UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
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Commission File Number 000-51366
EAGLE BULK SHIPPING INC.
(Exact name of Registrant as specified in its charter)
Republic of the Marshall Islands 98-0453513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's Address:
477 Madison Avenue
New York, New York 10022
Registrant's telephone number, including area code: (212) 785-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-Accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 30, 2005, the last business day of the registrant's most
recently completed second quarter, was $366,525,000, based on the closing price
of $13.50 per share on the NASDAQ Stock Exchange on that date. (For this
purpose, all outstanding shares of Common Stock have been considered held by
non-affiliates, other than the shares beneficially owned by directors, officers
and certain 5% shareholders of the registrant; without conceding that any of the
excluded parties are "affiliates" of the registrant for purposes of the federal
securities laws.)
As of March 14, 2006, 33,150,000 shares of the registrants Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed by the
registrant within 120 days of December 31, 2005 in connection with its 2006
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business...................................................... 3
Item 1A. Risk Factors.................................................. 21
Item 1B. Unresolved SEC Comments....................................... 31
Item 2. Properties.................................................... 31
Item 3. Legal Proceedings............................................. 31
Item 4. Submission of Matters to a Vote of Security Holders........... 31
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........ 32
Item 6. Selected Financial Data....................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risks... 53
Item 8. Financial Statements and Supplementary Data................... 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 54
Item 9A. Controls and Procedures....................................... 54
Item 9B. Other Information............................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant............ 55
Item 11. Executive Compensation........................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............... 55
Item 13. Certain Relationships and Related Transactions................ 55
Item 14. Principal Accounting Fees and Services........................ 55
PART IV
Item 15. Exhibits, Financial Statement Schedules....................... 56
Signatures.................................................... 57
PART I
ITEM 1. BUSINESS
Overview
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Eagle Bulk Shipping Inc. (the "Company"), incorporated under the laws
of the Republic of the Marshall Islands and headquartered in New York City, is
engaged primarily in the ocean transportation of a broad range of major and
minor bulk cargoes, including iron ore, coal, grain, cement and fertilizer,
along worldwide shipping routes. As of December 31, 2005, we owned and operated
a modern fleet of 13 oceangoing vessels with a combined carrying capacity of
643,980 deadweight tons and an average age of 6 years.
We are the largest U.S. based owner of Handymax dry bulk vessels.
Handymax dry bulk vessels range in size from 35,000 to 60,000 dwt. Nine of the
13 vessels in our operating fleet are classed as Supramax dry bulk vessels, a
class of Handymax dry bulk vessels, which range in size from 50,000 dwt to
60,000 dwt. These vessels have the cargo loading and unloading flexibility of
on-board cranes while offering cargo carrying capacities approaching that of
Panamax dry bulk vessels, which range in size from 60,000 to 100,000 dwt and
must rely on port facilities to load and offload their cargoes. We believe that
the cargo handling flexibility and cargo carrying capacity of the Supramax class
vessels make them attractive to charterers.
A glossary of shipping terms (the "Glossary") that should be used as a
reference when reading this Annual Report on Form 10-K begins on page 18.
Capitalized terms that are used in this Annual Report are either defined when
they are first used or in the Glossary.
Forward-Looking Statements
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This Form 10-K contains forward-looking statements regarding the
outlook for dry cargo markets, and the Company's prospects. There are a number
of factors, risks and uncertainties that could cause actual results to differ
from the expectations reflected in these forward-looking statements, including
changes in production of or demand for major and minor bulk commodities, either
globally or in particular regions; greater than anticipated levels of vessel
newbuilding orders or less than anticipated rates of scrapping of older vessels;
changes in trading patterns for particular commodities significantly impacting
overall tonnage requirements; changes in the rates of growth of the world and
various regional economies; risks incident to vessel operation, including
discharge of pollutants; unanticipated changes in laws and regulations;
increases in costs of operation; the availability to the Company of suitable
vessels for acquisition or chartering-in on terms it deems favorable; the
ability to attract and retain customers. This Form 10-K also includes
statistical data regarding world dry bulk fleet and orderbook and fleet age. We
generated some of these data internally, and some were obtained from independent
industry publications and reports that we believe to be reliable sources. We
have not independently verified these data nor sought the consent of any
organizations to refer to their reports in this annual report. The Company
assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements in this Form 10-K and written and oral
forward-looking statements attributable to the Company or its representatives
after the date of this Form 10-K are qualified in their entirety by the
cautionary statement contained in this paragraph and in other reports hereafter
filed by the Company with the Securities and Exchange Commission.
Corporate Structure
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Eagle Bulk Shipping Inc. is a holding company incorporated under the
laws of the Republic of the Marshall Islands on March 23, 2005. Following our
incorporation, we merged with Eagle Holdings LLC, a Marshall Islands limited
liability company formed on January 26, 2005, and became a wholly-owned
subsidiary of Eagle Ventures LLC, or Eagle Ventures, a Marshall Islands limited
liability company. Eagle Ventures is owned by Kelso Investment Associates VII,
L.P. and KEP VI, LLC, both affiliates of Kelso & Company, L.P., or Kelso,
members of our management, a director, and outside investors. Eagle Ventures
currently owns approximately 37.5% of our outstanding common stock. Eagle
Ventures is 92.6% owned by affiliates of Kelso.
We carry out the commercial and strategic management of our fleet
through our wholly-owned subsidiary, Eagle Shipping International (USA) LLC, a
Marshall Islands limited liability company that was formed in January 2005 and
maintains its principle executive offices in New York City. Each of our vessels
is owned by us through a separate wholly owned Marshall Islands limited
liability company.
We maintain our principal executive offices at 477 Madison Avenue, New
York, New York 10022. Our telephone number at that address is (212) 785-2500.
Our website address is www.eagleships.com. Information contained on our website
does not constitute part of this annual report.
Management of Our Fleet
- -----------------------
Our New York City based management team, with an average of 20 years
of experience in the shipping industry primarily focused on the Handymax and
Handysize dry bulk sectors, undertakes all commercial and strategic management
of our fleet and supervises the technical management of our vessels. The
technical management of our fleet is provided by an unaffiliated third party,
V.Ships, which we believe is the world's largest provider of independent ship
management and related services, and to which we refer to as our technical
manager. The management of our fleet includes the following functions:
o Strategic management. We locate, obtain financing and insurance for,
purchase and sell vessels.
o Commercial management. We obtain employment for our vessels and manage our
relationships with charterers.
o Technical management. The technical manager performs day-to-day operations
and maintenance of our vessels.
Our Competitive Strengths
- -------------------------
We believe that we have a number of strengths that provide us with a
competitive advantage in the dry bulk shipping industry, including:
o A fleet of 13 Handymax dry bulk vessels. We are the largest U.S.
based owner of Handymax dry bulk vessels. We view Handymax
vessels as a highly attractive sector of the dry bulk shipping
industry relative to larger vessel sectors due to their:
- reduced volatility in charter rates;
- smaller newbuilding orderbook;
- increased operating flexibility;
- ability to access more ports;
- ability to carry a more diverse range of cargoes; and
- broader customer base.
o A modern, high quality fleet The 13 Handymax vessels in our
operating fleet have an average age of only 6 years as of
December 31, 2005, compared to an average age for the world
Handymax dry bulk fleet of over 15 years. We believe that owning
a modern, high quality fleet reduces operating costs, improves
safety and provides us with a competitive advantage in securing
employment for our vessels. Our fleet was built to high standards
and all of our vessels were built at leading Japanese shipyards,
including Mitsui Engineering and Shipbuilding Co., Ltd., or
Mitsui, which built 6 of our vessels, and Oshima Shipbuilding
Co., Ltd., or Oshima, which built 5 of our vessels.
o A fleet of sister and similar ships. Our fleet includes 6
identical sister ships built at the Mitsui shipyard based upon
the same design specifications and 3 similar ships built at the
Oshima shipyard that use many of the same parts and equipment.
Operating sister and similar ships provides us with operational
and scheduling flexibility, efficiencies in employee training and
lower inventory and maintenance expenses. We believe that this
should allow us both to increase revenue and lower operating
costs.
o A medium-to long-term fixed-rate time charter program. We have
entered into time charters for all of our vessels. Our charters
range in length from one to three years and provide for fixed
semi-monthly payments in advance. We believe that this structure
provides significant visibility to our future financial results
and allows us to take advantage of the stable cash flows and high
utilization rates that are associated with medium- to long-term
time charters.
o A strong balance sheet with a low level of indebtedness. We used
substantially all of the net proceeds of our initial public
offering, which we completed on June 28, 2005, to repay the
majority of our outstanding indebtedness at that time. We also
used a substantial portion of the net proceeds of our follow-on
public offering, which we completed on October 28, 2005, to repay
part of our outstanding indebtedness at that time. We believe
that our relatively low level of outstanding indebtedness
strengthens our balance sheet and increases the amount of funds
we may draw under our credit facility in connection with future
acquisitions.
Our Business Strategy
- ---------------------
Our strategy is to manage and expand our fleet in a manner that
enablesus to pay attractive dividends to our stockholders. To accomplish this
objective, we intend to:
o Operate a modern, high quality fleet of Handymax dry bulk
vessels. We believe that our ability to maintain and increase our
customer base will depend largely on the quality of our fleet. We
believe that owning a modern, high quality fleet reduces
operating costs, improves safety and provides us with a
competitive advantage in obtaining employment for our vessels. We
will carry out regular inspections and maintenance of our fleet
in order to maintain its high quality.
o Pursue medium-to long-term charters with the flexibility to
pursue short-term charters in the future. We have chartered our
vessels pursuant to a combination of one-to three-year time
charters that provide stable cash flows. Our strategy is to
charter our vessels primarily pursuant to one- to three-year time
charters to allow us to take advantage of the stable cash flow
and high utilization rates that are associated with medium to
long-term time charters. Our use of time charters also mitigates
in part the seasonality of the spot market business. Generally,
spot markets are strongest in the first and fourth quarters of
the calendar year and weaker in the second and third quarters. We
have entered into time charters for all of our vessels which
range in length from one to three years and provide for fixed
semi-monthly payments in advance. We regularly monitor the dry
bulk shipping market and based on market conditions we may
consider taking advantage of short-term charter rates.
o Maintain low cost, highly efficient operations. We believe that
we are a cost-efficient and reliable owner and operator of dry
bulk vessels due to the young age of our vessels, our groups of
sister and similar ships and the strength of our management team.
We intend to actively monitor and control vessel operating
expenses while maintaining the high quality of our fleet through
regular inspection and maintenance programs. We also intend to
take advantage of savings that result from the economies of scale
that V.Ships provides us through access to bulk purchasing of
supplies, quality crew members and a global service network of
engineers, naval architects and port captains.
o Expand our fleet through selective acquisitions of dry bulk
vessels. We intend to continue grow our fleet through timely and
selective acquisitions of additional vessels in a manner that is
accretive to earnings and dividends per share. We expect to focus
primarily in the Handymax sector of the dry bulk shipping
industry, and in particular on Supramax class vessels. We may
also consider acquisitions of other sizes of dry bulk vessels,
including Handysize vessels, but do not intend to acquire
tankers.
o Maintain a strong balance sheet with low leverage. We used
substantially all of the net proceeds of our initial public
offering, which we completed on June 28, 2005, to repay the
majority of our outstanding indebtedness at that time. We also
used a substantial portion of the net proceeds of our follow-on
public offering, which we completed on October 28, 2005, to repay
part of our outstanding indebtedness at that time. In the future,
we expect to draw funds under our credit facility or use the net
proceeds from future equity issuances to fund vessel
acquisitions. We intend to repay all or a portion of our
acquisition related debt from time to time with the net proceeds
of equity issuances. While our leverage will vary according to
our acquisition strategy and our ability to refinance acquisition
related debt through equity offerings on terms acceptable to us,
we generally intend to limit the amount of indebtedness that we
have outstanding at any time to low levels for our industry. We
believe this strategy will provide us with flexibility in
pursuing acquisitions that are accretive to earnings and
dividends per share.
Our Fleet
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The following table presents certain information concerning our fleet
as of December 31, 2005.
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Vessel Year Built Dwt Time Charter Employment Expiration (1)
------ ---------- --- --------------------------------------
SUPRAMAX:
Condor (2)......... 2001 50,296 November 2006 to March 2007
Falcon (2)......... 2001 50,296 February 2008 to June 2008
Harrier (2)........ 2001 50,296 March 2007 to June 2007
Hawk I (2)......... 2001 50,296 March 2007 to June 2007
Merlin (2)......... 2001 50,296 October 2007 to December 2007
Osprey I (2) (4) 2002 50,206 July 2008 to November 2008
Cardinal (3)....... 2004 55,408 March 2007 to June 2007
Peregrine (3)...... 2001 50,913 October 2006 to January 2007
Heron ............. 2001 52,827 December 2007 to February 2008
HANDYMAX:
Sparrow (3)........ 2000 48,220 November 2006 to February 2007
Kite............... 1997 47,195 March 2006 to May 2006
Griffon............ 1995 46,635 February 2006
Shikra............. 1984 41,096 July 2006 to November 2006
- -------------------------------------------------------------------------------
(1) The date range provided represents the earliest and latest
date on which the charterers may redeliver the vessel to us
upon the termination of the charter.
(2) These vessels are sister ships.
(3) These vessels are similar ships built at the same shipyard.
(4) The charterer of the OSPREY I has an option to extend the
charter period by up to 26 month.
All of our vessels are flagged in the Marshall Islands. We own each of
our vessels through a separate wholly owned Marshall Islands subsidiary.
Nature of Business
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Our strategy is to charter our vessels primarily pursuant to one- to
three-year time charters to allow us to take advantage of the stable cash flow
and high utilization rates that are associated with medium- to long-term time
charters. We have entered into time charters for all of our vessels which range
in length from one to three years. We will regularly monitor the dry bulk
shipping market and based on market conditions we may consider taking advantage
of short-term charter rates.
A time charter involves the hiring of a vessel from its owner for a
period of time pursuant to a contract under which the vessel owner places its
ship (including its crew and equipment) at the service of the charterer. Under a
typical time charter, the charterer periodically pays us a fixed daily charter
hire rate and bears all voyage expenses, including the cost of fuel and port and
canal charges. Once we have time chartered a vessel, trading of the vessel and
the commercial risks shift to the customer. Subject to certain restrictions
imposed by us in the contract, the charterer determines the type and quantity of
cargo to be carried and the ports of loading and discharging. The technical
operation and navigation of the vessel at all times remain our responsibility,
including vessel operating expenses, such as the cost of crewing, insuring,
repairing and maintaining the vessel, costs of spare parts and supplies, tonnage
taxes and other miscellaneous expenses.
In connection with the charter of each of our vessels, we pay
commissions ranging from 1.25% to 6.25% of the total daily charter hire rate of
each charter to unaffiliated ship brokers and to in-house ship brokers
associated with the charterers, depending on the number of brokers involved with
arranging the relevant charter.
Our vessels operate worldwide within the trading limits imposed by our
insurance terms and do not operate in areas where United States or United
Nations sanctions have been imposed.
Our Customers
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Our customers currently include national, regional and international
companies such as Norden A/S, Korea Line, Ltd., Western Bulk ASA, Daeyang
Shipping Ltd., Armada Bulk Shipping Ltd., MUR Shipping Contracting (Metall und
Rohstoff), Strategic Bulk Carriers and Fairfield Bulk Carriers. Our assessment
of a charterer's financial condition and reliability is an important factor in
negotiating employment for our vessels. We expect to charter our vessels to
major trading houses (including commodities traders), publicly traded companies,
reputable vessel owners and operators, major producers and government-owned
entities rather than to more speculative or undercapitalized entities. We
evaluate the counterparty risk of potential charterers based on our management's
experience in the shipping industry combined with the additional input of two
independent credit risk consultants. During the period from our inception to
December 31, 2005, four customers individually accounted for more than 10% of
our time charter revenue.
Operations
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There are two central aspects to the operation of our fleet:
o Commercial Operations, which involves chartering and operating a
vessel; and
o Technical Operations, which involves maintaining, crewing and
insuring a vessel.
We carry out the commercial and strategic management of our fleet
through our wholly owned subsidiary, Eagle Shipping International (USA) LLC, a
Marshall Islands limited liability company that was formed in January 2005 and
maintains its principle executive offices in New York City. Our office staff,
either directly or through this subsidiary, provides the following services:
o commercial operations and technical supervision;
o safety monitoring;
o vessel acquisition; and
o financial, accounting and information technology services.
We currently have a total of seven shore-based personnel, including our senior
management team.
Commercial and Strategic Management
- -----------------------------------
We perform all of the commercial and strategic management of our
fleet, including:
o Obtaining employment for our vessels and maintaining our
relationships with our charterers. We believe that because our
management team has an average of 20 years experience in
operating Handymax and Handysize dry bulk vessels, we have access
to a broad range of charterers and can employ the fleet
efficiently in any market and achieve high utilization rates.
We have entered into time charters for all of our vessels, in
accordance with our strategy. In general, our time charters afford us greater
assurance that we will be able to cover a fixed portion of our costs, mitigate
revenue volatility, provide stable cash flow and achieve high utilization rates
than if our vessels were employed on the shorter term voyage charters or on the
spot market.
We regularly monitor the dry bulk shipping market and based on market
conditions, when a time charter ends, we may consider taking advantage of
short-term charter rates. In such cases we will arrange voyage charters for
those vessels that we will operate in the spot market. Under a voyage charter,
the owner of a vessel provides the vessel for the transport of goods between
specific ports in return for the payment of an agreed-upon freight per ton of
cargo or, alternatively, a specified total amount. All operating costs are borne
by the owner of the vessel. A single voyage charter is often referred to as a
"spot market" charter, which generally lasts from two to ten weeks. Operating
vessels in the spot market may afford greater speculative opportunity to
capitalize on fluctuations in the spot market; when vessel demand is high we
earn higher rates, but when demand is low our rates are lower and potentially
insufficient to cover costs. Spot market rates are volatile and are affected by
world economics, international events, weather conditions, strikes, governmental
policies, supply and demand, and other factors beyond our control. If the
markets are especially weak for protracted periods, there is a risk that vessels
in the spot market may spend time idle waiting for business, or may have to be
"laid up".
o Identifying, purchasing, and selling vessels. We believe that our
commercial management team has longstanding relationships in the
dry bulk industry, which provides us access to an extensive
network of ship brokers and vessel owners that we believe will
provide us with an advantage in future transactions.
o Obtaining insurance coverage for our vessels. We have
well-established relationships with reputable marine underwriters
in all the major insurance markets around the world that helps
insure our fleet with insurance at competitive rates.
Additionally, our protection and indemnity insurance is directly
placed with the underwriter, thereby eliminating broker expenses.
o Supervising V.Ships, our third party technical manager. We
regularly monitor the expenditures, crewing, and maintenance of
our vessels by our technical manager. Our management team has
direct experience with vessel operations, repairs, drydockings
and construction.
Technical Management
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The technical management of our fleet is provided by our technical
manager, V.Ships, an unaffiliated third party, that we believe is the world's
largest provider of independent ship management and related services. We review
the performance of V.Ships on an annual basis and may add or change technical
managers.
Technical management includes managing day-to-day vessel operations,
performing general vessel maintenance, ensuring regulatory and classification
society compliance, supervising the maintenance and general efficiency of
vessels, arranging our hire of qualified officers and crew, arranging and
supervising drydocking and repairs, purchasing supplies, spare parts and new
equipment for vessels, appointing supervisors and technical consultants and
providing technical support. V.Ships also manages and processes all crew
insurance claims. Our technical manager maintains records of all costs and
expenditures incurred in connection with its services that are available for our
review on a daily basis. Our technical manager is a member of Marine Contracting
Association Limited (MARCAS), an association that arranges bulk purchasing for
its members, which enables us to benefit from economies of scale.
We currently crew our vessels with Ukrainian officers and seamen
supplied by V.Ships in its capacity as technical manager. These officers and
seamen are employees of our wholly owned vessel owning subsidiaries while aboard
our vessels. We currently employ a total of 288 officers and seamen on the 13
vessels in our operating fleet. Our technical manager handles each seaman's
training, travel, and payroll and ensures that all our seamen have the
qualifications and licenses required to comply with international regulations
and shipping conventions. Additionally, our seafaring employees perform most
commissioning work and assist in supervising work at shipyards and drydock
facilities. We typically man our vessels with more crew members than are
required by the country of the vessel's flag in order to allow for the
performance of routine maintenance duties. All of our crew members are subject
to and are paid commensurate with international collective bargaining agreements
and, therefore, we do not anticipate any labor disruptions. No international
collective bargaining agreements to which we are a party are set to expire
within two years.
In fiscal year 2005, we paid our technical manager a fee of $8,333 per
vessel per month, plus actual costs incurred by our vessels.
Permits and Authorizations
- --------------------------
We are required by various governmental and quasi-governmental
agencies to obtain certain permits, licenses and certificates with respect to
our vessels. The kinds of permits, licenses and certificates required depend
upon several factors, including the commodity transported, the waters in which
the vessel operates, the nationality of the vessel's crew and the age of a
vessel. We expect to be able to obtain all permits, licenses and certificates
currently required to permit our vessels to operate. Additional laws and
regulations, environmental or otherwise, may be adopted which could limit our
ability to do business or increase the cost of us doing business.
Environmental and Other Regulations
- -----------------------------------
Government regulation significantly affects the ownership and
operation of our vessels. We are subject to international conventions, national,
state and local laws and regulations in force in the countries in which our
vessels may operate or are registered.
A variety of government and private entities subject our vessels to
both scheduled and unscheduled inspections. These entities include the local
port authorities (United States Coast Guard, harbor master or equivalent),
classification societies, flag state administrations (country of registry) and
charterers, particularly terminal operators. Certain of these entities require
us to obtain permits, licenses and certificates for the operation of our
vessels. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend the operation of one or more of
our vessels.
We believe that the heightened level of environmental and quality
concerns among insurance underwriters, regulators and charterers is leading to
greater inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the dry bulk shipping 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 applicable to us as of the date of this
annual report.
International Maritime Organization
- -----------------------------------
The International Maritime Organization, or IMO, has negotiated
international conventions that impose liability for oil pollution in
international waters and a signatory's territorial waters. The IMO adopted Annex
VI to the International Convention for the Prevention of Pollution from Ships to
address air pollution from ships which became effective in May 2005. Annex VI
set limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and
prohibit deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. Our vessels are in compliance with Annex VI.
The operation of our vessels is also affected by the requirements set
forth in the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires ship owners and bareboat
charterers to develop and maintain an extensive "Safety Management System" that
includes the adoption of a safety and environmental protection policy setting
forth instructions and procedures for safe operation and describing procedures
for dealing with emergencies. The failure of a ship owner or bareboat charterer
to comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels and may result in
a denial of access to, or detention in, certain ports. As of the date of this
annual report, each of the 13 vessels in our operating fleet is ISM
Code-certified.
The United States Oil Pollution Act of 1990
- -------------------------------------------
The United States Oil Pollution Act of 1990, or OPA, established an
extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions or whose vessels
operate in United States waters, which includes the United States' territorial
sea and its two hundred nautical mile exclusive economic zone.
Under OPA, vessel owners, operators and bareboat charterers are
"responsible parties" and are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels. OPA defines
these other damages broadly to include:
o natural resources damage and the costs of assessment thereof;
o real and personal property damage;
o net loss of taxes, royalties, rents, fees and other lost revenues;
o lost profits or impairment of earning capacity due to property or
natural resources damage; and
o net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards, and loss
of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $600
per gross ton or $0.5 million per dry bulk vessel that is over 300 gross tons
(subject to possible adjustment for inflation). These limits of liability do not
apply if an incident was directly caused by violation of applicable United
States federal safety, construction or operating regulations or by a responsible
party's gross negligence or willful misconduct, or if the responsible party
fails or refuses to report the incident or to cooperate and assist in connection
with oil removal activities.
We maintain pollution liability coverage insurance in the amount of $1
billion per incident for each of our vessels. If the damages from a catastrophic
spill were to exceed our insurance coverage it could have an adverse effect on
our business and results of operation.
OPA requires owners and operators of vessels to establish and maintain
with the United States Coast Guard evidence of financial responsibility
sufficient to meet their potential liabilities under the OPA. In December 1994,
the United States Coast Guard implemented regulations requiring evidence of
financial responsibility in the amount of $1,500 per gross ton, which includes
the OPA limitation on liability of $1,200 per gross ton and the United States
Comprehensive Environmental Response, Compensation, and Liability Act liability
limit of $300 per gross ton. Under the regulations, vessel owners and operators
may evidence their financial responsibility by showing proof of insurance,
surety bond, self-insurance or guaranty. Under OPA, an owner or operator of a
fleet of vessels is required only to demonstrate evidence of financial
responsibility in an amount sufficient to cover the vessels in the fleet having
the greatest maximum liability under OPA.
The United States Coast Guard's regulations concerning certificates of
financial responsibility provide, in accordance with OPA, that claimants may
bring suit directly against an insurer or guarantor that furnishes certificates
of financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defense that it may
have had against the responsible party and is limited to asserting those
defenses available to the responsible party and the defense that the incident
was caused by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of financial
responsibility under pre-OPA laws, including the major protection and indemnity
organizations, have declined to furnish evidence of insurance for vessel owners
and operators if they are subject to direct actions or required to waive
insurance policy defenses.
The United States Coast Guard's financial responsibility regulations
may also be satisfied by evidence of surety bond, guaranty or by self-insurance.
Under the self-insurance provisions, the ship owner or operator must have a net
worth and working capital, measured in assets located in the United States
against liabilities located anywhere in the world, that exceeds the applicable
amount of financial responsibility. We have complied with the United States
Coast Guard regulations by providing a certificate of responsibility from third
party entities that are acceptable to the United States Coast Guard evidencing
sufficient self-insurance.
OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for oil spills. In some cases, states, which have enacted such
legislation, have not yet issued implementing regulations defining vessels
owners' responsibilities under these laws. We intend to comply with all
applicable state regulations in the ports where our vessels call.
Other Environmental Initiatives
- -------------------------------
The European Union is considering legislation that will affect the
operation of vessels and the liability of owners for oil pollution. It is
difficult to predict what legislation, if any, may be promulgated by the
European Union or any other country or authority.
Although the United States is not a party thereto, many countries have
ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended, or the CLC, and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended. Under these
conventions, a vessel's registered owner is strictly liable for pollution damage
caused on the territorial waters of a contracting state by discharge of
persistent oil, subject to certain complete defenses. Many of the countries that
have ratified the CLC have increased the liability limits through a 1992
Protocol to the CLC. The liability limits in the countries that have ratified
this Protocol are currently approximately $4.0 million plus approximately $566.0
per gross registered ton above 5,000 gross tons with an approximate maximum of
$80.5 million per vessel, with the exact amount tied to a unit of account which
varies according to a basket of currencies. The right to limit liability is
forfeited under the CLC where the spill is caused by the owner's actual fault or
privity and, under the 1992 Protocol, where the spill is caused by the owner's
intentional or reckless conduct. Vessels trading to contracting states must
provide evidence of insurance covering the limited 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 the CLC.
Vessel Security Regulations
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Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002, or the MTSA, came into
effect. To implement certain portions of the MTSA, in July 2003, the United
States Coast Guard issued regulations requiring the implementation of certain
security requirements aboard vessels operating in waters subject to the
jurisdiction of the United States. Similarly, in December 2002, amendments to
the International Convention for the Safety of Life at Sea, or SOLAS, created a
new chapter of the convention dealing specifically with maritime security. The
new chapter came into effect in July 2004 and imposes various detailed security
obligations on vessels and port authorities, most of which are contained in the
newly created International Ship and Port Facilities Security Code or ISPS Code.
Among the various requirements are:
o on-board installation of automatic information systems, or AIS,
to enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The United States Coast Guard regulations, intended to align with
international maritime security standards, exempt non-United States vessels from
MTSA vessel security measures provided such vessels have on board a valid
International Ship Security Certificate, or ISSC, that attests to the vessel's
compliance with SOLAS security requirements and the ISPS Code. We have
implemented the various security measures addressed by the MTSA, SOLAS and the
ISPS Code.
Inspection by Classification Societies
- --------------------------------------
Every seagoing vessel must be "classed" by a classification society.
The classification society certifies that the vessel is "in class," signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
the vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys
and checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made in each individual case and /or to
the regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of
hull, machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:
o Annual Surveys. For seagoing ships, annual surveys are conducted
for the hull and the machinery, including the electrical plant
and where applicable for special equipment classed, at intervals
of 12 months from the date of commencement of the class period
indicated in the certificate.
o Intermediate Surveys. Extended annual surveys are referred to as
intermediate surveys and typically are conducted two and one-half
years after commissioning and each class renewal. Intermediate
surveys may be carried out on the occasion of the second or third
annual survey.
o Class Renewal Surveys. Class renewal surveys, also known as
special surveys, are carried out for the ship's hull, machinery,
including the electrical plant and for any special equipment
classed, at the intervals indicated by the character of
classification for the hull. At the special survey the vessel is
thoroughly examined, including audio-gauging to determine the
thickness of the steel structures. Should the thickness be found
to be less than class requirements, the classification society
would prescribe steel renewals. The classification society may
grant a one year grace period for completion of the special
survey. Substantial amounts of money may have to be spent for
steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every four
or five years, depending on whether a grace period was granted, a
ship owner has the option of arranging with the classification
society for the vessel's hull or machinery to be on a continuous
survey cycle, in which every part of the vessel would be surveyed
within a five year cycle. At an owner's application, the surveys
required for class renewal may be split according to an agreed
schedule to extend over the entire period of class. This process
is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society
are required to be surveyed at least once per class period, unless shorter
intervals between surveys are prescribed elsewhere. The period between two
subsequent surveys of each area must not exceed five years. Vessels under 5
years of age can waive drydocking in order to increase available days and
decrease capital expenditures, provided that the vessel is inspected underwater.
Most vessels are also drydocked 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, or IACS.
All our vessels that we have purchased and may agree to purchase in the future
must be certified as being "in class" prior to their delivery under our standard
purchase contracts and memorandum of agreement. If the vessel is not certified
on the date of closing, we have no obligation to take delivery of the vessel. We
have all of our vessels, and intend to have all vessels that we acquire in the
future, classed by IACS members.
Risk of Loss and Liability Insurance
- ------------------------------------
General
The operation of any dry bulk 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 (from fuel oil) 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 vessels trading in the United States
exclusive economic zone for certain oil pollution accidents in the United
States, has made liability insurance more expensive for ship owners and
operators trading in the United States market.
We maintain hull and machinery insurance, war risks insurance,
protection and indemnity cover, and freight, demurrage and defense cover for our
operating fleet in amounts that we believe to be prudent to cover normal risks
in our operations, we may not be able to achieve or maintain this level of
coverage throughout a vessel's useful life. Furthermore, not all risks can be
insured, and there can be no guarantee that any specific claim will be paid, or
that we will always be able to obtain adequate insurance coverage at reasonable
rates.
Hull & Machinery and War Risks Insurance
We maintain marine hull and machinery and war risks insurances, which
cover the risk of actual or constructive total loss, for all of our vessels. Our
vessels are each covered up to at least their fair market value with deductibles
of $75,000 - $100,000 per vessel per incident.
Protection & Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection
and indemnity associations, or P&I Associations, which insure our third party
liabilities in connection with our shipping activities. This includes
third-party liability and other related expenses resulting from the injury or
death of crew, passengers and other third parties, the loss or damage to cargo,
claims arising from collisions with other vessels, damage to other third-party
property, pollution arising from oil or other substances and salvage, towing and
other related costs, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or "clubs." Subject to the "capping" discussed below, our
coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution
is $1 billion per vessel per incident. The fourteen P&I Associations that
comprise the International Group insure approximately 90% of the world's
commercial tonnage and have entered into a pooling agreement to reinsure each
association's liabilities. As a member of a P&I Association, which is a member
of the International Group, we are subject to calls payable to the associations
based on the group's claim records as well as the claim records of all other
members of the individual associations and members of the pool of P&I
Associations comprising the International Group.
Competition
- -----------
We compete with a large number of international fleets. The
international shipping industry is highly competitive and fragmented with many
market participants. There are approximately 6,100 drybulk carriers aggregating
approximately 350 million dwt, and the ownership of these vessels is divided
among approximately 1,400 mainly private independent dry bulk vessel owners with
no one shipping group owning or controlling more than 5.0% of the world dry bulk
fleet. We primarily compete with other owners of dry bulk vessels in the
Handymax class that are mainly privately owned fleets.
Competition in the ocean shipping industry varies primarily according
to the nature of the contractual relationship as well as with respect to the
kind of commodity being shipped. Our business will fluctuate in line with the
main patterns of trade of dry bulk cargoes and varies according to changes in
the supply and demand for these items. Competition in virtually all bulk trades
is intense 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 owner and operator. Increasingly, major
customers are demonstrating a preference for modern vessels based on concerns
about the environmental and operational risks associated with older vessels.
Consequently, owners of large modern fleets have gained a competitive advantage
over owners of older fleets.
As in the spot market, the time charter market is price sensitive and
also depends on our ability to demonstrate the high quality of our vessels and
operations to chartering customers. However, because of the longer term
commitment, customers entering time charters are more concerned about their
exposure and image from chartering vessels that do not comply with environmental
regulations or that will be forced out of service for extensive maintenance and
repairs. Consequently, in the time charter market, factors such as the age and
quality of a vessel and the reputation of the owner and operator tend to be more
significant than in the spot market in competing for business.
Value of Assets and Cash Requirements
- -------------------------------------
The replacement costs of comparable new vessels may be above or below
the book value of our fleet. The market value of our fleet may be below book
value when market conditions are weak and exceed book value when markets are
strong. In common with other shipowners, we may consider asset redeployment
which at times may include the sale of vessels at less than their book value.
The Company's results of operations and cash flow may be significantly
affected by future charter markets.
Exchange Controls
- -----------------
Under Marshall Islands law, there are currently no restrictions on the
export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to
non-resident holders of our common stock.
United States Tax Considerations
- --------------------------------
The following is a discussion of certain United States federal income
tax considerations relevant to owning our common stock by a United States
Holder, as defined below. This discussion does not purport to deal with the tax
consequences of owning the Company's common stock to all categories of
investors, some of which (such as financial institutions, regulated investment
companies, real estate investment trusts, tax-exempt organizations, insurance
companies, persons holding our common stock as part of a hedging, integrated,
conversion or constructive sale transaction or a straddle, traders in securities
that have elected the mark-to-market method of accounting for their securities,
persons liable for alternative minimum tax, persons who are investors in
pass-through entities, dealers in securities or currencies, persons who own 10%
or more of our common stock and investors whose functional currency is not the
United States dollar) may be subject to special rules. Shareholders are
encouraged to consult their own tax advisors concerning the overall tax
consequences arising in any particular situation under United States federal,
state, local or foreign law of the ownership of our common stock.
United States Federal Income Taxation of Our Company
- ----------------------------------------------------
Taxation of Operating Income
The Company anticipates that it will derive substantially all of its
gross income from the use and operation of vessels in international commerce and
that this income will principally consist of hire from time and voyage charters
for the transportation of cargoes and the performance of services directly
related thereto, which is referred to herein as "shipping income."
Shipping income that is attributable to transportation that begins or
ends, but that does not both begin and end, in the U.S. will be considered to be
50% derived from sources within the United States. Shipping income attributable
to transportation that both begins and ends in the United States will be
considered to be 100% derived from sources within the United States. The Company
does not engage in transportation that gives rise to 100% U.S. source income.
Shipping income attributable to transportation exclusively between non-U.S.
ports will be considered to be 100% derived from sources outside the United
States. Shipping income derived from sources outside the U.S. will not be
subject to any U.S. federal income tax.
The Company's vessels operate in various parts of the world, including
to or from U.S. ports. We believe that we currently qualify under Section 883 of
the U.S. Internal Revenue Code of 1986, as amended (the "Code") for an exemption
from U.S. federal income tax on substantially all of our shipping income. This
exemption may be lost if 50% or more of our stock is owned, for more than half
the number of days during the taxable year, by persons who actually or
constructively own 5% or more of our stock and we cannot qualify for an
exemption from such rule.
While we believe that we qualify for exemption from tax under Section
883 for 2005, we can give no assurance that changes in the ownership of our
stock will permit us to qualify for the Section 883 exemption in the future. If
we do not qualify for an exemption pursuant to Section 883 of the Code, we will
be subject to U.S. federal income tax imposed on a gross basis at 4% on our U.S.
source shipping income. In such a case, our net income and cash flow will be
reduced by the amount of such tax.
If the Section 883 exemption were not available to the Company for
2005, the 4% tax so imposed would be approximately $200,000. However, since no
more that 50% of our shipping income would be treated as derived from U.S.
sources, our maximum tax liability under the 4% tax regime would never exceed 2%
of our shipping income.
No assurance can be given that changes in or interpretation of
existing laws will not occur or will not be retroactive or that anticipated
future circumstances will in fact occur. The Company's views should not be
considered official, and no assurances on the conclusions discussed above can be
given.
United States Federal Income Taxation of United States Holders
- --------------------------------------------------------------
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a United
States Holder (as used herein means a beneficial owner of common stock that is
an individual United States citizen or resident, a United States corporation or
other United States entity taxable as a corporation, an estate the income of
which is subject to United States federal income taxation regardless of its
source, or a trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust) that holds stock in a foreign corporation classified as a "passive
foreign investment company" for United States federal income tax purposes. In
general, the Company will be treated as a passive foreign investment company
with respect to a United States Holder if, for any taxable year in which such
holder holds the Company's common stock, either
o at least 75% of our gross income for such taxable year consists of
passive income (e.g., dividends, interest, capital gains and rents
derived other than in the active conduct of a rental business), or
o at least 50% of the average value of our assets during such taxable
year produce, or are held for the production of, passive income.
Income earned, or deemed earned, by the Company in connection with the
performance of services would not constitute passive income. By contrast, rental
income would generally constitute "passive income" unless the Company was
treated under specific rules as deriving its rental income in the active conduct
of a trade or business.
Based on the Company's current operations and future projections, we
do not believe that the Company has been or is, nor do we expect the Company to
become, a passive foreign investment company with respect to any taxable year.
Although there is no legal authority directly on point, our belief is based
principally on the position that, for purposes of determining whether the
Company is a passive foreign investment company, the gross income it derives
from its time chartering and voyage chartering activities should constitute
services income, rather than rental income. Accordingly, such income should not
constitute passive income, and the assets that the Company owns and operates in
connection with the production of such income, in particular, the vessels,
should not constitute passive assets for purposes of determining whether the
Company is a passive foreign investment company. In the absence of any legal
authority specifically relating to the statutory provisions governing passive
foreign investment companies, the Internal Revenue Service or a court could
disagree with our position. In addition, although the Company intends to conduct
its affairs in a manner to avoid being classified as a passive foreign
investment company with respect to any taxable year, we cannot assure you that
the nature of its operations will not change in the future.
As discussed more fully below, if the Company were to be treated as a
passive foreign investment company for any taxable year, a United States Holder
would be subject to different taxation rules depending on whether the United
States Holder makes an election to treat the Company as a "Qualified Electing
Fund," which election we refer to as a "QEF election." As an alternative to
making a QEF election, a United States Holder should be able to make a
"mark-to-market" election with respect to the Company's common stock, as
discussed below.
Taxation of United States Holders Making a Timely QEF Election
If a United States Holder makes a timely QEF election, which United
States Holder we refer to as an "Electing Holder," the Electing Holder must
report for United States federal income tax purposes its pro rata share of the
Company's ordinary earnings and net capital gain, if any, for each taxable year
of the Company for which it is a passive foreign investment company that ends
with or within the taxable year of the Electing Holder, regardless of whether or
not distributions were received from the Company by the Electing Holder. No
portion of any such inclusions of ordinary earnings will be treated as
"qualified dividend income." Net capital gain inclusions of United States
Non-Corporate Holders would be eligible for preferential capital gains tax
rates. The Electing Holder's adjusted tax basis in the common stock will be
increased to reflect taxed but undistributed earnings and profits. Distributions
of earnings and profits that had been previously taxed will result in a
corresponding reduction in the adjusted tax basis in the common stock and will
not be taxed again once distributed. An Electing Holder would not, however, be
entitled to a deduction for its pro rata share of any losses that the Company
incurs with respect to any year. An Electing Holder would generally recognize
capital gain or loss on the sale, exchange or other disposition of the Company's
common stock. A United States Holder would make a timely QEF election for shares
of the Company by filing one copy of IRS Form 8621 with his United States
federal income tax return for the first year in which he held such shares when
the Company was a passive foreign investment company. If the Company were to be
treated as a passive foreign investment company for any taxable year, the
Company would provide each United States Holder with all necessary information
in order to make the QEF election described above.
Taxation of United States Holders Making a "Mark-to-Market" Election
Alternatively, if the Company were to be treated as a passive foreign
investment company for any taxable year and, as we anticipate, its stock is
treated as "marketable stock," a United States Holder would be allowed to make a
"mark-to-market" election with respect to the Company's common stock, provided
the United States Holder completes and files IRS Form 8621 in accordance with
the relevant instructions and related Treasury regulations. If that election is
made, the United States Holder generally would include as ordinary income in
each taxable year the excess, if any, of the fair market value of the common
stock at the end of the taxable year over such holder's adjusted tax basis in
the common stock. The United States Holder would also be permitted an ordinary
loss in respect of the excess, if any, of the United States Holder's adjusted
tax basis in the common stock over its fair market value at the end of the
taxable year, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election. A United States Holder's tax
basis in his common stock would be adjusted to reflect any such income or loss
amount. Gain realized on the sale, exchange or other disposition of the
Company's common stock would be treated as ordinary income, and any loss
realized on the sale, exchange or other disposition of the common stock would be
treated as ordinary loss to the extent that such loss does not exceed the net
mark-to-market gains previously included by the United States Holder. No
ordinary income inclusions under this election will be treated as "qualified
dividend income."
Taxation of United States Holders Not Making a Timely QEF or
Mark-to-Market Election
Finally, if the Company were to be treated as a passive foreign
investment company for any taxable year, a United States Holder who does not
make either a QEF election or a "mark-to-market" election for that year, whom we
refer to as a "Non-Electing Holder," would be subject to special rules with
respect to (1) any excess distribution (i.e., the portion of any distributions
received by the Non-Electing Holder on the common stock in a taxable year in
excess of 125 percent of the average annual distributions received by the
Non-Electing Holder in the three preceding taxable years, or, if shorter, the
Non-Electing Holder's holding period for the common stock), and (2) any gain
realized on the sale, exchange or other disposition of the Company's common
stock. Under these special rules:
o the excess distribution or gain would be allocated ratably over the
Non-Electing Holder's aggregate holding period for the common stock;
o the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which the Company was a passive
foreign investment company, would be taxed as ordinary income and
would not be "qualified dividend income"; and
o the amount allocated to each of the other taxable years would be
subject to tax at the highest rate of tax in effect for the applicable
class of taxpayer for that year, and an interest charge for the deemed
deferral benefit would be imposed with respect to the resulting tax
attributable to each such other taxable year.
These special rules would not apply to a qualified pension, profit
sharing or other retirement trust or other tax-exempt organization that did not
borrow money or otherwise utilize leverage in connection with its acquisition of
the Company's common stock. If the Company is a passive foreign investment
company and a Non-Electing Holder who is an individual dies while owning the
Company's common stock, such holder's successor generally would not receive a
step-up in tax basis with respect to such stock.
GLOSSARY OF SHIPPING TERMS
- --------------------------
Following are definitions of shipping terms used in this Form 10-K.
Annual Survey--The inspection of a vessel by a classification society, on behalf
of a flag state, that takes place every year.
Bareboat Charter--Also known as "demise charter." Contract or hire of a ship
under which the shipowner is usually paid a fixed amount of charter hire rate
for a certain period of time during which the charterer is responsible for the
operating costs and voyage costs of the vessel as well as arranging for crewing.
Bulk Vessels/Carriers--Vessels which are specially designed and built to carry
large volumes of cargo in bulk cargo form.
Bunkers--Heavy fuel oil used to power a vessel's engines.
Capesize--A dry bulk carrier in excess of 100,000 dwt.
Charter--The hire of a vessel for a specified period of time or to carry a cargo
for a fixed fee from a loading port to a discharging port. The contract for a
charter is called a charterparty.
Charterer--The individual or company hiring a vessel.
Charter Hire Rate--A sum of money paid to the vessel owner by a charterer under
a time charterparty for the use of a vessel.
Classification Society--An independent organization which certifies that a
vessel has been built and maintained in accordance with the rules of such
organization and complies with the applicable rules and regulations of the
country of such vessel and the international conventions of which that country
is a member.
Deadweight Ton--"dwt"--A unit of a vessel's capacity for cargo, fuel oil, stores
and crew, measured in metric tons of 1,000 kilograms. A vessel's DWT or total
deadweight is the total weight the vessel can carry when loaded to a particular
load line.
Draft--Vertical distance between the waterline and the bottom of the vessel's
keel.
Dry Bulk--Non-liquid cargoes of commodities shipped in an unpackaged state.
Drydocking--The removal of a vessel from the water for inspection and/or repair
of submerged parts.
Gross Ton--Unit of 100 cubic feet or 2.831 cubic meters used in arriving at the
calculation of gross tonnage.
Handymax--A dry bulk carrier of approximately 35,000 to 60,000 dwt.
Handysize--A dry bulk carrier having a carrying capacity of up to approximately
35,000 dwt.
Hull--The shell or body of a vessel.
International Maritime Organization--"IMO"--A United Nations agency that issues
international trade standards for shipping.
Intermediate Survey--The inspection of a vessel by a classification society
surveyor which takes place between two and three years before and after each
Special Survey for such vessel pursuant to the rules of international
conventions and classification societies.
ISM Code--The International Management Code for the Safe Operation of Ships and
for Pollution Prevention, as adopted by the IMO.
Metric Ton--A unit of measurement equal to 1,000 kilograms.
Newbuilding--A newly constructed vessel.
OPA--The United States Oil Pollution Act of 1990 (as amended).
Orderbook--A reference to currently placed orders for the construction of
vessels (e.g., the Panamax orderbook).
Panamax--A dry bulk carrier of approximately 60,000 to 100,000 dwt of maximum
length, depth and draft capable of passing fully loaded through the Panama
Canal.
Protection & Indemnity Insurance--Insurance obtained through a mutual
association formed by shipowners to provide liability insurance protection from
large financial loss to one member through contributions towards that loss by
all members.
Scrapping--The disposal of old or damaged vessel tonnage by way of sale as scrap
metal.
Short-Term Time Charter--A time charter which lasts less than approximately 12
months.
Sister Ships--Vessels of the same class and specification which were built by
the same shipyard.
SOLAS--The International Convention for the Safety of Life at Sea 1974, as
amended, adopted under the auspices of the IMO.
Special Survey--The inspection of a vessel by a classification society surveyor
which takes place a minimum of every four years and a maximum of every five
years.
Spot Market--The market for immediate chartering of a vessel usually for single
voyages.
Strict Liability--Liability that is imposed without regard to fault.
Supramax--A new class of Handymax dry bulk carrier of approximately 50,000 to
60,000 dwt.
Time Charter--Contract for hire of a ship. A charter under which the ship-owner
is paid charter hire rate on a per day basis for a certain period of time, the
shipowner being responsible for providing the crew and paying operating costs
while the charterer is responsible for paying the voyage costs. Any delays at
port or during the voyages are the responsibility of the charterer, save for
certain specific exceptions such as loss of time arising from vessel breakdown
and routine maintenance.
Ton--A metric ton.
Voyage Charter--Contract for hire of a vessel under which a shipowner is paid
freight on the basis of moving cargo from a loading port to a discharge port.
The shipowner is responsible for paying both operating costs and voyage costs.
The charterer is typically responsible for any delay at the loading or
discharging ports.
Available Information
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The Company makes available free of charge through its internet
website, www.eagleships.com its Annual Report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission. You may read and copy any document we file with the SEC at
the SEC's public reference facilities maintained by the Securities and Exchange
Commission at 100 Fifth Street, N.E., Room 1580, Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
facilities. Our SEC filings are also available to the public at the SEC's web
site at http://www.sec.gov. The information on our website is not incorporated
by reference into this report.
ITEM 1A. RISK FACTORS
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We operate in an intensely competitive industry. Some of the following
risks relate principally to the industry in which we operate and our business in
general. Other risks relate principally to the securities market and ownership
of our common stock. The occurrence of any of the events described in this
section could cause results to differ materially from those contained in the
forward-looking statements made in this report, and could significantly and
negatively affect our business, financial condition, operating results or cash
available for dividends.
Industry Specific Risk Factors
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Charter hire rates for dry bulk vessels may decrease in the future, which may
adversely affect our earning. The dry bulk shipping industry is cyclical with
attendant volatility in charter hire rates and profitability. The degree of
charter hire rate volatility among different types of dry bulk vessels has
varied widely, and charter hire rates for dry bulk vessels have recently
declined from historically high levels. Fluctuations in charter rates result
from changes in the supply and demand for vessel capacity and changes in the
supply and demand for the major commodities carried by water internationally.
Because the factors affecting the supply and demand for vessels are outside of
our control and are unpredictable, the nature, timing, direction and degree of
changes in industry conditions are also unpredictable.
Factors that influence demand for vessel capacity include:
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o demand for and production of dry bulk products;
o global and regional economic conditions;
o the distance dry bulk is to be moved by sea; and
o changes in seaborne and other transportation patterns.
Factors that influence the supply of vessel capacity include:
-------------------------------------------------------------
o the number of newbuilding deliveries;
o the scrapping of older vessels;
o vessel casualties; and
o the number of vessels that are out of service.
We anticipate that the future demand for our dry bulk vessels will be
dependent upon continued economic growth in the world's economies, including
China and India, seasonal and regional changes in demand, changes in the
capacity of the global dry bulk fleet and the sources and supply of dry bulk
cargo to be transported by sea. The capacity of the global dry bulk carrier
fleet seems likely to increase and there can be no assurance that economic
growth will continue. Adverse economic, political, social or other developments
could have a material adverse effect on our business and operating results.
Our ability to recharter our dry bulk vessels upon the expiration or
termination of their time charters and the charter rates payable under any
renewal or replacement charters will depend upon, among other things, the
current state of the dry bulk shipping market. If the dry bulk shipping market
is in a period of depression when our vessels' charters expire, we may be forced
to re-charter them at reduced rates or even possibly a rate whereby we incur a
loss, which may reduce our earnings or make our earnings volatile.
In addition, because the market value of our vessels may fluctuate
significantly, we may incur losses when we sell vessels, which may adversely
affect our earnings. If we sell vessels at a time when vessel prices have fallen
and before we have recorded an impairment adjustment to our financial
statements, the sale may be at less than the vessel's carrying amount on our
financial statements, resulting in a loss and a reduction in earnings.
The market values of our vessels may decrease, which could limit the amount of
funds that we can borrow under our credit facility. The fair market values of
our vessels have generally experienced high volatility. Market prices for
secondhand dry bulk vessels have recently been at historically high levels. You
should expect the market values of our vessels to fluctuate depending on general
economic and market conditions affecting the shipping industry and prevailing
charter hire rates, competition from other shipping companies and other modes of
transportation, the types, sizes and ages of our vessels, applicable
governmental regulations and the cost of newbuildings. If the market value of
our fleet declines, we may not be able to draw down the full amount of our
credit facility and we may not be able to obtain other financing or incur debt
on terms that are acceptable to us or at all.
The market values of our vessels may decrease, which could cause us to breach
covenants in our credit facility and adversely affect our operating results. If
the market values of our vessels, which have recently been at historically high
levels, decrease, we may breach some of the covenants contained in the financing
agreements relating to our indebtedness at the time, including covenants in our
credit facility. If we do breach such covenants and we are unable to remedy the
relevant breach, our lenders could accelerate our debt and foreclose on our
fleet. In addition, if the book value of a vessel is impaired due to unfavorable
market conditions or a vessel is sold at a price below its book value, we would
incur a loss that could adversely affect our operating results.
World events could affect our results of operations and financial condition.
Terrorist attacks such as the attacks on the United States on September 11, 2001
and in London on July 7, 2005 and the continuing response of the United States
to these attacks, as well as the threat of future terrorist attacks in the
United States or elsewhere, continues to cause uncertainty in the 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 additional financing on terms
acceptable to us or at all. In the past, political conflicts have also resulted
in attacks on vessels, mining of waterways and other efforts to disrupt
international shipping, particularly in the Arabian Gulf region. Acts of
terrorism and piracy have also affected vessels trading in regions such as the
South China Sea. Any of these occurrences could have a material adverse impact
on our operating results, revenues and costs.
Our operating results will be subject to seasonal fluctuations, which could
affect our operating results and the amount of available cash with which we can
pay dividends. We operate our vessels in markets that have historically
exhibited seasonal variations in demand and, as a result, in charter hire rates.
To the extent we operate vessels in the spot market, this seasonality may result
in quarter-to-quarter volatility in our operating results, which could affect
the amount of dividends that we pay to our stockholders from quarter to quarter.
The dry bulk shipping market is typically stronger in the fall and winter months
in anticipation of increased consumption of coal and other raw materials in the
northern hemisphere during the winter months. In addition, unpredictable weather
patterns in these months tend to disrupt vessel scheduling and supplies of
certain commodities. While this seasonality will not affect our operating
results, as long as our fleet is employed on time charters, if our vessels are
employed in the spot market in the future, it could materially affect our
operating results and cash available for distribution to our stockholders.
We are subject to international safety regulations and the failure to comply
with these regulations may subject us to increased liability, may adversely
affect our insurance coverage and may result in a denial of access to, or
detention in, certain ports. The operation of our vessels is affected by the
requirements set forth in the United Nation's International Maritime
Organization's International Management Code for the Safe Operation of Ships and
Pollution Prevention, or the ISM Code. The ISM Code requires shipowners, ship
managers and bareboat charterers to develop and maintain an extensive "Safety
Management System" that includes the adoption of a safety and environmental
protection policy setting forth instructions and procedures for safe operation
and describing procedures for dealing with emergencies. The failure of a
shipowner or bareboat charterer to comply with the ISM Code may subject it to
increased liability, may invalidate existing insurance or decrease available
insurance coverage for the affected vessels and may result in a denial of access
to, or detention in, certain ports. Each of the vessels that has been delivered
to us is ISM Code-certified and we expect that each other vessel that we have
agreed to purchase will be ISM Code-certified when delivered to us.
Maritime claimants could arrest one or more of our vessels, which could
interrupt our cash flow. Crew members, suppliers of goods and services to a
vessel, shippers of cargo and other parties may be entitled to a maritime lien
against a vessel for unsatisfied debts, claims or damages. In many
jurisdictions, a claimant may seek to obtain security for its claim by arresting
a vessel through foreclosure proceedings. The arrest or attachment of one or
more of our vessels could interrupt our cash flow and require us to pay large
sums of money to have the arrest or attachment lifted. In addition, in some
jurisdictions, such as South Africa, under the "associated ship" theory of
liability, a claimant may arrest both the vessel which is subject to the
claimant's maritime lien and any "associated" vessel, which is any vessel owned
or controlled by the same owner. Claimants could attempt to assert "associated
ship" liability against one vessel in our fleet for claims relating to another
of our vessels.
Governments could requisition our vessels during a period of war or emergency,
resulting in a loss of earnings. A government could requisition one or more of
our vessels for title or for hire. Requisition for title occurs when a
government takes control of a vessel and becomes her owner, while requisition
for hire occurs when a government takes control of a vessel and effectively
becomes her charterer at dictated charter rates. Generally, requisitions occur
during periods of war or emergency, although governments may elect to
requisition vessels in other circumstances. Although we would be entitled to
compensation in the event of a requisition of one or more of our vessels, the
amount and timing of payment would be uncertain. Government requisition of one
or more of our vessels may negatively impact our revenues and reduce the amount
of cash we have available for distribution as dividends to our stockholders.
Company Specific Risk Factors
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We are a recently formed company and have a limited operating history. Our
company and our predecessor company, Eagle Holdings LLC, were formed in March
2005 and January 2005, respectively, and we did not own or operate any vessels
prior to April 2005. We therefore, have a limited operating history and limited
historical financial data on which to evaluate our operations or our ability to
implement and achieve our business strategy.
We cannot assure you that our board of directors will declare dividends. Our
policy is to declare quarterly dividends to stockholders in February, April,
July and October in amounts that are substantially equal to our available cash
from operations during the previous quarter less any cash reserves for
drydockings and working capital. The declaration and payment of dividends, if
any, will always be subject to the discretion of our board of directors,
restrictions contained in our credit facility and the requirements of Marshall
Islands law. The timing and amount of any dividends declared will depend on,
among other things, our earnings, financial condition and cash requirements and
availability, our ability to obtain debt and equity financing on acceptable
terms as contemplated by our growth strategy, the terms of our outstanding
indebtedness and the ability of our subsidiaries to distribute funds to us.
Although our fleet is currently committed to time charters, the international
dry bulk shipping industry is highly volatile, and we cannot predict with
certainty the amount of cash, if any, that will be available for distribution as
dividends in any period. Also, there may be a high degree of variability from
period to period in the amount of cash that is available for the payment of
dividends.
We may incur expenses or liabilities or be subject to other circumstances in the
future that reduce or eliminate the amount of cash that we have available for
distribution as dividends, including as a result of the risks described in this
prospectus. Our growth strategy contemplates that we will finance our
acquisitions of additional vessels through debt financings or the net proceeds
of future equity issuances on terms acceptable to us. If financing is not
available to us on acceptable terms, our board of directors may determine to
finance or refinance acquisitions with cash from operations, which would reduce
or even eliminate the amount of cash available for the payment of dividends.
Under the terms of our credit facility, we will not be permitted to
pay dividends if there is a default or a breach of a loan covenant. In addition,
we are permitted to pay dividends only in amounts up to our EBITDA (as defined
in our credit agreement) less the aggregate amount of interest incurred and net
amounts payable under interest rate hedging agreements during the relevant
period and an agreed upon reserve for drydockings. Please see the section of
this prospectus entitled "Credit Facility" for more information relating to
restrictions on our ability to pay dividends under the terms of our credit
facility.
Marshall Islands law generally prohibits the payment of dividends
other than from surplus (retained earnings and the excess of consideration
received for the sale of shares above the par value of the shares) or while a
company is insolvent or would be rendered insolvent by the payment of such a
dividend. We may not have sufficient surplus in the future to pay dividends and
our subsidiaries may not have sufficient funds or surplus to make distributions
to us. We can give no assurance that dividends will be paid at all.
We may have difficulty managing our planned growth properly. The recent
formation of our company and our initial public offering and the acquisition and
management of the 13 vessels in our operating fleet have imposed, as well as
additional dry bulk vessels that we may acquire in the future, will impose,
significant responsibilities on our management and staff. The addition of
vessels to our fleet may require us to increase the number of our personnel. We
will also have to manage our customer base so that we can provide continued
employment for our vessels upon the expiration of our existing time charters.
We intend to continue to grow our business. Our future growth will
primarily depend on:
o locating and acquiring suitable vessels;
o identifying and consummating acquisitions;
o enhancing our customer base;
o managing our expansion; and
o obtaining required financing on acceptable terms.
Growing any business by acquisition presents numerous risks, such as
undisclosed liabilities and obligations, the possibility that indemnification
agreements will be unenforceable or insufficient to cover potential losses and
difficulties associated with imposing common standards, controls, procedures and
policies, obtaining additional qualified personnel, managing relationships with
customers and integrating newly acquired assets and operations into existing
infrastructure. We cannot give any assurance that we will be successful in
executing our growth plans or that we will not incur significant expenses and
losses in connection with our future growth.
We cannot assure you that we will be able to borrow amounts under our
credit facility and restrictive covenants in our credit facility may impose
financial and other restrictions on us
We entered into a senior secured revolving credit facility in July
2005. We used borrowings under the revolving credit facility to refinance a
portion of our outstanding indebtedness at the time of our initial public
offering in June 2005 and to fund vessel acquisitions. Our ability to borrow
future amounts under our credit facility will be subject to the satisfaction of
certain customary conditions precedent and compliance with terms and conditions
included in the loan documents. In connection with vessel acquisitions, amounts
borrowed may not exceed 60% of the value of the vessels securing our obligations
under the credit facility. Our ability to borrow such amounts, in each case,
will be subject to our lender's approval of the vessel acquisition. Our lender's
approval will be based on the lender's satisfaction of our ability to raise
additional capital through equity issuances in amounts acceptable to our lender
and the proposed employment of the vessel to be acquired. To the extent that we
are not able to satisfy these requirements, including as a result of a decline
in the value of our vessels, we may not be able to draw down the credit facility
in connection with a vessel acquisition without obtaining a waiver or consent
from the lender.
The credit facility also imposes operating and financial restrictions
on us. These restrictions may limit our ability to, among other things:
o pay dividends in amounts exceeding our EBITDA, less the aggregate
amount of interest incurred and net amounts payable under
interest rate hedging agreements during the relevant period and
an agreed upon reserve for drydockings;
o change our Chief Executive Officer without the approval of our
lender;
o incur additional indebtedness;
o change the flag, class or management of our vessels;
o create liens on our assets;
o sell our vessels;
o merge or consolidate with, or transfer all or substantially all
our assets to, another person;
o enter into a new line of business; and
o enter into a time charter or consecutive voyage charters that has a
term that exceeds, or which by virtue of any optional extensions may
exceed, thirteen months.
In addition, we may not pay dividends if there is a default or a
breach of a loan covenant under the credit facility or if the payment of the
dividends would result in a default or breach of a loan covenant. Our
indebtedness may also be accelerated if we experience a change of control.
Therefore, we may need to seek permission from our lender in order to engage in
some corporate actions. Our lender's interests may be different from ours and we
cannot guarantee you that we will be able to obtain our lender's permission when
needed. This may limit our ability to pay dividends to you, finance our future
operations, make acquisitions or pursue business opportunities.
We cannot assure you that we will be able to refinance indebtedness incurred
under our credit facility. Our business strategy contemplates that we repay all
or a portion of our acquisition related debt from time to time with the net
proceeds of equity issuances. We cannot assure you that we will be able to
refinance our indebtedness through equity offerings or otherwise on terms that
are acceptable to us or at all. If we are not able to refinance our
indebtedness, we will have to dedicate a portion of our cash flow from
operations to pay the principal and interest of this indebtedness. We cannot
assure you that we will be able to generate cash flow in amounts that are
sufficient for these purposes. If we are not able to satisfy these obligations,
we may have to undertake alternative financing plans or sell our assets. The
actual or perceived credit quality of our charterers, any defaults by them, and
the market value of our fleet, among other things, may materially affect our
ability to obtain alternative financing. In addition, debt service payments
under our credit facility or alternative financing may limit funds otherwise
available for working capital, capital expenditures, payment of dividends and
other purposes. If we are unable to meet our debt obligations, or if we
otherwise default under our credit facility or an alternative financing
arrangement, our lender could declare the debt, together with accrued interest
and fees, to be immediately due and payable and foreclose on our fleet, which
could result in the acceleration of other indebtedness that we may have at such
time and the commencement of similar foreclosure proceedings by other lenders.
Purchasing and operating secondhand vessels may result in increased operating
costs and reduced fleet utilization The 13 Handymax dry bulk vessels in our
operating fleet are all secondhand vessels. We also may purchase additional
secondhand vessels in the future. While we have the right to inspect previously
owned vessels prior to purchase, such an inspection does not provide us with the
same knowledge about their condition that we would have if these vessels had
been built for and operated exclusively by us. A secondhand vessel may have
conditions or defects that we were not aware of when we bought the vessel and
which may require us to incur costly repairs to the vessel. These repairs may
require us to put a vessel into drydock, which would reduce our fleet
utilization. Furthermore, we usually do not receive the benefit of warranties on
secondhand vessels.
We depend upon a few significant customers for a large part of our revenues and
the loss of one or more of these customers could adversely affect our financial
performance. We derive a significant part of our revenues from a small number of
charterers. The charterers' payments to us under their charters are our sole
source of revenue. Some of our charterers are privately owned companies for
which limited credit and financial information was available to us in making our
assessment of counterparty risk when we entered into our charter. If one or more
of these charterers terminates its charter or chooses not to re-charter our
vessel or is unable to perform under its charter with us and we are not able to
find a replacement charter, we could suffer a loss of revenues that could
adversely affect our financial condition, results of operations and cash
available for distribution as dividends to our stockholders. In addition, we may
be required to change the flagging or registration of the related vessel and may
incur additional costs, including maintenance and crew costs if a charterer were
to default on its obligations. Our stockholders do not have any recourse against
our charterers.
In the highly competitive international shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater
resources. Our vessels are employed in a highly competitive market that is
capital intensive and highly fragmented. Competition arises primarily from other
vessel owners, some of whom have substantially greater resources than we do.
Competition for the transportation of dry bulk cargo by sea is intense and
depends on price, location, size, age, condition and the acceptability of the
vessel and its operators to the charterers. Due in part to the highly fragmented
market, competitors with greater resources could enter the dry bulk shipping
industry and operate larger fleets through consolidations or acquisitions and
may be able to offer lower charter rates and higher quality vessels than we are
able to offer.
We may be unable to attract and retain key management personnel and other
employees in the shipping industry, which may negatively impact the
effectiveness of our management and results of operations. Our success depends
to a significant extent upon the abilities and efforts of our management team.
We have entered into an employment contract with our Chairman and Chief
Executive Officer, Sophocles Zoullas. Our success will depend upon our ability
to retain key members of our management team and to hire new members as may be
necessary. The loss of any of these individuals could adversely affect our
business prospects and financial condition. Difficulty in hiring and retaining
replacement personnel could have a similar effect. We do not intend to maintain
"key man" life insurance on any of our officers.
Risks associated with operating ocean going vessels could affect our business
and reputation, which could adversely affect our revenues and stock price. The
operation of ocean going vessels carries inherent risks. These risks include the
possibility of:
o marine disaster;
o environmental accidents;
o cargo and property losses or damage;
o business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions; and
o piracy.
Any of these circumstances or events could increase our costs or lower
our revenues. The involvement of our vessels in an environmental disaster may
harm our reputation as a safe and reliable vessel owner and operator.
The shipping industry has inherent operational risks that may not be adequately
covered by our insurance. We procure insurance for our fleet against risks
commonly insured against by vessel owners and operators, including hull and
machinery insurance, war risks insurance and protection and indemnity insurance
(which include environmental damage and pollution insurance). We can give no
assurance that we are adequately insured against all risks or that our insurers
will pay a particular claim. Even if our insurance coverage is adequate to cover
our losses, we may not be able to timely obtain a replacement vessel in the
event of a loss. Furthermore, in the future, we may not be able to obtain
adequate insurance coverage at reasonable rates for our fleet. We may also be
subject to calls, or premiums, in amounts based not only on our own claim
records but also the claim records of all other members of the protection and
indemnity associations through which we receive indemnity insurance coverage for
tort liability. Our insurance policies also contain deductibles, limitations and
exclusions which, although we believe are standard in the shipping industry, may
nevertheless increase our costs or decrease our recovery in the event of a loss.
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.
Although the average age of the 13 Handymax dry bulk vessels in our operating
fleet is six years as of December 31, 2005, one of our vessels is 22 years old.
As our fleet ages, we will incur increased costs. Older vessels are typically
less fuel efficient and more costly to maintain than more recently constructed
vessels due to improvements in engine technology. Cargo insurance rates increase
with the age of a vessel, making older vessels less desirable to charterers.
Governmental regulations and safety or other equipment standards related to the
age of vessels may also require expenditures for alterations or the addition of
new equipment, to our vessels and may restrict the type of activities in which
our vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.
We may have to pay tax on United States source income, which would reduce our
earnings. Under the United States Internal Revenue Code of 1986, as amended, or
the Code, 50% of the gross shipping income of a vessel owning or chartering
corporation, such as ourselves and our subsidiaries, that is attributable to
transportation that begins or ends, but that does not both begin and end, in the
United States is characterized as United States source shipping income and such
income is subject to a 4% United States federal income tax without allowance for
any deductions, unless that corporation qualifies for exemption from tax under
Section 883 of the Code and the Treasury regulations promulgated thereunder.
While we believe that we qualify for exemption under Section 883 for
2005, our ability to qualify for this statutory tax exemption is dependent on
certain circumstances related to the ownership of our common stock which are
beyond our control and on interpretations of existing Treasury regulations and
we can therefore give no assurance that we in fact will be eligible to qualify
for exemption under Section 883 for future years.
In addition, changes in the Code, the Treasury regulations or the
interpretation thereof by the Internal Revenue Service or the courts could
adversely affect our ability to take advantage of the exemption under Section
883.
If we are not entitled to this exemption under Section 883 for any
taxable year, we would be subject for such taxable year 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 and would result
in decreased earnings available for distribution to our stockholders.
Based on the current operation of our vessels, if we were subject to
this tax, our United States federal income tax liability would be approximately
$200,000 per year. Because the operations of our vessels are under the control
of third party charterers, we can give no assurance that our United States
federal income tax liability would be substantially higher. However, since no
more that 50% of our shipping income would be treated as derived from U.S.
sources, our maximum tax liability under the 4% tax regime would never exceed 2%
of our shipping income.
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 stockholders 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.
Based on our current and proposed method of operation, we do not
believe that we have been, are or will be a PFIC with respect to any taxable
year. In this regard, we intend to treat the gross income we derive or are
deemed to derive from our time chartering activities as services income, rather
than rental income. Accordingly, we believe that our income from our time
chartering activities does not constitute "passive income," and the assets that
we own and operate in connection with the production of that income do not
constitute passive assets.
There is, however, no direct legal authority under the PFIC rules
addressing our proposed method of operation. Accordingly, no assurance can be
given that the United States Internal Revenue Service, or IRS, or a court of law
will accept our position, and there is a risk that the IRS or a court of law
could determine that we are a PFIC. Moreover, no assurance can be given that we
would not constitute a PFIC for any future taxable year if there were to be
changes in the nature and extent of our operations. If the IRS were to find that
we are or have been a PFIC for any taxable year, our United States stockholders
would face adverse United States tax consequences. Under the PFIC rules, unless
those stockholders made an election available under the Code (which election
could itself have adverse consequences for such stockholders, as discussed below
under "United States Federal Income Taxation of United States Holders"), such
stockholders would be liable to pay United States federal income tax upon excess
distributions and upon any gain from the disposition of our common stock at the
then prevailing income tax rates applicable to ordinary income plus interest as
if the excess distribution or gain had been recognized ratably over the
stockholder's holding period of our common stock. Please see the section of this
Form 10-K entitled "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 stockholders if we are treated
as a PFIC.
Our vessels may suffer damage and we may face unexpected drydocking costs, which
could adversely affect our cash flow and financial condition. If our vessels
suffer damage, they may need to be repaired at a drydocking facility. The costs
of drydock repairs are unpredictable and can be substantial. The loss of
earnings while our vessels are being repaired and repositioned, as well as the
actual cost of these repairs, would decrease our earnings and reduce the amount
of cash that we have available for dividends. We may not have insurance that is
sufficient to cover these costs or losses and may have to pay drydocking costs
not covered by our insurance.
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations and to make
dividend payments. We are a holding company and our subsidiaries conduct all of
our operations and own all of our operating assets. We have no significant
assets other than the equity interests in our subsidiaries. As a result, our
ability to make dividend payments depends on our subsidiaries and their ability
to distribute funds to us. If we are unable to obtain funds from our
subsidiaries, our board of directors may exercise its discretion not to declare
or pay dividends. We do not intend to obtain funds from other sources to pay
dividends.
As we expand our business, we may need to improve our operating and financial
systems and will need to recruit suitable employees and crew for our vessels.
Our current operating and financial systems may not be adequate as we implement
our plan to expand the size of our fleet and our attempts to improve those
systems may be ineffective. In addition, as we expand our fleet, we will need to
recruit suitable additional seafarers and shore side administrative and
management personnel. We cannot guarantee that we will be able to hire suitable
employees as we expand our fleet. If we or our crewing agent encounters business
or financial difficulties, we may not be able to adequately staff our vessels.
If we are unable to grow our financial and operating systems or to recruit
suitable employees as we expand our fleet, our financial performance may be
adversely affected and, among other things, the amount of cash available for
distribution as dividends to our stockholders may be reduced.
Risks Relating to Our Common Stock
- ----------------------------------
There is no guarantee that there will continue to be an active and liquid public
market for you to resell our common stock. The price of our common stock after
this offering may be volatile and may fluctuate due to factors such as:
o actual or anticipated fluctuations in our quarterly and annual results
and those of other public companies in our industry;
o mergers and strategic alliances in the dry bulk shipping industry;
o market conditions in the dry bulk shipping industry;
o changes in government regulation;
o shortfalls in our operating results from levels forecast by securities
analysts;
o announcements concerning us or our competitors; and
o the general state of the securities market.
The dry bulk shipping industry has been highly unpredictable and
volatile. The market for common stock in this industry may be equally volatile.
Our largest stockholder will continue to have a significant amount of control
over the outcome of matters on which our stockholders are entitled to vote.
Eagle Ventures, which is controlled by affiliates of Kelso, owns approximately
37.5% of our outstanding common stock. Therefore, Eagle Ventures will continue
to have a significant amount of control over the outcome of all matters on which
our stockholders are entitled to vote, including the election of directors and
other significant corporate actions. The interests of Eagle Ventures and
affiliates of Kelso may be different from your interests.
Future changes in the market price of our common stock could result in our
incurring non-cash compensation charges that could lower our earnings. Members
of our management have been awarded profits interests in Eagle Ventures. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Non-Cash Compensation Charges" for a discussion of these profits
interests. These profits interests dilute the interests of the holders of Eagle
Ventures and not the interests of holders of our common stock. However, we
record non cash charges in our income statement for compensation to our
management's profits interests in Eagle Ventures, which is based on, among other
things, changes to the market price of our common stock.
We are incorporated in the Marshall Islands, which does not have a
well-developed body of corporate law. Our corporate affairs are governed by our
amended and restated articles of incorporation and bylaws and by the Marshall
Islands Business Corporations Act, or the BCA. The provisions of the BCA
resemble provisions of the corporation laws of a number of states in the United
States. However, there have been few judicial cases in the Marshall Islands
interpreting the BCA. The rights and fiduciary responsibilities of directors
under the laws of the Marshall Islands are not as clearly established as the
rights and fiduciary responsibilities of directors under statutes or judicial
precedent in existence in the United States. The rights of stockholders of
companies incorporated in the Marshall Islands may differ from the rights of
stockholders of companies incorporated in the United States. While the BCA
provides that it is to be interpreted according to the laws of the State of
Delaware and other states with substantially similar legislative provisions,
there have been few, if any, court cases interpreting the BCA in the Marshall
Islands and we can not predict whether Marshall Islands courts would reach the
same conclusions as United States courts. Thus, you may have more difficulty in
protecting your interests in the face of actions by the management, directors or
controlling stockholders than would stockholders of a corporation incorporated
in a United States jurisdiction which has developed a relatively more
substantial body of case law.
Future sales of our common stock could cause the market price of our common
stock to decline. Sales of a substantial number of shares of our common stock in
the public market, or the perception that these sales could occur, may depress
the market price for our common stock. These sales could also impair our ability
to raise additional capital through the sale of our equity securities in the
future. We intend to issue additional shares of our common stock in the future
and our stockholders, including Eagle Ventures LLC, our largest stockholder, may
elect to sell large numbers of shares held by them from time to time. Our
amended and restated articles of incorporation authorize us to issue 100 million
shares of common stock of which 33,150,000 shares are outstanding currently.
Anti-takeover provisions in our organizational documents could make it difficult
for our stockholders to replace or remove our current board of directors or have
the effect of discouraging, delaying or preventing a merger or acquisition,
which could adversely affect the market price of our common stock. Several
provisions of our amended and restated articles of incorporation and bylaws
could make it difficult for our stockholders to change the composition of our
board of directors in any one year, preventing them from changing the
composition of management. In addition, the same provisions may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable. These provisions will include:
o authorizing our board of directors to issue "blank check"
preferred stock without stockholder approval;
o providing for a classified board of directors with staggered,
three year terms;
o authorizing vacancies on our board of directors to be filled only
by a vote of the majority of directors then in office and
specifically denying our stockholders the right to fill vacancies
on the board;
o establishing certain advance notice requirements for nominations
for election to our board of directors or for proposing matters
that can be acted on by stockholders at stockholder meetings;
o prohibiting cumulative voting in the election of directors; and
o limiting the persons who may call special meetings of
stockholders.
o From and after the time that Eagle Ventures no longer has
beneficial ownership of 35% or more of our outstanding common
stock, these provisions will also include:
o authorizing the removal of directors only for cause and only upon
the affirmative vote of the holders of a majority of the
outstanding shares of our common stock entitled to vote for the
directors;
o prohibiting stockholder action by written consent; and
o establishing supermajority voting provisions with respect to
amendments to certain provisions of our amended and restated
articles of incorporation and bylaws.
These anti-takeover provisions could substantially impede the ability
of public stockholders to benefit from a change in control and, as a result, may
adversely affect the market price of our common stock and your ability to
realize any potential change of control premium.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------
None
ITEM 2. PROPERTIES
- -------------------
We do not own any real property. We lease office space at 477 Madison
Avenue, New York, New York 10022.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
We have not been involved in any legal proceedings which may have, or
have had a significant effect on our business, financial position, results of
operations or liquidity, nor are we aware of any proceedings that are pending or
threatened which may have a significant effect on our business, financial
position, results of operations or liquidity. From time to time, we may be
subject to legal proceedings and claims in the ordinary course of business,
principally personal injury and property casualty claims. We expect that these
claims would be covered by insurance, subject to customary deductibles. Those
claims, even if lacking merit, could result in the expenditure of significant
financial and managerial resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------------------------
Common Stock
- ------------
The trading market for shares of our common stock is the Nasdaq
National Market, on which our shares are quoted under the symbol "EGLE." As of
March 13, 2006 the number of stockholders of record of the Company's common
stock was approximately 20,000. The following table sets forth the high and low
closing prices for shares of our common stock since our initial public offering
of common stock at $14.00 per share on June 23, 2005, as reported by the Nasdaq
National Market:
For the period: High Low
--------------- ---- ---
June 23, 2005 to June 30, 2005.................. $13.50 $12.90
July 1, 2005 to September 30, 2005.............. $17.57 $12.36
October 1, 2005 to December 31, 2005............ $17.74 $14.38
On October 28, 2005, we completed an offering of 6,000,000 shares of
our common stock. Please see Item 7, "Sale of Common Stock", for additional
information relating to this offering.
Restricted Stock
- ----------------
None
Equity Compensation Plans
- -------------------------
None
Payment of Dividends to Stockholders
- ------------------------------------
The Company paid a dividend on its common stock in the amount of $0.54
per share on October 31, 2005 to holders of record on October 17, 2005.
Aggregate payments were $14.7 million for dividends declared in 2005. The
Company paid a dividend of $0.57 per share on February 24, 2006 to holders of
record on February 15, 2006. Aggregate payments were $19.0 million for dividends
paid in February 2006. The Company currently intends to pay quarterly dividends
to stockholders in February, April, July and October in amounts that are
substantially equal to our available cash from operations during the previous
quarter less any cash reserves for drydockings and working capital; however, any
determination to pay dividends in the future will be at the discretion of the
Board of Directors and will depend upon the Company's results of operations,
financial condition, covenants and other factors deemed relevant by the Board of
Directors. Payment of dividends is limited by the terms of certain credit
agreements to which the Company and its subsidiaries are party. (See Notes to
the Consolidated Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
We were incorporated on March 23, 2005 and our predecessor, Eagle
Holdings LLC, was formed on January 26, 2005. The following selected
consolidated financial data are derived from the audited consolidated financial
statements of the Company included elsewhere in this report, which have been
audited by Ernst & Young LLP, an independent registered public accounting firm.
The data presented herein should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein. In accordance with standard shipping industry practice, we did not
obtain from the sellers historical operating data for the vessels that we
acquired, as that data was not material to our decision to purchase the vessels.
Accordingly, we have not included any historical financial data relating to the
results of operations of our vessels from the period before our acquisition of
them. Please see the section of this annual report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Lack
of Historical Operating Data for Vessels Before their Acquisition."
- -------------------------------------------------------------------------------
Period from January 26,
(Dollar amounts in thousands except Per Share amounts) 2005 (inception) to
December 31, 2005
-----------------
Income Statement Data
Revenues, net of commissions................................ $56,066
--------------
Vessel Expenses............................................. 11,053
Depreciation and Amortization............................... 10,412
General and Administrative Expenses......................... 3,491
Management and Other Fees to Affiliates..................... 6,175
Non-cash Compensation Expense............................... 11,735
--------------
Total Operating Expenses..................................... 42,866
Net Interest Expense......................................... 6,547
--------------
Net Income.................................................. $ 6,653
==============
Share and Per Share Data
Basic and Diluted Income per Share ......................... $0.30
Weighted Average Shares Outstanding ........................ 21,968,824
Cash Dividend Declared per Share ........................... $ 0.54
Consolidated Cash Flow Data
Net cash from operating activities.......................... $ 26,616
Net cash used in investing activities....................... ($427,966)
Net cash from financing activities.......................... $ 425,877
As of December 31, 2005
-----------------------
Consolidated Balance Sheet Data
Current assets ............................................. $33,829
Total assets ............................................... 462,344
Total liabilities .......................................... 146,551
Long-term debt ............................................. 140,000
Stockholders' equity ....................................... $315,793
Other Data (in `000)
EBITDA (a).................................................. 43,075
Capital Expenditures :
Vessels............................................... 427,966
Payments for Drydocking............................... 422
Ratio of Total Debt to Total Capitalization (b)............. 30.7%
Fleet Data
Number of Vessels .......................................... 13
Average age of Fleet (in years)............................. 6
Fleet Ownership Days........................................ 2,531
Fleet Available Days........................................ 2,507
Fleet Operating Days........................................ 2,500
Fleet Utilization........................................... 99.7%
- --------------------------------------------------------------------------------
(a) Our revolving credit facility permits us to pay dividends in amounts up to
our earnings before extraordinary or exceptional items, interest, taxes,
depreciation and amortization (Credit Agreement EBITDA), less the aggregate
amount of interest incurred and net amounts payable under interest rate
hedging agreements during the relevant period and an agreed upon reserve
for dry-docking. Therefore, we believe that this non-GAAP measure is
important for our investors as it reflects our ability to pay dividends.
The Company's computation of EBITDA may not be comparable to similar titled
measures of other companies. The following table is a reconciliation of net
income, as reflected in the consolidated statements of operations, to the
Credit Agreement EBITDA for the period from inception on January 26, 2005
to December 31, 2005: Period from January 26, 2005 (inception) to December
31, 2005
Net Income........................................................ $ 6,653,400
Interest Expense.................................................. 7,208,641
Depreciation and Amortization..................................... 10,412,227
Amortization of Prepaid and Deferred Revenue...................... 890,500
--------------
EBITDA............................................................ 25,164,768
Adjustments for Exceptional Items:
Management and Other Fees to Affiliates (1) ...................... 6,175,046
Non-cash Compensation Expense (2) ................................ 11,734,812
--------------
Credit Agreement EBITDA ..........................................$ 43,074,626
==============
(1) One time charge (see Notes to the financial statements)
(2) Management's participation in profits interests in Eagle Ventures LLC
(see Notes to the financial statements)
(b) Ratio of Total Debt to Total Capitalization was calculated as debt divided
by capitalization (debt plus stockholders' equity).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The following is a discussion of the Company's financial condition and
results of operation for the period from January 26, 2005 (inception) to
December 31, 2005. This section should be read in conjunction with the
consolidated financial statements included elsewhere in this report and the
notes to those financial statements.
This discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended and the Private Securities
Litigation Reform Act of 1995 and are intended to be covered by the safe harbor
provided for under these sections. These statements may include words such as
"believe," "estimate," "project," "intend," "expect," "plan," "anticipate," and
similar expressions in connection with any discussion of the timing or nature of
future operating or financial performance or other events. Forward looking
statements reflect management's current expectations and observations with
respect to future events and financial performance. Where we express an
expectation or belief as to future events or results, such expectation or belief
is expressed in good faith and believed to have a reasonable basis. However, our
forward-looking statements are subject to risks, uncertainties, and other
factors, which could cause actual results to differ materially from future
results expressed, projected, or implied by those forward-looking statements.
The principal factors that affect our financial position, results of operations
and cash flows include, charter market rates, which have recently increased to
historic highs, and periods of charter hire, vessel operating expenses and
voyage costs, which are incurred primarily in U.S. dollars, depreciation
expenses, which are a function of the cost of our vessels, significant vessel
improvement costs and our vessels' estimated useful lives, and financing costs
related to our indebtedness. Our actual results may differ materially from those
anticipated in these forward looking statements as a result of certain factors
which could include the following: (i) changes in demand in the dry bulk market,
including, without limitation, changes in production of, or demand for,
commodities and bulk cargoes, generally or in particular regions; (ii) greater
than anticipated levels of dry bulk vessel new building orders or lower than
anticipated rates of dry bulk vessel scrapping; (iii) changes in rules and
regulations applicable to the dry bulk industry, including, without limitation,
legislation adopted by international bodies or organizations such as the
International Maritime Organization and the European Union or by individual
countries; (iv) actions taken by regulatory authorities; (v) changes in trading
patterns significantly impacting overall dry bulk tonnage requirements; (vi)
changes in the typical seasonal variations in dry bulk charter rates; (vii)
changes in the cost of other modes of bulk commodity transportation; (viii)
changes in general domestic and international political conditions; (ix) changes
in the condition of the Company's vessels or applicable maintenance or
regulatory standards (which may affect, among other things, our anticipated dry
docking costs); (x) and other factors listed from time to time in our filings
with the Securities and Exchange Commission, including, without limitation, our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission. This discussion also includes statistical data regarding world dry
bulk fleet and orderbook and fleet age. We generated some of these data
internally, and some were obtained from independent industry publications and
reports that we believe to be reliable sources. We have not independently
verified these data nor sought the consent of any organizations to refer to
their reports in this annual report. We disclaim any intent or obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
Overview
- --------
We are Eagle Bulk Shipping Inc., a Marshall Islands corporation
headquartered in New York City. We are the largest U.S. based owner of Handymax
dry bulk vessels. Handymax dry bulk vessels range in size from 35,000 to 60,000
deadweight tons, or dwt, and transport a broad range of major and minor bulk
cargoes, including iron ore, coal, grain, cement and fertilizer, along worldwide
shipping routes. As of December 31, 2005, we own and operate a modern fleet of
13 Handymax dry bulk vessels that we have purchased from unrelated third
parties.
We are focused on maintaining a high quality fleet that is
concentrated primarily in one vessel type - Handymax dry bulk carriers and its
sub-category of Supramax vessels which are Handymax vessels ranging in size from
50,000 to 60,000 dwt. Nine of the 13 vessels in our operating fleet are classed
as Supramax dry bulk vessels. These vessels have the cargo loading and unloading
flexibility of on-board cranes while offering cargo carrying capacities
approaching that of Panamax dry bulk vessels, which range in size from 60,000 to
100,000 dwt and must rely on port facilities to load and offload their cargoes.
We believe that the cargo handling flexibility and cargo carrying capacity of
the Supramax class vessels make them attractive to potential charterers. The 13
vessels in our operating fleet have a combined carrying capacity of 643,980 dwt
and an average age of only 6 years, as compared to an average age for the world
Handymax dry bulk fleet of over 15 years.
Our financial performance in 2005 and currently, in 2006, is based on
the following key elements of our business strategy:
(1) concentration in one vessel category: Handymax dry bulk vessels,
which offer size, operational and geographical advantages (over
Panamax and Capesize vessels).
(2) our strategy is to charter our vessels primarily pursuant to one-
to three-year time charters to allow us to take advantage of the
stable cash flow and high utilization rates that are associated
with medium to long-term time charters. Reliance on the spot
market contributes to fluctuations in revenue, cash flow, and net
income. On the other hand, time charters provide a shipping
company with a predictable level of revenues. We have entered
into time charters for all of our vessels which range in length
from one to three years and provide for fixed semi-monthly
payments in advance. This strategy is effective in strong and
weak dry bulk markets, giving us security and predictability of
cashflows when we look at the volatility of the shipping markets,
(3) maintain high quality vessels and improve standards of operation
through improved environmental procedures, crew training and
maintenance and repair procedures, and
(4) maintain a balance between purchasing vessels as market
conditions and opportunities arise and maintaining prudent
financial ratios (e.g. leverage ratio)
The following are several significant items that have occurred during 2005:
o We incorporated on March 23, 2005 as a Marshall Islands corporation
headquartered in New York City.
o In April 2005, we acquired the vessels CARDINAL, CONDOR, FALCON,
HARRIER, HAWK I, and SHIKRA.
o In May 2005, we acquired the vessel KITE.
o In June 2005, we acquired the vessel GRIFFON and PEREGRINE.
o On June 23, 2005, we completed our initial public offering by selling
14,400,000 shares of common stock at $14.00 per share.
o In July 2005, we acquired the vessel SPARROW.
o In August 2005, we acquired the vessel OSPREY I.
o On October 28, 2005, we sold 6,000,000 shares of our common stock in a
follow-on public offering at a price of $14.50 per share.
o In October 2005, we acquired the vessel MERLIN.
o In December 2005, we acquired the vessel HERON.
We have employed all of our vessels on time charters for periods
ranging from one to three years. The following table represents certain
information about the Company's vessel acquisition and revenue earning charters:
- ------------------------------------------------------------------------------------------------------------
Daily Time
Delivered to Charter Hire
Vessel Vessel Acquired Charterer Time Charter Expiration (1) Rate
------ --------------- ------------ --------------------------- -------------
Cardinal........ April 18, 2005 April 19, 2005 March 2007 to June 2007 $26,500
Condor.......... April 29, 2005 April 30, 2005 November 2006 to March 2007 $24,000
Falcon.......... April 21, 2005 April 22, 2005 February 2008 to June 2008 $20,950
Griffon (2)..... June 1, 2005 June 3, 2005 February 2006 $28,000
Harrier......... April 19, 2005 April 21, 2005 March 2007 to June 2007 $23,750
Hawk I.......... April 26, 2005 April 28, 2005 March 2007 to June 2007 $23,750
Heron........... December 1, 2005 December 11, 2005 November 2007 to February 2008 $24,000
Kite............ May 9, 2005 May 10, 2005 March 2006 to May 2006 $25,000
Merlin.......... October 26, 2005 October 26, 2005 October 2007 to December 2007 $24,000
Osprey I (3)... August 31, 2005 August 31, 2005 July 2008 to November 2008 $21,000
Peregrine....... June 30, 2005 July 1, 2005 October 2006 to January 2007 $24,000
Shikra.......... April 29, 2005 April 30, 2005 July 2006 to November 2006 $22,000
Sparrow......... July 19, 2005 July 20, 2005 November 2006 to Feb 2007 $22,500
- ------------------------------------------------------------------------------------------------------------
(1) The date range provided represents the earliest and latest date on
which the charterer may redeliver the vessel to the Company upon the
termination of the charter.
(2) Upon completion of the charter in March 2006, the GRIFFON has
commenced a new charter at $13,550 per day until January 2007 to March
2007.
(3) The charterer of the OSPREY I has an option to extend the charter
period by up to 26 months at a daily time charter rate of $25,000.
Market Overview
- ---------------
The international shipping industry is highly competitive and
fragmented with many market participants. There are approximately 6,100 drybulk
carriers of over 10,000 dwt aggregating approximately 350 million dwt, and the
ownership of these vessels is divided among approximately 1,400 mainly private
independent dry bulk vessel owners with no one shipping group owning or
controlling more than 5.0% of the world bulker fleet. We primarily compete with
other owners of dry bulk vessels in the Handymax and Handysize class and Panamax
class sectors that are mainly privately owned fleets.
Competition in virtually all bulk trades is intense and based
primarily on supply and demand. Such demand is a function of world economic
conditions and the consequent requirement for commodities, production and
consumption patterns, as well as events which interrupt production, trade routes
and consumption. We compete for charters on the basis of price, vessel location,
size, age and condition of the vessel, as well as on our reputation as an owner
and operator. Increasingly, major customers are demonstrating a preference for
modern vessels based on concerns about the environmental and operational risks
associated with older vessels. Consequently, owners of large modern fleets have
gained a competitive advantage over owners of older fleets.
Our strategy is to concentrate in one vessel category of the dry bulk
segment of the shipping industry - the Handymax sector. Handymax dry bulk
vessels range in size from 35,000 to 60,000 dwt. Within the Handymax sector, the
industry has migrated to a larger size of vessel class called the Surpamax class
of dry bulk vessels which range in size from 50,000 dwt to 60,000 dwt. vessel.
These vessels have the cargo loading and unloading flexibility of on-board
cranes while offering cargo carrying capacities approaching that of Panamax dry
bulk vessels, which range in size from 60,000 to 100,000 dwt and must rely on
port facilities to load and offload their cargoes. We believe that the cargo
handling flexibility and cargo carrying capacity of the Supramax class vessels
make them attractive to potential charterers. Nine of the 13 vessels in our
operating fleet are classed as Supramax vessels.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
The supply of dry bulk vessels depends primarily on the level of the
orderbook, the fleet age profile, and the operating efficiency of the existing
fleet. As of January 2006, 31% of the world Handymax fleet is 20 years or older.
The 13 Handymax vessels in our operating fleet have an average age of only 6
years as of December 31, 2005, compared to an average age for the world Handymax
dry bulk fleet of over 15 years. The Handymax newbuilding orderbook currently
stands at 16% of the world Handymax fleet. The number of Handymax vessels over
20 years is double the orderbook.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
The Handymax Market
The dry bulk charter market was very strong in the first half of 2005,
and the average TCE for Handymax vessels was the highest ever. A primary driver
was sustained demand in East Asia led by continuing strong demand for
commodities in China and increasingly India. Demand for vessels was further
boosted by port congestion and shifts in trade patterns which increased
distances or tonne-miles. However, during the second half of 2005, charter rates
eased considerably from their all-time highs as the inventory build-up of
commodities at consuming economies declined along with an easing of port
congestion.
Lack of Historical Operating Data for Vessels Before their Acquisition
- ----------------------------------------------------------------------
Consistent with shipping industry practice, other than inspection of
the physical condition of the vessels and examinations of classification society
records, there is no historical financial due diligence process when we acquire
vessels. Accordingly, we do not obtain the historical operating data for the
vessels from the sellers because that information is not material to our
decision to make acquisitions, nor do we believe it would be helpful to
potential investors in our common stock in assessing our business or
profitability. Most vessels are sold under a standardized agreement, which,
among other things, provides the buyer with the right to inspect the vessel and
the vessel's classification society records. The standard agreement does not
give the buyer the right to inspect, or receive copies of, the historical
operating data of the vessel. Prior to the delivery of a purchased vessel, the
seller typically removes from the vessel all records, including past financial
records and accounts related to the vessel. In addition, the technical
management agreement between the seller's technical manager and the seller is
automatically terminated and the vessel's trading certificates are revoked by
its flag state following a change in ownership.
Consistent with shipping industry practice, we treat the acquisition
of a vessel (whether acquired with or without charter) as the acquisition of an
asset rather than a business. Although vessels are generally acquired free of
charter, 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
delivered to the buyer free of charter, and it is rare in the shipping industry
for the last charterer of the vessel in the hands of the seller to continue as
the first charterer of the vessel in the hands of the buyer. In most cases, when
a vessel is under time charter and the buyer wishes to assume that charter, the
vessel cannot be acquired without the charterer's consent and the buyer's
entering into a separate direct agreement with the charterer to assume the
charter. The purchase of a vessel itself does not transfer the charter, because
it is a separate service agreement between the vessel owner and the charterer.
Critical Accounting Policies
- ----------------------------
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of those financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.
Critical accounting policies are those that reflect significant
judgments of uncertainties and potentially result in materially different
results under different assumptions and conditions. We have described below what
we believe are our most critical accounting policies, because they generally
involve a comparatively higher degree of judgment in their application. For a
description of all our significant accounting policies, see Note 2 to our
consolidated financial statements included herein.
Revenue Recognition
We currently generate all of our revenue from time charters. Time
charters are for a specific period of time at a specific rate per day or month,
and are generally not as complex or as subjective as voyage charters. If we had
a vessel on a voyage charter, or a charter in the spot market, we would agree to
provide a vessel for the transport of specific goods between specific ports in
return for the payment of an agreed upon freight per ton of cargo or,
alternatively, for a specified total amount. All operating costs would be for
our account. Voyage expenses, such as fuel and port charges, are recognized
ratably over the duration of the voyage and, therefore, are allocated between
reporting periods based on the relative transit time in each period. Estimated
losses under a voyage charter are provided for in full at the time such losses
become evident.
Revenue recognition for voyage charters may be calculated on either a
load-to-load basis or on a discharge-to-discharge basis. Our accounting policy
for recognition of voyage freight for vessels operating on voyage charters would
be on a discharge-to-discharge basis. Under this method, voyage revenue is
recognized evenly over the period from the departure of a vessel from its prior
discharge port to departure from the next discharge port. We believe that the
discharge-to-discharge method is preferable because it eliminates the
uncertainty associated with the location of the next load port. This method is
the predominant one used by the industry.
Vessel Lives and Impairment
The carrying value of each of our vessels represents its original cost
at the time it was delivered or purchased less depreciation. We depreciate our
dry bulk vessels on a straight-line basis over their estimated useful lives,
estimated to be 28 years from date of initial delivery from the shipyard to the
original owner. Depreciation is based on cost less the estimated residual
salvage value. Salvage, or scrap, value is based upon a vessel's lightweight
tonnage ("lwt") multiplied by a scrap rate. We use a scrap rate of $150 per lwt,
which we believe is common in the dry bulk shipping industry, to compute each
vessel's salvage value. An increase in the useful life of a dry bulk vessel or
in its salvage value would have the effect of decreasing the annual depreciation
charge and extending it into later periods. A decrease in the useful life of a
dry bulk vessel or in its salvage value would have the effect of increasing the
annual depreciation charge. However, when regulations place limitations over the
ability of a vessel to trade on a worldwide basis, the vessel's useful life is
adjusted to end at the date such regulations become effective. The estimated
scrap value is used in the computation of depreciation expense and
recoverability of the carrying value of each vessel when evaluating for
impairment of vessels. Management's estimates for salvage values may differ from
actual results.
The carrying values of the Company's vessels may not represent their
fair market value at any point in time since the market prices of second-hand
vessels tend to fluctuate with changes in charter rates and the cost of
newbuildings. Historically, both charter rates and vessel values tend to be
cyclical. We evaluate the carrying amounts and periods over which long-lived
assets are depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flow for each vessel and
compare it to the vessel carrying value. This assessment is made at the
individual vessel level since separately identifiable cash flow information for
each vessel is available. In developing estimates of future cash flows, the
Company must make assumptions about future charter rates, ship operating
expenses, and the estimated remaining useful lives of the vessels. These
assumptions are based on historical trends as well as future expectations.
Although management believes that the assumptions used to evaluate potential
impairment are reasonable and appropriate, such assumptions are highly
subjective. In the event that an impairment were to occur, we would determine
the fair value of the related asset and record a charge to operations calculated
by comparing the asset's carrying value to the estimated fair value. We estimate
fair value primarily through the use of third party valuations performed on an
individual vessel basis.
Deferred Drydock Cost
There are three methods that are used by the shipping industry to
account for drydockings; first is the prepaid method where drydock costs are
capitalized when incurred and amortized over the period to the next scheduled
drydock; second, is the accrual method where the estimated cost of the next
scheduled drydock is accrued over the period preceding such drydock, and lastly;
expensing drydocking costs in the period it is incurred. We use the prepaid
method of accounting for drydock expenses. Under the prepaid method, drydock
expenses are capitalized and amortized on a straight-line basis until the next
drydock, which we estimate to be a period of two to three years. We believe the
prepaid method better matches costs with revenue and minimizes any significant
changes in estimates associated with the accrual method, including the disposal
of vessels before a drydock which has been accrued before it is performed. We
use judgment when estimating the period between drydocks performed, which can
result in adjustments to the estimated amortization of drydock expense. If the
vessel is disposed of before the next drydock, the remaining balance in prepaid
drydock is written-off to the gain or loss upon disposal of vessels in the
period when contracted. We expect that our vessels will be required to be
drydocked approximately every 30 to 60 months for major repairs and maintenance
that cannot be performed while the vessels are operating. Costs capitalized as
part of the drydocking include actual costs incurred at the drydock yard and
parts and supplies used in making such repairs.
Vessel Acquisitions
Where we identify any intangible assets or liabilities associated with
the acquisition of a vessel, we record all identified tangible and intangible
assets or liabilities at fair value. Fair value is determined by reference to
market data and the amount of expected future cash flows. We value any asset or
liability arising from the market value of the time charters assumed when an
acquired vessel is delivered to us.
Where we have assumed 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 less than market charter rates, we record a
liability in Deferred Revenues 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 in Prepaid Charter
Revenue, based on the difference between the market charter rate and the
contracted charter rate for an equivalent vessel. This determination is made at
the time the vessel is delivered to us, and such assets and liabilities are
amortized to revenue over the remaining period of the charter. The determination
of the fair value of acquired assets and assumed liabilities requires us to make
significant assumptions and estimates of many variables including market charter
rates, expected future charter rates, future vessel operation expenses, the
level of utilization of our vessels and our weighted average cost of capital.
The use of different assumptions could result in a material change in the fair
value of these items, which could have a material impact on our financial
position and results of operations. In the event that the market charter rates
relating to the acquired vessels are lower than the contracted charter rates at
the time of their respective deliveries to us, our net earnings for the
remainder of the terms of the charters may be adversely affected although our
cash flows will not be so affected.
Results of Operations for the period from January 26, 2005 (inception) to
December 31, 2005
Factors Affecting Our Results of Operations
We believe that the important measures for analyzing future trends in
our results of operations consist of the following:
Period from January
26, 2005 (inception)
to December 31, 2005
--------------------
Ownership Days................................. 2,531
Available Days................................. 2,507
Operating Days................................. 2,500
Fleet Utilization.............................. 99.7%
o Ownership days: We define ownership days as the aggregate number of
days in a period during which each vessel in our fleet has been owned
by us. Ownership 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 a period.
o Available days: We define available days as the number of our
ownership days less the aggregate number of days that our vessels are
off-hire due to vessel familiarization upon acquisition, scheduled
repairs or repairs under guarantee, vessel upgrades or special surveys
and the aggregate amount of time that we spend positioning our
vessels. The shipping industry uses available days to measure the
number of days in a period during which vessels should be capable of
generating revenues.
o Operating days: We define operating days as the number of our
available days in a period less the aggregate number of days that our
vessels are off-hire due to any reason, including unforeseen
circumstances. The shipping industry uses operating days to measure
the aggregate number of days in a period during which vessels actually
generate revenues.
o Fleet utilization: We calculate fleet utilization by dividing the
number of our operating days during a period by the number of our
available days during the 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 other than scheduled repairs or
repairs under guarantee, vessel upgrades, special surveys or vessel
positioning.
o TCE rates: We define TCE rates as our voyage and time charter revenues
less voyage expenses during a period divided by the number of our
available days during the period, which is consistent with industry
standards. TCE rate is a standard shipping industry performance
measure used primarily to compare daily earnings generated by vessels
on time charters with daily earnings generated by vessels on voyage
charters, because charter hire rates for vessels on voyage charters
are generally not expressed in per day amounts while charter hire
rates for vessels on time charters generally are expressed in such
amounts.
Voyage and Time Charter Revenue
Shipping revenues are highly sensitive to patterns of supply and
demand for vessels of the size and design configurations owned and operated by a
Company and the trades in which those vessels operate. In the drybulk sector of
the shipping industry, rates for the transportation of drybulk cargoes such as
ores, grains, steel, fertilizers, and similar commodities, are determined by
market forces such as the supply and demand for such commodities, the distance
that cargoes must be transported, and the number of vessels expected to be
available at the time such cargoes need to be transported. The demand for
shipments then is significantly affected by the state of the economy globally
and in discrete geographical areas. The number of vessels is affected by
newbuilding deliveries and by the removal of existing vessels from service,
principally because of scrapping.
Revenues are also affected by the mix of charters between spot (voyage
charter) and long-term (time charter). Because shipping revenues and voyage
expenses are significantly affected by the mix between voyage charters and time
charters, we manage our vessels based on time charter equivalent ("TCE")
revenues. TCE revenue comprises revenue from vessels operating on time charters,
or TC revenue, and voyage revenue less voyage expenses from vessels operating on
voyage charters in the spot market. TCE revenue serves as a measure of analyzing
fluctuations between financial periods and as a method of equating revenue
generated from a voyage charter to time charter revenue. TCE revenue also serves
as an industry standard for measuring revenue and comparing results between
geographical regions and among competitors.
Our economic decisions are based on anticipated TCE rates and we
evaluate financial performance based on TCE rates achieved. Our revenues are
driven primarily by the number of vessels in our fleet, the number of days
during which our vessels operate and the amount of the daily charter hire rates
that our vessels earn under charters, which, in turn, are affected by a number
of factors, including:
o the duration of our charters;
o our decisions relating to vessel acquisitions and disposals;
o the amount of time that we spend positioning our vessels;
o the amount of time that our vessels spend in dry-dock undergoing
repairs;
o maintenance and upgrade work;
o the age, condition and specifications of our vessels;
o levels of supply and demand in the dry bulk shipping industry; and
o other factors affecting spot market charter rates for dry bulk
carriers.
All our revenues for the period from inception on January 26, 2005 to
December 31, 2005 were earned from time charters hence our TCE revenue is equal
to the TC revenue. As is common in the shipping industry, we pay commissions
ranging from 1.25% to 6.25% of the total daily charter hire rate of each charter
to unaffiliated ship brokers and in-house brokers associated with the
charterers, depending on the number of brokers involved with arranging the
charter.
Net revenues, for the period since inception on January 26, 2005 to
December 31, 2005, of $56,066,058 includes time charter revenues of $59,997,448
and deductions for brokerage commissions of $3,040,890 and $890,500 in
amortization of net prepaid and deferred charter revenue.
Voyage Expenses
To the extent that we employ our vessels on voyage charters, we will
incur expenses that include port and canal charges, bunker (fuel oil) expenses
and commissions, as these expenses are borne by the vessel owner on voyage
charters. Port and canal charges and bunker expenses primarily increase in
periods during which vessels are employed on voyage charters because these
expenses are for the account of the vessels. Currently all our vessels are
employed under time charters that require the charterer to bear all of those
expenses, hence we expect that any port and canal charges and bunker expenses,
if incurred, will represent a relatively minor portion of our vessels' overall
expenses.
Vessel Expenses
For the period since inception on January 26, 2005 to December 31,
2005, total vessel expenses incurred amounted to $11,052,429. These expenses
included $8,156,481 in vessel operating costs, $1,678,695 in delivery and
pre-operating costs associated with the acquisition of the 13 vessels of our
fleet, including providing these newly acquired vessels with initial provisions
and stores, $692,605 in technical management fees, and $524,648 in costs
associated with vessel onboard inventory stocks.
Vessel operating expenses include crew wages and related costs, the
cost of insurance, expenses relating to repairs and maintenance, the cost of
spares and consumable stores, tonnage taxes, other miscellaneous expenses, and
technical management fees.
Insurance expense varies with overall insurance market conditions as
well as the insured's loss record, level of insurance and desired coverage. The
main insurance expenses include Protection and Indemnity ("P & I") insurance
(i.e. liability insurance) costs, and hull and machinery insurance (i.e. asset
insurance) costs. Certain other insurances, such as basic war risk premiums
based on voyages into designated war risk areas are often for the account of the
charterers.
With regard to vessel operating expenses, we have entered into
technical management agreements for each of our vessels with V. Ships Management
Ltd, our independent technical manager. In conjunction with our management, V.
Ships has established an operating expense budget for each vessel and performs
the technical management of our vessels. All deviations from the budgeted
amounts are for our account.
For the period since commencement of vessel operations in April 2005
to December 31, 2005, we paid our technical manager, V. Ships, a fixed
management fee of $8,333 per month for each vessel in our operating fleet in
respect of which it provides technical management services. These fees are
included in Vessel Operating Expenses. Technical management services include
managing day-to-day vessel operations, performing general vessel maintenance,
ensuring regulatory and classification society compliance, supervising the
maintenance and general efficiency of vessels, arranging the hire of qualified
officers and crew, arranging dry-docking and repairs, purchasing stores,
supplies, spare parts and new equipment, appointing supervisors and technical
consultants and providing technical support.
Our vessel operating expenses, which generally represent costs under
the vessel operating budgets, cost of insurance and vessel registry and other
regulatory fees, will increase with the enlargement of our fleet. Other factors
beyond our control, some of which may affect the shipping industry in general,
may also cause these expenses to increase, including, for instance, developments
relating to market prices for insurance and petroleum-based lubricants and
supplies.
Depreciation and Amortization
The cost of our vessels is depreciated on a straight-line basis over
the expected useful life of each vessel. Depreciation is based on the cost of
the vessel less its estimated residual value. We estimate the useful life of our
vessels to be 28 years from the date of initial delivery from the shipyard to
the original owner. Furthermore, we estimate the residual values of our vessels
to be $150 per lightweight ton, which we believe is common in the dry bulk
shipping industry. Our depreciation charges will increase as our fleet is
enlarged which will also lead to an increase of ownership days. For the period
since inception on January 26, 2005 to December 31, 2005, total depreciation and
amortization expense was $10,412,227 of which amount, $10,384,247 relates to
depreciation and $27,980 relates to the amortization of deferred drydocking
costs.
Amortization of deferred financing costs for the period since
inception on January 26, 2005 to December 31, 2005 is included in interest
expense. These amortization costs include a write-off of $1,130,712 relating to
deferred financing fees associated with our term loan facility which was
entirely repaid upon refinancing with our revolving credit facility in July
2005, and $98,065 relating to amortization of financing costs associated with
our revolving credit facility.
General and Administrative Expenses
General and Administrative Expenses for the period since inception on
January 26, 2005 to December 31, 2005 amounted to $3,491,330. Our general and
administrative expenses include recurring administrative costs and non-recurring
formation and advisory costs. Recurring costs include our onshore vessel
administration related expenses such as legal and professional expenses and
administrative and other expenses including payroll and expenses relating to our
executive officers and office staff, office rent and expenses, directors fees,
and directors and officers insurance. For the period from inception on January
26, 2005 to December 31, 2005, recurring administrative costs amounted to
$2,681,063. Non-recurring costs include costs relating to the formation of our
company and related advisory costs. For the period from inception on January 26,
2005 to December 31, 2005, non-recurring costs amounted to $810,267. We expect
general and administrative expenses to increase as our fleet is enlarged.
Financial Advisory Fees
For the period since inception on January 26, 2005 to December 31,
2005, we have recorded an expense of $5,175,046 in connection with an investment
banking and financial advisory fee paid to Kelso & Company, L.P. ("Kelso") and
certain non-management affiliates of Eagle Ventures LLC pursuant to the
financial advisory agreement that we entered into with Kelso. This fee was
incurred in the quarter ended June 30, 2005 and was payable in connection with
Kelso assisting us in our strategic planning, obtaining debt and equity
financing and acquiring vessels. In addition, we have recorded an expense of
$1,000,000 in the quarter ended June 30, 2005 in connection with a payment made
to Kelso in order to terminate certain of our obligations under the financial
advisory agreement including our obligation to pay an annual $500,000 fee
thereunder.
Non-Cash Compensation Expense
Members of the Company's management have been awarded profits
interests (and in the future others having senior management and/or strategic
planning-type responsibilities may be awarded similar profits interests) in
Eagle Ventures LLC that may entitle such persons to an economic interest of up
to 16.7% on a fully diluted basis (assuming all profits interests were vested)
in any appreciation in the value of the assets of Eagle Ventures LLC (including
shares of the Company's common stock owned by Eagle Ventures LLC when sold). In
all, one-fourth of the profits interests are service-related and vest in equal
three-month installments over four years (the vesting of such service-related
profits interests is subject to continued employment with Eagle Ventures LLC or
its affiliates at the end of each such three-month period), and the remaining
profits interests are performance-related. Pursuant to an amendment to the Eagle
Ventures LLC limited liability company agreement, 44% of the performance-related
profits interests became fully vested upon the consummation of the Company's
initial public offering (or an economic interest in approximately 6.2% of the
appreciation of the assets of Eagle Ventures LLC on a fully diluted basis taking
into account the vesting of only such profits interests), and the remaining
portion of the performance-related profits interests will vest based on
affiliates of Kelso achieving certain multiples on their original indirect
investment in the Company, subject to an internal rate of return minimum.
Retention of the non-accelerated performance-related profits interests is
subject to continued employment with Eagle Ventures LLC or its affiliates.
The vesting of profits interests may be further accelerated in the
future by the compensation committee of Eagle Ventures LLC. These profits
interests will dilute only the interests of owners of Eagle Ventures LLC, and
will not dilute direct holders of the Company's common stock. However, the
Company's statement of operations reflects non-cash charges for compensation
related to the profits interests.
For the period from inception in January 26, 2005 to December 31,
2005, the Company recorded a non-cash compensation charge of $11.7 million. Of
that charge, approximately $9.2 million relates to the portion of the
performance-related profits interests that vested upon consummation of the
Company's initial public offering. The remaining $2.5 million non-cash
compensation charge was taken as a result of the service-related and
non-accelerated performance-related profits interests. The Company is recording
compensation charges relating to the service-related profits interests over four
years. The non-accelerated performance related profits interests vest based on
affiliates of Kelso achieving certain multiples on their original investment in
the assets of Eagle Ventures LLC through the receipt of distributions from Eagle
Ventures LLC. The vesting occurs ratably upon achieving a return on investment
ranging from two times to four times the original investment. To calculate the
non-cash compensation charge that is reflected in the Company's income statement
for the non-accelerated performance-related profits interests, the Company has
assumed that these profits interests will vest four years after their issuance.
The Company is therefore recording compensation charges relating to such profits
interests over four years.
The non-cash compensation charge will be recorded as an expense over
the estimated service period in accordance with SFAS No. 123(R). The non-cash
compensation charges will be based on the fair value of the profits interests
which will be "marked to market" at the end of each reporting period. The impact
of any changes in the estimated fair value of the profits interests will be
recorded as a change in estimate cumulative to the date of change. The impact on
the amortization of the compensation charge of any changes to the estimated
vesting periods for the performance-related profits interests will be adjusted
prospectively as a change in estimate.
On January 28, 2006, the limited liability company agreement of Eagle
Ventures LLC was amended and restated (the "Third LLC Agreement"). This provided
for the award of additional profits interests in Eagle Ventures LLC to certain
management employees and provided for certain adjustments in the manner
distributions are made by Eagle Ventures in connection with such newly awarded
profits interests. These profits interests will dilute only the interests of
owners of Eagle Ventures LLC, and will not dilute the direct holders of the
Company's common stock.
On March 8, 2006, the Third LLC Agreement was amended and restated
(the "Fourth LLC Agreement") and is included as Exhibit 10.6 to this annual
report. Pursuant to the Fourth LLC Agreement, an adjustment was made in the
schedule governing the management members' retention of service-related profits
interests upon their termination of employment with Eagle Ventures LLC or its
subsidiaries (including the Company). In addition, under the Fourth LLC
Agreement one-fourth of the service-related profits interests granted on January
28, 2006 were immediately vested and the remaining newly granted service-related
profits interests were made subject to a three-year retention schedule.
Interest and Finance Costs
Interest Expense period from inception in January 26, 2005 to December 31, 2005
consists of:
Loan Interest......................................... $4,855,054
Commitment Fees....................................... 516,588
Eagle Ventures Note Interest.......................... 608,222
Amortization of Deferred Financing Costs.............. 98,065
Write-off of Deferred Financing Costs ................ 1,130,712
----------------
Total Interest Expense................................ $7,208,641
================
At the time of our initial public offering, we had term loan
facilities with aggregate principal balances of $185,950,000 and a promissory
note in the amount of $58,730,434 issued to Eagle Ventures LLC. Concurrent with
the initial public offering, we used a portion of the net proceeds of the
offering to repay $125,950,000 of the outstanding principal balance of the term
loan facility and the promissory note in full with accrued interest of $608,222.
Subsequent to the Company's initial public offering in June 2005, we borrowed
$28,500,000 from the term loan facility to fund the balance of the purchase
price for its ninth vessel, PEREGRINE.
In July 2005, the outstanding balance of $88,500,000 under the term
loan facility was refinanced with a new ten-year $330,000,000 revolving credit
facility. We paid a facility arrangement fee of $1,200,000 which is recorded in
Interest Expense. We expect to incur interest expense and additional financing
costs under our new credit facility in connection with debt incurred to finance
future vessel acquisitions.
From July 2005 to October 2005, we borrowed $100,000,000 from the
revolving credit facility to fund the following vessel purchases: $30,600,000 to
fund the balance of the purchase price of our tenth vessel, SPARROW; $30,900,000
to fund the balance of the purchase price of our eleventh vessel, OSPREY I;
$7,000,000 to fund the deposits representing the 10% of the purchase price for
the twelfth and thirteenth vessels, MERLIN and HERON; $31,500,000 to fund the
balance of the purchase price of the MERLIN.
In October 2005, we used a portion of the proceeds from our follow-on
equity offering to repay $48,500,000 of the principal balance under the from the
revolving credit facility.
As of December 31, 2005, our debt consisted of $140,000,000 in
borrowings under the revolving credit facility.
Under the terms of the revolving credit agreement, the facility will
be available in full for five years and there are no principal repayment
obligations for the first five years. Over the remaining period of five years,
the amount available under the facility will reduce in semi-annual amounts of
$20,500,000 with a final reduction of $125,000,000 occurring simultaneously with
the last semi-annual reduction. The credit facility bears interest at LIBOR plus
a margin of 0.95%. The Company must also pay a commitment fee of 0.4% per annum
on the unused portion of the revolving credit facility on a quarterly basis.
From the inception of the Company's debt through December 31, 2005,
interest rates ranged from 4.10% to 5.49%, including a margin of 0.95% over
LIBOR. The weighted average effective interest rate was 4.69%.
Interest Rate Swaps
We have entered into interest rate swaps to effectively convert a
portion of our debt from a floating to a fixed-rate basis. The swaps are
designated and qualify as cash flow hedges. In September 2005, we entered into
interest rate swap contracts for notional amounts of $100,000,000 and
$30,000,000. These contracts mature in September 2010. Exclusive of a margin of
0.95%, the Company will pay fixed-rate interest of 4.22% and 4.54% respectively,
and receive floating-rate interest amounts based on three month LIBOR settings
(for a term equal to the swaps' reset periods). We record the fair value of the
interest rate swap as an asset or liability in our financial statements. The
effective portion of the swap is recorded in accumulated other comprehensive
income. Accordingly, $2,647,077 has been recorded in Other Assets in our
financial statements as of December 31, 2005.
EBITDA
EBITDA represents operating earnings before extraordinary items,
depreciation and amortization, interest expense, and income taxes, if any.
EBITDA is included because it is used by certain investors to measure a
company's financial performance. EBITDA is not an item recognized by GAAP and
should not be considered a substitute for net income, cash flow from operating
activities and other operations or cash flow statement data prepared in
accordance with accounting principles generally accepted in the United States or
as a measure of profitability or liquidity. EBITDA is presented to provide
additional information with respect to the Company's ability to satisfy its
obligations including debt service, capital expenditures, and working capital
requirements. While EBITDA is frequently used as a measure of operating results
and the ability to meet debt service requirements, the definition of EBITDA used
here may not be comparable to that used by other companies due to differences in
methods of calculation.
Our revolving credit facility permits us to pay dividends in amounts
up to our earnings before extraordinary or exceptional items, interest, taxes,
depreciation and amortization (Credit Agreement EBITDA), less the aggregate
amount of interest incurred and net amounts payable under interest rate hedging
agreements during the relevant period and an agreed upon reserve for
dry-docking. Therefore, we believe that this non-GAAP measure is important for
our investors as it reflects our ability to pay dividends. The following table
is a reconciliation of net income, as reflected in the consolidated statements
of operations, to the Credit Agreement EBITDA for the period from inception on
January 26, 2005 to December 31, 2005:
Period from January 26,
2005 (inception) to
December 31, 2005
-----------------
Net Income......................................... $ 6,653,400
Interest Expense................................... 7,208,641
Depreciation and Amortization...................... 10,412,227
Amortization of Prepaid and Deferred Revenue....... 890,500
---------------------------
EBITDA............................................. 25,164,768
Adjustments for Exceptional Items:
Management and Other Fees to Affiliates (1) ....... 6,175,046
Non-cash Compensation Expense (2) ................. 11,734,812
---------------------------
Credit Agreement EBITDA ........................... $ 43,074,626
===========================
- ----------
(1) One time charge (see Notes to our financial statements)
(2) Management's participation in profits interests in Eagle Ventures LLC (see
Notes to our financial statements)
Effects of Inflation
The Company does not believe that inflation has had or is likely, in
the foreseeable future, to have a significant impact on vessel operating
expenses, drydocking expenses and general and administrative expenses.
Liquidity and Capital Resources
Prior to our initial public offering, we funded our initial capital
requirements with equity contributions, borrowings from Eagle Ventures and
borrowings under our term loan facility. Eagle Ventures had provided us with
$40,843,662 in equity contributions, $58,730,404 in debt financing in the form
of a promissory note, and we borrowed a total of $214,450,000 under our term
loan facility in connection with vessel acquisitions.
Our initial public offering on June 23, 2005 raised a total of
$201,600,000, providing us with net proceeds of $186,529,290. We used the net
proceeds from that offering primarily to repay the Eagle Ventures' promissory
note in full along with accrued interest of $608,222, to repay $125,950,000 of
outstanding principal under the existing term loan facility and to pay a
$1,000,000 one time fee to Kelso to terminate certain of our obligations under a
financial advisory agreement with Kelso & Company, L.P. We paid Kelso a
$5,000,000 financial advisory fee and paid $175,046 to certain non-management
affiliates of Eagle Ventures LLC pursuant to our financial advisory agreement
with Kelso.
In connection with our initial public offering, in July 2005, we
entered into a $330,000,000 revolving credit facility to refinance the remaining
portion of our outstanding indebtedness under the term loan facility, fund
vessel acquisitions and provide funds for working capital purposes. In addition
to the refinanced portion of $88,500,000, we borrowed an additional $100,000,000
under this revolving credit facility to finance the acquisition of four vessels
in 2005.
In connection with our follow-on public offering on October 28 2005,
which raised a total of $87,000,000 providing us with net proceeds of
$82,045,773, we used $48,500,000 of the net proceeds to repay part of the
outstanding principal under the revolving credit facility and $31,500,000 to pay
the balance of the purchase price of the vessel HERON. As of December 31, 2005
we have a total outstanding debt of $140,000,000 under the revolving credit
facility. As of December 31, 2005, the available undrawn amount under our
revolving credit facility was $190,000,000.
As of December 31, 2005, our cash balance was $24,526,528. In
addition, $6,500,000 in cash deposits are maintained with our lender for loan
compliance purposes and this amount is recorded in Restricted Cash in our
financial statements as of December 31, 2005. Also recorded in Restricted Cash
is an amount of $124,616 which is collateralizing a letter of credit relating to
our office lease. We anticipate that internally generated cash flow and, if
necessary, borrowings under our new credit facility will be sufficient to fund
the operations of our fleet, including our working capital requirements, for at
least the next 12 months. We have the ability to borrow up to $10,000,000 under
our credit facility for working capital purposes.
It is our intention to fund our future acquisition related capital
requirements initially through borrowings under our new credit facility and to
repay all or a portion of such borrowings from time to time with the net
proceeds of equity issuances. We believe that funds will be available to support
our growth strategy, which involves the acquisition of additional vessels, and
will allow us to pay dividends to our stockholders as contemplated by our
dividend policy.
Dividends
Our policy is to declare quarterly dividends to stockholders in
February, April, July and October in amounts that are substantially equal to our
available cash from operations during the previous quarter less any cash
reserves for drydocking and working capital.
Our revolving credit facility permits us to pay quarterly dividends in
amounts up to our quarterly earnings before extraordinary or exceptional items,
interest, taxes, depreciation and amortization (Credit Agreement EBITDA), less
the aggregate amount of interest incurred and net amounts payable under interest
rate hedging agreements during the relevant period and an agreed upon reserve
for drydocking for the period, provided that there is not a default or breach of
loan covenant under the credit facility and the payment of the dividends would
not result in a default or breach of a loan covenant. Depending on market
conditions in the dry bulk shipping industry and acquisition opportunities that
may arise, we may be required to obtain additional debt or equity financing
which could affect our dividend policy.
On October 31, 2005 we paid a cash dividend on our common stock of
$0.54 per share for the third quarter of 2005 to all shareholders of record as
of October 17, 2005. The aggregate amount of the cash dividend paid to our
shareholders was $14,661,000.
On January 30, 2006 the Company's Board of Directors declared a cash
dividend for the fourth quarter of 2005 of $0.57 per share which was paid on
February 24, 2006 to all shareholders of record as of February 15, 2006. The
aggregate amount of this cash dividend was $18,895,500. Since the Company did
not own the two acquired ships and receive the benefit of their revenues for the
full quarter (the Merlin delivered October 26, 2005 and the Heron delivered
December 1, 2005), it funded approximately $1,500,000 of this dividend from
excess working capital as disclosed in the Company's prospectus dated October
28, 2005 in order to pay its indicated dividend of $0.57 per share.
Sale of Common Stock
On June 23, 2005, the Company completed its initial public offering by
issuing and selling to the public 14,400,000 shares of common stock at $14.00
per share, raising gross proceeds of $201,600,000 before deduction of
underwriting discounts, commissions and expenses of $15,070,710. The Company
used $185,288,656 of the net proceeds from the offering to repay $125,950,000 of
the indebtedness under its existing loan facility and $59,338,656 owed to Eagle
Ventures under a promissory note, including accrued interest.
On October 28, 2005, the Company sold 6,000,000 shares of its common
stock in a public offering at a price of $14.50 per share, raising gross
proceeds of $87,000,000 before deduction of underwriting discounts, commissions
and expenses of $4,954,227. The sale included an over-allotment portion of
825,000 shares of which 325,000 shares were offered by our largest shareholder
Eagle Ventures LLC. We used $80,000,000 of the net proceeds from the offering to
repay $48,500,000 of our outstanding indebtedness under the revolving credit
facility, which reduced our outstanding debt to $140,000,000, and used
$31,500,000 of the net proceeds to pay the balance of the purchase price for the
HERON which was acquired in December 2005.
Revolving Credit Facility
In July 2005, we entered into a 10-year $330,000,000 revolving credit
facility. As of December 31, 2005, the outstanding indebtedness under the
revolving credit facility amounts to $140,000,000.
We are permitted to borrow up to the remaining capacity, as of
December 31, 2005, of $190,000,000 including amounts available to borrow for
working capital purposes as described below, in connection with future
acquisitions of dry bulk carriers between 25,000 dwt and 85,000 dwt that are not
older than 10 years. We are permitted to borrow up to $10,000,000 at any one
time for working capital purposes during an initial period of 18 months from the
first draw down date, after which time our ability to borrow amounts for working
capital purposes is subject to review and reapproval on an annual basis.
Under the terms of the revolving credit agreement, the facility will
be available in full for five years and there are no principal repayment
obligations for the first five years. Over the remaining period of five years,
the facility will reduce in semi-annual amounts of $20,500,000 with a final
reduction of $125,000,000 occurring simultaneously with the last semi-annual
reduction. The facility bears interest at LIBOR plus a margin of 0.95%.
We paid an arrangement fee of $1,200,000 in connection with the credit
facility. We also incur a fee of 0.4% per annum on the unused portion of the
revolving loan on a quarterly basis.
Our ability to borrow amounts under the revolving credit facility will
be subject to the satisfaction of certain customary conditions precedent and
compliance with terms and conditions included in the loan documents. In
connection with vessel acquisitions, amounts borrowed may not exceed 60% of the
value of the vessels securing our obligations under the credit facility. Our
ability to borrow such amounts, in each case, is subject to our lender's
approval of the vessel acquisition. Our lender's approval will be based on the
lender's satisfaction of our ability to raise additional capital through equity
issuances in amounts acceptable to our lender and the proposed employment of the
vessel to be acquired.
Our obligations under the revolving credit facility are secured by a
first priority mortgage on each of the vessels in our fleet and such other
vessels that we may from time to time include with the approval of our lender,
and by a first assignment of all freights, earnings, insurances and requisition
compensation relating to our vessels. The facility also limits our ability to
create liens on our assets in favor of other parties. We may grant additional
securities from time to time in the future.
The revolving credit facility, as amended, contains financial
covenants requiring us, among other things, to ensure that:
o the aggregate market value of the vessels in our fleet that
secure our obligations under the revolving credit facility, as
determined by an independent shipbroker on a charter free basis,
at all times exceeds 130% of the aggregate principal amount of
debt outstanding under the new credit facility and the notional
or actual cost of terminating any related hedging arrangements;
o to the extent our debt during any accounting period is less than
$200,000,000, our total assets minus our debt will not be less
than $100,000,000; to the extent our debt during any accounting
period is greater than $200,000,000, our total assets minus our
debt will not be less than $150,000,000;
o our EBITDA, as defined in the credit agreement, will at all times
be not less than 2x the aggregate amount of interest incurred and
net amounts payable under interest rate hedging arrangements
during the relevant period; and
o we maintain with the lender $500,000 per vessel in addition to an
amount adequate to meet anticipated capital expenditures for the
vessel over a 12 month period.
For the purposes of the revolving credit facility, our "total assets"
includes our tangible fixed assets and our current assets, as set forth in our
consolidated financial statements, except that the value of any vessels in our
fleet that secure our obligations under the facility are measured by their fair
market value rather than their carrying value on our consolidated balance sheet.
The revolving credit facility permits us to pay dividends in amounts
up to our earnings before extraordinary or exceptional items, interest, taxes,
depreciation and amortization (EBITDA), less the aggregate amount of interest
incurred and net amounts payable under interest rate hedging agreements during
the relevant period and an agreed upon reserve for dry-docking, provided that
there is not a default or breach of loan covenant under the credit facility and
the payment of the dividends would not result in a default or breach of a loan
covenant.
Contractual Obligations
The following table sets forth our expected contractual obligations and their
maturity dates as of December 31, 2005:
Within One to Three to More than
One Year Three Years Five Years Five years Total
-------- ----------- ---------- ---------- -----
(in thousands of U.S. dollars)
Bank Loans ............................ $-- $-- $-- $140,000 $140,000
Interest and borrowing fees (1) ........ 8,239 16,500 16,559 38,523 79,821
Office lease (2)........................ 191 511 544 69 1,315
-------------------------------------------------------------------------
Total................................... $8,430 $17,011 $17,113 $178,592 $221,136
=========================================================================
- ----------
(1) The Company is a party to floating-to-fixed interest rate swaps covering
notional amounts of $100,000,000 and $30,000,000 at December 31, 2005 that
effectively convert the Company's interest rate exposure from a floating
rate based on LIBOR to a fixed rate of 4.22% and 4.54% respectively, plus a
margin of 0.95%. The interest obligations for floating rate debt
($10,000,000 as of December 31, 2005) have been estimated based on the
fixed rates stated in related floating-to-fixed interest rate swaps, where
applicable, or the LIBOR rate at December 31, 2005.
(2) We occupy office space on a 63-month lease.
Capital Expenditures
We make capital expenditures from time to time in connection with our
vessel acquisitions. Our vessel acquisitions in 2005 consist of 13 Handymax dry
bulk vessels with a total cost of $427,144,953. We funded the acquisitions of
our vessels with a combination of equity contributions that we received from
Eagle Ventures, borrowings under our credit facilities, debt incurred under a
promissory note that we issued to Eagle Ventures, proceeds from our initial
public offering and proceeds from our follow-on public offering.
In addition to the vessel acquisitions, we have spent $820,904 on
capital improvements to some of our vessels. These improvements are expected to
enhance the revenue earning capabilities of these vessels.
In addition to acquisitions that we may undertake in future periods,
other major capital expenditures include funding the Company's maintenance
program of regularly scheduled drydocking necessary to preserve the quality of
our vessels as well as to comply with international shipping standards and
environmental laws and regulations. Although the Company has some flexibility
regarding the timing of its dry docking, the costs are relatively predictable.
Management anticipates that vessels are to be drydocked every two and a half
years. Funding of these requirements is anticipated to be met with cash from
operations. We anticipate that this process of recertification will require us
to reposition these vessels from a discharge port to shipyard facilities, which
will reduce our available days and operating days during that period.
In 2005, we have spent $421,682 on vessel drydockings and this amount
will be amortized to expense on a straight-line basis over the period through
the date the next drydocking is scheduled to become due. The following table
represents certain information about the estimated costs for anticipated vessel
drydockings in 2006 and 2007 along with the allocation of anticipated off-hire
days:
Quarter Ending Off-hire Days(1) Projected Costs(2)
- -------------- ---------------- ------------------
March 31, 2006 ....................... 60 $1.40 million
June 30, 2006......................... -- --
September 30, 2006.................... 15 $0.35 million
December 31, 2006..................... 15 $0.35 million
March 31, 2007........................ 30 $0.70 million
June 30, 2007......................... -- --
September 30, 2007.................... 30 $0.70 million
December 31, 2007..................... 15 $0.35 million
- ----------
(1) Actual length of drydocking will vary based on the condition of the vessel,
yard schedules and other factors.
(2) Actual costs vary based on various factors, including where the drydockings
are actually performed.
Contracted Time Charter Revenue
We have time charter contracts currently for all our vessels. The
contracted time charter revenue schedule, as shown below, reduces future
contracted revenue for any estimated off-hire days relating to dry-docks.
The following table represents certain information about the Company's
revenue earning charters:
Daily Time
Delivered Charter
Vessel to Charterer Time Charter Expiration (1) Hire Rate
- ------ ------------ --------------------------- ---------
Cardinal April 19, 2005 March 2007 to June 2007 $26,500
Condor April 30, 2005 November 2006 to March 2007 $24,000
Falcon April 22, 2005 February 2008 to June 2008 $20,950
Griffon(2) June 3, 2005 February 2006 $28,000
Harrier April 21, 2005 March 2007 to June 2007 $23,750
Hawk I April 28, 2005 March 2007 to June 2007 $23,750
Kite May 10, 2005 March 2006 to May 2006 $25,000
Osprey I(3) September 1, 2005 May 2008 to September 2008 $21,000
Peregrine July 1, 2005 October 2006 to January 2007 $24,000
Shikra April 30, 2005 July 2006 to November 2006 $22,000
Sparrow July 20, 2005 November 2006 to Feb 2007 $22,500
Merlin October 26, 2005 October 2007 to December 2007 $24,000
Heron December 11, 2005 December 2007 to February 2008 $24,000
- ----------
(1) The date range provided represents the earliest and latest date on which
the charterer may redeliver the vessel to the Company upon the termination
of the charter.
(2) Upon completion of the charter in March 2006, the GRIFFON has commenced a
new charter at $13,550 per day until January 2007 to March 2007.
(3) The charterer of the OSPREY I has an option to extend the charter period by
up to 26 months at a daily time charter rate of $25,000.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates,
which could impact its results of operations and financial condition. The
Company's objective is to manage the impact of interest rate changes on earnings
and cash flows of its borrowings. The Company expects to manage this exposure to
market risk through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. The
Company expects to use interest rate swaps to manage net exposure to interest
rate changes related to its borrowings and to lower its overall borrowing costs.
As of December 31, 2005, the Company's debt consisted of $140,000,000
in loans under bank mortgage agreements at a margin plus variable rates above
the LIBOR. From the facility's inception through December 31, 2005, rates ranged
from 4.10% to 5.49% (including margins). The weighted average effective interest
rates was 4.69%.
The Company entered into interest rate swaps to effectively convert a
portion of its debt from a floating to a fixed-rate basis. The swaps are
designated and qualify as cash flow hedges. As of December 31, 2005, the Company
has entered into interest rate swap contracts for notional amounts of
$100,000,000 and $30,000,000. These contracts commenced in September 2005 and
mature in September 2010. Exclusive of a margin of 0.95%, the Company will pay
fixed-rate interest of 4.22% and 4.54% respectively, and receive floating-rate
interest amounts based on three month LIBOR settings (for a term equal to the
swaps' reset periods). The Company records the fair value of the interest rate
swap as an asset or liability on the balance sheet. The effective portion of the
swap is recorded in accumulated other comprehensive income. At December 31,
2005, the Company recorded an asset of $2,647,077 which is included in Other
Assets in the accompanying balance sheet.
Currency and Exchange Rates
The shipping industry's functional currency is the U.S. dollar. The
Company generates all of its revenues in U.S. dollars. The majority of the
Company's operating expenses and the entirety of its management expenses are in
U.S. dollars. The Company does not intend to use financial derivatives to
mitigate the risk of exchange rate fluctuations.
Item 8. Financial Statements and Supplementary Data
The information required by this item is contained in the financial statements
set forth in Item 15(a) under the caption "Consolidated Financial Statements" as
part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits to the SEC under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms.
Internal Control Over Financial Reporting
In addition, we evaluated our internal control over financial
reporting, (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934), and there have been no changes in our internal control
over financial reporting that occurred during the fourth quarter of 2005 that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
On January 28, 2006, the limited liability company agreement of Eagle
Ventures LLC was amended and restated (the "Third LLC Agreement"). This provided
for the award of additional profits interests in Eagle Ventures LLC to certain
management employees and provided for certain adjustments in the manner
distributions are made by Eagle Ventures in connection with such newly awarded
profits interests. These profits interests will dilute only the interests of
owners of Eagle Ventures LLC, and will not dilute the direct holders of the
Company's common stock.
On March 8, 2006, the Third LLC Agreement was amended and restated
(the "Fourth LLC Agreement") and is included as Exhibit 10.6 to this annual
report. Pursuant to the Fourth LLC Agreement, an adjustment was made in the
schedule governing the management members' retention of service-related profits
interests upon their termination of employment with Eagle Ventures LLC or its
subsidiaries (including the Company). In addition, under the Fourth LLC
Agreement one-fourth of the service-related profits interests granted on January
28, 2006 were immediately vested and the remaining newly granted service-related
profits interests were made subject to a three-year retention schedule.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information concerning our directors required under this Item is
incorporated herein by reference from our proxy statement, which will be filed
with the Securities and Exchange Commission, relating to our Annual Meeting of
Stockholders (our "2006 Proxy Statement").
Executive Officers
The information concerning our Executive Officers required under this
Item is incorporated herein by reference from our proxy statement, which will be
filed with the Securities and Exchange Commission, relating to our Annual
Meeting of Stockholders (our "2006 Proxy Statement").
Code of Ethics
The information concerning our Code of Conduct is incorporated herein by
reference from our 2006 Proxy Statement.
Audit Committee
The information concerning our Audit Committee is incorporated herein by
reference from our 2006 Proxy Statement.
Audit Committee Financial Experts
The information concerning our Audit Committee Financial Experts is incorporated
herein by reference from our 2006 Proxy Statement.
Item 11. Executive Compensation
The information required under this Item is incorporated herein by reference
from our 2006 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required under this Item is incorporated herein by reference
from our 2006 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated herein by reference
from our 2006 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information about the fees for 2005 for professional services rendered by our
independent registered public accounting firm is incorporated herein by
reference from our 2006 Proxy Statement. Our Audit Committee's policy on
pre-approval of audit and permissible non-audit services of our independent
registered public accounting firm is incorporated by reference from our 2006
Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Annual Report on Form 10-K
1. Consolidated Financial Statements: See accompanying Index to
Consolidated Financial Statements.
2. Consolidated Financial Statement Schedule: Financial statement
schedules are omitted due to the absence of conditions under which
they are required
(b) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Form of Share Certificate of the Company*
10.1 Form of Registration Rights Agreement*
10.2 Form of Management Agreement*
10.3 Form of Credit Agreement*
10.4 Eagle Bulk Shipping Inc. 2005 Stock Incentive Plan*
10.5 Employment Agreement for Mr. Sophocles N. Zoullas*
10.6 Form of Fourth Amended and Restated Limited Liability Company
Agreement of Eagle Ventures LLC
21.1 Subsidiaries of the Company**
31.1 Rule 13a-14(d) / 15d-14(a)_Certification of CEO
31.2 Rule 13a-14(d) / 15d-14(a)_Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
* Incorporated by reference to the Registration Statement on Form S-1,
Registration No. 333-123817.
** Incorporated by reference to the Registration Statement on Form S-1,
Registration No. 333-128930.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EAGLE BULK SHIPPING INC.
By: /s/Sophocles Zoullas
----------------------
Name: Sophocles Zoullas
Title: Chief Executive Officer
March 14, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 14, 2006.
Signature Title
/s/Sophocles Zoullas
- ----------------------------------- Chief Executive Officer, and Director
Sophocles Zoullas
/s/Alan S. Ginsberg
- ----------------------------------- Chief Financial Officer
Alan S. Ginsberg (principal accounting Officer)
/s/Michael B. Goldberg
- ----------------------------------- Director
Michael B. Goldberg
/s/Frank J. Loverro
- ----------------------------------- Director
Frank J. Loverro
/s/David B. Hiley
- ----------------------------------- Director
David B. Hiley
/s/Douglas P. Haensel
- ----------------------------------- Director
Douglas P. Haensel
/s/Joseph Cianciolo
- ----------------------------------- Director
Joseph Cianciolo
/s/Michael Mitchell
- ----------------------------------- Director
Michael Mitchell
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ..... F-2
Consolidated Balance Sheet as of December 31, 2005........... F-3
Consolidated Statements of Operations from January 26, 2005
(inception) to December 31, 2005........................... F-4
Consolidated Statement of Stockholders' Equity from
January 26, 2005 (inception) to December 31, 2005......... F-5
Consolidated Statement of Cash Flows from January 26, 2005
(inception) to December 31, 2005.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Eagle Bulk Shipping Inc.
We have audited the accompanying consolidated balance sheet of Eagle
Bulk Shipping Inc. and subsidiaries as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from January 26, 2005 (inception) through December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 2005, and the consolidated results
of their operations and their cash flows for the period from January 26, 2005 to
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
March 8, 2006
EAGLE BULK SHIPPING INC.
CONSOLIDATED BALANCE SHEET
December 31, 2005
-----------------
ASSETS:
Current Assets:
Cash ................................................................................ $24,526,528
Accounts Receivable.................................................................. 281,094
Prepaid Charter Revenue.............................................................. 8,508,000
Prepaid Expenses..................................................................... 513,145
-----------------
Total Current Assets................................................................... 33,828,767
Fixed Assets:
Vessels and Vessel Improvements, at cost, net of Accumulated
Depreciation of $10,384,247.................................................... 417,581,610
Restricted Cash......................................................................... 6,624,616
Deferred Drydock Costs, net of Accumulated Amortization of $27,980...................... 393,702
Deferred Financing Costs, net of Accumulated Amortization of $98,065.................... 1,268,209
Other Assets ........................................................................... 2,647,077
==================
Total Assets............................................................................ $462,343,981
==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable......................................................................... $1,861,145
Accrued Interest......................................................................... 514,631
Other Accrued Liabilities................................................................ 424,669
Deferred Revenue......................................................................... 1,306,000
Unearned Charter Hire Revenue............................................................ 2,444,522
-----------------
Total Current Liabilities.............................................................. 6,550,967
Long-term Debt......................................................................... 140,000,000
-----------------
Total Liabilities....................................................................... 146,550,967
Commitment and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none issued............... --
Common stock, $.01 par value, 100,000,000 shares authorized, 33,150,000 shares issued and 331,500
outstanding............................................................................
Additional Paid-In Capital............................................................... 320,822,037
Retained Earnings (net of Dividends declared of $14,661,000)............................. (8,007,600)
Accumulated Other Comprehensive Income................................................... 2,647,077
-----------------
Total Stockholders' Equity............................................................. 315,793,014
-----------------
Total Liabilities and Stockholders' Equity.............................................. $462,343,981
==================
The accompanying notes are an integral part of these Consolidated Financial Statements.
EAGLE BULK SHIPPING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
January 26, 2005
(inception) to
December 31, 2005
-----------------
Revenues, net of commissions........................... $56,066,058
Vessel Expenses........................................ 11,052,429
Depreciation and Amortization.......................... 10,412,227
General and Administrative Expenses.................... 3,491,330
Management and Other Fees to Affiliates................ 6,175,046
Non-cash Compensation Expense.......................... 11,734,812
-----------------
Total Operating Expenses............................ 42,865,844
-----------------
Operating Income....................................... 13,200,214
Interest Expense....................................... 7,208,641
Interest Income........................................ (661,827)
-----------------
Net Interest Expense................................ 6,546,814
-----------------
Net Income............................................. $ 6,653,400
=================
Basic and Diluted Income per Share..................... $0.30
Weighted Average Shares Outstanding.................... 21,968,824
The accompanying notes are an integral part of these Consolidated Financial
Statements.
EAGLE BULK SHIPPING INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FROM JANUARY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
Retained
Earnings
Additional
Common Paid-In
Shares Shares Capital Net Income
------ ------ ------- ----------
Balance at January 26, 2005... - $- $- $-
Comprehensive Income :
Net Income................. - - - 6,653,400
Net Unrealized gains
on derivatives............ - - - -
Comprehensive Income ......... - - - -
Issuance of Common Stock and
Capital Contributions....... 12,750,000 127,500 40,716,162 -
Initial Public Offering, net
of issuance costs .......... 14,400,000 144,000 186,385,290 -
Public Offering, net of
issuance costs ............. 6,000,000 60,000 81,985,773 -
Cash Dividends................ - - - -
Non-cash Compensation......... - - 11,734,812 -
Balance at December 31, 2005.. 33,150,000 $331,500 $320,822,037
EAGLE BULK SHIPPING INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FROM JANUARY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
Retained
Earnings
Other Total
Cash Accumulated Comprehensive Stockholders'
Dividends Deficit Income Equity
--------- ------- ------ ------
Balance at January 26, 2005... $- $- $- $-
Comprehensive Income :
Net Income................. - 6,653,400 - 6,653,400
Net Unrealized gains
on derivatives............ - - 2,647,077 2,647,077
Comprehensive Income ......... - - - 9,300,477
Issuance of Common Stock and
Capital Contributions....... - - - 40,843,662
Initial Public Offering, net
of issuance costs .......... - - - 186,529,290
Public Offering, net of
issuance costs ............. - - - 82,045,773
Cash Dividends................ (14,661,000) (14,661,000) - (14,661,000)
Non-cash Compensation......... - - - 11,734,812
Balance at December 31, 2005.. $(8,007,600) $2,647,077 $315,793,014
The accompanying notes are an integral part of these Consolidated Financial
Statements.
EAGLE BULK SHIPPING INC. CONSOLIDATED STATEMENT OF CASH FLOWS
FROM JANUARY 26, 2005 (INCEPTION) TO DECEMBER 31, 2005
Cash Flows from Operating Activities
Net Income.................................................................................. $6,653,400
Adjustments to Reconcile Net Income to Net Cash provided by Operating
Activities: Items included in net income not affecting cash flows:
Depreciation and Amortization................................................................ 10,412,227
Amortization of Deferred Financing Costs..................................................... 98,065
Write-off of Deferred Financing Costs ....................................................... 1,130,712
Amortization of Prepaid and Deferred Charter Revenue......................................... 890,500
Non-cash Compensation Expense................................................................ 11,734,812
Changes in Operating Assets and Liabilities:
Accounts Receivable.......................................................................... (281,094)
Prepaid Charter Revenue...................................................................... (10,149,000)
Prepaid Expenses............................................................................. (513,145)
Accounts Payable............................................................................. 1,620,722
Accrued Interest............................................................................. 514,631
Accrued Expenses............................................................................. 424,669
Deferred Revenue............................................................................. 2,056,500
Drydocking Expenses.......................................................................... (421,682)
Unearned Charter Hire Revenue................................................................ 2,444,522
----------------------
Net Cash Provided by Operating Activities................................................... 26,615,839
Cash Flows from Investing Activities
Purchase of Vessels and Improvements......................................................... (427,965,857)
----------------------
Net Cash Used in Investing Activities....................................................... (427,965,857)
Cash Flows from Financing Activities
Capital Contribution......................................................................... 40,843,662
Issuance of Common Stock in public offerings................................................. 288,600,000
Equity Issuance Costs........................................................................ (19,784,514)
Bank Borrowings.............................................................................. 314,450,000
Repayment of Bank Debt....................................................................... (174,450,000)
Increase in Restricted Cash.................................................................. (6,624,616)
Deferred Financing Costs..................................................................... (2,496,986)
Borrowings from Eagle Ventures LLC........................................................... 58,730,434
Repayment of Eagle Ventures LLC Note......................................................... (58,730,434)
Cash Dividend................................................................................ (14,661,000)
----------------------
Net Cash Provided by Financing Activities................................................... 425,876,546
Net Increase in Cash........................................................................ 24,526,528
Cash at Beginning of Period................................................................. --
----------------------
Cash at End of Period....................................................................... $24,526,528
======================
Supplemental Cash Flow Information:
Cash paid during the period for Interest (including Fees).................................... $5,465,233
The accompanying notes are an integral part of these Consolidated Financial
Statements.
EAGLE BULK SHIPPING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and General Information:
The accompanying consolidated financial statements include the
accounts of Eagle Bulk Shipping Inc. and its wholly-owned subsidiaries
(collectively, the "Company"). The Company is engaged in the ocean
transportation of dry bulk cargoes worldwide through the ownership and operation
of dry bulk vessels. The Company's fleet is comprised of Handymax bulk carriers
and the Company operates its business in one business segment.
The Company is a holding company incorporated on March 23, 2005, under
the laws of the Republic of the Marshall Islands. Following incorporation, the
Company merged with Eagle Holdings LLC, a Marshall Islands limited liability
company formed on January 26, 2005, and became a wholly-owned subsidiary of
Eagle Ventures LLC, a Marshall Islands limited liability company. Eagle Ventures
LLC is owned by Kelso Investments Associates VII, L.P. and KEP VI, LLC, both
affiliates of Kelso & Company, L.P. ("Kelso"), members of management, a
director, and outside investors. The merger was accounted for as a
reorganization of entities under common control. Eagle Ventures LLC currently
owns approximately 37.5% of the Company's outstanding common stock. Eagle
Ventures LLC is 92.6% owned by affiliates of Kelso & Company, L.P.
The Company is the sole owner of all of the outstanding shares of the
Marshall Island incorporated wholly-owned subsidiaries listed below. The primary
activity of each of these subsidiaries is the ownership of a vessel.
Owner
Company Vessel dwt. Built Vessel Acquired
------- ------ ---- ----- ---------------
Cardinal Shipping LLC................................ Cardinal 55,362 2004 April 18, 2005
Condor Shipping LLC.................................. Condor 50,206 2001 April 29, 2005
Falcon Shipping LLC.................................. Falcon 50,206 2001 April 21, 2005
Griffon Shipping LLC................................. Griffon 46,635 1995 June 1, 2005
Harrier Shipping LLC................................. Harrier 50,206 2001 April 19, 2005
Hawk Shipping LLC.................................... Hawk I 50,206 2001 April 26, 2005
Heron Shipping LLC................................... Heron 52,827 2001 December 1, 2005
Kite Shipping LLC.................................... Kite 47,195 1997 May 9, 2005
Merlin Shipping LLC.................................. Merlin 50,296 2001 October 26, 2005
Osprey Shipping LLC.................................. Osprey I 50,206 2002 August 31, 2005
Peregrine Shipping LLC............................... Peregrine 50,913 2001 June 30, 2005
Shikra Shipping LLC.................................. Shikra 41,096 1984 April 29, 2005
Sparrow Shipping LLC................................. Sparrow 48,225 2000 July 19, 2005
The operations of the vessels are managed by a wholly-owned subsidiary
of the Company, Eagle Shipping International (USA) LLC, a Marshall Islands
limited liability company.
The following table represents certain information about the Company's
revenue earning charters, as of December 31, 2005
Delivered to Daily Time
Vessel Charterer Time Charter Expiration (1) Charter Hire Rate
------ --------- --------------------------- -----------------
Cardinal....................... April 19, 2005 March 2007 to June 2007 $26,500
Condor......................... April 30, 2005 November 2006 to March 2007 $24,000
Falcon......................... April 22, 2005 February 2008 to June 2008 $20,950
Griffon........................ June 3, 2005 February 2006 $28,000
Harrier........................ April 21, 2005 March 2007 to June 2007 $23,750
Hawk I......................... April 28, 2005 March 2007 to June 2007 $23,750
Heron.......................... December 11, 2005 November 2007 to February 2008 $24,000
Kite........................... May 10, 2005 March 2006 to May 2006 $25,000
Merlin......................... October 26, 2005 October 2007 to December 2007 $24,000
Osprey I....................... August 31, 2005 July 2008 to November 2008 $21,000
Peregrine...................... July 1, 2005 October 2006 to January 2007 $24,000
Shikra......................... April 30, 2005 July 2006 to November 2006 $22,000
Sparrow........................ July 20, 2005 November 2006 to February 2007 $22,500
(1) The date range provided represents the earliest and latest date on which
the charterer may redeliver the vessel to the Company upon the termination
of the charter.
During the period from inception on January 26, 2005 to December 31,
2005, four charterers individually accounted for more than 10% of the Company's
gross time charter revenue as follows:
Charterer % of time
charter revenue
---------------
Charterer A.................................. 19.9%
Charterer B.................................. 17.2%
Charterer C.................................. 11.3%
Charterer D.................................. 10.4%
Note 2. Significant Accounting Policies:
(a) Principles of Consolidation: The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles and include the accounts of Eagle Bulk Shipping Inc.
and its wholly-owned subsidiaries. All significant intercompany balances
and transactions were eliminated upon consolidation.
(b) Use of Estimates: The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Other Comprehensive Income: The Company follows the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires separate presentation of certain
transactions, which are recorded directly as components of stockholders'
equity. The Company records the fair value of interest rate swaps as an
asset or liability on the balance sheet. The effective portion of the swap
is recorded in accumulated other comprehensive income. Comprehensive Income
is composed of net income and gains or losses relating to the interest rate
swap.
(d) Cash, Cash Equivalents and Restricted Cash: The Company considers highly
liquid investments such as time deposits and certificates of deposit with
an original maturity of three months or less to be cash equivalents.
Restricted Cash includes minimum cash deposits required to be maintained
with a bank for loan compliance purposes and an amount of $124,616 which is
collateralizing a letter of credit.
(e) Accounts Receivable: Accounts receivable includes receivables from
charterers for hire. At each balance sheet date, all potentially
uncollectible accounts are assessed for purposes of determining the
appropriate provision for doubtful accounts.
(f) Insurance Claims: Insurance claims are recorded on an accrual basis and
represent the claimable expenses, net of deductibles, incurred through each
balance sheet date, which are expected to be recovered from insurance
companies. Any remaining costs to complete the claims are included in
accrued liabilities.
(g) Vessels at Cost: Vessels are stated at cost which consists of the contract
price and any material expenses incurred upon acquisition for major
improvements and delivery expenses.
(h) Intangibles: Where the Company identifies any intangible assets or
liabilities associated with the acquisition of a vessel, the Company
records all identified tangible and intangible assets or liabilities at
fair value. Fair value is determined by reference to market data and the
amount of expected future cash flows. The Company values any asset or
liability arising from the market value of the time charters assumed when a
vessel is acquired. When the time charters assumed are above market charter
rates, the difference between the market charter rate and assumed charter
rate is recorded as Prepaid Charter Revenue. When the time charters assumed
are below market charter rates, the difference between the market charter
rate and assumed charter rate is recorded as Deferred Revenue. Such assets
and liabilities are amortized to revenue over the remaining period of the
time charters.
(i) Impairment of Long-Lived Assets: The Company uses SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-lived Assets," which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The standard requires that, long-lived assets and
certain identifiable intangibles held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
When the estimate of undiscounted cash flows, excluding interest charges,
expected to be generated by the use of the asset is less than its carrying
amount, the Company should evaluate the asset for an impairment loss.
Measurement of the impairment loss is based on the fair value of the asset
as provided by third parties or discounted cash flow analyses. In this
respect, management regularly reviews the carrying amount of the vessels in
connection with the estimated recoverable amount for each of the Company's
vessels.
(j) Vessel Depreciation: Depreciation is computed using the straight-line
method over the estimated useful life of the vessels, after considering the
estimated salvage value. Each vessel's salvage value is equal to the
product of its lightweight tonnage and estimated scrap rate. Management
estimates the useful life of the Company's vessels to be 28 years from the
date of initial delivery from the shipyard to the original owner.
Management estimates the scrap rate to be $150 per lightweight ton.
Secondhand vessels are depreciated from the date of their acquisition
through their remaining estimated useful life.
(k) Accounting for Dry-Docking Costs: The Company follows the deferral method
of accounting for dry-docking costs whereby actual costs incurred are
deferred and are amortized on a straight-line basis over the period through
the date the next dry-docking is scheduled to become due. Unamortized
dry-docking costs of vessels that are sold are written off and included in
the calculation of the resulting gain or loss in the year of the vessels'
sale.
(l) Financing Costs: Fees incurred for obtaining new loans or refinancing
existing ones are deferred and amortized to interest expense over the life
of the related debt. Unamortized fees relating to loans repaid or
refinanced are expensed in the period the repayment or refinancing is made.
(m) Accounting for Revenues and Expenses: Revenues are generated from voyage
and time charter agreements. Time charter revenues are recognized on a
straight-line basis over the term of the respective time charter agreements
as service is provided. Under a voyage charter the revenues and associated
voyage costs are recognized on a pro-rata basis over the duration of the
voyage. Probable losses on voyages are provided for in full at the time
such losses can be estimated. A voyage is deemed to commence upon the
completion of discharge of the vessel's previous cargo and is deemed to end
upon the completion of discharge of the current cargo. Voyage expenses
primarily include only those specific costs which are borne by the Company
in connection with voyage charters which would otherwise have been borne by
the charterer under time charter agreements. These expenses principally
consist of fuel and port charges. Demurrage income represents payments by
the charterer to the vessel owner when loading or discharging time exceeded
the stipulated time in the voyage charter and is recognized as incurred.
Time charter hire and voyage charter revenue brokerage Commissions are
recorded in the same period as these revenues are recognized. Vessel
operating expenses are accounted for on the accrual basis.
(n) Unearned Charter Hire Revenue: Unearned charter hire revenue represents
cash received from charterers prior to the time such amounts are earned.
These amounts are recognized as revenue as services are provided in future
periods.
(o) Repairs and Maintenance: All repair and maintenance expenses are expensed
as incurred and is recorded in Vessel Expenses.
(p) Protection and Indemnity Insurance: The Vessel's Protection and Indemnity
Insurance is subject to additional premiums referred to as "back calls" or
"supplemental calls" which are accounted for on an accrual basis and is
recorded in Vessel Expenses.
(q) Derivatives: SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value,
with changes in the derivatives' fair value recognized currently in
earnings unless specific hedge accounting criteria are met.
(r) Earnings Per Share: Earnings per share is computed by dividing the net
income by the weighted average number of common shares outstanding during
the period. During 2005, the Company did not have dilutive securities
outstanding.
(s) Segment Reporting: The Company reports financial information and evaluates
its operations by charter revenues and not by the length of ship employment
for its customers, i.e., spot or time charters. The Company does not use
discrete financial information to evaluate the operating results for each
such type of charter. Although revenue can be identified for these types of
charters, management cannot and does not identify expenses, profitability
or other financial information for these charters. As a result, management,
including the chief operating decision maker, reviews operating results
solely by revenue per day and operating results of the fleet and thus the
Company has determined that it operates under one reportable segment.
Furthermore, when the Company charters a vessel to a charterer, the
charterer is free to trade the vessel worldwide and, as a result, the
disclosure of geographic information is impracticable.
(t) Interest Rate Risk Management: The Company is exposed to the impact of
interest rate changes. The Company's objective is to manage the impact of
interest rate changes on earnings and cash flows of its borrowings. The
Company may use interest rate swaps to manage net exposure to interest rate
changes related to its borrowings.
(u) Federal Income Taxes: The Company is a Marshall Islands Corporation.
Pursuant to various tax treaties and the current United States Internal
Revenue Code, the Company does not believe its operations prospectively
will be subject to federal income taxes in the United States of America.
Note 3. Recent Accounting Pronouncements:
On December 16, 2004, Statement of Financial Accounting Standards No.
123 (revised 2004) (SFAS No. 123(R)), "Share-Based Payment," was issued. SFAS
No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25. The approach
in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. The Company adopted SFAS No.123(R) at
inception.
Note 4. Vessels and Vessel Improvements
During the year 2005, the Company through its subsidiaries has
acquired 13 Handymax dry bulk vessels at a total cost of $427,144,953. These
costs consists of aggregate purchase contract price of $434,877,903, $359,550 in
additional costs relating to the acquisition of the vessels, and $8,092,500 in
net prepaid charter revenue adjustments relating to the assumption of time
charters associated with certain of the acquired vessels. The Company has also
capitalized $820,904 of costs relating to vessel improvements.
Note 5. Accrued Liabilities
Accrued liabilities consist of:
December 31, 2005
Vessel Expenses..................................... 261,496
General and Administrative, and Other Expenses...... 163,173
-------------------
Balance, December 31, 2005.......................... $424,669
===================
Note 6. Long-Term Debt
The Company's subsidiaries had initially entered into a term loan
facility with an aggregate principal balance of $185,950,000. Concurrent with
its initial public offering, the Company used part of the proceeds from the
initial public offering to repay $125,950,000 of the principal balance under the
term loan facility.
Subsequent to the Company's initial public offering, in June 2005 the
Company borrowed $28,500,000 from the term loan facility to fund the balance of
the purchase price for its ninth vessel, PEREGRINE.
In July 2005, the Company entered into a $330,000,000 revolving credit
facility. The facility was used to refinance the existing term loan.
From July 2005 to October 2005, the Company borrowed $100,000,000 from
the revolving credit facility to fund the following vessel purchases:
$30,600,000 to fund the balance of the purchase price of the SPARROW;
$30,900,000 to fund the balance of the purchase price of the, OSPREY I;
$7,000,000 to fund the deposits representing the 10% of the purchase price for
the MERLIN and HERON; $31,500,000 to fund the balance of the purchase price of
the MERLIN.
The Company used a portion of the proceeds from its follow-on equity
offering to repay $48,500,000 of the principal balance under the from the
revolving credit facility.
As of December 31, 2005, the Company's debt consisted of $140,000,000
in borrowings under the revolving credit facility.
The new credit facility has a facility limit of $330,000,000 and a
term of ten years. The Company is permitted to borrow the remaining capacity of
$190 million, which amount includes amounts available to borrow for working
capital purposes as described below, in connection with future acquisitions of
dry bulk carriers between 25,000 dwt and 85,000 dwt that are not older than 10
years. The Company is permitted to borrow up to $10,000,000 at any one time for
working capital purposes during an initial period of 18 months from the first
draw down date, after which time the Company's ability to borrow amounts for
working capital purposes will be subject to review and reapproval on an annual
basis.
Under the terms of the revolving credit agreement, the facility will
be available in full for five years and there are no principal repayment
obligations for the first five years. Over the remaining period of five years,
the amount available under the facility will reduce in semi-annual amounts of
$20,500,000 with a final reduction of $125,000,000 occurring simultaneously with
the last semi-annual reduction. The credit facility bears interest at LIBOR plus
a margin of 0.95%. The Company must also pay a fee of 0.4% per annum on the
unused portion of the revolving credit facility on a quarterly basis.
The Company paid an arrangement fee of $1,200,000 in connection with
the credit facility.
The Company's ability to borrow amounts under the new credit facility
is subject to satisfaction of certain customary conditions precedent and
compliance with terms and conditions included in the loan documents. In
connection with vessel acquisitions, amounts borrowed may not exceed 60% of the
value of the vessels securing the Company's obligations under the credit
facility. The Company's ability to borrow such amounts, in each case, is subject
to its lender's approval of the vessel acquisition. The lender's approval will
be based on the lender's satisfaction of the Company's ability to raise
additional capital through equity issuances in amounts acceptable to the lender
and the proposed employment of the vessel to be acquired.
The Company's obligations under the credit facility is secured by a
first priority mortgage on each of the vessels in its fleet and such other
vessels that it may from time to time include with the approval of the lender, a
first assignment of all freights, earnings, issuances and compensation. The
Company's new credit facility will also limit its ability to create liens on its
assets in favor of other parties. The Company may grant additional security from
time to time in the future.
The new credit facility, as amended, contains financial covenants
requiring the Company, among other things, to ensure that: (1) the aggregate
market value of the vessels in the Company's fleet that secure its obligations
under the new credit facility, as determined by an independent shipbroker on a
charter-free basis, at all times exceeds 130% of the aggregate principal amount
of debt outstanding under the new credit facility and the notional or actual
cost of terminating any related hedging arrangements; (2) to the extent the
Company's debt during any accounting period is less than $200,000,000, the
Company's total assets minus debt will not be less than $100,000,000; to the
extent the Company's debt during any accounting period is greater than
$200,000,000, the Company's total assets minus debt will not be less than
$150,000,000; (3) the Company's EBITDA, as defined in the credit agreement, will
at all times be not less than 2.0x the aggregate amount of interest incurred and
net amounts payable under interest rate hedging arrangements during the relevant
period; and (4) the Company maintains with the lender $500,000 per vessel in
addition to an amount adequate to meet anticipated capital expenditures for the
vessel over a 12 month period. Such cash deposits are recorded in Restricted
Cash.
For the purposes of the credit facility, the Company's "total assets"
will be defined to include its tangible fixed assets and its current assets, as
set forth in the consolidated financial statements, except that the value of any
vessels in its fleet that secure its obligations under the new credit facility
will be measured by their fair market value rather than their carrying value on
its consolidated balance sheet.
The Company's revolving credit facility permits it to pay dividends in
amounts up to its earnings before extraordinary or exceptional items, interest,
taxes, depreciation and amortization (EBITDA), less the aggregate amount of
interest incurred and net amounts payable under interest rate hedging agreements
during the relevant period and an agreed upon reserve for dry-docking, provided
that there is not a default or breach of loan covenant under the credit facility
and the payment of the dividends would not result in a default or breach of a
loan covenant.
From the inception of the Company's debt through December 31, 2005,
interest rates ranged from 4.10% to 5.49%, including a margin of 0.95% over
LIBOR. The weighted average effective interest rate was 4.69%.
Interest Expense for the period ended December 31, 2005 consists of:
Loan Interest................................................. $4,855,054
Commitment Fees............................................... 516,588
Eagle Ventures Note Interest.................................. 608,222
Amortization of Deferred Financing Costs...................... 98,065
Write-off of Deferred Financing Costs ........................ 1,130,712
-----------------
Total Interest Expense........................................ $7,208,641
=================
Interest-Rate Swaps
The Company entered into interest rate swaps to effectively convert a
portion of its debt from a floating to a fixed-rate basis. The swaps are
designated and qualify as cash flow hedges. As of December 31, 2005, the Company
had entered into interest rate swap contracts for notional amounts of
$100,000,000 and $30,000,000. These contracts mature in September 2010.
Exclusive of a margin of 0.95%, the Company will pay 4.22% and 4.54% fixed-rate
interest, respectively, and receive floating-rate interest amounts based on
three-month LIBOR settings. The Company records the fair value of the interest
rate swap as an asset or liability on the balance sheet. The effective portion
of the swap is recorded in accumulated other comprehensive income. At December
31, 2005, the Company recorded an asset of $2,647,077 which is included in Other
Assets in the accompanying balance sheet.
Note 7. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash and cash equivalents--The carrying amounts reported in the
consolidated balance sheet for interest-bearing deposits approximate their fair
value due to their short-term nature thereof.
Debt--The carrying amounts of borrowings under the credit agreement and
the other floating rate loans approximate their fair value, due to the variable
interest rate nature thereof.
Interest rate swaps--The fair value of interest rate swaps (used for
hedging purposes) is the estimated amount that the Company would receive or pay
to terminate the swaps at the reporting date.
Note 8. Related Party Transactions
The Company had borrowed $58,730,434 from Eagle Ventures LLC. This
borrowing bore interest at 7%. Such amount was repaid along with interest
amounting to $608,222 upon the closing of the Company's initial public offering.
The Company had a financial advisory agreement dated February 1, 2005
with Kelso. Under the terms of the agreement the Company was to pay Kelso annual
fees of up to $500,000. The Company terminated certain of its obligations under
this agreement, including its obligation to pay the annual fees of $500,000, for
a one-time payment of $1,000,000. The agreement also provided for Kelso to be
paid fees in connection with other services.
In the period ended December 31, 2005, the Company paid $5,175,046 in
fees to Kelso and certain non-management affiliates of Eagle Ventures LLC for
investment banking services pursuant to the financial advisory agreement. This
fee was payable in connection with Kelso assisting the Company in its strategic
planning, obtaining debt and equity financing and acquiring vessels.
Note 9. Commitments and Contingencies
Vessel Technical Management Contract
The Company entered into technical management agreements for each of
its vessels with V. Ships Management Ltd., an independent technical manager. V.
Ships is paid a technical management fee of $8,333 per vessel per month.
Operating Lease
In December 2005, the Company entered into a lease for office space.
The lease is secured by a Letter of Credit backed by cash collateral of $124,616
which amount is recorded under Restricted Cash. The Letter of Credit amounts
decline to zero at the conclusion of the lease. The future minimum commitments
under lease obligations for office space are as follows, and will be recorded:
2006..................................... $ 190,951
2007..................................... 250,521
2008..................................... 260,634
2009..................................... 270 814
2010..................................... 273 193
2011..................................... 68,858
--------------------
Total.................................... $ 1,314,971
====================
Note 10. Earnings Per Common Share
The computation of earnings per share is based on the weighted average
number of common shares outstanding during the period. The Company does not have
any potentially dilutive securities outstanding. Accordingly, basic and diluted
income per share is the same.
Note 11. Non-cash Compensation
Members of the Company's management have been awarded profits
interests (and in the future others having senior management and/or strategic
planning-type responsibilities may be awarded similar profits interests) in
Eagle Ventures LLC that may entitle such persons to an economic interest of up
to 16.7% on a fully diluted basis (assuming all profits interests were vested)
in any appreciation in the value of the assets of Eagle Ventures LLC (including
shares of the Company's common stock owned by Eagle Ventures LLC when sold). In
all, one-fourth of the profits interests are service-related and vest in equal
three-month installments over four years (the vesting of such service-related
profits interests is subject to continued employment with Eagle Ventures LLC or
its affiliates at the end of each such three-month period), and the remaining
profits interests are performance-related. Pursuant to an amendment to the Eagle
Ventures LLC limited liability company agreement, 44% of the performance-related
profits interests became fully vested upon the consummation of the Company's
initial public offering (or an economic interest in approximately 6.2% of the
appreciation of the assets of Eagle Ventures LLC on a fully diluted basis taking
into account the vesting of only such profits interests), and the remaining
portion of the performance-related profits interests will vest based on
affiliates of Kelso achieving certain multiples on their original indirect
investment in the Company, subject to an internal rate of return minimum.
Retention of the non-accelerated performance-related profits interests is
subject to continued employment with Eagle Ventures LLC or its affiliates.
The vesting of profits interests may be further accelerated in the
future by the compensation committee of Eagle Ventures LLC. These profits
interests will dilute only the interests of owners of Eagle Ventures LLC, and
will not dilute direct holders of the Company's common stock. However, the
Company's income statement reflects non-cash charges for compensation related to
the profits interests.
For the period from inception in January 26, 2005 to December 31,
2005, the Company recorded a non-cash compensation charge of $11.7 million. Of
that charge, approximately $9.2 million relates to the portion of the
performance-related profits interests that vested upon consummation of the
Company's initial public offering. The remaining $2.5 million non-cash
compensation charge was taken as a result of the service-related and
non-accelerated performance-related profits interests. The Company is recording
compensation charges relating to the service-related profits interests over four
years. The non-accelerated performance related profits interests vest based on
affiliates of Kelso achieving certain multiples on their original investment in
the assets of Eagle Ventures LLC through the receipt of distributions from Eagle
Ventures LLC. The vesting occurs ratably upon achieving a return on investment
ranging from two times to four times the original investment. To calculate the
non-cash compensation charge that is reflected in the Company's income statement
for the non-accelerated performance-related profits interests, the Company has
assumed that these profits interests will vest four years after their issuance.
The Company is therefore recording compensation charges relating to such profits
interests over four years.
The non-cash compensation charge will be recorded as an expense over
the estimated service period in accordance with SFAS No. 123(R). The non-cash
compensation charges will be based on the fair value of the profits interests
which will be "marked to market" at the end of each reporting period. The impact
of any changes in the estimated fair value of the profits interests will be
recorded as a change in estimate cumulative to the date of change. The impact on
the amortization of the compensation charge of any changes to the estimated
vesting periods for the performance-related profits interests will be adjusted
prospectively as a change in estimate.
Note 12. Capital Stock
Common Stock
On March 31, 2005, in connection with its formation, the Company sold
250 shares of its common stock to Eagle Ventures LLC for an aggregate purchase
price of $250. On March 31, 2005, in connection with the merger of Eagle
Holdings LLC with and into the Company, all of the issued and outstanding
membership interests in Eagle Holdings LLC (which were held by Eagle Ventures
LLC) were converted into and exchanged for, and the Company issued 250 shares of
its common stock to Eagle Ventures LLC. An additional $21,384 was recorded as a
subscription receivable. On June 14, 2005 the Company effected a 25,500 for 1
stock split in the form of a stock dividend. As a result of the stock split,
Eagle Ventures LLC received, in the form of a stock dividend, 12,749,500
additional shares of the Company's common stock. All share and per share data
gives retroactive effect to the stock split. As of March 31, 2005, Eagle
Ventures LLC had made equity contributions to the Company (as successor to Eagle
Holdings LLC) of $40,822,278.
On June 23, 2005, the Company completed its initial public offering by
issuing and selling to the public 14,400,000 shares of common stock at $14.00
per share, raising gross proceeds of $201,600,000 before deduction of
underwriting discounts, commissions and expenses of $15,070,710. The Company
used $185,288,656 of the net proceeds from the offering to repay $125,950,000 of
the indebtedness under its existing loan facility and $59,338,656 owed to Eagle
Ventures under a promissory note, including accrued interest.
On October 28, 2005, the Company sold 6,000,000 shares of its common
stock in a public offering at a price of $14.50 per share, raising gross
proceeds of $87,000,000 before deduction of underwriting discounts, commissions
and expenses of $4,954,227. The sale included an over-allotment portion of
825,000 shares of which 325,000 shares were offered by Eagle Ventures LLC. The
Company used $80,000,000 of the net proceeds from the offering to repay
$48,500,000 of its outstanding indebtedness under its revolving credit facility,
which reduced its outstanding debt to $140,000,000, and used $31,500,000 of the
net proceeds to pay the balance of the purchase price for the HERON which was
acquired in December 2005.
Dividends
The Company's current policy is to declare quarterly dividends to
stockholders in February, April, July and October. Payment of dividends is
limited by the terms of certain agreements to which the Company and its
subsidiaries are party. The Company's revolving credit facility permits it to
pay quarterly dividends in amounts up to its quarterly earnings before
extraordinary or exceptional items, interest, taxes, depreciation and
amortization (Credit Agreement EBITDA), less the aggregate amount of interest
incurred and net amounts payable under interest rate hedging agreements during
the relevant period and an agreed upon reserve for dry-docking for the period,
provided that there is not a default or breach of loan covenant under the credit
facility and the payment of the dividends would not result in a default or
breach of a loan covenant. Depending on market conditions in the dry bulk
shipping industry and acquisition opportunities that may arise, the Company may
be required to obtain additional debt or equity financing which could affect its
dividend policy. However, any determination to pay dividends in the future will
be at the discretion of the Board of Directors and will depend upon the
Company's results of operations, financial condition, capital restrictions,
covenants and other factors deemed relevant by the Board of Directors.
On October 5, 2005 the Company's board of directors voted to declare a
cash dividend for the third quarter of 2005 on its common stock of $0.54 per
share, based on 27,150,000 shares of common stock outstanding, payable on
October 31, 2005 to all shareholders of record as of October 17, 2005. The
aggregate amount of the cash dividend paid to the Company's shareholders on
October 31, 2005 was $14,661,000.
Note 13. 2005 Stock Incentive Plan
The Company adopted the 2005 Stock Incentive Plan for the purpose of
affording an incentive to eligible persons. The 2005 Stock Incentive Plan
provides for the grant of equity-based awards, including stock options, stock
appreciation rights, restricted stock, restricted stock units, stock bonuses,
dividend equivalents and other awards based on or relating to the Company's
common stock to eligible non-employee directors, selected officers and other
employees and independent contractors. The plan is administered by a committee
of the Company's Board of Directors.
An aggregate of 2.6 million shares of the Company's common stock has
been authorized for issuance under the plan. As of December 31, 2005, no grants
have been made under the plan.
Note 14. Subsequent Events
On January 30, 2006 the Company's Board of Directors declared a cash
dividend for the fourth quarter of 2005 of $0.57 per share, based on 33,150,000
shares of common stock outstanding, payable on February 24, 2006 to all
shareholders of record as of February 15, 2006. The aggregate amount of the cash
dividend paid to the Company's shareholders on February 24, 2006 was
$18,895,500.
On January 28, 2006, the limited liability company agreement of Eagle
Ventures LLC was amended and restated. This provided for the award of the
previously unallocated profits interests in Eagle Ventures LLC to certain
employees and adjusted the manner distributions are made by Eagle Ventures in
connection with these newly awarded profits interests. In most other respects,
the terms of these newly awarded profits interests are similar in nature to
those discussed in Note 11.
On March 8, 2006, the limited liability company agreement of Eagle Ventures LLC
was amended and restated again. This provided for an acceleration of the
retention schedule applicable to all service based profits interests that were
allocated prior to January 28, 2006. In addition, this provided for the
immediate vesting of 25% of the service-related profits interests that were
granted on January 28, 2006 with the remaining amount vesting over a three-year
period.
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