PART
I
ITEM
1.
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
Applicable.
ITEM
2.
OFFER
STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
ITEM
3.
KEY
INFORMATION
Unless
the context otherwise requires, as used in this report, the terms ''Company,''
''we,'' ''us,'' and ''our'' refer to TOP SHIPS INC. and all of its subsidiaries,
and ''TOP SHIPS INC.'' refers only to TOP SHIPS 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.
A. Selected
Financial Data
The
following table sets forth the selected historical consolidated financial data
and other operating data of TOP SHIPS INC. and its predecessors for the
years ended December 31, 2004, 2005, 2006, 2007 and 2008. The following
information should be read in conjunction with Item 5 "Operating and Financial
Review and Prospects" and the consolidated financial statements and related
notes included herein. The following selected historical consolidated financial
data of TOP SHIPS INC. and its predecessors in the table are derived from our
consolidated financial statements and notes thereto which have been prepared in
accordance with U.S. generally accepted accounting principles, or GAAP, and have
been audited for the years ended December 31, 2004 and 2005 by Ernst & Young
(Hellas) Certified Auditors Accountants S.A, or Ernst and Young, and for the
years ended December 31, 2006, 2007 and 2008 by Deloitte, Hadjipavlou, Sofianos
& Cambanis S.A., or Deloitte, both independent registered public accounting
firms.
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars
in thousands, except per share data and average daily
results
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
INCOME
STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$93,829
|
|
|
|
$244,215
|
|
|
|
$310,043
|
|
|
|
$252,259
|
|
|
|
$257,380
|
|
Voyage
expenses
|
|
|
16,898
|
|
|
|
36,889
|
|
|
|
55,351
|
|
|
|
59,414
|
|
|
|
38,656
|
|
Charter
hire expense
|
|
|
-
|
|
|
|
7,206
|
|
|
|
96,302
|
|
|
|
94,118
|
|
|
|
53,684
|
|
Amortization
of deferred gain on sale and leaseback of vessels
|
|
|
-
|
|
|
|
(837
|
)
|
|
|
(8,110
|
)
|
|
|
(15,610
|
)
|
|
|
(18,707
|
)
|
Other
vessel operating expenses
|
|
|
16,859
|
|
|
|
47,315
|
|
|
|
66,082
|
|
|
|
67,914
|
|
|
|
67,114
|
|
Dry-docking
costs
|
|
|
7,365
|
|
|
|
10,478
|
|
|
|
39,333
|
|
|
|
25,094
|
|
|
|
10,036
|
|
General
and administrative expenses (1)
|
|
|
8,579
|
|
|
|
23,818
|
|
|
|
23,016
|
|
|
|
24,824
|
|
|
|
31,473
|
|
Foreign
currency (gains) losses, net
|
|
|
75
|
|
|
|
(68
|
)
|
|
|
255
|
|
|
|
176
|
|
|
|
(85
|
)
|
Gain
on sale of vessels
|
|
|
(1,889
|
)
|
|
|
(10,831
|
)
|
|
|
(12,667
|
)
|
|
|
(1,961
|
)
|
|
|
(19,178
|
)
|
Depreciation
|
|
|
13,108
|
|
|
|
47,055
|
|
|
|
35,266
|
|
|
|
27,408
|
|
|
|
32,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
60,995
|
|
|
|
161,025
|
|
|
|
294,828
|
|
|
|
281,377
|
|
|
|
195,657
|
|
Operating
income (loss)
|
|
|
32,834
|
|
|
|
83,190
|
|
|
|
15,215
|
|
|
|
(29,118
|
)
|
|
|
61,723
|
|
Interest
and finance costs
|
|
|
(4,839
|
)
|
|
|
(19,430
|
)
|
|
|
(27,030
|
)
|
|
|
(19,518
|
)
|
|
|
(25,764
|
)
|
Gain
/ (loss) on financial instruments
|
|
|
(362
|
)
|
|
|
(747
|
)
|
|
|
(2,145
|
)
|
|
|
(3,704
|
)
|
|
|
(12,024
|
)
|
Interest
income
|
|
|
481
|
|
|
|
1,774
|
|
|
|
3,022
|
|
|
|
3,248
|
|
|
|
1,831
|
|
Other
income (expense), net
|
|
|
80
|
|
|
|
134
|
|
|
|
(67
|
)
|
|
|
16
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
$28,194
|
|
|
|
$64,921
|
|
|
|
$(11,005
|
)
|
|
|
$(49,076
|
)
|
|
|
$25,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share, basic and diluted
|
|
|
$6.54
|
|
|
|
$6.97
|
|
|
|
$(1.16
|
)
|
|
|
$(4.09
|
)
|
|
|
$1.01
|
|
Weighted
average common shares outstanding, basic
|
|
|
4,307,483
|
|
|
|
9,308,923
|
|
|
|
10,183,424
|
|
|
|
11,986,857
|
|
|
|
25,445,031
|
|
Weighted
average common shares outstanding, diluted
|
|
|
4,307,483
|
|
|
|
9,310,670
|
|
|
|
10,183,424
|
|
|
|
11,986,857
|
|
|
|
25,445,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
|
$1.80
|
|
|
|
$2.64
|
|
|
|
$23.13
|
|
|
|
-
|
|
|
|
-
|
|
Dollars
in thousands, except per share data and average daily
results
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
BALANCE
SHEET DATA, at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
141,051
|
|
|
$
|
67,574
|
|
|
$
|
72,799
|
|
|
$
|
102,161
|
|
|
$
|
57,088
|
|
Total
assets
|
|
|
533,138
|
|
|
|
970,386
|
|
|
|
490,885
|
|
|
|
776,917
|
|
|
|
698,375
|
|
Current
liabilities, including current portion of long-term debt
|
|
|
42,811
|
|
|
|
76,143
|
|
|
|
45,416
|
|
|
|
153,290
|
|
|
|
386,934
|
|
Total
long-term debt, including current portion
|
|
|
194,806
|
|
|
|
564,103
|
|
|
|
218,052
|
|
|
|
438,884
|
|
|
|
342,479
|
|
Common
Stock
|
|
|
278
|
|
|
|
280
|
|
|
|
108
|
|
|
|
205
|
|
|
|
283
|
|
Stockholders'
equity
|
|
|
315,061
|
|
|
|
359,147
|
|
|
|
161,198
|
|
|
|
211,408
|
|
|
|
292,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FLEET
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of vessels at end of period
|
|
|
15.0
|
|
|
|
27.0
|
|
|
|
24.0
|
|
|
|
23.0
|
|
|
|
12.0
|
|
Average
number of vessels
(2)
|
|
|
9.6
|
|
|
|
21.7
|
|
|
|
26.7
|
|
|
|
22.4
|
|
|
|
18.8
|
|
Total
voyage days for fleet
(3)
|
|
|
3,215
|
|
|
|
7,436
|
|
|
|
8,634
|
|
|
|
7,032
|
|
|
|
6,099
|
|
Total
time charter days for
fleet
|
|
|
1,780
|
|
|
|
5,567
|
|
|
|
6,223
|
|
|
|
4,720
|
|
|
|
5,064
|
|
Total
spot market days for
fleet
|
|
|
1,435
|
|
|
|
1,869
|
|
|
|
2,411
|
|
|
|
2,312
|
|
|
|
1,035
|
|
Total
calendar days for fleet
(4)
|
|
|
3,517
|
|
|
|
7,905
|
|
|
|
9,747
|
|
|
|
8,176
|
|
|
|
6,875
|
|
Fleet
utilization
(5)
|
|
|
91.4
|
%
|
|
|
94.1
|
%
|
|
|
88.6
|
%
|
|
|
86.0
|
%
|
|
|
88.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE
DAILY RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent
(6)
|
|
$
|
23,929
|
|
|
$
|
27,881
|
|
|
$
|
29,499
|
|
|
$
|
27,424
|
|
|
$
|
35,862
|
|
Other
vessel operating expenses (7)
|
|
|
4,794
|
|
|
|
5,985
|
|
|
|
6,780
|
|
|
|
8,307
|
|
|
|
9.762
|
|
General
and administrative expenses (8)
|
|
|
2,439
|
|
|
|
3,013
|
|
|
|
2,361
|
|
|
|
3,036
|
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
General
and administrative expenses include, sub-manager fees and other general
and administrative expenses. During 2004, 2005, 2006, 2007 and 2008, we
paid to the members of our senior management and to our directors'
aggregate compensation of approximately $4.4 million, $8.1 million, $4.2
million, $4.8 million and $5.6 million
respectively.
|
(2)
|
Average
number of vessels is the number of vessels that constituted our fleet for
the relevant period, as measured by the sum of the number of days each
vessel was a part of our fleet during the period divided by the number of
calendar days in that period.
|
(3)
|
Total
voyage days for fleet are the total days the vessels were in our
possession for the relevant period net of off hire days associated with
major repairs, dry-dockings or special or intermediate
surveys.
|
(4)
|
Calendar
days are the total days the vessels were in our possession for the
relevant period including off hire days associated with major repairs,
dry-dockings or special or intermediate
surveys.
|
(5)
|
Fleet
utilization is the percentage of time that our vessels were available for
revenue generating voyage days, and is determined by dividing voyage days
by fleet calendar days for the relevant
period.
|
(6)
|
Time
charter equivalent rate, or TCE rate, is a measure of the average daily
revenue performance of a vessel on a per voyage basis. Our method of
calculating TCE rate is consistent with industry standards and is
determined by dividing time charter equivalent revenues or TCE revenues by
voyage days for the relevant time period. TCE revenues are revenues minus
voyage expenses. Voyage expenses primarily consist of port, canal and fuel
costs that are unique to a particular voyage, which would otherwise be
paid by the charterer under a time charter contract, as well as
commissions. TCE revenues and TCE rate non-GAAP measures, provide
additional meaningful information in conjunction with shipping revenues,
the most directly comparable GAAP measure, because it assists Company's
management in making decisions regarding the deployment and use of its
vessels and in evaluating their financial
performance.
|
(7)
|
Daily
other vessel operating expenses, which includes crew costs, provisions,
deck and engine stores, lubricating oil, insurance, maintenance and
repairs is calculated by dividing other vessel operating expenses by fleet
calendar days for the relevant time
period.
|
(8)
|
Daily
general and administrative expenses are calculated by dividing general and
administrative expenses by fleet calendar days for the relevant time
period.
|
The
following table reflects reconciliation of TCE revenues to revenues as reflected
in the consolidated statements of operations and calculation of the TCE rate
(all amounts are expressed in thousands of U.S. dollars, except for Average
Daily Time Charter Equivalent amounts and Total Voyage Days):
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
On a consolidated basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$93,829
|
|
|
|
$244,215
|
|
|
|
$310,043
|
|
|
|
$252,259
|
|
|
|
$257,380
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
expenses
|
|
|
(16,898
|
)
|
|
|
(36,889
|
)
|
|
|
(55,351
|
)
|
|
|
(59,414
|
)
|
|
|
(38,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent revenues
|
|
|
$76,931
|
|
|
|
$207,326
|
|
|
|
$254,692
|
|
|
|
$192,845
|
|
|
|
$218,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
voyage days
|
|
|
3,215
|
|
|
|
7,436
|
|
|
|
8,634
|
|
|
|
7,032
|
|
|
|
6,099
|
|
Average
Daily Time Charter Equivalent
|
|
|
$23,929
|
|
|
|
$27,881
|
|
|
|
$29,499
|
|
|
|
$27,424
|
|
|
|
$35,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
Tanker Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$93,829
|
|
|
|
$244,215
|
|
|
|
$310,043
|
|
|
|
$248,944
|
|
|
|
$163,995
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
expenses
|
|
|
(16,898
|
)
|
|
|
(36,889
|
)
|
|
|
(55,351
|
)
|
|
|
(59,253
|
)
|
|
|
(34,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent revenues
|
|
|
$76,931
|
|
|
|
$207,326
|
|
|
|
$254,692
|
|
|
|
$189,691
|
|
|
|
$129,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
voyage days
|
|
|
3,215
|
|
|
|
7,436
|
|
|
|
8,634
|
|
|
|
6,991
|
|
|
|
4,357
|
|
Average
Daily Time Charter Equivalent
|
|
|
$23,929
|
|
|
|
$27,881
|
|
|
|
$29,499
|
|
|
|
$27,134
|
|
|
|
$29,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
Drybulk Fleet
|
|
|
|
|
|
|
Revenues
|
|
|
$1,902
|
|
|
|
$71,590
|
|
Less:
|
|
|
|
|
|
|
|
|
Voyage
expenses
|
|
|
(161
|
)
|
|
|
(4,441
|
)
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent revenues
|
|
|
$1,741
|
|
|
|
$67,149
|
|
|
|
|
|
|
|
|
|
|
Total
voyage days
|
|
|
41
|
|
|
|
1,742
|
|
Average
Daily Time Charter Equivalent
|
|
|
$42,463
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|
|
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$38,547
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|
|
|
|
|
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B. Capitalization
and Indebtedness
Not
Applicable.
C. Reasons
for the Offer and Use of Proceeds
Not
Applicable.
D. Risk
Factors
The
following risks relate principally to the industries in which we operate and our
business in general. Any of the risk factors could materially and adversely
affect our business, financial condition or operating results and the trading
price of our common stock.
Risks Related to Our
Industries
The
international tanker and drybulk industries are both cyclical and volatile and
this may lead to reductions and volatility in our charter rates when we
re-charter our vessels, vessel values and our results of operations
The
international tanker and drybulk industries in which we operate are cyclical
with attendant volatility in charter hire rates, vessel values and industry
profitability. For both tankers and drybulk vessels, the degree of charter rate
volatility among different types of vessels has varied widely. If we enter into
a charter when charter rates are low, our revenues and earnings will be
adversely affected. In addition, a decline in charter hire rates likely will
cause the value of our vessels to decline. Our current fleet deployment consists
mainly of long term time charters and long term bareboat charters which limits
significantly our exposure to charter rate volatility and its effect on our
result of operations. We are nonetheless exposed to changes in spot rates for
one of our drybulk vessels that do not have long term charter coverage.
Additionally, changes in spot rates in the tanker sector and the drybulk sector
can affect the value of respective vessels at any given time despite the
existence of long term employment contracts. Our ability to re-charter our
vessels on the expiration or termination of their current time and bareboat
charters and the charter rates payable under any renewal or replacement charters
will depend upon, among other things, economic conditions in the tanker and
drybulk market.
The
factors affecting the supply and demand for our vessels are outside our control
and are unpredictable. The nature, timing, direction and degree of changes in
tanker and drybulk industry conditions are also unpredictable. Factors that
influence demand for tanker and drybulk vessel capacity include:
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demand
for refined petroleum products and crude oil for tankers and drybulk
commodities for drybulk vessels;
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changes
in crude oil production and refining capacity as well as drybulk commodity
production and resulting shifts in trade flows for crude oil, petroleum
product and drybulk commodities;
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the
location of regional and global crude oil refining facilities and drybulk
commodities markets that affect the distance refined petroleum products
and crude oil or drybulk commodities are to be moved by
sea;
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global
and regional economic and political
conditions;
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•
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the
location of regional and global crude oil refining facilities and drybulk
commodities markets that affect the distance refined petroleum products
and crude oil or drybulk commodities are to be moved by
sea;
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environmental
and other regulatory developments;
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currency
exchange rates; and
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The
factors that influence the supply of oceangoing vessel capacity
include:
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the
number of newbuilding deliveries;
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the
scrapping rate of older vessels;
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potential
conversion of vessels to alternative
use;
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changes
in environmental and other regulations that may limit the useful lives of
vessels;
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port
or canal congestion;
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the
number of vessels that are out of service at a given time;
and
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changes
in global crude oil and drybulk commodity
production.
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The
international tanker and drybulk shipping industries have experienced drastic
downturns after experiencing historically high charter rates and vessel values
in the recent past, and a continued downturn in these markets may have an
adverse effect on our earnings, impair the carrying value of our vessels and
affect compliance with our loan covenants.
The
Baltic Drybulk Index, or BDI, a U.S. dollar daily average of charter rates
issued by the London based Baltic Exchange (an organization providing maritime
market information for the trading and settlement of physical and derivative
contracts) that takes into account input from brokers around the world regarding
fixtures for various routes, dry cargoes and various drybulk vessel sizes,
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. The decline in charter rates is due to various factors,
including the lack of trade financing for purchases of commodities carried by
sea, which has resulted in a significant decline in cargo shipments, and the
excess supply of iron ore in China, which has resulted in falling iron ore
prices and increased stockpiles in Chinese ports. The decline in charter
rates in the drybulk market also affects the value of our drybulk vessels, which
follows the trends of drybulk charter rates, and earnings on our charters, and
similarly, affects our cash flows, liquidity and compliance with the covenants
contained in our loan agreements. The BDI has since risen to 4,026 as of June
17, 2009. However, there can be no assurance that the drybulk charter market
will continue to experience recovery over the next several months and the market
could decline from its current level.
The
Baltic Dirty Tanker Index, a U.S. dollar daily average of charter rates issued
by the London based Baltic Exchange that takes into account input from brokers
around the world regarding crude oil fixtures for various routes various tanker
vessel sizes, declined from a high of 2,347 in July 2008 to a low of
453 in mid-April 2009, which represents a decline of 80%. The Baltic Clean
Tanker Index has fallen over 1,160 points, or 77%, since the early summer of
2008. The decline in charter rates is due to various factors, including the
significant fall in demand for crude oil and petroleum products, the consequent
rising inventories of crude oil and petroleum products in the United States and
in other industrialized nations and the corresponding reduction in oil refining,
the dramatic fall in the price of oil in 2008, and the restrictions on crude oil
production that the Organization of Petroleum Exporting Countries (OPEC) and
other non-OPEC oil producing countries have imposed in an effort to stabilize
the price of oil.
If the
current low charter rates in the tanker and drybulk market continue through a
significant period, our earnings may be adversely affected and we may have to
record impairment adjustments to the carrying values of our fleet, and we may
not be able to maintain compliance with the financial covenants in our loan
agreements even though we have received waivers for certain breaches as
discussed in "Item 5 – Operating and Financial Review And Prospects - Tabular
Disclosure of Contractual Obligations – Long term debt". In such a situation,
unless our lenders were willing to provide modifications to waivers of covenant
compliance or modifications to our covenants, in order to remain viable, we
would sell vessels in our fleet and/or seek to raise additional capital in the
equity markets. Our lenders' interests may be different from ours, and we may
not be able to obtain our lenders' permission or waivers when needed. This may
limit our ability to continue to conduct our operations, finance our future
operations, make acquisitions or pursue business opportunities. A decline in
charter rates could have a material adverse effect on our business, financial
condition and results of operations.
Compliance
with environmental laws or regulations may adversely affect our
operations.
The
shipping industry in general and our business and the operation of tankers and
drybulk vessels in particular, are affected by a variety of governmental
regulations in the form of numerous international conventions, national, state
and local laws and international, national and local regulations in force in the
jurisdictions in which such tankers and drybulk vessels operate, as well as in
the country or countries in which such tankers and drybulk vessels are
registered. These regulations include:
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the
United States Oil Pollution Act of 1990, or OPA, which imposes strict
liability for the discharge of oil into the 200-mile United States
exclusive economic zone, the obligation to obtain certificates of
financial responsibility for vessels trading in United States waters and
the requirement that newly constructed tankers that trade in United States
waters be constructed with
double-hulls;
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the
International Convention on Civil Liability for Oil Pollution Damage of
1969, as amended in 2000, or the CLC, entered into by many countries
(other than the United States) relating to strict liability for pollution
damage caused by the discharge of
oil;
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the
International Maritime Organization, or IMO (the United Nations agency for
maritime safety and the prevention of pollution by ships), International
Convention for the Prevention of Pollution from Ships, 1973, as modified
by the related Protocol of 1978 relating thereto, or the MARPOL
Convention, which has been updated through various amendments, with
respect to strict technical and operational requirements for
tankers;
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the
IMO International Convention for the Safety of Life at Sea, or SOLAS
Convention, with respect to crew and passenger
safety;
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the
International Convention on Load Lines, 1966, or LL Convention, with
respect to the safeguarding of life and property through limitations on
load capability for vessels on international voyages;
and
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the
United States Marine Transportation Security Act of 2002, or
MTSA.
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More
stringent maritime safety rules have been imposed in Europe as a result of the
oil spill off the coast of France in November 2002 relating to the loss of the
M/T Prestige, a 26-year old single-hull tanker owned by a company not affiliated
with us. Additional laws and regulations may also be adopted that could limit
our ability to do business or increase the cost of our doing business and that
could have a material adverse effect on our operations. In addition, we are
required by various governmental and quasi-governmental agencies to obtain
certain permits, licenses, certificates and financial assurances with respect to
our vessel operations. In the event of war or national emergency, our tankers
and drybulk vessels may be subject to requisition by the government of the flag
flown by the tanker or drybulk vessel without any guarantee of compensation for
lost profits. We believe our vessels are maintained in good condition in
compliance with present regulatory requirements, are operated in compliance with
applicable safety/environmental laws and regulations and are insured against
usual risks for such amounts as our management deems appropriate. Our vessels'
operating certificates and licenses are renewed periodically during each
vessel's required annual survey. However, government regulation of tankers and
drybulk vessels, particularly in the areas of safety and environmental impact,
may change in the future and require us to incur significant capital
expenditures on our ships to keep them in compliance.
Under
local, national and foreign laws, as well as international treaties and
conventions, we could incur material liabilities, including cleanup obligations,
natural resource damages and third-party claims for personal injury or property
damages, in the event that there is a release of petroleum or other hazardous
substances from our vessels or otherwise in connection with our current or
historic operations. We could also incur substantial penalties, fines and other
civil or criminal sanctions, including in certain instances seizure or detention
of our vessels, as a result of violations of or liabilities under environmental
laws, regulations and other requirements.
For
example, OPA affects all vessel owners shipping oil to, from or within the
United States. OPA allows for potentially unlimited liability for owners,
operators and bareboat charterers of vessels without regard to fault for oil
pollution in United States waters. Similarly, the CLC, which has been adopted by
most countries outside of the United States, imposes liability for oil pollution
in international waters. OPA expressly permits individual states to impose their
own liability regimes with regard to hazardous materials and oil pollution
incidents occurring within their boundaries. Coastal states in the United States
have enacted pollution prevention liability and response laws, many providing
for unlimited liability.
Future
accidents may be expected in the shipping industry, and such accidents or other
events may be expected to result in the adoption of even stricter laws and
regulations, which could limit our operations or our ability to do business and
which could have a material adverse effect on our business and financial
results.
Because
the market value of our vessels may fluctuate significantly, we may incur losses
when we sell vessels or we may be required to write down their carrying value,
which will adversely affect our earnings.
Current
market conditions have caused a decrease in the fair market value of our
vessels. The fair market value of our vessels may increase and decrease
depending on the following factors:
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general
economic and market conditions affecting the international tanker and
drybulk shipping industries;
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prevailing
level of charter rates;
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competition
from other shipping companies;
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types,
sizes and ages of vessels;
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other
modes of transportation;
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governmental
or other regulations; and
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technological
advances.
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If we
sell vessels at a time when vessel prices have fallen and before an impairment
is identified, the sale may be at less than the vessel's carrying amount in our
financial statements, or if vessel prices have fallen below the carrying amount
in our financial statements, in which case we evaluate the asset for a potential
impairment and may be required to write down the carrying amount of the vessels
on our financial statements and incur a loss and a reduction in earnings, if the
estimate of undiscounted cash flows, excluding interest charges, expected to be
generated by the use of the asset is less than its carrying amount.
An
increase in the supply of vessel capacity without an increase in demand for
vessel capacity would likely cause charter rates and vessel values to decline,
which could have a material adverse effect on our revenues and
profitability.
The
supply of vessels generally increases with deliveries of new vessels and
decreases with the scrapping of older vessels, conversion of vessels to other
uses, such as floating production and storage facilities, and loss of tonnage as
a result of casualties. Currently there is significant new building activity
with respect to virtually all sizes and classes of vessels. If the amount of
tonnage delivered exceeds the number of vessels being scrapped, vessel capacity
will increase. If the supply of vessel capacity increases faster than the demand
for vessel capacity, the charter rates paid for our vessels as well as the value
of our vessels could materially decline. Such a decline in charter rates and
vessel values would likely have a material adverse effect on our revenues and
profitability.
Our
operating results from our tankers are subject to seasonal fluctuations, which
may adversely affect our operating results.
Eight of
the vessels in our combined fleet are tankers. We operate our tankers in markets
that have historically exhibited seasonal variations in demand and, therefore,
charter rates. This seasonality may result in quarter-to-quarter volatility in
our operating results. The tanker sector is typically stronger in the fall and
winter months in anticipation of increased consumption of oil and petroleum
products in the northern hemisphere during the winter months. As a result, our
revenues from our tankers may be weaker during the fiscal quarters ended June 30
and September 30, and, conversely, revenues may be stronger in fiscal quarters
ended December 31 and March 31. This seasonality could materially affect our
results from 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 results of operations, financial condition and cash flows, and could cause
the market price of shares of our common stock to decline.
Over the
last year, global financial markets have experienced extraordinary disruption
and volatility following adverse changes in the global credit markets. The
credit markets in the United States have experienced significant contraction,
deleveraging and reduced liquidity, and governments around the world have taken
significant measures in response to such events, including the enactment of the
Emergency Economic Stabilization Act of 2008 in the United States, and may
implement other significant responses in the future.
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 have enacted temporary emergency regulations and may take other
extraordinary actions in the event of market emergencies and may effect
permanent 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 into bankruptcy proceedings or are in regulatory
enforcement actions. These difficulties have resulted, in part, from declining
markets for assets held by such institutions, particularly the reduction in the
value of their mortgage and asset-backed securities portfolios. These
difficulties have been compounded by a general decline in the willingness by
banks and other financial institutions to extend credit. In addition, these
difficulties may adversely affect the financial institutions that provide our
credit facilities and may impair their ability to continue to perform under
their financing obligations to us, which could have an impact on our ability to
fund current and future obligations, including our ability to take delivery of
our newbuildings.
We face
risks attendant to changes in economic environments, changes in interest rates
and instability in 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 may have a material adverse effect on our results of
operations, financial condition or cash flows and could cause the price of
shares of our common stock to decline significantly or impair our ability to
make distributions to our shareholders.
Compliance
with safety and other vessel requirements imposed by classification societies
may be very costly and may adversely affect our business.
The hull
and machinery of every commercial vessel 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. Our vessels are currently enrolled with the American
Bureau of Shipping, Lloyd's Register of Shipping, Det Norske Veritas and Bureau
Veritas each of which is a member of the International Association of
Classification Societies.
A vessel
must undergo annual surveys, intermediate surveys and special surveys. In lieu
of a special survey, a vessel's machinery may be placed on a continuous survey
cycle, under which the machinery would be surveyed periodically over a five-year
period. Our vessels are on special survey cycles for hull inspection and
continuous survey cycles for machinery inspection. Every vessel is also required
to be dry docked every two to three years for inspection of the underwater parts
of such vessel.
If a
vessel does not maintain its class and/or fails any annual survey, intermediate
survey or special survey, the vessel will be unable to trade between ports and
will be unemployable, which will negatively impact our revenues and results from
operations.
Our
earnings may be adversely affected if we do not successfully employ our
vessels.
Given
current market conditions, we seek to deploy our vessels on time and bareboat
charters in a manner that will help us achieve a steady flow of earnings. As of
the date of this report, three of our tanker vessels and four of our drybulk
vessels were contractually committed to time charters, and five of our tanker
vessels and one of our drybulk vessels were contractually committed to bareboat
charters. Although these period charters provide relatively steady streams of
revenue as well as a portion of the revenues generated by the charterer's
deployment of the vessels in the spot market or otherwise, our vessels committed
to period charters may not be available for spot voyages during an upturn in the
tanker or drybulk industry cycle, as the case may be, when spot voyages might be
more profitable. The spot market is highly competitive, and spot market charter
rates may fluctuate dramatically based on the supply and demand for the major
commodities carried internationally by water as well as other
factors. As of the date of this report, we did not have any
vessels that were trading in the spot market. If we cannot continue to employ
our vessels on profitable time charters or trade them in the spot market
profitably, our results of operations and operating cash flow may suffer if
rates achieved are not sufficient to cover respective vessel operating and
financial expenses.
World
events could adversely affect our results of operations and financial
condition.
Terrorist
attacks such as the attacks on the United States on September 11, 2001, the
bombings in Spain on March 11, 2004 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, continue to cause
uncertainty in the world 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 any
additional financing or, if we are able to obtain additional financing, to do so
on terms favorable to us. 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 business, financial condition and results of operations.
Acts
of piracy on oceangoing vessels have recently increased in frequency, which
could adversely affect our business.
Acts of
piracy have historically affected oceangoing vessels trading in regions of the
world such as the South China Sea and the Gulf of Aden off the coast of Somalia.
Throughout 2008 and 2009, the frequency of piracy incidents against commercial
shipping vessels increased significantly, particularly in the Gulf of Aden. For
example, in November 2008 the M/T Sirius Star, a tanker not affiliated with us,
was captured by pirates in the Indian Ocean while carrying crude oil estimated
to be worth $100.0 million. Since the beginning of 2009, numerous tanker and
drybulk vessels have fallen victim to piracy attacks off the coast of
Somalia. For example, in February 2009, the M/V Saldanha, a drybulk
vessel not affiliated with us, 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 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.
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 plans, or 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.
A
further 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 mainly by our drybulk
vessels will continue to involve the loading or discharging of drybulk
commodities in ports in the Asia Pacific region. As a result, 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 position and results of operations, as well as our future prospects.
In recent years, China has been one of the world's fastest growing economies in
terms of gross domestic product, which has had a significant impact on shipping
demand. Through the end of the fourth quarter of 2008, growth in China's gross
domestic product was approximately 4.2% lower than it was during the same period
in 2007, and it is likely that China and other countries in the Asia Pacific
region will continue to experience slowed or even negative 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. China has recently
announced a $586.0 billion stimulus package aimed in part at increasing
investment and consumer spending and maintaining export growth in response to
the recent slowdown in its economic growth. Our business, financial condition
and, results of operations as well as our future prospects, will likely be
materially and adversely affected by a further economic downturn in any of these
countries.
Increased
inspection procedures and tighter import and export controls could increase
costs and disrupt our business.
International
shipping is subject to various security and customs inspection and related
procedures in countries of origin and destination. Inspection procedures can
result in the seizure of contents of our vessels, delays in the loading,
offloading or delivery and the levying of customs duties, fines or other
penalties against us. It is possible that changes to inspection procedures could
impose additional financial and legal obligations on us. Furthermore, 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.
Our
vessels call on ports located in countries that are subject to restrictions
imposed by the United States government.
From time
to time, our time charterers or bareboat charterers who make use of our vessels
in our fleet may call on ports located in countries subject to sanctions and
embargoes imposed by the United States government and countries identified by
the United States government as state sponsors of terrorism. Although these
sanctions and embargoes do not prevent our vessels from making calls to ports in
these countries, potential investors could view such port calls negatively,
which could adversely affect our reputation and the market for shares of our
common stock. Investor perception of the value of shares of our common stock may
be adversely affected by the consequences of war, the effects of terrorism,
civil unrest and governmental actions in these and surrounding
countries.
Risks Related to Our
Company
We
are in breach of certain financial covenants contained in our loan agreements,
have received notices from certain of our lenders regarding these covenant
breaches, and if we are not successful in obtaining waivers and amendments with
respect to covenants breached, our lenders may declare an event of default and
accelerate our outstanding indebtedness under the relevant agreement, which
would impair our ability to continue to conduct our business.
Our
loan agreements require that we maintain certain financial and other covenants.
The current low drybulk and tanker charter rates and respective drybulk and
tanker vessel values have affected our ability to comply with covenants relating
to vessel values such as asset cover ratio, adjusted net worth and net asset
value covenants. A violation of these covenants constitutes an event of default
under our credit facilities, which would, unless waived by our lenders, provide
our lenders with the right to require us to post additional collateral, enhance
our equity and liquidity, increase our interest payments, pay down our
indebtedness to a level where we are in compliance with our loan covenants, sell
vessels in our fleet, reclassify our indebtedness as current liabilities and
accelerate our indebtedness and foreclose their liens on our vessels, which
would impair our ability to continue to conduct our business. Our total
indebtedness of $342.5 million is presented within current liabilities in our
audited consolidated balance sheet for the year ended December 31, 2008 included
in this annual report as a result of cross-default provisions within our loan
agreements. A cross-default provision means that if we are in default with
regards to a specific loan then we are automatically in default of all our loans
that contain such provisions. For this reason, we are not able to breakdown our
debt obligations into current and long term, unless we are able to receive
waivers for all covenants breaches. The amount of long term debt that has been
reclassified from long term debt and presented together with current liabilities
amounts to $290.0 million.
Several
of our lenders notified us that we are in breach of certain financial and other
covenants relating to vessel values such as asset cover ratio, adjusted net
worth and net asset value covenants (as defined by each bank) contained in our
loan agreements. As of the date of this annual report, we have received certain
waivers on these covenant breaches from HSH Nordbank and Alpha Bank until March
31, 2010. In addition, we are in the process of drafting amendments to our
agreements with DVB and Emporiki Bank regarding covenant breaches and we are in
negotiations with RBS with regards to covenant breaches. For more details on
breaches and waivers see "Item 5 – Operating and Financial Review And Prospects
- Tabular Disclosure of Contractual Obligations – Long term debt".
During
2009, we expect to be in breach of covenants relating to the minimum
liquidity and EBITDA as defined by each bank.
Breach of
our loan covenants, without applicable waiver, may entitle our lenders to
accelerate our debt. If our indebtedness is accelerated, it would be very
difficult in the current financing environment for us to refinance our debt or
obtain additional financing and we could lose our vessels if our lenders
foreclose their liens. Further, as discussed below, our independent registered
public accounting firm has issued its opinion with an explanatory paragraph
emphasizing that we have prepared our financial statements under the going
concern assumption despite our covenants breaches and working capital
deficit.
Our
inability to comply with certain financial and other covenants under our loan
agreements raises substantial doubt about our ability to continue as a going
concern.
As
discussed above, we are in breach of certain financial and other covenants
contained in our loan agreements as a result of the decline in the drybulk and
tanker charter markets and related decline in vessel values. We may be unable to
meet the financial and other covenants contained in our loan agreements for the
foreseeable future and our lenders may choose to accelerate our indebtedness.
Therefore, our ability to continue as a going concern is dependent on
management's ability to successfully generate revenue to meet our obligations as
they become due and have the continued support of our lenders. Our independent
registered public accounting firm has issued its opinion with an explanatory
paragraph emphasizing that we have prepared our financial statements under the
going concern assumption despite our covenants breaches and working capital
deficit. Our financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of our inability to continue as a going concern. However, there is a material
uncertainty related to events or conditions which raises significant doubt on
our ability to continue as a going concern and, therefore, we may be unable to
realize our assets and discharge our liabilities in the normal course of
business.
If
we need to receive waivers and/or amendments to our loan agreements in the
future, our lenders may impose additional operating and financial restrictions
on us and/or modify the terms of our existing loan agreements.
In
addition to certain financial covenants relating to our financial position,
operating performance and liquidity, in connection with future waivers or
amendments that we may need, lenders may impose additional restrictions on us.
See "Item 5. Operating and Financial Review and Prospects – Liquidity and
Capital Resources – Breach of Loan Covenants." Therefore, we may need to seek
permission from our lenders in order to engage in some corporate actions. Our
lenders' interests may be different from ours and we may not be able to obtain
our lender's permission when needed, which could prevent us from pursuing a
course of action that we deem necessary. In addition to the above restrictions,
our lenders may require the payment of additional fees, require prepayment of a
portion of our indebtedness to them, or impose other conditions on the issuance
of waivers, which could adversely affect our financial results and hinder our
ability to raise capital.
Servicing
current and future debt will limit funds available for other purposes and impair
our ability to react to changes in our business.
To
finance our fleet expansion program, we incurred secured indebtedness. We must
dedicate a portion of our cash flow from operations to pay the principal and
interest on our indebtedness. These payments limit funds otherwise available for
working capital, capital expenditures and other purposes. As of December 31,
2008, we had total indebtedness of $346.9 million (excluding unamortized
deferred financing fees of $4.4 million), and a ratio of indebtedness to total
capital of approximately 54%. We will need to take on additional indebtedness as
we expand our fleet, which could increase our debt to equity ratio. Our
substantial level of indebtedness increases the possibility that we may be
unable to generate cash sufficient to pay, when due, the principal of, interest
on or other amounts due in respect of, our indebtedness. Our substantial debt
could also have other significant consequences. For example, it
could:
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increase
our vulnerability to general economic downturns and adverse competitive
and industry conditions;
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require
us to dedicate a substantial portion, if not all, of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate
purposes;
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limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
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place
us at a competitive disadvantage compared to competitors that have less
debt or better access to capital;
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limit
our ability to raise additional financing on satisfactory terms or at all;
and
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adversely
impact our ability to comply with the financial and other restrictive
covenants in the indenture governing the notes and the credit agreements
governing the debts of our subsidiaries, which could result in an event of
default under such agreements.
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Furthermore,
our interest expense could increase if interest rates increase because some of
the debt under the credit facilities of our subsidiaries is variable rate debt.
If we do not have sufficient earnings, we may be required to refinance all or
part of our existing debt, sell assets, borrow more money or sell more
securities, none of which we can guarantee we will be able to do.
Our
loan agreements contain restrictive covenants that may limit our liquidity and
corporate activities.
Our loan
agreements impose operating and financial restrictions on us. These restrictions
may limit our ability to:
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incur
additional indebtedness;
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create
liens on our assets;
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sell
capital stock of our subsidiaries;
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engage
in mergers or acquisitions;
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make
capital expenditures or other
investments;
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change
the management of our vessels or terminate or materially amend the
management agreement relating to each vessel;
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Therefore,
we may need to seek permission from our lenders in order to engage in some
corporate actions. Our lenders' interests may be different from ours, and we
cannot guarantee that we will be able to obtain our lenders' permission when
needed. This may prevent us from taking actions that are in our best
interest.
If
we fail to manage our planned growth properly, we may not be able to
successfully expand our market share.
We intend
to continue to grow our fleet. Our growth will depend on:
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locating
and acquiring suitable vessels;
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identifying
and consummating acquisitions or joint
ventures;
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integrating
any acquired business successfully with our existing
operations;
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enhancing
our customer base;
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managing
expansion; and
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obtaining
required financing.
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Growing
any business by acquisition presents numerous risks such as undisclosed
liabilities and obligations, difficulty in obtaining additional qualified
personnel, managing relationships with customers and suppliers and integrating
newly acquired operations into existing infrastructures. We cannot give any
assurance that we will be successful in executing our growth plans or that we
will not incur significant additional expenses and losses in connection
therewith.
If
the recent volatility in LIBOR continues, it could affect our profitability,
earnings and cash flow.
The
London Interbank Offered Rate, or 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.
Our
ability to obtain additional debt financing may be dependent on the performance
of our then existing charters and the creditworthiness of our
charterers.
The
actual or perceived credit quality of our charterers, and any defaults by them,
may materially affect our ability to obtain the additional capital resources
that we will require to purchase additional vessels or may significantly
increase our costs of obtaining such capital. Our inability to obtain additional
financing at all or at a higher than anticipated cost may materially affect our
results of operation and our ability to implement our business
strategy.
We
may not be able to renew our time charters when they expire.
We might
not be able to renew our existing time charters or, if renewed, they might not
be at favorable rates. If, upon expiration of the existing time charters, we are
unable to obtain time charters or voyage charters at desirable rates, our
profitability may be adversely affected.
In
the highly competitive international tanker and drybulk shipping markets, we may
not be able to compete for charters with new entrants or established companies
with greater resources.
We employ
our vessels in a highly competitive market that is capital intensive and highly
fragmented. The operation of tanker and drybulk vessels and the transportation
of cargoes shipped in these vessels, as well as the shipping industry in
general, is extremely competitive. Competition arises primarily from other
vessel owners, including major oil companies as well as independent tanker and
drybulk shipping companies, some of whom have substantially greater resources
than we do. Competition for the transportation of oil and refined petroleum
products and drybulk cargoes can be 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 and operate larger fleets through consolidations
or acquisitions that may be able to offer better prices and fleets than
us.
We
depend upon a few significant customers for a large part of our revenues. The
loss of one or more of these customers could adversely affect our financial
performance.
We have
historically derived a significant part of our revenue from a small number of
charterers. In 2007 and 2008, approximately 33% and 26%, respectively, of our
revenue was derived from two charterers. These two charterers, Glencore and
PDVSA, respectively provided 23% and 10% of our revenues in 2007 and 17% and 9%
of our revenues in 2008. The occurrence of any problems with these charterers
may adversely affect our revenues.
We
may be unable to attract and retain key management personnel and other employees
in the international tanker and drybulk shipping industries, which may
negatively impact the effectiveness of our management and our results of
operations.
Our
success depends to a significant extent upon the abilities and efforts of our
management team. We have entered into employment contracts with our President,
Chief Executive Officer, and Director, Evangelos Pistiolis, our Chief Financial
Officer and Director, Alexandros Tsirikos, our Executive Vice President and
Director, Vangelis Ikonomou and our Vice President Demetris Souroullas. Our
success will depend upon our ability to hire and retain key members of our
management team. The loss of any of these individuals could adversely affect our
business prospects and financial condition. Difficulty in hiring and retaining
personnel could adversely affect our results of operations. We do not intend to
maintain ''key man'' life insurance on any of our officers.
As
we expand our business, we will need to improve our operations and financial
systems and staff; if we cannot improve these systems or recruit suitable
employees, our performance may be adversely affected.
Our
current operating and financial systems may not be adequate as we implement our
plan to expand the size of our fleet, and our attempts to improve those systems
may be ineffective. If we are unable to operate our financial and operations
systems effectively or to recruit suitable employees as we expand our fleet, our
performance may be adversely affected.
Risks
involved with operating oceangoing vessels could affect our business and
reputation, which would adversely affect our revenues and stock
price.
The
operation of an oceangoing vessel carries inherent risks. These risks include
the possibility of:
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environmental
accidents;
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cargo
and property losses or damage;
and
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mechanical
failure, human error, war, terrorism, political action in various
countries, labor strikes or adverse weather
conditions.
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Any of
these circumstances or events could result in death or injury to persons, loss
of revenues or property, environmental damage, higher insurance rates, damage to
our customer relationships, delay or rerouting, and could increase our costs or
lower our revenues. The involvement of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable vessel
operator. If one of our vessels were involved in an accident with the potential
risk of environmental contamination, the resulting media coverage could have a
material adverse effect on our business, results of operations, cash flows and
financial condition.
Delays
in deliveries of our vessels could harm our operating results.
The
delivery of our last newbuilding product tanker could be delayed, which would
affect our results of operations and financial condition
.
We
expend substantial sums during construction of newbuildings without assurance
that they will be completed.
We are
typically required to expend substantial sums as progress payments during
construction of a newbuilding, but we do not derive any revenue from the vessel
until after its delivery.
If we are
unable to obtain financing required to complete payments on our newbuilding
orders, we could effectively forfeit all or a portion of the progress payments
previously made. As of December 31, 2008, we had six newbuildings on order with
deliveries scheduled during 2009. As of December 31, 2008, progress payments
made towards these newbuildings totaled $152.0 million.
To fund
the remaining portion of existing or future capital expenditures, we will be
required to use cash from operations or incur borrowings or raise capital
through the sale of additional equity securities. Our ability to obtain bank
financing or to access the capital markets for future offerings may be limited
by our financial condition at the time of any such financing or offering as well
as by adverse market conditions resulting from, among other things, general
economic conditions and contingencies and uncertainties that are beyond our
control. Our failure to obtain the funds for necessary future capital
expenditures could have a material adverse effect on our business, results of
operations and financial condition. Even if we are successful in obtaining
necessary funds, incurring additional debt may significantly increase our
interest expense and financial leverage, which could limit our financial
flexibility and ability to pursue other business opportunities.
Due
to market conditions, we may not take delivery of our newbuildings or may sell
them at a loss
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Since the
highs reached during the summer of 2008, vessel values in both the drybulk and
tanker industries have declined significantly. Some, if not all, of
our newbuildings have also declined in value from the price we have agreed to
pay for such newbuildings. If such vessel values remain depressed or
decline further, we may choose to terminate our contract with the shipyard,
which may result in termination payments in addition to any forfeiture of
payments already made, or we may sell the newbuildings on the market at a loss,
which might also include addtional payments. Either of these
scenarios would affect our cash flow and financial condition.
Rising
fuel prices may adversely affect our profits.
Fuel is a
significant, if not the largest, operating expense for many of our shipping
operations when our vessels are not under period charter. The price and supply
of fuel is unpredictable and fluctuates based on events outside our control,
including geopolitical developments, supply and demand for oil and gas, actions
by OPEC and other oil and gas producers, war and unrest in oil producing
countries and regions, regional production patterns and environmental concerns.
As a result, an increase in the price of fuel may adversely affect our
profitability. Further, fuel may become much more expensive in future, which may
reduce the profitability and competitiveness of our business versus other forms
of transportation, such as truck or rail.
Our
vessels may suffer damage and we may face unexpected drydocking costs, which
could affect our cash flow and financial condition.
If our
vessels suffer damage, they may need to be repaired at a drydocking facility,
resulting in vessel downtime. The costs of drydock repairs are unpredictable and
can be substantial. We may have to pay drydocking costs that our insurance does
not cover. The inactivity of these vessels while they are being repaired and
repositioned, as well as the actual cost of these repairs, would decrease our
earnings. In addition, space at drydocking facilities is sometimes limited and
not all drydocking facilities are conveniently located. We may be unable to find
space at a suitable drydocking facility or we may be forced to move to a
drydocking facility that is not conveniently located to our vessels' positions.
The loss of earnings while our vessels are forced to wait for space or to
relocate to drydocking facilities that are farther away from the routes on which
our vessels trade would decrease our earnings.
A
drop in spot charter rates may provide an incentive for some charterers to
default on their charters.
When we
enter into a time or bareboat charter, charter rates under that charter are
fixed for the term of the charter. If the spot charter rates in the tanker or
drybulk shipping industry, as applicable, become significantly lower than the
time charter equivalent rates that some of our charterers are obligated to pay
us under our existing charters, the charterers may have incentive to default
under that charter or attempt to renegotiate the charter. If our charterers fail
to pay their obligations, we would have to attempt to re-charter our vessels at
lower charter rates, which would affect our ability to comply with our loan
covenants and operate our vessels profitably. If we are not able to comply with
our loan covenants and our lenders choose to accelerate our indebtedness and
foreclose their liens, we could be required to sell vessels in our fleet and our
ability to continue to conduct our business would be impaired.
The
aging of our fleet may result in increased operating costs in the future, which
could adversely affect our earnings.
In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. Our current operating fleet has an average age of
approximately nine 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 also increase with the age of a vessel, making older
vessels less desirable to charterers. Governmental regulations, including
environmental regulations, safety or other equipment standards related to the
age of vessels may require expenditures for alterations, or the addition of new
equipment, to our vessels and may restrict the type of activities in which our
vessels may engage. As our vessels age, market conditions might not justify
those expenditures or enable us to operate our vessels profitably during the
remainder of their useful lives.
Purchasing
and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our
earnings.
While we
rigorously inspect previously owned, or secondhand vessels prior to purchase,
this does not normally provide us with the same knowledge about their condition
and cost of any required (or anticipated) repairs that we would have had if
these vessels had been built for and operated exclusively by us. Also, we do not
receive the benefit of warranties from the builders if the vessels we buy are
older than one year. In general, the costs to maintain a vessel in good
operating condition increase with the age of the vessel. As of the date of this
report, six of the tanker vessels in our fleet were more than 10 years of age.
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, safety or other
equipment standards related to the age of vessels may require expenditures for
alterations or the addition of new equipment to our vessels and may restrict the
type of activities in which the vessels may engage. As our vessels age, market
conditions might not justify those expenditures or enable us to operate our
vessels profitably during the remainder of their useful lives. If we sell
vessels, the price for which we sell them might be lower than their carrying
amount at that time which would result in a loss.
We
may not have adequate insurance to compensate us if we lose our
vessels.
We
procure insurance for our fleet against those types of risks commonly insured
against by vessel owners and operators. These insurances include hull and
machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage, war risk insurance and
insurance against loss of hire, which covers business interruptions that result
in the loss of use of a vessel. While we currently have loss of hire insurance
that covers, subject to annual coverage limits, all of the vessels in our fleet,
we may not purchase loss of hire insurance to cover newly acquired vessels. We
can give no assurance that we are adequately insured against all risks. We may
not be able to obtain adequate insurance coverage at reasonable rates for our
fleet in the future. The insurers may not pay particular claims. Our insurance
policies contain deductibles for which we will be responsible as well as,
limitations and exclusions which may nevertheless increase our costs or lower
our revenue.
Maritime
claimants could arrest 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 that vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien 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 lifted. In addition, in some jurisdictions, such as South Africa, under
the ''sister ship'' theory of liability, a claimant may arrest both the vessel
which is subject to the claimant's maritime lien and any ''associated'' vessel,
which is any vessel owned or controlled by the same owner. Claimants could try
to assert ''sister ship'' liability against one vessel in our fleet for claims
relating to another of our ships.
Governments
could requisition our vessels during a period of war or emergency, resulting in
loss of earnings.
A
government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes her owner.
Also, a government could requisition our vessels for hire. 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 a
period of war or emergency. Government requisition of one or more of our vessels
could negatively impact our revenues should we not receive adequate
compensation.
Certain existing stockholders, who
hold approximately 36.97% of our common stock, may have the power to exert
control over us, which may limit your ability to influence our
actions.
As of
June 24, 2009, Sovereign Holdings Inc., or Sovereign Holdings, a company that is
wholly owned by our President, Chief Executive Officer and Director, Evangelos
J. Pistiolis, and Kingdom Holdings Inc., or Kingdom Holdings, a company owned
primarily by adult relatives of Mr. Pistiolis, own, directly or indirectly,
approximately 13.17% of the outstanding shares of our common stock. In addition,
Sphinx Investment Corp., Maryport Navigation Corp. and Mr. George Economou own
13.99% of the outstanding shares of our common stock. QVT Financial LP, QVT
Financial GP LLC and QVT Associates GP LLC own 9.81% of the outstanding shares
of our common stock. Sphinx Investment Corp., Maryport Navigation Corp., QVT
Financial LP, QVT Financial GP LLC and QVT Associates GP LLC are entities owned
and controlled by unaffiliated third parties. Together, these existing
shareholders own 36.97% of our common stock. While these shareholders have no
agreement, arrangement or understanding relating to the voting of their shares
of common stock, due to the number of shares of our common stock they own, they
have the power to exert considerable influence over our actions.
Our
President, Chief Executive Officer, and Director, Mr. Evangelos Pistiolis, has
affiliations with a private shipping company which could create conflicts of
interest.
The
family of our President, Chief Executive Officer, and Director, Mr. Evangelos
Pistiolis, owns a private shipping company. This relationship could
create conflicts of interest between us, on the one hand, and this private
shipping company, on the other hand. These conflicts may arise in connection
with the chartering, purchase, sale and operations of the vessels in our fleet
versus tankers and drybulk vessels managed by this private shipping company. For
example, Mr. Pistiolis may give preferential treatment to vessels that are
beneficially owned by this private shipping company because Mr. Pistiolis and
members of his family may receive greater economic benefits.
We
may have to pay tax on United States source income, which would reduce our
earnings.
Under the
United States Internal Revenue Code of 1986, or the Code, 50% of the gross
shipping income of a vessel owning or chartering corporation, such as ourselves
and our subsidiaries, that is attributable to transportation that begins or
ends, but that does not begin and end, in the United States is characterized as
United States source shipping income and such income is subject to a 4% United
States federal income tax without allowance for deduction, unless that
corporation qualifies for exemption from tax under Section 883 of the Code. We
expect that we and each of our subsidiaries will qualify for this statutory tax
exemption and we have taken this position for United States federal income tax
return reporting purposes. However, there are factual circumstances beyond our
control that could cause us to lose the benefit of this tax exemption and
thereby become subject to United States federal income tax on our United States
source income. Therefore, we can give no assurances on our tax-exempt status or
that of any of our subsidiaries. If we or our subsidiaries are not entitled to
this exemption under Section 883 for any taxable year, we or our subsidiaries
would be subject for those years to a 4% United States federal income tax on our
United States source shipping income. The imposition of this taxation could have
a negative effect on our business.
United
States tax authorities could treat us as a ''passive foreign investment
company,'' which could have adverse United States federal income tax
consequences to United States holders.
A foreign
corporation will be treated as a ''passive foreign investment company,'' or
PFIC, for United States federal income tax purposes if either (1) at least 75%
of its gross income for any taxable year consists of certain types of ''passive
income'' or (2) at least 50% of the average value of the corporation's assets
produce or are held for the production of those types of ''passive income.'' For
purposes of these tests, ''passive income'' includes dividends, interest, and
gains from the sale or exchange of investment property and rents and royalties
other than rents and royalties which are received from unrelated parties in
connection with the active conduct of a trade or business. For purposes of these
tests, income derived from the performance of services does not constitute
''passive income.'' United States shareholders of a PFIC are subject to a
disadvantageous United States federal income tax regime with respect to the
income derived by the PFIC, the distributions they receive from the PFIC and the
gain, if any, they derive from the sale or other disposition of their shares in
the PFIC.
As of
March 2009, 67% of the average value of our fleet was employed under bareboat
charters that produce passive income. If our fleet and charter composition
remains the same, we would likely be treated as a PFIC for our 2009 taxable
year. Nevertheless, it is management's intention to take necessary steps in
order to avoid PFIC status as this would have negative tax consequences for our
investors. Remedial actions could involve the sale of passive income producing
vessels or the purchase of non passive income producing assets.
In this
regard, we intend to treat the gross income we derive or are deemed to derive
from our time chartering activities as services income, rather than rental
income. Accordingly, we believe that our income from our time chartering
activities does not constitute ''passive income,'' and the assets that we own
and operate in connection with the production of that income do not constitute
passive assets.
There is,
however, no direct legal authority under the PFIC rules addressing our proposed
method of operation. We believe there is substantial legal authority supporting
our position consisting of case law and United States 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, we note that there is also authority which characterizes time charter
income as rental income rather than services income for other tax purposes.
Accordingly, there is a risk that the IRS or a court of law could determine that
we are a PFIC. Moreover, there is a risk that we could constitute a PFIC for any
future taxable year if there were to be changes in the nature and extent of our
operations or if our vessels continue to be bareboat chartered.
If the
IRS were to find that we are or have been a PFIC for any taxable year, our
United States shareholders will face adverse United States tax consequences.
Under the PFIC rules, unless those shareholders make an election available under
the Code (which election could itself have adverse consequences for such
shareholders, as discussed below under ''Tax Considerations— United States
Federal Income Taxation of United States Holders''), such shareholders would be
liable to pay United States federal income tax at the then prevailing income tax
rates on ordinary income plus interest upon excess distributions and upon any
gain from the disposition of our common stock, as if the excess distribution or
gain had been recognized ratably over the shareholder's holding period of our
common stock. See ''Tax Considerations— United States Federal Income Taxation of
United States Holders'' for a more comprehensive discussion of the United States
federal income tax consequences to United States shareholders if we are treated
as a PFIC.
Because
we generate all of our revenues in U.S. dollars but incur a portion of our
expenses in other currencies, exchange rate fluctuations could hurt our results
of operations.
We
generate all of our revenues in U.S. dollars but incur approximately 16% of our
expenses in currencies other than U.S. dollars, mainly Euros. This difference
could lead to fluctuations in net income due to changes in the value of the U.S.
dollar relative to the other currencies, in particular, the Euro. During 2008,
the Euro appreciated versus the US dollar more than it ever has for the past
five years, reaching almost 1.6 US dollars to 1 Euro during the summer of 2008.
Should the Euro further appreciate relative to the U.S. dollar in future
periods, our expenses will increase in U.S dollar terms, thereby decreasing our
net income. We have not hedged these risks. Our operating results could suffer
as a result.
Risks Relating to Our Common
Shares
There
is no guarantee of a continuing public market for you to resell our common
shares.
Our
common shares commenced trading on the Nasdaq National Market, now the Nasdaq
Global Select Market, in July 2004. An active and liquid public market for our
common shares may not continue. The price of our common shares may be volatile
and may fluctuate due to factors such as:
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actual
or anticipated fluctuations in our quarterly and annual results and those
of other public companies in our
industry;
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mergers
and strategic alliances in the drybulk shipping
industry;
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market
conditions in the drybulk shipping industry and the general state of the
securities markets;
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•
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changes
in government regulation;
|
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•
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shortfalls
in our operating results from levels forecast by securities analysts;
and
|
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•
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announcements
concerning us or our
competitors.
|
You may
not be able to sell your common shares in the future at the price that you paid
for them or at all. In addition, if the price of our common shares falls below
$1.00, we may be involuntarily delisted from the Nasdaq Global Select
Market.
Future
sales of our common shares could cause the market price of our common shares to
decline
Sales of
a substantial number of our common shares in the public market, or the
perception that these sales could occur, may depress the market price for our
common shares. These sales could also impair our ability to raise additional
capital through the sale of our equity securities in the future.
We
are incorporated in the Republic of the Marshall Islands, which does not have a
well-developed body of corporate law.
Our
corporate affairs are governed by our Articles of Incorporation and Bylaws and
by the Marshall Islands Business Corporations Act, or BCA. The provisions of the
BCA resemble provisions of the corporation laws of a number of states in the
United States. However, there have been few judicial cases in the Republic of
the Marshall Islands interpreting the BCA. The rights and fiduciary
responsibilities of directors under the law of the Republic of the Marshall
Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence
in certain United States jurisdictions. Security holder rights may differ as
well. While the BCA does specifically incorporate the non-statutory law, or
judicial case law, of the State of Delaware and other states with substantially
similar legislative provisions, our security holders may have more difficulty in
protecting their interests in the face of actions by the management, directors
or controlling shareholders than would security holders of a corporation
incorporated in a United States jurisdiction.
A
small number of our stockholders effectively control the outcome of matters on
which our stockholders are entitled to vote.
Entities
affiliated with Mr. Evangelos Pistiolis, our Chief Executive Officer, currently
own, directly or indirectly, approximately 9.57% of our outstanding common stock
as of June 24, 2009. In addition, entities affiliated with Mr. George Economou
currently own, directly or indirectly, approximately 13.99% of our outstanding
common stock as of June 24, 2009. While, as far as we are aware, those
stockholders have no agreement, arrangement or understanding relating to the
voting of their shares of our common stock, they will effectively control the
outcome of matters on which our stockholders are entitled to vote, including the
election of directors and other significant corporate actions. The interests of
these stockholders may be different from your interests.
Anti-takeover
provisions in our organizational documents could have the effect of
discouraging, delaying or preventing a merger, amalgamation or acquisition,
which could reduce the market price of our common shares.
Several
provisions of our Amended and Restated Articles of Incorporation and our Amended
and Restated Bylaws could make it difficult for our shareholders 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 shareholders may
consider favorable.
These
provisions include:
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•
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authorizing
our board of directors to issue "blank check" preferred stock without
shareholder approval;
|
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•
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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 at least 80% of the outstanding shares of our capital
stock entitled to vote for the
directors;
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•
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prohibiting
shareholder action by written consent unless the written consent is signed
by all shareholders entitled to vote on the
action;
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•
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limiting
the persons who may call special meetings of shareholders;
and
|
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•
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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 shareholders at
shareholder meetings.
|
In
addition, we have entered into a Stockholder Rights Agreement that will make it
more difficult for a third party to acquire us without the support of our board
of directors and principal shareholders. These anti-takeover provisions could
substantially impede the ability of public shareholders to benefit from a change
in control and, as a result, may reduce the market price of our common stock and
your ability to realize any potential change of control premium.
The
market price of our common shares has fluctuated widely and may fluctuate widely
in the future
The
market price of our common shares has fluctuated widely since our common shares
and warrants began trading in the Nasdaq National Market, now the Nasdaq Global
Select Market, in July 2004.
ITEM
4.
INFORMATION
ON THE COMPANY
A. History
and Development of the Company
Our
predecessor, Ocean Holdings Inc., was formed as a corporation in January 2000
under the laws of the Republic of the Marshall Islands and renamed TOP TANKERS
INC. in May 2004. In December 2007, TOP TANKERS INC. was renamed TOP SHIPS INC.
Our common stock is currently listed on the NASDAQ Global Select Market under
the symbol "TOPS". The current address of our principal executive office is 1
Vas. Sofias and Meg. Alexandrou Str, 15124 Maroussi, Greece. The telephone
number of our registered office is +30 210 812 8000.
On
July 23, 2004, we completed our initial public offering. The net proceeds
of our initial public offering, approximately $124.6 million, were
primarily used to finance the acquisition of 10 vessels, comprising of
eight Ice-class double-hull Handymax tankers and two double-hull Suezmax
tankers. The total cost of the acquisition was approximately
$251.3 million.
On
November 5, 2004, we completed a follow-on offering of our common stock. The net
proceeds of our follow-on offering, approximately $139.5 million, were used
primarily to finance the acquisition of five double-hull Suezmax tankers. The
total cost of the acquisition was approximately $249.3 million.
During
2005, we acquired five double-hull Handymax and four double-hull Suezmax tankers
at a total cost of $453.4 million and sold one double-hull Handymax and our last
single-hull Handysize tanker. We sold and leased-back five double-hull Handymax
tankers for a period of seven years.
From
April 2006, until July 2006, we issued through a "controlled equity offering"
1,302,454 shares of common stock, par value $0.01. The net proceeds totaled
$26.9 million.
During
2006, we sold and leased-back on a fixed charter basis four double-hull
Handymax, four double-hull Suezmax and five double-hull Suezmax tankers for
periods of five years, five years and seven years, respectively. Additionally,
we sold three double-hull Handymax tankers, and we entered into an agreement
with SPP Shipbuilding Co., Ltd. of the Republic of Korea, or SPP, for the
construction of six product/chemical tankers.
In May
2007, we re-acquired four Suezmax tankers that we sold in 2006 in an earlier
sale and leaseback transaction and terminated the respective bareboat charters.
The re-acquisition price was $208.0 million and was partially financed by the
early redemption of the seller's credit of $20.6 million associated with the
2006 sales and leaseback transactions, along with secured debt financing and
cash from operations.
From June
2007 until July 2007, we issued through a "controlled equity offering" 1,435,874
shares of common stock, par value $0.01. The net proceeds totaled $29.4
million.
During
July and August 2007, we agreed to acquire one Supramax, one Handymax and four
Panamax drybulk vessels at a total cost of $370.1 million. The Handymax and two
of the four Panamax drybulk vessels were delivered to us during the fourth
quarter of 2007. The Supramax and the remaining two Panamax drybulk vessels were
delivered to us during the first two quarters of 2008.
In
December 2007, we completed a follow-on offering of our common stock. The net
proceeds of this follow-on offering, approximately $68.9 million, were used
primarily to repay outstanding secured debt and to partially finance the
acquisition of the six drybulk vessels mentioned above, one of which we have
since sold.
During
2007 we sold one Suezmax tanker, we agreed to sell one Suezmax tanker that we
later delivered in January 2008 to its new owners, and we terminated the
bareboat charters on three Handymax tankers that we sold in 2006 in sale and
leaseback transactions, due to the sale of the vessels by their owners to third
parties.
During
2008, we took delivery of one Supramax drybulk vessel and two Panamax drybulk
vessels, which we had agreed to acquire in 2007 as mentioned above.
Additionally, during 2008, we sold seven owned Suezmax tankers and one Panamax
drybulk vessel and we arranged the sale of six chartered-in vessels, under
bareboat charters, and terminated the respective charters.
On March
20, 2008, we effected a three-for-one reverse stock split of our common stock.
There was no change in the number of authorized common shares. As a result of
the reverse stock split, the number of outstanding shares as of March 20, 2008
decreased to 20,705,380, while the par value of our common shares remained
unchanged at $0.01 per share.
In April
2008, we privately placed with various investors 7.3 million unregistered shares
of common stock, par value $0.01, for aggregate proceeds of approximately $51.0
million. The 7.3 million shares were sold for $7.00 per share, which represents
a discount of 15.5 percent based on the closing share price of $8.28 on April
23, 2008. In July 2008, we filed a registration statement on Form F-3, with
respect to these 7.3 million shares.
As of
December 31, 2008, our fleet consisted of twelve vessels – seven Handymax
tankers, one Supramax drybulk vessel, one Handymax drybulk vessel, and three
Panamax drybulk vessels, with total carrying capacity of 0.7 million dwt
(including five tankers sold and leased back), as compared to 23 vessels, with
total carrying capacity of 2.4 million dwt (including 11 tankers sold and leased
back), as of December 31, 2007.
In
February 2009, the Company took delivery of Miss Marilena and Lichtenstein from
SPP. Miss Marilena and Lichtenstein are two out of six 50,000 dwt product /
chemical tankers scheduled to be delivered in 2009. Miss Marilena and
Lichtenstein entered into bareboat time-charter employment for a period of 10
years at a daily rate of $14,400 and $14,550, respectively.
On March
19, 2009, the Company took delivery of Ionian Wave and Tyrrhenian Wave from SPP.
Ionian Wave and Tyrrhenian Wave are the third and fourth out of the six 50,000
dwt product / chemical tankers discussed above. Ionian Wave and Tyrrhenian Wave
entered into bareboat time-charter employment for a period of seven years at a
daily rate of $14,300, with three successive one-year options at a higher daily
rate.
In April
2009, we agreed with the owners of the M/T Relentless to terminate the
bareboat charter initially entered into as part of the sale and leaseback deal
in 2005. Under this agreement, we will redeliver the vessel to its owners and
pay a termination fee of $2.5 million during the third quarter of 2009. The
bareboat charter would have expired in 2012.
On May
22, 2009, the Company took delivery of Britto from SPP. Britto is the fifth out
of the six 50,000 dwt newbuilding product / chemical tankers scheduled to be
delivered in 2009. Britto entered into bareboat time-charter employment for a
period of ten years at a daily rate of $14,550.
On June
24, 2009, we terminated the bareboat charters and redelivered the vessels M/T
Faithful, the M/T Doubtless, the M/T Spotless and the M/T Vanguard to their
owners after paying $11.75 million in termination fees and expenses. In addition
to the termination fees and expenses, we have forfeited our right to
receive the seller's credit of $10.0 million from the initial sale of
the vessels, which would have been received upon the expiration of the
bareboat charter, and we have undertaken to pay for the dry-dock of
the M/T Spotless which is currently in progress. The bareboat charter would have
expired in 2011. We will remain the managers of these vessels until the
expiration of their current time charters, in early 2010, and will be reimbursed
by the owners for all expenses incurred. These were the last leased vessels in
our fleet.
B. Business
Overview
Business
Strategy
We are a
provider of international seaborne transportation services, carrying petroleum
products, crude oil for the oil industry and drybulk commodities for the steel,
electric utility, construction and agriculture-food industries. We employ our
tanker and drybulk vessels under time charters, bareboat charters, or in the
spot charter market. Three of our tankers and four of our drybulk vessels are
currently employed on time charters and five of our tankers and one of our
drybulk vessels are employed on bareboat charters. We actively manage the
deployment of our fleet between time charters and bareboat charters, which last
from several months to several years. 56% of our fleet by dwt are sister ships,
which enhances the revenue generating potential of our fleet by providing us
with operational and scheduling flexibility. Sister ships also increase our
operating efficiencies because technical knowledge can be applied to all vessels
in a series and create cost efficiencies and economies of scale when ordering
spare parts, supplying and crewing these vessels.
As of the
date of this report, our tanker fleet under management consists of 12 owned
(seven tankers and five drybulk vessels) and one chartered-in tanker vessel from
a sale and leaseback transaction that we completed in 2005. The purpose of the
sale and leaseback transaction was to take advantage of the high asset price
environment prevailing in the market at the time and to maintain commercial and
operations control of the vessels for a period of five to seven
years.
However,
the vessels sold and leased back proved to have higher operating expenses due to
the increased need for regular repairs and maintenance. In addition, freight
market conditions deteriorated during the years ended December 31, 2007 and
December 31, 2008. At the inception of the lease period we had assumed a
utilization rate of approximately 90% for those vessels. However, most of these
vessels underwent their drydockings in 2006 and early 2007. All of these
drydockings required significantly more time and expense than originally
anticipated because of the unexpected, increased amount of works required and
overbooking of the Chinese shipyards at which the vessels were drydocked, which
caused significant delays. These circumstances decreased the utilization rate to
approximately 71%. As a result of the above, the transaction proved uneconomical
and had a negative impact on our operating results.
The
chartered-in vessels constituted the majority of the fleet in 2006, but soon
thereafter we initiated a process to unwind a number of bareboat agreements. We
have successfully unwound all bareboat charter agreements, either by
re-acquiring tankers previously sold and leased back, initiating the sale
process by the lessors to third parties or by terminating the leases in exchange
for a termination fee. Our last leased vessel will be redelivered to its
owners in the third quarter of 2009.
During
2006 we ordered six newbuilding product tankers in the SPP shipyard in the
Republic of Korea in order to modernize our tanker fleet. Five of these tankers
have already been delivered to us during the first two quarters of 2009 and the
sixth one is expected to be delivered during the summer of 2009.
In
addition, during 2007 we diversified our fleet portfolio by acquiring drybulk
vessels, beginning with the acquisition of six drybulk vessels, one of which we
subsequently sold.
We intend
to continue to review the market for tanker and drybulk vessels to continue our
program of acquiring suitable vessels on accretive terms.
We
believe we have established a reputation in the international ocean transport
industry for operating and maintaining our fleet with high standards of
performance, reliability and safety. We have assembled a management team
comprised of executives who have extensive experience operating large and
diversified fleets of tankers and drybulk vessels, and who have strong ties to a
number of national, regional and international oil companies, charterers and
traders.
Our
Fleet
The
following table presents the Company's fleet list and employment as of the date
of this report:
|
Dwt
|
Year
Built
|
Charter Type
|
Expiry
|
Daily Base Rate
|
Profit Sharing
Above Base Rate (2009)
|
Eight
Tanker Vessels
|
|
|
|
|
|
|
Relentless
(A)
|
47,084
|
1992
|
Time
Charter
|
Q2/2009
|
$14,000
|
50%
thereafter
|
Dauntless
(B)
|
46,168
|
1999
|
Time
Charter
|
Q1/2010
|
$16,250
|
100%
first $1,000 + 50% thereafter
|
Ioannis
P (B)
|
46,346
|
2003
|
Time
Charter
|
Q4/2010
|
$18,000
|
100%
first $1,000 + 50% thereafter
|
Miss
Marilena (B)
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2019
|
$14,400
|
None
|
Lichtenstein
(B)
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2019
|
$14,550
|
None
|
Ionian
Wave (B)
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2016
|
$14,300
|
None
|
Thyrrhenian
Wave (B)
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2016
|
$14,300
|
None
|
Britto
(B)
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2019
|
$14,550
|
None
|
|
|
|
|
|
|
|
One
Newbuilding Product Tanker
|
|
|
|
|
|
|
Hull
S-1033
|
50,000
|
2009
|
Bareboat
Charter
|
Q1-2/2019
|
$14,550
|
None
|
|
|
|
|
|
|
|
Total
Tanker dwt
|
439,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
Drybulk Vessels
|
|
|
|
|
|
|
Cyclades
(B)
|
75,681
|
2000
|
Time
Charter
|
Q2/2011
|
$54,250
|
None
|
Amalfi
(B)
|
45,526
|
2000
|
Time
Charter
|
Q2/2009
|
$10,000
|
None
|
Voc
Gallant (B)
|
51,200
|
2002
|
Bareboat
Charter
|
Q2/2012
|
$24,000
|
None
|
Pepito
(B)
|
75,928
|
2001
|
Time
Charter
|
Q2/2013
|
$41,000
|
None
|
Astrale
(B)
|
75,933
|
2000
|
Time
Charter
|
Q2/2011
|
$18,000
|
None
|
|
|
|
|
|
|
|
Total
Drybulk dwt
|
324,268
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
DWT
|
763,866
|
|
|
|
|
|
A.
Vessel sold and leased back in September 2005 for a period of 7
years.
|
B.
Owned vessels.
|
Management
of the Fleet
Since
July 1, 2004, TOP Tanker Management Inc., or TOP Tanker Management, our
wholly-owned subsidiary, has been responsible for all of the chartering,
operational and technical management of our fleet, including crewing,
maintenance, repair, capital expenditures, drydocking, vessel taxes, maintaining
insurance and other vessel operating expenses under management agreements with
our vessel owning subsidiaries. TOP Tanker Management has built a management
team with significant experience in operating large and diversified fleets of
tankers and drybulk vessels and has expertise in all aspects of commercial,
technical, management and financial areas of our business. Prior to July 1,
2004, the operations of our fleet were managed by Primal Tankers Inc.,
which was wholly-owned by the father of our Chief Executive
Officer.
As of
December 31, 2008, TOP Tanker Management has subcontracted the day-to-day
technical management and crewing of two Handymax tankers to V. Ships Management
Limited, a ship management company Additionally, TOP Tanker Management has also
subcontracted the crewing of three Handymax tankers to V. Ships Management
Limited and has also subcontracted the crewing of two Handymax tankers and four
drybulk vessels to Interorient Maritime Enterprises Inc. TOP Tanker Management
pays a monthly fee of $11,800 per vessel for technical management and crewing of
the two vessels and $3,550 per vessel for the crewing of three vessels under its
agreements with V. Ships Management, and a monthly fee of $1,700 per vessel for
the six vessels under its agreements with Interorient Maritime Enterprises
Inc.
Crewing
and Employees
As of
December 31, 2007 and 2008, TOP SHIPS INC. had four employees, while our
wholly-owned subsidiary, TOP Tanker Management, employed 92 employees in 2007
and 66 employees in 2008, all of whom are shore-based. TOP Tanker Management
ensures that all seamen have the qualifications and licenses required to comply
with international regulations and shipping conventions, and that our vessels
employ experienced and competent personnel.
During
2008, V. Ships Management, Hanseatic Shipping Company and Interorient Maritime
Enterprises Inc, were responsible for the crewing of the fleet. Such
responsibilities include training, transportation, compensation and insurance of
the crew.
All of
the employees of TOP Tanker Management are subject to a general collective
bargaining agreement covering employees of shipping agents in Greece. These
agreements set industry-wide minimum standards. We have not had any labor
problems with our employees under this collective bargaining agreement and
consider our workplace and labor union relations to be good.
The
Industry - Tankers
The
international tanker industry represents, we believe, the most efficient and
safest method of transporting large volumes of crude oil and refined petroleum
products such as gasoline, diesel, fuel oil, gas oil and jet fuel, as well as
edible oils and chemicals. Over the past five years, seaborne transportation of
petroleum products has grown substantially, although it declined during
2008.
Freight
rates in the tanker shipping industry are determined by the supply of product
tankers and the demand for crude oil and refined petroleum products
transportation. Factors that affect the supply of product tankers and the demand
for transportation of crude oil and refined petroleum products
include:
Demand
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•
|
general
economic conditions, including increases and decreases in industrial
production and transportation, in which China has played a significant
role since it joined the World Trade
Organization.
|
|
•
|
environmental
issues or
concerns;
|
|
•
|
competition
from alternative energy sources;
and
|
Supply
|
•
|
the
number of combined carriers, or vessels capable of carrying oil or drybulk
cargoes, carrying oil
cargoes;
|
|
•
|
the
number of newbuildings on order and being
delivered;
|
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•
|
the
number of tankers in lay-up, which refers to vessels that are in storage,
dry-docked, awaiting repairs or otherwise not available or out of
commission; and
|
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•
|
the
number of tankers scrapped for obsolescence or subject to
casualties;
|
|
•
|
prevailing
and expected future charterhire
rates;
|
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•
|
costs
of bunkers, fuel oil, and other operating
costs;
|
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•
|
the
efficiency and age of the world tanker
fleet;
|
|
•
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current
shipyard capacity;
and
|
|
•
|
government
and industry regulation of maritime transportation practices, particularly
environmental protection laws and
regulations.
|
Developments
in the International Tanker Market
The
Baltic Dirty Tanker Index, a U.S. dollar daily average of charter rates issued
by the London based Baltic Exchange (an organization providing maritime market
information for the trading and settlement of physical and derivative contracts)
which takes into account input from brokers around the world regarding crude oil
fixtures for various routes various tanker vessel sizes, declined from a high of
2,347 in July 2008 to a low of 453 in mid-April 2009, which represents a decline
of 80%. The Baltic Clean Tanker Index has fallen over 1,160 points, or 77%,
since the early summer of 2008. The decline in charter rates is due to various
factors, including the significant fall in demand for crude oil and petroleum
products, the consequent rising inventories of crude oil and petroleum products
in the United States and in other industrialized nations and the corresponding
reduction in oil refining, the dramatic fall in the price of oil in 2008, and
the restrictions on crude oil production that the Organization of Petroleum
Exporting Countries, or OPEC and other non-OPEC oil producing countries have
imposed in an effort to stabilize the price of oil.
The price
of crude oil rose sharply in the first half of 2008. From a starting point of
$99 per barrel at the turn of the year, spot prices for West Texas Intermediate,
or WTI, a specific type of oil, rose to peak prices above $145 per barrel in
July. The rise in prices caused OPEC to continue increasing crude oil production
in the first seven months of 2008, driving tanker earnings to the highest levels
witnessed since late 2004 in most markets. After July, oil prices declined
sharply as a result of the deterioration in the world economy, the collapse of
financial markets, declining oil demand and bearish market sentiment. The fall
in prices and in demand and rising oil inventories led OPEC to reduce crude oil
production and exports resulting in lower, albeit still historically high,
tanker earnings in the second half of the year. In the first quarter of 2009 oil
prices stabilized in a trading range of $35-$55 per barrel as OPEC continued to
reduce production levels.
The
Industry – Drybulk Vessels
Drybulk
cargo is cargo that is shipped in quantities and can be easily stowed in a
single hold with little risk of cargo damage. According to industry sources,
approximately 3,065 million tons of drybulk cargo was transported by sea,
consisting of iron ore, coal and grains representing 27.5%, 25.87% and 10.24% of
the total drybulk trade, respectively.
The
demand for drybulk vessel capacity is determined by the underlying demand for
commodities transported in drybulk vessels, which in turn is influenced by
trends in the global economy. Between 2001 and 2007, trade in all drybulk
commodities increased from 2,108 million tons to 2,961 million tons, an increase
of 40.46%. One of the main reasons for that increase in drybulk trade was the
growth in imports by China of iron ore, coal and steel products during the last
eight years. Chinese imports of iron ore alone increased from 92.2 million tons
in 2001 to approximately 382 million tons in 2007. In 2008, overall trade in all
drybulk commodities increased from 2,961 million tons in 2007 to 3,065 million
tons, an increase of 3.5%. However, demand for drybullk shipping decreased
dramatically in the second quarter of 2008 evidenced by the decrease in Chinese
iron ore imports which decreased from a high of 119.5 million tons in the second
quarter of 2008 to a low of 96.2 million tons during the fourth quarter of 2008
representing a decrease of 19.5%.
The
supply of drybulk vessels is dependent on the delivery of new vessels and the
removal of vessels from the global fleet, either through scrapping or loss. The
orderbook of new drybulk vessels scheduled to be delivered in 2009 represents
approximately 28.3% of the world drybulk fleet. The level of scrapping activity
is generally a function of scrapping prices in relation to current and
prospective charter market conditions, as well as operating, repair and survey
costs. Drybulk vessels at or over 25 years old are considered to be scrapping
candidate vessels.
Developments
in the International Drybulk Shipping Industry
The
Baltic Drybulk Index, or BDI, a US dollar daily average of charter rates issued
by the London based Baltic Exchange which takes into account input from brokers
around the world regarding fixtures for various routes, dry cargoes and various
drybulk vessel sizes, 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 2008 alone. The decline in charter rates is due
to various factors, including the lack of trade financing for purchases of
commodities carried by sea, which has resulted in a significant decline in cargo
shipments, and the excess supply of iron ore in China, which has resulted in
falling iron ore prices and increased stockpiles in Chinese ports. The
decline in charter rates in the drybulk market also affects the value of drybulk
vessels which follow the trends of drybulk charter rates. During 2009, the BDI
has risen to 4,026 as of June 17, 2009.
Environmental
Regulation
Government
regulation significantly affects the ownership and operation of our vessels. We
are subject to international conventions, national, state and local laws and
regulations in force in the countries in which our vessels may operate or are
registered relating to safety and health and environmental protection, including
the storage, handling, emission, transportation and discharge of hazardous and
nonhazardous materials, the remediation of contamination, and liability for
damage to natural resources. Compliance with such laws, regulations and other
requirements entails significant expense, including vessel modifications and
implementation of certain operating procedures.
A variety
of governmental and private entities subject our vessels to both scheduled and
unscheduled inspections. These entities include the local port authorities (U.S.
Coast Guard, harbor master or equivalent), classification societies, flag state
administration (country of registry) and charterers, particularly terminal
operators and oil companies. Certain of these entities require us to obtain
permits, licenses and certificates for the operation of our vessels. Failure to
maintain necessary permits, certificates or approvals could require us to incur
substantial costs or temporarily suspend the operation of one or more of our
vessels.
We
believe that the heightened level of environmental and quality concerns among
insurance underwriters, regulators and charterers have lead to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with United States
and international regulations. We believe that the operation of our vessels is
in substantial compliance with applicable environmental laws and regulations and
that our vessels have all material permits, licenses, certificates or other
authorizations necessary for the conduct of our operations. However, because
such laws and regulations are frequently changed and may impose increasingly
stricter requirements, we cannot predict the ultimate cost of complying with
these requirements, or the impact of these requirements on the resale value or
useful lives of our vessels. In addition, a future serious marine incident that
results in significant oil pollution or otherwise causes significant adverse
environmental impact could result in additional legislation or regulation that
could negatively affect our profitability.
International
Maritime Organization
The
International Maritime Organization, or IMO (the United Nations agency for
maritime safety and the prevention of pollution by ships), has adopted the
International Convention for the Prevention of Marine Pollution from Ships,
1973, as modified by the Protocol of 1978 relating thereto, which has been
updated through various amendments, or the MARPOL Convention. The MARPOL
Convention implements environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. Under IMO
regulations, in order to trade in ports of IMO member nations, a newbuild tanker
of 5,000 dwt or above must be of double-hull construction or a mid-deck design
with double-sided construction or be of another approved design ensuring the
same level of protection against oil pollution if the tanker:
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is
the subject of a contract for a major conversion or original construction
on or after July 6,
1993;
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commences
a major conversion or has its keel laid on or after January 6, 1994;
or
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completes
a major conversion or is a newbuilding delivered on or after July 6,
1996.
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Since the
enactment of these regulations, the IMO has accelerated the timetable for the
phase-out of single-hull oil tankers. We do not currently own any single-hull
tankers.
In
December 2003, the Marine Environmental Protection Committee of the IMO, or
MEPC, adopted an amendment to the MARPOL Convention, which became effective in
April 2005. The amendment revised an existing regulation 13G accelerating the
phase-out of single-hull oil tankers and adopted a new regulation 13H on the
prevention of oil pollution from oil tankers when carrying heavy grade oil.
Under the revised regulation, single-hull oil tankers were required to be phased
out no later than April 5, 2005 or the anniversary of the date of delivery of
the ship on the date or in the year specified in the following
table:
Category
of Oil Tankers
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Date
or Year for Phase Out
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Category
1 – oil tankers of 20,000 dwt and above carrying crude oil, fuel oil,
heavy diesel oil or lubricating oil as cargo, and of 30,000 dwt and above
carrying other oils, which do not comply with the requirements for
protectively located segregated ballast tanks
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April
5, 2005 for ships delivered on April 5, 1982 or earlier
2005
for ships delivered after April 5, 1982
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Category
2 – oil tankers of 20,000 dwt and above carrying crude oil, fuel oil,
heavy diesel oil or lubricating oil as cargo, and of 30,000 dwt and above
carrying other oils, which do comply with the protectively located
segregated ballast tank requirements
and
Category
3 – oil tankers of 5,000 dwt and above but less than the tonnage specified
for Category 1 and 2 tankers.
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April
5, 2005 for ships delivered on April 5, 1977 or earlier
2005
for ships delivered after April 5, 1977 but before January 1,
1978
2006
for ships delivered in 1978 and 1979
2007
for ships delivered in 1980 and 1981
2008
for ships delivered in 1982
2009
for ships delivered in 1983
2010
for ships delivered in 1984 or
later
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Under the
revised regulations, a flag state may permit continued operation of certain
Category 2 or 3 tankers beyond their phase out date in accordance with the above
table. Under regulation 13G, the flag state may allow for some newer single-hull
oil tankers registered in its country that conform to certain technical
specifications to continue operating until the earlier of the anniversary of the
date of delivery of the vessel in 2015 or the 25th anniversary of their
delivery. Under regulations 13G and 13H, as described below, certain Category 2
and 3 tankers fitted only with double bottoms or double sides may be allowed by
the flag state to continue operations until their 25th anniversary of delivery.
Any port state, however, may deny entry of those single-hull oil tankers that
are allowed to operate under any of the flag state exemptions. These regulations
have been adopted by over 150 nations, including many of the jurisdictions in
which our tankers operate.
Revised
Annex I to the MARPOL Convention entered into force in January 2007. Revised
Annex I incorporates various amendments adopted since the MARPOL Convention
entered into force in 1983, including the amendments to regulation 13G
(regulation 20 in the revised Annex) and Regulation 13H (regulation 21 in the
revised Annex). Revised Annex I also imposes construction requirements for oil
tankers delivered on or after January 1, 2010. A further amendment to revised
Annex I includes an amendment to the definition of heavy grade oil that will
broaden the scope of regulation 21. On August 1, 2007, regulation 12A (an
amendment to Annex I) came into effect requiring oil fuel tanks to be located
inside the double-hull in all ships with an aggregate oil fuel capacity of
600m
3
and
above, and which are delivered on or after August 1, 2010, including ships for
which the building contract is entered into on or after August 1, 2007 or, in
the absence of a contract, ships for which a keel is laid on or after February
1, 2008.
In
September 1997, the IMO adopted Annex VI to the MARPOL Convention to address air
pollution 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
all commercial vessel exhausts and prohibits deliberate emissions of ozone
depleting substances (such as halons and chlorofluorocarbons), emissions of
volatile compounds from cargo tanks, and the shipboard incineration of specific
substances. 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. Additional or new conventions,
laws and regulations may be adopted that could require the installation of
expensive emission control systems and could adversely affect our business, cash
flows, results of operations and financial condition. In October 2008, the IMO
adopted amendments to Annex VI regarding particulate matter, nitrogen oxide and
sulfur oxide emissions standards that will enter into force July 1, 2010. The
amended Annex VI would reduce air pollution from vessels by, among other things,
(i) implementing a progressive reduction of sulfur oxide emissions from ships,
with the global sulfur cap reduced initially to 3.50% (from the current cap of
4.50%), effective from January 1, 2012, then progressively to 0.50%, effective
from January 1, 2020, subject to a feasibility review to be completed no later
than 2018; and (ii) establishing new tiers of stringent nitrogen oxide emissions
standards for new marine engines, depending on their date of installation. Once
these amendments become effective, we may incur costs to comply with these
revised standards. The United States ratified the Annex VI amendments in October
2008, thereby rendering U.S. air emissions standards equivalent to IMO
requirements.
The IMO
has also adopted the SOLAS Convention and the LL Convention, which impose a
variety of standards to regulate design and operational features of ships. SOLAS
Convention and LL Convention standards are revised periodically. We believe that
all our vessels are in substantial compliance with SOLAS Convention and LL
Convention standards.
Under
Chapter IX of the SOLAS Convention, the requirements contained in the
International Safety Management Code for the Safe Operation of Ships and for
Pollution Prevention, or ISM Code, promulgated by the IMO, also affect our
operations. The ISM Code requires the party with operational control of a vessel
to develop an extensive safety management system that includes, among other
things, the adoption of a safety and environmental protection policy setting
forth instructions and procedures for operating its vessels safely and
describing procedures for responding to emergencies.
The ISM
Code requires that vessel operators obtain a safety management certificate for
each vessel they operate. This certificate evidences compliance by a vessel's
management with the ISM Code requirements for a safety management system. No
vessel can obtain a certificate unless its operator has been awarded a document
of compliance, issued by each flag state, under the ISM Code. We have obtained
documents of compliance for our offices and safety management certificates for
all of our vessels for which the certificates are required by the IMO. As
required by the ISM Code, we renew these documents of compliance and safety
management certificates annually.
Noncompliance
with the ISM Code and other IMO regulations may subject the shipowner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in a tanker's denial of
access to, or detention in, some ports. Both the U.S. Coast Guard and European
Union authorities have indicated that vessels not in compliance with the ISM
Code by the applicable deadlines will be prohibited from trading in U.S. and
European Union ports, as the case may be.
The IMO
has negotiated international conventions that impose liability for oil pollution
in international waters and a signatory's territorial waters. Additional or new
conventions, laws and regulations may be adopted which could limit our ability
to do business and which could have a material adverse effect on our business
and results of operations.
The IMO
adopted an International Convention for the Control and Management of Ships'
Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM
Convention's implementing regulations call for a phased introduction of
mandatory ballast water exchange requirements (beginning in 2009), to be
replaced in time with mandatory concentration limits. The BWM Convention will
not become effective until 12 months after it has been adopted by 30 states, the
combined merchant fleets of which represent not less than 35% of the gross
tonnage of the world's merchant shipping tonnage. To date, there has not been
sufficient adoption of this standard for it to take force.
Although
the United States 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 vessel's registered owner is strictly liable for pollution damage caused in
the territorial waters of a contracting state by discharge of persistent oil,
subject to certain defenses. The limits on liability outlined in the 1992
Protocol use the International Monetary Fund currency unit of Special Drawing
Rights, or SDR. Under an amendment to the 1992 Protocol that became effective on
November 1, 2003, for vessels between 5,000 and 140,000 gross tons (a unit
of measurement for the total enclosed spaces within a vessel), liability is
limited to approximately $6.92 million (4.51 million SDR) plus $970 (631 SDR)
for each additional gross ton over 5,000. For vessels of over 140,000 gross
tons, liability is limited to $138.01 million (89.77 million SDR). As the
convention calculates liability in terms of a basket of currencies, these
figures are based on currency exchange rates of 0.65046 SDR per U.S. dollar on
June 17, 2009. The right to limit liability is forfeited under the CLC
where the spill is caused by the shipowner's actual fault and under the 1992
Protocol where the spill is caused by the shipowner's intentional or reckless
conduct. Vessels trading with states that are parties to these conventions must
provide evidence of insurance covering the liability of the owner. In
jurisdictions where the CLC 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 of the convention. We believe that our protection and
indemnity insurance will cover the liability under the plan adopted by the
IMO.
IMO
regulations also require owners and operators of vessels to adopt Ship Oil
Pollution Emergency Plans or SOPEPs. Periodic training and drills for response
personnel and for vessels and their crews are required.
The IMO
continues to review and introduce new regulations. It is impossible to predict
what additional regulations, if any, may be passed by the IMO and what effect,
if any, such regulations might have on our operations.
U.S.
Oil Pollution Act of 1990 and Comprehensive Environmental Response, Compensation
and Liability Act
In 1990,
the United States Congress enacted the
U.S. Oil
Pollution Act of 1990, 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 United States or
its territories or possessions, or whose vessels operate in the waters of the
United States, which include the United States territorial sea and the 200
nautical mile exclusive economic zone around the United States. The
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
imposes liability for clean-up 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"
who 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 oil spills
from their vessels. These other damages are defined broadly to
include:
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natural
resource damage and related assessment
costs;
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real
and personal property
damage;
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net
loss of taxes, royalties, rents, profits or earnings
capacity;
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net
cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards;
and
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loss
of subsistence use of natural
resources.
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Under
amendments to OPA that became effective on July 11, 2006, the liability of
responsible parties is limited with respect to tanker vessels to the greater of
$1,900 per gross ton or $16.0 million per vessel that is over 3,000 gross tons,
and with respect to non tanker vessels, to the greater of $950 per gross ton or
$0.8 million per vessel (subject to periodic adjustment for inflation). On
September 24, 2008, the U.S. Coast Guard proposed adjustments to the limits of
liability that would increase the limits for tank vessels to the greater of
$2,000 per gross ton or $17.0 million per vessel that is over 3,000 gross tons
and for non tank vessels 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 comment period for the proposed rule closed on November 24, 2008, and the
adjustments will become effective after publication as final regulations. 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
discharge of pollutants within their waters. In some cases, states that have
enacted this type of legislation have not yet issued implementing regulations
defining tanker owners' responsibilities under these laws.
CERCLA,
which applies to owners and operators of vessels, contains a similar liability
regime and provides for cleanup, removal and natural resource damages. Liability
under CERCLA is limited to the greater of $300 per gross ton or $5.0 million for
vessels carrying a hazardous substance as cargo and the greater of $300 per
gross ton or $0.5 million for any other vessel.
These
limits of liability do not apply, however, where the incident is caused by
violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or willful
misconduct. These limits also do not apply if the responsible party fails or
refuses to report the incident or to cooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law.
OPA also
requires owners and operators of vessels to establish and maintain with the U.S.
Coast Guard evidence of financial responsibility sufficient to meet the limit of
their potential strict liability under the act. On October 17, 2008, the U.S.
Coast Guard regulatory requirements under OPA and CERCLA were amended to require
evidence of financial responsibility in amounts that reflect the higher limits
of liability imposed by the July 2006 amendments to OPA, as described above. The
increased amounts became effective on January 15, 2009. U.S. Coast Guard
regulations currently require evidence of financial responsibility in the amount
of $2,200 per gross ton for tankers, coupling the current OPA
limitation on liability of $1,900 per gross ton with the CERCLA liability limit
of $300 per gross ton. Under the regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. Under OPA regulations, an owner or operator of more than one tanker is
required to demonstrate evidence of financial responsibility for the entire
fleet in an amount equal only to the financial responsibility requirement of the
tanker having the greatest maximum strict liability under OPA and CERCLA. We
have provided such evidence and received certificates of financial
responsibility from the U.S. Coast Guard for each of our vessels required to
have one.
We insure
each of our vessels with pollution liability insurance in the maximum
commercially available amount of $1.0 billion. A catastrophic spill could exceed
the insurance coverage available, in which event there could be a material
adverse effect on our business.
The
U.S. Clean Water Act
The U.S.
Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances
in U.S. navigable waters unless authorized by a duly-issued permit or exemption,
and imposes strict liability in the form of penalties for any unauthorized
discharges. The CWA also imposes substantial liability for the costs of removal,
remediation and damages and complements the remedies available under OPA and
CERCLA.
The
United States Environmental Protection Agency, or EPA, has enacted rules
governing the regulation of ballast water discharges and other discharges
incidental to the normal operation of vessels within U.S. waters. Under the new
rules, which took effect February 6, 2009, commercial vessels 79 feet in length
or longer (other than commercial fishing vessels), or Regulated Vessels , are
required to obtain a CWA permit regulating and authorizing such normal
discharges. This permit, which the EPA has designated as the Vessel General
Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP,
incorporates the current U.S. Coast Guard requirements for ballast water
management as well as supplemental ballast water requirements, and includes
limits applicable to specific discharge streams.
Although
the VGP became effective on February 6, 2009, the VGP application procedure,
known as the Notice of Intent, or NOI, has yet to be finalized. Accordingly,
Regulated Vessels will effectively be covered under the VGP from February 6,
2009 until June 19, 2009, at which time the "eNOI" electronic filing interface
will become operational. Thereafter, owners and operators of Regulated Vessels
must file their NOIs prior to September 19, 2009, or the Deadline. Any Regulated
Vessel that does not file a NOI by the Deadline will not be allowed to discharge
into U.S. navigable waters until it has obtained a VGP. Our fleet is
composed entirely of Regulated Vessels, and we intend to submit NOIs for each
vessel in our fleet as soon after June 19, 2009 as practicable.
Owners
and operators of vessels visiting U.S. waters will be required to comply with
this VGP program or face penalties. Compliance with the VGP may 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. In addition, the CWA
requires each state to certify federal discharge permits such as the VGP.
Certain states have enacted more stringent discharge standards as conditions to
their certification of the VGP. The VGP and its state-specific
regulations and any similar restrictions enacted in the future will increase the
costs of operating in the relevant waters.
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 taken on by ships in foreign ports. NISA established a ballast
water management program for ships entering U.S. waters. Under NISA mid-ocean
ballast water exchange is voluntary except for ships heading to the Great Lakes
or Hudson River, or vessels engaged in the foreign export of Alaskan North Slope
crude oil. However NISA's reporting and record keeping requirements are
mandatory for vessels bound for any port in the United States. Although ballast
water exchange is the primary means of compliance with the act's
guidelines, compliance can also be achieved through the retention of ballast
water on-board the ship, or the use of environmentally sound alternative ballast
water management methods approved by the U.S. Coast Guard. If the mid-ocean
ballast exchange is made mandatory throughout the United States, or
if water treatment requirements or options are instituted, the cost of
compliance could increase for ocean carriers. Although we do not believe that
the costs of compliance with a mandatory mid-ocean ballast exchange would be
material, it is difficult to predict the overall impact of such a requirement on
the shipping industry. In April 2008 the U.S. House of Representatives 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. Michigan's ballast water management
legislation mandating the use of various techniques for ballast water treatment
was upheld by the federal courts. Other states may proceed with the enactment of
similar requirements that could increase the costs of operating in state
waters.
Other
Regulations
The U.S.
Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and
1990, or the CAA, requires the EPA to promulgate standards applicable to
emissions of volatile organic compounds and other air contaminants. Our tanker
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 tanker 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 tanker vessels operating in covered port areas are already
equipped with vapor recovery systems that satisfy these requirements. Although a
risk exists that new regulations could require significant capital expenditures
and otherwise increase our costs, based on the regulations that have been
proposed to date, we believe that no material capital expenditures beyond those
currently contemplated and no material increase in costs are likely to be
required.
On
October 9, 2008, the United States ratified the amended Annex VI to the IMO's
MARPOL Convention, addressing air pollution from ships, which went into effect
on January 8, 2009. The EPA and the state of California, however, have each
proposed more stringent regulations of air emissions from ocean-going vessels.
The California Air Resources Board or CARB, has recently adopted clean-fuel
regulations 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 new CARB regulations
require such vessels to use low sulfur marine fuels rather than bunker fuel. By
July 1, 2009, such vessels are 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 will be allowed. CARB adopted the new regulations in spite of
the invalidation of similar regulations by the courts, and more legal challenges
to the standards are expected to follow. If CARB prevails and the new
regulations go into effect as scheduled on July 1, 2009, in the event our
vessels were to travel within such waters, these new regulations would require
significant expenditures on low-sulfur fuel and would increase our operating
costs. Finally, although the more stringent CARB regime was technically
superseded when the United States ratified and implemented the amended Annex VI,
on March 27, 2009, the United States requested IMO to designate the area
extending 200 miles from the territorial sea baseline adjacent to the
Atlantic/Gulf and Pacific coasts and the eight main Hawaiian Islands as Emission
Control Areas under the Annex VI amendments. If approved by the IMO, more
stringent emissions standards similar to the new CARB regulations would apply in
the Emission Control Areas, which would cause us to incur further
costs.
Several
of our vessels currently carry cargoes to U.S. waters and we believe that all of
our vessels are suitable to meet OPA and other U.S. environmental
requirements.
European Union
Tanker Restrictions
In 2005,
the European Union (EU) 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 EU countries that adopt implementing legislation. Criminal
liability for pollution may result in substantial penalties or fines and
increased civil liability claims.
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 the warming of the
Earth's atmosphere. Currently, the emissions of greenhouse gases from
international shipping are not subject to the Kyoto Protocol. A new treaty is
expected to be adopted at the United Nations climate change conference in
Copenhagen in December 2009, and there is pressure to include shipping. The
European Union has also indicated that it intends to propose an expansion of the
existing E.U. emissions trading scheme to include emissions of greenhouse gases
from vessels. In the U.S., on April 17, 2009, the EPA Administrator signed a
proposed finding that greenhouse gases threaten public health and safety and
that emissions from new motor vehicle engines contribute to concentrations of
greenhouse gases in the atmosphere. Although the proposed finding does not
extend to vessels and vessel engines, the EPA is separately considering a
petition from the California Attorney General and a coalition of environmental
groups to regulate greenhouse gas emissions from ocean-going vessels under the
Clean Air Act. Climate change initiatives are also being considered by the U.S.
Congress in this session.
Any
passage of climate control legislation or other regulatory initiatives by the
IMO, E.U., the U.S. or other individual countries where we operate that restrict
emissions of greenhouse gases could require us to make significant financial
expenditures that we cannot predict with certainty at this time.
Vessel
Security Regulations
Since the
terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the U.S.
Maritime Transportation Security Act of 2002, or MTSA, came into effect. To
implement certain portions of the MTSA, the United States Coast Guard in July
2003 issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the SOLAS
Convention created a new chapter of the convention dealing specifically with
maritime security. The new chapter went into effect on July 1, 2004 and imposes
various detailed security obligations on vessels and port authorities, most of
which are contained in the recently created International Ship and Port Facility
Security Code, or the ISPS Code. The ISPS Code is designed to protect ports and
international shipping against terrorism. After July 1, 2004, to trade
internationally, a vessel must obtain an International Ship Security Certificate
from a recognized security organization approved by the vessel's flag state.
Among the various requirements are:
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on-board
installation of automatic identification systems to provide a means for
the automatic transmission of safety-related information from among
similarly equipped ships and shore stations, including information on a
ship's identity, position, course, speed and navigational
status;
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on-board
installation of ship security alert systems, which do not sound on the
vessel but only alerts the authorities on
shore;
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the
development of vessel security
plans;
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ship
identification number to be permanently marked on a vessel's
hull;
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a
continuous synopsis record kept onboard showing a vessel's history
including, name of the ship and of the state whose flag the ship is
entitled to fly, the date on which the ship was registered with that
state, the ship's identification number, the port at which the ship is
registered and the name of the registered owner(s) and their registered
address; and
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compliance
with flag state security certification
requirements.
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The U.S.
Coast Guard regulations, intended to align with international maritime security
standards, exempt from MTSA vessel security measures non-U.S. vessels that have
on board, as of July 1, 2004, a valid ISSC attesting to the vessel's compliance
with SOLAS Convention security requirements and the ISPS Code. We have
implemented the various security measures addressed by MTSA, the SOLAS
Convention, and the ISPS Code, and our fleet is in compliance with applicable
security requirements.
Inspection
by Classification Societies
Every
seagoing vessel must be ''classed'' by a classification society. The
classification society certifies that the vessel is ''in class,'' signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
the vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The
classification society also undertakes or requests other surveys and checks that
are required by regulations and requirements of the flag state. These surveys
are subject to agreements made in each individual case and/or to the regulations
of the country concerned.
For
maintenance of the class, regular and extraordinary surveys of hull, machinery,
including the electrical plant, and any special equipment classed are required
to be performed as follows:
Annual Surveys:
For seagoing
ships, annual surveys are conducted for the hull and the machinery, including
the electrical plant, and where applicable for special equipment classed, at
intervals of 12 months from the date of commencement of the class period
indicated in the certificate.
Intermediate Surveys:
Extended annual surveys are referred to as intermediate surveys and
typically are conducted two and one-half years after commissioning and each
class renewal. Intermediate surveys may be carried out on the occasion of the
second or third annual survey.
Class Renewal Surveys:
Class
renewal surveys, also known as special surveys, are carried out for the ship's
hull, machinery, including the electrical plant, and for any special equipment
classed, at the intervals indicated by the character of classification for the
hull. At the special survey, the vessel is thoroughly examined, including
audio-gauging to determine the thickness of the steel structures. Should the
thickness be found to be less than class requirements, the classification
society would prescribe steel renewals. The classification society may grant a
one-year grace period for completion of the special survey. Substantial amounts
of money may have to be spent for steel renewals to pass a special survey if the
vessel experiences excessive wear and tear. In lieu of the special survey every
four or five years, depending on whether a grace period was granted, a shipowner
has the option of arranging with the classification society for the vessel's
hull or machinery to be on a continuous survey cycle, in which every part of the
vessel would be surveyed within a five-year cycle.
At an
owner's application, the surveys required for class renewal may be split
according to an agreed schedule to extend over the entire period of class. This
process is referred to as continuous class renewal.
All areas
subject to survey as defined by the classification society are required to be
surveyed at least once per class period, unless shorter intervals between
surveys are prescribed elsewhere. The period between two subsequent surveys of
each area must not exceed five years.
Most
vessels are also dry-docked every 30 to 36 months for inspection of the
underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a ''recommendation'' which must be
rectified by the ship owner within prescribed time limits.
Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as ''in class'' by a classification society which is a member of
the International Association of Classification Societies. All our vessels are
certified as being ''in class'' by the American Bureau of Shipping, Lloyd's
Register of Shipping or Det Norske Veritas. All new and secondhand vessels that
we purchase must be certified prior to their delivery under our standard
contracts and memorandum of agreement. If the vessel is not certified on the
date of closing, we have no obligation to take delivery of the
vessel.
Risk
of Loss and Liability Insurance General
The
operation of any cargo vessel includes risks such as mechanical failure,
collision, property loss, cargo loss or damage and business interruption due to
political circumstances in foreign countries, hostilities and labor strikes. In
addition, there is always an inherent possibility of marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade. OPA, which imposes
virtually unlimited liability upon owners, operators and demise charterers of
any vessel trading in the United States exclusive economic zone for certain oil
pollution accidents in the United States, has made liability insurance more
expensive for ship owners and operators trading in the United States market.
While we carry loss of hire insurance to cover 100% of our fleet, we may not be
able to maintain this level of coverage. Furthermore, while we believe that our
present insurance coverage is adequate, not all risks can be insured, and there
can be no guarantee that any specific claim will be paid, or that we will always
be able to obtain adequate insurance coverage at reasonable rates.
Hull
and Machinery Insurance
We have
obtained marine hull and machinery and war risk insurance, which includes the
risk of actual or constructive total loss, general average, particular average,
salvage, salvage charges, sue and labor, damage received in collision or contact
with fixed or floating objects for all of the vessels in our fleet. The vessels
in our fleet are each covered up to at least fair market value, with deductibles
of $100,000 per vessel per incident, for the seven Handymax tankers and five
drybulk vessels. We also have arranged increased value coverage for some
vessels. Under this increased value coverage, in the event of total loss of a
vessel, we will recover for amounts not recoverable under the hull and machinery
policy by reason of any under-insurance.
Loss
of Hire Insurance
We have
obtained Loss of Hire Insurance to cover the loss of hire of each vessel for 90
days in excess of 30 days in case of an incident that is coverable by Hull and
Machinery policy.
Protection
and Indemnity Insurance
Protection
and indemnity insurance is provided by mutual protection and indemnity
associations, or P&I Associations, which covers our third party liabilities
in connection with our shipping activities. This includes third party liability
and other related expenses of injury or death of crew, passengers and other
third parties, loss or damage to cargo, claims arising from collisions with
other vessels, damage to other third party property, pollution arising from oil
or other substances, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or ''clubs.'' Subject to the ''capping'' discussed below,
our coverage, except for pollution, is unlimited.
Our
current protection and indemnity insurance coverage for pollution is $1.0
billion per vessel per incident. The 13 P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. Each P&I Association has capped its exposure to this pooling
agreement at $4.25 billion. As a member of a P&I Association, which is a
member of the International Group, we are subject to calls payable to the
associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group.
Competition
We
operate in markets that are highly competitive and based primarily on supply and
demand. We compete for charters on the basis of price, vessel location, size,
age and condition of the vessel, as well as on our reputation as an operator. We
arrange our time charters and voyage charters in the spot market through the use
of brokers, who negotiate the terms of the charters based on market conditions.
We compete primarily with owners of tankers in the Handymax class sizes and also
with owners of drybulk vessels in the Handymax and Panamax class sizes.
Ownership of tankers is highly fragmented and is divided among major oil
companies and independent vessel owners. The drybulk market is less fragmented
with more small operators.
Seasonality
We
operate our vessels in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. This seasonality may affect
operating results. Currently, one of our drybulk vessels is not under any long
term charter employment and as a result its revenues may be affected by the
seasonality of the drybulk market which is typically stronger in the fall and
winter months in anticipation of increased consumption of coal and other raw
materials.
Legal
Proceedings Against Us
In
December 2006, the Company and certain of its executive officers and directors
were named as defendants in various class action securities complaints brought
in the United States District Court for the Southern District of New York,
alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, which were subsequently consolidated under the caption
In re Top Tankers, Inc. Securities Litigation, Case No. 06-cv-13761 (CM), which
we refer to as the Putative Class Action. On December 18, 2007, the Court denied
the motion to dismiss brought by the Company and other defendants in connection
with the Putative Class Action. On or about January 18, 2008, the parties
reached a settlement agreement in principle whereby the plaintiff, on behalf of
members of the Class who do not opt out, would dismiss all claims against the
Company with prejudice in exchange for a settlement payment of $1.2
million.
On April
28, 2008, the Court entered an order preliminarily approving the proposed
settlement and directing that notice be given to all potential members of the
Class of the proposed settlement. The Court ordered a hearing on July 31, 2008
to determine whether the settlement should be approved. The settlement hearing
took place as scheduled, and Judge McMahon approved the settlement and award of
attorneys' fees to class counsel. The clerk of the court terminated the case on
July 31, 2008. The settlement was funded by the Company's directors and
officers' insurance carriers.
TOP SHIPS
INC. is the sole owner of all outstanding shares of the wholly-owned
subsidiaries as of December 31, 2008. TOP SHIPS INC. is the sole owner of all
outstanding shares of the following subsidiaries:
|
Shipowning
Companies with vessels sold
|
1
|
Olympos
Shipping Company Limited
|
2
|
Vermio
Shipping Company Limited ( "Faithful")
|
3
|
Kalidromo
Shipping Company Limited ("Kalidromo")
|
4
|
Olympos
Shipping Company Limited ("Olympos")
|
5
|
Rupel
Shipping Company Inc. ("Rupel")
|
6
|
Helidona
Shipping Company Limited ("Helidona")
|
7
|
Mytikas
Shipping Company Ltd. ("Mytikas")
|
8
|
Litochoro
Shipping Company Ltd. ("Litochoro")
|
9
|
Vardousia
Shipping Company Ltd. ("Vardousia")
|
10
|
Psiloritis
Shipping Company Ltd. ("Psiloritis")
|
11
|
Menalo
Shipping Company Ltd. ("Menalo")
|
12
|
Pintos
Shipping Company Ltd. ("Pintos")
|
13
|
Pylio
Shipping Company Ltd. ("Pylio")
|
14
|
Taygetus
Shipping Company Ltd. ("Taygetus")
|
15
|
Imitos
Shipping Company Limited ("Imitos")
|
16
|
Parnis
Shipping Company Limited ("Parnis")
|
17
|
Parnasos
Shipping Company Limited ("Parnasos")
|
18
|
Vitsi
Shipping Company Limited ("Vitsi")
|
19
|
Kisavos
Shipping Company Limited ("Kisavos")
|
20
|
Agion
Oros Shipping Company Limited ("Agion Oros")
|
21
|
Giona
Shipping Company Limited ("Giona")
|
22
|
Agrafa
Shipping Company Limited ("Agrafa")
|
23
|
Ardas
Shipping Company Limited ("Ardas")
|
24
|
Nedas
Shipping Company Limited ("Nedas")
|
25
|
Kifisos
Shipping Company Limited ("Kifisos")
|
26
|
Sperhios
Shipping Company Limited ("Sperhios")
|
27
|
Noir
Shipping S.A. ("Noir")
|
|
|
|
Shipowning
Companies with sold and leased back vessels at December 31,
2008
|
28
|
Gramos
Shipping Company Inc. ("Gramos")
|
29
|
Falakro
Shipping Company Ltd. ("Falakro")
|
30
|
Pageon
Shipping Company Ltd. ("Pageon")
|
31
|
Idi
Shipping Company Ltd. ("Idi")
|
32
|
Parnon
Shipping Company Ltd. ("Parnon")
|
|
|
|
Shipowning
Companies with vessels in operations at December 31,
2008
|
33
|
Lefka
Shipping Company Limited ("Lefka")
|
34
|
Ilisos
Shipping Company Limited ("Ilisos")
|
35
|
Amalfi
Shipping Company Limited ("Amalfi")
|
36
|
Jeke
Shipping Company Limited ("Jeke")
|
37
|
Japan
I Shipping Company Limited ("Japan I")
|
38
|
Japan
II Shipping Company Limited ("Japan II")
|
39
|
Japan
III Shipping Company Limited ("Japan III")
|
|
|
|
Shipowning
Companies with vessels under construction at December 31,
2008
|
40
|
Warhol
Shipping Company Limited ("Warhol")
|
41
|
Lichtenstein
Shipping Company Limited ("Lichtenstein")
|
42
|
Banksy
Shipping Company Limited ("Banksy")
|
43
|
Indiana
R Shipping Company Limited ("Indiana R")
|
44
|
Britto
Shipping Company Limited ("Britto")
|
45
|
Hongbo
Shipping Company Limited ("Hongbo")
|
|
|
|
Other
Companies
|
46
|
Top
Tankers (U.K.) Limited
|
47
|
Top
Bulker Management Inc
|
48
|
TOP
Tanker Management Inc ((the "Manager")
|
49
|
Ierissos
Shipping Inc
|
D. Properties,
Plants and Equipment
For a
list of our fleet see "Business Overview – Our Fleet" above.
In
January 2006, we entered into an agreement with an unrelated party to lease
office space in Athens, Greece. The office is located at 1, Vasilisis Sofias
& Megalou Alexandrou Street, 151 24 Maroussi, Athens, Greece. The agreement
is for a duration of 12 years beginning May 2006 with a lessee's option for an
extension of 10 years. The current monthly rental is $161,231 (based on the
Dollar/Euro exchange rate as of December 31, 2008) adjusted annually for
inflation increase plus 1.0%.
In
addition, our subsidiary TOP TANKERS (U.K.) LIMITED, a representative office in
London, leases office space in London, from an unrelated third
party.
ITEM
4A. Unresolved Staff
Comments
None.
ITEM
5.
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
The
following management's discussion and analysis is intended to discuss our
financial condition, changes in financial condition and results of operations,
and should be read in conjunction with our historical consolidated financial
statements and their notes included in this report.
This
discussion contains forward-looking statements that reflect our current views
with respect to future events and financial performance. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, such as those set forth in the section entitled
"Risk Factors" and elsewhere in this report.
Overview
We are an
international provider of seaborne transportation services, carrying petroleum
products, crude oil and drybulk commodities for the steel, electric utility,
construction and agriculture-food industries.
As of
December 31, 2008, our fleet consisted of 12 vessels (five drybulk vessels and
seven tankers), with total carrying capacity of approximately 0.7 million dwt
(including seven owned and five vessels sold and leased back for a period of
five to seven years) as compared to 23 vessels (three drybulk vessels and 20
tankers), with total carrying capacity of approximately 2.4 million dwt
(including 11 vessels sold and leased back for a period of five to seven years)
on December 31, 2007.
Since
2007, we have been seeking to reduce our ongoing financial expenditure by
unwinding or reacquiring the vessels sold and leased back during 2005 and
2006.
During
2007, we reacquired four previously sold and leased back Suezmax tankers. During
2008, we unwound six leased vessels by assisting their owners in disposing them.
To date during 2009, we have managed to unwind or agreed to unwind the remaining
five leased vessels by incurring one off termination fees. Specifically, as of
the date of this report, we have redelivered four out of five leased vessels to
their new owners. The fifth one will be redelivered in the third quarter of
2009. After the redelivery of the last leased vessel, our company will remain
with a very young tanker fleet of seven product tankers – five built in 2009,
one built in 2003 and one built in 1999, and a relatively young drybulk fleet,
five drybulk vessels – two Panamaxes built in 2000, one Handymax built in 2000,
one Panamax built in 2001 and one Supramax built in 2002
Also, in
2007, we diversified our fleet portfolio by adding drybulk vessels to our fleet.
This diversification significantly added to our net income during 2008 and is
expected to contribute positively to our results during 2009.
The
termination of the leases which took away older, loss making vessels from our
fleet together with a well timed entrance in the drybulk sector and the
employment of these vessels on charters at above market rates which contributed
significantly to 2008 results, helped transform the company from a loss making
one in 2007 to a profitable one in 2008. See "Results of operations
for the fiscal years ended December 31, 2006, 2007 and 2008" for more
information.
Segments
Since the
acquisition of drybulk vessels in the fourth quarter of 2007, we have been
analyzing and reporting our results of operations in two segments: tanker fleet
and drybulk fleet.
Tanker fleet
: For the
year ended December 31, 2008, revenues for this segment were $164.0 million and
operating income $13.0 million.
Drybulk fleet
: For
the year ended December 31, 2008, revenues for this segment were $71.6 million
and operating income $26.8 million.
A. Operating
results
Factors affecting our
results of operations – all segments
We
believe that the important measures for analyzing trends in the results of our
operations for both tankers and drybulk vessels consist of the
following:
•
Calendar days. We define calendar days as the total number of days in a period
during which each vessel in our fleet was in our possession, including off-hire
days associated with major repairs, dry dockings or special or intermediate
surveys. Calendar days are an indicator of the size of our fleet over a period
and affect both the amount of revenues and the amount of expenses that we record
during that period.
• Voyage
days. We define voyage days as the total number of days in a period during which
each vessel in our fleet (including vessels we operate under our lease
agreements) was in our possession net of off-hire days associated with major
repairs, dry dockings or special or intermediate surveys. The shipping industry
uses voyage days (also referred to as available days) to measure the number of
days in a period during which vessels actually generate revenues.
• Fleet
utilization. We calculate fleet utilization by dividing the number of our voyage
days during a period by the number of our calendar days during that period. The
shipping industry uses fleet utilization to measure a company's efficiency in
finding suitable employment for its vessels and minimizing the amount of days
that its vessels are off-hire for reasons such as scheduled repairs, vessel
upgrades, dry dockings or special or intermediate surveys.
• Spot
Charter Rates. Spot charter rates are volatile and fluctuate on a seasonal and
year-to-year basis. Fluctuations are by imbalances in the availability of
cargoes for shipment and the number of vessels available at any given time to
transport these cargoes.
• TCE
revenues. We define TCE revenues as revenues minus voyage expenses. Voyage
expenses primarily consist of port, canal and fuel costs that are unique to a
particular voyage, which would otherwise be paid by a charterer under a time
charter, as well as commissions. We believe that presenting revenues net of
voyage expenses neutralizes the variability created by unique costs associated
with particular voyages or the deployment of vessels on the spot market and
facilitates comparisons between periods on a consistent basis. We calculate
daily TCE rates by dividing TCE revenues by voyage days for the relevant time
period. TCE revenues include demurrage revenue, which represents fees charged to
charterers associated with our spot market voyages when the charterer exceeds
the agreed upon time required to load or discharge a cargo. We calculate daily
direct vessel operating expenses and daily general and administrative expenses
for the relevant period by dividing the total expenses by the aggregate number
of calendar days that we owned each vessel for the period.
In
accordance with GAAP measures, we report revenues in our income statements and
include voyage expenses among our expenses. However, in the shipping industry
the economic decisions are based on vessels' deployment upon anticipated TCE
rates, and industry analysts typically measure shipping freight rates in terms
of TCE rates. This is because under time-charter and bareboat contracts the
customer usually pays the voyage expenses, while under voyage charters the
ship-owner usually pays the voyage expenses, which typically are added to the
hire rate at an approximate cost. Consistent with industry practice, management
uses TCE as it provides a means of comparison between different types of vessel
employment and, therefore, assists decision making process.
Voyage
Revenues
Tanker
segment
Our
voyage revenues are driven primarily by the number of vessels in our fleet, the
number of voyage days during which our vessels generate revenues and the amount
of daily charterhire that our vessels earn under charters, which, in turn, are
affected by a number of factors, including our decisions relating to vessel
acquisitions and disposals, the amount of time that we spend positioning our
vessels, the amount of time that our vessels spend in dry dock undergoing
repairs, maintenance and upgrade work, the duration of the charter, the age,
condition and specifications of our vessels, levels of supply and demand in the
global transportation market for oil products or bulk cargo and other factors
affecting spot market charter rates such as vessel supply and demand
imbalances.
Vessels
operating on period charters, time charters or bareboat charters, provide more
predictable cash flows, but can yield lower profit margins than vessels
operating in the short-term, or spot, charter market during periods
characterized by favorable market conditions. Vessels operating in the spot
charter market generate revenues that are less predictable, but may enable us to
capture increased profit margins during periods of improvements in charter
rates, although we are exposed to the risk of declining charter rates, which may
have a materially adverse impact on our financial performance. If we employ
vessels on period charters, future spot market rates may be higher or lower than
the rates at which we have employed our vessels on period time
charters.
Under a
time charter, the charterer typically pays us a fixed daily charter hire rate
and bears all voyage expenses, including the cost of bunkers (fuel oil) and port
and canal charges. We remain responsible for paying the chartered vessel's
operating expenses, including the cost of crewing, insuring, repairing and
maintaining the vessel, the costs of spares and consumable stores, tonnage taxes
and other miscellaneous expenses, and we also pay commissions to one or more
unaffiliated ship brokers and to in-house brokers associated with the charterer
for the arrangement of the relevant charter.
Under a
bareboat charter, the vessel is chartered for a stipulated period of time which
gives the charterer possession and control of the vessel, including the right to
appoint the master and the crew. Under bareboat charters all voyage and
operating costs are paid by the charterer. During 2009, we have taken delivery
of five newbuilding product tankers all of which are on bareboat charters for a
period between 7 and 10 years. During 2007 and 2008, we also employed
vessels in the spot market and we may do so again in the future depending on
prevailing market conditions at the time our period charters
expire.
Drybulker
segment
The above
discussion for the Tanker Segment also applies to the drybulker segment with the
only difference being the different economics that apply in the global markets
for oil versus the global market for dry products shipped in bulk.
As of the
date of this report, four of our drybulk vessels were operating under time
charters and one under a bareboat charter.
Revenues
for the drybulker segment include amortization of fair value of below market
acquired time charter liability. Specifically, when vessels are acquired with
period charters attached and the rates on such charters are below market on the
acquisition date, we allocate the total cost between the vessel and the fair
value of below market time charter based on the relative fair values of the
vessel and the liability acquired. The fair value of the attached period charter
is computed as the present value of the difference between the contractual
amount to be received over the term of the period charter and management's
estimates of the market period charter rate at the time of acquisition. The fair
value of below market period charter is amortized over the remaining period of
the period charter as an increase to revenues.
In
November and December 2007 and February 2008, we acquired the drybulk vessels
M/V Bertram, M/V Amalfi and M/V Voc Gallant, respectively, with attached time
charter contracts. As a result, the purchase price of the vessels was allocated
between vessel cost and the fair value of the time charter contracts, totaling
in aggregate $43.3 million, which is reflected in Fair Value of Below Market
Time Charter on the accompanying consolidated balance sheets. Following the sale
of the M/V Bertram, in April 16, 2008, the then unamortized fair value of below
market time charter of $16.1 million was written-off to the loss from the sale
of vessel. For the year ended December 31, 2007 and 2008, the amortization of
the fair value of the time charter contracts totaled $1.4 million and $21.8
million, respectively and is included in Revenues in the accompanying
consolidated statement of operations.
Voyage
Expenses
Tanker
segment
Voyage
expenses primarily consist of port charges, including canal dues, bunkers (fuel
costs) and commissions. All these expenses, except commissions, are paid by the
charterer under a time charter or bareboat charter contract. The amount of
voyage expenses are mainly driven by the routes that the vessels travel, the
amount of ports called on, the canals crossed and the price of bunker fuels
paid. This category was less significant in 2008 when compared to 2007 due the
fact that less vessels were operating in the spot market in 2008. In 2009,
voyage expenses are expected to be even less significant since all our tanker
vessels are either on time charters or bareboat charters expiring after
2009.
Drybulker
segment
Our
drybulk vessels are operating under time charter or bareboat charter contracts
and hence voyage expenses primarily consist of commissions on the time
charters.
Charter Hire
Expenses
Tanker
segment
Charter
hire expenses consist of lease payments for vessels sold and leased-back during
2005 and 2006 for periods between five to seven years.
Drybulker
segment
Not
applicable.
Other Vessel Operating
Expenses
Tanker and Drybulker
segment
Vessel
operating expenses include crew wages and related costs, the cost of insurance,
expenses relating to repairs and maintenance, the costs of spares and consumable
stores, tonnage taxes and other miscellaneous expenses for vessels that we own
and vessels that we lease under our operating leases. Our vessel operating
expenses, which generally represent fixed costs, have historically increased as
a result of the increase in the size of our fleet. We analyze vessel operating
expenses on a $ / per day basis. Additionally, vessel operating expenses can
fluctuate due to factors beyond our control, such as unplanned repairs and
maintenance which can be quite significant, or factors which may affect the
shipping industry in general, such as developments relating to insurance
premiums, or developments relating to the availability of crew, may also cause
these expenses to increase.
Dry-docking
Costs
Tanker
segment
Dry
docking costs relate to the regularly scheduled intermediate survey or special
survey dry-docking necessary to preserve the quality of our vessels (see
relevant accounting policy) as well as to comply with international shipping
standards and environmental laws and regulations. Dry docking costs can vary
according to the age of the vessel, the location where the drydock takes place,
shipyard availability, local availability of manpower and material, the billing
currency of the yard, the days the vessel is off hire in order to complete its
survey and the diversion necessary in order to get from the last port of
employment to the yard and back to a position for the next employment. In the
case of tankers, dry docking costs may also be affected by new rules and
regulations (see "Item 4 – Information on the Company – B. Business Overview –
Environmental Regulations).
Drybulker
segment
The above
discussion for the Tanker Segment also applies to the drybulker segment. The
effect of new rules and regulations on cost is lower in the drybulker segment
due to the lower pollution risk this segment has compared to
tankers.
Sub Managers
Fees
Tanker
segment
Historically,
we have been outsourcing part or all of our technical functions and crewing to
third parties. Since 2007, Top Tanker Management, our wholly owned subsidiary
has been undertaking a larger role in technical management thereby reducing the
dependence on third parties. Given the relatively small size of the company our
Board of Directors is currently in the process of determining the most cost
efficient model of management, i.e. in-house management versus outsourcing. With
regards to crewing, we will continue to use third parties due to access to
larger pools of crew.
Drybulker
segment
Top
Tankers Management performs the technical management of the drybulk vessels,
except crew management, from the date of delivery to us. Given the relatively
small size of the company our Board of Directors is currently in the process of
determining the most cost efficient model of management, i.e. in-house
management versus outsourcing. With regards to crewing, we will continue to use
third parties due to access to larger pools of crew.
Other General and
Administrative Expenses
Tanker and Drybulker
segments
Other
general and administrative expenses include the salaries and other related costs
of senior management, directors and other on shore employees, our office rent,
legal and auditing costs, regulatory compliance costs, other miscellaneous
office expenses, long-term compensation costs, non cash stock compensation, and
corporate overhead. Other general and administrative expenses are Euro
denominated except for some legal fees and are therefore affected by the
conversion rate of the U.S. dollar versus the Euro.
General
and administrative expenses are allocated to different segments based on
calendar days of vessels operated.
Interest and Finance
Costs
Tanker and Drybulker
segments
We have
historically incurred interest expense and financing costs in connection with
vessel-specific debt. Interest expense is directly related with the repayment
schedule of our loans, the prevailing LIBOR and the relevant
margin.
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 which in all cases is higher than LIBOR.
Additionally, as part of our discussions with banks with regards to certain loan
covenant breaches, we have agreed to increase the margins to certain of our
loans (see " – B. Liquidity and Capital Resources).
Inflation
Tanker and Drybulker
segments
Inflation
has not had a material effect on our expenses given current economic conditions.
In the event that significant global inflationary pressures appear, these
pressures would increase our operating, voyage, administrative and financing
costs.
In
evaluating our financial condition, we focus on the above measures to assess our
historical operating performance and we use future estimates of the same
measures to assess our future financial performance. In assessing the future
performance of our fleet, the greatest uncertainty relates to the spot market
which affects those of our vessels not employed on time charter or bareboat
charter or whose charters will expire. Decisions about future purchases and
sales of vessel, and the unwinding of the sales leaseback transactions are based
on the financial and operational evaluation of such actions and depend on the
overall state of the drybulk and tanker markets, the availability of relevant
purchase candidates, the availability of financing and our general assessment of
the prospects for the segments that we operate in.
Lack of Historical Operating
Data for Vessels Before Their Acquisition
Although
vessels are generally acquired free of charter, we have acquired (and may in the
future acquire) some vessels with time charters. Where a vessel has been under a
voyage charter, the vessel is usually delivered to the buyer free of charter. It
is rare in the shipping industry for the last charterer of the vessel in the
hands of the seller to continue as the first charterer of the vessel in the
hands of the buyer. In most cases, when a vessel is under time charter and the
buyer wishes to assume that charter, the vessel cannot be acquired without the
charterer's consent and the buyer entering into a separate direct agreement (a
"novation agreement") with the charterer to assume the charter. The purchase of
a vessel itself does not transfer the charter because it is a separate service
agreement between the vessel owner and the charterer.
Where we
identify any intangible assets or liabilities associated with the acquisition of
a vessel, we allocate the purchase price to identified tangible and intangible
assets or liabilities based on their relative fair values. Fair value is
determined by reference to market data and the discounted amount of expected
future cash flows. Where we have assumed an existing charter obligation or
entered into a time charter with the existing charterer in connection with the
purchase of a vessel at charter rates that are less than market charter rates,
we record a liability, based on the difference between the assumed charter rate
and the market charter rate for an equivalent vessel. Conversely, where we
assume an existing charter obligation or enter into a time charter with the
existing charterer in connection with the purchase of a vessel at charter rates
that are above market charter rates, we record an asset, based on the difference
between the market charter rate for an equivalent vessel and the contracted
charter rate. This determination is made at the time the vessel is delivered to
us, and such assets and liabilities are amortized as a reduction or increase to
revenue over the remaining period of the charter.
In
November and December 2007 and February 2008, the Company acquired the drybulk
vessels M/V Bertram, M/V Amalfi and M/V Voc Gallant, respectively, with attached
time charter contracts. As a result, the purchase price of the vessels was
allocated between vessel cost and the fair value of the time charter contracts,
totaling in aggregate $43.3 million, which is reflected in Fair Value of Below
Market Time Charter on the accompanying consolidated balance
sheets.
During
2009, the Company did not acquire any vessels which were under existing bareboat
or time charter contracts.
When we
purchase a vessel and assume or renegotiate a related time charter, we must take
the following steps before the vessel will be ready to commence
operations:
|
•
|
obtain
the charterer's consent to us as the new
owner;
|
|
•
|
obtain
the charterer's consent to a new technical
manager;
|
|
•
|
in
some cases, obtain the charterer's consent to a new flag for the
vessel;
|
|
•
|
arrange
for a new crew for the vessel, and where the vessel is on charter, in some
cases, the crew must be approved by the
charterer;
|
|
•
|
replace
all hired equipment on board, such as gas cylinders and communication
equipment;
|
|
•
|
negotiate
and enter into new insurance contracts for the vessel through our own
insurance brokers;
and
|
|
•
|
register
the vessel under a flag state and perform the related inspections in order
to obtain new trading certificates from the flag
state.
|
The
following discussion is intended to help you understand how acquisitions of
vessels affect our business and results of operations. Our business is comprised
of the following main elements:
|
•
|
employment
and operation of our tanker and drybulk vessels;
and
|
|
•
|
management
of the financial, general and administrative elements involved in the
conduct of our business and ownership of our tanker and drybulk
vessels.
|
The
employment and operation of our vessels require the following main
components:
|
•
|
vessel
maintenance and
repair;
|
|
•
|
crew
selection and
training;
|
|
•
|
vessel
spares and stores
supply;
|
|
•
|
contingency
response
planning;
|
|
•
|
onboard
safety procedures
auditing;
|
|
•
|
vessel
insurance
arrangement;
|
|
•
|
vessel
security training and security response plans
(ISPS);
|
|
•
|
obtain
ISM certification and audit for each vessel within the six months of
taking over a
vessel;
|
|
•
|
vessel
performance
monitoring.
|
The
management of financial, general and administrative elements involved in the
conduct of our business and ownership of our vessels requires the following main
components:
|
•
|
management
of our financial resources, including banking relationships, i.e.,
administration of bank loans and bank
accounts;
|
|
•
|
management
of our accounting system and records and financial
reporting;
|
|
•
|
administration
of the legal and regulatory requirements affecting our business and
assets;
and
|
|
•
|
management
of the relationships with our service providers and
customers.
|
The
principal factors that affect our profitability, cash flows and shareholders'
return on investment include:
|
•
|
Charter
rates and periods of charter hire for our tanker and drybulk
vessels;
|
|
•
|
Utilization
of our tanker and drybulk vessels (earnings
efficiency);
|
|
•
|
levels
of our tanker and drybulk vessels' operating expenses and dry docking
costs;
|
|
•
|
depreciation
and amortization
expenses;
|
|
•
|
fluctuations
in foreign exchange
rates.
|
Results of operations for
the fiscal years ended December 31, 2006, 2007 and 2008
The
following table depicts changes in the results of operations for 2008 compared
to 2007 and 2007 compared to 2006.
|
|
Year
Ended December 31,
|
|
|
change
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
YE07
v YE06
|
|
|
YE08
v YE07
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
$
|
%
|
|
|
|
|
|
$
|
%
|
Voyage
Revenues
|
|
|
310,043
|
|
|
|
252,259
|
|
|
|
257,380
|
|
|
|
(57,784
|
)
|
|
|
-18.6
|
%
|
|
|
5,121
|
|
|
|
2.0
|
%
|
Voyage
expenses
|
|
|
55,351
|
|
|
|
59,414
|
|
|
|
38,656
|
|
|
|
4,063
|
|
|
|
7.3
|
%
|
|
|
(20,758
|
)
|
|
|
-34.9
|
%
|
Charter
hire expenses
|
|
|
96,302
|
|
|
|
94,118
|
|
|
|
53,684
|
|
|
|
(2,184
|
)
|
|
|
-2.3
|
%
|
|
|
(40,434
|
)
|
|
|
-43.0
|
%
|
Amortization
of deferred gain on sale and lease
|
|
|
(8,110
|
)
|
|
|
(15,610
|
)
|
|
|
(18,707
|
)
|
|
|
(7,500
|
)
|
|
|
92.5
|
%
|
|
|
(3,097
|
)
|
|
|
19.8
|
%
|
Other
Vessel operating expenses
|
|
|
66,082
|
|
|
|
67,914
|
|
|
|
67,114
|
|
|
|
1,832
|
|
|
|
2.8
|
%
|
|
|
(800
|
)
|
|
|
-1.2
|
%
|
Dry-docking
costs
|
|
|
39,333
|
|
|
|
25,094
|
|
|
|
10,036
|
|
|
|
(14,239
|
)
|
|
|
-36.2
|
%
|
|
|
(15,058
|
)
|
|
|
-60.0
|
%
|
Depreciation
|
|
|
35,266
|
|
|
|
27,408
|
|
|
|
32,664
|
|
|
|
(7,858
|
)
|
|
|
-22.3
|
%
|
|
|
5,256
|
|
|
|
19.2
|
%
|
Sub-Manager
fees
|
|
|
2,755
|
|
|
|
1,828
|
|
|
|
1,159
|
|
|
|
(927
|
)
|
|
|
-33.6
|
%
|
|
|
(669
|
)
|
|
|
-36.6
|
%
|
Other
general and administrative expenses
|
|
|
20,261
|
|
|
|
22,996
|
|
|
|
30,314
|
|
|
|
2,735
|
|
|
|
13.5
|
%
|
|
|
7,318
|
|
|
|
31.8
|
%
|
Foreign
currency (gains) / losses, net
|
|
|
255
|
|
|
|
176
|
|
|
|
(85
|
)
|
|
|
(79
|
)
|
|
|
-31.0
|
%
|
|
|
(261
|
)
|
|
|
-148.3
|
%
|
Gain
on sale of vessels
|
|
|
(12,667
|
)
|
|
|
(1,961
|
)
|
|
|
(19,178
|
)
|
|
|
10,706
|
|
|
|
-84.5
|
%
|
|
|
(17,217
|
)
|
|
|
878.0
|
%
|
Expenses
|
|
|
294,828
|
|
|
|
281,377
|
|
|
|
195,657
|
|
|
|
(13,451
|
)
|
|
|
-4.6
|
%
|
|
|
(85,720
|
)
|
|
|
-30.5
|
%
|
Operating
income (loss)
|
|
|
15,215
|
|
|
|
(29,118
|
)
|
|
|
61,723
|
|
|
|
(44,333
|
)
|
|
|
-291.4
|
%
|
|
|
90,841
|
|
|
|
-312.0
|
%
|
Interest
and finance costs
|
|
|
(27,030
|
)
|
|
|
(19,518
|
)
|
|
|
(25,764
|
)
|
|
|
7,512
|
|
|
|
-27.8
|
%
|
|
|
(6,246
|
)
|
|
|
32.0
|
%
|
Gain
/ (loss) on financial instruments
|
|
|
(2,145
|
)
|
|
|
(3,704
|
)
|
|
|
(12,024
|
)
|
|
|
(1,559
|
)
|
|
|
72.7
|
%
|
|
|
(8,320
|
)
|
|
|
224.6
|
%
|
Interest
income
|
|
|
3,022
|
|
|
|
3,248
|
|
|
|
1,831
|
|
|
|
226
|
|
|
|
7.5
|
%
|
|
|
(1,417
|
)
|
|
|
-43.6
|
%
|
Other,
net
|
|
|
(67
|
)
|
|
|
16
|
|
|
|
(127
|
)
|
|
|