and
three years. 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 challenging 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 34 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
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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 will have
significant indebtedness and payment obligations relating to two
drillships under construction for Ocean Rig UDW.
Our subsidiary, Ocean Rig UDW, has acquired our existing
subsidiary, DrillShips Investment, which has contracts for
construction of the two drillships, Hulls 1865 and 1866,
scheduled to be delivered in July 2011 and September 2011,
respectively. We will owe an additional $312.1 million in
installment payments due within the next year and
$707.0 million of newbuilding installment payments due
thereafter. We have entered into two separate credit facilities
with Deutsche Bank A.G., each in the amount of
$562.5 million, to finance these installment payments. This
indebtedness is in addition to the indebtedness we have incurred
and will incur to finance our drybulk fleet and its operations,
may 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 also lose our deposit money, which as of
September 30, 2009 amounted to $411.9 million.
No financing has
been arranged for the construction of the two newbuilding
drillships, Hulls 1837 and 1838, which we acquired through our
subsidiary, Ocean Rig UDW.
Ocean Rig UDW owns the equity interests of DrillShips Holdings
Inc., or DrillShips Holdings, which owns contracts for the
construction of two drillships, identified as Hull 1837 and Hull
1838, scheduled to be delivered in December 2010 and March 2011,
respectively. The expected cost of construction is approximately
$747.5 million per unit. As of September 30, 2009,
$503.4 million was capitalized as construction-related
expenses for these hulls, which was financed by
$261.1 million in debt and $242.3 million in equity
contributions. In connection with the acquisition of these
drillships, we have assumed construction-related payment
obligations totaling approximately $920.9 million as of
September 30, 2009. We have not yet obtained financing for
these construction-related payment obligations due during 2009
to 2011 for Hulls 1837 and 1838, which amounts to approximately
62% of the expected cost of construction of these drillships. In
the current challenging financing environment, it may be
difficult to obtain secured debt to finance these purchases or
raise debt or equity in the capital markets. If we fail to
secure financing for the two newbuilding drillships, Hulls 1837
and 1838, we could also lose our deposit money, which as of
September 30, 2009 amounted to $460.9 million.
Construction of
drillships is subject to risks, including delays and cost
overruns, which could have an adverse impact on our available
cash resources and results of operations.
We, through our subsidiaries, have entered into contracts with
Samsung Heavy Industries Co. Ltd., or Samsung Heavy Industries,
for the construction of four ultra-deepwater newbuilding
drillships, which we expect to take delivery of in the fourth
quarter of 2010, the first, second and third quarter of 2011. We
may also undertake new construction projects and conversion
projects in the future. In addition, we make significant
upgrade, refurbishment, conversion and repair expenditures for
our fleet from time to time, particularly as our drilling units
become older. Some of these expenditures are unplanned. These
projects and other
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efforts of this type are subject to risks of cost overruns or
delays inherent in any large construction project as a result of
numerous factors, including the following:
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shipyard unavailability;
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shortages of equipment, materials or skilled labor;
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unscheduled delays in the delivery of ordered materials and
equipment;
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local customs strikes or related work slowdowns that could delay
importation of equipment or materials;
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engineering problems, including those relating to the
commissioning of newly designed equipment;
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latent damages or deterioration to the hull, equipment and
machinery in excess of engineering estimates and assumptions;
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work stoppages;
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client acceptance delays;
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weather interference or storm damage;
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disputes with shipyards and suppliers;
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shipyard failures and difficulties;
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failure or delay of third-party equipment vendors or service
providers;
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unanticipated cost increases; and
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difficulty in obtaining necessary permits or approvals or in
meeting permit or approval conditions.
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These factors may contribute to cost variations and delays in
the delivery of our ultra-deepwater newbuilding drillships.
Delays in the delivery of these newbuilding drillships or the
inability to complete construction in accordance with their
design specifications may, in some circumstances, result in
delay in contract commencement, resulting in a loss of revenue
to us, and may also cause customers to renegotiate, terminate or
shorten the term of a drilling contract for the drillship
pursuant to applicable late delivery clauses. In the event of
termination of one of these contracts, we may not be able to
secure a replacement contract on as favorable terms.
Additionally, capital expenditures for drillship upgrades,
refurbishment and construction projects could materially exceed
our planned capital expenditures. Moreover, our drillships that
may undergo upgrade, refurbishment and repair may not earn a
dayrate during the periods they are out of service. In addition,
in the event of a shipyard failure or other difficulty, we may
be unable to enforce certain provisions under our newbuilding
contracts such as our refund guarantee, to recover amounts paid
as installments under such contracts. The occurrence of any of
these events may have a material adverse effect on our results
of operations, financial condition or cash flows.
Purchasing and
operating secondhand vessels may result in increased operating
costs and reduced fleet utilization.
While we have the right to inspect previously owned vessels
prior to our purchase of them and we intend to inspect all
secondhand vessels that we acquire in the future, such an
inspection does not provide us with the same knowledge about
their condition that we would have if these vessels had been
built for and operated exclusively by us. A secondhand vessel
may have conditions or defects that we were not aware of when we
bought the vessel and which may require us to incur costly
repairs to the vessel. These repairs may require us to put
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a vessel into dry dock which would reduce our fleet utilization.
Furthermore, we usually do not receive the benefit of warranties
on secondhand vessels.
New technologies
may cause our current drilling methods to become obsolete,
resulting in an adverse effect on our business.
The offshore contract drilling industry is subject to the
introduction of new drilling techniques and services using new
technologies, some of which may be subject to patent protection.
As competitors and others use or develop new technologies, we
may be placed at a competitive disadvantage and competitive
pressures may force us to implement new technologies at
substantial cost. Although we purchased the right to use the
Bingo 9000 design, or the Bingo Design, for our drilling rigs,
neither we nor the company from which we purchased those rights
has obtained or applied for any patents or other intellectual
property protection relating to the Bingo Design. As a result,
other parties may challenge our right to use the Bingo Design or
seek damages for the alleged infringement of intellectual
property rights that they may claim to own. We may also lose the
competitive advantage that we sought to achieve through the use
of the Bingo Design if our competitors duplicate key aspects of
the Bingo Design without our permission, and we may be unable to
prevent our competitors from doing so.
The steep
continued 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 four newbuilding
drillships currently under construction which do not have
employment contracts.
The price of crude oil is volatile and fell sharply 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, cause 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 would recognize
less revenue from their operations. We entered into an agreement
on April 8, 2009 for the Leiv Eiriksson for a three
year period with Petróleo Brasileiro S.A. at a maximum
dayrate of $583,000, including a bonus based on operational
performance. The contract commenced on October 27, 2009. As
of September 30, 2009, the contract for the Eirik Raude
was amended for a maximum dayrate of $629,000 per day
assuming 100% utilization, effective until the expiration of the
contract in October 2011. We have not yet secured employment
contracts for any of the four newbuilding drillships. If the
price of crude oil were to again fall to depressed levels, we
may not be able to negotiate charter agreements for Hulls 1837,
1838, 1865 or 1866 at attractive rates or at all.
Our earnings may
be adversely affected if we are not able to take advantage of
favorable charter rates.
We charter our drybulk carriers to customers primarily pursuant
to long-term or shortterm (spot) time charters, which
generally last from several days to several weeks, and long-term
time charters, which can last up to several years. As of
November 16, 2009, 34 of our vessels are under time
charters with an average duration of three years. We may in the
future extend the charter periods for additional vessels in our
fleet. Our vessels that are committed to longer-term charters
may not be available for employment on short-term charters
during periods of increasing short-term charter hire rates when
these charters may be more profitable than long-term charters.
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We may expand
into the oil tanker, product tanker or container shipping
sectors, which are currently at depressed levels and could have
an adverse effect on our business, results of operation and
financial condition.
We may expand into the oil tanker, product tanker or container
shipping sectors if attractive vessel acquisition opportunities
arise, including by using proceeds from this offering. The
charter markets for crude oil carriers and product tankers have
deteriorated significantly since summer 2008 and are currently
at depressed levels. These markets may be further depressed in
2010 given the significant number of newbuilding vessels
scheduled to be delivered that year. Attractive investment
opportunities in these sectors may reflect these depressed
conditions, however, the return on any such investment would be
highly uncertain in this extremely challenging operating
environment. Our company has not previously operated vessels in
these sectors, which are intensely competitive, have unique
operational risks and are highly dependent on the availability
of and demand for crude oil and petroleum products as well as
being significantly impacted by the availability of modern
tanker capacity and the scrapping, conversion or loss of older
vessels. An inability to successfully execute any expansion into
these sectors could be costly, distract us from our drybulk and
drill rig business and divert management resources, each of
which could have an adverse effect on our business, results of
operation and financial condition.
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.
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 waivers of our non-compliance with the
covenants in our loan agreements that we received from our
lenders prohibit us from paying dividends.
Investment in
derivative instruments such as freight forward agreements could
result in losses.
From time to time, we may take positions in derivative
instruments including freight forward agreements, or FFAs. FFAs
and other derivative instruments may be used to hedge a vessel
owners exposure to the charter market by providing for the
sale of a contracted charter rate along a specified route and
period of time. Upon settlement, if the contracted charter rate
is less than the average of the rates, as reported by an
identified index, for the specified route and period, the seller
of the FFA is required to pay the buyer an amount equal to the
difference between the contracted rate and the settlement rate,
multiplied by the number of days in the specified period.
Conversely, if the contracted rate is greater than the
settlement rate, the buyer is required to pay the seller the
settlement sum. If we take positions in FFAs or other derivative
instruments and do not correctly anticipate charter rate
movements over the specified route and time period, we could
suffer losses in the settling or termination of the FFA. This
could adversely affect our results of operations and cash flows.
S-34
The derivative
contracts we have entered into to hedge our exposure to
fluctuations in interest rates could result in higher than
market interest rates and charges against our income.
We have entered into 34 interest rate swaps for purposes of
managing our exposure to fluctuations in interest rates
applicable to indebtedness under our credit facilities, which
were advanced at a floating rate based on LIBOR. Our hedging
strategies, however, may not be effective and we may incur
substantial losses if interest rates move materially differently
from our expectations. Some of our existing interest rate swaps
do not, and future derivative contracts may not, qualify for
treatment as hedges for accounting purposes. We recognize
fluctuations in the fair value of these contracts in our income
statement. In addition, our financial condition could be
materially adversely affected to the extent we do not hedge our
exposure to interest rate fluctuations under our financing
arrangements, under which loans have been advanced at a floating
rate based on LIBOR and for which we have not entered into an
interest rate swap or other hedging arrangement. Any hedging
activities we engage in may not effectively manage our interest
rate exposure or have the desired impact on our financial
conditions or results of operations. At September 30, 2009,
the fair value of our interest rate swaps was an asset of
$83,825 and a liability of $192.6 million.
We depend
entirely on Cardiff to manage and charter our drybulk
fleet.
With respect to our operations in the drybulk shipping sector,
we currently have four employees, our Chief Executive Officer,
our Chief Operating Officer, our Chief Financial Officer and our
Internal Auditor. We have no plans to hire additional employees
for our operations in the drybulk shipping sector. We
subcontract the commercial and technical management of our
drybulk fleet, including crewing, maintenance and repair to
Cardiff. 70% of the issued and outstanding capital stock of
Cardiff is owned by a foundation which is controlled by
Mr. Economou, our Chairman and Chief Executive Officer, and
a director of our Company. The remaining 30% of the issued and
outstanding capital stock of Cardiff is owned by a company
controlled by the sister of Mr. Economou, who is also a
director of our Company. The loss of Cardiffs services or
its failure to perform its obligations to us could materially
and adversely affect the results of our operations. Although we
may have rights against Cardiff if it defaults on its
obligations to us, you will have no recourse against Cardiff.
Further, we are required to seek approval from our lenders to
change our manager.
Cardiff is a
privately held company and there is little or no publicly
available information about it.
The ability of Cardiff to continue providing services for our
benefit will depend in part on its own financial strength.
Circumstances beyond our control could impair Cardiffs
financial strength, and because it is privately held it is
unlikely that information about its financial strength would
become public unless Cardiff began to default on its
obligations. As a result, an investor in our shares might have
little advance warning of problems affecting Cardiff, even
though these problems could have a material adverse effect on us.
Our Chairman,
Chief Executive Officer has affiliations with Cardiff which
could create conflicts of interest.
Our majority shareholder is controlled by Mr. George
Economou who controls four companies that, in aggregate, own
14.4% of us as of November 16, 2009 and a foundation that
owns 70% of Cardiff. Mr. Economou is also our Chairman,
Chief Executive Officer and a director of our Company. These
responsibilities and relationships could create conflicts of
interest between us, on the one hand, and Cardiff, on the other
hand. These conflicts may arise in connection with the
chartering, purchase, sale and operations of the vessels in our
fleet versus drybulk carriers managed by other companies
affiliated with Cardiff and Mr. Economou.
S-35
In particular, Cardiff may give preferential treatment to
vessels that are beneficially owned by related parties because
Mr. Economou and members of his family may receive greater
economic benefits.
We may have
difficulty managing our planned growth properly.
We intend to continue to grow our fleet. Our future growth will
primarily depend on our ability to:
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locate and acquire suitable vessels;
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identify and consummate acquisitions or joint ventures;
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enhance our customer base;
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manage our expansion; and
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obtain required financing on acceptable terms.
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Growing any business by acquisition presents numerous risks,
such as undisclosed liabilities and obligations, the possibility
that indemnification agreements will be unenforceable or
insufficient to cover potential losses and difficulties
associated with imposing common standards, controls, procedures
and policies, obtaining additional qualified personnel, managing
relationships with customers and integrating newly acquired
assets and operations into existing infrastructure. We may be
unable to successfully execute our growth plans or we may incur
significant expenses and losses in connection with our future
growth which would have an adverse impact on our financial
condition and results of operations.
If our vessels
fail to maintain their class certification and/or fail any
annual survey, intermediate survey, dry docking or special
survey, that vessel would be unable to carry cargo, thereby
reducing our revenues and profitability and violating certain
covenants under our credit facilities.
The hull and machinery of every commercial drybulk vessel and
rig must be classed by a classification society authorized by
its country of registry. The classification society certifies
that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of
the vessel and the Safety of Life at Sea Convention, or SOLAS.
All of our drybulk vessels are certified as being in
class by all the major Classification Societies (e.g.,
American Bureau of Shipping, Lloyds Register of Shipping).
Both our drilling rigs are certified as being in
class by De Norske Veritas (DNV). The Leiv Eiriksson
completed the
5-year class
in 2006 and the Eirik Raude in 2007.
A drybulk vessel must undergo annual surveys, intermediate
surveys, dry dockings and special surveys. In lieu of a special
survey, a vessels machinery may be on a continuous survey
cycle, under which the machinery would be surveyed periodically
over a five-year period. Every vessel is also required to be dry
docked every two to three years for inspection of the underwater
parts of such vessel.
If any drybulk vessel does not maintain its class
and/or fails
any annual survey, intermediate survey, dry docking or special
survey, the vessel will be unable to carry cargo between ports
and will be unemployable and uninsurable which could cause us to
be in violation of certain covenants in our credit facilities.
Any such inability to carry cargo or be employed, or any such
violation of covenants, could have a material adverse impact on
our financial condition and results of operations. That status
could cause us to be in violation of certain covenants in our
credit facility.
S-36
The aging of our
fleet may result in increased operating costs or loss of hire in
the future, which could adversely affect our earnings.
In general, the cost of maintaining a vessel in good operating
condition increases with the age of the vessel. As of
November 16, 2009, the 39 vessels in our fleet had an
average age of 7.6 years. As our fleet ages we will incur
increased costs. Older vessels are typically less fuel efficient
and more costly to maintain than more recently constructed
vessels due to improvements in engine technology. Cargo
insurance rates increase with the age of a vessel, making older
vessels less desirable to charterers. Governmental regulations
and safety or other equipment standards related to the age of
vessels may also require expenditures for alterations or the
addition of new equipment to our vessels and may restrict the
type of activities in which our vessels may engage. As our
vessels age, market conditions may not justify those
expenditures or enable us to operate our vessels profitably
during the remainder of their useful lives.
In addition, charterers actively discriminate against hiring
older vessels. For example, Rightship, the ship vetting service
founded by Rio Tinto and BHP-Billiton which has become the major
vetting service in the drybulk shipping industry, ranks the
suitability of vessels based on a scale of one to five stars.
Most major carriers will not charter a vessel that Rightship has
vetted with fewer than three stars. Rightship automatically
downgrades any vessel over 18 years of age to two stars,
which significantly decreases its chances of entering into a
charter. Therefore, as our vessels approach and exceed
18 years of age, we may not be able to operate these
vessels profitably during the remainder of their useful lives.
Our vessels may
suffer damage and we may face unexpected dry docking costs,
which could adversely affect our cash flow and financial
condition.
If our vessels suffer damage, they may need to be repaired at a
dry docking facility. The costs of dry dock repairs are
unpredictable and can be substantial. The loss of earnings while
our vessels are being repaired and repositioned, as well as the
actual cost of these repairs, would decrease our earnings and
reduce the amount of dividends, if any, in the future. We may
not have insurance that is sufficient to cover all or any of
these costs or losses and may have to pay dry docking costs not
covered by our insurance.
If our drilling rigs suffer damage, they may need to be repaired
at a yard facility. The costs of discontinued operations due to
repairs are unpredictable and can be substantial. The loss of
earnings while our rigs are being repaired and repositioned, as
well as the actual cost of these repairs, would decrease our
earnings and reduce the amount of dividends, if any, in the
future. We may not have insurance that is sufficient to cover
all or any of these costs or losses and may have to pay repair
costs not covered by our insurance.
Currently, our
revenues from the offshore drilling segment depend on two
drilling rigs, which are designed to operate in harsh
environments. The damage or loss of either of these drilling
rigs could have a material adverse effect on our results of
operations and financial condition.
Our revenues from the offshore drilling segment are dependent on
two drilling rigs, the Eirik Raude, which is currently
operating offshore Ghana and the Leiv Eiriksson, which is
currently mobilizing in the North Sea to go to the Black Sea.
Both drilling rigs may be exposed to risks inherent in deepwater
drilling and operating in harsh environments that may cause
damage or loss. The drilling of oil and gas wells, particularly
exploratory wells where little is known of the subsurface
formations involves risks, such as extreme pressure and
temperature, blowouts, reservoir damage, loss of production,
loss of well control, lost or stuck drill strings, equipment
defects, punch-throughs, craterings, fires, explosions,
pollution and natural disasters such as hurricanes and tropical
storms. In addition, offshore drilling operations are subject to
perils peculiar to marine operations, either while
on-site or
during mobilization, including
S-37
capsizing, sinking, grounding, collision, marine life
infestations, and loss or damage from severe weather. The
replacement or repair of a rig could take a significant amount
of time, and we may not have any right to compensation for lost
revenues during that time, despite our comprehensive loss of
hire insurance policy. As long as we have only two drilling rigs
in operation, loss of or serious damage to one of the drilling
rigs could materially reduce our revenues in our offshore
drilling segment for the time that a rig is out of operation. In
view of the sophisticated design of the drilling rigs, we may be
unable to obtain a replacement rig that could perform under the
conditions that our drilling rigs are expected to operate, which
could have a material adverse effect on our results of
operations and financial condition.
We are exposed to
U.S. Dollar and foreign currency fluctuations and devaluations
that could harm our reported revenue and results of
operations.
We generate all of our revenues in U.S. Dollars but
currently incur approximately 50% of our operating expenses and
the majority of our general and administrative expenses in
currencies other than the U.S. Dollar, primarily the Euro.
Our principal currency for our operations and financing for the
offshore drilling sector is the U.S. Dollar. The dayrates
for the drilling rigs, our principal source of revenues in the
offshore drilling sector, are quoted and received in
U.S. Dollars. The principal currency for operating expenses
in the offshore drilling sector is also the U.S. Dollar;
however, a significant portion of employee salaries and
administration expenses, as well as parts of the consumables and
repair and maintenance expenses for the drilling rigs, are paid
in Norwegian Kroner (NOK), Great British Pound (GBP), Canadian
dollar (CAD) and Euro (EUR). Because a significant portion of
our expenses are incurred in currencies other than the
U.S. Dollar, our expenses may from time to time increase
relative to our revenues as a result of fluctuations in exchange
rates, particularly between the U.S. Dollar and the Euro,
which could affect the amount of net income that we report in
future periods. We use financial derivatives to operationally
hedge some of our currency exposure. Our use of financial
derivatives involves certain risks, including the risk that
losses on a hedged position could exceed the nominal amount
invested in the instrument and the risk that the counterparty to
the derivative transaction may be unable or unwilling to satisfy
its contractual obligations, which could have an adverse effect
on our results.
If the recent
volatility in LIBOR continues, it could affect our
profitability, earnings and cash flow.
LIBOR has recently been volatile, with the spread between LIBOR
and the prime lending rate widening significantly at times.
These conditions are the result of the recent disruptions in the
international credit markets. Because the interest rates borne
by our outstanding indebtedness fluctuate with changes in LIBOR,
if this volatility were to continue, it would affect the amount
of interest payable on our debt, which in turn, could have an
adverse effect on our profitability, earnings and cash flow.
Furthermore, interest in most loan agreements in our industry
has been based on published LIBOR rates. Recently, however,
lenders have insisted on provisions that entitle the lenders, in
their discretion, to replace published LIBOR as the base for the
interest calculation with their
cost-of-funds
rate. If we are required to agree to such a provision in future
loan agreements, our lending costs could increase significantly,
which would have an adverse effect on our profitability,
earnings and cash flow.
We are a holding
company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial
obligations or pay dividends, if any, in the future.
We are a holding company and our subsidiaries, which are all
wholly-owned by us either directly or indirectly, conduct all of
our operations and own all of our operating assets. We
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have no significant assets other than the equity interests in
our subsidiaries. As a result, our ability to make dividend
payments, if any, in the future depends on our subsidiaries and
their ability to distribute funds to us. Under the waivers of
our non-compliance with covenants in our loan agreements, we are
prohibited from paying dividends during the waiver period. If we
are unable to obtain funds from our subsidiaries, our board of
directors may not exercise its discretion to pay dividends in
the future. We do not intend to obtain funds from other sources
to pay dividends, if any, in the future. In addition, the
declaration and payment of dividends, if any, in the future will
depend on the provisions of Marshall Islands law affecting the
payment of dividends. Marshall Islands law generally prohibits
the payment of dividends if the company is insolvent or would be
rendered insolvent upon payment of such dividend and dividends
may be declared and paid out of our operating surplus; but in
this case, there is no such surplus. Dividends may be declared
or paid out of net profits for the fiscal year in which the
dividend is declared and for the preceding fiscal year. Our
ability to pay dividends, if any, in the future will also be
subject to our satisfaction of certain financial covenants
contained in our credit facilities and certain waivers related
thereto.
As we expand our
business, we may need to improve our operating and financial
systems and will need to recruit suitable employees and crew for
our vessels.
Our current operating and financial systems may not be adequate
as we expand the size of our fleet and our attempts to improve
those systems may be ineffective. In addition, as we expand our
fleet, we will need to recruit suitable additional seafarers and
shoreside administrative and management personnel. We may be
unable to hire suitable employees as we expand our fleet. If we
or our crewing agent encounters business or financial
difficulties, we may not be able to adequately staff our
vessels. If we are unable to grow our financial and operating
systems or to recruit suitable employees as we expand our fleet,
our financial performance and our ability to pay dividends, if
any, in the future may be adversely affected.
U.S. tax
authorities could treat us as a passive foreign investment
company, which could have adverse U.S. federal income tax
consequences to U.S. holders.
A foreign corporation will be treated as a passive foreign
investment company, or PFIC, for U.S. federal income
tax purposes if either (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 corporations assets produce or are held for the
production of those types of passive income. For
purposes of these tests, passive income includes
dividends, interest, and gains from the sale or exchange of
investment property and rents and royalties other than rents and
royalties which are received from unrelated parties in
connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of
services does not constitute passive income.
U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect
to the income derived by the PFIC, the distributions they
receive from the PFIC and the gain, if any, they derive from the
sale or other disposition of their shares in the PFIC.
Based on our 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 substantial legal authority supporting this position
consisting of case law and U.S. Internal Revenue Service,
or IRS, pronouncements concerning the characterization of income
derived from time charters and voyage charters as services
income for other tax purposes. However, it should be noted that
there is also authority which characterizes time
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charter income as rental income rather than services income for
other tax purposes. Accordingly, no assurance can be given that
the IRS or a court of law will accept this position, and there
is a risk that the IRS or a court of law could determine that we
are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if the nature
and extent of our operations changed.
If the IRS were to find that we are or have been a PFIC for any
taxable year, our U.S. shareholders will face adverse
U.S. tax consequences. Under the PFIC rules, unless those
shareholders make an election available under the Code (which
election could itself have adverse consequences for such
shareholders, as discussed below under Taxation),
such shareholders would be liable to pay U.S. federal
income tax at the then prevailing income tax rates on ordinary
income plus interest upon excess distributions and upon any gain
from the disposition of our common shares, as if the excess
distribution or gain had been recognized ratably over the
shareholders holding period of our common shares. See
Taxation for a more comprehensive discussion of the
U.S. federal income tax consequences to 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 U.S. Internal Revenue Code of 1986, or the Code,
50% of the gross shipping income of a vessel-owning or
-chartering corporation, such as ourselves certain of 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% U.S. 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 vessel-owning subsidiaries
qualify for this statutory tax exemption and we have taken and
intend to continue to take this position for U.S. 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
U.S. federal income tax on our U.S. 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 vessel-owning 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%) U.S. 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.
A change in tax
laws, treaties or regulations, or their interpretation, of any
country in which we operate our drilling rigs could result in a
high tax rate on our worldwide earnings, which could result in a
significant negative impact on our earnings and cash flows from
operations.
We conduct our worldwide drilling operations through various
subsidiaries. Tax laws and regulations are highly complex and
subject to interpretation. Consequently, we are subject to
changing tax laws, treaties and regulations in and between
countries in which we operate. Our income tax expense is based
upon our interpretation of tax laws in effect in various
countries at the time that the expense was incurred. A change in
these tax laws, treaties or regulations, or in the
interpretation thereof, or in the valuation of our deferred tax
assets, could result in a materially higher tax expense or a
higher effective tax rate on our worldwide earnings in our
offshore drilling segment, and such change could be significant
to our financial results. If any
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tax authority successfully challenges our operational structure,
inter-company pricing policies or the taxable presence of our
key subsidiaries in certain countries; or if the terms of
certain income tax treaties are interpreted in a manner that is
adverse to our structure; or if we lose a material tax dispute
in any country, particularly in the U.S., Canada, the U.K., or
Norway, our effective tax rate on our worldwide earnings from
our offshore drilling operations could increase substantially
and our earnings and cash flows from these operations could be
materially adversely affected.
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. Ocean Rig ASA
is currently in the process of transferring the domicile of its
Norwegian entities that own, directly or indirectly, the Leiv
Eiriksson and the Eirik Raude to the Republic of the
Marshall Islands. The Leiv Eiriksson and the Eirik
Raude were transferred to Marshall Island entities in
December 2008 and the remainder of the rig-owning structure is
in progress of being reorganized under Marshall Island entities.
Investors are encouraged to consult their own tax advisors
concerning the overall tax consequences of the ownership of our
common stock arising in an investors particular situation
under United States federal, state, local or foreign law.
The spin-off of
our subsidiary, Ocean Rig UDW, may have adverse tax consequences
to shareholders.
The proposed spin-off of our subsidiary, Ocean Rig UDW, may be a
taxable transaction to our shareholders depending upon their
country of residence. A shareholder may recognize taxable gain
and be subject to tax as a result of receiving shares of Ocean
Rig UDW in the spin-off, notwithstanding that cash had not been
received. In addition, after the spin-off, Ocean Rig UDW 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 Ocean Rig UDW. 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 Ocean Rig
UDW, as if the excess distribution or gain had been recognized
ratably over the shareholders holding period in such
shares.
Our insurance may
not be adequate to cover our losses that may result from our
operations due to the inherent operational risks of the offshore
drilling contract industry.
We maintain insurance in accordance with industry standards. Our
insurance is intended to cover normal risks in our current
operations, including insurance against property damage, loss of
hire, war risk and third-party liability, including pollution
liability.
Although we have obtained insurance for the full assessed market
value of our drilling units, insurance coverage may not, under
certain circumstances, be available, and if available, may not
provide sufficient funds to protect us from all losses and
liabilities that could result from our operations. We have also
obtained loss of hire insurance which becomes effective after
45 days of downtime and coverage extends for approximately
one year. The principal risks which may not be insurable are
various environmental liabilities and liabilities resulting from
reservoir damage caused by our negligence. Moreover, our
insurance provides for premium adjustments based on claims and
is subject to deductibles and aggregate recovery limits. In the
case of pollution liabilities, our deductible is $25,000 per
event and $10,000 in the case of other claims, our deductible is
$1.5 million per hull and machinery event and our
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aggregate recovery limits are $624 million under our
protection and indemnity insurance which is provided by mutual
protection and indemnity associations. Our insurance coverage
may not protect fully against losses resulting from a required
cessation of rig operations for environmental or other reasons.
The occurrence of a casualty, loss or liability against which we
may not be fully insured could significantly reduce our
revenues, make it financially impossible for us to obtain a
replacement rig or to repair a damaged rig, cause us to pay
fines or damages which are generally not insurable and that may
have priority over the payment obligations under our
indebtedness or otherwise impair our ability to meet our
obligations under our indebtedness and to operate profitably.
Insurance may not be available to us at all or on terms
acceptable to us, we may not maintain insurance or, if we are so
insured, our policy may not be adequate to cover our loss or
liability in all cases.
Our customers may
be involved the handling of environmentally hazardous substances
and if discharged into the ocean may subject us to pollution
liability which could have a negative impact on our cash flows,
results of operations and ability to pay dividends, if any, in
the future.
Our operations may involve the use or handling of materials that
may be classified as environmentally hazardous substances.
Environmental laws and regulations applicable in the countries
in which we conduct operations have generally become more
stringent. Such laws and regulations may expose us to liability
for the conduct of or for conditions caused by others, or for
our acts that were in compliance with all applicable laws at the
time such actions were taken.
During our drilling operations in the past, we, through our
subsidiary Ocean Rig ASA, have caused the release of oil, waste
and other pollutants into the sea and into protected areas, such
as the Barents Sea where on April 12, 2005, we discharged
less than one cubic meter of hydraulic oil. While we conduct
maintenance on our drilling rigs in an effort to prevent such
releases, future releases could occur, especially as our rigs
age. Such releases may be large in quantity, above our permitted
limits or in protected or other areas in which public interest
groups or governmental authorities have an interest. These
releases could result in fines and other costs to us, such as
costs to upgrade our drilling rigs, costs to clean up the
pollution, and costs to comply with more stringent requirements
in our discharge permits. Moreover, these releases may result in
our customers or governmental authorities suspending or
terminating our operations in the affected area, which could
have a material adverse effect on our business, results of
operation and financial condition.
We expect that we will be able to obtain some degree of
contractual indemnification from our customers in most of our
drilling contracts against pollution and environmental damages,
but such indemnification may not be enforceable in all
instances, and the customer may not be financially capable in
all cases of complying with its indemnity obligations or that we
will be able to obtain such indemnification agreements in the
future.
Failure to
attract or retain key personnel, labor disruptions or an
increase in labor costs could hurt our operations in the
offshore drilling sector.
We require highly skilled personnel to operate and provide
technical services and support for our business in the offshore
drilling sector worldwide. We had at September 30, 2009
approximately 455 skilled employees in our offshore drilling
sector, the majority of whom are employed on the Leiv
Eiriksson and the Eirik Raude. Competition for the
labor required for drilling operations has intensified as the
number of rigs activated, added to worldwide fleets or under
construction has increased, leading to shortages of qualified
personnel in the industry and creating upward pressure on wages
and higher turnover. If turnover increases, we could see a
reduction in the experience level of our personnel, which could
lead to higher downtime, more operating incidents and personal
injury and other claims, which in turn could decrease
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revenues and increase costs. In addition, labor disruptions
could hinder our operations from being carried our normally and
if not resolved in a timely cost-effective manner, could have a
material impact our business. In response to these labor market
conditions, we are increasing efforts in our recruitment,
training, development and retention programs as required to meet
our anticipated personnel needs for offshore drilling. If these
labor trends continue, we may experience further increases in
costs or limits on operations in the offshore drilling sector.
Some of our employees are covered by collective bargaining
agreements. If we choose to cease operations in one of those
countries or if market conditions reduce the demand for our
drilling services in such a country, we would incur costs, which
may be material, associated with workforce reductions. In
addition, upon their expiration, these agreements may be
renegotiated, and as a result, we could experience higher
personnel expenses, other increased costs and increased
operating restrictions, which may be material to our business in
the offshore drilling sector.
Our operating and
maintenance costs with respect to our offshore drilling rigs
will not necessarily fluctuate in proportion to changes in
operating revenues, which may have a material adverse effect on
our results of operations, financial condition and cash
flows.
Our operating and maintenance costs with respect to our offshore
drilling rigs will not necessarily fluctuate in proportion to
changes in operating revenues. Operating revenues may fluctuate
as a function of changes in dayrate. However, costs for
operating a rig are generally fixed or only semi-variable
regardless of the dayrate being earned. In addition, should our
drilling units incur idle time between contracts, we typically
will not de-man those drilling units because we will use the
crew to prepare the rig for its next contract. During times of
reduced activity, reductions in costs may not be immediate as
portions of the crew may be required to prepare rigs for
stacking, after which time the crew members are assigned to
active rigs or dismissed. In addition, as our drilling units are
mobilized from one geographic location to another, the labor and
other operating and maintenance costs can vary significantly. In
general, labor costs increase primarily due to higher salary
levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the unit is performing and
the age and condition of the equipment. Contract preparation
expenses vary based on the scope and length of contract
preparation required and the duration of the firm contractual
period over which such expenditures are incurred. If we
experience increased operating costs without a corresponding
increase in earnings, this may have a material adverse effect on
our results of operations, financial condition and cash flows.
We may be subject
to litigation that, if not resolved in our favor and not
sufficiently insured against, could have a material adverse
effect on us.
We may be, from time to time, involved in various litigation
matters. These matters may include, among other things, contract
disputes, personal injury claims, environmental claims or
proceedings, asbestos and other toxic tort claims, employment
matters, governmental claims for taxes or duties, and other
litigation that arises in the ordinary course of our business.
Although we intend to defend these matters vigorously, we cannot
predict with certainty the outcome or effect of any claim or
other litigation matter, and the ultimate outcome of any
litigation or the potential costs to resolve them may have a
material adverse effect on us. Insurance may not be applicable
or sufficient in all cases
and/or
insurers may not remain solvent which may have a material
adverse effect on our financial condition.
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Risks Relating to
the Notes
Investment in our
notes involves a high degree of risk.
The abrupt and dramatic downturn in the drybulk charter market,
from which we derive a significant portion 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. As of November 16, 2009, it stood at 4,220. 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:
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an absence of financing for vessels;
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no active second-hand market for the sale of vessels;
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extremely low charter rates, particularly for vessels employed
in the spot market;
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charterers seeking to renegotiate the rates for existing time
charters; and
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widespread loan covenant defaults in the drybulk shipping
industry.
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As a result of a total of $1.4 billion of our indebtedness
being reclassified as current liabilities as of
September 30, 2009, we had a working capital deficit of
$1.1 billion. Several of our lenders, which collectively
held $1.4 billion of our indebtedness as of
September 30, 2009, notified us that we were in breach of
certain financial and other covenants contained in our loan
agreements. As of November 17, 2009, we had entered into
agreements with all of lenders for covenant waivers and to
restructure our loan facilities. There can be no assurance that
our lenders that have given us waivers will extend those waivers
if we are not in compliance with our loan covenants when the
waivers expire.
Accordingly, your investment in our notes 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 notes are
unsecured, are effectively subordinated to all of our existing
and future secured indebtedness, are structurally subordinated
to all present and future liabilities of our subsidiaries,
including trade payables, and are not guaranteed by our
subsidiaries.
The notes will be our senior unsecured obligations and will rank
pari passu with all of our other senior unsecured debt
and senior to all of our present and future subordinated debt.
The notes will be structurally subordinated to all present and
future debt and other obligations of our subsidiaries, including
trade payables. The notes are not guaranteed by any of our
subsidiaries. In addition, the notes are effectively
subordinated to all of our present and future secured debt to
the extent of the collateral securing that debt. As of
September 30, 2009, we had outstanding secured debt under
our secured credit facilities of approximately
$2.5 billion. We expect from time to time to incur
additional indebtedness and other liabilities. The indenture
pursuant to which the notes are issued does not limit the amount
of indebtedness that we or any of our subsidiaries may incur. In
the event of our insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up, we may not have
sufficient assets to pay amounts due on any or all of the notes
then outstanding. See Description of
NotesGeneral.
None of our subsidiaries has guaranteed or otherwise become
obligated with respect to the notes. Our right to receive assets
from any of our subsidiaries upon its liquidation or
reorganization, and the right of holders of the notes to
participate in those assets, is structurally subordinated to
claims of that subsidiarys creditors, including trade
creditors. Even if we were a creditor of any of our
subsidiaries, our rights as a creditor would be subordinate to
any
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security interest in the assets of that subsidiary and any
indebtedness of that subsidiary senior to that held by us.
Furthermore, none of our subsidiaries is under any obligation to
make payments to us, and any payments to us would depend on the
earnings or financial condition of our subsidiaries and various
business considerations. Statutory, contractual or other
restrictions may also limit our subsidiaries ability to
pay dividends or make distributions, loans or advances to us.
For these reasons, we may not have access to any assets or cash
flows of our subsidiaries to make payments on the notes.
Governmental
action impacting the convertible debt markets may adversely
affect the market value of the notes.
Governmental actions that interfere with the ability of
convertible notes investors to effect short sales of the
underlying common stock could significantly affect the market
value of the notes. Such government actions could make the
convertible arbitrage strategy that many convertible notes
investors employ difficult to execute for outstanding
convertible notes of any company whose common stock was subject
to such actions. For example, in 2008 the SEC issued orders that
temporarily imposed a prohibition on effecting short sales of
common stock of certain financial companies in response to
unprecedented disruptions resulting from instability in the
credit and capital markets. These SEC orders effectively made
the convertible arbitrage strategy that many convertible notes
investors employ difficult to execute for outstanding
convertible notes of those companies whose common stock was
subject to the short sale prohibition, and resulted in
unprecedented disruptions to the convertible debt market. If
similar limitations or restrictions on trading in our common
stock are instituted by the SEC or any other regulatory
agencies, the market value of the notes could be adversely
affected.
Future sales or
issuances of our common stock may depress the trading price of
our common stock and the notes.
The sale or issuance of substantial amounts of our common stock
or other equity-related securities could adversely impact the
market price of our common stock, which could in turn negatively
affect the trading price of the notes and impair our ability to
raise capital through the sale of additional equity securities.
We may issue additional shares of our common stock in the future
and our stockholders may elect to sell large numbers of shares
held by them from time to time. Under our articles of
incorporation, our authorized capital stock consists of
1,000,000,000 shares of common stock, par value $.0.01 per
share, of which 254,225,821 shares are issued and
outstanding as of November 1, 2009 and
500,000,000 shares of preferred stock, of which
52,238,806 shares are issued and outstanding as of
November 16, 2009.
In addition, the existence of the notes also may encourage short
selling by market participants because the conversion of the
notes could depress our common stock price. The price of our
common stock could be affected by possible sales of our common
stock by investors who view the notes as a more attractive means
of equity participation in us or as a means to engage in hedging
or arbitrage trading activity, which we expect to occur
involving our common stock. This hedging or arbitrage could, in
turn, affect the market price of the notes.
The effect of the
issuance and sale of our shares of common stock pursuant to the
share lending agreement, which issuance is being made to
facilitate transactions by which investors in the notes may
hedge their investments, may be to lower the market price of our
common stock.
The existence of the share lending agreement and the short sales
of our common stock effected in connection with the sale of the
notes and the trading of the notes following completion of this
offering could cause the market price of our common stock to be
lower over
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the term of the share lending agreement than it would have been
had we not entered into that agreement, due to the effect of the
increase in the number of outstanding shares of our common stock
resulting from the loan of shares or otherwise. We will not
receive any proceeds from the borrowed shares of common stock,
but we will receive a nominal lending fee from the share
borrower for the use of those shares. All borrowed shares (or
identical shares or, in certain circumstances, the cash value
thereof) must be returned to us on or about the maturity date of
the notes or earlier upon demand when the notes are no longer
outstanding, and in certain other circumstances. See
Description of Share Lending Agreement. In addition,
we have been informed by Deutsche Bank Securities Inc. that it
or its affiliates intend to use the short position created by
the share loan and the concurrent short sales of the borrowed
shares for purposes reasonably designed to facilitate
transactions by which investors in the notes may hedge their
investments through short sales or privately negotiated
derivative transactions. Deutsche Bank Securities Inc. has also
informed us that it intends to short sell up
to
borrowed shares concurrently with this offering of the notes. To
the extent such shares are not sold concurrently with the
offering of the convertible notes, the share borrower may from
time to time borrow additional shares from us for additional
offerings that may be made from time to time. The market price
of our common stock could be further negatively affected by
these or other short sales of our common stock, including other
sales by the purchasers of the notes hedging their investment
therein.
Adjustments by
purchasers of the notes of their hedging positions in our common
stock and the expectation thereof may have a negative effect on
the market price of our common stock.
The shares of our common stock that are being offered in the
concurrent offering in connection with the share lending
agreement are expected to be used by investors in the notes to
establish hedged positions with respect to our common stock
through short sale transactions or privately negotiated
derivative transactions. The number of shares of our common
stock offered in the concurrent offering may be more or less
than the number of shares that will be needed in such hedging
transactions. Any buying or selling of shares of our common
stock by those investors to adjust their hedging positions in
connection with this offering or the concurrent offering or in
the future may affect the market price of our common stock.
Anti-takeover
provisions in our organizational documents and in our
stockholders rights agreement could make it difficult for our
stockholders to replace or remove our current board of directors
or have the effect of discouraging, delaying or preventing a
merger or acquisition, which could adversely affect the market
price of our common stock.
Several provisions of our amended and restated articles of
incorporation and bylaws and in our stockholders rights
agreement could make it difficult for our stockholders to change
the composition of our board of directors in any one year,
preventing them from changing the composition of management. In
addition, the same provisions may discourage, delay or prevent a
merger or acquisition that stockholders may consider favorable.
These provisions include:
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prior to the date of the transaction that resulted in the
shareholder becoming an interested shareholder, our board of
directors approved either the business combination or the
transaction that resulted in the shareholder becoming an
interested shareholder;
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providing for a classified board of directors with staggered,
three year terms;
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prohibiting cumulative voting in the election of directors;
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authorizing the removal of directors only for cause and only
upon the affirmative vote of the holders of a majority of the
outstanding shares of our common stock entitled to vote for the
directors;
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prohibiting stockholder action by written consent;
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limiting the persons who may call special meetings of
stockholders; and
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establishing advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings.
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Under our stockholders rights plan adopted in 2008 and amended
in 2009, our board of directors declared a dividend of one
preferred share purchase right, or a right, to purchase one
one-thousandth of a share of our Series A Participating
Preferred Stock for each outstanding common share. Each right
entitles the registered holder, upon the occurrence of certain
events, to purchase from us one one-thousandth of a share of
Series A Participating Preferred Stock. The rights may have
anti-takeover effects. The rights will cause substantial
dilution to any person or group that attempts to acquire us
without the approval of our board of directors. As a result, the
overall effect of the rights may be to render more difficult or
discourage any attempt to acquire us. Because our board of
directors can approve a redemption of the rights or a permitted
offer, the rights should not interfere with a merger or other
business combination approved by our board of directors. The
adoption of the rights agreement was approved by our existing
stockholders prior to the offering.
Although the Marshall Islands Business Corporation Act does not
contain specific provisions regarding business
combinations between corporations organized under the laws
of the Republic of Marshall Islands and interested
shareholders, we have included provisions regarding such
combinations in our articles of incorporation. Our articles of
incorporation contain provisions which prohibit us from engaging
in a business combination with an interested shareholder for a
period of three years after the date of the transaction in which
the person became an interested shareholder, unless:
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authorizing our board of directors to issue blank
check preferred stock without stockholder approval;
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upon consummation of the transaction that resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of our voting stock outstanding
at the time the transaction commenced;
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at or subsequent to the date of the transaction that resulted in
the shareholder becoming an interested shareholder, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of shareholders by the
affirmative vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested shareholder; or
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the shareholder became an interested shareholder prior to the
consummation of the Initial Public Offering.
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For purposes of these provisions, a business
combination includes mergers, consolidations, exchanges,
asset sales, leases and other transactions resulting in a
financial benefit to the interested shareholder and an
interested shareholder is any person or entity that
beneficially owns 15% or more of our outstanding voting stock
and any person or entity affiliated with or controlling or
controlled by that person or entity. Further, the term
business combination, when used in reference to us
and any interested shareholder does not include any
transactions for which definitive agreements were entered into
prior to the date the articles were filed with the Republic of
the Marshall Islands.
S-47
Borrowed shares
may not be available for hedging transactions.
Some or all of the borrowed shares we have agreed to lend to the
share borrower may not be available to facilitate hedging
transactions in some circumstances, including if (i) the
share borrower returns shares to us before the expiration of the
share lending agreement, (ii) the share borrower does not
borrow the maximum amount of shares available to them
concurrently with the offering of the notes, and the
registration statement is unavailable at the time the share
borrower wants to borrow additional shares or (iii) if the
share borrower is unwilling or unable to purchase additional
shares at the market. See Description of Share Lending
Agreement. Any unavailability of borrowed shares to
facilitate hedging transactions may make it more difficult for
investors in the notes to hedge their investment and
consequently could adversely impact the trading price of the
notes.
Changes in the
accounting guidelines relating to the borrowed shares could
decrease our reported earnings per share and potentially our
common stock price.
Because the borrowed shares that are being offered in the
concurrent offering (or identical shares) must be returned to us
at the end of the loan availability period under the share
lending agreement or earlier in certain circumstances, we
believe that under U.S. GAAP, as presently in effect, the
borrowed shares will not be considered outstanding for the
purpose of computing and reporting our earnings per share. If
accounting guidelines were to change in the future, we may
become required to treat the borrowed shares as outstanding for
purposes of computing earnings per share, our reported earnings
per share would be reduced and our common stock price could
decrease, possibly significantly.
There is not
currently and there may never be an active trading market for
the notes.
The notes are a new issue of securities for which there is
currently no trading market, and an active trading market might
never develop. To the extent that an active trading market does
not develop, the liquidity and trading prices for the notes may
be harmed. If the notes are traded after their initial issuance,
they may trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for similar
securities, the price and volatility in the price of our shares
of common stock, our performance and other factors.
We have no plans to list the notes on a securities exchange. We
have been advised by the underwriter that it presently intends
to make a market in the notes. However, the underwriter is not
obligated to do so. Any market-making activity, if initiated,
may be discontinued at any time, for any reason or for no
reason, and without notice. If the underwriter ceases to act as
market maker for the notes, we cannot assure you that another
firm or person will make a market in the notes.
Even if a trading market for the notes develops, it may not be
liquid. The liquidity of any market for the notes will depend
upon the number of holders of the notes, our results of
operations and financial condition, the market for similar
securities, the interest of securities dealers in making a
market in the notes and other factors.
Fluctuations in
the price of our common stock may prevent you from being able to
convert the notes, may impact the price of the notes and may
make the notes (or the common stock into which the notes are
convertible) more difficult to resell.
The ability of holders of the notes to convert the notes other
than during the six-month periods immediately preceding the
maturity date for such notes is conditioned on the closing price
of our common stock reaching and remaining at or above a
specified threshold for a specified period, the trading price of
the notes falling below a certain level for a specified period
or the occurrence of specified corporate transactions, such as a
change in control. If the closing price threshold for conversion
of the notes is satisfied at the end of a calendar quarter,
S-48
holders may convert the notes only during the subsequent
calendar quarter. If such closing price threshold is not
satisfied, the trading price of the notes does not fall below
the relevant threshold, and none of the specified distributions
or corporate transactions that would permit a holder to convert
its notes occurs, holders would not be able to convert their
notes except during the six-month period prior to the maturity
date of the notes.
Because the notes may be convertible into shares of our common
stock, volatility or depressed prices for our common stock could
have a similar effect on the trading price of the notes
and/or the
value of the consideration payable upon the conversion of the
notes. Holders who receive common stock upon conversion of the
notes will also be subject to the risk of volatility and
depressed prices of our common stock.
The limited
protections in the indenture and notes against certain types of
important corporate events may not protect your
investment.
The indenture for the notes does not:
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require us to maintain any financial ratios or specific levels
of net worth, revenues, income, cash flows or liquidity;
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protect holders of the notes in the event that we experience
significant adverse changes in our financial condition or
results of operations;
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limit our ability to incur secured indebtedness that would
effectively rank senior to the notes to the extent of the value
of the assets securing the indebtedness;
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limit our ability to incur indebtedness that is equal in right
of payment to the notes;
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restrict our subsidiaries ability to issue securities or
incur liabilities that would be structurally senior to our
indebtedness;
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restrict our ability to repurchase or prepay our securities
(other than the notes); or
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restrict our ability to make investments or to repurchase or pay
dividends (except with respect to triggering conversion rights,
if applicable) or make other payments in respect of our common
stock or other securities ranking junior to the notes.
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Furthermore, the indenture for the notes contains only limited
protections in the event of a fundamental change, which includes
a change in control and termination of trading in our common
stock. We could engage in many types of transactions, such as
certain acquisitions, refinancings, recapitalizations, sales,
carve-outs or spin-offs that could substantially affect our
capital structure and the value of the notes and our common
stock, but would not constitute a change in control
that permits holders to require us to repurchase their notes.
For these reasons, you should not consider the repurchase
feature of the notes as a significant factor in evaluating
whether to invest in the notes.
Upon conversion
of the notes, you may receive less proceeds than expected
because the value of our common stock may decline after you
exercise your conversion right.
Under the notes, a converting holder will be exposed to
fluctuations in the value of our common stock during the period
from the date such holder surrenders notes for conversion until
the date we settle our conversion obligation. Under the notes,
if we elect to settle all or any portion of our conversion
obligation in cash (other than solely cash in lieu of any
fractional shares), the amount of consideration that you will
receive upon conversion of your notes is in part determined by
reference to the volume weighted average prices of our common
stock for each trading day in a 25 trading day period. Except as
described under Description of NotesConversion of
Notes, this period will begin the third trading day after
the date on which your notes are surrendered for conversion.
Accordingly, if the price of our common stock decreases
S-49
during this period, the amount of consideration you receive will
be adversely affected. In addition, if we elect to settle a
portion, but less than all, of our conversion obligation in cash
(other than solely cash in lieu of any fractional shares), and
the market price of our common stock at the end of such 25
trading day period is below the average of the volume weighted
average price of our common stock during such period, the value
of any shares of our common stock that you will receive in
satisfaction of our conversion obligation will be less than the
value used to determine the number of shares you will receive.
The conversion
rate for the notes may not be adjusted for all dilutive events
that may occur.
The conversion rate for the notes is subject to adjustment for
certain events including, but not limited to, the issuance of
stock dividends on shares of our common stock, the issuance of
certain rights or warrants, subdivisions or combinations of
shares of our common stock, certain distributions of assets,
debt securities, capital stock or cash to holders of our common
stock, including distributions made in connection with a
spin-off, and certain issuer tender or exchange offers as
described under Description of NotesConversion of
NotesConversion Price Adjustments. The conversion
rate will not be adjusted for other events, such as stock
issuances for cash, sales of less than substantially all of our
assets that do not constitute a fundamental change,
or third-party tender offers, that may adversely affect the
trading price of the notes or any common stock. For example, the
spin-off, carve-out or sale of our subsidiary, Ocean Rig UDW,
may or may not give rise to a conversion rate adjustment. If the
disposition of Ocean Rig UDW is structured as a spin-off to
holders of our common stock, there would be an adjustment to the
conversion rate. Alternatively, there would be no conversion
rate adjustment if the disposition of Ocean Rig UDW does not
involve a distribution to holders of our common stock and is
structured as a sale of less than substantially all of our
assets. We may also engage in other spin-offs, carve-outs or
sales in the future and whether or not they result in a
conversion rate adjustment will depend on the particular
structure of the particular transaction. See Description
of NotesConversion Price Adjustments. In addition,
we are not restricted from issuing additional common stock
during the life of the notes and have no obligation to consider
the interests of holders of the notes in deciding whether to
issue common stock. There can be no assurance that an event that
adversely affects the value of the notes, but does not result in
an adjustment to the conversion rate, will not occur.
The adjustment to
the conversion rate for notes converted in connection with a
make-whole adjustment event may not adequately compensate you
for any lost value of your notes as a result of such
transaction.
If a make-whole adjustment event (as defined herein) occurs,
under certain circumstances we will increase the conversion rate
by a number of additional shares of our common stock for notes
converted in connection with such make-whole adjustment event.
The increase in the conversion rate will be determined based on
the date on which the make-whole adjustment event becomes
effective and the applicable price (as defined herein) in
connection with the make-whole adjustment event, as described
below under Description of NotesAdjustments to
Conversion Rate Upon a Make-Whole Adjustment Event. The
adjustment to the conversion rate for notes converted in
connection with a make-whole adjustment event may not adequately
compensate you for any lost option value with respect to your
notes as a result of such make-whole adjustment event. In
addition, if the applicable price used to determine the
adjustment upon a make-whole adjustment event is greater than
$50.00 per share or less than $5.75 per share (each such price,
subject to adjustment), no adjustment will be made to the
conversion rate. In addition, in no event will the total number
of shares of common stock issuable upon conversion as a result
of this adjustment exceed 173.8647 per $1,000 principal amount
of the notes, subject to adjustments in the same manner as the
conversion rate as set forth under Description of
NotesConversion Price Adjustment. In addition, our
obligation
S-50
to increase the conversion rate in connection with any such
make-whole adjustment event could be considered a penalty, in
which case the enforceability thereof would be subject to
general principles of reasonableness of economic remedies.
Because your
right to require our repurchase of the notes and to receive a
make-whole
adjustment is limited, the market prices of the notes may
decline if we enter into a transaction that is not a change in
control under the indenture.
The term fundamental change is limited and may not
include every event that might cause the market prices of the
notes to decline or result in a downgrade of the credit rating
of the notes. Our obligation to repurchase the notes at the
holders option upon a fundamental change may not preserve
the value of the notes in the event of a highly leveraged
transaction, reorganization, merger or similar transaction that
would not constitute a change in control under the indenture,
but could nevertheless increase the amount of our outstanding
debt at such time, adversely affect our capital structure or
credit ratings, change the volatility or other trading
characteristics of our common stock, or otherwise adversely
affect holders of the notes. See Description of
NotesPurchase of Notes at your Option Upon a Fundamental
Change. In addition, if the transaction is not considered
a make-whole adjustment event, holders will not be able to
receive a make-whole adjustment in connection with any
conversion in connection with the transaction. Based on the
anticipated structure of the disposition of Ocean Rig UDW as
described in SummaryOur Company, we do not
expect that the spin-off, carve-out or sale of Ocean Rig UDW
would constitute a fundamental change giving rise to
a repurchase right or make-whole adjustment. We may also engage
in spin-offs, carve-outs or sales in the future and whether or
not they result in a fundamental change giving rise to a
repurchase right or make-whole adjustment will depend on the
particular structure of the particular transaction. See
Description of NotesAdjustment to Conversion Rate
Upon a Make-Whole Adjustment Event.
If you hold
notes, you are not entitled to any rights with respect to our
common stock, but you are subject to all changes made with
respect to our common stock.
If you hold notes, you are not entitled to any rights with
respect to our common stock (including, without limitation,
voting rights and rights to receive any dividends or other
distributions on our common stock), but you are subject to all
changes to our common stock that might be adopted by the holders
of our common stock to curtail or eliminate any of the powers,
preferences or special rights of our common stock, or impose new
restrictions or qualifications upon our common stock. You will
not be entitled to any rights as a holder of our common stock
until the close of business on the conversion date (if we
deliver solely shares of our common stock in respect of our
conversion obligation, other than cash in lieu of fractional
shares) or the close of business on the last trading day of the
relevant cash settlement averaging period (if we deliver cash in
respect of any portion of our conversion obligation (other than
solely cash in lieu of any fractional shares)). For example, in
the event that an amendment is proposed to our certificate of
incorporation or bylaws requiring shareholder approval and the
record date for determining the shareholders of record entitled
to vote on the amendment occurs prior to delivery of any common
stock upon conversion of your notes, you will not be entitled to
vote on the amendment, although you will nevertheless be subject
to any changes in the powers, preferences or special rights of
our common stock.
We may not be
able to raise the funds necessary to repay the notes when due,
finance a change in control repurchase or to make the payments
due upon conversion.
At maturity, the entire outstanding principal amount of the
notes will become due and payable. In addition, upon the
occurrence of a change in control, holders of notes may require
S-51
us to repurchase their notes. Furthermore, unless we elect to
deliver solely shares of our common stock upon conversion of the
notes, other than cash in lieu of fractional shares, we will be
required to make cash payments to holders on conversion thereof.
However, it is possible that we would not have sufficient funds
to repay the notes at maturity, to make the required repurchase
of the notes or to make cash payments on conversion. Any credit
facility in place at the time of a repurchase or conversion of
the notes may also limit our ability to use borrowings to pay
any cash payable on a repurchase or conversion of the notes and
may prohibit us from making any cash payments on the repurchase
or conversion of the notes if a default or event of default has
occurred under that facility. Our failure to repurchase tendered
notes at a time when the repurchase is required by the indenture
or to pay any cash payable on a conversion of the notes would
constitute a default under the indenture. A default under the
indenture or a fundamental change could lead to a default under
our credit facilities or other existing and future agreements
governing our indebtedness. If the repayment of the related
indebtedness were to be accelerated after any applicable notice
or grace periods, we may not have sufficient funds to repay the
indebtedness and repurchase the notes.
The fundamental
change repurchase feature of the notes may delay or prevent an
otherwise beneficial attempt to take over our company.
The terms of the notes require us to repurchase the notes for
cash at the option of the holder in the event of a fundamental
change and in certain circumstances require us to increase the
conversion rate for conversions in connection with a make-whole
adjustment event. A takeover of our company may trigger an
option of the holder to require us to repurchase the notes.
These features may have the effect of delaying or preventing a
takeover of our company that would otherwise be beneficial to
investors in the notes.
If you are a U.S.
holder, you may have to pay taxes with respect to distributions
on our common stock that you do not receive.
The conversion rate of the notes is subject to adjustment for
certain events arising from stock splits and combinations, stock
dividends, cash dividends and certain other actions by us that
modify our capital structure. If, for example, the conversion
rate is adjusted as a result of a distribution that is taxable
to holders of our common stock, such as a cash dividend, if you
are a U.S. Holder (as defined below), you may be required
to include an amount in income for U.S. federal income tax
purposes, notwithstanding the fact that you do not receive an
actual distribution. If we are required to withhold in respect
of such amount we may, at our option, set off the amount
required to be withheld against payments to such holder of cash
or deliveries of common stock on the notes. See discussions
under the heading TaxationU.S. Federal Income
Taxation of U.S. HoldersAdjustments to Conversion
Rate.
S-52
USE OF
PROCEEDS
We estimate that the net proceeds from the notes offered hereby,
after deducting discounts and commissions payable to the
underwriter and other expenses related to the offering, will be
approximately $388.0 million (or approximately
$446.2 million if the underwriter exercises its
overallotment option in full).
We intend to use the net proceeds for vessel acquisitions,
acquisitions of vessel owning companies, and other acquisitions
in shipping and related industries, and for general corporate
purposes such as scheduled capital expenditures for our newbuild
drillships.
S-53
MARKET PRICE OF
COMMON STOCK
The trading market for our common stock is The Nasdaq Global
Select Market, on which the shares are listed under the symbol
DRYS. The following table sets forth the high and
low closing prices for our common stock since February 3,
2005, when our common stock began trading on Nasdaq. The high
and low closing prices for our common stock for the periods
indicated were as follows:
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High
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Low
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For the Fiscal Year Ended December 31, 2008
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$
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110.74
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$
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3.54
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For the Fiscal Year Ended December 31, 2007
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130.97
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16.99
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For the Fiscal Year Ended December 31, 2006
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18.01
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8.58
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For the Fiscal Year Ended December 31, 2005 (beginning
February 3, 2005)
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23.16
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12.16
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For the Quarter Ended
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September 30, 2009
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$
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7.48
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$
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4.90
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June 30, 2009
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10.70
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4.52
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March 31, 2009
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16.58
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2.79
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December 31, 2008
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35.45
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3.54
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September 30, 2008
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79.61
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33.15
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June 30, 2008
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110.74
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59.98
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March 31, 2008
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87.45
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52.18
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December 31, 2007
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130.97
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69.67
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September 30, 2007
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91.40
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44.14
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June 30, 2007
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43.38
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23.24
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March 31, 2007
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23.50
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16.99
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High
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Low
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For the Month:
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November (up to November 19, 2009)
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$
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7.14
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$
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5.86
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October 2009
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7.37
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6.01
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September 2009
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7.48
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5.65
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August 2009
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6.71
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5.69
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July 2009
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7.08
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4.90
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June 2009
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7.87
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5.45
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May 2009
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10.70
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6.09
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S-54
DIVIDEND
POLICY
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, 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, the waivers of our
non-compliance with covenants in our loan agreements that we
received from our lenders prohibit us from paying any dividends.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
condition, cash requirements and availability, fleet renewal and
expansion, restrictions in our loan agreements, the provisions
of Marshall Islands law affecting the payment of distributions
to shareholders and other factors. The payment of dividends
would also result in a conversion rate adjustment under the
terms of the convertible notes.
Because we are a holding company with no material assets other
than the stock of our subsidiaries, our ability to pay
dividends, if any, in the future, will depend on the earnings
and cash flow of our subsidiaries and their ability to pay
dividends to us. If there is a substantial decline in the
drybulk charter market, our earnings would be negatively
affected thus limiting our ability to pay dividends, if any, in
the future. Marshall Islands law generally prohibits the payment
of dividends other than from surplus or while a company is
insolvent or would be rendered insolvent upon the payment of
such dividend.
We believe that, under current law, our dividend payments from
earnings and profits will constitute qualified dividend
income and as such will generally be subject to a 15%
United States federal income tax rate with respect to
non-corporate individual stockholders (for taxable years
beginning on or before December 31, 2010). Distributions in
excess of our earnings and profits will be treated first as a
non-taxable return of capital to the extent of a United States
stockholders tax basis in its common stock on a
dollar-for-dollar basis and thereafter as capital gain. Please
see the section of this report entitled Tax
Considerations for additional information relating to the
tax treatment of our dividend payments.
S-55
CAPITALIZATION
The following table sets forth our cash position and
consolidated capitalization as of September 30, 2009:
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on an actual basis;
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on an as adjusted basis to give effect to (i) the
additional drawdown of $3.0 million for the newbuilding
Hulls 1865 and 1866 and (ii) loan repayments of
$40.2 million under our credit facilities subsequent to
September 30, 2009; and
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on an as further adjusted basis giving effect to gross proceeds
of $400.0 million from this offering of senior notes net of
fair value of conversion option of $103 million (assuming
no exercise by the underwriter of its over-allotment option) and
reflecting the 26.1 million shares of common stock to be
loaned to the share borrower under the share lending agreement.
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As of September 30, 2009
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As Further
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Actual
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As Adjusted (1)
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Adjusted
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(in thousands of U.S. dollars)
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Cash and cash equivalents
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$
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291,583
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$
|
275,667
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$
|
675,667
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Restricted cash (2)
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$
|
377,713
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$
|
353,414
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$
|
353,414
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Total secured debt, including current portion
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2,488,725
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2,451,478
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2,451,478
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Convertible senior notes due 2014 offered concurrently
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$
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297,000
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Total debt (3)
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$
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2,488,725
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$
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2,451,478
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$
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2,748,478
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Shareholders equity
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Preferred stock, $0.01 par value; 500,000,000 shares
authorized, none issued as of September 30, 2009
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Series A Convertible preferred stock, $0.01 par value;
100,000,000 shares authorized, 52,238,806 shares
issued and outstanding as of September 30, 2009
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522
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|
522
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|
522
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Common stock, $0.01 par value; 1,000,000,000 shares
authorized, 254,225,821 shares issued and outstanding at
September 30, 2009; 254,225,821 shares issued as
adjusted; 280,325,821 shares as further adjusted (4)(5)
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|
2,543
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|
|
|
2,543
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|
|
|
2,804
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Additional paid-in capital (6)
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|
2,543,658
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|
|
|
2,543,658
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|
|
|
2,655,258
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Accumulated other comprehensive loss
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|
(33,027
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)
|
|
|
(33,027
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)
|
|
|
(33,027
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)
|
Retained earnings
|
|
|
153,943
|
|
|
|
153,943
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|
|
|
153,943
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|
|
Total shareholders equity
|
|
|
2,667,639
|
|
|
|
2,667,639
|
|
|
|
2,779,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
5,156,364
|
|
|
$
|
5,119,117
|
|
|
$
|
5,527,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
There have been no significant
changes to our capitalization since September 30, 2009, as
so adjusted.
|
|
(2)
|
|
Restricted cash represents bank
deposits to be used to fund loan installments coming due and
minimum cash deposits required to be maintained with certain
banks under our borrowing arrangements.
|
|
(3)
|
|
Total debt does not include debt
insurance costs.
|
|
(4)
|
|
Does not include out of the
money five-year warrants issued on April 9, 2009, to
entities controlled by our Chairman and Chief Executive Officer,
George Economou, for the purchase of up to 3.5 million
common shares with exercise prices, depending on the relevant
tranches, of between $20 and $30 per share. Does not include any
amount of common shares resulting from the conversion of the
Series A Convertible preferred stock.
|
|
(5)
|
|
The borrowed shares that are being
offered in the concurrent offering (or identical shares) must be
returned to us at the end of the loan availability period under
the share lending agreement or earlier in certain circumstances.
We believe that U.S. GAAP, as presently in effect, the
borrowed shares will not be considered outstanding for the
purpose of computing and reporting our earning per share,
although the borrowed shares will be outstanding for corporate
law purposes.
|
|
(6)
|
|
As further adjusted represents
estimated fair value of conversion option related to the notes
offered hereby of approximately $103 million and an
estimated fair value of the share-lending agreement entered into
in connection with this note offering of approximately
$8.6 million.
|
S-56
RATIO OF EARNINGS
TO FIXED CHARGES
Effective November 1, 2004, we changed our fiscal reporting
year-end from October 31st to December 31st. The
following table sets forth our unaudited ratio of earnings to
fixed charges
|
|
|
|
|
for the fiscal year ended October 31, 2004, the two-month
period ended December 31, 2004, the fiscal years ended
December 31, 2005, 2006, 2007, and 2008 and the nine-month
period ended September 30,
2009(1)(
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Months
|
|
|
|
Year Ended
|
|
|
December 31
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
|
October 31,2004
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
September 30,
|
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
(As Adjusted)
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands of dollars, except per share and fleet data)
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes and non controlling interests
|
|
$
|
37,552
|
|
|
$
|
11,039
|
|
|
$
|
110,243
|
|
|
$
|
54,312
|
|
|
$
|
478,325
|
|
|
$
|
(341,613
|
)
|
|
$
|
(16,368
|
)
|
Add: Fixed charges
|
|
|
1,410
|
|
|
|
368
|
|
|
|
20,341
|
|
|
|
41,149
|
|
|
|
53,370
|
|
|
|
122,048
|
|
|
|
79,728
|
|
Less: Cap interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110.00
|
)
|
|
|
(2,597
|
)
|
|
|
(13,058
|
)
|
|
|
(16,973
|
)
|
Add: Equity in loss of investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings
|
|
$
|
38,962
|
|
|
$
|
11,407
|
|
|
$
|
130,584
|
|
|
$
|
95,351
|
|
|
$
|
529,397
|
|
|
$
|
(225,730
|
)
|
|
$
|
46,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and capitalized interest
|
|
|
1,278
|
|
|
|
257
|
|
|
|
19,797
|
|
|
|
37,364
|
|
|
|
51,180
|
|
|
|
106,200
|
|
|
|
64,457
|
|
Amortization and write-off capitalized expenses relating to
indebtedness
|
|
|
132
|
|
|
|
111
|
|
|
|
544
|
|
|
|
3,785
|
|
|
|
2,190
|
|
|
|
15,848
|
|
|
|
15,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges
|
|
$
|
1,410
|
|
|
$
|
368
|
|
|
$
|
20,341
|
|
|
$
|
41,149
|
|
|
$
|
53,370
|
|
|
$
|
122,048
|
|
|
$
|
79,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges
|
|
|
27.6
|
x
|
|
|
31.0
|
x
|
|
|
6.4
|
x
|
|
|
2.3
|
x
|
|
|
9.9
|
x
|
|
|
|
|
|
|
|
|
Dollar Amount of Deficiency in Earnings to Fixed Charges
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
347,778
|
|
|
|
33,341
|
|
( (1) For purposes of
computing the consolidated ratio of earnings to fixed charges,
earnings consist of income/(loss) before income taxes,
non-controlling interests and equity in the loss of investee
plus interest expense and amortization and write-off of
capitalized expenses relating to indebtedness. Fixed charges
consist of interest expense and capitalized interest and
amortization and write-off of capitalized expenses relating to
indebtedness.
S-57
DESCRIPTION OF
INDEBTEDNESS
The following is a summary of the material terms of our
credit facilities and other indebtedness that will be
outstanding following the consummation of this offering.
DnB NOR Bank (as
Agent) $1.04 billion revolving credit and term loan
facility, dated September 17, 2008
In September and October 2008, Ocean Rig ASA, our wholly-owned
subsidiary, drew down a total of $1.0 billion under this
credit facility, which was used to repay all other outstanding
Ocean Rig ASA debt in the amount of $776 million and for
general corporate purposes. This credit facility consists of a
guarantee facility which provides us with a letter of credit in
the amount of up to $20 million, three revolving credit
facilities in the amounts of up to $350 million,
$250 million and $20 million, respectively, and a term
loan facility in the amount of up to $400 million. This
loan bears interest at LIBOR plus a margin, and is repayable in
20 quarterly installments plus a balloon payment of
$400 million, payable together with the last installment on
September 17, 2013. As of December 31, 2008, we had
outstanding borrowings in the amount of $982.5 million
under this facility, and as of September 30, 2009, we had
outstanding borrowings in the amount of $849.5 million
under this facility.
The loan contains various finance covenants, including
restrictions as to payment of dividends, distribution to
shareholders, and the reduction of share capital without the
banks prior consent. The loan is secured by (i) first
and second priority mortgages over Ocean Rig ASAs two
ultra-deepwater drilling rigs; (ii) first and second
priority assignment of all insurances and earnings of the
mortgaged drilling rigs; (iii) pledges of shares of Ocean
Rig Norway AS, Ocean Rig 1 AS, Ocean Rig 2 AS, Ocean Rig North
Sea AS, Ocean Rig Ghana Ltd., Ocean Rig Ltd., Ocean Rig 1 Inc.
and Ocean Rig 2 Inc.; and (iv) first and second mortgages
over the machinery and plant of Ocean Rig 1 Inc. and Ocean Rig 2
Inc. As of September 30, 2009, we were in compliance with
all covenants under this facility.
Under this loan, Ocean Rig ASA is restricted from paying
dividends if there is less than six months on the contract for
the MV Eirik Raude with Tullow Oil Plc, which expires
October 2011, and no other contract with equally
satisfactory terms has been entered into.
Two Deutsche Bank
$562.5 million credit facilities, each dated July 18,
2008
As of December 2008, Drillship Kithira Owners Inc. and Drillship
Skopelos Owners Inc., our wholly-owned subsidiaries, each drew
down $86.7 million under these credit facilities, which was
used to partially finance the construction costs of Drillship
Hulls 1865 and 1866, including payment of the loan financing
fees, incidental vessel costs, commitment fees, loan interest,
and a portion of the second yard installments. Both of these
loans bear interest at LIBOR plus a margin and are repayable in
18 semi-annual installments through November 2020. The first
installment is payable six months after delivery of the vessels,
which is expected to be in the third quarter of 2011. As of
December 31, 2008, we had outstanding borrowings in the
aggregate amount of $173.4 million under these credit
facilities, and as of September 30, 2009, we had
outstanding borrowings in the aggregate amount of
$183.3 million under these credit facilities. As of
December 31, 2008, we were not in compliance with the
following covenants for this facility: (i) the
market-adjusted equity ratio must be greater than or equal to
25% and (ii) the market value adjusted net worth must be
greater than or equal to $500 million.
On June 5, 2009, we entered into agreements with Deutsche
Bank Luxembourg S.A, as facility agent, and certain other
lenders on waiver and amendment terms with respect to each of
these credit facilities providing for a waiver of certain
financial covenants through January 31, 2010. These
agreements provide for, among other things, (i) a waiver of
the required market adjusted equity ratio, (ii) a waiver of
the required market value adjusted net worth; and (iii) a
required payment from us to each lender and the facility agent.
S-58
Norddeutsche
Landesbank Girozentrale $126.4 million term loan facility,
dated July 23, 2008
In July 2008, Cretan Traders Inc., our wholly-owned subsidiary,
drew down $126.4 million under this term loan facility,
which was used to partially finance the acquisition of the
secondhand vessel, to be named MV Flecha. This loan bears
interest at LIBOR plus a margin, and is repayable in 40
quarterly installments, plus a balloon payment of
$20.4 million payable with the last installment in July
2018. As of December 31, 2008, we had outstanding
borrowings in the amount of $123.75 million under this term
loan facility, and as of September 30,, 2009, we had
outstanding borrowings in the amount of $115.8 million
under this term loan facility. As of December 31, 2008, we
were not in compliance with a covenant for this facility which
requires that the market value to loan amount ratio be equal to
or greater than 125%.
On October 12, 2009, we entered into a supplemental
agreement with Nordeutsche Landesbank Girozentrale, as agent, on
waiver and amendment terms on this loan facility providing for a
waiver of certain covenants, including the security cover
provisions, through October 9, 2011.
Under this loan, we are restricted from paying dividends if we
are in default of the loan or the payment of dividends would
result in a default of the loan.
WestLB AG
$103.2 million loan facility, dated June 20,
2008
In June and July 2008, Aegean Traders Inc. and Iguana Shipping
Company Limited, our wholly-owned subsidiaries, drew down
$32.5 million and $51.6 million under this loan
facility, respectively, to partially finance the acquisition
cost of the vessels MV Iguana and MV Sorrento This
loan bears interest at LIBOR plus a margin, and is repayable in
32 quarterly installments, plus a balloon payment of
$16 million payable with the last installment in July 2016
for the MV Sorrento, and 20 quarterly installments, with
the last installment in June 2013 for the Iguana. As of
December 31, 2008, we had outstanding borrowings in the
amount of $78.4 million under this loan facility, and as of
September 30, 2009, we had outstanding borrowings in the
amount of $67.1 million under this loan facility. As of
December 31, 2008, we were not in compliance with the
following covenants for this facility: (i) the
market-adjusted equity ratio must be greater than or equal to
20%, (ii) the market value adjusted net worth must be equal
to or greater than $250 million and (iii) the market
value to loan amount ratio must be greater than or equal to 135%.
On October 8, 2009, we entered into a supplemental
agreement with WestLB AG on waiver and amendments terms on this
loan facility providing for a waiver of certain covenants. This
supplemental agreement, among other things, waives (i) the
security cover provisions; (ii) market adjusted equity
ratio; (iii) market value adjusted net worth and
(iv) the financial covenants as guarantor through
April 8, 2011.
Deutsche
Schiffsbank Aktiengesellschaft $125 million loan facility,
dated May 13, 2008
In May and June 2008, Norwalk Star Owners Inc. and Ionian
Traders Inc., our wholly-owned subsidiaries, drew down
$81.8 million and $43.2 million, respectively, under
this loan facility to partially finance the acquisition cost of
the vessels MV Capri and MV Positano. This loan
bears interest at LIBOR plus a margin, and is repayable in 32
quarterly installments, plus a balloon payment of
$19 million payable with the last installment in June 2016.
As of December 31, 2008, we had outstanding borrowings in
the amount of $112 million under this loan facility, and as
of September 30, 2009, we had outstanding borrowings in the
amount of $92.5 million under this loan facility. As of
December 31, 2008, we were not in compliance with the
following covenants for this facility (i) the
market-adjusted equity ratio must be greater than or equal to
25%, (ii) the market value to loan amount ratio must be
greater than or equal to 125% and (iii) the market value
adjusted net-worth greater than or equal to $180 million.
S-59
On November 13, 2009, we entered into a supplemental
agreement with Deutsche Schiffsbank Aktiengesellschaft,
providing for a waiver of certain covenants. This covenant
waiver and amendment agreement, among other things,
(i) increases the applicable margin on the facility from
January 1, 2009 until December 31, 2010;
(ii) waives additional security; and (iii) amends our
financial covenants as guarantor until December 31, 2010.
Under this loan, we are restricted from paying dividends without
the lenders consent if we are in default of the loan.
Dresdner Bank AG
$90 million loan facility dated May 5, 2008
In June 2008, Dalian Star Owners Inc, our wholly-owned
subsidiary, drew down $90 million under this loan facility
to partially finance the acquisition cost of the secondhand
vessel MV Mystic. The loan bears interest at LIBOR plus a
margin, and is repayable in 14 semi-annual installments, with a
balloon payment of $27 million, payable together with the
last installment in December 2015. As of December 31, 2008
we had outstanding borrowings in the amount of $80 million
under this loan facility and as of September 30, 2009, we
had outstanding borrowings in the amount of $70 million
under this loan facility. As of December 31, 2008, we were
not in compliance with the following covenants for this
facility: (i) the market-adjusted equity ratio must be
greater than or equal to 20%, (ii) the market value
adjusted net worth must be greater than or equal to
$250 million and (iii) the market value to loan amount
ratio must be greater than or equal to 125%.
On October 22, 2009, we entered into an agreement with
Commerzbank AG on waiver and amendment terms with respect to
this facility. This agreement will, among other things,
(i) revise/modify the security cover for the duration of
the waiver period; and (ii) amends the minimum requirements
for the market adjusted equity ratio and market value adjusted
new worth of the group. Furthermore, the waiver agreement
increases the interest margin for the duration of the waiver
period and it includes various dividend and capital expenditure
restrictions by us or our subsidiary Dalian Star Owners Inc. The
waiver period ends on September 30, 2010.
Piraeus Bank A.E.
$130 million loan facility, dated March 13,
2008
In March 2008, Annapolis Shipping Company Limited, Atlas Owning
Company Limited, Farat Shipping Company Limited and Lansat
Shipping Company Limited, our wholly-owned subsidiaries, drew
down $130 million under this loan facility in order to
obtain additional liquidity and for general corporate purposes.
The vessels MV Lacerta, MV Menorca, MV Toro
and MV Paragon were released from their previous loan
and related security obligations, and were provided as
collateral under this loan facility. On June 27, 2008, the
vessel MV Menorca was sold and its loan balance
outstanding at such date of $33 million was fully repaid.
On December 9, 2008, the vessel MV Lacerta was
renamed MV Delray. The loan bears interest at LIBOR plus
a margin and is repayable in 28 quarterly installments plus a
balloon payment of $31.6 million, payable with the last
installment in March 2015. On March 3, 2009, the MV
Paragon was sold and its outstanding loan balance of
$28.5 million was fully repaid. As of that date, the
balloon payment of $31.6 million was reduced to
$20.9 million. As of December 31, 2008, we had
outstanding borrowings in the amount of $84 million under
this loan facility, and as of September 30, 2009, we had
outstanding borrowings in the amount of $50.3 million under
this loan facility. As of December 31, 2008, we were not in
compliance with the following covenants for this facility:
(i) the market-adjusted equity ratio must be greater than
or equal to 25%, and (ii) the market value to loan amount
ratio must be greater than or equal to 125%.
On July 30, 2009, we entered into a supplemental agreement
with respect to this credit facility with Piraeus Bank A.E.
providing for the waiver of certain covenants. This supplemental
agreement, among other things, (i) increases the applicable
margin on the facility to 2% per
S-60
annum from April 1, 2009 until March 31, 2011 and 1.5%
per annum from March 31, 2011 until the final maturity
date; (ii) requires that until March 31, 2011,
proceeds from the sale or loss of the collateral vessels be
applied to the outstanding advance of the facility;
(iii) requires additional security and a restricted cash
account in the name of Piraeus Bank equaling a minimum of the
next four quarterly principal installments; (iv) waives the
minimum required security cover until March 31, 2011; and
(v) waives our financial covenants until March 31,
2011.
DnB NOR Bank ASA
$101.2 million loan facility, dated December 4,
2007
In December 2007 and January 2008,
Team-Up
Owning Company Limited and Orpheus Owning Company Limited, our
wholly-owned subsidiaries, drew down an aggregate of
$101.2 million under this loan facility in order to
partially finance the acquisition cost of the second hand
vessels MV Saldahna (ex. Shino Brilliance) and
MV Avoca. The loan bears interest at LIBOR plus a margin,
and is repayable in 28 quarterly installments, with a balloon
payment of $32.2 million, payable together with the last
installment in January 2015. As of December 31, 2008, we
had outstanding borrowings in the amount of $91.8 million
under this loan facility, and as of September 30, 2009, we
had outstanding borrowings of $81.1 million under this loan
facility. As of December 31, 2008, we were not in
compliance with the following covenants for this facility:
(i) the market-adjusted equity ratio must be greater than
or equal to 30%, and (ii) the market value to loan amount
ratio must be greater than or equal to 125%.
On June 11, 2009, we entered into a supplemental agreement
with DnB NOR Bank ASA as agent, on waiver terms on this loan
facility. This supplemental agreement provides, among other
things that through May 19, 2011, (i) the lender will
waive the financial covenants contained in the corporate
guarantee; (ii) the lender will waive the required
prepayment in the event of a security value shortfall;
(iii) the applicable margin will be increased; and
(iv) we will not pay any cash dividends except under
certain circumstances.
EFG Eurobank
$47 million loan facility dated November 16,
2007
In December 2007, Iason Owning Company Limited, our wholly-owned
subsidiary, drew down $47 million under this loan facility
in order to partially finance the acquisition cost of the second
hand vessel MV Oregon (ex. Athina Zafirakis). The
loan bears interest at LIBOR plus a margin, and is repayable in
32 quarterly installments, with a balloon payment of
$12 million, payable together with the last installment in
December 2015. As of December 31, 2008, we had outstanding
borrowings in the amount of $38 million under this loan
facility and as of September 30, 2009 we had outstanding
borrowings of $31.3 million under this loan facility. As of
December 31, 2008, we were not in compliance with the
following covenants for this facility: (i) the
market-adjusted equity ratio must be greater than or equal to
20%, (ii) market value adjusted net worth greater than or
equal to $180 million, and (iii) the market value to
loan amount must be greater than or equal to 130%.
In February 2009, we entered in a supplemental agreement with
EFG Eurobank on waiver and amendment terms on this loan
facility, providing for a waiver of certain covenants through
December 31, 2009. On November 11, 2009, we entered
into an agreement with EFG to confirm that the conditions in
such waivers remain satisfied, and that the waivers extend to
certain financial covenants in our guarantee of this loan
facility through December 31, 2009.
$90 million
loan facility dated October 5, 2007
In October and November 2007, Boone Star Owners Inc. and Iokasti
Owning Company Limited, our wholly-owned subsidiaries, drew down
$90 million under this loan facility in order to partially
finance the acquisition cost of the second hand vessels MV
Samatan and MV VOC Galaxy. The loan bears interest at
LIBOR plus a margin depending on corporate leverage, and
S-61
is repayable in 32 quarterly installments beginning in the first
quarter of 2008, with a balloon payment of $43.5 million,
payable together with the last installment in the fourth quarter
of 2015. As of December 31, 2008, we had outstanding
borrowings in the amount of $82 million under this loan
facility, and as of September 30, 2009, we had outstanding
borrowings of $76 million under this loan facility. As of
December 31, 2008, we were not in compliance with the
following covenants for this facility: (i) the
market-adjusted equity ratio must be greater than or equal to
25%, (ii) the market value adjusted net worth must be
greater than or equal to $250 million and (iii) the
market value to loan amount ratio must be greater than or equal
to 125%.
On April 15, 2009, we entered into a covenant waiver and
amendment agreement with respect to this credit facility with
Piraeus Bank, providing for the waiver of certain covenants.
This covenant waiver and amendment agreement, among other
things, (i) increases the applicable margin on the facility
to 2% per annum from April 1, 2009 until March 31,
2011 and 1.5% per annum from March 31, 2011 until the final
maturity date; (ii) requires that until March 31,
2011, proceeds from the sale or loss of the collateral vessels
be applied to the outstanding advance of the facility;
(iii) requires additional security; (iv) waives the
minimum required security cover until March 31, 2011; and
(v) waives our financial covenants as guarantor until
March 31, 2011.
Deutsche
Schiffsbank Aktiengesellschaft $35 million loan facility
dated October 2, 2007
In October 2007, Ioli Owning Company Limited, our wholly-owned
subsidiary, drew down $35 million under this loan facility
in order to partially finance the acquisition cost of the second
hand vessel MV Clipper Gemini. The loan bears interest at
LIBOR plus a margin, and is repayable in 36 quarterly
installments beginning in the first quarter of 2008, with a
balloon payment of $11 million, payable together with the
last installment in the fourth quarter of 2016. As of
December 31, 2008, we had outstanding borrowings in the
amount of $29 million under this loan facility, and as of
September 30, 2009, we had outstanding borrowings of
$25.5 million under this loan facility. As of
December 31, 2008, we were not in compliance with the
market value to loan covenant. Our ratio must be greater than or
equal to 125%. If we are in default of this loan, we may not pay
dividends without the lenders consent.
On November 13, 2009, we entered into a supplemental
agreement with Deutsche Schiffsbank Aktiengesellschaft,
providing for a waiver of certain covenants. This covenant
waiver and amendment agreement, among other things,
(i) increases the applicable margin on the facility from
January 1, 2009 until December 31, 2010;
(ii) waives additional security; and (iii) amends our
financial covenants as guarantor until December 31, 2010.
HSH Nordbank
$628.75 million senior and junior loan facilities, dated
March 31, 2006
In April, 2006, we drew down $628.8 million in order to
refinance the then outstanding balance of our prior indebtedness
($528.3 million as at 2005), to provide us with working
capital, and to partially finance the acquisition cost of the
second hand vessels MV Hille Oldendorff, MV
Maganari, MV Ligari and MV Lanzarote. These
facilities are comprised of (i) term loan and short-term
credit facilities of up to $557.5 million in the aggregate
(senior loan facility) and (ii) term loan and short-term
credit facilities of up to $71.3 million in the aggregate
(junior loan facility). The senior and junior loan facilities
were subsequently amended and supplemented (as described below).
As of December 31, 2008, we were not in compliance with the
following covenants for this facility: (i) market-adjusted
equity ratio and (ii) minimum market value adjusted net
worth of $750 million.
Under these facilities, dividends may not exceed more than 50%
of our net income for that year, as evidenced by the relevant
annual audited financial statements.
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The senior loan facility bears interest at LIBOR plus a margin.
The term loan facility is repayable in 40 quarterly
installments, with a balloon payment of up to
$17.2 million, payable together with the last installment
on May 31, 2016. Each advance from the short term credit
facility is repayable in quarterly installments with the next
term loan facility installment. As of December 31, 2008, we
had outstanding borrowings in the amount of $561 million
under this loan facility, and as of September 30, 2009, we
had outstanding borrowings of $513.4 million under this
loan facility.
The junior loan facility bears interest at LIBOR plus a margin.
The term loan facility is repayable in 40 quarterly
installments, with a balloon payment of up to
$17.2 million, payable with the last installment on
May 31, 2016. Each advance from the short term credit
facility is repayable in quarterly installments with the next
term loan facility installment. As of December 31, 2008, we
had outstanding borrowings in the amount of $112.5 million
under this loan facility, and as of September 30, 2009, we
had outstanding borrowings of $103.0 million under this
loan facility.
During May 2006, we entered into a supplemental letter agreement
to the senior and junior loan facilities and obtained the HSH
Nordbanks consent to draw down $26,512,500 to partially
finance the acquisition of the vessel MV Maganari, an
amount exceeding 75% of the market value of the ship. The
lenders also gave consent to a separate repayment schedule
for this amount.
On November 28, 2006 we entered into supplemental letter
agreements with HSH Nordbank to increased the amount of the
senior and junior credit facilities by up to $11.6 million
and $70.8 million, respectively. During 2006, we drew down
$82.3 million to repay the $61.5 million loan
facility, dated September 7, 2006, to partially finance the
acquisition cost of the vessel Redondo ($11.6 million) and
to provide us with working capital ($9.3 million).
On May 23, 2007, we entered into amended and restated the
senior and junior loan facilities to increase the aggregate
amounts by up to $181.0 million and to include a
re-borrowing option for mandatory repayment due to sale of
vessels of up to $200.0 million. During 2007, we drew down
$319.7 million under the amending and restating agreements
in order to partially finance the acquisition cost of the second
hand vessels MV Samsara, MV Bargara, MV
Marbella, MV Primera, MV Brisbane, MV
Majorca, MV Heinrich, MV Oldendorff, MV
Menorca, MV Capitola and MV Ecola and any
additional vessels. The loan bears interest at LIBOR plus a
margin, and is repayable in 37 variable quarterly installments,
with a balloon installment of $157.5 million, payable
together with the last installment on May 31, 2016.
We entered into supplemental letter agreements, each dated
February 27, 2008, to the senior and junior loan
facilities, whereby the financial covenants in the loans were
amended so that our required minimum market value adjusted net
worth was increased from $225 million to $500 million
for the years subsequent to the year ended December 31,
2008, and the amount of free cash required was increased from
$20 million to $40 million.
In April 2008, we drew down $49.4 million in order to
partially finance the acquisition of the vessel MV
Conquistador.
In April 23, 2008, the senior and junior loan facilities
were amended to provide as follows: (i) our market value
net worth must be higher than $750 million for the year
ended December 31, 2008, $800 million for the year
ended December 31, 2009, and $1 billion for subsequent
years, (ii) we must maintain minimum available cash of
$100 million, and (iii) we must have current charters
for 25% of our vessels until December 31, 2009 and 35% of
our vessels following that date.
As of December 31, 2008, we were not in compliance with the
following covenants for the senior and junior loan facilities:
(i) the market-adjusted equity ratio must be greater than
or
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equal to 40% and (ii) the market value adjusted net worth
must be greater than or equal to $750 million.
On November 17, 2009, we entered in a supplemental
agreement with HSH Nordbank on waiver and amendment terms on the
Senior and Junior loan facilities. These supplemental
agreements, among other things, amend (i) market adjusted
equity ratios; (ii) market value adjusted net worth;
(iii) interest coverage ratios; (iv) minimum
liquidity; (v) applicable margins on the facilities from
December 22, 2008 until September 30, 2010; and
(vi) security cover requirements during the waiver period.
In connection with the acquisition of Drillships Holdings on
May 15, 2009, we assumed two $115,000 loan facilities that
were entered into in September 2007, in order to finance the
construction of Hulls 1837 and 1838. The loans bear interest at
LIBOR plus margin and are repayable upon the delivery of Hull
1837 in December 2010 and Hull 1838 in March 2011. Borrowings
under the loan are subject to certain financial covenants and
restrictions on dividend payments, assignment of the relevant
shipbuilding contracts, refund guarantees and other related
items.
All of our credit facilities discussed in this section other
than the $1.04 billion revolving credit and term loan
facility, dated September 17, 2008, the two
$562.5 million credit facilities, each dated July 18,
2008 and the two $115 million loan facilities, each entered
into in September 2007, are secured by a first priority mortgage
over the vessels, assignment of shipbuilding contracts and
refund guarantees, corporate guarantee, a first assignment of
all freights, earnings, insurances and requisition compensation.
The loans contain covenants including restrictions, without the
banks prior consent, as to changes in management and
ownership of the vessels, additional indebtedness and mortgaging
of vessels and change in the general nature of our business. In
addition, the vessel owning companies are not permitted to pay
any dividends without the requisite lenders prior consent.
The loans also contain certain financial covenants relating to
our financial position, operating performance and liquidity.
The $1.04 billion revolving credit and term loan facility,
dated September 17, 2008 is secured by (i) first and
second priority mortgages over the ultra-deep water drilling
rigs; (ii) first and second priority assignment of all
insurances and earnings of the mortgaged drilling rigs;
(iii) pledge of shares of Ocean Rig AS, Ocean Rig Norway
AS, Ocean Rig 1 AS, Ocean Rig 2 AS, Ocean Rig North Sea AS,
Ocean Rig Ghana Ltd, Ocean Rig Ltd, Ocean Rig 1 Inc and Ocean
Rig 2 Inc; and (iv) first and second mortgages over the
machinery and plant of Ocean Rig 1 Inc and Ocean Rig 2 Inc.
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DESCRIPTION OF
NOTES
We will issue the notes under an indenture, to be dated as of
the date we consummate the offer, between us and Law Debenture
Trust Company of New York, as trustee. The following
summarizes the material provisions of the notes and the
indenture, but does not purport to be complete and is qualified
by reference to all the provisions of the notes and the
indenture, including the definitions of certain terms used in
those documents. The terms of the notes include those expressly
set forth in the indenture and those made part of the indenture
by reference to certain provisions of the Trust Indenture
Act of 1939, as amended. We urge you to read the indenture and
the form of certificate evidencing the notes in their entirety,
because they, and not this description, define your rights as a
holder of the notes. You may request a copy of these documents
at our address shown under Where You Can Find More
Information.
In this section entitled Description of the Notes,
when we refer to DryShips Inc., we,
our or us, we are referring to DryShips
Inc. and not any of its subsidiaries. This description
supplements, and should be read together with, the description
of the general terms and provisions of the debt securities set
forth in the accompanying prospectus under the caption
Description of Debt Securities, but supersedes that
information to the extent it is inconsistent with that
information.
General
We will issue $400 million (or $460 million if the
underwriter exercises its over-allotment option in full)
aggregate principal amount of notes. We will settle conversions
of notes by paying or delivering, as the case may be, cash,
shares of our common stock or a combination thereof at our
election as described below under Conversion of
NotesSettlement upon Conversion. The notes will be
issued only in denominations of $1,000 and in integral multiples
of $1,000. The notes will mature on December 1, 2014 unless
earlier converted by you or purchased by us at your option upon
the occurrence of a fundamental change (as defined below). The
notes are not subject to redemption at our option prior to
maturity.
The notes will be our senior unsecured obligations and will rank
pari passu with all of our other senior unsecured debt
and senior to all of our present and future subordinated debt.
The notes will be structurally subordinated to all present and
future debt and other obligations of our subsidiaries, including
trade payables. The notes are not guaranteed by any of our
subsidiaries. In addition, the notes are effectively
subordinated to all of our present and future secured debt to
the extent of the collateral securing that debt. As of
September 30, 2009, we had approximately
$616.4 million of senior indebtedness and we had
approximately $1,872.3 million of indebtedness at our
subsidiaries. All of our senior indebtedness is secured.
Neither we nor our subsidiaries are restricted from paying
dividends, incurring debt or issuing or repurchasing our
securities under the indenture governing the notes. We expect
that our subsidiaries and we will from time to time incur
additional indebtedness and other liabilities. In addition,
there are no financial covenants in the indenture. You are not
protected by the indenture in the event of a highly leveraged
transaction, a change in control of DryShips Inc. or a
termination in the trading of our common stock, except to the
extent described under Purchase of Notes at Your
Option upon a Fundamental Change and
Conversion of NotesConversion upon Specified
Corporate Transactions.
We will pay interest on the notes at a rate of 5.00% per annum,
payable semi-annually in arrears on June 1 and December 1 of
each year, or if any such day is not a business day, the
immediately following business day (each, an interest
payment date), commencing June 1, 2010, to holders of
record at the close of business on the preceding May 15 and
November 15, respectively. Interest is computed on the
basis of a
360-day year
comprised of twelve
30-day
months. In the event of any notes maturity, conversion or
purchase by us at the option of the
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holder thereof, interest will cease to accrue on those notes
under the terms of and subject to the conditions of the
indenture. We will, however, pay interest on the maturity date
to holders of record of the notes on the record date immediately
preceding the stated maturity date regardless of whether such
holders convert their notes. A business day is any
day other than (x) a Saturday, (y) a Sunday or
(z) a day on which state or federally chartered banking
institutions in New York, New York are not required to be open.
We may, without the consent of the holders, reopen the indenture
and issue additional notes under the indenture with the same
terms and with the same CUSIP number as the notes offered hereby
in an unlimited aggregate principal amount, provided that no
such additional notes may be issued unless fungible with the
notes offered hereby under U.S. securities laws and for
U.S. federal income tax purposes. The notes offered hereby
and any such additional notes would be treated as a single class
for all purposes under the indenture and would vote together as
one class on all matters with respect to the notes. We may also
from time to time repurchase the notes in open market purchases
or negotiated transactions without prior notice to holders. We
do not intend to list the notes on any securities exchange or
automated dealer quotation system.
We will maintain an office in New York City where the notes may
be presented for registration of transfer, exchange or
conversion. This office will initially be an office or agency of
Deutsche Bank Trust Company Americas. Except under limited
circumstances described below, the notes will be issued only in
fully registered book-entry form, without coupons, and will be
represented by one or more global notes. There will be no
service charge for any registration of transfer or exchange of
notes. We may, however, require holders to pay a sum sufficient
to cover any tax or other governmental charge payable in
connection with certain transfers or exchanges.
Conversion of
Notes
General
Subject to the conditions described below, you may convert your
notes at an initial conversion price of $7.19 per share of
common stock (equivalent to an initial conversion rate of
approximately 139.0821 shares of our common stock per
$1,000 aggregate principal amount of notes). The conversion
price and the corresponding conversion rate in effect at any
given time will be subject to adjustment as described below
under Conversion Price Adjustments and
Adjustment to Shares Delivered upon Conversion upon
Certain Corporate Transactions. The conversion rate of a
note is equal to $1,000 divided by the then-applicable
conversion price at the time of determination. Accordingly, an
adjustment to the conversion price will result in a
corresponding (but inverse) adjustment to the conversion rate. A
holder may convert fewer than all of such holders notes so
long as the notes converted are an integral multiple of $1,000
principal amount.
Holders may surrender notes for conversion any time until the
close of business on June 1, 2014 (six months prior to the
maturity date), and receive the consideration described below
under Settlement upon Conversion, only if any
of the following conditions is satisfied:
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during any calendar quarter commencing after the date of
original issuance of the notes, if the closing sale price of our
common stock, for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the
calendar quarter immediately preceding the calendar quarter in
which the conversion occurs, is more than 130% of the conversion
price in effect on that last trading day;
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during the ten consecutive
trading-day
period following any five consecutive
trading-day
period in which the trading price for the notes for each such
trading day was less than
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98% of the closing sale price of our common stock on such date
multiplied by the then current conversion rate; or
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if we make certain significant distributions to holders of our
common stock, we enter into specified corporate transactions or
our common stock is not listed on a U.S. national
securities exchange.
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We describe each of these conditions in greater detail below.
However, after June 1, 2014 holders may surrender their
notes for conversion at any time until the close of business on
the business day immediately preceding the stated maturity date
regardless of whether any of the foregoing conditions is
satisfied.
Notes that are validly surrendered for conversion will be deemed
to have been converted immediately prior to the close of
business on the conversion date. Generally, the conversion
date for any notes will be the date on which the holder of
the note has complied with all requirements under the indenture
to convert a note, provided that if a holder surrenders
for conversion a note at any time after the thirtieth scheduled
trading day preceding the stated maturity date, the conversion
date will be deemed to be the thirtieth trading day immediately
preceding the stated maturity date. If you hold a beneficial
interest in a global note, you must comply with DTCs
procedures for converting a beneficial interest in a global note.
We will settle conversions of notes by paying or delivering, as
the case may be, cash, shares of our common stock or a
combination thereof at our election as described below under
Settlement upon Conversion. If we satisfy our
conversion obligation solely in cash or through payment and
delivery, as the case may be, of a combination of cash and
shares of our common stock, the amount of cash and shares of
common stock, if any, due upon conversion will be based on a
daily conversion value (as defined below under
Settlement upon Conversion) calculated on a
proportionate basis for each trading day in the applicable 25
trading-day
conversion period (as defined below under Settlement
upon Conversion).
Upon conversion of a note, a holder will not receive any
additional cash payment for accrued and unpaid interest, if any,
unless such holder is the holder on a regular record date and
such conversion occurs between such regular record date and the
interest payment date to which it relates, and we will not
adjust the conversion rate to account for accrued and unpaid
interest, except that we will pay on the maturity date accrued
and unpaid interest to holders of record on the record date
immediately preceding the stated maturity date regardless of
whether such holders convert their notes. Our settlement of
conversions as described below under Settlement upon
Conversion will be deemed to satisfy our obligation to pay
the principal amount of the note and accrued and unpaid
interest, if any, to, but not including, the conversion date.
Accordingly, accrued and unpaid interest, if any, to, but not
including, the conversion date will be deemed to be paid in full
upon conversion, rather than cancelled, extinguished or
forfeited.
Holders of notes at the close of business on a regular record
date will receive payment of interest payable on the
corresponding interest payment date notwithstanding the
conversion of such notes at any time after the close of business
on the applicable regular record date. Notes surrendered for
conversion by a holder after the close of business on any
regular record date but prior to the corresponding interest
payment date must be accompanied by payment of an amount equal
to the interest that will be payable on the notes;
provided, however, that no such payment need be
made (1) if we have specified a purchase date following a
fundamental change that is after a record date and on or prior
to the corresponding interest payment date, (2) with
respect to any notes surrendered for conversion following the
record date for the payment of interest immediately preceding
the stated maturity date or (3) only to the extent of
overdue interest, if any overdue interest exists at the time of
conversion with respect to such note.
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If a holder converts notes, we will pay any documentary, stamp
or similar issue or transfer tax due on the issuance of any
shares of our common stock upon the conversion of the notes,
unless the tax is due because the holder requests any shares to
be issued in a name other than the holders name, in which
case the holder will pay the tax.
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
Upon determining that holders are entitled to convert their
notes in accordance with the provisions described below, we will
promptly (i) issue a press release and use our reasonable
efforts to post such information on our website or otherwise
publicly disclose this information or (ii) provide written
notice to the holders of the notes in a manner contemplated by
the indenture, including through the facilities of DTC.
Conversion
upon Satisfaction of Market Price Condition
Holders may surrender notes for conversion during any calendar
quarter commencing after the date of original issuance of the
notes if the closing sale price (as defined below) of our common
stock, for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the
calendar quarter immediately preceding the calendar quarter in
which the conversion occurs, is more than 130% of the conversion
price in effect on that last trading day.
The closing sale price of our common stock on any
date means the closing per share sale price (or, if no closing
sale price is reported, the average of the bid and ask prices
or, if more than one in either case, the average of the average
bid and the average ask prices) at 4:00 p.m. (New York City
time) on such date as reported in composite transactions for the
principal U.S. securities exchange on which our common
stock is traded or, if our common stock is not listed on a
U.S. national or regional securities exchange, as reported
by Pink OTC Markets Inc.
A trading day means a day on which (i) there is
no market disruption event (as defined below) and (ii) The
Nasdaq Global Select Market (NASDAQ) or, if our
common stock is not listed on NASDAQ, the principal other
U.S. national or regional securities exchange on which our
common stock is then listed is open for trading or, if our
common stock is not so listed, any business day. A trading
day only includes those days that have a scheduled closing
time of 4:00 p.m. (New York City time) or the then standard
closing time for regular trading on the relevant exchange or
trading system.
A market disruption event means (1) a failure
by the primary exchange or quotation system on which our common
stock trades or is quoted to open for trading during its regular
trading session or (2) the occurrence or existence for more
than one half hour period in the aggregate on any scheduled
trading day for our common stock of any suspension or limitation
imposed on trading (by reason of movements in price exceeding
limits permitted by NASDAQ or otherwise) in our common stock or
in any options, contracts or future contracts relating to our
common stock, and such suspension or limitation occurs or exists
at any time before 1:00 p.m. (New York City time) on such
day.
A scheduled trading day means any day that is
scheduled to be a trading day.
Conversion
upon Trading Price of Notes Falling Below Conversion Value of
the Notes
If the trading price (as defined below) for the notes on each
trading day during any five consecutive
trading-day
period was less than 98% of the closing sale price of our common
stock on such date multiplied by the then-current conversion
rate, a holder may surrender notes for conversion at any time
during the following 10 consecutive trading days.
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Upon request, the conversion agent (which shall initially be
Deutsche Bank Trust Company Americas) will, on our behalf,
determine if the notes are convertible and will notify us and
the trustee accordingly. The conversion agent shall have no
obligation to determine the trading price of the notes unless we
have requested such determination in writing, and we shall have
no obligation to make such request unless a holder provides us
and the trustee with reasonable evidence that the trading price
of the notes on any trading day would be less than 98% of the
product of the then-current conversion rate times the closing
sale price of our common stock on that date. At such time, we
shall instruct the conversion agent to determine the trading
price of the notes beginning on such trading day and on each of
the next four trading days.
Trading price means, on any date of determination,
the average of the secondary bid quotations per note obtained by
the conversion agent for $5,000,000 principal amount of the
notes at approximately 3:30 p.m. (New York City time), on
such determination date from three independent nationally
recognized securities dealers we select; provided that, if at
least three such bids cannot reasonably be obtained, but two
such bids can reasonably be obtained, then the average of these
two bids shall be used; provided, further, that, if at least two
such bids cannot reasonably be obtained, but one such bid can
reasonably be obtained, this one bid shall be used. If on any
date of determination the conversion agent cannot reasonably
obtain at least one bid for $5,000,000 principal amount of the
notes from an independent nationally recognized securities
dealer, then the trading price of the notes on such date of
determination will be deemed to be less than 98% of the closing
sale price of our common stock on such date multiplied by the
then current conversion rate.
Conversion
upon Specified Corporate Transactions
If we elect to distribute to all or substantially all holders of
our common stock:
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specified rights, options or warrants entitling them to
subscribe for or purchase, for a period expiring within
60 days, our common stock at less than the closing sale
price on the record date for such issuance; or
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cash, debt securities (or other evidence of indebtedness) or
other assets (excluding dividends or distributions described in
clauses (1) or (2) of the description below under
Conversion Price Adjustments), which
distribution, together with all other such distributions within
the preceding twelve months, has a per share value exceeding 10%
of the closing sale price of our common stock as of the trading
day immediately preceding the declaration date for such
distribution,
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we must notify the holders of the notes at least 40 scheduled
trading days prior to the ex-dividend date for such
distribution. Once we have given such notice, holders may
surrender their notes for conversion at any time until the
earlier of the close of business on the business day immediately
preceding the ex-dividend date, or our announcement that such
distribution will not take place.
In addition, in the event of a fundamental change (as defined
under Purchase of Notes at Your Option upon a
Fundamental Change), a holder may surrender notes for
conversion at any time from or after the effective time of the
fundamental change until the close of business on the business
day immediately preceding the related fundamental change
purchase date (as defined under Purchase of Notes at
Your Option upon a Fundamental Change) or, if there is no
such purchase date, the 40th scheduled trading day
immediately following the effective date of the fundamental
change. In some circumstances, a converting holder will also be
entitled to receive additional shares as described below under
Adjustment to Shares Delivered upon Conversion upon
a Make Whole Adjustment Event. The holder may also require
us to purchase all or a portion of its notes upon the occurrence
of a fundamental change as described under Purchase
of Notes at Your Option upon a Fundamental Change.
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To the extent practicable, we will give notice to holders of the
anticipated effective date for a fundamental change not more
than 70 scheduled trading days nor less than 40 scheduled
trading days prior to the anticipated effective date.
Holders will also have the right to surrender notes for
conversion if we are a party to a consolidation, merger or
binding share exchange or a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all
of our property and assets that does not also constitute a
fundamental change (including any event that would be a
fundamental change but for the existence of an exception
specified in the paragraph following the definition thereof), in
each case pursuant to which our common stock would be converted
into cash, securities or other property. In such event, holders
will have the right to surrender notes for conversion at any
time from or after the effective date of such transaction and
ending on the 40th scheduled trading day following the
effective date of such transaction. We will notify holders at
least 40 scheduled trading days prior to the anticipated
effective date of such transaction. If the transaction also
constitutes a fundamental change, in lieu of the conversion
right described in this paragraph, holders will have the
conversion right described in the preceding paragraph and will
have the right to require us to purchase their notes as set
forth below under Purchase of Notes at Your Option
upon a Fundamental Change.
Conversion
after June 1, 2014
After June 1, 2014 (six months prior to the maturity date)
and until the close of business on the business day immediately
prior to the stated maturity date, holders may surrender their
notes for conversion regardless of whether any of the conditions
described in Conversion upon Satisfaction of Market
Price Condition, Conversion upon Trading Price
of Notes Falling Below Conversion Value of the Notes, or
Conversion upon Specified Corporate
Transactions has been satisfied.
Settlement
upon Conversion
Upon conversion, we may choose to deliver cash, shares of our
common stock or a combination of cash and shares of our common
stock, as described below. We refer to the amount we are
required to deliver as our conversion obligation.
All conversions after June 1, 2014 will be settled in the
same relative proportions of cash and shares of our common
stock, which we refer to as the settlement method.
If we have not delivered a notice of our election of settlement
method on or prior to June 1, 2014 we will, with respect to
any conversions thereafter, be deemed to have elected to deliver
cash or cash and shares of our common stock, as the case may be,
in respect of our conversion obligation, as described below, and
the specified dollar amount (as defined below) will be equal to
$1,000.
On or prior to June 1, 2014 we will use the same settlement
method for all conversions occurring on any given conversion
date. Except for any conversions that occur after June 1,
2014 we will not have any obligation to use the same settlement
method with respect to conversions that occur on different
conversion dates. For example, until that date, we may choose in
respect of one conversion date to settle conversions in shares
of our common stock only, and choose in respect of another
conversion date to settle in cash or a combination of cash and
shares of our common stock. If we elect a particular settlement
method in connection with any conversion on or prior to
June 1, 2014 we will inform holders so converting through
the conversion agent of the settlement method we have selected
(including the specified dollar amount (as defined below), if
applicable), no later than the second business day immediately
following the related conversion date. If we do not make such an
election, we will be deemed to have elected to deliver cash or a
combination of cash and shares of our common stock in respect of
our conversion obligation, as described in the third bullet
point of the second
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following paragraph, and the specified dollar amount (as defined
below) will be equal to $1,000 for each such conversion date.
It is our current intent and policy to settle the principal
amount of the notes in cash. We may, at our option, for purposes
of the daily settlement amount irrevocably elect a particular
specified dollar amount for all subsequent
conversions by notice of such election to the holders, such
notice to be given in accordance with the provisions of the
indenture.
Settlement amounts will be computed as follows:
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if we elect to satisfy our conversion obligation solely in
shares of our common stock, we will deliver to the converting
holder a number of shares of our common stock equal to
(1) the aggregate principal amount of notes to be converted
divided by $1,000, multiplied by (2) the
applicable conversion rate on the conversion date;
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if we elect to satisfy our conversion obligation solely in cash,
we will deliver to the converting holder in respect of each
$1,000 principal amount of notes being converted cash in an
amount equal to the sum of the daily conversion values for each
of the 25 consecutive trading days during the related
conversion period; and
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if we elect to satisfy our conversion obligation through
delivery of a combination of cash and shares of our common
stock, we will deliver to holders in respect of each $1,000
principal amount of notes being converted a settlement
amount equal to the sum of the daily settlement amounts
for each of the 25 consecutive trading days during the related
conversion period.
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Conversion period with respect to any note means the
25 consecutive trading day period beginning on and including the
third trading day immediately following the related conversion
date, except that if a holder surrenders a note for conversion
at any time after the thirtieth scheduled trading day prior to
the maturity date and until the close of business on the
business day immediately preceding the maturity date, then
(i) the holder will be deemed to have surrendered such note
as of the thirtieth trading day immediately preceding the
maturity date, (ii) the conversion period for such note
will commence on the twenty-seventh trading day immediately
preceding the maturity date, and (iii) the settlement date
for the conversion of such note will be the maturity date
(assuming no delay in settlement due to market disruption
events).
The daily settlement amount, for each $1,000
aggregate principal amount of notes validly surrendered for
conversion, on each of the 25 consecutive trading days during
the conversion period, will consist of:
(1) if (x) the daily conversion value for such trading
day for each $1,000 aggregate principal amount of notes exceeds
(y) the dollar amount per note to be received upon
conversion as specified in the notice regarding our chosen
settlement method (the specified dollar amount), if
any, divided by 25 (such quotient being referred to as the
daily measurement value), the sum of:
(a) a cash payment of the daily measurement value, and
(b) a number of shares (the daily net share
settlement value) equal to
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(i)
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the difference between the daily conversion value and the daily
measurement value, divided by
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(ii) the daily VWAP of our common stock for such trading
day; or
(2) if the daily conversion value for such trading day for
each $1,000 aggregate principal amount of notes is less than or
equal to the daily measurement value, a cash payment equal to
the daily conversion value.
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Daily conversion value means, for each of the 25
consecutive trading days during the conversion period,
one-twenty-fifth (1/25th) of the product of (i) the
applicable conversion rate and (ii) the daily VWAP of our
common stock on such trading day.
No fractional shares will be issued upon conversion. Instead, we
will pay cash in lieu of fractional shares based on the daily
VWAP of our common stock on the relevant conversion date (if we
elect to satisfy our conversion obligation solely in shares of
our common stock) or based on the daily VWAP of our common stock
on the last trading day of the relevant conversion period (in
the case of any other settlement method).
Daily VWAP of our common stock (or any security that
is part of the reference property into which our common stock
has been converted, if applicable), in respect of any trading
day, means the per share volume-weighted average price of our
common stock (or other security) on NASDAQ (or other principal
exchange on which such security is then listed) as displayed
under the heading Bloomberg VWAP on Bloomberg
Page DRYS <equity> AQR (or its equivalent
successor if such page is not available, or the Bloomberg Page
for any security that is part of the reference property into
which our common stock has been converted, if applicable) in
respect of the period from the scheduled open of trading until
the scheduled close of trading of the primary trading session on
such trading day or, if such volume-weighted average price is
unavailable (or the reference property is not a security), the
market value of one share of our common stock (or other
reference property) on such trading day as determined by our
board of directors in a commercially reasonable manner, using a
volume-weighted average price method (unless the reference
property is not a security), provided that, in making a
volume-weighted average price determination, our board of
directors may rely conclusively on the determination of daily
VWAP for such trading day made by an independent nationally
recognized securities dealer selected by the board of
directors), and will be determined without regard to
after-hours
trading or any other trading outside the regular trading session.
The cash, cash and shares of our common stock or shares of our
common stock deliverable upon conversion of the notes will be
delivered through the conversion agent. This delivery will
generally be made three business days after the last day of the
relevant conversion period (including in any case where we elect
to satisfy our conversion obligation solely in shares of our
common stock), provided, however, that if prior to
the conversion date for any converted notes our common stock has
been replaced by reference property (as defined under
Conversion Price Adjustments below)
consisting solely of cash (pursuant to the provisions described
under Conversion Price Adjustments), we
will deliver the conversion consideration due in respect of
conversion on the third trading day immediately following the
relevant conversion date. Notwithstanding the foregoing, if any
information required in order to calculate the conversion
consideration deliverable will not be available as of the
applicable settlement date, we will deliver the additional
shares of our common stock resulting from that adjustment on the
third trading day after the earliest trading day on which such
calculation can be made (but in no event later than May 31,
2015). Further, if application of the provisions set forth in
the proviso to the second sentence of this paragraph would
result in settlement of a conversion during the 10 trading days
immediately following the effective date of a fundamental
change, settlement will instead take place on the tenth trading
day following the relevant effective date.
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Conversion
Price Adjustments
The conversion price will be adjusted as described below:
(1) If we issue solely shares of our common stock as a
dividend or distribution on all or substantially all of our
shares of our common stock, or if we subdivide or combine our
common stock, the conversion price will be adjusted based on the
following formula:
where,
CP0 = the
conversion price in effect immediately prior to the open of
business on the ex-dividend date for such dividend or
distribution, or immediately prior to the open of business on
the effective date of such subdivision or combination of common
stock, as the case may be;
CP = the conversion price in effect immediately after
the open of business on the ex-dividend date for such dividend
or distribution, or immediately after the open of business on
the effective date of such subdivision or combination of common
stock, as the case may be;
OS0 = the
number of shares of our common stock outstanding immediately
prior to the open of business on the ex-dividend date for such
dividend or distribution, or immediately prior to the open of
business on the effective date of such subdivision or
combination of common stock, as the case may be; and
OS = the number of shares of our common stock
outstanding immediately after such dividend or distribution, or
immediately after the effective date of such subdivision or
combination of common stock, as the case may be.
(2) If we distribute to all or substantially all holders of
our common stock any rights, options or warrants entitling them
for a period of not more than 60 calendar days from the record
date for such distribution to subscribe for or purchase shares
of our common stock (or securities convertible into our common
stock), at a price per share (or a conversion price per share)
less than the average of the closing sale prices of our common
stock for the 10 consecutive
trading-day
period ending on, and including, the trading day immediately
preceding the ex-dividend date for such distribution, the
conversion price will be decreased based on the following
formula (provided that the conversion price will be
readjusted to the extent that such rights, options or warrants
are not exercised prior to their expiration or are not
distributed):
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OS0 + Y
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CP
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=
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CP0
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×
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OS0 + X
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where,
CP0 = the
conversion price in effect immediately prior to the open of
business on the ex-dividend date for such distribution;
CP = the conversion price in effect immediately after
the open of business on the ex-dividend date for such
distribution;
OS0 = the
number of shares of our common stock outstanding immediately
prior to the open of business on the ex-dividend date for such
distribution;
X = the total number of shares of our common stock
issuable pursuant to such rights, options or warrants; and
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Y = the number of shares of our common stock equal to
the aggregate price payable to exercise such rights, options or
warrants divided by the average of the closing sale
prices of our common stock over the 10 consecutive
trading-day
period ending on, and including, the trading day immediately
preceding the ex-dividend date for such distribution.
For purposes of this clause (2), in determining whether any
rights, options or warrants entitle the holders to subscribe for
or purchase our common stock at less than the average of the
closing sale prices of our common stock for each trading day in
the applicable 10 consecutive
trading-day
period, there shall be taken into account any consideration we
receive for such rights, options or warrants and any amount
payable on exercise thereof, with the value of such
consideration if other than cash to be determined by our board
of directors or a committee thereof.
(3) If we distribute shares of our capital stock, evidences
of our indebtedness or other assets or property of ours to all
or substantially all holders of our common stock (excluding
(i) dividends or distributions (including subdivision of
common stock) and rights, options or warrants referred to in
clause (1) or (2) above; (ii) dividends or
distributions paid exclusively in cash referred to in
clause (5) below; (iii) spin-offs referred to further
below in this clause (3); and (iv) distributions of rights
to all or substantially all holders of common stock pursuant to
the adoption of a shareholder rights plan), then the conversion
price will be decreased based on the following formula:
where,
CP0
= the conversion price in effect immediately prior to the open
of business on the ex-dividend date for such distribution;
CP = the conversion price in effect immediately after
the open of business on the ex-dividend date for such
distribution;
SP0 = the
average of the closing sale prices of our common stock over the
10 consecutive
trading-day
period ending on, and including, the trading day immediately
preceding the ex-dividend date for such distribution; and
FMV = the fair market value (as determined by our
board of directors) of the shares of capital stock, evidences of
indebtedness, assets or property distributed with respect to
each outstanding share of our common stock as of the open of
business on the ex-dividend date for such distribution.
If the then-fair market value of the portion of the shares of
capital stock, evidences of indebtedness or other assets or
property so distributed applicable to one share of common stock
is equal to or greater than the average of the closing sale
prices of the common stock over the 10 consecutive
trading-day
period ending on the trading day immediately preceding the
ex-dividend date for such distribution, in lieu of the foregoing
adjustment, adequate provisions shall be made so that each
holder of a note shall have the right to receive on conversion
in respect of each note held by such holder, in addition to the
number of shares of common stock to which such holder is
entitled to receive, the amount and kind of securities and
assets such holder would have received had such holder already
owned a number of shares of common stock equal to the conversion
rate immediately prior to the record date for the distribution
of the securities or assets.
With respect to an adjustment pursuant to this clause (3)
where there has been a payment of a dividend or other
distribution on our common stock of shares of capital stock
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of any class or series, or similar equity interest, of or
relating to a subsidiary or other business unit, which we refer
to as a spin-off, the conversion price will be
decreased based on the following formula:
where,
CP0 = the
conversion price in effect immediately prior to the open of
business on the ex-dividend date for the spin-off;
CP = the conversion price in effect immediately after
the open of business on the ex-dividend date for the spin-off;
FMV = the average of the closing sale prices of the
capital stock or similar equity interests distributed to holders
of our common stock applicable to one share of our common stock
over the first 10 consecutive
trading-day
period immediately following, and including, the ex-dividend
date for the spin-off (such period, the valuation
period); and
MP0 = the
average of the closing sale prices of our common stock over the
valuation period.
The adjustment to the conversion price under the preceding
paragraph of this clause (3) will be made immediately after
the open of business on the day after the last day of the
valuation period, but will be given effect as of the open of
business on the ex-dividend date for the spin-off. If the
ex-dividend date for the spin-off is less than 10 trading days
prior to, and including, the end of the conversion period in
respect of any conversion, references within this
clause (3) to 10 trading days shall be deemed replaced, for
purposes of calculating the affected daily conversion prices in
respect of that conversion, with such lesser number of trading
days as have elapsed from, and including, the ex-dividend date
for the spin-off to, and including, the last trading day of such
conversion period. For purposes of determining the conversion
price, in respect of any conversion during the 10 trading days
commencing on the ex-dividend date for any spin-off, references
within the portion of this clause (3) related to
spin-offs to 10 trading days shall be deemed
replaced with such lesser number of trading days as have elapsed
from, and including, the ex-dividend date for such spin-off to,
but excluding, the relevant conversion date.
(4) If we make or pay any cash dividend or distribution to
all, or substantially all, holders of our outstanding common
stock (other than (i) distributions described in
clause (5) below, and (ii) any dividend or
distribution in connection with our liquidation, dissolution or
winding up), the conversion price will be decreased based on the
following formula:
where,
CP0 = the
conversion price in effect immediately prior to the open of
business on the ex-dividend date for such distribution;
CP = the conversion price in effect immediately after
the open of business on the ex-dividend date for such
distribution;
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SP0 = the
average of the closing sale prices of our common stock over the
10 consecutive
trading-day
period ending on, and including, the trading day immediately
preceding the ex-dividend date for such distribution; and
C = the amount in cash per share we pay or distribute
to holders of our common stock.
If any dividend or distribution described in this
clause (4) is declared but not so paid or made, the new
conversion price shall be readjusted to the conversion price
that would then be in effect if such dividend or distribution
had not been declared.
(5) If we or any of our subsidiaries makes a payment in
respect of a tender offer or exchange offer for our common stock
and, if the cash and value of any other consideration included
in the payment per share of common stock exceeds the average of
the closing sale prices of our common stock over the 10
consecutive
trading-day
period commencing on, and including, the trading day next
succeeding the last date on which tenders or exchanges may be
made pursuant to such tender or exchange offer (the
expiration date), the conversion price will be
decreased based on the following formula:
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OS0 x SP
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CP
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=
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CP0
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×
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AC + (OS x SP)
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where,
CP0 = the
conversion price in effect immediately prior to the open of
business on the trading day next succeeding the expiration date;
CP = the conversion price in effect immediately after
the open of business on the trading day next succeeding the
expiration date;
AC = the aggregate value of all cash and any other consideration
(as determined by our board of directors) paid or payable for
shares purchased in such tender or exchange offer;
OS0 = the
number of shares of our common stock outstanding immediately
prior to the time (the expiration time) such tender
or exchange offer expires (prior to giving effect to such tender
offer or exchange offer);
OS = the number of shares of our common stock
outstanding immediately after the expiration time (after giving
effect to such tender offer or exchange offer); and
SP = the average of the closing sale prices of our
common stock over the 10 consecutive
trading-day
period commencing on, and including, the trading day next
succeeding the expiration date.
The adjustment to the conversion price under the preceding
paragraph of this clause (5) will be given effect at the
open of business on the trading day next succeeding the
expiration date. If the trading day next succeeding the
expiration date is less than 10 trading days prior to, and
including, the end of the conversion period in respect of any
conversion, references within this clause (5) to 10 trading
days shall be deemed replaced, for purposes of calculating the
affected daily conversion prices in respect of that conversion,
with such lesser number of trading days as have elapsed from,
and including, the trading day next succeeding the expiration
date to, and including, the last trading day of such conversion
period. For purposes of determining the conversion price, in
respect of any conversion during the 10 trading days commencing
on the trading day next succeeding the expiration date,
references within this clause (5) to 10 trading days shall
be deemed replaced with such lesser number of trading days
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as have elapsed from, and including, the trading day next
succeeding the expiration date to, but excluding, the relevant
conversion date.
For purposes hereof, the term ex-dividend date, when
used with respect to any dividend or distribution, means the
first date on which shares of common stock trade, regular way,
on the relevant exchange or in the relevant market from which
the sale price was obtained without the right to receive such
dividend or distribution.
If:
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we elect to satisfy our conversion obligation through delivery
of a combination of cash and common stock, and shares of common
stock are deliverable to settle the daily net share settlement
value for a given trading day within the conversion period
applicable to notes that you have converted,
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any distribution or transaction described in clauses (1) to
(5) above has not yet resulted in an adjustment to the
conversion price on the trading day in question, and
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the shares you will receive in respect of such trading day are
not entitled to participate in the relevant distribution or
transaction (because they were not held on a related record date
or otherwise),
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then we will adjust the number of shares that we deliver to you
in respect of the relevant trading day to reflect the relevant
distribution or transaction.
If:
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we elect to satisfy our conversion obligation solely in shares
of common stock,
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any distribution or transaction described in clauses (1) to
(5) above has not yet resulted in an adjustment to the
conversion price on the conversion date, and
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the shares you will receive on settlement are not entitled to
participate in the relevant distribution or transaction (because
they were not held on a related record date or otherwise),
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then we will adjust the number of shares that we deliver to you
in respect of the relevant trading day to reflect the relevant
distribution or transaction.
To the extent that our stockholders rights plan is in
place upon conversion of the notes or we have another rights
plan in effect upon conversion of the notes (i.e., a
poison pill), you will receive, in addition to any common stock
received in connection with such conversion, the rights under
the rights plan, unless prior to any conversion, the rights have
separated from the common stock, in which case the conversion
price will be adjusted at the time of separation as if we
distributed to all holders of our common stock, shares of our
capital stock, evidences of indebtedness or other assets or
property as described in clause (3) above, subject to
readjustment in the event of the expiration, termination or
redemption of such rights.
In the event of:
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any reclassification of our common stock;
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a consolidation, merger or binding share exchange involving Dry
Ships Inc.; or
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a sale, assignment, conveyance, transfer, lease or other
disposition to another person of our property and assets as an
entirety or substantially as an entirety,
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in each case, in which holders of our outstanding common stock
are entitled to receive cash, securities or other property for
their shares of our common stock (reference
property), holders of notes will generally be entitled
thereafter to convert their notes into the kind and amount of
shares of stock, other securities or other property or assets
(including cash or any
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combination thereof) that a holder of a number of shares of our
common stock equal to the conversion rate immediately prior to
such transaction would have owned or been entitled to receive
upon such transaction; provided that, at and after the
effective time of any such transaction, any amount otherwise
payable in cash upon conversion of the notes will continue to be
payable as described under the provision under
Settlement upon Conversion, including our
right to determine the form of consideration as described
therein. If the notes become convertible into reference
property, we will notify the trustee and issue a press release
containing the relevant information (and make the press release
available on our website). Throughout this section
(Conversion of Notes), if our common stock has
been replaced by reference property as a result of any
transaction described in the preceding sentence, references to
our common stock are intended to refer to such reference
property.
For purposes of the foregoing, the type and amount of
consideration that holders of our common stock are entitled to
in the case of reclassifications, consolidations, mergers,
combinations, binding share exchanges, sales or transfers of
assets or other transactions that cause our common stock to be
converted into the right to receive more than a single type of
consideration because the holders of our common stock have the
right to elect the type of consideration they receive will be
deemed to be the weighted average of the types and amounts of
consideration received by the holders of our common stock that
affirmatively make such an election. We will notify holders of
the weighted average as soon as practicable after such
determination is made.
We are permitted to reduce the conversion price by any amount
for a period of at least 20 business days so long as the
reduction is irrevocable during the period and our board of
directors determines that such reduction would be in our best
interest. We must give at least 15 days prior notice
of any such reduction in the conversion price. We may also (but
are not required to) reduce the conversion price to avoid or
diminish income tax to holders of our common stock or rights to
purchase shares of our common stock in connection with a
dividend or distribution of shares (or rights to acquire shares)
or similar events. We will not take any action that would result
in adjustment of the conversion price, pursuant to the
provisions described above, in such a manner as to result in the
reduction of the conversion price to less than the par value per
share of our common stock.
You may, in some circumstances, including the distribution of
cash dividends to holders of our shares of common stock, be
deemed to have received a distribution or dividend subject to
U.S. federal income tax as a result of an adjustment or the
nonoccurrence of an adjustment to the conversion price. For a
discussion of the U.S. federal income tax treatment of an
adjustment to the conversion price, see U.S. Federal
Income Tax Considerations below for a relevant discussion.
The conversion price will not be adjusted:
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upon the issuance of any shares of our common stock pursuant to
any present or future plan providing for the reinvestment of
dividends or interest payable on our securities and the
investment of additional optional amounts in shares of our
common stock under any plan;
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upon the issuance of any shares of our common stock or options
or rights to purchase those shares pursuant to any present or
future employee, director or consultant benefit plan or program
of, or assumed by, us or any of our subsidiaries;
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upon the issuance of any shares of our common stock pursuant to
any option, warrant, right or exercisable, exchangeable or
convertible security not described in the preceding bullet and
outstanding as of the date the notes were first issued; or
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for accrued and unpaid interest, if any.
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Adjustments to the conversion rate will be calculated to the
nearest 1/10,000th of a share. Notwithstanding anything in
this section Conversion Price Adjustments to
the contrary, we will not be required to adjust the conversion
price unless the adjustment would result in a change of at least
1% of the conversion price. However, we will carry forward any
adjustments that are less than 1% of the conversion rate and
make such carried forward adjustments, regardless of whether the
aggregate adjustment is less than 1%, (i) upon any
conversion of notes, (ii) upon any required purchases of
the notes in connection with a fundamental change, and
(iii) on each of the 27 scheduled trading days immediately
preceding the maturity date.
Except as described in this section or in Adjustment
to Shares Delivered upon Conversion upon a Make Whole Adjustment
Event, we will not adjust the conversion price. No
adjustment to the conversion price need be made for a given
transaction if holders of the notes will participate in that
transaction without conversion of the notes.
If we adjust the conversion price pursuant to the above
provisions, we will deliver to the conversion agent a
certificate setting forth the conversion price, detailing the
calculation of the conversion price and describing the facts
upon which the adjustment is based. In addition, we will issue a
press release containing the relevant information (and make the
press release available on our website).
Conversion
Procedures
Holders may convert their notes only in denominations of $1,000
principal amount and integral multiples thereof. Delivery of our
common stock and cash upon conversion in accordance with the
terms of the notes will be deemed to satisfy our obligation to
pay the principal amount of the notes.
The right of conversion attaching to any note may be exercised
(a) if such note is represented by a global security, by
book-entry transfer to the conversion agent through the
facilities of DTC and compliance with DTCs then applicable
conversion procedures or (b) if such note is represented by
a certificated security, by delivery of such note at the
specified office of the conversion agent, accompanied by a duly
signed and completed notice of conversion and appropriate
endorsements and transfer documents if required by the
conversion agent. A holder delivering a note for conversion will
be required to pay any taxes or duties payable in respect of the
issue or delivery of our common stock upon conversion in a name
other than that of the holder.
We will not issue fractional shares of common stock upon
conversion of notes.
If you have submitted your notes for purchase upon a fundamental
change, you may only convert your notes if you withdraw your
purchase notice prior to the fundamental change purchase date,
as described below under Purchase of Notes at Your
Option upon a Fundamental Change. If your notes are
submitted for purchase upon a fundamental change, your right to
withdraw your purchase notice and convert the notes that are
subject to purchase will terminate at 5:00 p.m. (New York
City time) on the business day before such purchase date.
Adjustment to
Shares Delivered upon Conversion upon a Make Whole Adjustment
Event
If you elect to convert your notes at any time from, and
including, the effective date of a make whole adjustment event
(as defined below) to, and including, the business day
immediately preceding the related purchase date, or if a make
whole adjustment event does not also constitute a fundamental
change as described below under Conversion of
NotesPurchase of Notes at Your Option upon a Fundamental
Change, the 40th scheduled trading day immediately
following the effective date of such make whole adjustment event
(such period,
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the make whole adjustment event period), the
conversion rate will be increased by an additional number of
shares of common stock (these shares being referred to as the
additional shares) as described below. We will
notify holders, the trustee and the conversion agent of the
anticipated effective date of such make whole adjustment event
and issue a press release as soon as practicable after we first
determine the anticipated effective date of such make whole
adjustment event (and make the press release available on our
website). We will use our commercially reasonable efforts to
give notice to holders of the anticipated effective date for a
fundamental change not more than 70 scheduled trading days nor
less than 40 scheduled trading days prior to the anticipated
effective date.
A make whole adjustment event is (i) any
change in control included in clause (1),
(2) or (4) of the definition of that term below under
Purchase of Notes at Your Option Upon a Fundamental
Change and (ii) any termination of
trading as defined below under Purchase of
Notes at Your Option Upon a Fundamental Change. An
acquisition, consolidation, merger or binding share exchange or
a sale, assignment, conveyance, transfer, lease or other
disposition otherwise constituting a change in control will not
constitute a make whole adjustment event if at least 90% of the
consideration paid for our common stock in that transaction,
excluding cash payments for fractional shares and cash payments
made pursuant to dissenters appraisal rights, consists of
shares of common stock traded on the New York Stock Exchange,
NASDAQ or the NASDAQ Global Market (or any of their respective
successors), or will be so traded immediately following the
merger or consolidation, and, as a result of the merger or
consolidation, the notes become convertible into such shares of
such common stock.
The number of additional shares by which the conversion rate
will be increased for conversions in connection with a make
whole adjustment event will be determined by reference to the
table below, based on the date on which the make whole
adjustment event occurs or becomes effective, which we refer to
as the effective date, and (1) the price paid
or deemed paid per share of our common stock in the change in
control in the case of a make whole adjustment event described
in the second clause of the definition of change in control, in
the event that our common stock is acquired for cash, or
(2) the average of the closing sale prices of our common
stock over the five
trading-day
period ending on the trading day immediately preceding the
effective date of such other make whole adjustment event, in the
case of any other make whole adjustment event. We refer to the
amount determined under the first or second clause of the
preceding sentence, as applicable, as the stock
price.
The stock prices set forth in the first row of the table below
(i.e., column headers) will be adjusted as of any date on which
the conversion price is adjusted as described under
Conversion of Notes Conversion Price
Adjustments. The stock prices in the table will be
adjusted by the same adjustment factor applied to the conversion
price as described underConversion of
NotesConversion Price Adjustments above and the
number of additional shares will be adjusted by the inverse of
that adjustment factor.
The following table sets forth the number of additional shares
to be received per $1,000 principal amount of notes based on
hypothetical stock prices and effective dates:
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Stock Price
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Effective Date
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$5.75
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$6.00
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$7.00
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$8.00
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$9.00
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$10.00
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$12.50
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$15.00
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$20.00
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$25.00
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$30.00
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$35.00
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$40.00
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$50.00
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November 25, 2009
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34.7826
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32.2331
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24.5383
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19.6825
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16.3528
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13.9077
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9.8345
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7.2562
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4.1324
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2.3568
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1.2834
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0.6293
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0.2460
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0.0000
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December 1, 2010
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34.7826
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30.5958
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22.2987
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17.4003
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14.2419
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12.0290
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8.4974
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6.3107
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3.6526
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2.1136
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1.1620
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0.5707
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0.2198
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0.0000
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December 1, 2011
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34.7826
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29.0892
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19.7622
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14.6870
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11.6972
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9.7556
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6.8645
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5.1327
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3.0244
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1.7818
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0.9929
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0.4886
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0.1829
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0.0000
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December 1, 2012
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34.7826
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27.6963
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16.6865
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11.2945
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8.5393
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6.9719
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4.8887
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3.6859
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2.2127
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1.3328
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0.7581
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0.3762
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0.1367
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0.0000
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December 1, 2013
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34.7826
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27.6080
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12.1116
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6.5736
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4.4869
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3.5983
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2.5711
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1.9575
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1.1930
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0.7342
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0.4287
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0.2150
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0.0706
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0.0000
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December 1, 2014
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34.7826
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27.5197
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3.7161
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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0.0000
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The stock prices and additional share amounts set forth above
are based upon the price of the shares initially offered
pursuant to the common stock offering, which is $5.75 and an
initial conversion price of $7.19.
S-80
Notwithstanding anything in the indenture to the contrary, we
may not increase the conversion rate to more than
173.8647 shares per $1,000 principal amount of notes
pursuant to the events described in this section, though we will
adjust such number of shares for the same events for which we
must adjust the conversion price as described under
Conversion of NotesConversion Price
Adjustments above, by the inverse of the adjustment factor
applied to the conversion price under that section.
The exact stock prices and effective dates may not be set forth
in the table above, in which case if the stock price is:
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between two stock price amounts in the table or the effective
date is between two effective dates in the table, the number of
additional shares will be determined by a straight-line
interpolation between the number of additional shares set forth
for the higher and lower stock prices and the earlier and later
effective dates, as applicable, based on a
365-day year;
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in excess of $50.00 per share (subject to adjustment), no
additional shares will be issued upon conversion; and
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less than $5.75 per share (subject to adjustment), no additional
shares will be issued upon conversion.
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You may, in some circumstances, including the distribution of
cash dividends to holders of our shares of common stock, be
deemed to have received a distribution or dividend subject to
U.S. federal income tax as a result of an adjustment to the
conversion price, including an adjustment pursuant to a
make-whole adjustment event. For a discussion of the
U.S. federal income tax treatment of an adjustment to the
conversion price, see U.S. Federal Income Tax
Considerations below for a relevant discussion.
Purchase of Notes
at Your Option upon a Fundamental Change
If a fundamental change occurs, you will have the option to
require us to purchase for cash all or any part of your notes
that is equal to $1,000, or an integral multiple of $1,000, on
the day of our choosing that is not less than 20 or more than 30
business days after the occurrence of such fundamental change
(such day, the fundamental change purchase date) at
a purchase price (the fundamental change purchase
price) equal to 100% of the principal amount of the notes
to be purchased plus accrued and unpaid interest to but
excluding the fundamental change purchase date (unless the
fundamental change purchase date is after a regular record date
and on or prior to the interest payment date to which it
relates, in which case interest accrued to the interest payment
date will be paid to holders of the notes as of the preceding
record date and the price we are required to pay to the holder
surrendering the note for repurchase will be equal to 100% of
the principal amount of notes subject to repurchase and will not
include any accrued and unpaid interest). Any notes we purchase
will be paid for in cash.
We will mail to the trustee and to each holder a written notice
of the fundamental change within 10 business days after the
occurrence of such fundamental change, and issue a press release
announcing the occurrence of such fundamental change (and make
the press release available on our website). This notice shall
state certain specified information, including:
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the events causing the fundamental change;
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the effective date of the fundamental change, and whether the
fundamental change is a make whole adjustment event, in which
case the effective date of the make whole adjustment event;
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information about the holders right to convert the notes;
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S-81
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information about the holders right to require us to
purchase the notes;
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the last date on which a holder may exercise the purchase right;
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the fundamental change purchase price;
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the fundamental change purchase date;
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the conversion price and any adjustments to the conversion price;
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the procedures required for exercise of the purchase option upon
the fundamental change; and
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the name and address of the paying and conversion agents.
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You must deliver written notice of your exercise of this
purchase right to the paying agent during the period between the
fundamental change notice and the close of business on the
business day immediately preceding the fundamental change
purchase date. The written notice must specify the notes for
which the purchase right is being exercised. If you wish to
withdraw this election, you must provide a written notice of
withdrawal to the paying agent at any time until the close of
business on the business day prior to the fundamental change
purchase date. If the notes are not in certificated form, the
notice given by each holder (and any withdrawal notice) must
comply with applicable DTC procedures.
Fundamental change means the occurrence of a change
in control or a termination of trading.
A change in control will be deemed to have occurred
if any of the following occurs after the time the notes are
originally issued:
(1) any person or group is or
becomes the beneficial owner, directly or
indirectly, of shares of our voting stock representing 50% or
more of the total voting power of all outstanding classes of our
voting stock entitled to vote generally in elections of
directors, or has the power, directly or indirectly, to elect a
majority of the members of our board of directors;
(2) we consolidate with, enter into a binding share
exchange with, or merge with or into, another person or we sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all of our assets, or any person consolidates
with, or merges with or into, us, in any such event, other than
any transaction:
(a) pursuant to which the persons that beneficially
owned, directly or indirectly, the shares of our voting
stock immediately prior to such transaction beneficially
own, directly or indirectly, shares of our voting stock
representing at least a majority of the total voting power of
all outstanding classes of voting stock of the surviving or
transferee person and such holders proportional voting
power immediately after such transaction vis-à-vis each
other with respect to the securities they receive in such
transaction shall be in substantially the same proportions as
their respective voting power vis-à-vis each other
immediately prior to such transaction; or
(b) which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of our common stock solely into
shares of common stock of the surviving entity;
(3) the first day on which a majority of the members of our
board of directors are not continuing directors; or
(4) the holders of our capital stock approve any plan or
proposal for the liquidation or dissolution of DryShips Inc.
(whether or not otherwise in compliance with the indenture).
S-82
However, notwithstanding the foregoing, holders of the notes
will not have the right to require us to purchase any notes
under the clause (1) or (2) of the definition of
change of control above, and we will not be required
to deliver the fundamental change notice incidental thereto as a
result of any acquisition, consolidation, merger or binding
share exchange or a sale, assignment, conveyance, transfer,
lease or other disposition if at least 90% of the consideration
paid for our common stock in that transaction, excluding cash
payments for fractional shares and cash payments made pursuant
to dissenters appraisal rights, consists of shares of
common stock traded on the New York Stock Exchange, NASDAQ or
The NASDAQ Global Market (or any of their respective
successors), or will be so traded immediately following the
merger or consolidation, and, as a result of the merger or
consolidation, the notes become convertible into such shares of
such common stock.
A termination of trading means that our common stock
or other securities into which the notes are convertible are not
approved for listing on the New York Stock Exchange, NASDAQ or
the NASDAQ Global Market (or any of their respective successors).
If any transaction in which our common stock is replaced by the
securities of another entity occurs, following completion of any
related make whole adjustment event period and any related
fundamental change purchase date, references to us in the
definitions of fundamental change, change of
control and termination of trading above
will apply to such other entity instead.
For purposes of this change in control definition:
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person or group have the meanings given
to them for purposes of Sections 13(d) and 14(d) of the
Exchange Act or any successor provisions, and the term
group includes any group acting for the purpose of
acquiring, holding, voting or disposing of securities within the
meaning of
Rule 13d-5(b)(1)
under the Exchange Act, or any successor provision;
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a beneficial owner will be determined in accordance
with Rule 13d -3 under the Exchange Act, as in effect on
the date of the indenture, except that the number of shares of
our voting stock will be deemed to include, in addition to all
outstanding shares of our voting stock and unissued shares
deemed to be held by the person or group
or other person with respect to which the change in control
determination is being made, all unissued shares deemed to be
held by all other persons;
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continuing directors means, as of any date of
determination, any member of our board of directors who
(i) was a member of such board of directors on the date of
the original issuance of the notes, or (ii) was nominated
for election or elected to such board of directors with the
approval of a majority of the continuing directors who were
members of such board at the time of such nomination or election;
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beneficially own and beneficially owned
have meanings correlative to that of beneficial owner;
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unissued shares means shares of voting stock not
outstanding that are subject to options, warrants, rights to
purchase or conversion privileges exercisable within
60 days of the date of determination of a change in
control; and
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voting stock means any class or classes of capital
stock or other interests then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in
the election of the board of directors, managers or trustees.
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The term all or substantially all as used in the
definition of change in control in respect of the sale, lease or
transfer of our assets will likely be interpreted under the
applicable law and will be dependent upon particular facts and
circumstances. Although there is a developing body of case law
under the law of certain U.S. states, including Delaware,
interpreting the
S-83
phrase substantially all, there is no precise,
established definition of this phrase under applicable law. As a
result, we cannot assure you how a court would interpret this
phrase under applicable law if you elect to exercise your rights
following the occurrence of a transaction which you believe
constitutes a transfer of all or substantially all
of our assets.
We will be required to purchase the notes that have been validly
surrendered for purchase and not withdrawn on the fundamental
change purchase date. You will receive payment of the
fundamental change purchase price promptly following the later
of the fundamental change purchase date or the time of
book-entry transfer or the delivery of your notes. If the paying
agent holds money or securities sufficient to pay the
fundamental change purchase price of the notes on the
fundamental change purchase date, then:
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the notes will cease to be outstanding and interest will cease
to accrue (whether or not book-entry transfer of the notes is
made or whether or not the note is delivered to the paying
agent); and
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all other rights of the holder will terminate (other than the
right to receive the fundamental change purchase price and
previously accrued and unpaid interest upon book-entry transfer
or delivery of the notes).
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In connection with any purchase of notes in the event of a
fundamental change, we will in accordance with the indenture:
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comply with the provisions of
Rule 13e-4,
Rule 14e-1
and any other tender offer rules under the Exchange Act, to the
extent any such rules are applicable;
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file a Schedule TO or any successor or similar schedule, if
required, under the Exchange Act; and
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otherwise comply with all federal and state securities laws in
connection with any offer by us to purchase the notes upon a
fundamental change.
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No notes may be purchased by us at the option of holders upon a
fundamental change if the principal amount of the notes has been
accelerated, and such acceleration has not been rescinded, on or
prior to the purchase date for such fundamental change.
This fundamental change purchase feature may make more difficult
or discourage a takeover of us and the removal of incumbent
management. We are not, however, aware of any specific effort to
accumulate shares of our common stock or to obtain control of us
by means of a merger, tender offer, solicitation or otherwise.
In addition, the fundamental change purchase feature is not part
of a plan by management to adopt a series of anti-takeover
provisions. Instead, the fundamental change purchase feature is
a standard term contained in other similar convertible debt
offerings.
We could, in the future, enter into certain transactions,
including recapitalizations, that would not constitute a
fundamental change but would increase the amount of debt,
including senior indebtedness, outstanding, or otherwise
adversely affect a holder. Neither we nor our subsidiaries are
prohibited from incurring debt, including senior indebtedness,
under the indenture. The incurrence of significant amounts of
additional debt could adversely affect our ability to service
our debt, including the notes.
If a fundamental change were to occur, we may not have
sufficient funds to pay the fundamental change purchase price
for the notes tendered by holders. Our existing credit
facilities contain, and any future credit agreements or other
agreements relating to our indebtedness may contain, provisions
prohibiting purchase of the notes under some circumstances or
expressly prohibiting our purchase of the notes upon a
fundamental change or may provide that a fundamental change
constitutes an event of default under that agreement. If a
fundamental change occurs at a time when we are prohibited from
purchasing notes, we could seek the
S-84
consent of our lenders to purchase the notes or attempt to
refinance this debt. If we do not obtain any required consent,
we would not be permitted to purchase the notes. Our failure to
purchase tendered notes would constitute an event of default
under the indenture, which could constitute an event of default
under our senior indebtedness then outstanding, if any, and
might constitute a default under the terms of our other
indebtedness then outstanding, if any.
Payment of
Additional Amounts
We will, subject to the exceptions and limitations set forth
below, pay to a holder of any note or any coupon, as additional
interest, such additional amounts (the additional
amounts) as may be necessary in order that every net
payment by us or a paying agent of the principal of and interest
on the note and any other amounts payable on the note after
withholding or deduction for or on account of any present or
future tax, assessment or governmental charge imposed or levied
by a relevant jurisdiction, or any political subdivision or
taxing authority thereof or therein, will not be less than the
amount provided for in the note or coupon to be then due and
payable under the notes. The term relevant
jurisdiction as used herein means the Marshall Islands,
Greece, or any other jurisdiction in which DryShips Inc. or
Cardiff Marine Inc. is organized or maintains an executive
office or place of management.
However, the obligation to pay additional amounts shall not
apply to:
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any present or future tax, assessment or other governmental
charge that would not have been so imposed but for the existence
of any present or former connection between the holder (or
between a fiduciary, settlor, beneficiary, member or shareholder
of the holder, if the holder is an estate, a trust, a
partnership, a limited liability company or a corporation) and a
relevant jurisdiction and its possessions, including, without
limitation, the holder (or such fiduciary, settlor, beneficiary,
member or shareholder) being or having been a citizen or
resident of a relevant jurisdiction or being or having been
engaged in a trade or business or present in a relevant
jurisdiction or having, or having had, a permanent establishment
in a relevant jurisdiction.
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any estate, inheritance, gift, sales, transfer, capital gains,
excise or personal property tax or any similar tax, assessment
or governmental charge;
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any tax, assessment or other governmental charge that is payable
otherwise than by withholding or deduction from payments on or
in respect of any note;
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any tax, assessment or other governmental charge that would not
have been imposed but for the failure to comply with
certification, information or other reporting requirements
concerning the nationality, residence or identity of the holder
or beneficial owner of that note, if compliance is required by
statute or by regulation of a relevant jurisdiction or of any
political subdivision or taxing authority thereof or therein as
a precondition to relief or exemption from the tax, assessment
or other governmental charge;
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any tax, assessment or other governmental charge required to be
withheld by any paying agent from any payment of principal of,
or interest on any note, if payment can be made without
withholding by at least one other paying agent; or
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in the case of any combination of the items listed above.
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Nor will additional amounts be paid with respect to any payment
on a note to a holder who is a fiduciary, a partnership, a
limited liability company or other than the sole beneficial
owner of that payment to the extent that payment would be
required by the laws of a relevant jurisdiction (or any
political subdivision thereof) to be included in the income, for
tax purposes, of a beneficiary or settlor with respect to the
fiduciary, a member of that partnership, an interestholder in a
limited liability company or a beneficial owner who would not
have been entitled to the additional amounts had that
beneficiary, settlor, member or beneficial owner been the holder.
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Events of
Default
Each of the following will constitute an event of default under
the indenture:
(1) we fail to pay the principal, including any additional
amounts, of any note when due;
(2) we fail to pay the conversion obligation, including any
additional amounts, owing upon conversion of any note (including
any additional shares) within the time period required by the
indenture;
(3) we fail to pay any interest amounts, including any
additional amounts, on any note when due if such failure
continues for 30 days;
(4) we fail to perform any other covenant required of us in
the indenture (other than a covenant or agreement a default in
whose performance or whose breach is specifically dealt with in
clauses (1) through (3) above) if such failure
continues for 60 days after notice is given in accordance
with the indenture;
(5) we fail to pay the purchase price, including any
additional amounts, of any note when due;
(6) we fail to provide timely notice of a fundamental
change in accordance with the terms of the indenture;
(7) any indebtedness for money borrowed by, or any other
payment obligation of, us or any of our subsidiaries, in an
outstanding principal amount, individually or in the aggregate,
in excess of $50 million is not paid at final maturity (or
when otherwise due) or is accelerated, and such indebtedness is
not discharged (or such default in payment or acceleration is
not cured or rescinded) within 30 days after written notice
as provided in the indenture; provided that a payment obligation
(other than indebtedness for borrowed money) shall not be deemed
to have matured, come due, or been accelerated to the extent
that it is being disputed by the relevant obligor or obligors in
good faith;
(8) we fail or any of our subsidiaries fails to pay one or
more final and non-appealable judgments entered by a court or
courts of competent jurisdiction, the aggregate uninsured or
unbonded portion of which is in excess of $50 million, if
the judgments are not paid, discharged or stayed within
30 days; and
(9) certain events of bankruptcy, insolvency or
reorganization of us or any of our subsidiaries.
If an event of default, other than an event of default described
in clause (9) above with respect to us, occurs and is
continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes may declare
the principal amount of the notes to be due and payable
immediately. If an event of default described in clause (9)
above occurs with respect to us, the principal amount of the
notes will automatically become immediately due and payable.
After any such acceleration, but before a judgment or decree
based on acceleration, the holders of a majority in aggregate
principal amount of the notes may, under certain circumstances,
rescind and annul such acceleration if all events of default,
other than the non-payment of accelerated principal, have been
cured or waived.
Notwithstanding the foregoing, if we so elect, the sole remedy
under the indenture for an event of default relating to the
failure to comply with our reporting obligations to the trustee
and the SEC, as described under Reports below,
and for any failure to comply with the requirements of
Section 314(a)(1) of the Trust Indenture Act, will,
for the 180 days after the occurrence of such an event of
default, consist exclusively of the right to receive additional
S-86
interest on the notes at an annual rate equal to 0.50% of the
aggregate principal amount of the notes to, but not including,
the 181st day thereafter (or, if applicable, the earlier
date on which the event of default relating to the reporting
obligations is cured or waived). Any such additional interest
will be payable in the same manner and on the same dates as the
stated interest payable on the notes. In no event shall
additional interest accrue under the terms of the indenture at
an annual rate in excess of 0.50%, in the aggregate, for any
violation or default caused by or our failure to be current in
respect of our Exchange Act reporting obligations. If the event
of default is continuing on the 181st day after an event of
default relating to a failure to comply with the reporting
obligations described above first occurs, the notes will be
subject to acceleration as provided above. The provisions of the
indenture described in this paragraph will not affect the rights
of holders of notes in the event of the occurrence of any other
events of default. References herein to interest on the notes
are, except as otherwise required by the context, intended to
refer to any additional interest as well as to regular interest.
In order to elect to pay additional interest as the sole remedy
during the first 180 days after the occurrence of an event
of default relating to the failure to comply with the reporting
obligations in accordance with the immediately preceding
paragraph, we must notify all holders of record of notes and the
trustee and paying agent of such election on or before the close
of business on the fifth business day after the date on which
such event of default otherwise would occur. Upon our failure to
timely give such notice or pay additional interest, the notes
will be immediately subject to acceleration as provided above.
Subject to the trustees duties in the case of an event of
default, the trustee will not be obligated to exercise any of
its rights or powers at the request of the holders unless the
holders have offered to the trustee reasonable indemnity or
security reasonably satisfactory to it against any loss,
liability or expense. Subject to the indenture, applicable law
and the trustees indemnification, the holders of a
majority in aggregate principal amount of the outstanding notes
will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred on the
trustee with respect to the notes. The indenture provides that
in the event an event of default has occurred and is continuing,
the trustee will be required in the exercise of its powers to
use the degree of care that a prudent person would use in the
conduct of its own affairs. The trustee, however, may refuse to
follow any direction that conflicts with law or the indenture or
that the trustee determines is unduly prejudicial to the rights
of any other holder or that would involve the trustee in
personal liability. None of the Trustee, Paying Agent, Registrar
or Conversion Agent shall be required to risk or expend its own
funds or otherwise incur liability, financial or otherwise, in
the performance of any of its duties, or in the exercise of any
of its rights or powers, if it has reasonable grounds for
believing that repayment of such funds or indemnity satisfactory
to it against such risk is not reasonably assured to it. The
Paying Agent, the Registrar, Conversion Agent and any
authenticating agent and the Trustee in each of its capacities
shall be entitled to the same rights, indemnities, protections
and immunities afforded to the Trustee under the indenture.
No holder will have any right to institute any proceeding under
the indenture, or for the appointment of a receiver or a
trustee, or for any other remedy under the indenture unless:
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the holder has previously given the trustee written notice of a
continuing event of default;
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the holders of at least 25% in aggregate principal amount of the
notes then outstanding have made a written request and have
offered reasonable indemnity to the trustee to institute such
proceeding as trustee; and
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the trustee has failed to institute such proceeding within
60 days after such notice, request and offer and has not
received from the holders of a majority in aggregate
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S-87
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principal amount of the notes then outstanding a direction
inconsistent with such request within 60 days after such
notice, request and offer.
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However, the above limitations do not apply to a suit instituted
by a holder for the enforcement of payment of the principal of
or interest amounts on any note on or after the applicable due
date or the right to convert the note in accordance with the
indenture.
Generally, the holders of not less than a majority of the
aggregate principal amount of outstanding notes may waive any
default or event of default unless:
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we fail to pay the principal of or any interest amounts on any
note when due;
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we fail to pay the cash and deliver the shares of common stock
owing upon conversion of any note (including additional shares,
if any) within the time period required by the indenture; or
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we fail to comply with any of the provisions of the indenture
that would require the consent of the holder of each outstanding
note affected.
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The indenture provides that if a default occurs and is
continuing and is known to the trustee, the trustee must mail to
each holder notice of the default within 90 days after it
occurs. Except in the case of a default in the payment of
principal of or interest, including any additional interest, on
any note, the trustee may withhold notice if and so long as a
committee of trust officers of the trustee in good faith
determines that withholding notice is in the interests of the
holders. In addition, we are required to deliver to the trustee
(i) within 120 days after the end of each fiscal year,
a certificate indicating whether the signers thereof know of any
default that occurred during the previous year and whether
DryShips Inc., to the officers knowledge, is in default in
the performance or observance of any of the terms, provisions
and conditions of the indenture and (ii) within
30 days after the occurrence thereof, written notice of any
events which would constitute defaults under clause (7),
(8) or (9) above, their status and what action we are
taking or propose to take in respect thereof.
Modification and
Waiver
We and the trustee may amend or supplement the indenture with
respect to the notes with the consent of the holders of a
majority in aggregate principal amount of the outstanding notes.
In addition, the holders of a majority in aggregate principal
amount of the outstanding notes may waive our compliance in any
instance with any provision of the indenture without notice to
the other holders of notes. However, no amendment, supplement or
waiver may be made without the consent of each holder of
outstanding notes affected thereby if such amendment, supplement
or waiver would:
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change the stated maturity of the principal of, or any interest
amounts on, the notes;
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reduce the principal amount of or interest amounts on the notes;
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reduce the amount of principal payable upon acceleration of the
maturity of the notes;
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change the currency of payment of principal of or interest
amounts on the notes or change any notes place of payment;
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impair the right of any holder to receive payment of principal
of and interest on such holders notes on or after the due
dates therefor or to institute suit for the enforcement of any
payment on, or with respect to, the notes;
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modify the provisions with respect to the purchase rights of the
holders as described above under Purchase of Notes
at Your Option upon a Fundamental Change in a manner
adverse to holders of notes;
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change the ranking of the notes;
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S-88
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adversely affect the right of holders to convert notes;
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modify provisions with respect to modification, amendment or
waiver (including waiver of events of default), except to
increase the percentage required for modification, amendment or
waiver or to provide for consent of each affected holder of
notes; or
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modify the provisions with respect to any additional amounts.
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We and the trustee may amend or supplement the indenture or the
notes without notice to, or the consent of, the holders of the
notes to, among other things, cure any ambiguity, defect or
inconsistency or make any other change that does not adversely
affect the rights of any holder. Any amendment or supplement
made solely to conform the provisions of the indenture and notes
to the description of the indenture and the notes contained
herein will be deemed not to adversely affect the rights of any
holder.
The consent of the holders is not necessary under the indenture
to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment. After an amendment under the indenture
becomes effective, we are required to mail to the holders a
notice briefly describing such amendment. However, the failure
to give such notice to all the holders, or any defect in the
notice, will not impair or affect the validity of the amendment.
Consolidation,
Merger and Sale of Assets
We may not consolidate with, enter into a binding share exchange
with, or merge with or into, another person or sell, assign,
convey, transfer, lease or otherwise dispose of our properties
and assets substantially as an entirety to any successor person,
unless:
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the successor person, if any, is a corporation organized and
existing under the laws of the Marshall Islands, England and
Wales, the United States, any state of the United States or
the District of Columbia and expressly assumes by supplemental
indenture all of our obligations under the notes and the
indenture;
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immediately after giving effect to the transaction, no default
or event of default shall have occurred and be
continuing; and
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other conditions specified in the indenture are met.
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Upon any such consolidation, merger or transfer, the resulting,
surviving or transferee corporation (if not us) shall succeed
to, and may exercise every right and power of, DryShips Inc.
under the indenture.
Although these types of transactions are permitted under the
indenture, certain of the foregoing transactions could
constitute a change of control (as defined above) permitting
each holder to require us to purchase the notes of such holder
as described above.
Satisfaction and
Discharge
We may satisfy and discharge our obligations under the indenture
by delivering to the registrar for cancellation all outstanding
notes or depositing with the paying agent or delivering to the
holders, as applicable, after the notes have become due and
payable, whether at the stated maturity, any fundamental change
purchase date or upon conversion or otherwise, cash or cash and
shares of our common stock, if any (solely to satisfy
outstanding conversions, if applicable), sufficient to pay all
of the outstanding notes and all other sums payable under the
indenture by us. Such discharge is subject to terms contained in
the indenture.
S-89
Transfer and
Exchange
A holder may transfer or exchange notes at the office of the
registrar in accordance with the indenture. The registrar and
the trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents. No service
charge will be imposed by us, the trustee or the registrar for
any registration of transfer or exchange of notes, but any tax
or similar governmental charge required by law or permitted by
the indenture because a holder requests any shares to be issued
in a name other than such holders name will be paid by
such holder. We are not required to transfer or exchange any
note surrendered for repurchase or conversion except for any
portion of that note not being repurchased or converted, as the
case may be.
We have initially appointed Deutsche Bank Trust Company
Americas, an affiliate of the trustee and the underwriter, as
the registrar, paying agent and conversion agent. We reserve the
right to:
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vary or terminate the appointment of the registrar, paying agent
or conversion agent;
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appoint additional paying agents or conversion agents; or
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approve any change in the office through which any registrar or
any paying agent or conversion agent acts.
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Payment and
Paying Agents
Payments in respect of the principal and interest, including
additional interest, if any, on global notes registered in the
name of DTC or its nominee will be payable to DTC or its
nominee, as the case may be, in its capacity as the registered
holder under the indenture. In the case of certificated notes,
payments will be made in U.S. dollars at the office of the
paying agent or, at our option, by check mailed to the
holders registered address (or, if requested by a holder
of more than $1,000,000 principal amount of notes, by wire
transfer to the account designated by such holder). We will make
any required interest payments to the person in whose name each
note is registered at the close of business on the record date
for the interest payment.
Deutsche Bank Trust Company Americas will be designated as
our paying agent for payments on the notes. We may at any time
designate additional paying agents or rescind the designation of
any paying agent or approve a change in the office through which
any paying agent acts.
Subject to the requirements of any applicable abandoned property
laws, the paying agent shall pay to us upon written request any
money held by them for payments on the notes that remain
unclaimed for two years after the date upon which that payment
has become due. After payment to us, holders entitled to the
money must look to us for payment. In that case, all liability
of the paying agent with respect to that money will cease.
Purchase and
Cancellation
All notes surrendered for payment, redemption, registration of
transfer or exchange or conversion shall, if surrendered to any
agent be delivered to the trustee. All notes delivered to the
trustee shall be cancelled promptly by the trustee. No notes
shall be authenticated in exchange for any notes cancelled as
provided in the indenture.
We may, to the extent permitted by law, purchase notes in the
open market or by tender offer at any price or by private
agreement. Any notes purchased by us may, to the extent
permitted by law, be reissued or resold or may, at our option,
be surrendered to the trustee for cancellation. Any notes
surrendered for cancellation may not be reissued or resold and
will be promptly cancelled. Any notes held by us or one of our
subsidiaries shall be disregarded for voting purposes in
connection with any notice, waiver, consent or direction
requiring the vote or concurrence of holders of the notes.
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Reports
So long as any notes are outstanding, we will (i) file with
the SEC within the time periods prescribed by its rules and
regulations and (ii) furnish to the trustee and the holders
of the notes within 15 days after the date on which we
would be required to file the same with the SEC pursuant to its
rules and regulations (giving effect to any grace period
provided by
Rule 12b-25
under the Exchange Act), all quarterly and annual financial
information required to be filed or furnished with the SEC
pursuant to Section 13 or Section 15(d) of the
Exchange Act and, with respect to the annual consolidated
financial statements only, a report thereon by our independent
auditors. We shall not be required to file any report or other
information with the SEC if the SEC does not permit such filing,
although such reports will be required to be furnished to the
trustee. Documents filed by us with the SEC via the EDGAR system
will be deemed furnished to the trustee and the holders of the
notes as of the time such documents are filed via EDGAR.
Replacement of
Notes
We will replace mutilated, destroyed, stolen or lost notes at
your expense upon delivery to the registrar of the mutilated
notes, or evidence of the loss, theft or destruction of the
notes satisfactory to us and the registrar. In the case of a
lost, stolen or destroyed note, indemnity satisfactory to the
registrar and us may be required at the expense of the holder of
such note before a replacement note will be issued.
Calculations in
Respect of the Notes
We will be responsible for making many of the calculations
called for under the indenture and the notes. These calculations
include, but are not limited to, determination of the closing
sale price of our common stock, adjustments to the conversion
rate, accrued interest payable on the notes and the applicable
conversion price and conversion rate. We will make all these
calculations in good faith and, absent manifest error, our
calculations will be final and binding on the holders of notes.
We will provide a schedule of our calculations to each of the
trustee, paying agent and the conversion agent, and each of the
trustee, paying agent and conversion agent is entitled to rely
conclusively upon the accuracy of our calculations without
independent verification. The trustee will forward our
calculations to any holder upon the request of that holder.
Notices
Except as otherwise described herein, notice to registered
holders of the notes will be given to the addresses as they
appear in the security register. Notices will be deemed to have
been given on the date of such mailing or electronic delivery.
Whenever a notice is required to be given by us, such notice may
be given by the trustee or registrar on our behalf (and we will
make any notice we are required to give to holders available on
our website).
Governing
Law
Each of the indenture and the notes will be governed by, and
construed in accordance with, the laws of the State of New York.
Concerning the
Trustee and Agents
Law Debenture Trust Company of New York has agreed to serve
as the trustee under the indenture and Deutsche Bank
Trust Company Americas has agreed to serve as paying agent,
registrar and conversion agent under the indenture. Law
Debenture Trust Company of New York and Deutsche Bank
Trust Company Americas will be permitted to deal with us
and our affiliates with the same rights as if they were not the
trustee or an agent, respectively. Deutsche
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Bank Trust Company Americas is an affiliate of Deutsche
Bank Securities Inc., the underwriter. Under the
Trust Indenture Act, if the trustee acquires any
conflicting interest and there exists a default with respect to
the notes, the trustee must eliminate such conflict or resign.
The holders of a majority in principal amount of all outstanding
notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy or power
available to the trustee. However, any such direction may not
conflict with any law or the indenture, may not be unduly
prejudicial to the rights of another holder or the trustee and
may not involve the trustee in personal liability.
Book-Entry,
Delivery and Form
We will initially issue the notes in the form of one or more
global securities. The global security will be deposited with
the registrar as custodian for The Depository
Trust Company, or DTC, and registered in the name of
Cede & Co., as nominee of DTC. Except as set forth
below, the global security may be transferred, in whole and not
in part, only to DTC or another nominee of DTC. You may hold
your beneficial interests in the global security directly
through DTC if you have an account with DTC or indirectly
through organizations that have accounts with DTC. Notes in
definitive, fully registered, certificated form, referred to as
certificated securities, will be issued only in
certain limited circumstances described below.
DTC has advised us that it is:
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a limited purpose trust company organized under the laws of the
State of New York;
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a banking organization within the meaning of the New
York State Banking Law;
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a member of the Federal Reserve System;
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a clearing corporation within the meaning of the New
York Uniform Commercial Code; and
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a clearing agency registered under Section 17A
of the Exchange Act.
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DTC was created to hold securities of institutions that have
accounts with DTC, referred to as participants, and
to facilitate the clearance and settlement of securities
transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants,
thereby eliminating the need for physical movement of securities
certificates. DTCs participants include securities brokers
and dealers, which may include the underwriter, banks, trust
companies, clearing corporations and certain other
organizations. Access to DTCs book-entry system is also
available to others such as banks, brokers, dealers and trust
companies, referred to as the indirect participants,
that clear through or maintain a custodial relationship with a
participant, whether directly or indirectly.
Book-Entry
Procedures for the Global Notes
We expect that, pursuant to procedures established by DTC upon
the deposit of the global security with DTC, DTC will credit, on
its book-entry registration and transfer system, the principal
amount of notes represented by such global security to the
accounts of participants. The accounts to be credited shall be
designated by the underwriter. Ownership of beneficial interests
in the global security will be limited to participants or
persons that may hold interests through participants. Ownership
of beneficial interests in the global security will be shown on,
and the transfer of those beneficial interests will be effected
only through, records maintained by DTC (with respect to
participants interests), the participants and the indirect
participants. The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such
securities in definitive form. These limits and laws may impair
the ability to transfer or pledge beneficial interests in the
global security.
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Owners of beneficial interests in global securities who desire
to convert their interests into common stock should contact
their brokers or other participants or indirect participants
through whom they hold such beneficial interests to obtain
information on procedures, including proper forms and cut-off
times, for submitting requests for conversion.
So long as DTC, or its nominee, is the registered owner or
holder of a global security, DTC or its nominee, as the case may
be, will be considered the sole owner or holder of the notes
represented by the global security for all purposes under the
indenture and the notes. In addition, no owner of a beneficial
interest in a global security will be able to transfer that
interest except in accordance with the applicable procedures of
DTC. Except as set forth below, as an owner of a beneficial
interest in the global security, you will not be entitled to
have the notes represented by the global security registered in
your name, will not receive or be entitled to receive physical
delivery of certificated securities and will not be considered
to be the owner or holder of any notes under the global
security. We understand that under existing industry practice,
if an owner of a beneficial interest in the global security
desires to take any action that DTC, as the holder of the global
security, is entitled to take, DTC would authorize the
participants to take such action, and the participants would
authorize beneficial owners owning through such participants to
take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
We will make payments of principal of, and any interest amounts
on, the notes represented by the global security registered in
the name of and held by DTC or its nominee to DTC or its
nominee, as the case may be, as the registered owner and holder
of the global security. Neither we, the trustee nor any paying
agent will have any responsibility or liability for any aspect
of the records relating to or payments made on account of
beneficial interests in the global security or for maintaining,
supervising or reviewing any records relating to such beneficial
interests.
We expect that DTC or its nominee, upon receipt of any payment
of principal of, or any interest amounts on, the global
security, will credit participants accounts with payments
in amounts proportionate to their respective beneficial
interests in the principal amount of the global security as
shown on the records of DTC or its nominee. We also expect that
payments by participants or indirect participants to owners of
beneficial interests in the global security held through such
participants or indirect participants will be governed by
standing instructions and customary practices and will be the
responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of
the records relating to, or payments made on account of,
beneficial interests in the global security for any note or for
maintaining, supervising or reviewing any records relating to
such beneficial interests or for any other aspect of the
relationship between DTC and its participants or indirect
participants or the relationship between such participants or
indirect participants and the owners of beneficial interests in
the global security owning through such participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day
funds.
DTC has advised us that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more
participants to whose account the DTC interests in the global
security is credited and only in respect of such portion of the
aggregate principal amount of notes as to which such participant
or participants has or have given such direction. However, if
DTC notifies us that it is unwilling to be a depositary for the
global security or ceases to be a clearing agency or there is an
event of default under the notes, DTC will exchange the global
security for certificated securities which it will distribute to
its participants.
Although DTC is expected to follow the foregoing procedures in
order to facilitate transfers of interests in the global
security among participants of DTC, it is under no obligation to
perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the
trustee will have any responsibility, or liability, for the
performance by DTC or the participants or indirect participants
of their respective obligations under the rules and procedures
governing their respective operations.
S-93
DESCRIPTION OF
CAPITAL STOCK
Authorized and
Outstanding Capital Stock
Under our articles of incorporation, our authorized capital
stock consists of 1,000,000,000 shares of common stock, par
value $.01 per share, of which 254,225,821 shares are
issued and outstanding as of November 16, 2009, and
500,000,000 shares of preferred stock, of which
52,238,806 shares are issued and outstanding as of
November 16, 2009. All of our shares of stock are in
registered form.
Share
History
In October 2004, we issued 15,400,000 shares of our common
stock to the Entrepreneurial Spirit Foundation, or the
Foundation, as consideration for the contribution to us of all
of the issued and outstanding capital stock of six of our
subsidiaries. The Foundation is a foundation organized under the
laws of Lichtenstein and is controlled by our Chairman and Chief
Executive Officer Mr. George Economou. Subsequent to the
issuance of the 15,400,000 shares discussed above,
2,772,000 shares of common stock were transferred from the
Foundation to Advice Investments S.A., a corporation organized
under the Republic of Liberia, all the issued and outstanding
capital stock of which is owned by Ms. Elisavet Manola of
Athens, Greece, the ex-wife of Mr. Economou. The Foundation
transferred 1,848,000 shares of common stock to Magic
Management Inc., all of the issued and outstanding capital stock
of which is owned by Ms. Rika Vosniadou of Athens, Greece,
the ex-wife of Mr. Economou. In February 2005, we issued
14,950,000 shares of common stock in connection with our
initial public offering. The net proceeds of the initial public
offering were $251.3 million. On February 14, 2006,
the Foundation transferred all of its shares to its wholly-owned
subsidiary, Elios Investments.
On May 10, 2006, we filed our universal shelf registration
statement and related prospectus for the issuance of 5,000,000
of common shares. From May 2006 through August 2006,
4,650,000 shares of common stock with a par value $0.01
were issued. The net proceeds after underwriting commissions of
2.5% and other issuance fees were $56.5 million.
Our shareholders voted to adopt a resolution at our annual
general shareholders meeting on July 11, 2006, which
increased the aggregate number of shares of common stock that we
are authorized to issue from 45,000,000 registered shares with
par value of $0.01 to 75,000,000 registered shares with par
value $0.01.
On October 24, 2006, our board of directors agreed to the
request of our major shareholders (Elios Investments Inc.,
Advice Investments S.A. and Magic Management Inc.) following the
declaration of our $0.20 quarterly dividend per share in
September 2006, to receive their dividend payment in the form of
our common shares in lieu of cash. One of these shareholders,
Elios Investments Inc., is controlled by our Chairman and Chief
Executive Officer, Mr. George Economou. In addition, the
board of directors also agreed on that date to the request of a
company related to Mr. Economou to accept repayment of the
outstanding balance of a sellers credit in respect of a
vessel purchased by us (as discussed in Note 3(e) of our
consolidated financial statements included in out annual report
on
Form 20-F
for the fiscal year ended December 31, 2006) in our
common shares. As a result of the agreement, an aggregate of
$3,080,000 in dividends and the sellers credit together
with interest amounting to $3,327,000 were settled with 235,585
and 254,512 of our common shares, respectively. The price used
as consideration for issuance of the above common shares was
equal to the average closing price of our common stock on The
Nasdaq Global Select Market over the 8 trading days ended
October 24, 2006, which was $13.07 per share.
In December 2006, we filed a registration statement on
Form F-3
on behalf of our major shareholders registering for resale an
aggregate of 15,890,097 of our common shares.
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On October 5, 2007, we filed an automatic shelf
registration statement for an undetermined amount of securities,
including common shares, preferred shares, debt securities,
guarantees, warrants, purchase contracts and units.
In January 2008, following a special shareholders meeting, we
increased the aggregate number of authorized shares of our
common stock from 75,000,000 registered shares with par value of
$0.01 to 1,000,000,000 registered shares with a par value of
$0.01 and increased the aggregate number of authorized shares of
preferred stock from 30,000,000 registered shares, par value
$0.01 per share, to 500,000,000 registered preferred shares with
a par value of $0.01 per share.
In January 2008, entered into a stockholder rights agreement and
declared a dividend of one preferred share purchase right, or a
right, to purchase one one-thousandth of the our Series A
Participating Preferred Stock for each outstanding common share.
Each right entitles the registered holder, upon the occurrence
of certain events, to purchase from us one one-thousandth of a
share of Series A Participating Preferred Stock at a
purchase price of $250, subject to adjustment.
In March 2008, we filed a prospectus supplement relating to the
offer and sale of up to 6,000,000 common shares, par value $0.01
per share pursuant to our controlled equity offering. In May
2008, we issued 1,109,903 common shares pursuant to this
prospectus supplement. The net proceeds, after underwriting
commissions and other issuance fees, amounted to
$101.6 million.
On October 21, 2008, we filed a prospectus supplement
pursuant to our controlled equity offering for the sale of up to
4,940,097 common shares, pursuant to which we sold
2,069,700 shares. The net proceeds of this offering
amounted to $41.9 million.
On November 16, 2008, we filed a prospectus supplement
pursuant to our controlled equity offering for the sale of up to
25,000,000 common shares, pursuant to which we sold
24,980,300 shares. The net proceeds of this offering
amounted to $167.1 million.
On January 28, 2009, we entered into an ATM Equity Sales
Agreement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated and we filed a related prospectus supplement
relating to the offer and sale of up to $500 million of our
common shares, pursuant to which we have sold
71,265,000 shares as of March 26, 2009. The net
proceeds of this offering were $370.5 million after
commissions.
On March 19, 2009, we issued a total of 11,990,405 common
shares to the nominees of Central Mare Inc. in connection with
the disposal of three newbuilding Capesize vessels.
On April 2, 2009, we filed a prospectus supplement pursuant
to our controlled equity offering for the sale of the remaining
amount of $119,966 of common shares. We issued
24,404,595 shares of common stock with par value $0.01 per
share. The net proceeds of this offering amounted to $116,949,
after commissions.
On May 7, 2009 we filed a prospectus supplement pursuant to
our controlled equity offering for the sale of up to
$475 million of common shares, pursuant to which we sold
69,385,000 shares. The net proceeds of this offering
amounted to $464.9 million after commissions.
On July 9, 2009, we entered into an agreement with entities
affiliated with our Chairman and Chief Executive Officer to
acquire the remaining 25% of the total issued and outstanding
capital stock of Ocean Rig UDW. The consideration paid for the
25% interest in Ocean Rig UDW consisted of a one-time
$50 million cash payment upon the closing of the
transaction, and the issuance of 52,238,806 shares of
Series A Convertible Preferred Stock with an aggregate face
value of $280 million. The holders of our Series A
Convertible Preferred Stock have demand Registration Rights
exercisable at anytime.
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As of November 16, 2009, we had 254,225,821 common shares
and 52,238,806 Series A Convertible Preferred shares issued
and outstanding.
Description of
Common Stock
Each outstanding share of common stock entitles the holder to
one vote on all matters submitted to a vote of stockholders.
Subject to preferences that may be applicable to any outstanding
shares of preferred stock, holders of shares of common stock are
entitled to receive ratably all dividends, if any, declared by
our board of directors out of funds legally available for
dividends. Holders of common stock do not have conversion,
redemption or preemptive rights to subscribe to any of our
securities. All outstanding shares of common stock are, and the
shares to be sold in this offering when issued and paid for will
be, fully paid and non-assessable. The rights, preferences and
privileges of holders of common stock are subject to the rights
of the holders of any shares of preferred stock which we may
issue in the future. Our common stock is quoted on The Nasdaq
Global Select Market under the symbol DRYS.
Our Articles of
Incorporation and Bylaws
Our purpose, as stated in Section B of our Articles of
Incorporation, is to engage in any lawful act or activity for
which corporations may now or hereafter be organized under the
Marshall Islands Business Corporations Act. Our articles of
incorporation and bylaws do not impose any limitations on the
ownership rights of our shareholders.
Directors
Our directors are elected by a plurality of the votes cast by
stockholders entitled to vote in an election. Our articles of
incorporation provide that cumulative voting shall not be used
to elect directors. Our board of directors must consist of at
least three members. The exact number of directors is fixed by a
vote of at least
662/3%
of the entire board. Our by laws provide for a staggered board
of directors whereby directors shall be divided into three
classes: Class A, Class B and Class C which shall
be as nearly equal in number as possible. Shareholders, acting
as at a duly constituted meeting, or by unanimous written
consent of all shareholders, initially designated directors as
Class A, Class B or Class C. Class A
directors served for a term expiring at the 2005 annual meeting
of shareholders. Directors designated as Class B directors
served for a term expiring at the 2006 annual meeting. Directors
designated Class C directors served for a term expiring at
the 2007 annual meeting. At annual meetings for each initial
term, directors to replace those whose terms expire at such
annual meetings will be elected to hold office until the third
succeeding annual meeting. Each director serves his respective
term of office until his successor has been elected and
qualified, except in the event of his death, resignation,
removal or the earlier termination of his term of office. Our
board of directors has the authority to fix the amounts which
shall be payable to the members of the board of directors for
attendance at any meeting or for services rendered to us.
Stockholder
Meetings
Under our bylaws, annual stockholder meetings will be held at a
time and place selected by our board of directors. The meetings
may be held in or outside of the Marshall Islands. Special
meetings may be called by the board of directors, chairman of
the board or by the president. Our board of directors may set a
record date between 15 and 60 days before the date of any
meeting to determine the stockholders that will be eligible to
receive notice and vote at the meeting.
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Dissenters
Rights of Appraisal and Payment
Under the BCA, our stockholders have the right to dissent from
various corporate actions, including any merger or
consolidation, sale of all or substantially all of our assets
not made in the usual course of our business, and receive
payment of the fair value of their shares. In the event of any
further amendment of our amended and restated articles of
incorporation, a stockholder also has the right to dissent and
receive payment for his or her shares if the amendment alters
certain rights in respect of those shares. The dissenting
stockholder must follow the procedures set forth in the BCA to
receive payment. In the event that we and any dissenting
stockholder fail to agree on a price for the shares, the BCA
procedures involve, among other things, the institution of
proceedings in the high court of the Republic of the Marshall
Islands or in any appropriate court in any jurisdiction in which
our shares are primarily traded on a local or national
securities exchange.
Stockholders
Derivative Actions
Under the BCA, any of our stockholders may bring an action in
our name to procure a judgment in our favor, also known as a
derivative action, provided that the stockholder bringing the
action is a holder of common stock both at the time the
derivative action is commenced and at the time of the
transaction to which the action relates.
Indemnification
of Officers and Directors
Our bylaws includes a provision that entitles any director or
officer of the Corporation to be indemnified by the Corporation
upon the same terms, under the same conditions and to the same
extent as authorized by the BCA if he acted in good faith and in
a manner reasonably believed to be in and not opposed to the
best interests of the Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
We are also authorized to carry directors and
officers insurance as a protection against any liability
asserted against our directors and officers acting in their
capacity as directors and officers regardless of whether we
would have the power to indemnify such director or officer
against such liability by law or under the provisions of our by
laws. We believe that these indemnification provisions and
insurance are useful to attract and retain qualified directors
and executive officers.
The indemnification provisions in our bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Anti-takeover
Provisions of our Charter Documents
Several provisions of our articles of incorporation and by-laws
may have anti-takeover effects. These provisions are intended to
avoid costly takeover battles, lessen our vulnerability to a
hostile change of control and enhance the ability of our board
of directors to maximize stockholder value in connection with
any unsolicited offer to acquire us. However, these
anti-takeover provisions, which are summarized below, could also
discourage, delay or prevent (1) the merger or acquisition
of our company by means of a tender offer, a proxy contest or
otherwise, that a stockholder may consider in its best interest
and (2) the removal of incumbent officers and directors.
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Blank Check
Preferred Stock
Under the terms of our articles of incorporation, our board of
directors has authority, without any further vote or action by
our stockholders, to issue up to 447,761,194 shares of
blank check preferred stock. Our board of directors may issue
shares of preferred stock on terms calculated to discourage,
delay or prevent a change of control of our company or the
removal of our management.
Classified Board
of Directors
Our articles of incorporation provide for a board of directors
serving staggered, three-year terms. Approximately one-third of
our board of directors will be elected each year. The classified
board provision could discourage a third party from making a
tender offer for our shares or attempting to obtain control of
our company. It could also delay stockholders who do not agree
with the policies of the board of directors from removing a
majority of the board of directors for two years.
Stockholder
Rights Agreement
Each right entitles the registered holder, upon the occurrence
of certain events, to purchase from us one one-thousandth of a
share of our Series A Participating Preferred Stock for
each outstanding common share at a purchase price of $250,
subject to adjustment. The rights are issued pursuant to a
rights agreement between us and American Stock
Transfer & Trust Company, as rights agent. Until
a right is exercised, the holder of a right will have no rights
to vote or receive dividends or any other stockholder rights.
The rights may have anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to
acquire us without the approval of our board of directors. As a
result, the overall effect of the rights may be to render more
difficult or discourage any attempt to acquire us. Because our
board of directors can approve a redemption of the rights or a
permitted offer, the rights should not interfere with a merger
or other business combination approved by our board of
directors. The adoption of the rights agreement was approved by
our existing stockholders prior to the offering.
Election and
Removal of Directors
Our articles of incorporation prohibit cumulative voting in the
election of directors. Our by-laws require shareholders to give
advance written notice of nominations for the election of
directors. Our by-laws also provide that our directors may be
removed only for cause and only upon affirmative vote of the
holders of at least
662/3%
of outstanding voting shares. These provisions may discourage,
delay or prevent the removal of incumbent officers and directors.
Limited Actions
by Stockholders
Our by-laws provide that if a quorum is present, and except as
otherwise expressly provided by law, the affirmative vote of a
majority of the shares of stock represented at the meeting shall
be the act of the shareholders. Shareholders may act by way of
written consent in accordance with the provisions of
Section 67 of the BCA.
Advance Notice
Requirements for Shareholder Proposals and Director
Nominations
Our bylaws provide that shareholders seeking to nominate
candidates for election as directors or to bring business before
an annual meeting of shareholders must provide timely notice of
their proposal in writing to the corporate secretary. Generally,
to be timely, a shareholders notice must be received at
our principal executive offices not less than 150 days nor
more than 180 days prior to the one year anniversary of the
preceding years annual
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meeting. Our bylaws also specify requirements as to the form and
content of a shareholders notice. These provisions may
impede shareholders ability to bring matters before an
annual meeting of shareholders or make nominations for directors
at an annual meeting of shareholders.
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, 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.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
condition, cash requirements and availability, restrictions in
our loan agreements, the terms of the debt securities we offer,
the provisions of applicable law affecting the payment of
distributions to shareholders and other factors. Because we are
a holding company with no material assets other than the stock
of our subsidiaries, our ability to pay dividends will depend on
the earnings and cash flow of our subsidiaries and their ability
to pay dividends to us. The laws governing us and our
subsidiaries generally prohibit the payment of dividends other
than from surplus or while a company is insolvent or would be
rendered insolvent.
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DESCRIPTION OF
SHARE LENDING AGREEMENT
Concurrently with this offering of notes, we are offering, by
means of a separate prospectus supplement and accompanying
prospectus, shares of our common stock in a transaction
registered under the Securities Act. All of these shares are
being borrowed by an affiliate of Deutsche Bank Securities Inc.,
the underwriter in the common stock offering. We will not
receive any proceeds of that offering of common stock but will
receive a nominal loan fee for each share we loan as described
below.
To make the purchase of the notes offered pursuant to this
prospectus supplement more attractive to prospective investors,
we have entered into a share lending agreement with Deutsche
Bank AG, London Branch, which we refer to as DB London, under
which we have agreed to loan to DB London up to
26,100,000 shares of our common stock during a period
beginning on the date we entered into the share lending
agreement and ending on or about the maturity date of the notes
or, if earlier, the date as of which the entire principal amount
of the notes ceases to be outstanding as the result of
conversion or repurchase, subject to certain limited exceptions,
which we refer to as the loan availability period.
The total number of shares that the share borrower can borrow
under the share lending agreement is limited to 26,100,000. We
will receive a one-time loan fee of $0.01 per share for each
share of common stock that we loan to DB London.
Share loans under the share lending agreement will terminate and
the borrowed shares must be returned to us if the concurrent
offering of our convertible notes is not consummated or upon the
termination of the loan availability period, as well as under
the following circumstances:
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DB London may terminate all or any portion of a loan at any
time; and
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we or DB London may terminate any or all of the outstanding
loans upon a default by the other party under the share lending
agreement, including certain breaches by DB London of its
representations and warranties, covenants or agreements under
the share lending agreement, or the bankruptcy of us or DB
London.
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Any shares that we loan to DB London will be issued and
outstanding for corporate law purposes and, accordingly, the
holders of the borrowed shares will have all of the rights of a
holder of our outstanding shares, including the right to vote
the shares on all matters submitted to a vote of our
shareholders and the right to receive any dividends or other
distributions that we may pay or make on our outstanding shares
of common stock. However, under the share lending agreement, DB
London has agreed:
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to pay to us an amount equal to cash dividends, if any, that we
pay on the borrowed shares;
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to pay or deliver to us any other distribution, other than in
liquidation or a reorganization in bankruptcy, that we make on
the borrowed shares; and
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not to vote on the borrowed shares on any matter submitted to a
vote of our stockholders, except in certain circumstances where
such vote is required for quorum purposes.
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In view of the contractual undertakings of DB London in the
share lending agreement, which have the effect of substantially
eliminating the economic dilution that otherwise would result
from the issuance of the borrowed shares, we believe that under
U.S. generally accepted accounting principles currently in
effect, the borrowed shares will not be considered outstanding
for the purpose of computing and reporting our earnings per
share.
Deutsche Bank Securities Inc. (together with DB London, referred
to herein collectively as Deutsche Bank) has
informed us that it, or its affiliates, intend to use the short
position created by the share loan and the short sales of the
borrowed shares to facilitate transactions
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by which investors in our convertible notes may hedge their
respective investments through short sales or privately
negotiated derivative transactions. Deutsche Bank has also
informed us that it intends to short sell the borrowed shares
concurrently with the concurrent offering of our convertible
notes. Deutsche Bank and its affiliates will receive all the
proceeds from the sale of the borrowed shares, if any, and we
will have no interest whatsoever in any such proceeds.
To the extent that fewer than 26,100,000 shares are sold
concurrently with the offering of the convertible notes, the
share borrower may from time to time borrow additional shares
from us for additional offerings that may be made from time to
time. We refer to the latter shares as of the supplemental
borrowed shares. In connection with the sale of these
supplemental borrowed shares, Deutsche Bank may effect such
transactions by selling the shares at various prices from time
to time or through dealers, and these dealers may receive
compensation in the form of discounts, concessions or
commissions from the underwriter and or from purchases of shares
for whom the dealers may act as agents or to whom they may sell
as principals. Over the same period that Deutsche Bank sells
these supplemental borrowed shares, it may, in its discretion,
purchase at least an equal amount of shares of our common stock
on the open market. Deutsche Bank may from time to time purchase
shares of our common stock in the market and use such shares,
including shares purchased in connection with the sale of
supplemental borrowed shares, to facilitate transactions by
which investors in the notes may hedge their investments in such
notes.
The existence of the share lending agreement and the short sales
of our common stock effected in connection with the sale of our
convertible notes being offered concurrently herewith could
cause the market price of our common stock to be lower over the
term of the share lending agreement than it would have been had
we not entered into that agreement. See Risk
FactorsRisks Relating To the NotesThe effect of the
issuance and sale of our shares of common stock pursuant to the
share lending agreement, which issuance is being made to
facilitate transactions by which investors in the notes may
hedge their investments, may be to lower the market price of our
common stock. However, we have determined that the entry
into the share lending agreement is in our best interests as a
means to facilitate the offer and sale of our convertible notes
pursuant to the related prospectus supplement and accompanying
prospectus on terms more favorable to us than we could have
otherwise obtained.
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TAXATION
The following discussion summarizes the material
U.S. federal income tax and Marshall Islands tax
consequences to U.S. Holders and
Non-U.S. Holders
(as defined below) of the purchase, ownership and disposition of
our notes and any of our common stock received upon their
conversion. This summary does not purport to deal with all
aspects of U.S. federal income taxation or Marshall Islands
taxation that may be relevant to an investors decision to
purchase notes, nor any tax consequences arising under the laws
of any state, locality or other foreign jurisdiction. This
summary is not intended to be applicable to all categories of
investors, such as dealers in securities, banks, thrifts or
other financial institutions, insurance companies, regulated
investment companies, tax-exempt organizations,
U.S. expatriates, persons that hold the notes or common
stock as part of a straddle, conversion transaction or hedge,
persons who own 10% or more of our outstanding stock, persons
deemed to sell the notes or the common stock under the
constructive sale provisions of the U.S. Internal Revenue
Code of 1986, as amended, or the Code, a U.S. Holder (as
defined below) whose functional currency is other
than the U.S. dollar, or persons who acquire or are deemed
to have acquired the notes in an exchange or for property other
than cash, or holders subject to the alternative minimum tax,
each of which may be subject to special rules. In addition, this
discussion is limited to persons who hold the notes and common
stock as capital assets (generally, property held
for investment) within the meaning of Code Section 1221.
Finally, this discussion only applies to notes that are
purchased by those holders who purchase notes in this offering
at the issue price, which will equal the first price
to the public (not including bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers) at which a substantial amount
of the notes is sold for money.
If an entity treated as a partnership for U.S. federal
income tax purposes holds the notes or the common stock, the
U.S. federal income tax treatment of a partner will
generally depend upon the status of the partner and upon the
activities of the partnership. Partnerships holding the notes or
the common stock and partners in such partnerships are
encouraged to consult their own tax advisors.
U.S. Federal
Income Tax Considerations
In the opinion of Seward & Kissel LLP, our
U.S. counsel, the following are the material
U.S. federal income tax consequences to us of our
activities and to U.S. Holders and
Non-U.S. Holders
(both as defined below) of the notes and any of our common stock
received upon their conversion. The following discussion of
U.S. federal income tax matters is based on the Code,
judicial decisions, administrative pronouncements, and existing
and proposed regulations issued by the U.S. Department of
the Treasury, all of which are subject to change, possibly with
retroactive effect. Except as otherwise noted, this discussion
is based on the assumption that we will not maintain an office
or other fixed place of business within the United States.
References in the following discussion to we and
us are to DryShips Inc. and its subsidiaries on a
consolidated basis.
PROSPECTIVE PURCHASERS OF THE NOTES ARE ENCOURAGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL,
STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP, CONVERSION AND DISPOSITION OF THE NOTES.
U.S. Federal
Income Taxation of U.S. Holders
As used in this section, a U.S. Holder is a
beneficial owner of notes or common stock that is, for
U.S. federal income tax purposes: (1) an individual
citizen or resident alien of the United States, (2) a
corporation or other entity that is taxable as a corporation,
created or organized under the laws of the United States or any
state or political subdivision thereof
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(including the District of Columbia), (3) an estate, the
income of which is subject to U.S. federal income taxation
regardless of its source or (4) a trust, if a
U.S. court can exercise primary supervision over the
administration of such trust and one or more U.S. persons
has the authority to control all substantial decisions of the
trust.
Payment of
Interest
It is expected, and therefore this discussion assumes, that the
notes will be issued without original issue discount for
U.S. federal income tax purposes. Accordingly, interest on
a note generally will be includable in the income of a
U.S. Holder as ordinary income at the time such interest is
received or accrued, in accordance with such holders
regular method of accounting for U.S. federal income tax
purposes. If, however, the principal amount of the notes exceeds
issue price, as defined above, by more than a de minimis
amount, as determined under applicable Treasury Regulations,
a U.S. Holder will be required to include such excess in
income as original issue discount, as it accrues, in accordance
with a constant yield method based on a compounding of interest
before the receipt of cash payments attributable to this income.
Additional Amounts paid pursuant to the obligations described
under Description of Notes - Payment of Additional
Amounts will be treated as ordinary interest income.
Interest on a note will be income from sources outside the
United States and will generally constitute passive
category income or, in the case of certain
U.S. Holders, general category income for
U.S. foreign tax credit limitation purposes. The rules
governing foreign tax credits are complex and, therefore,
U.S. Holders should consult their own tax advisors
regarding the availability of foreign tax credits in their
particular circumstances and the application of these rules.
Adjustments to
Conversion Rate
The conversion rate of the notes is subject to adjustment under
certain circumstances, as described under Description of
NotesAdjustment to Conversion Rate. Section 305
of the Code and the Treasury Regulations issued thereunder may
treat the holders of the notes as having received a constructive
distribution, resulting in dividend treatment (as described
below) to the extent of the Companys current
and/or
accumulated earnings and profits as determined under
U.S. federal income tax principles, if, and to the extent
that, certain adjustments in the conversion rate (or certain
other corporate transactions) increase the proportionate
interest of a holder of notes in the fully diluted common stock,
whether or not such holder ever exercises its conversion
privilege. For example, if at any time we make a distribution of
cash or property to our stockholders that would be taxable to
the stockholders as a dividend for U.S. federal income tax
purposes and, in accordance with the anti-dilution provisions of
the notes, the conversion rate of the notes is increased, such
increase will be deemed to give rise to a distribution subject
to U.S. federal income tax as a dividend to a
U.S. Holder of a note, to the extent the amount of such
distribution does not exceed our current and accumulated
earnings and profits (as determined under U.S. federal
income tax principles), notwithstanding the fact that the
U.S. Holder does not receive a cash payment.
U.S. Holders should consult their tax advisors as to the
tax consequences of receiving constructive dividends. Moreover,
if there is not a full adjustment to the conversion rate of the
notes to reflect a stock dividend or other event increasing the
proportionate interest of the holders of outstanding common
stock in the assets or earnings and profits of the Company, then
such increase in the proportionate interest of the holders of
the common stock may be treated as a distribution to such
holders, taxable as a dividend (as described below) to the
extent of the Companys current
and/or
accumulated earnings and profits. Any constructive distributions
received in respect of the notes will not be eligible for either
the dividends received deduction or the preferential tax rate
afforded to qualified dividend income under
U.S. federal income tax law.
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Sale, Exchange
or Redemption of a Note or Conversion of a Note Solely in
Exchange for Cash
Upon the sale, exchange or redemption of a note or conversion of
a note solely in exchange for cash, a U.S. Holder generally
will recognize capital gain or loss equal to the difference
between (1) the amount of cash proceeds and the fair market
value of any property received on the sale, exchange, redemption
or conversion, except to the extent such amount is attributable
to accrued interest not previously included in income, which is
taxable as ordinary income, and (2) such
U.S. Holders adjusted tax basis in the note. A
U.S. Holders adjusted tax basis in a note generally
will equal the cost of the note to such U.S. Holder plus
the amount, if any, included in income on an adjustment to the
conversion rate of the notes, as described in Adjustments
to Conversion Rate above. Exceptions to this general
treatment apply in the case we are treated as a passive
foreign investment company, as discussed below under
Passive Foreign Investment Company Status and
Significant Tax Consequences. U.S. Holders are
encouraged to consult their tax advisors regarding the treatment
of capital gains (which may be taxed at lower rates than
ordinary income for U.S. Holders who are individuals,
trusts or estates) and capital losses (the deductibility of
which is subject to limitations). Such gain or loss will
generally be treated as gain or loss from sources within the
United States for U.S. foreign tax credit limitation
purposes.
Conversion of
a Note in Exchange for a Combination of Common Stock and
Cash
If a U.S. Holder receives a combination of shares of our
common stock and cash upon conversion of a note, and such cash
is not merely received in lieu of a fractional share, the U.S.
federal income tax treatment to the U.S. Holder is
uncertain. For U.S. federal income tax purposes, the
transaction will be treated as an exchange of the note for a
combination of cash and shares of our common stock. Assuming the
note is a security for U.S. federal income tax
purposes, which is likely, a U.S. Holder will be required
to recognize gain (but not loss) realized on this exchange in an
amount equal to the lesser of (i) the gain realized (being
the excess, if any, of the fair market value of the shares
received plus the cash received (other than amount attributable
to accrued interest, which will be treated as described above
under Payment of Interest) over the adjusted tax
basis of the note exchanged therefor) and (ii) the cash
received (excluding cash attributable to accrued interest). Such
gain generally will be capital gain, and will be long-term
capital gain if the U.S. Holders holding period for
the note is more than one year at the time of the exchange. The
U.S. Holders adjusted tax basis in the shares of our
common stock received generally will equal the adjusted tax
basis in the note exchanged, decreased by the cash received
(excluding cash attributable to accrued interest) and increased
by the amount of gain recognized. The U.S. Holders
holding period in the shares of our common stock received upon
exchange of the note will include the holding period of the note
so exchanged.
Alternatively, the cash payment might be treated as the proceeds
from the redemption of a portion of the note and taxed in the
manner described above under Sale, Exchange or Redemption
of a Note or Conversion of a Note Solely in Exchange for
Cash. In such case, the U.S. Holders adjusted
tax basis in the note would be allocated pro rata between the
shares of our common stock received and the portion of the note
that is treated as redeemed for cash.
In either case, a U.S. Holder should be entitled to treated
any cash received in the exchange as applied first to the
satisfaction of any accrued but unpaid interest on the note.
U.S. Holders are encouraged to consult their tax advisors
regarding the proper treatment to them of the receipt of a
combination of cash and shares of our common stock upon a
conversion.
Any gain recognized will generally be U.S. source income
for purposes of computing a U.S. Holders foreign tax
credit limitation.
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Conversion of
a Note Solely in Exchange for Common Stock
A U.S. Holder generally will not recognize any income, gain
or loss upon conversion of a note into common stock except with
respect to cash received in lieu of a fractional share of common
stock. A U.S. Holders tax basis in the common stock
received on conversion of a note will be the same as such
U.S. Holders adjusted tax basis in the note at the
time of conversion, reduced by any basis allocable to a
fractional share interest, and the holding period for the common
stock received on conversion will generally include the holding
period of the note converted. However, to the extent that any
common stock received upon conversion is considered attributable
to accrued interest not previously included in income by the
U.S. Holder, it will be taxable as ordinary income. A
U.S. Holders tax basis in shares of common stock
considered attributable to accrued interest generally will equal
the amount of such accrued interest included in income, and the
holding period for such shares will begin on the date of
conversion.
Cash received in lieu of a fractional share of common stock upon
conversion will be treated as a payment in exchange for the
fractional share of common stock. Accordingly, the receipt of
cash in lieu of a fractional share of common stock generally
will result in capital gain or loss, measured by the difference
between the cash received for the fractional share and the
U.S. Holders adjusted tax basis in the fractional
share, and will be taxable as described below under Sale,
Exchange or Other Disposition of Common Stock.
Any gain recognized will generally be U.S. source income
for purposes of computing a U.S. Holders foreign tax
credit limitation.
Taxation of
Distributions on Common Stock
Subject to the discussion below under Passive Foreign
Investment Company Status and Significant Tax
Consequences, distributions, if any, paid on our common
stock generally will be includable in a U.S. Holders
income as dividend income to the extent made from our current
and/or
accumulated earnings and profits, as determined under
U.S. 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
U.S. Holders tax basis in his common stock on a
dollar-for-dollar
basis and thereafter as capital gain. Such distributions will
not be eligible for the dividends-received deduction, but may
qualify for taxation at preferential rates (for taxable years
beginning on or before December 31, 2010) in the case
of a U.S. Holder which is an individual, trust or estate,
provided that the common stock is traded on an established
securities market in the United States (such as The Nasdaq
Global Select Market on which our common stock is currently
traded) and such holder meets certain holding period and other
requirements and provided further that we do not constitute
a passive foreign investment company, as described below, for
the taxable year of the distribution or the immediately
preceding year. Legislation has been previously introduced in
the U.S. Congress which, if enacted in its present form,
would preclude our dividends from qualifying for such
preferential rates prospectively from the date of the enactment.
Dividends paid on our common stock will be income from sources
outside the United States and will generally constitute
passive category income or, in the case of certain
U.S. Holders, general category income for
U.S. foreign tax credit limitation purposes.
Sale, Exchange
or Other Disposition of Common Stock
Subject to the discussion below under Passive Foreign
Investment Company Status and Significant Tax
Consequences, upon the sale, exchange or other disposition
of common stock, a U.S. Holder generally will recognize
capital gain or capital loss equal to the difference between the
amount realized on such sale or exchange and such holders
adjusted tax basis in such common stock. U.S. Holders are
encouraged to consult their tax advisors regarding the
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treatment of capital gains (which may be taxed at lower rates
than ordinary income for U.S. Holders who are individuals,
trusts or estates) and capital losses (the deductibility of
which is subject to limitations). A U.S. Holders gain
or loss will generally be treated (subject to certain
exceptions) as gain or loss from sources within the United
States for U.S. foreign tax credit limitation purposes.
Spin-off of
our subsidiary, Ocean Rig UDW
If we spin off the stock of our subsidiary, Ocean Rig UDW, to
our shareholders, depending on the manner in which the spin-off
is structured, the transaction may be treated as an in-kind
distribution with respect to our common stock, and as a result
as a taxable dividend to U.S. Holders of our common stock,
or otherwise as a transaction resulting in taxable gain for
U.S. Holders of our common stock, notwithstanding that cash
has not been received. See Risk FactorsCompany
Specific Risk FactorsThe spin-off of our subsidiary, Ocean
Rig UDW, may have adverse tax consequences to shareholders.
Passive
Foreign Investment Company Status and Significant Tax
Consequences
Special U.S. federal income tax rules apply to a
U.S. Holder that holds stock in a foreign corporation
classified as a passive foreign investment company for
U.S. federal income tax purposes. In general, we will be
treated as a passive foreign investment company with respect to
a U.S. Holder if, for any taxable year in which such holder
held our common stock, either:
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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
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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.
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If we are treated as a passive foreign investment company, a
U.S. Holder of notes is likely to be treated for passive
foreign investment company purposes as a holder of our stock,
prior to conversion of the notes, under constructive ownership
rules.
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%
of the value of the subsidiarys 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, or IRS,
pronouncements concerning the characterization of income derived
from time charters and voyage charters as services income for
other tax purposes. However,
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there is also authority which characterizes time charter income
as rental income rather than services income for other tax
purposes. It should be noted that in the absence of any legal
authority specifically relating to the statutory provisions
governing passive foreign investment companies, the IRS 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
U.S. Holder would be subject to different taxation rules
depending on whether the U.S. 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 U.S. Holder should
be able to make a
mark-to-market
election with respect to our common stock, as discussed below.
Taxation of U.S.
Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which
U.S. Holder we refer to as an Electing Holder,
the Electing Holder must report each year for U.S. federal
income tax purposes its 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 Holders 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
U.S. 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 its U.S. federal income tax
return. However, a U.S. Holder is not permitted to make a
QEF election with respect to the notes. As a result, if we are
treated as a passive foreign investment company at any time
during which a U.S. Holder owns notes, the U.S. Holder
will not be able to make a normal QEF election with respect to
shares acquired upon a conversion of the notes. Such a
U.S. Holder could, however, make a special QEF election
with respect to the shares under which the U.S. Holder
would recognize inherent gain in the shares as an excess
distribution at the time of the election, by treating the
holding period of the shares as including the holding period of
the notes. If we were aware that we were to be treated as a
passive foreign investment company for any taxable year, we
would provide each U.S. Holder with all necessary
information in order to make the QEF election described above.
Taxation of U.S.
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
U.S. Holder would be allowed to make a
mark-to-market
election with respect to our common stock, provided the
U.S. Holder completes and files IRS Form 8621 in
accordance with the relevant instructions and related Treasury
Regulations. The
mark-to-market
election under the passive foreign investment company rules is
not permitted to be made with respect to the notes. A
U.S. Holder may make a
mark-to-market
election under the passive foreign investment company rules with
respect to shares acquired upon a conversion of notes; however,
this election would require the U.S. Holder to recognize
inherent gain in the shares as an excess
distribution at the time of the election, by treating the
holding period of the shares as including the holding period of
the notes. If that election is made, the U.S. Holder
generally would include as ordinary income in each taxable year
the excess, if any, of the fair market
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value of the common stock at the end of the taxable year over
such holders adjusted tax basis in the common stock. The
U.S. Holder would also be permitted an ordinary loss in
respect of the excess, if any, of the U.S. Holders
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 U.S. Holders tax basis in its 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 U.S. Holder. Any
additional loss would be treated as a capital loss, subject to
generally applicable limitations under the Code.
Taxation of U.S.
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 U.S. 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 Holders 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
holders successor generally would not receive a
step-up in
tax basis with respect to such stock.
U.S. Federal Tax
Consequences to
Non-U.S.
Holders
A
Non-U.S. Holder
is a beneficial owner of the notes or common stock that is not a
U.S. Holder, as defined above. In general,
distributions on the notes or the common stock to a
Non-U.S. Holder
and gain realized by a
Non-U.S. Holder
on the sale, exchange, or redemption of the notes or the common
stock, or conversion of the notes will not be subject to
U.S. federal income or withholding tax, unless:
(1) such income is effectively connected with a trade or
business conducted by such
Non-U.S. Holder
in the United States (and, in the case of an applicable tax
treaty, is attributable to the
Non-U.S. Holders
permanent establishment in the United States), or
(2) in the case of gain, such
Non-U.S. Holder
is a nonresident alien individual who is present in the United
States for more than 182 days in the taxable year of the
sale of the notes and certain other requirements are met.
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Except as may otherwise be provided in an applicable income tax
treaty between the United States and a foreign country, a
Non-U.S. Holder
will generally be subject to tax in the same manner as a
U.S. Holder with respect to payments of interest and
dividends if such payments are effectively connected with the
conduct of a trade or business by the
Non-U.S. Holder
in the United States. Such
Non-U.S. Holder
will be required to provide the withholding agent with a
properly executed IRS
Form W-8ECI.
In addition, if the
Non-U.S. Holder
is a corporation, such holder may be subject to a branch profits
tax at a 30% rate (or such lower rate as provided by an
applicable tax treaty) on its effectively connected earnings and
profits for the taxable year, subject to certain adjustments. A
Non-U.S. Holder
will not be considered to be engaged in a trade or business
within the United States for U.S. federal income tax
purposes solely by reason of holding the notes or the common
stock.
Information
Reporting and Backup Withholding
Under certain circumstances, the Code requires information
reporting annually to the IRS and to each U.S. Holder
and
Non-U.S. Holder
(collectively, a Holder), and backup
withholding with respect to certain payments made on or
with respect to the notes or the common stock. Certain Holders
are exempt from backup withholding, including corporations,
tax-exempt organizations, qualified pension and profit sharing
trusts, and individual retirement accounts that provide a
properly completed IRS
Form W-9.
Backup withholding will apply to a non-exempt U.S. Holder
if such U.S. Holder (1) fails to furnish its Taxpayer
Identification Number, or TIN, which, for an individual would be
his or her Social Security Number, (2) furnishes an
incorrect TIN, (3) is notified by the IRS that it has
failed to properly report payments of interest and dividends, or
(4) under certain circumstances, fails to certify, under
penalties of perjury, that it has furnished a correct TIN and
has not been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments.
A
Non-U.S. Holder
which receives payments made on or with respect to the notes or
the common stock through the U.S. office of a broker, will
not be subject to either IRS reporting requirements or backup
withholding if such
Non-U.S. Holder
provides to the withholding agent either IRS
Form W-8BEN
or W-8IMY,
as applicable, together with all appropriate attachments, signed
under penalties of perjury, identifying the
Non-U.S. Holder
and stating that the
Non-U.S. Holder
is not a U.S. person.
The payment of the proceeds on the disposition of the notes or
the common stock to or through the U.S. office of a broker
generally will be subject to information reporting and backup
withholding unless the Holder provides the certification
described above or otherwise establishes an exemption from such
reporting and withholding requirements.
Backup withholding is not an additional tax. Rather, the
U.S. federal income tax liability of persons subject to
backup withholding will be offset by the amount of tax withheld.
If backup withholding results in an overpayment of
U.S. federal income tax, a refund or credit may be obtained
from the IRS, provided that certain required information is
furnished in a timely manner. Copies of the information returns
reporting such interest and withholding may be made available to
the tax authorities in the country in which a
Non-U.S. Holder
is a resident under the provisions of an applicable income tax
treaty or agreement.
Taxation of the
Companys Shipping Income
In
General
Unless exempt from U.S. federal income taxation under the
rules discussed below, a foreign corporation is subject to
U.S. federal income taxation in respect of any income that
is derived from the use of vessels, from the hiring or leasing
of vessels for use on a time, voyage or bareboat charter basis,
from the participation in a pool, partnership, strategic
alliance, joint operating agreement, code sharing arrangements
or other joint venture it directly or indirectly
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owns or participates in that generates such income, or from the
performance of services directly related to those uses, which we
refer to as shipping income, to the extent that the
shipping income is derived from sources within the United
States. Shipping income includes income derived both from
vessels which are owned by a foreign corporation as well as
those vessels that are chartered in by a foreign corporation.
For these purposes, 50% of shipping income that is attributable
to transportation that begins or ends, but that does not both
begin and end, in the United States constitutes income from
sources within the United States, which we refer to as
U.S.-source
shipping income.
Shipping income attributable to transportation that both begins
and ends in the United States is considered to be 100% from
sources within the United States. We are not permitted by law to
engage in transportation that produces income which is
considered to be 100% from sources within the United States.
Shipping income attributable to transportation exclusively
between
non-U.S. ports
will be considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the
United States will not be subject to any U.S. federal
income tax.
In the absence of exemption from tax under Code
Section 883, our gross
U.S.-source
shipping income would be subject to a 4% tax imposed without
allowance for deductions as described below.
Exemption of
Operating Income from U.S. Federal Income Taxation
Under Code Section 883 and the regulations thereunder, we
will be exempt from U.S. federal income taxation on our
U.S.-source
shipping income if:
(1) we are organized in a foreign country (our
country of organization) that grants an
equivalent exemption to corporations organized in
the United States; and
(2) either
(A) more than 50% of the value of our stock is owned,
directly or indirectly, by individuals who are
residents of our country of organization or of
another foreign country that grants an equivalent
exemption to corporations organized in the
United States, which we refer to as the 50% Ownership
Test, or
(B) our stock is primarily and regularly traded on an
established securities market in our country of
organization, in another country that grants an equivalent
exemption to United States corporations, or in the United
States, which we refer to as the Publicly-Traded
Test.
The Marshall Islands, the jurisdiction where we and our
ship-owning subsidiaries are incorporated, has been formally
recognized by the IRS as a foreign country that grants an
equivalent exemption to United States corporations.
Therefore, we will be exempt from United States federal income
taxation with respect to our U.S. source shipping income if
we satisfy either the 50% Ownership Test or the Publicly-Traded
Test.
Due to the widely-held ownership of our stock, we do not
anticipate being able to satisfy the 50% Ownership Test. Our
ability to satisfy the Publicly-Traded Test is discussed below.
The regulations provide, in pertinent part, that stock of a
foreign corporation will be considered to be primarily
traded on an established securities market if the number
of shares of each class of stock that are traded during any
taxable year on all established securities markets in that
country exceeds the number of shares in each such class that are
traded during that year on established securities markets in any
other single country. Our
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common stock, which is our sole class of our issued and
outstanding stock, is currently primarily traded on
The Nasdaq Global Select Market.
Under the regulations, our stock will be considered to be
regularly traded on an established securities market
if one or more classes of our stock representing more than 50%
of our outstanding shares, by total combined voting power of all
classes of stock entitled to vote and total value, is listed on
the market which we refer to as the listing threshold. Since our
common stock, our sole class of stock, is listed on The Nasdaq
Global Select Market, we will satisfy the listing requirement.
It is further required that with respect to each class of stock
relied upon to meet the listing threshold (i) such class of
the stock is traded on the market, other than in minimal
quantities, on at least 60 days during the taxable year or
1/6
of the days in a short taxable year; and (ii) the aggregate
number of shares of such class of stock traded on such market is
at least 10% of the average number of shares of such class of
stock outstanding during such year or as appropriately adjusted
in the case of a short taxable year. We believe we currently
satisfy and will continue to satisfy the trading frequency and
trading volume tests. Even if this were not the case, the
regulations provide that the trading frequency and trading
volume tests will be deemed satisfied by a class of stock if, as
is the case with our common stock, such class of stock is traded
on an established securities market in the United States and
such class of stock is regularly quoted by dealers making a
market in such stock.
Notwithstanding the foregoing, the regulations provide, in
pertinent part, our common stock will not be considered to be
regularly traded on an established securities market
for any taxable year in which 50% or more of the outstanding
shares of our common stock are owned, actually or constructively
under specified stock attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more
of our common stock, which we refer to as the
5 Percent Override Rule.
For purposes of being able to determine the persons who own 5%
or more of our stock, or 5% Stockholders, the
regulations permit us to rely on Schedule 13G and
Schedule 13D filings with the United States Securities and
Exchange Commission, or the SEC, to identify persons who have a
5% or more beneficial interest in our common stock. The
regulations further provide that an investment company which is
registered under the Investment Company Act of 1940, as amended,
will not be treated as a 5% Stockholder for such purposes.
If 5% Stockholders were to come to own 50% or more of our common
stock, we would be subject to the 5% Override Rule unless we
were able to establish that among the closely-held group of 5%
Stockholders, there are sufficient 5% Stockholders that are
qualified stockholders for purposes of Section 883 to
preclude non-qualified 5% Stockholders in the closely-held group
from owning 50% or more of each class of our stock for more than
half the number of days during the taxable year. In order to be
a qualifying stockholder under section 883, a stockholder
must be a resident of a qualifying foreign country, may not own
its interest in the corporation in the form of bearer shares,
and must comply with certain documentation and reporting
requirements designed to substantiate its identity as a
qualified stockholder. These documentation and reporting
requirements are onerous and we may not be able to satisfy them.
Taxation in
Absence of Exemption
To the extent the benefits of Section 883 are unavailable,
our U.S. source shipping income, to the extent not
considered to be effectively connected with the
conduct of a U.S. trade or business, as described below,
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
U.S. sources, the maximum effective rate of
U.S. federal income tax on our shipping
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income would never exceed 2% (i.e., 50% of 4%) of gross shipping
income under the 4% gross basis tax regime.
To the extent the benefits of the Section 883 exemption are
unavailable and our
U.S.-source
shipping income is considered to be effectively
connected with the conduct of a U.S. trade or
business, as described below, any such effectively
connected
U.S.-source
shipping income, net of applicable deductions, would be subject
to the U.S. federal corporate income tax currently imposed
at rates of up to 35%. In addition, we may be subject to the 30%
branch profits tax 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 its
U.S. trade or business.
Our
U.S.-source
shipping income would be considered effectively
connected with the conduct of a U.S. trade or
business only if:
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We have, or are considered to have, a fixed place of business in
the United States involved in the earning of shipping
income; and
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Substantially all of our
U.S.-source
shipping income is attributable to regularly scheduled
transportation, such as the operation of a tanker 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.
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We do not intend to have, or permit circumstances that would
result in having any tanker operating to the United States on a
regularly scheduled basis. Based on the foregoing and on the
expected mode of our shipping operations and other activities,
we believe that none of our
U.S.-source
shipping income will be effectively connected with
the conduct of a U.S. trade or business.
United States
Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for the benefits of
Section 883, we will not be subject to U.S. federal
income taxation with respect to gain realized on a sale of a
vessel, provided the sale is considered to occur outside of the
United States under U.S. federal income tax principles. In
general, a sale of a vessel will be considered to occur outside
of the United States for this purpose if title to the vessel,
and risk of loss with respect to the vessel, pass to the buyer
outside of the United States. It is expected that any sale of a
vessel by us will be considered to occur outside of the United
States.
U.S. Taxation of
Our Other Income
In addition to our shipping operations, we provide drilling
services to third parties on the U.S. 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
U.S. federal income tax on a net basis on its taxable
income. The amount of such taxable income and such
U.S. federal income tax liability will vary depending upon
the level of Ocean Rig USA LLCs 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 U.S. federal withholding tax at a
30% rate.
Marshall Islands
Tax Considerations
In the opinion of Seward & Kissel LLP, the following
are the material Marshall Islands tax consequences of our
activities to us and U.S. Holders and
Non-U.S. Holders
of the notes and of any of our common stock received upon
conversion of the notes. We are incorporated in the Marshall
Islands. Under current Marshall Islands law, we are not subject
to tax on income or
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capital gains, and no Marshall Islands withholding tax will be
imposed upon payments of dividends or interest by us to our
stock or note holders.
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.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF
U.S. FEDERAL AND MARSHALL ISLANDS INCOME TAXATION THAT MAY
BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES.
YOU ARE ENCOURAGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO YOU OF ACQUIRING, HOLDING,
CONVERTING OR OTHERWISE DISPOSING OF THE NOTES AND
SHARES OF OUR COMMON STOCK.
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UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement, Deutsche Bank Securities Inc. has agreed to purchase
from us $400,000,000 principal amount of notes at the public
offering price less the underwriting discounts and commissions
set forth on the cover page of this prospectus supplement.
The underwriting agreement provides that the obligations of the
underwriter to purchase the notes offered hereby are subject to
certain conditions precedent and that the underwriter will
purchase all of the notes offered by this prospectus supplement
if any of these notes are purchased.
We have been advised by the underwriter that it proposes to
offer the notes to the public at the public offering price set
forth on the cover of this prospectus and to dealers at a price
that represents a concession not in excess of 0.05% of the
principal amount of the notes. After the initial public
offering, the underwriter may change the offering price and
other selling terms.
The underwriter has agreed to reimburse our expenses in
connection with this offering in an amount of up to
$1.4 million. We currently estimate that our share of the
total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1 million.
We have agreed to indemnify the underwriter against some
specified types of liabilities, including liabilities under the
Securities Act, and to contribute to payments the underwriter
may be required to make in respect of any of these liabilities.
We have granted to the underwriter an option, exercisable not
later than 30 days after the date of this prospectus
supplement, to purchase up to $60,000,000 aggregate principal
amount of additional notes at the public offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus supplement. The underwriter may exercise
this option only to cover over-allotments made in connection
with the sale of the notes offered by this prospectus. To the
extent that the underwriter exercises this option, the
underwriter will become obligated, subject to conditions, to
purchase these additional notes. We will be obligated, pursuant
to the option, to sell these additional notes to the underwriter
to the extent the option is exercised. If any additional notes
are purchased, the underwriter will offer the additional notes
on the same terms as those on which the notes are being offered.
The underwriter has advised us that it does not intend to
confirm sales to any account over which it exercises
discretionary authority.
The notes are a new issue of securities with no established
trading market. The notes will not be listed on any securities
exchange or on any automated dealer quotation system. The
underwriter may make a market in the notes after completion of
the offering, but will not be obligated to do so and may
discontinue any market-making activities at any time without
notice. No assurance can be given as to the liquidity of the
trading market for the notes or that an active public market for
the notes will develop. If an active public trading market for
the notes does not develop, the market price and liquidity of
the notes may be adversely affected.
Our common stock is currently listed on The Nasdaq Global Select
Market under the symbol DRYS. We intend to list the shares of
common stock issuable upon conversion of the notes on The Nasdaq
Global Select Market.
We and our Chief Executive Officer have agreed neither we nor he
and his affiliates will offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition
of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of
our common stock or derivatives of our common stock or common
stock issuable upon exercise of options or warrants held by
these persons for a period of 60 days after the date of
this prospectus
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supplement without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without
public notice.
In connection with the offering, the underwriter may purchase
and sell the notes in the open market. These transactions may
include short sales, purchases to cover positions created by
short sales and stabilizing transactions.
Short sales involve the sale by the underwriter of a greater
principal amount of notes than they are required to purchase in
the offering. Covered short sales are sales made in an amount
not greater than the underwriters option to purchase
additional notes from us in the offering. The underwriter may
close out any covered short position by either exercising its
option to purchase additional notes or purchasing notes in the
open market. In determining the source of notes to close out the
covered short position, the underwriter will consider, among
other things, the price of notes available for purchase in the
open market as compared to the price at which they may purchase
notes through the over-allotment option. Naked short sales are
any sales in excess of the over-allotment option. The
underwriter must close out any naked short position by
purchasing notes in the open market. A naked short position is
more likely to be created if the underwriter is concerned that
there may be downward pressure on the price of the notes in the
open market prior to the completion of the offering.
Stabilizing transactions consist of various bids for or
purchases of the notes made by the underwriter in the open
market prior to the completion of the offering.
The underwriter may impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a
portion of the underwriting discount received by it because an
underwriter has repurchased notes sold by or for the account of
that underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or slowing a decline in the
market price of the notes. Additionally, these purchases, along
with the imposition of the penalty bid, may stabilize, maintain
or otherwise affect the market price of the notes. As a result,
the price of the notes may be higher than the price that might
otherwise exist in the open market. These transactions may be
effected in the
over-the-counter
market or otherwise.
A prospectus supplement in electronic format is being made
available on Internet web sites maintained by the underwriter of
this offering. Other than the prospectus supplement in
electronic format, the information on any underwriters web
site and any information contained in any other web site
maintained by an underwriter is not part of the prospectus
supplement or the registration statement of which the related
prospectus forms a part.
Concurrently with this offering, we are offering from time to
time up to an aggregate of 26,100,000 shares of our common
stock by means of a separate prospectus supplement and
accompanying prospectus. These shares of our common stock will
be offered to the public in an offering underwritten by Deutsche
Bank Securities Inc. In addition, we have agreed to loan such
shares of common stock to an affiliate of Deutsche Bank
Securities Inc., which affiliate we refer to as the share
borrower, pursuant to a share lending agreement described
in Description of Share Lending Agreement. An
affiliate of the share borrower has informed us that it intends
to use the short position created by the share loan and the
concurrent short sales of the borrowed shares to facilitate
transactions by which investors in the notes may hedge their
investments. See Description of Share Lending
Agreement. In connection with facilitating those
transactions, such affiliate of the share borrower expects to
receive customary negotiated fees from investors.
Notice to
Prospective Investors in European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), with effect from and including the date on which
the Prospectus Directive is implemented in that Relevant Member
State (the
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Relevant Implementation Date) an offer of the notes to the
public may not be made in that Relevant Member State prior to
the publication of a prospectus in relation to the notes which
has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant
Member State and notified to the competent authority in that
Relevant Member State, all in accordance with the Prospectus
Directive, except that an offer to the public in that Relevant
Member State of any notes may be made at any time under the
following exemptions under the Prospectus Directive if they have
been implemented in the Relevant Member State:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
(c) in any other circumstances falling within
Article 3(2) of the Prospectus Directive;
provided that no such offer of notes shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an
offer to the public in any Relevant Member State
means the communication in any form and by any means of
sufficient information on the terms of the offer and the
securities to be offered so as to enable an investor to decide
to purchase or subscribe the securities, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Notice to
Prospective Investors in United Kingdom
The underwriter acknowledges and agrees that:
(i) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the notes in
circumstances in which Section 21(1) of the FSMA does not
apply to the us; and
(ii) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the notes in, from or otherwise involving the United
Kingdom.
This document is only being distributed to and is only directed
at (i) persons who are outside the United Kingdom or
(ii) to investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(iii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons). The
notes are only available to, and any invitation, offer or
agreement to subscribe, purchase or otherwise acquire such notes
will be engaged in only with, relevant persons. Any person who
is not a relevant person should not act or rely on this document
or any of its contents.
Notice to
Prospective Investors in Switzerland
This document, as well as any other material relating to the
notes which are the subject of the offering contemplated by this
prospectus supplement, does not constitute an issue prospectus
pursuant to Article 652a of the Swiss Code of Obligations.
The notes will not be listed on the
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SWX Swiss Exchange and, therefore, the documents relating to the
notes, including, but not limited to, this document, do not
claim to comply with the disclosure standards of the listing
rules of SWX Swiss Exchange and corresponding prospectus schemes
annexed to the listing rules of the SWX Swiss Exchange. The
notes are being offered in Switzerland by way of a private
placement, i.e., to a small number of selected investors only,
without any public offer and only to investors who do not
purchase the notes with the intention to distribute them to the
public. The investors will be individually approached by us from
time to time. This document, as well as any other material
relating to the notes, is personal and confidential and does not
constitute an offer to any other person. This document may only
be used by those investors to whom it has been handed out in
connection with the offering described herein and may neither
directly nor indirectly be distributed or made available to
other persons without our express consent. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
Notice to
Prospective Investors in France
Neither this prospectus supplement nor any other offering
material relating to the notes described in this prospectus
supplement has been submitted to the clearance procedures of the
Autorité des Marchés Financiers or by the competent
authority of another member state of the European Economic Area
and notified to the Autorité des Marchés Financiers.
The notes have not been offered or sold and will not be offered
or sold, directly or indirectly, to the public in France.
Neither this prospectus supplement nor any other offering
material relating to the notes has been or will be:
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released, issued, distributed or caused to be released, issued
or distributed to the public in France; or
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used in connection with any offer for subscription or sale of
the notes to the public in France.
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Such offers, sales and distributions will be made in France only:
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to qualified investors (investisseurs qualifiés)
and/or to a
restricted circle of investors (cercle restreint
dinvestisseurs), in each case investing for their own
account, all as defined in, and in accordance with,
Article L.411-2,
D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the
French Code monétaire et financier; r
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to investment services providers authorized to engage in
portfolio management on behalf of third parties; or
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in a transaction that, in accordance with article
L.411-2-II-1°-or-2°-or 3° of the French Code
monétaire et financier and
article 211-2
of the General Regulations (Règlement
Général) of the Autorité des Marchés
Financiers, does not constitute a public offer (appel public
à lépargne).
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The notes may be resold directly or indirectly, only in
compliance with
Articles L.411-1,
L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
Code monétaire et financier.
Other
Relationships
The underwriter and its affiliates may have provided in the past
and may in the future provide, various investment banking,
commercial banking and other financial services for us for which
they have received and may continue to receive customary fees.
In particular, affiliates of Deutsche Bank Securities Inc. are
lenders under certain of our credit facilities.
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LEGAL
MATTERS
Certain legal matters in connection with the sale of the notes
offered hereby are being passed upon for us by
Seward & Kissel LLP, New York, New York. The
underwriter is being represented by Morgan, Lewis &
Bockius LLP, New York, New York. The underwriters special
counsel is Cleary Gottlieb Steen & Hamilton LLP.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The consolidated financial statements of DryShips Inc. and its
subsidiaries (the Company), except Ocean Rig ASA and
subsidiaries, prior to the allocation of the Companys
purchase price to Ocean Rig ASA and subsidiaries net
assets, as of December 31, 2008 and 2007, and for each of
the two years ended December 31, 2008, the related
financial statement schedule, and the effectiveness of DryShips
Inc. internal control over financial reporting as of
December 31, 2008, all included in the DryShips Inc. Annual
Report on
Form 20-F/A
for the year ended December 31, 2008 (the Annual
Report) have been audited by Deloitte. Hadjipavlou
Sofianos & Cambanis S.A., an independent registered
public accounting firm as stated in their reports (which reports
(1) express an unqualified opinion on the consolidated
financial statements and financial statement schedule and
includes an explanatory paragraph regarding substantial doubt
about the Companys ability to continue as a going concern
and the Companys change in accounting for dry-docking
costs during 2008 and (2) express an unqualified opinion on
the effectiveness of internal control over financial reporting)
appearing in the Annual Report.
The Financial Statements of Ocean Rig prior to allocation of the
Companys purchase price to Ocean Rig ASA for the year
ended December 31, 2008 were audited by Ernst &
Young AS, an independent registered public accounting firm, as
stated in their report appearing in the Annual Report. Such
financial statements of the Company are incorporated herein by
reference in reliance upon the respective reports of such firms
given upon their authority as experts in accounting and auditing.
The consolidated financial statements and schedule of DryShips
Inc. for the year ended December 31, 2006, incorporated in
this prospectus by reference from our Annual Report on
Form 20-F/A
for the year ended December 31, 2008 filed with the SEC on
April 3, 2009 have been audited by Ernst & Young
(Hellas) Certified Auditors Accountants S.A., as stated in their
report appearing therein. Such financial statements are
incorporated herein by reference in reliance upon the respective
reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
As required by the Securities Act of 1933, we filed a
registration statement relating to the securities offered by
this prospectus supplement and its accompanying prospectus with
the Commission. This prospectus supplement and prospectus are a
part of that registration statement, which includes additional
information.
Government
Filings
We file annual and special reports within the Commission. You
may read and copy any document that we file at the public
reference facilities maintained by the Commission at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling 1
(800) SEC-0330, and you may obtain copies at prescribed
rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. 20549. The Commission
maintains a website
(http://www.sec.gov)
that
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contains reports, proxy and information statements and other
information regarding registrants that file electronically with
the Commission.
Information
Incorporated by Reference
The SEC allows us to incorporate by reference
information that we file with it. This means that we can
disclose important information to you by referring you to those
filed documents. The information incorporated by reference is
considered to be a part of this prospectus supplement and
accompanying prospectus, and information that we file later with
the SEC prior to the termination of this offering will also be
considered to be part of this prospectus supplement and
prospectus and will automatically update and supersede
previously filed information, including information contained in
this document.
We incorporate by reference in this prospectus supplement the
following documents filed with the SEC pursuant to the
Securities Exchange Act of 1934, as amended (the Exchange
Act):
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Annual Report on
Form 20-F
for the year ended December 31, 2008, filed with the SEC on
March 30, 2009, and as amended on April 3, 2009, which
contains audited consolidated financial statements for the most
recent fiscal year for which those statements have been
filed; and
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Our reports on
Form 6-K
filed with the SEC on May 6, 2009, July 14, 2009,
August 3, 2009, October 28, 2009 and November 19,
2009.
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We are also incorporating by reference all subsequent annual
reports on
Form 20-F
that we file with the Commission and certain Reports on
Form 6-K
that we furnish to the Commission after the date of this
prospectus supplement (if they state that they are incorporated
by reference into this prospectus supplement or prospectus)
until we file a post-effective amendment indicating that the
offering of the securities made by this prospectus supplement
has been terminated. In all cases, you should rely on the later
information over different information included in this
prospectus supplement or the prospectus.
You should rely only on the information contained or
incorporated by reference in this prospectus and any
accompanying prospectus supplement. We have not, and any
underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriter is not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information
appearing in this prospectus and any accompanying prospectus
supplement as well as the information we previously filed with
the Commission and incorporated by reference, is accurate as of
the dates on the front cover of those documents only. Our
business, financial condition and results of operations and
prospects may have changed since those dates.
You may read and copy any document we file with the SEC at the
SEC public reference room located at:
100 F Street,
N.E.
Room 1580
Washington, D.C. 20549
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room and its
copy charges. Our SEC filings are also available to the public
on the SECs web site at
http://www.sec.gov
and through The Nasdaq Global Select Market, 1 Liberty Plaza,
New York, New York 10006, on which our common shares are traded.
The information contained in or accessible from the SECs
website is not part of this prospectus supplement.
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You may obtain a copy of above mentioned filing or any
subsequent filing we incorporated by reference to this
prospectus by writing or telephoning us at the following address:
DryShips Inc.
80 Kifissias Avenue,
Amaroussion 15125,
Athens, Greece
Attention: George Economou
Telephone: (011) (30) (210) 809 0570
Information
Provided by the Company
We will furnish holders of our common stock with annual reports
containing audited financial statements and a report by our
independent registered public accounting firm. The audited
financial statements will be prepared in accordance with
U.S. generally accepted accounting principles. As a
foreign private issuer, we are exempt from the rules
under the Securities Exchange Act prescribing the furnishing and
content of proxy statements to shareholders. While we furnish
proxy statements to shareholders in accordance with the rules of
The Nasdaq Global Select Market, those proxy statements do not
conform to Schedule 14A of the proxy rules promulgated
under the Securities Exchange Act. In addition, as a
foreign private issuer, our officers and directors
are exempt from the rules under the Securities Exchange Act
relating to short swing profit reporting and liability.
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Prospectus
DRYSHIPS
INC.
Through this prospectus, we or any selling shareholder may
periodically offer:
our common stock (including preferred share purchase rights),
our preferred shares,
our debt securities, which may be guaranteed by one or more of
our subsidiaries,
our warrants,
our purchase contracts, and
our units.
The prices and terms of the securities that we or any selling
shareholder will offer will be determined at the time of their
offering and will be described in a supplement to this
prospectus. We will not receive any of the proceeds from the
sale of securities by any selling shareholder.
Our common stock is currently listed on the Nasdaq Global Market
under the symbol DRYS.
The securities issued under this prospectus may be offered
directly or through underwriters, agents or dealers. The names
of any underwriters, agents or dealers will be included in a
supplement to this prospectus.
An investment in these securities involves risks. See the
section entitled Risk Factors beginning on
page 19 of this prospectus, and other risk factors
contained in the applicable prospectus supplement and in the
documents incorporated by reference herein and therein.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is October 17, 2008
TABLE OF
CONTENTS
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Page
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PROSPECTUS SUMMARY
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1
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RISK FACTORS
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19
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
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35
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RATIO OF EARNINGS TO FIXED CHARGES
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36
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CAPITALIZATION
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37
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PLAN OF DISTRIBUTION
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38
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ENFORCEMENT OF CIVIL LIABILITIES
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40
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DESCRIPTION OF CAPITAL STOCK
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41
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DESCRIPTION OF PREFERRED SHARES
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46
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DESCRIPTION OF WARRANTS
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47
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DESCRIPTION OF DEBT SECURITIES
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47
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DESCRIPTION OF PURCHASE CONTRACTS
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57
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DESCRIPTION OF UNITS
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57
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EXPENSES
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58
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LEGAL MATTERS
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EXPERTS
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58
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
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58
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i
We prepare our financial statements, including all of the
financial statements included or incorporated by reference in
this prospectus, in U.S. dollars and in conformity with
U.S. generally accepted accounting principles , or
U.S. GAAP. We have a fiscal year end of
December 31.
This prospectus is part of a registration statement we filed
with the Securities and Exchange Commission, or the Commission,
using a shelf registration process. Under the shelf registration
process, we or any selling shareholder may sell the common stock
(including preferred share purchase rights), preferred shares,
debt securities (and related guarantees), warrants, purchase
contracts and units described in this prospectus in one or more
offerings. This prospectus provides you with a general
description of the securities we or any selling shareholder may
offer. Each time we or a selling shareholder offer securities,
we will provide you with a prospectus supplement that will
describe the specific amounts, prices and terms of the offered
securities. We may file a prospectus supplement in the future
that may also add, update or change the information contained in
this prospectus. You should read carefully both this prospectus
and any prospectus supplement, together with the additional
information described below.
This prospectus does not contain all the information provided in
the registration statement we filed with the Commission. For
further information about us or the securities offered hereby,
you should refer to that registration statement, which you can
obtain from the Commission as described below under Where
You Can Find More Information.
ii
This section summarizes some of the information that is
contained later in this prospectus or in other documents
incorporated by reference into this prospectus. As an investor
or prospective investor, you should review carefully the risk
factors and the more detailed information that appears later in
this prospectus or is contained in the documents that we
incorporate by reference into this prospectus.
PROSPECTUS
SUMMARY
Unless the context otherwise requires, as used in this
prospectus, 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 October 17, 2008, we own, through our
subsidiaries, a fleet of 49 drybulk carriers comprised of 7
Capesize, 30 Panamax, 2 Supramax, and 10 newbuilding drybulk
vessels, which have a combined deadweight tonnage of
approximately 4.7 dwt. We have agreed to acquire an additional
nine Capesize drybulk vessels, five of which are newbuildings,
which will result in an additional deadweight tonnage of
approximately 1.6 million dwt. Since our inception in 2004,
we have increased the size and carrying capacity of our drybulk
fleet from six vessels and approximately 514,890 dwt to
58 vessels of approximately 6.3 million dwt, inclusive
of the nine Capesize vessels, five of which are newbuildings, we
have agreed to acquire. 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 7.8 years.
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 have entered into a share purchase agreement
with related parties to acquire two additional newbuilding
ultra-deep water drillships, identified as Hull 1837 and 1838,
in exchange for shares of our subsidiary Primelead Shareholders.
See below under Recent DevelopmentsAcquisition of
DrillShips Holdings Inc. and Spin Off of
Primelead.
We employ our vessels under period time charters, in the spot
charter market and in drybulk carrier pools. Two of the Panamax
drybulk carriers in our fleet are 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. Thirty of our vessels are
currently on time charter.
All of our drybulk carriers are managed by Cardiff Marine Inc.,
or Cardiff, under separate ship management agreements.
Mr. 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
1
responsible for all technical and commercial management
functions of our drybulk fleet. We believe that Cardiff has
established a reputation in the international drybulk 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. Economous sister, who is also a
member of our board of directors. For information on management
with respect to our offshore drilling operations, please see
Management of Our Offshore Drilling Operations.
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. Cardiffs 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 Organizations, 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.
Our
Fleet
As of October 17, 2008, our fleet is comprised of the
following vessels:
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|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Current
|
|
Rate
|
|
Redelivery
|
|
|
Built
|
|
DWT
|
|
Type
|
|
Employment
|
|
per Day
|
|
Earliest
|
|
Latest
|
|
Capesize:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alameda
|
|
2001
|
|
170,269
|
|
Capesize
|
|
T/C*
|
|
$41,982
|
|
Feb-2009
|
|
Apr-2009
|
Brisbane
|
|
1995
|
|
151,066
|
|
Capesize
|
|
T/C
|
|
$57,000
|
|
Dec-2011
|
|
Apr-2012
|
Capri
|
|
2001
|
|
172,579
|
|
Capesize
|
|
T/C
|
|
$61,000
|
|
Apr-2018
|
|
Jun-2018
|
Flecha
|
|
2004
|
|
170,012
|
|
Capesize
|
|
T/C
|
|
$55,000
|
|
Jul-2018
|
|
Nov-2018
|
Manasota
|
|
2004
|
|
171,061
|
|
Capesize
|
|
T/C
|
|
$67,000
|
|
Feb-2013
|
|
Apr-2013
|
Mystic
|
|
2008
|
|
170,500
|
|
Capesize
|
|
T/C
|
|
$52,310
|
|
Aug-2018
|
|
Dec-2018
|
Samsara
|
|
1996
|
|
150,393
|
|
Capesize
|
|
T/C
|
|
$139,000
|
|
Oct-2008
|
|
Dec-2008
|
|
|
Next
|
|
Employment
|
|
|
|
|
|
$57,000
|
|
Dec-2011
|
|
Apr-2012
|
Capesize We Have Agreed to Acquire:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fernantina
|
|
2006
|
|
174,315
|
|
Capesize
|
|
T/C*
|
|
$41,159
|
|
Apr-2014
|
|
Jun-2014
|
Morgiana
|
|
1998
|
|
186,001
|
|
Capesize
|
|
T/C**
|
|
$67,500
|
|
Oct-2012
|
|
Dec-2012
|
Pompano
|
|
2006
|
|
174,219
|
|
Capesize
|
|
T/C*
|
|
$41,159
|
|
Mar-2014
|
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May-2014
|
Ventura
|
|
2006
|
|
174,315
|
|
Capesize
|
|
T/C*
|
|
$41,159
|
|
Apr-2014
|
|
Jun-2014
|
|
|
6.6 years
|
|
1,864,730
|
|
11
|
|
|
|
|
|
|
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Panamax:
|
|
|
|
|
|
|
|
|
|
|
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|
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Avoca
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|
2004
|
|
76,500
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|
Panamax
|
|
Spot
|
|
$60,000
|
|
Prompt
|
|
Prompt
|
|
|
Next
|
|
Employment
|
|
|
|
T/C
|
|
$45,500
|
|
Sep-2013
|
|
Dec-2013
|
Bargara
|
|
2002
|
|
74,832
|
|
Panamax
|
|
T/C
|
|
$43,750
|
|
May-2012
|
|
Jul-2012
|
Capitola
|
|
2001
|
|
74,832
|
|
Panamax
|
|
T/C
|
|
$39,500
|
|
Jun-2013
|
|
Aug-2013
|
Catalina
|
|
2005
|
|
74,432
|
|
Panamax
|
|
T/C
|
|
$40,000
|
|
Jun-2013
|
|
Aug-2013
|
Conquistador
|
|
2001
|
|
75,607
|
|
Panamax
|
|
Spot
|
|
$37,500
|
|
Prompt
|
|
Prompt
|
Coronado
|
|
2000
|
|
75,706
|
|
Panamax
|
|
T/C
|
|
$81,750
|
|
Sep-2008
|
|
Oct-2008
|
|
|
Next
|
|
Employment
|
|
|
|
Spot
|
|
$8,000
|
|
Prompt
|
|
Prompt
|
Ecola
|
|
2001
|
|
73,931
|
|
Panamax
|
|
T/C
|
|
$43,500
|
|
Jun-2012
|
|
Aug-2012
|
Heinrich Oldendorff
|
|
2001
|
|
73,931
|
|
Panamax
|
|
BB
|
|
$20,633
|
|
Mar-2009
|
|
Jun-2009
|
Iguana
|
|
1996
|
|
70,349
|
|
Panamax
|
|
T/C
|
|
$77,000
|
|
Oct-2008
|
|
Nov-2008
|
|
|
Next
|
|
Employment
|
|
|
|
Spot
|
|
$16,500
|
|
Prompt
|
|
Prompt
|
La Jolla
|
|
1997
|
|
72,126
|
|
Panamax
|
|
Spot
|
|
$26,000
|
|
Prompt
|
|
Prompt
|
|
|
Next
|
|
Employment
|
|
|
|
Spot
|
|
$16,500
|
|
Prompt
|
|
Prompt
|
Lacerta
|
|
1994
|
|
71,862
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|
Panamax
|
|
Spot
|
|
$10,000
|
|
Prompt
|
|
Prompt
|
Ligari
|
|
2004
|
|
75,583
|
|
Panamax
|
|
T/C
|
|
$55,500
|
|
Jun-2012
|
|
Aug-2012
|
Maganari
|
|
2001
|
|
75,941
|
|
Panamax
|
|
Spot
|
|
$40,000
|
|
Prompt
|
|
Prompt
|
Majorca
|
|
2005
|
|
74,364
|
|
Panamax
|
|
T/C
|
|
$43,750
|
|
Jun-2012
|
|
Aug-2012
|
Marbella
|
|
2000
|
|
72,561
|
|
Panamax
|
|
T/C
|
|
$82,500
|
|
Oct-2008
|
|
Nov-2008
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Current
|
|
Rate
|
|
Redelivery
|
|
|
Built
|
|
DWT
|
|
Type
|
|
Employment
|
|
per Day
|
|
Earliest
|
|
Latest
|
|
Mendocino
|
|
2002
|
|
76,623
|
|
Panamax
|
|
T/C
|
|
$56,500
|
|
Jun-2012
|
|
Sep-2012
|
Ocean Crystal
|
|
1999
|
|
73,688
|
|
Panamax
|
|
Spot
|
|
$69,000
|
|
Prompt
|
|
Prompt
|
Oregon
|
|
2002
|
|
74,204
|
|
Panamax
|
|
Spot
|
|
$16,000
|
|
Prompt
|
|
Prompt
|
Padre
|
|
2004
|
|
73,601
|
|
Panamax
|
|
T/C
|
|
$81,000
|
|
Oct-2008
|
|
Nov-2008
|
|
|
Next
|
|
Employment
|
|
|
|
|
|
$46,500
|
|
Sept-2012
|
|
Dec-2012
|
Paragon
|
|
1995
|
|
71,259
|
|
Panamax
|
|
Spot
|
|
$33,000
|
|
Prompt
|
|
Prompt
|
Positano
|
|
2000
|
|
73,288
|
|
Panamax
|
|
Spot
|
|
$28,000
|
|
Prompt
|
|
Prompt
|
|
|
Next
|
|
Employment
|
|
|
|
|
|
$42,500
|
|
Sept-2013
|
|
Dec-2013
|
Primera
|
|
1998
|
|
72,495
|
|
Panamax
|
|
T/C
|
|
$78,600
|
|
Sep-2008
|
|
Oct-2008
|
Redondo
|
|
2000
|
|
74,716
|
|
Panamax
|
|
T/C
|
|
$34,500
|
|
Apr-2013
|
|
Jun-2013
|
Saldanha
|
|
2004
|
|
75,500
|
|
Panamax
|
|
T/C
|
|
$52,500
|
|
Jun-2012
|
|
Sep-2012
|
Samatan
|
|
2001
|
|
74,823
|
|
Panamax
|
|
T/C
|
|
$39,500
|
|
May-2013
|
|
Jul-2013
|
Sonoma
|
|
2001
|
|
74,786
|
|
Panamax
|
|
Baumarine
|
|
$42,355
|
|
|
|
|
Sorrento
|
|
2004
|
|
76,633
|
|
Panamax
|
|
Spot
|
|
$39,500
|
|
Prompt
|
|
Prompt
|
Tonga
|
|
1984
|
|
66,798
|
|
Panamax
|
|
Spot
|
|
$58,500
|
|
Prompt
|
|
Prompt
|
Toro
|
|
1995
|
|
73,034
|
|
Panamax
|
|
Baumarine
|
|
$40,314
|
|
|
|
|
Xanadu
|
|
1999
|
|
72,270
|
|
Panamax
|
|
T/C
|
|
$39,750
|
|
Jul-2013
|
|
Sep-2013
|
|
|
8.9 years
|
|
2,216,275
|
|
30
|
|
|
|
|
|
|
|
|
Supramax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clipper Gemini
|
|
2003
|
|
51,201
|
|
Supramax
|
|
BB
|
|
$27,000
|
|
Nov-2008
|
|
Jan-2009
|
VOC Galaxy
|
|
2002
|
|
51,201
|
|
Supramax
|
|
BB
|
|
$27,000
|
|
Sept-2008
|
|
Sept-2008
|
|
|
Next
|
|
Employment
|
|
|
|
|
|
$20,250
|
|
Sept-2010
|
|
Feb-2011
|
|
|
6.5 years
|
|
102,402
|
|
2
|
|
|
|
|
|
|
|
|
N/B Vessels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1128
|
|
2008
|
|
177,000
|
|
Capesize
|
|
T/C
|
|
$60,000
|
|
|
|
|
N/B-Hull No: 0002
|
|
2009
|
|
180,000
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 2089
|
|
2009
|
|
180,000
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 0003
|
|
2010
|
|
180,000
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: SS058
|
|
2010
|
|
82,100
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: SS059
|
|
2010
|
|
82,100
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1518A
|
|
2009
|
|
75,000
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1519A
|
|
2010
|
|
75,000
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1568
|
|
2008
|
|
75,000
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1569
|
|
2009
|
|
75,000
|
|
Panamax
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B Vessels We Have Agreed to Acquire:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1106
|
|
2009
|
|
177,926
|
|
Capesize
|
|
T/C
|
|
$56,000
|
|
|
|
|
N/B-Hull No: 1119
|
|
2010
|
|
177,926
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1129
|
|
2009
|
|
177,926
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1154
|
|
2009
|
|
177,926
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
N/B-Hull No: 1155
|
|
2009
|
|
177,926
|
|
Capesize
|
|
Spot
|
|
|
|
N/A
|
|
|
|
|
|
|
2,070,830
|
|
15
|
|
|
|
|
|
|
|
|
Totals
|
|
7.82 years
|
|
6,254,237
|
|
58
|
|
|
|
|
|
|
|
|
Rig:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leiv Eiriksson
|
|
2001
|
|
Fifth-generation semi-submersible drilling unit
|
|
|
|
Contract with Shell U.K. Limited, A/S Norske Shell and Shell
E&P Ireland Limited for a Two-Year Term at day rates
ranging between $475,000 and $510,000
|
Eirik Raude
|
|
2002
|
|
Fifth-generation semi-submersible drilling unit
|
|
|
|
Contract with Tullow Oil PLC for a Three-Year Term at a dayrates
of $635,000
|
N/B Drillships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1865
|
|
Q3 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1866
|
|
Q3 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B Drillships We Agreed to Acquire:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1837
|
|
Q4 2010
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
N/B-Hull No: 1838
|
|
Q1 2011
|
|
|
|
UDW Drillship
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Linked to the Baltic Index
|
|
**
|
|
Staggered at a gross daily rate of
$122,500, $95,000, $55,000, $35,000 and $30,000 for years one
through five respectively.
|
3
|
|
|
(1)
|
|
For vessels trading in the spot
market, the TCE rate is for the current voyage.
|
|
(2)
|
|
For vessels trading in the
Baumarine pool the TCE rate is the Pools estimate for
earnings in the month of September.
|
|
(3)
|
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For vessels trading in the spot
market or in 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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(4)
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The MV Heinrich Oldendorff,
MV Clipper Gemini and MV VOC Galaxy are employed
under a bareboat charter.
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Our Drybulk
Shipping Business Strategy
We focus our business strategy on providing reliable seaborne
transportation services for drybulk cargoes at a competitive
cost. We believe we can achieve our business objectives and
increase shareholder value through our business strategy. The
elements of our business strategy consist of:
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Fleet Expansion Through Second Hand and Newbuilding Vessel
Acquisitions. We intend to grow our fleet through
timely and selective acquisitions of drybulk carriers. We will
seek to identify potential second hand and newbuilding vessel
acquisition candidates among all size categories of drybulk
carriers in order to gain a worldwide presence in the drybulk
carrier market with a fleet capable of servicing virtually all
major ports and routes used for the seaborne transportation of
key commodities and raw materials. We expect to maintain an
average fleet age of less than 10 years.
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Focused Fleet Profile. We intend to maintain a
focused fleet profile that is comprised of drybulk carriers in
the larger size categories: Capesize, Panamax, and Supramax. We
believe that larger drybulk carriers, such as Capesize, Panamax
and Supramax vessels, offer greater potential compared to
smaller vessels such as Handysize and Handymax vessels. Our
Capesize, Panamax and Supramax vessels transport predominantly
coal and iron ore for energy and steel production as well as
grain and steel products, fertilizers, minerals, forest
products, ores, bauxite, alumina, cement and other construction
materials. These raw materials and products are used as
production inputs in a number of industries. Our vessels are
able to trade worldwide in a multitude of trade routes carrying
a wide range of cargoes for a number of industries. We transport
these various cargoes on several geographical routes thereby
reducing our dependency on any one cargo, trade route or
industry and maximizing fleet utilization.
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Combined Fleet Employment. As we expand our
fleet of drybulk carriers, we will actively and strategically
employ our fleet between fixed employment contracts, including
time or bareboat charters, which can last up to several years,
and spot charters, which generally last for periods of ten days
to four months. We will also continue to participate in drybulk
carrier pools. Drybulk carriers operating on fixed employment
contracts provide more predictable cash flows, while drybulk
carriers operating in the spot market may generate increased or
decreased profit margins during periods of improvement or
deterioration in freight (or charter) rates. We may also enter
into freight forward agreements in order to hedge our exposure
to market volatility.
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Our Offshore
Drilling Units
Through our acquisition of Ocean Rig, we own and operate two
ultra-deep water, harsh environment, semi-submersible drilling
rigs, the Leiv Eiriksson and the Eirik Raude.
The Leiv Eiriksson is currently operating under a
two-year contract 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
4
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 $511,000 applies while the rig is
operating in Norwegian waters.
During 2008, the Eirik Raude operated under a two-year
contract with a subsidiary of ExxonMobil Corporation, which we
refer to as the ExxonMobil contract. On July 25, 2008, the
Eirik Raude contract with ExxonMobil expired; however, we
were obligated to complete the well that was in progress. In
October 2008, we expect to commence with a contract entered in
February 2008 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, which we refer to as the Tullow Oil contract. The
Tullow Oil contract may be extended for one or two additional
years if Tullow Oil exercises such option by December 31,
2008. Following mobilization of the Eirik Raude to Ghana,
we expect to commence drilling in December 2008.
In April 2008, our wholly-owned subsidiary, Drillships
Investment Inc., or Drillships Investment, exercised its option
to acquire two advanced capability drillships for use in
ultra-deepwater drilling locations, identified as Hull 1865 and
Hull 1866, for an expected cost of approximately
$800 million per unit. The drillships will be constructed
by Samsung Heavy Industries Co. Ltd., or Samsung Heavy
Industries, located in Korea and are expected to be delivered
from the shipyard in the third quarter of 2011. As of
June 30, 2008, Drillships Investment paid a total of
$198.3 million as installment payments for both hulls.
Our wholly-owned subsidiary, Primelead Shareholders Inc., or
Primelead, entered into a share purchase agreement to acquire
the equity interests of DrillShips Holdings Inc., or DrillShips
Holdings, which owns two newbuilding advanced capability
drillships for use in ultra-deep water drilling locations,
identified as Hull 1837 and Hull 1838, and is controlled by
clients of Cardiff, including Mr. George Economou. See
Recent DevelopmentsIntended Acquisition of
DrillShips Holdings Inc.
Recent
Developments
Financing
Arrangements Relating to Newbuilding Vessels and Newbuilding
Drillships
We have agreements to acquire 6 newbuilding Panamax vessels and
9 newbuilding Capesize vessels (including the 5 newbuildings
described below) for delivery between 2008 and 2010. As of
October 17, 2008, the remaining installment payment
obligations to the shipyards for the Panamax and Capesize
newbuildings total $605.5 million due, with
$323.0 million due within the next twelve months and
$282.5 million due thereafter. In addition, installment
payments in respect of the four newbuilding drillships described
below total $2,238.9 million, with $226.9 million due
within the next twelve months and $2,010.0 million due
thereafter. We have not yet obtained financing for the third and
subsequent pre-delivery installment payments for Hulls 1837 and
1838, which payments amount to 70% of the purchase price of the
drillships.
Disposal of
Vessels
The Memorandum of Agreement for the vessel Primera entered into
on May 19, 2008 for $75 million was subsequently
cancelled on October 15, 2008 and the deposit of
$9 million was returned to the Company.
Financing
Arrangements by Ocean Rig
On September 17, 2008, the Companys subsidiary, Ocean
Rig, entered into a new five-year secured credit facility for
the amount of $1,040 million in order to refinance Ocean
Rigs existing loan indebtedness and for general corporate
purposes. On September 30, 2008, Ocean Rig drew down
$750,000 of the new credit facility, of which $52,500 was
repayable in the short term. The drawdown proceeds were used to
repay all other Ocean Rig outstanding debt at the
5
date of the drawdown amounting to $776,000 including the
$250,000 loan discussed above. The credit facility consists of a
guarantee facility, three revolving credit facilities and a term
loan. The aggregate amount of the term loan is up to $400,000
and the aggregate amount under the revolving credit facility A
is up to $350,000, the aggregate amount under the revolving
credit facility B is up to $250,000, the aggregate amount under
the revolving credit facility C is up to $20,000, and the
guarantee facility provides us with a letter of credit of up to
$20,000. The undrawn amounts under credit facility A will be
reduced by $17,500 on December 17, 2008 and quarterly
thereafter until September 17, 2013, which is
60 months after the date of the agreement. The loan bears
interest at Libor plus a margin and is repayable in twenty
quarterly installments plus a balloon payment of $400,000
payable together with the last installment, on September 2013.
Acquisition of
Nine Capesize Vessels
In October 2008, we entered into agreements to purchase the
equity interests of single purpose companies owning nine
Capesize drybulk carriers, including five newbuildings, with a
total carrying capacity of 1.6 million dwt and an average
age of approximately two years, from entities controlled by
clients of Cardiff, including Mr. George Economou. We
expect the five newbuildings to be delivered in 2009 and 2010.
Pursuant to these agreements, we will issue
19,431,840 shares of our common stock to the sellers of the
single purpose companies in exchange for the shares of these
companies. We will also assume $217.7 million of existing
debt and $262.0 million in remaining shipyard installments
related to these vessels, which will be financed by existing
credit facilities except for $16 million which will be
funded by our working capital.
All nine vessels are subject to existing financing arrangements.
In accordance with the terms of the agreements, on the initial
closing date, the sellers will transfer to us all of the
economic benefits and obligations arising from ownership of the
vessels. Specifically, for the four existing vessels, upon the
initial closing date, the seller will cause all charter hire
received in respect of such vessel to be credited to the account
of the vessel owning company and applied to pay the
vessels operating expenses and other liabilities with the
surplus, if any, to be distributed to the buyer on request as
permitted by the existing loan and security documents related to
such vessel. On the final closing date, the sellers will
transfer to us the shares of the vessel owning companies
following receipt of the consent from the applicable lenders
with respect to the transfer of such shares. The purchase price
in exchange for shares of each vessel owning company is subject
to adjustment where the amount of outstanding indebtedness
assumed per vessel on the initial closing date is less than the
amount outstanding on the date of the share purchase agreement,
such that the difference is payable in cash or in additional
common shares at the option of the sellers.
Pending the final closing, the common shares issued to the
sellers in respect of the purchase price of the vessels will be
held in escrow but the sellers will have the right to vote such
shares and to receive dividends. The common shares will be
issued to the sellers in transactions exempt from the
registration requirements of the Securities Act of 1933. The
newly issued shares will not be freely transferable under the
federal securities laws.
Following the issuance the 19,431,840 common shares to the
sellers of the nine Capesize vessels, our total number of shares
outstanding will be 62,981,840.
Acquisition of
DrillShips Holdings Inc.
Our wholly-owned subsidiary, Primelead, 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-deep water drilling locations,
identified as Hull 1837 and Hull 1838, and is controlled by
clients of Cardiff, including Mr. George Economou. The
6
drillships are to be constructed by Samsung Heavy Industries and
are expected to be delivered from the shipyard in the fourth
quarter of 2010 and the first quarter of 2011, respectively. The
drillships are sister vessels to the two drillships ordered by
us earlier in the year at Samsung Heavy Industries and which are
expected to be delivered in the third quarter of 2011.
The consideration payable to the sellers for these two
ultra-deep water drillships will be in the form of newly issued
shares of Primelead. The number of shares to be received by the
sellers will be equal to 25% of all the then issued and
outstanding shares of Primelead common stock. We refer to the
issuance of common shares of Primelead Shareholders to the
sellers of DrillShips Holdings as the DrillShips Holdings
Transaction. Upon the Spin Off (as described below), Primelead
will assume approximately $252.3 million of existing debt
and approximately $1,085.5 million in remaining shipyard
installments relating to these drillships.
Spin-Off of
Primelead
We intend to enter into a share purchase agreement with
Primelead whereby we will transfer the shares of our subsidiary,
DrillShips Investments, which, as discussed above, exercised its
option to purchase two newbuilding ultra-deepwater drillships
identified as Hull 1865 and Hull 1866 which are expected to
be delivered from the shipyard in the third quarter of 2011, in
exchange for shares of Primelead. We refer to this transaction
as the DrillShips Investment Transaction. After the closing of
the DrillShips Investment Transaction and the DrillShips
Holdings Transaction, we will own 75% of all the then issued and
outstanding shares of Primelead common stock.
Our board of directors has determined that, following the
closing of the DrillShips Holdings Transaction and the
DrillShips Investment Transaction and the effectiveness of the
registration of Primeleads common stock and depending on
market conditions, we will spin-off Primelead to our
shareholders by means of a distribution to our shareholders of
one share of Primelead for each of our outstanding common
shares, or the Spin Off. Following the Spin Off, interests
connected with Mr. Economou are expected to hold 25% of
Primeleads common shares.
After completion of the Spin Off, Primelead will own, through
its subsidiaries, four newbuilding contracts for ultra-deepwater
drillships and two ultra-deep water, harsh environment,
semi-submersible drilling rigs. The purpose of the Spin Off is
to provide a separate management and operating structure for our
offshore drilling rig segment, which we believe will maximize
the value of Primeleads drilling rigs and provide
Primelead with access to financing in order to further develop
its drilling operations. Primelead intends to apply to have its
common stock listed for trading on the Nasdaq Global Market.
Recent
Developments in the International Drybulk Shipping
Industry
We currently employ fourteen of our vessels in the spot market.
Their charters will expire over the next two months. Vessels
trading in the spot market are exposed to increased risk of
declining charter rates and freight rate volatility compared to
vessels employed on time charters. Since mid-August 2008, the
spot day rates in the drybulk charter market have declined very
significantly, and drybulk vessel values have also declined both
as a result of a slowdown in the availability of global credit
and the significant deterioration in charter rates. Charter
rates and vessel values have been affected in part by the lack
of availability of credit to finance both vessel purchases and
purchases of commodities carried by sea, resulting in a decline
in cargo shipments, and the excess supply of iron ore in China
which resulted in falling iron ore prices and increased
stockpiles in Chinese ports. There can be no assurance as to how
long charter rates and vessel values will remain at their
currently low levels or whether they will improve to any
significant degree. Charter rates may remain at depressed levels
for some time which will adversely affect our revenue and
profitability.
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In August 2008, Capesize rates averaged $100,000/day, while
rates fell to approximately $20,000 per day in October 2008. We
believe that the root cause of the fall has been a sharp
slowdown in Chinese steel demand and prices leading to reduced
demand for iron ore. Iron ore price negotiations between
Companhia Vale do Rio Doce and Chinese steel mills in the third
and fourth quarter of 2008 resulted in 15 Chinese mills turning
to domestic mining companies for iron ore.
Chinese iron ore demand is a significant driver for the drybulk
charter rates. Out of a total iron ore market in China of around
800 million tons this year, around 350 million tons is
sourced from domestic Chinese mines and around 450 million
tons are imported. Demand for iron ore is in turn affected by
steel prices and global steel production which also affects
another steelmaking feedstock, coking coal, which is in short
supply arising from mining capacity and infrastructure
constraints. In August 2008, Chinas steelmakers produced a
total of 42.6 million tons, which is a decrease of about
4 million tons, or over 8.5%, compared with the record
output in June 2008. Meeting 40% of the worlds steel
demand, Chinese steelmakers are currently exporting about
one-fifth of their total output and servicing domestic
requirements with the remaining production.
Over 90 percent of global trade is carried by sea, and as
such the international shipping industry is drive in large part
by economic cycles. At the start of October, the drybulk carrier
fleet comprised 6,958 vessels totaling 413.9 million
dwt. The fleet is larger by 2.7 million dwt than it was at
the end of August, which equates to an increase of 0.7%
month-on-month.
By the end of 2008, the fleet is now forecast to reach
424.8 million dwt, which reflects an increase of 8.1%, or
32.0 million dwt from the end of 2007. Deliveries in
September reached 1.2 million dwt, bringing deliveries for
2008 thus far to 16.0 million dwt.
During the last seven years, deliveries were made by
well-established yards with negligible slippage or cancellation
in newbuilding contracts, while in the next couple of years it
is estimated that 30% of the orderbook will come from new
shipyards where slippage may occur as a result of the crisis in
the world financial markets.
Although the growth rate for Chinese iron ore imports has
decreased, we believe that it remains high compared to
historical levels and that the outlook for future demand will
depend on the actions of the Chinese authorities aimed at
keeping economic growth intact such as increasing public
investment in infrastructure. We believe that the Central-East
and Central-South regions may be targeted areas for more
construction because those regions account for over half the
1.3 billion Chinese population and nearly two-thirds of
economic activity in China. Moreover, we believe that increased
public investment may be injected into the Northwest and
Southwest regions in an effort to attain a more balanced
regional development, which is an important factor for steel
demand, as Chinas construction sector consumes more than
half of all steel produced nationally.
Recent
Developments in Environmental Regulation
The information provided below should be read together with the
information set forth in our Annual Report on
Form 20-F
for the year ended December 31, 2007, filed on
March 31, 2008, under the heading Business
OverviewEnvironmental and Other Regulations.
International
Maritime Organization
Air
Emissions
The United Nations International Maritime Organization, or
IMO, has negotiated international conventions that impose
liability for oil pollution in international waters and a
signatorys territorial waters. In September 1997, the IMO
adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships, or MARPOL, to address air
pollution
8
from ships. Annex VI was ratified in May 2004, and became
effective in May 2005. Annex VI sets limits on sulfur oxide
and nitrogen oxide emissions from ship exhausts and prohibits
deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on
the sulfur content of fuel oil and allows for special areas to
be established with more stringent controls on sulfur emissions.
We believe that all our vessels are currently compliant in all
material respects with these regulations. In October 2008,
IMOs Maritime Environment Protection Committee, or MEPC,
adopted amendments to the Annex VI regulations that will
require a progressive reduction of sulfur oxide levels in heavy
bunker fuels and create more stringent nitrogen oxide emissions
standards for marine engines beginning in 2011. We may incur
costs to comply with these revised standards.
Oil Pollution
Liability
Although the U.S. is not a party to these conventions, many
countries have ratified and follow the liability plan adopted by
the IMO and set out in the International Convention on Civil
Liability for Oil Pollution Damage of 1969, as amended in 2000,
or the CLC. Under this convention and depending on whether the
country in which the damage results is a party to the 1992
Protocol to the CLC, a vessels registered owner is
strictly liable for pollution damage caused in the territorial
waters of a contracting state by discharge of persistent oil,
subject to certain complete defenses. Under an amendment to the
Protocol that became effective on November 1, 2003, for
vessels of 5,000 to 140,000 gross tons (a unit of
measurement for the total enclosed spaces within a vessel),
liability will be limited to approximately $7.1 million
plus $987 for each additional gross ton over 5,000. For vessels
of over 140,000 gross tons, liability will be limited to
approximately $140 million. As the convention calculates
liability in terms of a basket of currencies, these figures are
based on currency exchange rates on September 1, 2008. The
right to limit liability is forfeited under the CLC where the
spill is caused by the owners actual fault and under the
1992 Protocol where the spill is caused by the owners
intentional or reckless conduct. Vessels trading to states that
are parties to these conventions must provide evidence of
insurance covering the liability of the owner. In jurisdictions
where the International Convention on Civil Liability for Oil
Pollution Damage has not been adopted, various legislative
schemes or common law govern, and liability is imposed either on
the basis of fault or in a manner similar to that convention. We
believe that our P&I insurance will cover the liability
under the plan adopted by the IMO.
In 2001, the IMO adopted the International Convention on Civil
Liability for Bunker Oil Pollution Damage, or the Bunker
Convention, which imposes strict liability on ship owners for
pollution damage in jurisdictional waters of ratifying states
caused by discharges of bunker fuel. The Bunker Convention
requires registered owners of ships over 1,000 gross tons
to maintain insurance for pollution damage in an amount equal to
the limits of liability under the applicable national or
international limitation regime (but not exceeding the amount
calculated in accordance with the Convention on Limitation of
Liability for Maritime Claims of 1976, as amended). The Bunker
Convention has been ratified by a sufficient number of nations
for entry into force, and it will become effective on
November 21, 2008. Until the Bunker Convention comes into
force, liability for spills or releases of oil carried as fuel
in ships bunkers typically is determined by the national
or other domestic laws in the jurisdiction where the events or
damages occur.
Other
Requirements
The IMO also adopted the International Convention on the Control
of Harmful Anti-fouling Systems on Ships (the Anti-fouling
Convention) in 2001. The Anti-fouling Convention prohibits
the use of organotin compound coatings to prevent the attachment
of mollusks and other sea life to the hulls of vessels after
September 1, 2003. The exteriors of vessels constructed
prior to January 1, 2003 that have not been in dry-dock
must, by September 13, 2008 (the
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effective date of the convention), either not contain the
prohibited compounds or have coatings applied to the vessel
exterior that act as a barrier to the leaching of the prohibited
compounds. Vessels of over 400 gross tons engaged in
international voyages must obtain an International Anti-fouling
System Certificate and undergo a survey before the vessel is put
into service or when the antifouling systems are altered or
replaced. We have obtained Anti-fouling System Certificates for
all of our vessels that are subject to the Anti-Fouling
Convention.
In 2005, the European Union adopted a directive on ship-source
pollution, imposing criminal sanctions for intentional, reckless
or negligent pollution discharges by ships. The directive could
result in criminal liability for pollution from vessels in
waters of European countries that adopt implementing
legislation. Criminal liability for pollution may result in
substantial penalties or fines and increased civil liability
claims.
U.S. Oil
Pollution Act of 1990 and Comprehensive Environmental Response,
Compensation, and Liability Act
In 1990, the U.S. Congress enacted the Oil Pollution Act,
or OPA, to establish an extensive regulatory and liability
regime for environmental protection and cleanup of oil spills.
OPA affects all owners and operators whose vessels trade with
the U.S. or its territories or possessions, or whose
vessels operate in the waters of the U.S., which include the
U.S. territorial sea and the 200 nautical mile exclusive
economic zone around the U.S. The Comprehensive
Environmental Response, Compensation and Liability Act, or
CERCLA, was adopted in 1980 and it imposes liability for cleanup
and natural resource damage from the release of hazardous
substances (other than oil) whether on land or at sea. Both OPA
and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are
responsible parties and are jointly, severally and
strictly liable (unless the spill results solely from the act or
omission of a third party, an act of God or an act of war) for
all containment and
clean-up
costs and other damages arising from discharges or threatened
discharges of oil from their vessels. OPA defines these other
damages broadly to include:
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natural resources damage and the costs of assessment thereof;
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real and personal property damage;
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net loss of taxes, royalties, rents, fees and other lost
revenues;
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lost profits or impairment of earning capacity due to property
or natural resources damage; and
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net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards, and loss
of subsistence use of natural resources.
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Amendments to OPA that came into effect on July 11, 2006
increased the liability limits for responsible parties for any
vessel other than a tank vessel to $950 per gross ton or
$800,000, whichever is greater (subject to periodic adjustment
for inflation). These limits of liability do not apply if an
incident was directly caused by violation of applicable
U.S. federal safety, construction or operating regulations
or by a responsible partys gross negligence or willful
misconduct, or if the responsible party fails or refuses to
report the incident or to cooperate and assist in connection
with oil removal activities. On September 24, 2008, the
U.S. Coast Guard proposed adjustments to the limits of
liability for non-tank vessels that would increase the limits to
the greater of $1,000 per gross ton or $848,000 and establish a
procedure for adjusting the limits for inflation every three
years. The Coast Guard is currently soliciting comments on the
proposal.
CERCLA contains a liability regime similar to OPA and provides
for cleanup, removal and natural resource damages. Liability per
vessel under CERCLA is limited to the greater of $300
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per gross ton or $0.5 million, unless the incident is
caused by gross negligence, willful misconduct, or a violation
of certain regulations, in which case liability is unlimited.
OPA requires owners and operators of vessels to establish and
maintain with the U.S. Coast Guard evidence of financial
responsibility sufficient to meet their potential liabilities
under OPA. Current U.S. Coast Guard regulations require
evidence of financial responsibility in the amount of $900 per
gross ton for non-tank vessels, which includes the OPA
limitation on liability of $600 per gross ton and the CERCLA
liability limit of $300 per gross ton. The U.S. Coast Guard
recently adopted regulations that increase the amounts of
financial responsibility to reflect the July 2006 increases in
liability under OPA. Vessel operators must establish evidence of
financial responsibility in the increased amounts by
January 15, 2009. Under the regulations, vessel owners and
operators may evidence their financial responsibility by showing
proof of insurance, surety bond, self-insurance or guaranty.
Under OPA, an owner or operator of a fleet of vessels is
required only to demonstrate evidence of financial
responsibility in an amount sufficient to cover the vessels in
the fleet having the greatest maximum liability under OPA. We
have complied with the U.S. Coast Guard regulations by
providing a certificate of responsibility from third party
entities that are acceptable to the U.S. Coast Guard
evidencing sufficient self-insurance.
We currently maintain pollution liability coverage insurance in
the amount of $624 million per incident for each of our
vessels. If the damages from a catastrophic spill were to exceed
our insurance coverage it could have an adverse effect on our
business and results of operation.
The U.S. Coast Guards regulations concerning
certificates of financial responsibility provide, in accordance
with OPA, that claimants may bring suit directly against an
insurer or guarantor that furnishes certificates of financial
responsibility. In the event that such insurer or guarantor is
sued directly, it is prohibited from asserting any contractual
defense that it may have had against the responsible party and
is limited to asserting those defenses available to the
responsible party and the defense that the incident was caused
by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of
financial responsibility under pre-OPA laws, including the major
protection and indemnity organizations, have declined to furnish
evidence of insurance for vessel owners and operators if they
are subject to direct actions or are required to waive insurance
policy defenses.
OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents
occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for oil spills. In
some cases, states, which have enacted such legislation, have
not yet issued implementing regulations defining vessels
owners responsibilities under these laws. We intend to
comply with all applicable state regulations in the ports where
our vessels call.
The U.S. Clean
Water Act
The U.S. Clean Water Act, or CWA, prohibits the discharge
of oil or hazardous substances in navigable waters and imposes
strict liability in the form of penalties for any unauthorized
discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and complements the
remedies available under OPA and CERCLA.
The U.S. Environmental Protection Agency, or EPA,
historically exempted the discharge of ballast water and other
substances incidental to the normal operation of vessels in
U.S. ports from CWA permitting requirements. However, the
U.S. District Court for the Northern District of California
held in September 2006 that the EPA exceeded its authority in
creating such exemptions. The court ordered EPA to develop a
permit program for such discharges by September 30, 2008.
Although EPA appealed the decision to the Ninth Circuit Court of
Appeals, it proceeded with the development of a draft vessel
general permit, or VGP, that would apply
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to commercial vessels and large recreational vessels. The draft
VGP includes management practices for various types of vessel
discharges and incorporates the U.S. Coast Guards
ballast management requirements described below. The Ninth
Circuit upheld the District Court decision on July 23,
2008, and the deadline for having the permit program in place
has been extended to December 19, 2008. Owners and
operators of vessels visiting U.S. ports will be required
to comply with this CWA permitting program to be finalized by
the EPA or face penalties. Subjecting our vessels to CWA permit
requirements including ballast water treatment obligations could
increase the cost of operating in the U.S. For example,
this could require the installation of equipment on our vessels
to treat ballast water before it is discharged or the
implementation of other port facility disposal arrangements or
procedures at potentially substantial cost,
and/or
otherwise restrict our vessels from entering U.S. waters.
Various states have also enacted legislation restricting ballast
water discharges and the introduction of non-indigenous species
considered to be invasive. These and any similar restrictions
enacted in the future could increase the costs of operating in
the relevant waters.
Other
Environmental Initiatives
The European Union is considering legislation that will affect
the operation of vessels and the liability of owners for oil
pollution. It is difficult to predict what legislation, if any,
may be promulgated by the European Union or any other country or
authority.
In addition to the requirements of MARPOL Annex VI
(described above), the U.S. Clean Air Act of 1970, as
amended by the Clean Air Act Amendments of 1977 and 1990, or the
CAA, required the EPA to promulgate standards applicable to
emissions of volatile organic compounds and other air
contaminants. Our vessels are subject to vapor control and
recovery requirements for certain cargoes when loading,
unloading, ballasting, cleaning and conducting other operations
in regulated port areas. Our vessels that operate in such port
areas with restricted cargoes are equipped with vapor recovery
systems that satisfy these requirements. The CAA also requires
states to draft State Implementation Plans, or SIPs, designed to
attain national health-based air quality standards in primarily
major metropolitan
and/or
industrial areas. Several SIPs regulate emissions resulting from
vessel loading and unloading operations by requiring the
installation of vapor control equipment. As indicated above, our
vessels operating in covered port areas are already equipped
with vapor recovery systems that satisfy these existing
requirements. The EPA and some states, however, have each
proposed more stringent regulations of air emissions from
ocean-going vessels. For example, on July 24, 2008, the Air
Resources Board of the State of California, or CARB, held a
public hearing on proposed clean-fuel regulations that would be
applicable to all vessels sailing within 24 miles of the
California coastline whose itineraries call for them to enter
any California ports, terminal facilities, or internal or
estuarine waters. The proposed CARB regulations would require
such vessels to use low sulfur marine fuels rather than bunker
fuel. By July 1, 2009, such vessels would be required to
switch either to marine gas oil with a sulfur content of no more
than 1.5% or marine diesel oil with a sulfur content of no more
than 0.5%. By 2012, only marine gas oil and marine diesel oil
fuels with 0.1% sulfur would be allowed. CARBs previous
attempts to regulate marine vessel fuel were struck down by the
Ninth Circuit Court of Appeals as preempted by the CAA. In the
event such new regulations were to become effective and our
vessels were to travel to such destinations, these new
regulations may increase our costs.
Additionally, the EPA has proposed new emissions standards for
new Category 3 marine diesel engines. These are engines with
per-cylinder displacement at or above 30 liters and are
typically found on large oceangoing vessels such as drybulk
vessels. The EPA proposed to require the application of advanced
emission control technologies, as well as controls on the sulfur
content of fuels.
The U.S. National Invasive Species Act, or NISA, was
enacted in 1996 in response to growing reports of harmful
organisms being released into U.S. ports through ballast
water
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taken on by vessels in foreign ports. The U.S. Coast Guard
adopted regulations under NISA in July 2004 that impose
mandatory ballast water management practices for all vessels
equipped with ballast water tanks entering U.S. waters.
These requirements can be met by performing mid-ocean ballast
exchange, by retaining ballast water on board the vessel, or by
using environmentally sound alternative ballast water management
methods approved by the U.S. Coast Guard. Mid-ocean ballast
exchange is the primary method for compliance with the
U.S. Coast Guard regulations, since holding ballast water
can prevent vessels from performing cargo operations upon
arrival in the U.S., and alternative methods are still under
development. Vessels that are unable to conduct mid-ocean
ballast exchange due to voyage or safety concerns may discharge
minimum amounts of ballast water, provided that they comply with
recordkeeping requirements and document the reasons they could
not follow the required ballast water management requirements.
The U.S. Coast Guard is developing a proposal to establish
ballast water discharge standards, which could set maximum
acceptable discharge limits for various invasive species,
and/or lead
to requirements for active treatment of ballast water. The
U.S. House of Representatives has recently passed a bill
that amends NISA by prohibiting the discharge of ballast water
unless it has been treated with specified methods or acceptable
alternatives. Similar bills have been introduced in the
U.S. Senate, but we cannot predict which bill, if any, will
be enacted into law. In the absence of federal standards, states
have enacted legislation or regulations to address invasive
species through ballast water and hull cleaning management and
permitting requirements. For instance, the state of California
has recently enacted legislation extending its ballast water
management program to regulate the management of hull
fouling organisms attached to vessels and adopted
regulations limiting the number of organisms in ballast water
discharges.
Resource
Conservation and Recovery Act
Our operations occasionally generate and require the
transportation, treatment and disposal of both hazardous and
non-hazardous solid wastes that are subject to the requirements
of the U.S. Resource Conservation and Recovery Act or
comparable state, local or foreign requirements. In addition,
from time to time we arrange for the disposal of hazardous waste
or hazardous substances at offsite disposal facilities. If such
materials are improperly disposed of by third parties, we may
still be held liable for clean up costs under applicable laws.
Greenhouse Gas
Regulation
In February 2005, the Kyoto Protocol to the United Nations
Framework Convention on Climate Change, which we refer to as the
Kyoto Protocol, entered into force. Pursuant to the Kyoto
Protocol, adopting countries are required to implement national
programs to reduce emissions of certain gases, generally
referred to as greenhouse gases, which are suspected of
contributing to global warming. Currently, emissions of
greenhouse gases from international shipping are not subject to
the Kyoto Protocol. However, the European Union has indicated
that it intends to propose an expansion of the existing European
Union emissions trading scheme to include emissions of
greenhouse gases from vessels. In the U.S., the California
Attorney General and a coalition of environmental groups in
October 2007 petitioned the EPA to regulate greenhouse gas
emissions from ocean-going vessels under the CAA. Any passage of
climate control legislation or other regulatory initiatives by
the IMO, European Union or individual countries where we operate
that restrict emissions of greenhouse gases could entail
financial impacts on our operations that we cannot predict with
certainty at this time.
Our Offshore
Drilling Operations
We are an international provider of offshore drilling contractor
services in the area of offshore exploration, development and
production. Our drilling units are marketed for
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exploration and development drilling programs worldwide, with
particular focus on operation in ultra-deepwater and harsh
environments.
Management of our
Offshore Drilling Operations
Our subsidiary, Ocean Rig, directly manages its two drill rigs,
the Eirik Raude and the Leiv Eiriksson. At year
end 2007, the Ocean Rig group had 323 employees, of which
302 were directly employed by Ocean Rig and 21 employees
were permanent crew engaged through agencies. 125 persons
are employed on Eirik Raude and 130 on Leiv
Eiriksson. The remaining 47 are shore based support and
management positions, of which 36 employees are based at
the Forus, Norway headquarters and a total of 11 employees
are located at the shore bases in Stavanger, Norway and Houston,
Texas.
The supervision of the construction of our two newbuilding
drillships identified as Hulls 1865 and 1866 is performed by our
subsidiary Ocean Rig AS pursuant to two separate management
agreements, each dated August 1, 2008.
On August 1, 2008, the owning companies of the two
newbuilding drillships indentified 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 our agreements with Ocean Rig AS.
Under the terms and conditions of these agreements, Ocean Rig
AS, among other things, is responsible for (i) assisting in
construction contract technical negotiations, (ii) securing
contracts for the future employment the drillships, and
(iii) providing commercial, technical and operational
management for the drillships.
Pursuant to each of these agreements, Ocean Rig AS is entitled
to: (i) a fee of $250 per day until steel cutting,
(ii) a fee of $2,500 per day from the date of steel cutting
until the date of delivery of the applicable drillship to its
owner and (iii) $8,000 per day thereafter. The management
fees are subject to an increase based on the U.S. Consumer
Price Index for the preceding 12 months. Ocean Rig AS is
also entitled to a commission fee equal to 0.75% of gross hire
and charter hire for contracts or charter parties entered into
during the -term of the management agreement, payable on the
date that the gross or charter hire money is collected.
The agreements each terminate on December 31, 2020, unless
earlier terminated by Ocean Rig AS for non-payment within
fifteen working days of request.
We expect to enter into separate managements agreements with
Cardiff, pursuant to which Cardiff will provide additional
supervisory services in connection with the newbuilding
drillships identified as Hull 1837, Hull 1838, Hull 1865 and
Hull 1866 and will be responsible for, among other things:
(i) arranging insurance, (ii) identifying and
arranging financing and acting as the intermediary with the bank
after entering into any loan, (iii) providing sale and
purchase management services, (iv) cooperating with
Sarbanes-Oxley Act compliance and (v) handling and settling
all claims arising under the management agreements.
Pursuant to each of these agreements, Cardiff will be entitled
to: (i) a fee of 500 Euros per day per person, plus
expenses, for
on-site
visits to the newbuilding construction site; (ii) a daily
fee of $40 per from October 1, 2008 to the date of steel
cutting and a fee of $400 per day thereafter until 90 days
after the delivery of the drillship; (iii) a commission of
5% of total insurance premiums, (iv) a commission of 0.20%
of any loan amount financed or re-financed, (v) a monthly
fee of $30,000 per loan for which Cardiff serves as
intermediary, (vi) a commission of 1% of the purchase price
set forth in any memorandum of agreement for any vessel bought
or sold on our behalf and a fee of 400 Euros per day for
inspection of vessels for purchase, (vii) a daily fee of 20
Euros per vessel for services in respect of Sarbanes-Oxley
compliance and (viii) a fee of 150 Euros per man per day of
eight hours for time spent carrying out obligations with respect
to the handling and settling of claims.
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Financing for
Newbuilding Drillships
Deutsche Bank Loan Agreement dated July 18,
2008. On July 18, 2008, Drillship Kithira
Owners Inc., the rig owning company of the newbuilding drillship
identified as DrillShip Hull 1865, entered into loan agreement
with a syndicate of lenders including Deutsche, in the amount of
$562.5 million to partially finance the construction cost
of Drillship Hull 1865. The loan bears interest (i) during
the pre-construction period at LIBOR plus a margin plus certain
additional lender costs and (ii) during the
post-construction period at LIBOR plus a margin per annum plus
certain additional lender costs. The loan is repayable in
eighteen semi-annual installments of $31.3 million
commencing on March 30, 2012. As of October 13, 2008,
the balance under this loan agreement was $85.6 million.
Deutsche Bank Loan Agreement dated July 18,
2008. On July 18, 2008, Drillship Skopelos
Owners Inc., the rig owning company of the newbuilding drillship
identified as DrillShip Hull 1866, entered into a loan agreement
with a syndicate of lenders including Deutsche, in the amount of
$562.5 million to partially finance the construction cost
of Drillship Hull 1866. The loan bears interest (i) during
the pre-construction period at LIBOR plus a margin plus certain
additional lender costs and (ii) during the
post-construction period at LIBOR plus a margin plus certain
additional lender costs. The loan is repayable in eighteen
semi-annual installments of $31.3 commencing on March 30,
2012. As of October 13, 2008, the balance under this loan
agreement was $85.6 million.
The Deutsche Bank loan agreements are secured by assignment of
the shipbuilding contracts for the pre-construction period and
first priority mortgage for the post-construction period of Hull
1865 and Hull 1866. These loan agreements contain certain
financial covenants, including (i) a leverage ratio, which
is the ratio of the market value of the respective Drillship
Hull to the amount outstanding under the respective loan
facility, not less than 125%; (ii) vessel insurance not
less than the greater of 125% of the aggregate of the
outstanding loans or the fair market value of the vessel;
(iii) protection and indemnity insurance during sea trials
not less that $300.0 million and general third party
liability insurance, effective from the commencement of the sea
trials, not less than $25.0 million; and (iv) the rig
owning company must pay $25.0 million into the debt service
reserve account prior to the drilling charter cut-off date,
which is the earlier of January 31, 2010 and the drawdown
of the second installment under the respective loan agreements.
Dryships Inc. has extended guarantees that each of Drillship
Skopelos Owners Inc. and Drillship Kithira Owners Inc. has
sufficient funds to pay their equity contribution with regards
to the construction of Drillship Hull 1865 and Drillship Hull
1866. For the post-construction period, Dryships Inc. has
guaranteed up to $214 million and $225 million for
Drillship Kithira Owners Inc. and Drillship Skopelos Owners
Inc., respectively.
The loan agreements contain the following financial covenants at
the Dryships Inc. level: (i) market adjusted equity ratio
of 0.25:1 up to December 31, 2008 and 0.3:1 for each
subsequent year; (ii) interest coverage ratio of not less
than 3:1; (iii) market value adjusted net worth of not less
than $500 million and (iv) minimum liquidity of not
less than $40 million.
These loan agreements also contain covenants that include
restrictions on selling, transferring, or otherwise disposing of
the vessel-owning companys assets, giving possession of
the vessel for repair constituting an amount greater than
$15.0 million, the profits from the sale or total loss of
the vessel, including losses during the pre-delivery period, the
chartering of the vessels for any period and minimum collateral
requirements. No security interest may be created aside from
permitted liens and the vessel owning company may not make any
distributions.
As of October 17, 2008, our outstanding borrowings under
these credit facilities was $171.1 million.
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The Offshore
Contract Drilling Industry
Over the last three to four years, developments in the drilling
market have been positive for suppliers of drilling units,
equipment and services. Offshore drilling activity has continued
to increase and deep-water projects make up a significant
portion of the increased activity, which provides support for
higher dayrates for deep-water drilling units. The demand for
offshore drilling services is currently global in nature, and
activity has extended from the previously highly active
golden triangle of West Africa, Brazil and the
U.S. Gulf of Mexico, to Asia and the Far East, and to the
broader West Africa region beyond Angola and Nigeria. The
industry is also experiencing an increase in demand in the North
Sea and Atlantic Margin areas.
According to industry sources, the worldwide fleet of ultra-deep
water drilling units as of September 26, 2008 consists of
32 units, comprised of 16 rigs and 16 drillships. An
additional 39 rigs and 40 drill-ships are under construction or
on order, which would bring the total fleet to 111 units in
2011 when the last ordered units are scheduled to be delivered.
During 2007, a total of 25 drilling units were ordered and 28
drilling units have been ordered through September 2008.
Based on publicly available data, following the recent contract
award for two newbuildings owned by Seadrill Ltd., an Oslo
Exchange listed company scheduled for delivery in late 2008, and
the awards for drilling units owned by Transocean Inc., a listed
company and for the Eirik Raude, we believe there is no
ultra-deepwater drilling capacity available in 2008. We expect
that the lack of ultra-deepwater drilling capacity in 2008 might
lead to upward pressure on dayrates in 2009. For 2009, we
believe that the Leiv Eiriksson is the only available
drilling rig with 7,500 feet depth of water drilling
capability. For 2010, we expect that eight newbuildings and four
existing drilling units will be available in the deepwater
market.
Based on publicly available data, several new contracts for
ultra-deepwater semi-submersibles commencing in 2008 to 2010
have been secured by our competitors at rates of approximately
$550,000 to $600,000 per day. The duration of these contracts is
generally from three to five years, with some units contracted
to 2015. This compares to $350,000 to $405,000 for work
performed during 2006 and to $400,000 to $500,000 for work
performed during 2007.
Environmental and
Other Regulations in the Offshore Drilling Industry
Our operations in the offshore drilling sector include
activities that are subject to numerous international, federal,
state and local laws and regulations, including MARPOL, OPA and
CERCLA, each of which is discussed above, and the
U.S. Outer Continental Shelf Lands Act. These laws govern
the discharge of materials into the environment or otherwise
relate to environmental protection.
For example, the IMO adopted MARPOL and Annex VI to MARPOL
to regulate the discharge of harmful air emissions from ships,
which include rigs and drillships. Rigs and drillships must
comply with MARPOL limits on sulfur oxide and nitrogen oxide
emissions, chlorofluorocarbons, and the discharge of other air
pollutants, except that the MARPOL limits do not apply to
emissions that are directly related to drilling, production, or
processing activities.
Our drill units are subject not only to MARPOL regulation of air
emissions, but also to the Bunker Conventions strict
liability for pollution damage caused by discharges of bunker
fuel in ratifying states. We believe that all of our drill units
are currently compliant in all material respects with these
regulations. As described above, in October 2008, MEPC adopted
amendments to the Annex VI regulations that require a
progressive reduction of sulfur oxide levels in heavy bunker
fuels and create more stringent nitrogen oxide emissions
standards for marine engines. We may incur costs to comply with
these revised standards.
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Furthermore, any drillships we operate in the waters of the
U.S., including the U.S. territorial sea and the 200
nautical mile exclusive economic zone around the U.S., would
have to comply with OPA and CERCLA regulations, as described
above, that impose liability (unless the spill results solely
from the act or omission of a third party, an act of God or an
act of war) for all containment and
clean-up
costs and other damages arising from discharges of oil or other
hazardous substances, other than discharges related to drilling.
Numerous governmental agencies issue such regulations to
implement and enforce the laws of the applicable jurisdiction,
which often involve lengthy permitting procedures, impose
difficult and costly compliance measures particularly in
ecologically sensitive areas, and subject operators to
substantial administrative, civil and criminal penalties or
injunctive relief for failure to comply. Changes in
environmental laws and regulations occur frequently, and any
changes that result in more stringent and costly compliance
could adversely affect our consolidated financial statements.
While we believe that we are in substantial compliance with the
current laws and regulations, there is no assurance that
compliance can be maintained in the future.
Implementation of new environmental laws or regulations that may
apply to ultra-deepwater drilling units may subject us to
increased costs or limit the operational capabilities of our
drilling units and could materially and adversely affect our
operations and financial condition. See Risk
FactorsGovernmental laws and regulations, including
environmental laws and regulations, may add to our costs or
limit our drilling activity.
In addition to the MARPOL, OPA, and CERCLA requirements
described above, our international operations in the offshore
drilling segment are subject to various laws and regulations in
countries in which we operate, including laws and regulations
relating to the importation of and operation of drilling units
and equipment, currency conversions and repatriation, oil and
natural gas exploration and development, environmental
protection, taxation of offshore earnings and earnings of
expatriate personnel, the use of local employees and suppliers
by foreign contractors and duties on the importation and
exportation of drilling units and other equipment. New
environmental or safety laws and regulations could be enacted,
which could adversely affect our ability to operate in certain
jurisdictions. Governments in some foreign countries have become
increasingly active in regulating and controlling the ownership
of concessions and companies holding concessions, the
exploration for oil and natural gas and other aspects of the oil
and natural gas industries in their countries. In some areas of
the world, this governmental activity has adversely affected the
amount of exploration and development work done by major oil and
natural gas companies and may continue to do so. Operations in
less developed countries can be subject to legal systems that
are not as mature or predictable as those in more developed
countries, which can lead to greater uncertainty in legal
matters and proceedings.
Insurance for Our
Offshore Drilling Rigs
We maintain insurance for our drilling units in accordance with
industry standards. Our insurance is intended to cover normal
risks in our current operations, including insurance against
property damage, loss of hire, war risk and third-party
liability, including pollution liability.
We have obtained insurance for the full assessed market value of
our drilling units. Our insurance provides for premium
adjustments based on claims and is subject to deductibles and
aggregate recovery limits. In the case of pollution liabilities,
our deductible is $25,000 per event and in the case of other
hull and machinery claims, our deductible is $1.5 million
per event. Our insurance coverage may not protect fully against
losses resulting from a required cessation of rig operations for
environmental or other reasons.
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We also have loss of hire insurance which becomes effective
after 30 days of off-hire and coverage extends for
approximately one year.
The principal risks which may not be insurable are various
environmental liabilities and liabilities resulting from
reservoir damage caused by our negligence. In addition,
insurance may not be available to us at all or on terms
acceptable to us, that we will maintain insurance or, if we are
so insured, that our policy will be adequate to cover our loss
or liability in all cases.
Our Corporate
Structure
Dryships Inc. is a holding company existing under the laws of
the Marshall Islands. We maintain our principal executive
offices at 80 Kifissias Avenue, Amaroussion 15125, Athens,
Greece. Our telephone number at that address is (011) (30)
(210) 809 0570. Our website address is
www.dryships.com. The information on our website is not a
part of this prospectus.
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RISK
FACTORS
We have identified a number of risk factors which you should
consider before buying the securities we may offer using this
prospectus. These risk factors are incorporated by reference
into this registration statement from the Companys Annual
Report on
Form 20-F
filed on March 31, 2008. Please see Information
Incorporated by Reference. In addition, you should also
consider carefully the risks set forth below, as well as those
under the heading Risk Factors in any prospectus
supplement, before investing in the securities offered by this
prospectus. The occurrence of one or more of these risk factors
could adversely affect our results of operations or financial
condition.
International
Drybulk Shipping IndustrySpecific Risk Factors
Charterhire rates
for drybulk carriers are volatile and may decrease in the
future, which would adversely affect our earnings
The drybulk shipping industry is cyclical with attendant
volatility in charterhire rates and profitability. The degree of
charterhire rate volatility among different types of drybulk
carriers varies widely. Since mid-August 2008, charterhire rates
for Capesize, Panamax and Supramax drybulk carriers have
decreased sharply from their historically high levels. Charter
rates may remain at depressed levels for some time. If the
drybulk shipping market is depressed in the future, our earnings
and available cash flow may decrease. Our ability to re-charter
our vessels on the expiration or termination of their current
time charters and the charter rates payable under any renewal or
replacement charters will depend upon, among other things,
economic conditions in the drybulk shipping market. Fluctuations
in charter rates and vessel values result from changes in the
supply and demand for drybulk cargoes carried internationally at
sea, including coal, iron, ore, grains and minerals.
The factors affecting the supply and demand for vessel capacity
are outside of our control, and the nature, timing and degree of
changes in industry conditions are unpredictable.
The factors that influence demand for vessel capacity include:
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demand for and production of drybulk products;
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global and regional economic and political conditions;
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the distance drybulk cargo is to be moved by sea; and
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changes in seaborne and other transportation patterns.
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The factors that influence the supply of vessel capacity include:
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the number of new building deliveries;
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port and canal congestion;
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the scrapping of older vessels;
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vessel casualties; and
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the number of vessels that are out of service.
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We anticipate that the future demand for our drybulk carriers
will be dependent upon continued economic growth in the
worlds economies, including China and India, seasonal and
regional changes in demand, changes in the capacity of the
global drybulk carrier fleet and the sources and supply of
drybulk cargo to be transported by sea. The capacity of the
global drybulk carrier fleet seems likely to increase and
economic growth may not continue. Adverse economic, political,
social or other developments could have a material adverse
effect on our business and operating results.
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The market values
of our vessels may decrease, which could limit the amount of
funds that we can borrow or trigger certain financial covenants
under our current or future credit facilities and or we may
incur a loss if we sell vessels following a decline in their
market value
The fair market values of our vessels is related to prevailing
freight charter rates. While the fair market value of vessels
and the freight charter market have a very close relationship as
the charter market moves from trough to peak, the time lag
between the effect of charter rates on market values of ships
can vary.
The fair market value of our vessels may increase and decrease
depending on a number of factors including:
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prevailing level of charter rates;
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general economic and market conditions affecting the shipping
industry;
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types and sizes of vessels;
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supply and demand for vessels;
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other modes of transportation;
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cost of newbuildings;
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governmental or other regulations; and
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technological advances.
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In addition, as vessels grow older, they generally decline in
value. If the fair market value of our vessels declines, we may
not be in compliance with certain provisions of our credit
facilities, and our lenders could accelerate our indebtedness or
require us to pay down our indebtedness to a level where we are
again in compliance with our loan covenants. If our indebtedness
is accelerated, we may not be able to refinance our debt or
obtain additional financing. In addition, if we sell one or more
of our vessels at a time when vessel prices have fallen and
before we have recorded an impairment adjustment to our
consolidated financial statements, the sale may be less than the
vessels carrying value on our consolidated financial
statements, resulting in a loss and a reduction in earnings.
Furthermore, if vessel values fall significantly we may have to
record an impairment adjustment in our financial statements
which could adversely affect our financial results.
Changes in the
economic and political environment in China and policies adopted
by the government to regulate its economy may have a material
adverse effect on our business, financial condition and results
of operations
The Chinese economy differs from the economies of most countries
belonging to the Organization for Economic Cooperation and
Development, or OECD, in such respects as structure, government
involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and
balance of payments position. Prior to 1978, the Chinese economy
was a planned economy. Since 1978, increasing emphasis has been
placed on the utilization of market forces in the development of
the Chinese economy. Annual and five year State Plans are
adopted by the Chinese government in connection with the
development of the economy. Although state-owned enterprises
still account for a substantial portion of the Chinese
industrial output, in general, the Chinese government is
reducing the level of direct control that it exercises over the
economy through State Plans and other measures. There is an
increasing level of freedom and autonomy in areas such as
allocation of resources, production, pricing and management and
a gradual shift in emphasis to a market economy and
enterprise reform. Limited price reforms were undertaken, with
the result that prices for certain commodities are principally
determined by market forces. Many of the reforms are
20
unprecedented or experimental and may be subject to revision,
change or abolition based upon the outcome of such experiments.
If the Chinese government does not continue to pursue a policy
of economic reform the level of imports to and exports from
China could be adversely affected by changes to these economic
reforms by the Chinese government, as well as by changes in
political, economic and social conditions or other relevant
policies of the Chinese government, such as changes in laws,
regulations or export and import restrictions, all of which
could, adversely affect our business, operating results and
financial condition.
Offshore Drilling
IndustrySpecific Risk Factors
Our business in
the offshore drilling sector depends on the level of activity in
the offshore oil and gas industry, which is significantly
affected by, among other things, volatile oil and gas prices and
may be materially and adversely affected by a decline in the
offshore oil and gas industry.
The offshore contract drilling industry is cyclical and
volatile. Our business in the offshore drilling sector depends
on the level of activity in oil and gas exploration, development
and production in offshore areas worldwide. The availability of
quality drilling prospects, exploration success, relative
production costs, the stage of reservoir development and
political and regulatory environments affect customers
drilling campaigns. Oil and gas prices and market expectations
of potential changes in these prices also significantly affect
this level of activity and demand for drilling units.
Oil and gas prices are extremely volatile and are affected by
numerous factors beyond our control, including the following:
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worldwide demand for oil and gas;
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the cost of exploring for, developing, producing and delivering
oil and gas;
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expectations regarding future energy prices;
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advances in exploration and development technology;
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the ability of the Organization of Petroleum Exporting
Countries, or OPEC, to set and maintain levels and pricing;
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the level of production in non-OPEC countries;
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government regulations;
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local and international political, economic and weather
conditions;
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domestic and foreign tax policies;
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the development and exploitation of alternative fuels;
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the policies of various governments regarding exploration and
development of their oil and gas reserves; and
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the worldwide military and political environment, including
uncertainty or instability resulting from an escalation or
additional outbreak of armed hostilities or other crises in the
Middle East or other geographic areas or further acts of
terrorism in the United States, or elsewhere.
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Declines in oil and gas prices for an extended period of time
could negatively affect our business in the offshore drilling
sector. Sustained periods of low oil prices typically result in
reduced exploration and drilling because oil and gas
companies capital expenditure budgets are subject to their
cash flow and are therefore sensitive to changes in energy
prices. These changes in commodity prices can have a dramatic
effect on rig demand, and periods of low demand can cause excess
rig supply and intensify the competition in the industry which
often
21
results in drilling units, particularly lower specification
drilling units, being idle for long periods of time. We cannot
predict the future level of demand for our services or future
conditions of the oil and gas industry. Any decrease in
exploration, development or production expenditures by oil and
gas companies could reduce our revenues and materially harm our
business and results of operations.
In addition to oil and gas prices, the offshore drilling
industry is influenced by additional factors, including:
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the availability of competing offshore drilling vessels;
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the level of costs for associated offshore oilfield and
construction services;
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oil and gas transportation costs;
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the discovery of new oil and gas reserves; and
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the cost of non-conventional hydrocarbons, such as the
exploitation of oil sands.
The offshore
drilling industry is highly competitive and there is intense
price competition, and as a result, we may be unable to compete
successfully with other providers of contract drilling services
that have greater resources than we have.
The offshore contract drilling industry is highly competitive
with numerous industry participants, none of which has a
dominant market share. Drilling contracts are traditionally
awarded on a competitive bid basis. Intense price competition is
often the primary factor in determining which qualified
contractor is awarded the drilling contract, although rig
availability, location, and the quality and technical capability
of service and equipment are key factors which are considered.
Some of our competitors in the drilling industry are larger than
we are and have more diverse fleets, or fleets with generally
higher specifications, and greater resources than us. In
addition, because of the relatively small size of our offshore
drilling segment, we may be unable to take advantage of
economies of scale to the same extent as some of our larger
competitors. Given the high capital requirements that are
inherent in the offshore drilling industry, we may also be
unable to invest in new technologies or expand our fleet in the
future as may be necessary for us to succeed in this industry,
while our larger competitors superior financial resources
may enable them to respond more rapidly to changing market
demands. In addition, mergers among oil and natural gas
exploration and production companies have reduced the number of
available customers, resulting in increased competition for
projects. We may not be able to maintain our competitive
position, and we believe that competition for contracts will
continue to be intense in the foreseeable future. Our inability
to compete successfully may reduce our revenues and
profitability.
An over-supply of
drilling units may lead to a reduction in dayrates and therefore
may materially impact our profitability in our offshore drilling
segment.
During the recent period of high utilization and high dayrates,
industry participants have increased the supply of drilling
units by ordering the construction of new drilling units.
Historically, this has resulted in an oversupply of drilling
units and has caused a subsequent decline in utilization and
dayrates when the drilling units enter the market, sometimes for
extended periods of time until the units have been absorbed into
the active fleet. According to industry sources, the worldwide
fleet of ultra-deepwater drilling units currently consists of
32 units, comprised of 16 rigs and 16 drill-ships. An
additional 39 rigs and 40 drillships are under construction or
on order, which would bring the total fleet to 111 units in
2011 when the last ordered drilling units are scheduled to be
delivered. In addition, two drillships and three drilling rigs
have been ordered for delivery in 2012. During 2007, a total of
25 drilling units were ordered, however new orders appear to
have slowed in 2008 as only three orders for new drilling units
were placed in the first quarter. Not all of the drilling units
currently under
22
construction have been contracted for future work, which may
intensify price competition as scheduled delivery dates occur.
The entry into service of these new, upgraded or reactivated
drilling units will increase supply and could curtail a further
strengthening, or trigger a reduction, in dayrates as drilling
units are absorbed into the active fleet. Any further increase
in construction of new drilling units could have a negative
impact on utilization and dayrates. In addition, the new
construction of high-specification rigs, as well as changes in
our competitors drilling rig fleets, could require us to
make material additional capital investments to keep our fleet
competitive. Lower utilization and dayrates could adversely
affect our revenues and profitability. Prolonged periods of low
utilization and dayrates could also result in the recognition of
impairment charges on our drilling units if future cash flow
estimates, based upon information available to management at the
time, indicate that the carrying value of these drilling units
may not be recoverable.
The market value
of our current drilling units and drilling units we may acquire
in the future may decrease, which could cause us to incur losses
if we decide to sell them following a decline in their market
values.
If the offshore contract drilling industry suffers adverse
developments in the future, the fair market value of our
drilling units may decline. The fair market value of the
drilling units we currently own or may acquire in the future may
increase or decrease depending on a number of factors, including:
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prevailing level of drilling services contract day rates;
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general economic and market conditions affecting the offshore
contract drilling industry, including competition from other
offshore contract drilling companies;
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types, sizes and ages of drilling units;
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supply and demand for drilling units;
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costs of newbuildings;
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governmental or other regulations; and
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technological advances.
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If we sell any drilling unit when drilling unit prices have
fallen and before we have recorded an impairment adjustment to
our financial statements, the sale may be at less than the
drilling units carrying amount on our financial
statements, resulting in a loss. Additionally, our lenders may
accelerate loan prepayments should there be a loss in the market
value of our drilling units. Such loss or prepayment could
materially and adversely affect our business prospects,
financial condition, liquidity, results of operations, and our
ability to pay dividends to our shareholders.
Consolidation of
suppliers may limit our ability to obtain supplies and services
at an acceptable cost, on our schedule or at all, which may have
a material adverse effect on our results of operations and
financial condition.
We rely on certain third parties to provide supplies and
services necessary for our offshore drilling operations,
including but not limited to drilling equipment suppliers,
catering and machinery suppliers. Recent mergers have reduced
the number of available suppliers, resulting in fewer
alternatives for sourcing of key supplies. We may not be able to
obtain supplies and services at an acceptable cost, at the times
we need them or at all. Such consolidation, combined with a high
volume of drilling units under construction, may result in a
shortage of supplies and services thereby potentially inhibiting
the ability of suppliers to deliver on time. These cost
increases or delays could have a material adverse affect on our
results of operations and financial condition.
23
Our international
operations in the offshore drilling sector involve additional
risks not associated with our U.S. operations.
We operate in the offshore drilling sector in various regions
throughout the world, including Ghana, that may expose us to
political and other uncertainties, including risks of:
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terrorist acts, war and civil disturbances;
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seizure, nationalization or expropriation of property or
equipment;
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political unrest;
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foreign and U.S. monetary policy and foreign currency
fluctuations and devaluations;
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the inability to repatriate income or capital;
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complications associated with repairing and replacing equipment
in remote locations;
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piracy;
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import-export quotas, wage and price controls, imposition of
trade barriers and other forms of government regulation and
economic conditions that are beyond our control;
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regulatory or financial requirements to comply with foreign
bureaucratic actions; and
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changing taxation policies.
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In addition, international contract drilling operations are
subject to various laws and regulations in countries in which we
operate, including laws and regulations relating to:
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the equipping and operation of drilling units;
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repatriation of foreign earnings;
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oil and gas exploration and development;
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taxation of offshore earnings and earnings of expatriate
personnel; and
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use and compensation of local employees and suppliers by foreign
contractors.
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Some foreign governments favor or effectively require the
awarding of drilling contracts to local contractors, require use
of a local agent or require foreign contractors to employ
citizens of, or purchase supplies from, a particular
jurisdiction. These practices may adversely affect our ability
to compete in those regions. It is difficult to predict what
governmental regulations may be enacted in the future that could
adversely affect the international drilling industry. The
actions of foreign governments, including initiatives by OPEC,
may adversely affect our ability to compete.
We are indemnified to some extent against loss of capital
assets, but generally not loss of revenue, from most of these
risks through provisions in our drilling contracts.
Governmental laws
and regulations, including environmental laws and regulations,
may add to our costs or limit our drilling activity.
Our business in the offshore drilling industry is affected by
public policy and laws and regulations relating to the energy
industry and the environment in the geographic areas where we
operate.
The offshore drilling industry is dependent on demand for
services from the oil and gas exploration and production
industry, and accordingly, we are directly affected by the
adoption of laws and regulations that for economic,
environmental or other policy reasons curtail exploration and
development drilling for oil and gas. We may be required to make
significant capital expenditures to comply with governmental
laws and regulations. It is also possible that
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these laws and regulations may in the future add significantly
to our operating costs or significantly limit drilling activity.
Governments in some countries are increasingly active in
regulating and controlling the ownership of concessions, the
exploration for oil and gas, and other aspects of the oil and
gas industries. In recent years, increased concern has been
raised over protection of the environment. Offshore drilling in
certain areas has been opposed by environmental groups, and has
in certain cases been restricted.
To the extent new laws are enacted or other governmental actions
are taken that prohibit or restrict offshore drilling or impose
additional environmental protection requirements that result in
increased costs to the oil and gas industry in general or the
offshore drilling industry in particular, our business or
prospects could be materially adversely affected. The operation
of our drilling units will require certain governmental
approvals, the number and prerequisites of which cannot be
determined until we identify the jurisdictions in which we will
operate upon securing contracts for the drilling units.
Depending on the jurisdiction, these governmental approvals may
involve public hearings and costly undertakings on our part. We
may not obtain such approvals or such approvals may not be
obtained in a timely manner. If we fail to timely secure the
necessary approvals or permits, our customers may have the right
to terminate or seek to renegotiate their drilling contracts to
our detriment. The amendment or modification of existing laws
and regulations or the adoption of new laws and regulations
curtailing or further regulating exploratory or development
drilling and production of oil and gas could have a material
adverse effect on our business, operating results or financial
condition. Future earnings may be negatively affected by
compliance with any such new legislation or regulations. In
addition, we may become subject to additional laws and
regulations as a result of future rig operations or
repositioning.
We may be subject
to liability under environmental laws and regulations, which
could have a material adverse effect on our results of
operations and financial condition.
Our operations in the offshore drilling industry may involve the
use or handling of materials that may be classified as
environmentally hazardous substances. Environmental laws and
regulations applicable in the countries in which we conduct
operations have generally become more stringent. Such laws and
regulations may expose us to liability for the conduct of or for
conditions caused by others, or for our acts that were in
compliance with all applicable laws at the time such actions
were taken.
During our drilling operations in the past, we have caused the
release of oil, waste and other pollutants into the sea and into
protected areas, such as the Barents Sea. While we conduct
maintenance on our drilling rigs in an effort to prevent such
releases, future releases could occur, especially as our rigs
age. Such releases may be large in quantity, above our permitted
limits or in protected or other areas in which public interest
groups or governmental authorities have an interest. These
releases could result in fines and other costs to us, such as
costs to upgrade our drilling rigs, costs to clean up the
pollution, and costs to comply with more stringent requirements
in our discharge permits. Moreover, these releases may result in
our customers or governmental authorities suspending or
terminating our operations in the affected area, which could
have a material adverse effect on our business, results of
operation and financial condition.
We expect that we will be able to obtain some degree of
contractual indemnification from our customers in most of our
drilling contracts against pollution and environmental damages,
but such indemnification may not be enforceable in all
instances, the customer may not be financially capable in all
cases of complying with its indemnity obligations and we may not
be able to obtain such indemnification agreements in the future.
We currently maintain insurance coverage against certain
environmental liabilities, including pollution caused by sudden
and accidental oil spills. However, such insurance may not
25
continue to be available or carried by us or, if available and
carried, may not be adequate to cover any liability in all
circumstances, which could have a material adverse effect on our
business, operating results and financial conditions.
Acts of terrorism
and political and social unrest could affect the markets for
drilling services, which may have a material adverse effect on
our results of operations.
Acts of terrorism and political and social unrest, brought about
by world political events or otherwise, have caused instability
in the worlds financial and insurance markets in the past
and may occur in the future. Such acts could be directed against
companies such as ours. In addition, acts of terrorism and
social unrest could lead to increased volatility in prices for
crude oil and natural gas and could affect the markets for
drilling services and result in lower dayrates. Insurance
premiums could increase and coverages may be unavailable in the
future. U.S. government regulations may effectively
preclude us from actively engaging in business activities in
certain countries. These regulations could be amended to cover
countries where we currently operate or where we may wish to
operate in the future. Increased insurance costs or increased
cost of compliance with applicable regulations may have a
material adverse effect on our results of operations.
CompanySpecific
Risk Factors
A failure to
obtain financing for our newbuilding drillships may result in a
loss of investment and may have a material adverse effect on our
business and results of operations.
Each of the contracts for construction and sale for newbuilding
drillships Hulls 1837 and 1838 require us to make certain
pre-delivery installment payments. In September 2007, Drillship
Paros and Drillship Hydra, the contract owners of these
newbuilding drillships, entered into an agreement with DVB for a
term loan agreement in the aggregate amount of
$230.0 million, representing $115.0 million per Hull,
which may be used to partially fund the first and second
pre-delivery installment payments to the shipyard under such
newbuilding contracts. However, we have not yet obtained
financing for subsequent pre-delivery installment payments,
which amount to 70% of the purchase price of the drillships. If
we are unable to obtain financing for such payments, we may
default under these contracts. A default would entitle the
builder (i) to six percent interest from the due date of
any installment payment and (ii) to rescind the contract.
Rescission of a contract would enable the builder to retain any
installment payments already made and entitle the builder to
sell the applicable drillship to another buyer, which would
result in a loss of our investment and have a material adverse
effect on our business and results of operations.
Disruptions in
world financial markets and the resulting governmental action in
the United States and in other parts of the world could have a
material adverse impact on our ability to obtain financing, our
results of operations, financial condition and cash flows and
could cause the market price of our common stock to
decline.
There are signs that the United States and other parts of the
world are exhibiting deteriorating economic trends and may be
entering into a recession. For example, the credit markets in
the United States have experienced significant contraction,
de-leveraging and reduced liquidity, and the United States
federal government and state governments have implemented and
are considering a broad variety of governmental action
and/or new
regulation of the financial markets. Securities and futures
markets and the credit markets are subject to comprehensive
statutes, regulations and other requirements. The SEC, other
regulators, self-regulatory organizations and exchanges are
authorized to take extraordinary actions in the
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event of market emergencies, and may effect changes in law or
interpretations of existing laws.
Recently, a number of financial institutions have experienced
serious financial difficulties and, in some cases, have entered
bankruptcy proceedings or are in regulatory enforcement actions.
The uncertainty surrounding the future of the credit markets in
the United States has resulted in reduced access to credit
worldwide. As of October 17, 2008, we have total
outstanding indebtedness of $3.345 billion under our
existing credit facilities. As of October 17, 2008, we have
a total of $973.0 million available under our existing
credit facilities, all of which we expect to draw down in
connection with the construction of the newbuilding drillships
identified as Hulls 1865 and 1866 and vessel acquisitions.
We face risks attendant to changes in economic environments,
changes in interest rates, and instability in certain securities
markets, among other factors. Major market disruptions and the
current adverse changes in market conditions and regulatory
climate in the United States and worldwide may adversely affect
our business or impair our ability to borrow amounts under our
credit facilities or any future financial arrangements. The
current market conditions may last longer than we anticipate.
However, these recent and developing economic and governmental
factors may have a material adverse effect on our results of
operations, financial condition or cash flows and could cause
the price of our common stock to decline significantly.
Sharp declines in
the spot drybulk charter market will affect our earnings and
cash flows from the 14 vessels we operate in the spot
market.
We currently employ fourteen of our vessels in the spot market.
Their charters will expire over the next two months. Vessels
trading in the spot market are exposed to increased risk of
declining charter rates and freight rate volatility compared to
vessels employed on time charters. Since mid-August 2008, the
spot day rates in the drybulk charter market have declined very
significantly, and drybulk vessel values have also declined both
as a result of a slowdown in the availability of global credit
and the significant deterioration in charter rates. Charter
rates and vessel values have been affected in part by the lack
of availability of credit to finance both vessel purchases and
purchases of commodities carried by sea, resulting in a decline
in cargo shipments, and the excess supply of iron ore in China
which resulted in falling iron ore prices and increased
stockpiles in Chinese ports. There can be no assurance as to how
long charter rates and vessel values will remain at their
currently low levels or whether they will improve to any
significant degree. Charter rates may remain at depressed levels
for some time which will adversely affect our revenue and
profitability.
We are subject to
certain risks with respect to our counterparties under our time
charter agreements and failure of such counterparties to meet
their obligations could cause us to suffer losses or otherwise
adversely affect our business.
Thirty-one of our vessels are currently employed under time
charters with sixteen customers. The ability 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
counterparty. In addition, in depressed market conditions, our
customers may fail to pay charterhire. Should a counterparty
fail to honor its obligations under agreements with us, we could
sustain significant losses which could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
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The preferential
tax rates applicable to qualified dividend income are temporary,
and the enactment of proposed legislation could affect whether
dividends paid by us constitute qualified dividend income
eligible for the preferential rate.
Certain of our distributions may be treated as qualified
dividend income eligible for preferential rates of
U.S. federal income tax to non-corporate
U.S. shareholders. In the absence of legislation extending
the term for these preferential tax rates, all dividends
received by such U.S. taxpayers in tax years beginning on
January 1, 2011 or later will be taxed at graduated tax
rates applicable to ordinary income.
In addition, legislation has been proposed in the
U.S. Congress that would, if enacted, deny the preferential
rate of U.S. federal income tax currently imposed on
qualified dividend income with respect to dividends received
from a
non-U.S. corporation
if the
non-U.S. corporation
is created or organized under the laws of a jurisdiction that
does not have a comprehensive income tax system. Because the
Marshall Islands imposes only limited taxes on entities
organized under its laws, it is likely that if this legislation
were enacted, the preferential tax rates of federal income tax
may no longer be applicable to distributions received from us.
As of the date of this prospectus, it is not possible to predict
with certainty whether this proposed legislation will be enacted.
Our shareholders
that are subject to U.S. federal income taxation in respect of
their ownership of our shares could be subject to adverse U.S.
federal income tax rules if we were to qualify as a
passive foreign investment company.
Generally, a
non-U.S. corporation
will be treated as a passive foreign investment
company, or PFIC, for U.S. federal income tax
purposes if either (i) at least 75% of its gross income for
any taxable year consists of certain types of passive
income or (ii) at least 50% of the average value of
the corporations assets are assets that produce or are
held for the production of passive income. For
purposes of this test, passive income includes
dividends, interest and gains from the sale or exchange of
investment property and rents and royalties other than rents and
royalties 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.
We intend to take the position that income that we derive from
time and voyage charters is services income, rather than rental
income, and accordingly that our income from time and voyage
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 these issues. Accordingly, no
assurance can be given that the United States Internal Revenue
Service or a court of law would agree with our position.
In general, U.S. shareholders of a PFIC are subject to
disadvantageous U.S. federal income tax rules with respect
to their ownership of shares in the PFIC. Generally, under the
PFIC rules, unless U.S. shareholders make an election
available under the United States Internal Revenue Code (which
election could itself have adverse consequences for such
shareholders), such shareholders would be liable to pay
U.S. federal income tax at the then-prevailing highest
income tax rates on ordinary income plus interest on excess
distributions and upon any disposition of our shares, as if the
excess distribution or gain had been recognized ratably over the
shareholders holding period in our shares. Regardless of
the elections made by shareholders, distributions in respect of
our shares will not be treated as qualified dividend income
eligible for preferential rates of U.S. federal income tax
for non-corporate U.S. shareholders if we were treated as a
PFIC for the year of the distribution or the immediately
preceding tax year.
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While there are legal uncertainties involved in this
determination, and this determination is based on part on our
estimates of and expectations regarding the relative fair market
values of our assets, we believe that we should not be treated
as a PFIC for the taxable year ending December 31, 2008.
There can be no assurance, however, that the nature of our
assets, income or operations will not change or that we can
avoid being a PFIC for any subsequent year.
The Spin Off may
result in tax liabilities for shareholders in the absence of the
receipt of cash.
While not all details regarding the Spin Off are currently
known, it is possible that the Spin Off may be treated in some
jurisdictions, such as the United States, as a taxable
distribution, in which case shareholders that are subject to tax
in such jurisdictions would have a tax liability as a result of
the Spin Off even though they do not receive cash with which to
pay such liability.
If market
conditions continue to deteriorate, the Spin Off may be
delayed.
If market conditions in the United States and other parts of the
world continue to exhibit deteriorating economic trends, we may
delay the Spin Off. Such a delay could be substantial and would
result in our offshore drilling operations remaining within
subsidiaries of DryShips Inc.
Currently, our
revenues from the offshore drilling segment depend on two
drilling rigs, which are designed to operate in harsh
environments. The damage or loss of either of these drilling
rigs could have a material adverse effect on our results of
operations and financial condition.
Our revenues from the offshore drilling segment are dependent on
two drilling rigs, the Eirik Raude, which is preparing
for operations offshore Ghana and the Leiv Eiriksson,
which is currently operating in the North Sea. Both drilling
rigs may be exposed to risks inherent in deepwater drilling and
operating in harsh environments that may cause damage or loss.
The drilling of oil and gas wells, particularly exploratory
wells where little is known of the subsurface formations
involves risks, such as extreme pressure and temperature,
blowouts, reservoir damage, loss of production, loss of well
control, lost or stuck drill strings, equipment defects,
punch-throughs, craterings, fires, explosions, pollution and
natural disasters such as hurricanes and tropical storms. In
addition, offshore drilling operations are subject to perils
peculiar to marine operations, either while
on-site or
during mobilization, including capsizing, sinking, grounding,
collision, marine life infestations, and loss or damage from
severe weather. The replacement or repair of a rig could take a
significant amount of time, and we may not have any right to
compensation for lost revenues during that time, despite our
comprehensive loss of hire insurance policy. As long as we have
only two drilling rigs in operation, loss of or serious damage
to one of the drilling rigs could materially reduce our revenues
for the time that a rig is out of operation. In view of the
sophisticated design of the drilling rigs, we may be unable to
obtain a replacement rig that could perform under the conditions
that our drilling rigs are expected to operate, which could have
a material adverse effect on our results of operations and
financial condition.
We are subject to
certain risks with respect to our counterparties on contracts,
and failure of such counterparties to meet their obligations
could cause us to suffer losses or otherwise adversely affect
our business.
We enter into drilling services contracts with our customers,
newbuilding contracts with shipyards, interest rate swap
agreements and forward exchange contracts, and have employed and
may employ our drilling rigs and newbuild drillships on
fixed-term and well contracts. Our drilling contracts,
newbuilding contracts, and hedging agreements subject us to
counterparty
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risks. The ability of each of our counterparties to perform its
obligations under a contract with us will depend on a number of
factors that are beyond our control and may include, among other
things, general economic conditions, the condition of the
offshore contract drilling industry, the overall financial
condition of the counterparty, the dayrates received for
specific types of drilling rigs and drillships and various
expenses. In addition, in depressed market conditions, our
customers may no longer need a drilling unit that is currently
under contract or may be able to obtain a comparable drilling
unit at a lower dayrate. As a result, customers may seek to
renegotiate the terms of their existing drilling contracts or
avoid their obligations under those contracts. Should a
counterparty fail to honor its obligations under agreements with
us, we could sustain significant losses which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Construction of
drillships are subject to risks, including delays and cost
overruns, which could have an adverse impact on our available
cash resources and results of operations.
We, through our subsidiaries, have entered into contracts with
Samsung Heavy Industries Co. Ltd., or Samsung Heavy Industries,
for the construction of two ultra-deepwater newbuild drillships,
which we expect to take delivery of in the third quarter of
2011. We have also entered into a share purchase agreement to
acquire the owning companies of two additional newbuilding
drillships from a related party. We may also undertake new
construction projects and conversion projects in the future. In
addition, we make significant upgrade, refurbishment, conversion
and repair expenditures for our fleet from time to time,
particularly as our drilling units become older. Some of these
expenditures are unplanned. These projects and other efforts of
this type are subject to risks of cost overruns or delays
inherent in any large construction project as a result of
numerous factors, including the following:
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shipyard unavailability;
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shortages of equipment, materials or skilled labor;
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unscheduled delays in the delivery of ordered materials and
equipment;
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local customs strikes or related work slowdowns that could delay
importation of equipment or materials;
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engineering problems, including those relating to the
commissioning of newly designed equipment;
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latent damages or deterioration to hull, equipment and machinery
in excess of engineering estimates and assumptions;
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work stoppages;
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client acceptance delays;
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weather interference or storm damage;
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disputes with shipyards and suppliers;
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shipyard failures and difficulties;
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failure or delay of third-party equipment vendors or service
providers;
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unanticipated cost increases; and
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difficulty in obtaining necessary permits or approvals or in
meeting permit or approval conditions.
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These factors may contribute to cost variations and delays in
the delivery of our ultra-deepwater newbuild drillships. Delays
in the delivery of these newbuild drillships or the
30
inability to complete construction in accordance with their
design specifications may, in some circumstances, result in
delay in contract commencement, resulting in a loss of revenue
to us, and may also cause customers to renegotiate, terminate or
shorten the term of the drilling contract for the drillship
pursuant to applicable late delivery clauses. In the event of
termination of one of these contracts, we may not be able to
secure a replacement contract on as favorable terms.
Additionally, capital expenditures for drillship upgrades,
refurbishment and construction projects could materially exceed
our planned capital expenditures. Moreover, our drillships that
may undergo upgrade, refurbishment and repair may not earn a
dayrate during the periods they are out of service. In addition,
in the event of a shipyard failure or other difficulty, we may
be unable to enforce certain provisions under our newbuilding
contracts such as our refund guarantee, to recover amounts paid
as installments under such contracts. The occurrence of any of
these events may have a material adverse effect on our results
of operations, financial condition or cash flows.
New technologies
may cause our current drilling methods to become obsolete,
resulting in an adverse effect on our business.
The offshore contract drilling industry is subject to the
introduction of new drilling techniques and services using new
technologies, some of which may be subject to patent protection.
As competitors and others use or develop new technologies, we
may be placed at a competitive disadvantage and competitive
pressures may force us to implement new technologies at
substantial cost. Although we purchased the right to use the
Bingo 9000 design, or the Bingo Design, for our drilling rigs,
neither we nor the company from which we purchased those rights
has obtained or applied for any patents or other intellectual
property protection relating to the Bingo Design. As a result,
other parties may challenge our right to use the Bingo Design or
seek damages for the alleged infringement of intellectual
property rights that they may claim to own. We may also lose the
competitive advantage that we sought to achieve through the use
of the Bingo Design if our competitors duplicate key aspects of
the Bingo Design without our permission, and we may be unable to
prevent our competitors from doing so.
Our insurance may
not be adequate to cover our losses that may result from our
operations due to the inherent operational risks of the offshore
drilling contract industry.
We maintain insurance in accordance with industry standards. Our
insurance is intended to cover normal risks in our current
operations, including insurance against property damage, loss of
hire, war risk and third-party liability, including pollution
liability.
Although we have obtained insurance for the full assessed market
value of our drilling units, insurance coverage may not, under
certain circumstances, be available, and if available, may not
provide sufficient funds to protect us from all losses and
liabilities that could result from our operations. We have also
obtained loss of hire insurance which becomes effective after
30 days of downtime and coverage extends for approximately
one year. The principal risks which may not be insurable are
various environmental liabilities and liabilities resulting from
reservoir damage caused by our negligence. Moreover, our
insurance provides for premium adjustments based on claims and
is subject to deductibles and aggregate recovery limits. In the
case of pollution liabilities, our deductible is $25,000 per
event and in the case of other claims, our deductible is
$1.5 million per event and our aggregate recovery limits
are $624 million. Our insurance coverage may not protect
fully against losses resulting from a required cessation of rig
operations for environmental or other reasons. The occurrence of
a casualty, loss or liability against which we may not be fully
insured could significantly reduce our revenues, make it
financially impossible for us to obtain a replacement rig or to
repair a damaged rig, cause us to pay fines or damages which are
generally not insurable and that may
31
have priority over the payment obligations under our
indebtedness or otherwise impair our ability to meet our
obligations under our indebtedness and to operate profitably.
Insurance may not be available to us at all or on terms
acceptable to us, we may not maintain insurance or, if we are so
insured, our policy may not be adequate to cover our loss or
liability in all cases.
Our customers may
be involved the handling of environmentally hazardous substances
and if discharged into the ocean may subject us to pollution
liability which could have a negative impact on our cash flows,
results of operations and ability to pay dividends
Our operations may involve the use or handling of materials that
may be classified as environmentally hazardous substances.
Environmental laws and regulations applicable in the countries
in which we conduct operations have generally become more
stringent. Such laws and regulations may expose us to liability
for the conduct of or for conditions caused by others, or for
our acts that were in compliance with all applicable laws at the
time such actions were taken.
During our drilling operations in the past, we, through our
subsidiary, Ocean Rig, have caused the release of oil, waste and
other pollutants into the sea and into protected areas, such as
the Barents Sea where on April 12, 2005, we discharged less
than one cubic meter of hydraulic oil. While we conduct
maintenance on our drilling rigs in an effort to prevent such
releases, we cannot assure you that future releases will not
occur, especially as our rigs age. Such releases may be large in
quantity, above our permitted limits or in protected or other
areas in which public interest groups or governmental
authorities have an interest. These releases could result in
fines and other costs to us, such as costs to upgrade our
drilling rigs, costs to clean up the pollution, and costs to
comply with more stringent requirements in our discharge
permits. Moreover, these releases may result in our customers or
governmental authorities suspending or terminating our
operations in the affected area, which could have a material
adverse effect on our business, results of operation and
financial condition.
We expect that we will be able to obtain some degree of
contractual indemnification from our customers in most of our
drilling contracts against pollution and environmental damages,
but such indemnification may not be enforceable in all
instances, that the customer will be financially capable in all
cases of complying with its indemnity obligations or that the
Company will be able to obtain such indemnification agreements
in the future.
Because we
generate all of our revenues from the offshore drilling sector
in U.S. dollars but incur a significant portion of our employee
salary and administrative and other expenses in other
currencies, exchange rate fluctuations could have an adverse
impact on our results of operations from the offshore drilling
sector.
Our principal currency for our operations and financing for the
offshore drilling sector is the U.S. Dollar. The dayrates
for the drilling rigs, the Companys principal source of
revenues, are quoted and received in U.S. Dollars. The
principal currency for operating expenses in the offshore
drilling sector is also the U.S. Dollar; however, a
significant portion of employee salaries and administration
expenses, as well as parts of the consumables and repair and
maintenance expenses for the drilling rigs, are paid in
Norwegian Kroner (NOK), Great British Pound (GBP), Canadian
dollar (CAD) and Euro (EUR). The Company is also exposed to
changes in other currencies including the Euro. This could lead
to fluctuations in net income due to changes in the value of the
U.S. Dollar relative to the other currencies. Expenses
incurred in foreign currencies against which the
U.S. Dollar falls in value can increase, resulting in
higher U.S. Dollar denominated expenses. We employ
derivative instruments in order to hedge our currency exposure;
however, we may not be successful in hedging our currency
exposure and
32
our U.S. Dollar denominated results of operations could be
materially and adversely affected upon exchange rate
fluctuations determined by events outside of our control.
Failure to
attract or retain key personnel, labor disruptions or an
increase in labor costs could hurt our operations in the
offshore drilling sector.
We require highly skilled personnel to operate and provide
technical services and support for our business in the offshore
drilling sector worldwide. Competition for the labor required
for drilling operations has intensified as the number of rigs
activated, added to worldwide fleets or under construction has
increased, leading to shortages of qualified personnel in the
industry and creating upward pressure on wages and higher
turnover. If turnover increases, we could see a reduction in the
experience level of our personnel, which could lead to higher
downtime, more operating incidents and personal injury and other
claims, which in turn could decrease revenues and increase
costs. In addition, labor disruptions could hinder our
operations from being carried our normally and if not resolved
in a timely cost-effective manner, could have a material impact
our business. In response to these labor market conditions, we
are increasing efforts in our recruitment, training, development
and retention programs as required to meet our anticipated
personnel needs for offshore drilling. If these labor trends
continue, we may experience further increases in costs or limits
on operations in the offshore drilling sector. Some of our
employees are covered by collective bargaining agreements. If we
choose to cease operations in one of those countries or if
market conditions reduce the demand for our drilling services in
such a country, we would incur costs, which may be material,
associated with workforce reductions. In addition, upon their
expiration, these agreements may be renegotiated, and as a
result, we could experience higher personnel expenses, other
increased costs and increased operating restrictions, which may
be material to our business in the offshore drilling sector.
Our operating and
maintenance costs with respect to our offshore drilling rigs
will not necessarily fluctuate in proportion to changes in
operating revenues, which may have a material adverse effect on
our results of operations, financial condition and cash
flows.
Our operating and maintenance costs with respect to our offshore
drilling rigs will not necessarily fluctuate in proportion to
changes in operating revenues. Operating revenues may fluctuate
as a function of changes in dayrate. However, costs for
operating a rig are generally fixed or only semi-variable
regardless of the dayrate being earned. In addition, should our
drilling units incur idle time between contracts, we typically
will not de-man those drilling units because we will use the
crew to prepare the rig for its next contract. During times of
reduced activity, reductions in costs may not be immediate as
portions of the crew may be required to prepare rigs for
stacking, after which time the crew members are assigned to
active rigs or dismissed. In addition, as our drilling units are
mobilized from one geographic location to another, the labor and
other operating and maintenance costs can vary significantly. In
general, labor costs increase primarily due to higher salary
levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the unit is performing and
the age and condition of the equipment. Contract preparation
expenses vary based on the scope and length of contract
preparation required and the duration of the firm contractual
period over which such expenditures are incurred. If we
experience increased operating costs without a corresponding
increase in earnings, this may have a material adverse effect on
our results of operations, financial condition and cash flows.
33
We may be subject
to litigation that, if not resolved in our favor and not
sufficiently insured against, could have a material adverse
effect on us.
We may be, from time to time, involved in various litigation
matters. These matters may include, among other things, contract
disputes, personal injury claims, environmental claims or
proceedings, asbestos and other toxic tort claims, employment
matters, governmental claims for taxes or duties, and other
litigation that arises in the ordinary course of our business.
Although we intend to defend these matters vigorously, we cannot
predict with certainty the outcome or effect of any claim or
other litigation matter, and the ultimate outcome of any
litigation or the potential costs to resolve them may have a
material adverse effect on us. Insurance may not be applicable
or sufficient in all cases, insurers may not remain solvent, and
policies may not be located.
A change in tax
laws, treaties or regulations, or their interpretation, of any
country in which we operate our drilling rigs could result in a
high tax rate on our worldwide earnings, which could result in a
significant negative impact on our earnings and cash flows from
operations.
We conduct our worldwide drilling operations through various
subsidiaries. Tax laws and regulations are highly complex and
subject to interpretation. Consequently, we are subject to
changing tax laws, treaties and regulations in and between
countries in which we operate. Our income tax expense is based
upon our interpretation of tax laws in effect in various
countries at the time that the expense was incurred. A change in
these tax laws, treaties or regulations, or in the
interpretation thereof, or in the valuation of our deferred tax
assets, could result in a materially higher tax expense or a
higher effective tax rate on our worldwide earnings, and such
change could be significant to our financial results. If any tax
authority successfully challenges our operational structure,
inter-company pricing policies or the taxable presence of our
key subsidiaries in certain countries; or if the terms of
certain income tax treaties are interpreted in a manner that is
adverse to our structure; or if we lose a material tax dispute
in any country, particularly in the U.S., Canada, the U.K., or
Norway, our effective tax rate on our worldwide earnings from
our offshore drilling operations could increase substantially
and our earnings and cash flows from these operations could be
materially adversely affected. You are encouraged to consult
your own tax advisors concerning the overall tax consequences
arising in your own particular situation under United States
federal, state, local or foreign law of the ownership of common
stock.
34
USE OF
PROCEEDS
Unless we specify otherwise in any prospectus supplement, we
will use the net proceeds from the sale of securities offered by
this prospectus for capital expenditures, repayment of
indebtedness, working capital, to make vessel acquisitions and
for general corporate purposes.
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:
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future operating or financial results;
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statements about planned, pending or recent acquisitions,
business strategy and expected capital spending or operating
expenses, including drydocking and insurance costs;
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statements about drybulk shipping market trends, including
charter rates and factors affecting supply and demand;
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our ability to obtain additional financing;
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expectations regarding the availability of vessel
acquisitions; and
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anticipated developments with respect to pending litigation.
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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,
managements 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.
35
RATIO OF EARNINGS
TO FIXED CHARGES
Effective November 1, 2004, we changed our fiscal reporting
year-end from October 31st to December 31st. The
following table sets forth our unaudited ratio of earnings to
fixed charges for the fiscal years ended October 31, 2003
and 2004, the two-month period ended December 31, 2004, the
fiscal years ended December 31, 2005, 2006 and 2007 and the
six month period ended June 30,
2008(1)(.
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2-Month
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Year Ended
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Period Ended
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6-Month Period
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October 31,
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December 31,
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Year Ended December 31,
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Ended June 30,
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(in thousands of US dollars)
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2003
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2004
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2004
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2005
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2006
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2007
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2008
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Earnings
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Income from continuing operations before income taxes and
minority interest
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$
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7,189
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$
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39,113
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10,713
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$
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111,017
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$
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56,731
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$
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474,617
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$
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500,659
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Add: Fixed charges less interest capitalized
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896
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1,410
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368
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20,341
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41,149
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53,370
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46,336
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Less: Capitalized interest
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(110
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)
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(2,597
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)
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(3,539
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)
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Add: Equity in net loss of an associate
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299
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6,893
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Total Earnings
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$
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8,085
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$
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40,523
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11,081
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$
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131,358
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$
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97,770
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$
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525,689
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$
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550,349
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Fixed Charges
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Interest expense and capitalized interest
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758
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1,278
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257
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19,797
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37,364
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51,180
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36,576
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Amortization and write-off of capitalized expenses relating to
indebtedness
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138
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132
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111
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544
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3,785
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2,190
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9,760
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Total Fixed Charges
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$
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896
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$
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1,410
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368
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$
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20,341
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$
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41,149
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$
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53,370
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$
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46,336
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Ratio of Earnings to Fixed Charges
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9.0
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x
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28.7
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x
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30.1
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x
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6.5
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x
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2.4
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x
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9.8
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x
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11.9
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x
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( (1) We have not issued any
preferred shares as of the date of this prospectus.
36
CAPITALIZATION
A prospectus supplement will include information on the
Companys consolidated capitalization.
37
TAXATION
Taxation of Our
Drilling Operations
United States
Federal Income Tax Considerations
We operate in the United States through our subsidiary, Ocean
Rig USA LLC. Ocean Rig USA LLC is engaged in the trade or
business of providing drilling services to third parties on the
United States Outer Continental Shelf. 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 LLCs operations
in the United States in any given taxable year.
Other Tax
Considerations
In addition to the tax consequences discussed above, we may be
subject to income tax in jurisdictions where we conduct drilling
activities. The amount of any such tax imposed upon our
operations may be material.
PLAN OF
DISTRIBUTION
We or any selling shareholder may sell or distribute the
securities included in this prospectus through underwriters,
through agents, to dealers, in private transactions, at market
prices prevailing at the time of sale, at prices related to the
prevailing market prices, or at negotiated prices.
In addition, we or any selling shareholders may sell some or all
of our securities included in this prospectus through:
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a block trade in which a broker-dealer may resell a portion of
the block, as principal, in order to facilitate the transaction;
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purchases by a broker-dealer, as principal, and resale by the
broker-dealer for its account; or
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ordinary brokerage transactions and transactions in which a
broker solicits purchasers.
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In addition, we or any selling shareholders may enter into
option or other types of transactions that require us or them to
deliver our securities to a broker-dealer, who will then resell
or transfer the securities under this prospectus. We or any
selling shareholder may enter into hedging transactions with
respect to our securities. For example, we or any selling
shareholder may:
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enter into transactions involving short sales of our shares of
common stock by broker-dealers;
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sell shares of common stock short themselves and deliver the
shares to close out short positions;
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enter into option or other types of transactions that require us
or any selling shareholder to deliver shares of common stock to
a broker-dealer, who will then resell or transfer the shares of
common stock under this prospectus; or
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loan or pledge the shares of common stock to a broker-dealer,
who may sell the loaned shares or, in the event of default, sell
the pledged shares.
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We or any selling shareholder may enter into derivative
transactions with third parties, or sell securities not covered
by this prospectus to third parties in privately negotiated
transactions. If the applicable prospectus supplement indicates,
in connection with those derivatives,
38
the third parties may sell securities covered by this prospectus
and the applicable prospectus supplement, including in short
sale transactions. If so, the third party may use securities
pledged by us or any selling shareholder or borrowed from us,
any selling shareholder or others to settle those sales or to
close out any related open borrowings of stock, and may use
securities received from us or any selling shareholder in
settlement of those derivatives to close out any related open
borrowings of stock. The third party in such sale transactions
will be an underwriter and, if not identified in this
prospectus, will be identified in the applicable prospectus
supplement (or a post-effective amendment). In addition, we or a
selling shareholder may otherwise loan or pledge securities to a
financial institution or other third party that in turn may sell
the securities short using this prospectus. Such financial
institution or other third party may transfer its economic short
position to investors in our securities or in connection with a
concurrent offering of other securities.
Any broker-dealers or other persons acting on our behalf or the
behalf of the selling shareholders that participates with us or
any selling shareholders in the distribution of the securities
may be deemed to be underwriters and any commissions received or
profit realized by them on the resale of the securities may be
deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended, or the Securities Act.
At the time that any particular offering of securities is made,
to the extent required by the Securities Act, a prospectus
supplement will be distributed, setting forth the terms of the
offering, including the aggregate number of securities being
offered, the purchase price of the securities, the initial
offering price of the securities, the names of any underwriters,
dealers or agents, any discounts, commissions and other items
constituting compensation from us and any discounts, commissions
or concessions allowed or reallowed or paid to dealers.
Underwriters and agents in any distribution contemplated hereby,
including but not limited to at the market equity offerings, may
from time to time include Cantor Fitzgerald & Co.
Underwriters or agents could make sales in privately negotiated
transactions
and/or any
other method permitted by law, including sales deemed to be an
at-the-market
offering as defined in Rule 415 promulgated under the
Securities Act, which includes sales made directly on or through
the Nasdaq, the existing trading market for our shares of common
stock , or sales made to or through a market maker other than on
an exchange.
On October 1, 2008, Cantor Fitzgerald & Co.
issued an opinion to the audit committee of our board of
directors as to the fairness from a financial point of view of
our acquisition of the nine Capesize vessels in exchange for our
common shares.
We will bear costs relating to all of the securities being
registered under this Registration Statement.
Securities being offered by this prospectus and any accompanying
prospectus supplement may be sold directly by the Company to
shareholders and others, including broker dealers, pursuant to
dividend reinvestment and stock purchase plans.
As a result of requirements of the Financial Industry Regulatory
Authority (FINRA), formerly the National Association of
Securities Dealers, Inc. (NASD), the maximum commission or
discount to be received by any FINRA member or independent
broker/dealer may not be greater than eight percent (8%) of the
gross proceeds received by us or any selling shareholder for the
sale of any securities. If more than 10% of the net proceeds of
any offering of shares of common stock made under this
prospectus will be received by FINRA members participating in
the offering or affiliates or associated persons of such FINRA
members, the offering will be conducted in accordance with NASD
Conduct Rule 2710(h).
39
ENFORCEMENT OF
CIVIL LIABILITIES
DryShips Inc. is a Marshall Islands company and our executive
offices are located outside of the U.S. in Athens, Greece.
A majority of our directors, officers and the experts named in
the prospectus reside outside the U.S. In addition, a
substantial portion of our assets and the assets of our
directors, officers and experts are located outside of the
U.S. As a result, you may have difficulty serving legal
process within the U.S. upon us or any of these persons.
You may also have difficulty enforcing, both in and outside the
U.S., judgments you may obtain in U.S. courts against us or
these persons in any action, including actions based upon the
civil liability provisions of U.S. federal or state
securities laws.
Furthermore, there is substantial doubt that the courts of the
Marshall Islands or Greece would enter judgments in original
actions brought in those courts predicated on U.S. federal
or state securities laws.
PRICE RANGE OF
COMMON STOCK
Our common stock currently trades on the NASDAQ Global 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:
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Closing Price
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For the Period
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High
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Low
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2008
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Third quarter
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$
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79.61
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$
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33.15
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September
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68.78
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33.15
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August
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79.61
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66.30
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July
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79.13
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70.58
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Second quarter
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$
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110.74
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$
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59.98
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June
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95.23
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71.33
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May
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110.74
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83.21
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April
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86.54
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59.98
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First quarter
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$
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87.45
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$
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52.18
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March
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75.09
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55.93
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February
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87.45
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65.42
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January
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79.57
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52.18
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On October 16, the closing price for our common stock on
the Nasdaq Global Market was $19.50 per share.
40
DESCRIPTION OF
CAPITAL STOCK
Authorized and
Outstanding Capital Stock
Under our amended and restated articles of incorporation, our
authorized capital stock consists of 1,000,000,000 shares
of common stock, par value $0.01 per share, of which
43,550,000 shares are issued and outstanding as of
October 17, 2008, and 500,000,000 shares of preferred
stock, none of which were issued as of October 17, 2008.
All of our shares of stock are in registered form.
Share
History
In October 2004, we issued 15,400,000 shares of our common
stock to the Entrepreneurial Spirit Foundation, or the
Foundation, as consideration for the contribution to us of all
of the issued and outstanding capital stock of six of our
subsidiaries. The Foundation is a foundation organized under the
laws of Lichtenstein and is controlled by our Chairman and Chief
Executive Officer Mr. George Economou. Subsequent to the
issuance of the 15,400,000 shares discussed above,
2,772,000 shares of common stock were transferred from the
Foundation to Advice Investments S.A., a corporation organized
under the Republic of Liberia, all the issued and outstanding
capital stock of which is owned by Ms. Elisavet Manola of
Athens, Greece, the ex-wife of Mr. Economou. The Foundation
transferred 1,848,000 shares of common stock to Magic
Management Inc., all of the issued and outstanding capital stock
of which is owned by Ms. Rika Vosniadou of Athens, Greece,
the ex-wife of Mr. Economou. In February 2005, we issued
14,950,000 shares of common stock in connection with our
initial public offering. The net proceeds of the initial public
offering were $251.3 million. On February 14, 2006,
the Foundation transferred all of its shares to its wholly-owned
subsidiary, Elios Investments.
On May 10, 2006, the company filed its universal shelf
registration statement and related prospectus for the issuance
of 5,000,000 shares of common stock. From May 2006 through
August 2006, 4,650,000 shares of common stock with a par
value $0.01 were issued. The net proceeds after underwriting
commissions of 2.5% and other issuance fees were
$56.5 million.
Our shareholders voted to adopt a resolution at our annual
general shareholders meeting on July 11, 2006, which
increased the aggregate number of shares of common stock that
the Company is authorized to issue from 45,000,000 registered
shares with par value of $0.01 to 75,000,000 registered shares
with par value $0.01.
On October 24, 2006, the Companys board of directors
agreed to the request of the Companys major shareholders
(Elios Investments Inc., Advice Investments S.A. and Magic
Management Inc.) following the declaration of our $0.20
quarterly dividend per share in September 2006, to receive their
dividend payment in the form of our common stock in lieu of
cash. One of these shareholders, Elios Investments Inc., is
controlled by our Chairman and Chief Executive Officer,
Mr. George Economou. In addition, the board of directors
also agreed on that date to the request of a company related to
Mr. Economou to accept repayment of the outstanding balance
of a sellers credit in respect of a vessel purchased by us
(as discussed in Note 3(e) of our consolidated financial
statements included in our annual report on
Form 20-F
for the fiscal year ended December 31, 2006) in shares
of our common stock. As a result of the agreement, an aggregate
of $3,080,000 in dividends and the sellers credit together
with interest amounting to $3,327,000 were settled with 235,585
and 254,512 shares of our common stock, respectively. The
price used as consideration for issuance of the above common
stock was equal to the average closing price of our common stock
on the Nasdaq Global Market over the 8 trading days ended
October 24, 2006, which was $13.07 per share.
In December 2006, the Company filed a registration statement on
Form F-3
on behalf of the Companys major shareholders registering
for resale an aggregate of 15,890,097 shares of our common
stock.
41
In October 2007, the Company filed a universal shelf
registration statement on
Form F-3
ASR (Registration
No. 333-146540)
relating to the offer and sale of an indeterminate amount of
common shares, preferred shares, debt securities, which may be
guaranteed by one or more of our subsidiaries, our warrants, our
purchase contracts and units (the Registration
Statement). In October 2007, the Company filed a
prospectus supplement pursuant to Rule 424(b) relating to
the offer and sale of up to 6,000,000 shares of common
stock, par value $0.01 per share, pursuant to the Companys
Registration Statement, which was amended and supplemented by a
prospectus supplement filed pursuant to Rule 424(b) on
November 7, 2007. From October 2007 through December 2007,
we issued an aggregate of 1,191,000 shares of common stock
with par value $0.01 per share. The net proceeds, after
underwriting commissions ranging between 2% to 2.5% and other
issuance fees, amounted to $127.1 million.
In January 2008, the Company increased the aggregate number of
authorized shares of common stock of the Company from 75,000,000
registered shares with par value of $0.01 to 1,000,000,000
registered shares with a par value of $0.01 and increased the
aggregate number of authorized shares of preferred stock from
30,000,000 registered shares; par value $0.01 per share to
500,000,000 registered preferred shares with a par value of
$0.01 per share.
During the three months ended March 31, 2008, the Company
issued 4,759,000 shares of common stock with par value
$0.01 pursuant to the Registration Statement and related
prospectus supplements filed pursuant to Rule 424(b) on
October 12, 2007 and November 7, 2007. The net
proceeds, after underwriting commissions ranging between 1.5% to
2% and other issuance fees, amounted to $352.6 million.
In March 2008, the Company filed a prospectus supplement
pursuant to Rule 424(b) relating to the offer and sale of
up to an additional 6,000,000 shares of common stock, par
value $0.01 per share, pursuant to the Companys
Registration Statement.
On April 10, 2008, we issued 1,000,000 shares of
common stock out of the 1,834,055 shares reserved in the
Companys 2008 Equity Incentive Plan to Fabiana Services
S.A., or Fabiana. Fabiana, a related party entity incorporated
in the Marshall Islands, provides the services of the
individuals who serve in the positions of Chief Executive and
Interim Chief Financial Officer of the Company. Our Chief
Executive Officer also serves as our Interim Chief Financial
Officer. The shares vest quarterly in eight equal installments
with the first installment of 125,000 shares vesting on
May 28, 2008, in accordance with the consultancy agreement
with Fabiana.
In May 2008, the Company issued 1,109,903 shares of common
stock with par value $0.01 per share pursuant to the
Registration Statement and related prospectus supplement. The
net proceeds, after underwriting commissions of 1.75% and other
issuance fees, amounted to $101.6 million.
We will issue a total of 19,431,840 common shares to the sellers
of the nine Capesize vessels that we have agreed to acquire from
clients of Cardiff. The purchase price for each of the vessel
owning companies is subject to adjustment such that we may issue
additional common shares to the sellers in accordance with the
terms of the respective share purchase agreement. See
Recent DevelopmentsAcquisition of Nine Capesize
Vessels.
Description of
Common Stock
Each outstanding share of common stock entitles the holder to
one vote on all matters submitted to a vote of stockholders.
Subject to preferences that may be applicable to any outstanding
shares of preferred stock, holders of shares of common stock are
entitled to receive ratably all dividends, if any, declared by
our board of directors out of funds legally available for
dividends. Holders of common stock do not have conversion,
redemption or preemptive rights to subscribe to any of our
securities. All outstanding shares of common stock are, and the
shares to be sold in this offering when issued and paid for will
be, fully paid
42
and non-assessable. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders
of any shares of preferred stock which we may issue in the
future. Our common stock is quoted on the Nasdaq Global Market
under the symbol DRYS.
Our Amended and
Restated Articles of Incorporation and Bylaws
Our purpose, as stated in Section B of our amended and
restated articles of incorporation, is to engage in any lawful
act or activity for which corporations may now or hereafter be
organized under the Marshall Islands Business Corporations Act.
Our amended and restated articles of incorporation and bylaws do
not impose any limitations on the ownership rights of our
shareholders.
Directors
Our directors are elected by a plurality of the votes cast by
stockholders entitled to vote in an election. Our amended and
restated articles of incorporation provide that cumulative
voting shall not be used to elect directors. Our board of
directors must consist of at least three members. The exact
number of directors is fixed by a vote of at least
662/3%
of the entire board. Our by laws provide for a staggered board
of directors whereby directors shall be divided into three
classes: Class A, Class B and Class C which shall
be as nearly equal in number as possible. Shareholders, acting
as at a duly constituted meeting, or by unanimous written
consent of all shareholders, initially designated directors as
Class A, Class B or Class C. Directors designated
as Class B directors served for a term expiring at the 2006
annual meeting. Directors designated Class C directors
served for a term expiring at the 2007 annual meeting.
Class A directors served for a term expiring at the 2008
annual meeting of shareholders. At annual meetings for each
initial term, directors to replace those whose terms expire at
such annual meetings will be elected to hold office until the
third succeeding annual meeting. Each director serves his
respective term of office until his successor has been elected
and qualified, except in the event of his death, resignation,
removal or the earlier termination of his term of office. Our
board of directors has the authority to fix the amounts which
shall be payable to the members of the board of directors for
attendance at any meeting or for services rendered to us.
Stockholder
Meetings
Under our bylaws, annual stockholder meetings will be held at a
time and place selected by our board of directors. The meetings
may be held in or outside of the Marshall Islands. Special
meetings may be called by the board of directors, chairman of
the board or by the president. Our board of directors may set a
record date between 15 and 60 days before the date of any
meeting to determine the stockholders that will be eligible to
receive notice and vote at the meeting.
Dissenters
Rights of Appraisal and Payment
Under the BCA, our stockholders have the right to dissent from
various corporate actions, including any merger or
consolidation, sale of all or substantially all of our assets
not made in the usual course of our business, and receive
payment of the fair value of their shares. In the event of any
further amendment of our amended and restated articles of
incorporation, a stockholder also has the right to dissent and
receive payment for his or her shares if the amendment alters
certain rights in respect of those shares. The dissenting
stockholder must follow the procedures set forth in the BCA to
receive payment. In the event that we and any dissenting
stockholder fail to agree on a price for the shares, the BCA
procedures involve, among other things, the institution of
proceedings in the high court of the Republic of the Marshall
Islands or in any appropriate court in any jurisdiction in which
the Companys shares are primarily traded on a local or
national securities exchange.
43
Stockholders
Derivative Actions
Under the BCA, any of our stockholders may bring an action in
our name to procure a judgment in our favor, also known as a
derivative action, provided that the stockholder bringing the
action is a holder of common stock both at the time the
derivative action is commenced and at the time of the
transaction to which the action relates.
Indemnification
of Officers and Directors
Our bylaws includes a provision that entitles any director or
officer of the Corporation to be indemnified by the Corporation
upon the same terms, under the same conditions and to the same
extent as authorized by the BCA if he acted in good faith and in
a manner reasonably believed to be in and not opposed to the
best interests of the Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
We are also authorized to carry directors and
officers insurance as a protection against any liability
asserted against our directors and officers acting in their
capacity as directors and officers regardless of whether the
Company would have the power to indemnify such director or
officer against such liability by law or under the provisions of
our by laws. We believe that these indemnification provisions
and insurance are useful to attract and retain qualified
directors and executive officers.
The indemnification provisions in our bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Anti-takeover
Provisions of our Charter Documents
Several provisions of our amended and restated articles of
incorporation and by-laws may have anti-takeover effects. These
provisions are intended to avoid costly takeover battles, lessen
our vulnerability to a hostile change of control and enhance the
ability of our board of directors to maximize stockholder value
in connection with any unsolicited offer to acquire us. However,
these anti-takeover provisions, which are summarized below,
could also discourage, delay or prevent (1) the merger or
acquisition of our company by means of a tender offer, a proxy
contest or otherwise, that a stockholder may consider in its
best interest and (2) the removal of incumbent officers and
directors.
Blank Check
Preferred Stock
Under the terms of our amended and restated articles of
incorporation, our board of directors has authority, without any
further vote or action by our stockholders, to issue up to
30.0 million shares of blank check preferred stock. Our
board of directors may issue shares of preferred stock on terms
calculated to discourage, delay or prevent a change of control
of our company or the removal of our management.
Classified Board
of Directors
Our amended and restated articles of incorporation provide for a
board of directors serving staggered, three-year terms.
Approximately one-third of our board of directors will be
elected each year. The classified board provision could
discourage a third party from making a tender offer for our
shares or attempting to obtain control of our company. It could
also delay
44
stockholders who do not agree with the policies of the board of
directors from removing a majority of the board of directors for
two years.
Election and
Removal of Directors
Our amended and restated articles of incorporation prohibit
cumulative voting in the election of directors. Our by-laws
require shareholders to give advance written notice of
nominations for the election of directors. Our by-laws also
provide that our directors may be removed only for cause and
only upon affirmative vote of the holders of at least
662/3%
of the outstanding voting shares of the Company. These
provisions may discourage, delay or prevent the removal of
incumbent officers and directors.
Limited Actions
by Stockholders
Our by-laws provide that if a quorum is present, and except as
otherwise expressly provided by law, the affirmative vote of a
majority of the shares of stock represented at the meeting shall
be the act of the shareholders. Shareholders may act by way of
written consent in accordance with the provisions of
Section 67 of the BCA.
Advance Notice
Requirements for Shareholder Proposals and Director
Nominations
Our bylaws provide that shareholders seeking to nominate
candidates for election as directors or to bring business before
an annual meeting of shareholders must provide timely notice of
their proposal in writing to the corporate secretary. Generally,
to be timely, a shareholders notice must be received at
our principal executive offices not less than 150 days nor
more than 180 days prior to the one year anniversary of the
preceding years annual meeting. Our bylaws also specify
requirements as to the form and content of a shareholders
notice. These provisions may impede shareholders ability
to bring matters before an annual meeting of shareholders or
make nominations for directors at an annual meeting of
shareholders.
Stockholders
Rights Agreement
We entered into a Stockholders Rights Agreement with American
Stock Transfer & Trust Company, as Rights Agent,
as of January 18, 2008. Under this Agreement, we declared a
dividend payable of one preferred share purchase right, or
Right, to purchase one one-thousandth of a share of the
Companys Series A Participating Preferred Stock for
each outstanding share of DryShips Inc. common stock, par value
U.S.$0.01 per share. Each Right will separate from the common
stock and become exercisable after (1) a person or group
acquires ownership of 15% or more of the companys common
stock or (2) the 10th business day (or such later date
as determined by the companys board of directors) after a
person or group announces a tender or exchange offer which would
result in that person or group holding 15% or more of the
companys common stock. On the distribution date, each
holder of a right will be entitled to purchase for $250, or the
Exercise Price, a fraction (1/1000th) of one share of the
companys preferred stock which has similar economic terms
as one share of common stock. If an acquiring person, or an
Acquiring Person, acquires more than 15% of the companys
common stock then each holder of a right (except that Acquiring
Person) will be entitled to buy at the Exercise Price, a number
of shares of our common stock which has a market value of twice
the exercise price. Any time after the date an Acquiring Person
obtains more than 15% of our common stock and before that
Acquiring Person acquires more than 50% of our outstanding
common stock, we may exchange each right owned by all other
rights holders, in whole or in part, for one share of our common
stock. The rights expire on the earliest of
(1) February 4, 2018 or (2) the exchange or
redemption of the rights as described above. We can redeem the
rights at any time prior to a public announcement that a person
has acquired ownership of 15% or more of the companys
common stock. The terms of the rights
45
and the Stockholders Rights Agreement may be amended without the
consent of the rights holders at any time on or prior to the
Distribution Date. After the Distribution Date, the terms of the
rights and the Stockholders Rights Agreement may be amended to
make changes that do not adversely affect the rights of the
rights holders (other than the Acquiring Person). The rights do
not have any voting rights. The rights have the benefit of
certain customary anti-dilution protections.
Dividends
While we may not continue to do so, and subject to the
limitations discussed below, we currently intend to pay regular
cash dividends on our common stock on a quarterly basis. We have
paid a quarterly dividend of $0.20 per share to holders of our
common stock each quarter since our initial public offering in
February 2005. Under our credit facility we are restricted in
our payments of dividends. During 2006 dividend payments were
not permitted to exceed $18.0 million. For any dividends
declared or paid in excess of this amount in 2006, the Company
obtained a related written consent from its lenders. Thereafter
dividend payments are not to exceed 50% of net income as
evidenced by the relevant annual audited financial statements.
Declaration and payment of any dividend is subject to the
discretion of our board of directors. The timing and amount of
dividend payments will be dependent upon our earnings, financial
condition, cash requirements and availability, restrictions in
our loan agreements, the terms of the debt securities we offer,
the provisions of applicable law affecting the payment of
distributions to shareholders and other factors. Because we are
a holding company with no material assets other than the stock
of our subsidiaries, our ability to pay dividends will depend on
the earnings and cash flow of our subsidiaries and their ability
to pay dividends to us. The laws governing us and our
subsidiaries generally prohibit the payment of dividends other
than from surplus or while a company is insolvent or would be
rendered insolvent.
DESCRIPTION OF
PREFERRED SHARES
Under the terms of our amended and restated articles of
incorporation, our board of directors has authority, without any
further vote or action by our shareholders, to issue up to
500,000,000 shares of blank check preferred stock. Our
board of directors may issue shares of preferred stock on terms
calculated to discourage, delay or prevent a change of control
of our company or the removal of our management. The material
terms of any series of preferred shares that we offer through a
prospectus supplement will be described in that prospectus
supplement. Our board of directors is authorized to provide for
the issuance of preferred shares in one or more series with
designations as may be stated in the resolution or resolutions
providing for the issue of such preferred shares. At the time
that any series of our preferred shares are authorized, our
board of directors will fix the dividend rights, any conversion
rights, any voting rights, redemption provisions, liquidation
preferences and any other rights, preferences, privileges and
restrictions of that series, as well as the number of shares
constituting that series and their designation. Our board of
directors could, without shareholder approval, cause us to issue
preferred stock which has voting, conversion and other rights
that could adversely affect the holders of our ordinary shares
or make it more difficult to effect a change in control. Our
preferred shares could be used to dilute the share ownership of
persons seeking to obtain control of us and thereby hinder a
possible takeover attempt which, if our shareholders were
offered a premium over the market value of their shares, might
be viewed as being beneficial to our shareholders. In addition,
our preferred shares could be issued with voting, conversion and
other rights and preferences which would adversely affect the
voting power and other rights of holders of our ordinary shares.
The material terms of any series of preferred shares that we
offer through a prospectus supplement will be described in that
prospectus supplement.
46
DESCRIPTION OF
WARRANTS
We may issue warrants to purchase our debt or equity securities
or securities of third parties or other rights, including rights
to receive payment in cash or securities based on the value,
rate or price of one or more specified commodities, currencies,
securities or indices, or any combination of the foregoing.
Warrants may be issued independently or together with any other
securities and may be attached to, or separate from, such
securities. Each series of warrants will be issued under a
separate warrant agreement to be entered into between us and a
warrant agent. The terms of any warrants to be issued and a
description of the material provisions of the applicable warrant
agreement will be set forth in the applicable prospectus
supplement.
The applicable prospectus supplement will describe the following
terms of any warrants in respect of which this prospectus is
being delivered:
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the title of such warrants;
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the aggregate number of such warrants;
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the price or prices at which such warrants will be issued;
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the currency or currencies, in which the price of such warrants
will be payable;
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the securities or other rights, including rights to receive
payment in cash or securities based on the value, rate or price
of one or more specified commodities, currencies, securities or
indices, or any combination of the foregoing, purchasable upon
exercise of such warrants;
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the price at which and the currency or currencies, in which the
securities or other rights purchasable upon exercise of such
warrants may be purchased;
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the date on which the right to exercise such warrants shall
commence and the date on which such right shall expire;
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if applicable, the minimum or maximum amount of such warrants
which may be exercised at any one time;
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if applicable, the designation and terms of the securities with
which such warrants are issued and the number of such warrants
issued with each such security;
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if applicable, the date on and after which such warrants and the
related securities will be separately transferable;
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information with respect to book-entry procedures, if any;
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if applicable, a discussion of any material United States
Federal income tax considerations; and
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any other terms of such warrants, including terms, procedures
and limitations relating to the exchange and exercise of such
warrants.
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DESCRIPTION OF
DEBT SECURITIES
We may issue debt securities from time to time in one or more
series, under one or more indentures, each dated as of a date on
or prior to the issuance of the debt securities to which it
relates. We may issue senior debt securities and subordinated
debt securities pursuant to separate indentures, a senior
indenture and a subordinated indenture, respectively, in each
case between us and the trustee named in the indenture. These
indentures will be filed either as exhibits to an amendment to
this Registration Statement or a prospectus supplement, or as an
exhibit to a Securities Exchange Act of 1934, or Exchange Act,
report that will be
47
incorporated by reference to the Registration Statement or a
prospectus supplement. We will refer to any or all of these
reports as subsequent filings. The senior indenture
and the subordinated indenture, as amended or supplemented from
time to time, are sometimes referred to individually as an
indenture and collectively as the
indentures. Each indenture will be subject to and
governed by the Trust Indenture Act. The aggregate
principal amount of debt securities which may be issued under
each indenture will be unlimited and each indenture will contain
the specific terms of any series of debt securities or provide
that those terms must be set forth in or determined pursuant to,
an authorizing resolution, as defined in the applicable
prospectus supplement,
and/or a
supplemental indenture, if any, relating to such series.
Certain of our subsidiaries may guarantee the debt securities we
offer. Those guarantees may or may not be secured by liens,
mortgages, and security interests in the assets of those
subsidiaries. The terms and conditions of any such subsidiary
guarantees, and a description of any such liens, mortgages or
security interests, will be set forth in the prospectus
supplement that will accompany this prospectus.
Our statements below relating to the debt securities and the
indentures are summaries of their anticipated provisions, are
not complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the
applicable indenture and any applicable U.S. federal income
tax consideration as well as any applicable modifications of or
additions to the general terms described below in the applicable
prospectus supplement or supplemental indenture.
General
Neither indenture limits the amount of debt securities which may
be issued, and each indenture provides that debt securities may
be issued up to the aggregate principal amount from time to
time. The debt securities may be issued in one or more series.
The senior debt securities will be unsecured and will rank on a
parity with all of our other unsecured and unsubordinated
indebtedness. Each series of subordinated debt securities will
be unsecured and subordinated to all present and future senior
indebtedness of debt securities will be described in an
accompanying prospectus supplement.
You should read the subsequent filings relating to the
particular series of debt securities for the following terms of
the offered debt securities:
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the designation, aggregate principal amount and authorized
denominations;
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the issue price, expressed as a percentage of the aggregate
principal amount;
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the maturity date;
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the interest rate per annum, if any;
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if the offered debt securities provide for interest payments,
the date from which interest will accrue, the dates on which
interest will be payable, the date on which payment of interest
will commence and the regular record dates for interest payment
dates;
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any optional or mandatory sinking fund provisions or conversion
or exchangeability provisions;
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the date, if any, after which and the price or prices at which
the offered debt securities may be optionally redeemed or must
be mandatorily redeemed and any other terms and provisions of
optional or mandatory redemptions;
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if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which offered debt securities of
the series will be issuable;
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48
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if other than the full principal amount, the portion of the
principal amount of offered debt securities of the series which
will be payable upon acceleration or provable in bankruptcy;
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any events of default not set forth in this prospectus;
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the currency or currencies, including composite currencies, in
which principal, premium and interest will be payable, if other
than the currency of the United States of America;
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if principal, premium or interest is payable, at our election or
at the election of any holder, in a currency other than that in
which the offered debt securities of the series are stated to be
payable, the period or periods within which, and the terms and
conditions upon which, the election may be made;
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whether interest will be payable in cash or additional
securities at our or the holders option and the terms and
conditions upon which the election may be made;
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if denominated in a currency or currencies other than the
currency of the United States of America, the equivalent price
in the currency of the United States of America for purposes of
determining the voting rights of holders of those debt
securities under the applicable indenture;
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if the amount of payments of principal, premium or interest may
be determined with reference to an index, formula or other
method based on a coin or currency other than that in which the
offered debt securities of the series are stated to be payable,
the manner in which the amounts will be determined;
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any restrictive covenants or other material terms relating to
the offered debt securities, which may not be inconsistent with
the applicable indenture;
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whether the offered debt securities will be issued in the form
of global securities or certificates in registered or bearer
form;
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any terms with respect to subordination;
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any listing on any securities exchange or quotation system;
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additional provisions, if any, related to defeasance and
discharge of the offered debt securities; and
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the applicability of any guarantees.
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Unless otherwise indicated in subsequent filings with the
Commission relating to the indenture, principal, premium and
interest will be payable and the debt securities will be
transferable at the corporate trust office of the applicable
trustee. Unless other arrangements are made or set forth in
subsequent filings or a supplemental indenture, principal,
premium and interest will be paid by checks mailed to the
holders at their registered addresses.
Unless otherwise indicated in subsequent filings with the
Commission, the debt securities will be issued only in fully
registered form without coupons, in denominations of $1,000 or
any integral multiple thereof. No service charge will be made
for any transfer or exchange of the debt securities, but we may
require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection with these debt
securities.
Some or all of the debt securities may be issued as discounted
debt securities, bearing no interest or interest at a rate which
at the time of issuance is below market rates, to be sold at a
substantial discount below the stated principal amount. United
States federal income consequences and other special
considerations applicable to any discounted securities will be
described in subsequent filings with the Commission relating to
those securities.
49
We refer you to applicable subsequent filings with respect to
any deletions or additions or modifications from the description
contained in this prospectus.
Senior
Debt
We will issue senior debt securities under the senior debt
indenture. These senior debt securities will rank on an equal
basis with all our other unsecured debt except subordinated debt.
Subordinated
Debt
We will issue subordinated debt securities under the
subordinated debt indenture. Subordinated debt will rank
subordinate and junior in right of payment, to the extent set
forth in the subordinated debt indenture, to all our senior debt
(both secured and unsecured).
In general, the holders of all senior debt are first entitled to
receive payment of the full amount unpaid on senior debt before
the holders of any of the subordinated debt securities are
entitled to receive a payment on account of the principal or
interest on the indebtedness evidenced by the subordinated debt
securities in certain events.
If we default in the payment of any principal of, or premium, if
any, or interest on any senior debt when it becomes due and
payable after any applicable grace period, then, unless and
until the default is cured or waived or ceases to exist, we
cannot make a payment on account of or redeem or otherwise
acquire the subordinated debt securities.
If there is any insolvency, bankruptcy, liquidation or other
similar proceeding relating to us or our property, then all
senior debt must be paid in full before any payment may be made
to any holders of subordinated debt securities.
Furthermore, if we default in the payment of the principal of
and accrued interest on any subordinated debt securities that is
declared due and payable upon an event of default under the
subordinated debt indenture, holders of all our senior debt will
first be entitled to receive payment in full in cash before
holders of such subordinated debt can receive any payments.
Senior debt means:
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the principal, premium, if any, interest and any other amounts
owing in respect of our indebtedness for money borrowed and
indebtedness evidenced by securities, notes, debentures, bonds
or other similar instruments issued by us, including the senior
debt securities or letters of credit;
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all capitalized lease obligations;
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all hedging obligations;
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all obligations representing the deferred purchase price of
property; and
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all deferrals, renewals, extensions and refundings of
obligations of the type referred to above;
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but senior debt does not include:
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subordinated debt securities; and
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any indebtedness that by its terms is subordinated to, or ranks
on an equal basis with, our subordinated debt securities.
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50
Covenants
Any series of offered debt securities may have covenants in
addition to or differing from those included in the applicable
indenture which will be described in subsequent filings prepared
in connection with the offering of such securities, limiting or
restricting, among other things:
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the ability of us or our subsidiaries to incur either secured or
unsecured debt, or both;
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the ability to make certain payments, dividends, redemptions or
repurchases;
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our ability to create dividend and other payment restrictions
affecting our subsidiaries;
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our ability to make investments;
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mergers and consolidations by us or our subsidiaries;
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sales of assets by us;
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our ability to enter into transactions with affiliates;
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our ability to incur liens; and
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sale and leaseback transactions.
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Modification of
the Indentures
Each indenture and the rights of the respective holders may be
modified by us only with the consent of holders of not less than
a majority in aggregate principal amount of the outstanding debt
securities of all series under the respective indenture affected
by the modification, taken together as a class. But no
modification that:
changes the amount of securities whose holders must consent to
an amendment, supplement or waiver;
reduces the rate of or changes the interest payment time on any
security or alters its redemption provisions (other than any
alteration to any such section which would not materially
adversely affect the legal rights of any holder under the
indenture) or the price at which we are required to offer to
purchase the securities;
reduces the principal or changes the maturity of any security or
reduce the amount of, or postpone the date fixed for, the
payment of any sinking fund or analogous obligation;
waives a default or event of default in the payment of the
principal of or interest, if any, on any security (except a
rescission of acceleration of the securities of any series by
the holders of at least a majority in principal amount of the
outstanding securities of that series and a waiver of the
payment default that resulted from such acceleration);
makes the principal of or interest, if any, on any security
payable in any currency other than that stated in the Security;
makes any change with respect to holders rights to receive
principal and interest, the terms pursuant to which defaults can
be waived, certain modifications affecting shareholders or
certain currency-related issues; or
waives a redemption payment with respect to any Security or
change any of the provisions with respect to the redemption of
any securities
will be effective against any holder without his consent. Other
terms as specified in subsequent filings may be modified without
the consent of the holders.
51
Events of
Default
Each indenture defines an event of default for the debt
securities of any series as being any one of the following
events:
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default in any payment of interest when due which continues for
30 days;
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default in any payment of principal or premium when due;
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default in the deposit of any sinking fund payment when due;
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default in the performance of any covenant in the debt
securities or the applicable indenture which continues for
60 days after we receive notice of the default;
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default under a bond, debenture, note or other evidence of
indebtedness for borrowed money by us or our subsidiaries (to
the extent we are directly responsible or liable therefor)
having a principal amount in excess of a minimum amount set
forth in the applicable subsequent filing, whether such
indebtedness now exists or is hereafter created, which default
shall have resulted in such indebtedness becoming or being
declared due and payable prior to the date on which it would
otherwise have become due and payable, without such acceleration
having been rescinded or annulled or cured within 30 days
after we receive notice of the default; and
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events of bankruptcy, insolvency or reorganization.
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An event of default of one series of debt securities does not
necessarily constitute an event of default with respect to any
other series of debt securities.
There may be such other or different events of default as
described in an applicable subsequent filing with respect to any
class or series of offered debt securities.
In case an event of default occurs and continues for the debt
securities of any series, the applicable trustee or the holders
of not less than 25% in aggregate principal amount of the debt
securities then outstanding of that series may declare the
principal and accrued but unpaid interest of the debt securities
of that series to be due and payable. Any event of default for
the debt securities of any series which has been cured may be
waived by the holders of a majority in aggregate principal
amount of the debt securities of that series then outstanding.
Each indenture requires us to file annually after debt
securities are issued under that indenture with the applicable
trustee a written statement signed by two of our officers as to
the absence of material defaults under the terms of that
indenture. Each indenture provides that the applicable trustee
may withhold notice to the holders of any default if it
considers it in the interest of the holders to do so, except
notice of a default in payment of principal, premium or interest.
Subject to the duties of the trustee in case an event of default
occurs and continues, each indenture provides that the trustee
is under no obligation to exercise any of its rights or powers
under that indenture at the request, order or direction of
holders unless the holders have offered to the trustee
reasonable indemnity. Subject to these provisions for
indemnification and the rights of the trustee, each indenture
provides that the holders of a majority in principal amount of
the debt securities of any series then outstanding have the
right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee as long as the
exercise of that right does not conflict with any law or the
indenture.
Defeasance and
Discharge
The terms of each indenture provide us with the option to be
discharged from any and all obligations in respect of the debt
securities issued thereunder upon the deposit with the
52
trustee, in trust, of money or U.S. government obligations,
or both, which through the payment of interest and principal in
accordance with their terms will provide money in an amount
sufficient to pay any installment of principal, premium and
interest on, and any mandatory sinking fund payments in respect
of, the debt securities on the stated maturity of the payments
in accordance with the terms of the debt securities and the
indenture governing the debt securities. This right may only be
exercised if, among other things, we have received from, or
there has been published by, the United States Internal Revenue
Service a ruling to the effect that such a discharge will not be
deemed, or result in, a taxable event with respect to holders.
This discharge would not apply to our obligations to register
the transfer or exchange of debt securities, to replace stolen,
lost or mutilated debt securities, to maintain paying agencies
and hold moneys for payment in trust.
Defeasance of
Certain Covenants
The terms of the debt securities provide us with the right to
omit complying with specified covenants and that specified
events of default described in a subsequent filing will not
apply. In order to exercise this right, we will be required to
deposit with the trustee money or U.S. government
obligations, or both, which through the payment of interest and
principal will provide money in an amount sufficient to pay
principal, premium, if any, and interest on, and any mandatory
sinking fund payments in respect of, the debt securities on the
stated maturity of such payments in accordance with the terms of
the debt securities and the indenture governing such debt
securities. We will also be required to deliver to the trustee
an opinion of counsel to the effect that we have received from,
or there has been published by, the IRS a ruling to the effect
that the deposit and related covenant defeasance will not cause
the holders of such series to recognize income, gain or loss for
federal income tax purposes.
A subsequent filing may further describe the provisions, if any,
of any particular series of offered debt securities permitting a
discharge defeasance.
Subsidiary
Guarantees
Certain of our subsidiaries may guarantee the debt securities we
offer. In that case, the terms and conditions of the subsidiary
guarantees will be set forth in the applicable prospectus
supplement. Unless we indicate differently in the applicable
prospectus supplement, if any of our subsidiaries guarantee any
of our debt securities that are subordinated to any of our
senior indebtedness, then the subsidiary guarantees will be
subordinated to the senior indebtedness of such subsidiary to
the same extent as our debt securities are subordinated to our
senior indebtedness.
Global
Securities
The debt securities of a series may be issued in whole or in
part in the form of one or more global securities that will be
deposited with, or on behalf of, a depository identified in an
applicable subsequent filing and registered in the name of the
depository or a nominee for the depository. In such a case, one
or more global securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate
principal amount of outstanding debt securities of the series to
be represented by the global security or securities. Unless and
until it is exchanged in whole or in part for debt securities in
definitive certificated form, a global security may not be
transferred except as a whole by the depository for the global
security to a nominee of the depository or by a nominee of the
depository to the depository or another nominee of the
depository or by the depository or any nominee to a successor
depository for that series or a nominee of the successor
depository and except in the circumstances described in an
applicable subsequent filing.
53
We expect that the following provisions will apply to depository
arrangements for any portion of a series of debt securities to
be represented by a global security. Any additional or different
terms of the depository arrangement will be described in an
applicable subsequent filing.
Upon the issuance of any global security, and the deposit of
that global security with or on behalf of the depository for the
global security, the depository will credit, on its book-entry
registration and transfer system, the principal amounts of the
debt securities represented by that global security to the
accounts of institutions that have accounts with the depository
or its nominee. The accounts to be credited will be designated
by the underwriters or agents engaging in the distribution of
the debt securities or by us, if the debt securities are offered
and sold directly by us. Ownership of beneficial interests in a
global security will be limited to participating institutions or
persons that may hold interest through such participating
institutions. Ownership of beneficial interests by participating
institutions in the global security will be shown on, and the
transfer of the beneficial interests will be effected only
through, records maintained by the depository for the global
security or by its nominee. Ownership of beneficial interests in
the global security by persons that hold through participating
institutions will be shown on, and the transfer of the
beneficial interests within the participating institutions will
be effected only through, records maintained by those
participating institutions. The laws of some jurisdictions may
require that purchasers of securities take physical delivery of
the securities in certificated form. The foregoing limitations
and such laws may impair the ability to transfer beneficial
interests in the global securities.
So long as the depository for a global security, or its nominee,
is the registered owner of that global security, the depository
or its nominee, as the case may be, will be considered the sole
owner or holder of the debt securities represented by the global
security for all purposes under the applicable indenture. Unless
otherwise specified in an applicable subsequent filing and
except as specified below, owners of beneficial interests in the
global security will not be entitled to have debt securities of
the series represented by the global security registered in
their names, will not receive or be entitled to receive physical
delivery of debt securities of the series in certificated form
and will not be considered the holders thereof for any purposes
under the indenture. Accordingly, each person owning a
beneficial interest in the global security must rely on the
procedures of the depository and, if such person is not a
participating institution, on the procedures of the
participating institution through which the person owns its
interest, to exercise any rights of a holder under the indenture.
The depository may grant proxies and otherwise authorize
participating institutions to give or take any request, demand,
authorization, direction, notice, consent, waiver or other
action which a holder is entitled to give or take under the
applicable indenture. We understand that, under existing
industry practices, if we request any action of holders or any
owner of a beneficial interest in the global security desires to
give any notice or take any action a holder is entitled to give
or take under the applicable indenture, the depository would
authorize the participating institutions to give the notice or
take the action, and participating institutions would authorize
beneficial owners owning through such participating institutions
to give the notice or take the action or would otherwise act
upon the instructions of beneficial owners owning through them.
Unless otherwise specified in an applicable subsequent filings,
payments of principal, premium and interest on debt securities
represented by global security registered in the name of a
depository or its nominee will be made by us to the depository
or its nominee, as the case may be, as the registered owner of
the global security.
We expect that the depository for any debt securities
represented by a global security, upon receipt of any payment of
principal, premium or interest, will credit participating
institutions accounts with payments in amounts
proportionate to their respective beneficial interests in the
principal amount of the global security as shown on the records
of the depository. We
54
also expect that payments by participating institutions to
owners of beneficial interests in the global security held
through those participating institutions will be governed by
standing instructions and customary practices, as is now the
case with the securities held for the accounts of customers
registered in street names, and will be the responsibility of
those participating institutions. None of us, the trustees or
any agent of ours or the trustees will have any responsibility
or liability for any aspect of the records relating to or
payments made on account of beneficial interests in a global
security, or for maintaining, supervising or reviewing any
records relating to those beneficial interests.
Unless otherwise specified in the applicable subsequent filings,
a global security of any series will be exchangeable for
certificated debt securities of the same series only if:
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the depository for such global securities notifies us that it is
unwilling or unable to continue as depository or such depository
ceases to be a clearing agency registered under the Exchange Act
and, in either case, a successor depository is not appointed by
us within 90 days after we receive the notice or become
aware of the ineligibility;
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we in our sole discretion determine that the global securities
shall be exchangeable for certificated debt securities; or
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there shall have occurred and be continuing an event of default
under the applicable indenture with respect to the debt
securities of that series.
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Upon any exchange, owners of beneficial interests in the global
security or securities will be entitled to physical delivery of
individual debt securities in certificated form of like tenor
and terms equal in principal amount to their beneficial
interests, and to have the debt securities in certificated form
registered in the names of the beneficial owners, which names
are expected to be provided by the depositorys relevant
participating institutions to the applicable trustee.
In the event that the Depository Trust Company, or DTC,
acts as depository for the global securities of any series, the
global securities will be issued as fully registered securities
registered in the name of Cede & Co., DTCs
partnership nominee.
DTC is a limited purpose trust company organized under the New
York Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the Federal
Reserve System, a clearing corporation within the
meaning of the New York Uniform Commercial Code, and a
clearing agency registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds
securities that its participating institutions deposit with DTC.
DTC also facilitates the settlement among participating
institutions of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized
book-entry changes in participating institutions accounts,
thereby eliminating the need for physical movement of securities
certificates. Direct participating institutions include
securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. DTC is owned by a number
of its direct participating institutions and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the
DTC system is also available to others, such as securities
brokers and dealers and banks and trust companies that clear
through or maintain a custodial relationship with a direct
participating institution, either directly or indirectly. The
rules applicable to DTC and its participating institutions are
on file with the Commission.
To facilitate subsequent transfers, the debt securities may be
registered in the name of DTCs nominee, Cede &
Co. The deposit of the debt securities with DTC and their
registration in the name of Cede & Co. will effect no
change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the debt securities. DTCs
records reflect only the identity of the direct participating
institutions to whose accounts debt securities are credited,
55
which may or may not be the beneficial owners. The participating
institutions remain responsible for keeping account of their
holdings on behalf of their customers.
Delivery of notices and other communications by DTC to direct
participating institutions, by direct participating institutions
to indirect participating institutions, and by direct
participating institutions and indirect participating
institutions to beneficial owners of debt securities are
governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect.
Neither DTC nor Cede & Co. consents or votes with
respect to the debt securities. Under its usual procedures, DTC
mails a proxy to the issuer as soon as possible after the record
date. The proxy assigns Cede & Co.s consenting
or voting rights to those direct participating institution to
whose accounts the debt securities are credited on the record
date.
If applicable, redemption notices shall be sent to
Cede & Co. If less than all of the debt securities of
a series represented by global securities are being redeemed,
DTCs practice is to determine by lot the amount of the
interest of each direct participating institutions in that issue
to be redeemed.
To the extent that any debt securities provide for repayment or
repurchase at the option of the holders thereof, a beneficial
owner shall give notice of any option to elect to have its
interest in the global security repaid by us, through its
participating institution, to the applicable trustee, and shall
effect delivery of the interest in a global security by causing
the direct participating institution to transfer the direct
participating institutions interest in the global security
or securities representing the interest, on DTCs records,
to the applicable trustee. The requirement for physical delivery
of debt securities in connection with a demand for repayment or
repurchase will be deemed satisfied when the ownership rights in
the global security or securities representing the debt
securities are transferred by direct participating institutions
on DTCs records.
DTC may discontinue providing its services as securities
depository for the debt securities at any time. Under such
circumstances, in the event that a successor securities
depository is not appointed, debt security certificates are
required to be printed and delivered as described above.
We may decide to discontinue use of the system of book-entry
transfers through the securities depository. In that event, debt
security certificates will be printed and delivered as described
above.
The information in this section concerning DTC and DTCs
book-entry system has been obtained from sources that we believe
to be reliable, but we take no responsibility for its accuracy.
56
DESCRIPTION OF
PURCHASE CONTRACTS
We may issue purchase contracts for the purchase or sale of:
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debt or equity securities issued by us or securities of third
parties, a basket of such securities, an index or indices of
such securities or any combination of the above as specified in
the applicable prospectus supplement;
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currencies; or
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commodities.
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Each purchase contract will entitle the holder thereof to
purchase or sell, and obligate us to sell or purchase, on
specified dates, such securities, currencies or commodities at a
specified purchase price, which may be based on a formula, all
as set forth in the applicable prospectus supplement. We may,
however, satisfy our obligations, if any, with respect to any
purchase contract by delivering the cash value of such purchase
contract or the cash value of the property otherwise deliverable
or, in the case of purchase contracts on underlying currencies,
by delivering the underlying currencies, as set forth in the
applicable prospectus supplement. The applicable prospectus
supplement will also specify the methods by which the holders
may purchase or sell such securities, currencies or commodities
and any acceleration, cancellation or termination provisions or
other provisions relating to the settlement of a purchase
contract.
The purchase contracts may require us to make periodic payments
to the holders thereof or vice versa, which payments may be
deferred to the extent set forth in the applicable prospectus
supplement, and those payments may be unsecured or pre-funded on
some basis. The purchase contracts may require the holders
thereof to secure their obligations in a specified manner to be
described in the applicable prospectus supplement.
Alternatively, purchase contracts may require holders to satisfy
their obligations thereunder when the purchase contracts are
issued. Our obligation to settle such pre-paid purchase
contracts on the relevant settlement date may constitute
indebtedness. Accordingly, pre-paid purchase contracts will be
issued under either the senior indenture or the subordinated
indenture.
DESCRIPTION OF
UNITS
As specified in the applicable prospectus supplement, we may
issue units consisting of one or more purchase contracts,
warrants, debt securities, preferred shares, common stock or any
combination of such securities. The applicable prospectus
supplement will describe:
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the terms of the units and of the purchase contracts, warrants,
debt securities, preferred shares and common stock comprising
the units, including whether and under what circumstances the
securities comprising the units may be traded separately;
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a description of the terms of any unit agreement governing the
units; and
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a description of the provisions for the payment, settlement,
transfer or exchange or the units.
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57
EXPENSES
The following are the estimated expenses of the issuance and
distribution of the securities being registered under the
Registration Statement of which this prospectus forms a part,
all of which will be paid by us.
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SEC registration fee
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$
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*
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Blue sky fees and expenses
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$
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*
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Printing and engraving expenses
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$
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*
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Legal fees and expenses
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$
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*
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Rating agency fees
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$
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*
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Accounting fees and expenses
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$
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*
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Indenture trustee fees and experts
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$
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*
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Transfer agent and registrar
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$
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*
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Miscellaneous
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$
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*
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Total
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$
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*
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*
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To be provided by a prospectus
supplement or as an exhibit to Report on
Form 6-K
that is incorporated by reference into this prospectus.
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LEGAL
MATTERS
The validity of the securities offered by this prospectus 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.
EXPERTS
The consolidated financial statements as of December 31,
2007 and for the year ended December 31, 2007, incorporated
in this Prospectus by reference from the DryShips Inc. and
subsidiaries Annual Report on
Form 20-F
for the year ended December 31, 2007, and the effectiveness
of the DryShips Inc. and subsidiaries internal control over
financial reporting as of December 31, 2007 have been
audited by Deloitte, Hadjipavlou, Sofianos & Cambanis
S.A., an independent registered public accounting firm, as
stated in their reports, which are incorporated herein by
reference. Such financial statements have been so incorporated
in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of DryShips at
December 31, 2006 and for each of the two years in the
period ended December 31, 2006, incorporated in this
prospectus by reference from our Annual Report on
Form 20-F
for the year ended December 31, 2007, filed with the SEC on
March 31, 2008 have been audited by Ernst & Young
(Hellas) Certified Auditors Accountants S.A., independent
registered public accounting firm, as stated in their report,
which is incorporated in this prospectus by reference, and have
been so incorporated in reliance on the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
As required by the Securities Act of 1933, we filed a
registration statement relating to the securities offered by
this prospectus with the Commission. This prospectus is a part
of that registration statement, which includes additional
information.
58
Government
Filings
We file annual and special reports within the Commission. You
may read and copy any document that we file at the public
reference facilities maintained by the Commission at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling 1
(800) SEC-0330, and you may obtain copies at prescribed
rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. 20549. The Commission
maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the Commission.
Information
Incorporated by Reference
The SEC allows us to incorporate by reference
information that we file with it. This means that we can
disclose important information to you by referring you to those
filed documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that
we file later with the SEC prior to the termination of this
offering will also be considered to be part of this prospectus
and will automatically update and supersede previously filed
information, including information contained in this document.
We incorporate by reference the documents listed below and any
future filings made with the Commission under
Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934:
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Annual Report on
Form 20-F
for the year ended December 31, 2007, filed with the
Commission on March 31, 2008 which contains audited
consolidated financial statements for the most recent fiscal
year for which those statements have been filed;
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The description of our securities contained in our Registration
Statement on
Form F-1,
(File
No. 333-122008)
as amended, filed with the SEC on January 13, 2005 and any
amendment or report filed for the purpose of updating that
description; and
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Our reports on
Form 6-K
filed with the Commission on May 1, 2008 and our report on
Form 6-K/A
filed with the Commission on October 17, 2008.
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We are also incorporating by reference all subsequent annual
reports on
Form 20-F
that we file with the Commission and certain Reports on
Form 6-K
that we furnish to the Commission after the date of this
prospectus (if they state that they are incorporated by
reference into this prospectus) until we file a post-effective
amendment indicating that the offering of the securities made by
this prospectus has been terminated. In all cases, you should
rely on the later information over different information
included in this prospectus or the prospectus supplement.
You should rely only on the information contained or
incorporated by reference in this prospectus and any
accompanying prospectus supplement. We have not, and any
underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information
appearing in this prospectus and any accompanying prospectus
supplement as well as the information we previously filed with
the Commission and incorporated by reference, is accurate as of
the dates on the front cover of those documents only. Our
business, financial condition and results of operations and
prospects may have changed since those dates.
59
You may request a free copy of the above mentioned filing or any
subsequent filing we incorporated by reference to this
prospectus by writing or telephoning us at the following address:
DryShips Inc.
Attn: George Economou
80 Kifissias Avenue
Amaroussion GR 151 25
(011) (30) 210 80 90 570
Information
Provided by the Company
We will furnish holders of our common stock with annual reports
containing audited financial statements and a report by our
independent registered public accounting firm. The audited
financial statements will be prepared in accordance with
U.S. generally accepted accounting principles. As a
foreign private issuer, we are exempt from the rules
under the Securities Exchange Act prescribing the furnishing and
content of proxy statements to shareholders. While we furnish
proxy statements to shareholders in accordance with the rules of
the Nasdaq Global Market, those proxy statements do not conform
to Schedule 14A of the proxy rules promulgated under the
Securities Exchange Act. In addition, as a foreign private
issuer, our officers and directors are exempt from the
rules under the Securities Exchange Act relating to short swing
profit reporting and liability.
60
$400,000,000
5.00% Convertible Senior
Notes due December 1, 2014
Deutsche Bank
Securities
Prospectus Supplement
November 19, 2009