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N
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ANNUAL REPORT2014
I
I
I
I
I
I
S
S
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1
DIANA CONTAINERSHIPS INC.
2014 ANNUAL REPORT
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ANNUAL REPORT 2014
2
DIANA CONTAINERSHIPS INC. 2014 ANNUAL REPORT
LETTER TO SHAREHOLDERS
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ANNUAL REPORT 2014 3
To Our Shareholders:
I am pleased to report that the performance of Diana Containerships Inc. in 2014 was
highlighted by a strengthened capital position, improved profitability, and the continued
expansion of our fleet. At this writing, we see signs of recovery in the containership market,
particularly in the medium size sector where we have been focusing our fleet investment
strategy. This reflects a slowing cascade, along with a thin order book in the small and medium
vessel sizes, and an increased pace of demolition, all of which may serve to bring supply
into closer alignment with demand. We believe our actions during 2014 have positioned the
Company well for any upturn in the industry cycle.
A Transformational Transaction. The most significant event of the year was our
strengthening of the Company’s capital base through private investments in our common
stock. In July 2014, Diana Shipping Inc. made a significant commitment to our business with an
investment of $40 million in our common shares. At the same time, two institutional investors not
affiliated with the Company together purchased another $40 million of common shares. Finally,
I and a member of my family, as well as other members of the Company’s senior management,
purchased an aggregate of $12 million of our common shares.
This was a strategic and transformational initiative – significantly strengthening the Company
and helping to position us for the next phase of the industry cycle. It also represents a substantial
vote of confidence in Diana Containerships and our long-term strategies. As a result, Diana
Containerships now possesses greater capital resources and expanded financial flexibility.
2014 Financial Highlights. The Company recorded net income of $3.2 million for 2014. This
marked a substantial improvement from our net loss of $57.3 million for 2013, which was mainly
the result of impairment charges, direct sale and other charges related to five vessels. Net time
charter revenues, were $54.1 million for the year, relatively unchanged from 2013.
Our balance sheet has remained a source of strength and was bolstered by the private
placement offerings noted above. We had approximately $92 million in cash and more than $256
million in stockholders’ equity at December 31, 2014. As a result, we believe we have ample
capacity to expand our fleet further in the current marketplace.
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ANNUAL REPORT 2014
4
Fleet Expansion Strategy. We made steady progress during the year in our initiatives
to grow our fleet to position the Company to benefit from the long-term opportunities in the
containership market. In this regard, we acquired three container vessels in the mid-sized
range that we view as our “sweet spot”: one Panamax and two Post-Panamax. Continuing our
expansion, in March 2015 we announced agreements to purchase two additional Panamax
vessels. Including the two ships expected for delivery in April 2015, we will have a fleet of 13
container vessels, which are time-chartered to some of the industry’s leading container lines.
Dividend Policy. The Company, from Day One, has been committed to enhancing long-
term shareholder value. In 2014, after carefully considering the present status and future
outlook for the containership market, the Board of Directors determined that the best way to
advance this goal was to allocate our capital toward maintaining a strong balance sheet and
investing in vessel purchase opportunities. Accordingly, the decision was made to reduce the
cash dividend, which is currently at an annualized rate of $0.01 per share. We believe this use
of our financial capacity is consistent with our commitment to shareholder value and we will
evaluate future dividend decisions in light of prevailing market conditions.
Positioned for Opportunity. Diana Containerships emerges from 2014 with a substantially
strengthened balance sheet, an expanded fleet, and exciting future potential. What has not
changed is our commitment to delivering long-term shareholder value. Toward that end, we will
continue to pursue a well-defined strategic course, including:
Æ Seeking opportunities to acquire high quality containerships throughout the shipping cycle;
Æ Strategically deploying our vessels in a manner that balances the maturities of our time charters
to mitigate cyclical conditions while generating strong, visible cash flows; and
Æ Maintaining a strong balance sheet to provide the flexibility to capitalize on market conditions.
We remain confident that the Company is well-positioned – financially, operationally and
strategically – for an improvement in the containership industry and we look forward to building
on those strengths in the years to come.
Sincerely,
Symeon Palios
Chairman and Chief Executive Officer
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ANNUAL REPORT 2014 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from .......................to.......................
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report....................
Commission file number 001-35025
DIANA CONTAINERSHIPS INC.
(Exact name of Registrant as specified in its charter)
Diana Containerships Inc.
(Translation of Registrant’s name into English)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
Pendelis 18, 175 64 Palaio Faliro, Athens, Greece
(Address of principal executive offices)
Mr. Ioannis Zafirakis
Pendelis 18, 175 64 Palaio Faliro, Athens, Greece
Tel: + 30-216-600-24000, Fax: + 30-216-600-2599
E-mail: izafirakis@dcontainerships.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Common stock, $0.01 par value
Preferred stock purchase rights
Name of each exchange on which registered
Nasdaq Global Market
Nasdaq Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act.
....................... None .......................
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
....................... None .......................
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of
the close of the period covered by the annual report.
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ANNUAL REPORT 2014 6
As of December 31, 2014, there were 73,158,991 shares of the registrant’s common stock outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes No
Yes No
Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
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):
Yes No
Large accelerated filer
Accelerated filer Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
U.S. GAAP
International Financial Reporting Standards as issued
by the International Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Item 17 Item 18
Yes No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed
by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
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ANNUAL REPORT 2014
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
7
8
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Identity of Directors, Senior Management and Advisers ...........................
9
9
Offer Statistics and Expected Timetable .................................................
9
Key Information ......................................................................................
41
Information on the Company ..................................................................
65
Unresolved Staff Comments ..................................................................
65
Operating and Financial Review and Prospects ......................................
84
Directors, Senior Management and Employees ......................................
Major Shareholders and Related Party Transactions ...............................
90
96
Financial Ιnformation ..............................................................................
97
The Offer and Listing ..............................................................................
98
Additional Information ............................................................................
Quantitative and Qualitative Disclosures about Market Risk ..................... 109
Description of Securities Other than Equity Securities ............................. 110
Defaults, Dividend Arrearages and Delinquencies ................................... 110
Item 13.
Material Modifications to the Rights of Security Holders and Use of Proceeds .. 110
Item 14.
Controls and Procedures ....................................................................... 110
Item 15.
Item 16A.
Audit Committee Financial Expert ........................................................... 112
Item 16B. Code of Ethics ....................................................................................... 112
Principal Accountant Fees and Services ................................................. 112
Item 16C.
Exemptions from the Listing Standards for Audit Committees ................. 113
Item 16D.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers .... 113
Item 16E.
Item 16F.
Change in Registrant’s Certifying Accountant ......................................... 113
Item 16G. Corporate Governance .......................................................................... 113
Mine Safety Disclosure .......................................................................... 114
Item 16H.
PART III
Item 17.
Item 18.
Item 19.
Financial Statements .............................................................................. 114
Financial Statements .............................................................................. 114
Exhibits ................................................................................................. 115
INDEX TO FINANCIAL STATEMENTS
F-1
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ANNUAL REPORT 2014
8
FORWARD-LOOKING STATEMENTS
Diana Containerships Inc., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary
statement in connection with this safe harbor legislation. This document and any other written
or oral statements made by us or on our behalf may include forward-looking statements, which
reflect our current views with respect to future events and financial performance. The words
“believe”, “anticipate,” “intends,” “estimate,” “forecast,” “project,” “plan,” “potential,” “will,” “may,”
“should,” “expect” and similar expressions identify forward-looking statements.
Please note in this annual report, “we”, “us”, “our” and “the Company” all refer to Diana
Containerships Inc. and its subsidiaries, unless the context requires otherwise.
The forward-looking statements in this document are based upon various assumptions, many
of which are based, in turn, upon further assumptions, including without limitation, management’s
examination of historical operating trends, data contained in our records and other data available
from third parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties and contingencies
which are difficult or impossible to predict and are beyond our control, we cannot assure you that
we will achieve or accomplish these expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein, important
factors that, in our view, could cause actual results to differ materially from those discussed in the
forward-looking statements include the strength of world economies, fluctuations in currencies
and interest rates, general market conditions, including fluctuations in charter hire rates and
vessel values, changes in demand in the container shipping industry, changes in the supply of
vessels, changes in the Company’s operating expenses, including bunker prices, crew costs,
drydocking and insurance costs, changes in governmental rules and regulations or actions taken
by regulatory authorities, potential liability from pending or future litigation, general domestic and
international political conditions, potential disruption of shipping routes due to accidents, labor
disputes or political events, and other important factors described from time to time in the reports
filed by the Company with the Securities and Exchange Commission, or the SEC.
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ANNUAL REPORT 2014 9
PART I
Item 1. Identity of Directors, Senior Management and
Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following table sets forth our selected consolidated financial data and other operating
data. The selected consolidated financial data in the table as of and for the years ended December
31, 2014, 2013, 2012, 2011 and for the period from January 7, 2010, the inception date of the
Company, to December 31, 2010, are derived from our audited consolidated financial statements
and notes thereto which have been prepared in accordance with U.S. generally accepted
accounting principles, or “U.S. GAAP”. The following data should be read in conjunction with
Item 5. “Operating and Financial Review and Prospects”, the consolidated financial statements,
related notes and other financial information included elsewhere in this annual report.
For the years
ended December 31,
For the period from
Jan. 7, 2010
(inception date)
to Dec. 31,
2014
2013
2012
2011
2010
(in thousands of U.S. dollars, except for share and per share data)
Statement of Operations Data:
Time charter revenues
$
65,678 $
74,337 $
68,835 $
26,992 $
Prepaid charter revenue
amortization
Time charter revenues, net
(11,610)
54,068
(20,322)
54,015
(12,204)
56,631
-
26,992
Voyage expenses
332
705
1,404
731
Vessel operating expenses
26,559
30,870
28,969
11,134
Depreciation
Management fees
General and administrative
expenses
Impairment losses
Loss on vessels’ sale
Foreign currency losses /
(gains)
10,309
11,070
12,476
5,937
-
305
1,551
650
6,306
-
5,059
42,323
695
16,481
3,468
3,442
-
-
-
-
17
66
(194)
18
Operating income / (loss)
9,850
(52,864)
8,957
5,080
5,735
-
5,735
267
2,885
1,454
203
3,524
-
-
(1,044)
(1,554)
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ANNUAL REPORT 2014
10
Interest and finance costs
(6,746)
(4,554)
(3,066)
(1,604)
Interest income
134
72
78
154
(511)
64
Net income / (loss)
Earnings / (loss) per
common share,
basic and diluted
Dividends declared and
paid, per share
$
$
$
Weighted average number
of common shares, basic
Weighted average number
of common shares, diluted
3,238 $
(57,346) $
5,969 $
3,630 $
(2,001)
0.06 $
(1.73) $
0.22 $
0.23 $
(0.45)
0.21 $
0.90 $
1.00 $
0.18 $
-
51,645,071 33,159,328 26,934,533 15,536,028
4,449,431
51,645,071 33,159,328 26,934,533 15,543,916
4,449,431
As of and for the years
ended December 31,
As of and for the
period from
Jan. 7, 2010
(inception date)
to Dec. 31,
2014
2013
2012
2011
2010
(in thousands of U.S. dollars, except for fleet data and average daily results)
Balance Sheet Data:
Cash and cash equivalents
$
82,003 $
19,685 $
31,526 $
36,912
260,945
41,354 $
43,559
158,827
86,446
22,980
306,094
265,372
1,089
9,870
321
9,870
409,263
316,709
9,290
3,779
-
9,270
337,045
6,110
210,011
105,349
3,114
2,429
Total current assets
Vessels’ net book value
Property and equipment, net
Restricted cash
Total assets
Total current liabilities
Long-term bank debt
(net of unamortized deferred
financing costs)
Related party financing
Common stock
Total stockholders’ equity
$
256,443 $ 164,465 $
98,298
98,102
91,906
50,867
50,233
731
350
-
322
231
238,758 $ 206,533 $
Cash Flow Data:
Net cash provided by /
(used in) operating activities
Net cash used in investing
activities
Net cash provided by financing
activities
Fleet Data:
$
25,487 $
31,740 $
31,346 $
12,504 $
(186)
(51,636)
(81,663)
(149,960)
(79,321)
(93,531)
88,467
38,082
108,786
97,073
103,764
Average number of vessels (1)
8.8
9.6
8.6
3.6
Number of vessels
at end of period
Ownership days (2)
Available days (3)
Operating days (4)
Fleet utilization (5)
11.0
3,198
3,198
3,189
9.0
3,516
3,516
3,442
99.7%
97.9%
10.0
3,156
3,156
3,150
99.8%
5.0
1,320
1,320
1,311
99.3%
97.5%
11,098
12,376
92,077
-
787
19,490
-
61
84,611
1.0
2.0
361
361
352
-
-
-
-
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ANNUAL REPORT 2014
11
Average Daily Results:
Time charter equivalent
(TCE) rate (6)
Daily vessel operating expenses
(7)
$
16,803 $
15,162 $
17,499 $
19,895 $
15,146
8,305
8,780
9,179
8,435
7,991
(1) Average number of vessels is the number of vessels that constituted our fleet for the
relevant period, as measured by the sum of the number of days each vessel was a part of our
fleet during the period divided by the number of calendar days in the period.
(2) Ownership days are 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.
(3) Available days are the number of our ownership days less the aggregate number of days
that our vessels are off-hire due to 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.
(4) Operating days are the number of 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.
(5) 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.
(6) Time charter equivalent rates, or TCE rates, are defined as our 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. Voyage expenses include port charges, bunker (fuel)
expenses, canal charges and commissions. TCE rate is a non-GAAP measure, and management
believes it is useful to provide to investors because it 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 are generally expressed in such amounts. The following table reflects the
calculation of our TCE rates for the periods presented.
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ANNUAL REPORT 2014
12
For the years ended December 31,
For the period
from Jan. 7, 2010
(inception date)
to December 31,
2014
2013
2012
2011
2010
(in thousands of U.S. dollars, except for available days and TCE rate)
Time charter revenues, net
of prepaid charter revenue
amortization
$
54,068 $ 54,015 $
56,631 $ 26,992 $
Less: voyage expenses
(332)
(705)
(1,404)
(731)
Time charter equivalent revenues
$
53,736 $ 53,310 $
55,227 $ 26,261 $
Available days
3,198
3,516
3,156
1,320
5,735
(267)
5,468
361
Time charter equivalent (TCE) rate
$
16,803 $
15,162 $
17,499 $ 19,895 $
15,146
(7) Daily vessel operating expenses, which include crew wages and related costs, the cost of
insurance, expenses relating to repairs and maintenance, the costs of spares and consumable
stores, tonnage taxes, regulatory fees, environmental costs and other miscellaneous expenses
are calculated by dividing vessel operating expenses by ownership days for the relevant period.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Some of the following risks relate principally to the industry in which we operate and our
business in general. The occurrence of any of the events described in this section could
significantly and negatively affect our business, financial condition or operating results or the
trading price of our common stock.
Industry Specific Risk Factors
The containership sector is cyclical and volatile, with charter hire rates and profitability
at reduced levels, and the continued global economic recession has resulted in decreased
demand for container shipping.
Our growth generally depends on continued growth in world and regional demand for
containership services, and the global economic slowdown that commenced in 2008 and
from which the global economy has not fully recovered resulted in decreased demand for
containerships and a related decrease in charter rates that have not fully recovered.
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ANNUAL REPORT 2014
13
The ocean-going containership sector is both cyclical and volatile in terms of charter hire
rates and profitability. Containership charter rates peaked in 2005 and generally stayed strong
until the middle of 2008, when the effects of the 2008 economic crisis began to affect global
container trade. Containership charter rates have since improved and stabilized somewhat,
although such improvement may not be sustainable and rates remain below their long-term
averages and could decline again. Fluctuations in charter rates result from changes in the
supply and demand for ship capacity and changes in the supply and demand for the major
products internationally transported by containerships. The factors affecting the supply and
demand for containerships and supply and demand for products shipped in containers are
outside of our control, and the nature, timing and degree of changes in industry conditions are
unpredictable. We cannot assure you that we will be able to successfully charter our vessels
in the future or renew existing charters upon their expiration or termination, most of which are
scheduled to expire in 2015, assuming the earliest redelivery dates, at rates sufficient to allow
us to meet our obligations or at all.
The factors that influence demand for containership capacity include:
Æ supply and demand for products suitable for shipping in containers;
Æ changes in global production of products transported by containerships;
Æ the distance container cargo products are to be moved by sea;
Æ the globalization of manufacturing;
Æ global and regional economic and political conditions;
Æ developments in international trade;
Æ changes in seaborne and other transportation patterns, including changes in the distances
over which container cargoes are transported;
Æ environmental and other regulatory developments;
Æ currency exchange rates; and
Æ weather.
The factors that influence the supply of containership capacity include:
Æ the number of newbuilding deliveries;
Æ the scrapping rate of older containerships;
Æ containership owner access to capital to finance the construction of newbuildings;
Æ the price of steel and other raw materials;
Æ changes in environmental and other regulations that may limit the useful life of containerships;
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ANNUAL REPORT 2014 14
Æ the number of containerships that are sailing at reduced speed, or slow-steaming, to conserve
fuel;
Æ the number of containerships that are out of service; and
Æ port congestion and canal closures.
Our ability to employ any containerships that we acquire in the future and recharter our
containerships upon the expiration or termination of their current charters, and the charter rates
payable under any charters or renewal options or replacement charters will depend upon, among
other things, the prevailing state of the containership charter market, which can be affected by
consumer demand for products shipped in containers. For instance, we have vessels whose
charter expire in 2015, for which the current one-year time charter rate is significantly less than
the charter rate payable under the charters we currently have in place. When our containerships’
charters expire, we may be forced to recharter our containerships at reduced or even unprofitable
rates, or we may not be able to recharter our vessels at all, which may reduce or eliminate our
earnings or make our earnings volatile. The same issues will exist if we acquire additional vessels
and attempt to obtain multi-year time charter arrangements as part of our acquisition and financing
plan, which may affect our ability to operate our vessels profitably. The containership market also
affects the value of our vessels, which follow the trends of freight rates and containership rates.
Liner companies, which are the most significant charterers of containerships, have been
placed under significant financial pressure, thereby increasing our charter counterparty
risk.
The decline in global trade as a result of the lingering effects of the economic slowdown
has resulted in a significant decline in demand for the seaborne transportation of products in
containers, including for exports from China to Europe and the United States. Consequently,
the cargo volumes and freight rates achieved by liner companies, which charter containerships
from ship owners like us, declined sharply in the second half of 2011, and continued to be weak
throughout 2012 and 2013, especially for medium to smaller size containerships. Freight rates
began to show signs of improvement at the end of 2014 although they remain below their historical
averages, which has adversely affected their profitability. The financial challenges faced by liner
companies, some of which announced efforts to obtain third party aid and restructure their
obligations, have reduced demand for containership charters compared to historical averages.
The combination of the current surplus of containership capacity and the expected increase in
the size of the world containership fleet over the next several years may make it difficult to secure
substitute employment for our containerships if our counterparties fail to perform their obligations
under the currently arranged time charters, and any new charter arrangements we are able to
secure may be at lower rates.
We are dependent upon a limited number of customers in a consolidating industry for
a large part of our revenues. The loss of these customers could adversely affect our
financial performance.
Our vessels are currently employed on time charter, to an aggregate of 7 different charterers.
Should charter rates for containerships improve, we will seek to charter a greater portion of our
containerships pursuant to medium- and long-term fixed-rate time charters with leading liner
companies, and we may remain dependent upon a limited number of liner operators. In addition,
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in recent years there have been significant examples of consolidation in the containership sector.
Financial difficulties in the industry may accelerate the trend towards consolidation. The cessation
of business with liner companies to which our vessels are chartered or their failure to fulfill their
obligations under the charters for our containerships could have a material adverse effect on
our financial condition and results of operations, as well as our cash flows and our ability to pay
dividends to our shareholders.
An over-supply of containership capacity may lead to a further reduction in charter
rates, which may limit our ability to operate our vessels profitably.
According to industry sources, as of March 1, 2015, newbuilding containerships with
an aggregate capacity of 3.268 million TEUs, representing approximately 17.7% of the total
worldwide containership fleet capacity as of that date, were on order. The size of the orderbook
when compared to the fleet is small relative to historical levels and will result in the increase in the
size of the world containership fleet over the next few years. However, the orderbook remains
heavily skewed towards ships of at least 8,000 TEU in size. An over-supply of containership
capacity, combined with a decline in the demand for containerships, may result in a further
reduction of charter hire rates. If such a reduction continues in the future, we may only be able
to charter our fleet for reduced rates or unprofitable rates or we may not be able to charter our
containerships at all.
The state of global financial markets and economic conditions may adversely impact our
ability to obtain financing on acceptable terms, which may hinder or prevent us from
expanding our business.
Global financial markets and economic conditions have been, and continue to be, volatile.
During the economic downturn that began in 2008, the debt and equity capital markets were
severely distressed. These issues, along with significant write-offs in the financial services sector,
the re-pricing of credit risk and continuing weak economic conditions have made, and will likely
continue to make, it difficult to obtain financing. A weak state of global financial markets and
economic conditions might adversely impact our ability to issue additional equity at prices that
will not be dilutive to our existing shareholders or preclude us from issuing equity at all.
Also, as a result of concerns about the stability of financial markets generally and the solvency
of counterparties specifically, the cost of obtaining money from the credit markets has increased
as many lenders have increased interest rates, enacted tighter lending standards, refused to
refinance existing debt at all or on terms similar to current debt and reduced, and in some cases
ceased, to provide funding to borrowers. Due to these factors, we cannot be certain that financing
will be available if needed, and to the extent required, on acceptable terms. If financing is not
available when needed, or is available only on unfavorable terms, we may be unable to enhance
our existing business, or otherwise take advantage of business opportunities as they arise.
The instability of the euro or the inability of countries to refinance their debts could have
a material adverse effect on our revenue, profitability and financial position.
As a result of the credit crisis in Europe, the European Commission created the European
Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the
EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support.
In September 2012, the European Council established a permanent stability mechanism, the
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European Stability Mechanism, or the ESM, to assume the role of the EFSF and the EFSM in
providing external financial assistance to Eurozone countries. Despite these measures, concerns
persist regarding the debt burden of certain Eurozone countries and their ability to meet future
financial obligations. An extended period of adverse development in the outlook for European
countries could reduce the overall demand for consumer products and consequently for our
services. These potential developments, or market perceptions concerning these and related
issues, could affect our financial position, results of operations and cash flow.
Changes in the economic and political environment in China and policies adopted by the
government to regulate its economy may have a material adverse effect on our business,
financial condition and results of operations.
The Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development in such respects as structure,
government involvement, level of development, growth rate, capital reinvestment, allocation
of resources, rate of inflation and balance of payments position. Prior to 1978, the Chinese
economy was a planned economy. Since 1978, increasing emphasis has been placed on the
utilization of market forces in the development of the Chinese economy. Annual and five-year
State Plans are adopted by the Chinese government in connection with the development of the
economy. Although state-owned enterprises still account for a substantial portion of the Chinese
industrial output, in general, the Chinese government is reducing the level of direct control that
it exercises over the economy through State Plans and other measures. There is an increasing
level of freedom and autonomy in areas such as allocation of resources, production, pricing and
management and a gradual shift in emphasis to a “market economy” and enterprise reform.
Limited price reforms were undertaken, with the result that prices for certain commodities
are principally determined by market forces. Many of the reforms are unprecedented or
experimental and may be subject to revision, change or abolition based upon the outcome of
such experiments. If the Chinese government does not continue to pursue a policy of economic
reform, the level of imports to and exports from China could be adversely affected by changes
to these economic reforms by the Chinese government, as well as by changes in political,
economic and social conditions or other relevant policies of the Chinese government, such as
changes in laws, regulations or export and import restrictions, all of which could adversely affect
our business, operating results and financial condition.
A decrease in the level of China’s export of goods or an increase in trade protectionism
could have a material adverse impact on our charterers’ business and, in turn, could
cause a material adverse impact on our results of operations, financial condition and
cash flows.
China exports considerably more goods than it imports. Our containerships may be deployed
on routes involving containerized trade in and out of emerging markets, and our charterers’
container shipping and business revenue may be derived from the shipment of goods from
the Asia Pacific region to various overseas export markets including the United States and
Europe. Any reduction in or hindrance to the output of China-based exporters could have a
material adverse effect on the growth rate of China’s exports and on our charterers’ business.
For instance, the government of China has implemented economic policies aimed at increasing
domestic consumption of Chinese-made goods. This may have the effect of reducing the supply
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of goods available for export and may, in turn, result in a decrease of demand for container
shipping. Additionally, though in China there is an increasing level of autonomy and a gradual
shift in emphasis to a “market economy” and enterprise reform, many of the reforms, particularly
some limited price reforms that result in the prices for certain commodities being principally
determined by market forces, are unprecedented or experimental and may be subject to revision,
change or abolition. The level of imports to and exports from China could be adversely affected
by changes to these economic reforms by the Chinese government, as well as by changes in
political, economic and social conditions or other relevant policies of the Chinese government.
Our operations expose us to the risk that increased trade protectionism will adversely affect
our business. If the global recovery is undermined by downside risks, governments may turn to
trade barriers to protect their domestic industries against foreign imports, thereby depressing
the demand for shipping. Specifically, increasing trade protectionism in the markets that our
charterers serve has caused and may continue to cause an increase in: (i) the cost of goods
exported from China, (ii) the length of time required to deliver goods from China and (iii) the risks
associated with exporting goods from China, as well as a decrease in the quantity of goods to
be shipped.
Any increased trade barriers or restrictions on trade, especially trade with China, would have
an adverse impact on our charterers’ business, operating results and financial condition and
could thereby affect their ability to make timely charter hire payments to us and to renew and
increase the number of their time charters with us. This could have a material adverse effect on
our business, results of operations and financial condition and our ability to pay dividends to our
shareholders.
Vessel values may fluctuate which may adversely affect our financial condition, result in
the incurrence of a loss upon disposal of a vessel, impairment losses or increases in the
cost of acquiring additional vessels.
Vessel values may fluctuate due to a number of different factors, including: general
economic and market conditions affecting the shipping industry; competition from other
shipping companies; the types and sizes of available vessels; the availability of other modes
of transportation; increases in the supply of vessel capacity; the cost of newbuildings;
governmental or other regulations; and the need to upgrade secondhand and previously
owned vessels as a result of charterer requirements, technological advances in vessel
design or equipment or otherwise. In addition, as vessels grow older, they generally decline
in value. Due to the cyclical nature of the containership market, if for any reason we sell
any of our owned vessels at a time when prices are depressed, we could incur a loss and
our business, results of operations, cash flow and financial condition could be adversely
affected. Moreover, if the book value of a vessel is impaired due to unfavorable market
conditions we may incur a loss that could adversely affect our operating results. For example,
during 2013, impairment losses were recorded for certain of our vessels, as our impairment
test exercise indicated that the carrying values of these vessels were not recoverable.
Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels,
the cost of acquisition may increase and this could adversely affect our business, results of
operations, cash flows, financial condition and ability to pay dividends to our shareholders.
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The containership sector is highly competitive, and we may be unable to compete
successfully for charters with established companies or new entrants that may have
greater resources and access to capital, which may have a material adverse affect on us.
The containership sector is a highly competitive industry that is capital intensive and highly
fragmented. Competition arises primarily from other vessel owners, some of whom may have
greater resources and access to capital than we have. Competition among vessel owners for
the seaborne transportation of semi-finished and finished consumer and industrial products can
be intense and depends on the charter rate, location, size, age, condition and the acceptability
of the vessel and its operators to charterers. Due in part to the highly fragmented market, many
of our competitors with greater resources and access to capital than we have could operate
larger fleets than we may operate and thus be able to offer lower charter rates or higher quality
vessels than we are able to offer. If this were to occur, we may be unable to retain or attract new
charterers on attractive terms or at all, which may have a material adverse effect on our business,
prospects, financial condition, liquidity and results of operations.
An increase in operating costs could adversely affect our cash flows and financial
condition.
Vessel operating expenses include the costs of crew, provisions, deck and engine stores,
lube oil, bunkers, insurance and maintenance and repairs, which depend on a variety of factors,
many of which are beyond our control. Some of these costs, primarily relating to insurance and
enhanced security measures implemented after September 11, 2001 and as a result of increases
in the frequency of acts of piracy, have been increasing. 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. Increases in any of these costs could have a material adverse effect on our
business, results of operations, cash flows, financial condition and ability to pay dividends to our
shareholders.
Change to the price of fuel, or bunkers, may adversely affect profits.
While we generally do not bear the cost of fuel, or bunkers, for vessels operating on time
charters, fuel is a significant factor in negotiating charter rates. As a result, an increase in the
price of fuel beyond our expectations may adversely affect our profitability at the time of charter
negotiation. The price and supply of fuel is unpredictable and fluctuates based on events outside
our control, including geopolitical developments, supply and demand for oil and gas, actions by
the Organization of Petroleum Exporting Countries and other oil and gas producers, war and
unrest in oil producing countries and regions, regional production patterns and environmental
concerns and regulations.
Further, despite the recent low fuel prices in the beginning of 2015, fuel may become much
more expensive in the future, which may reduce the profitability and competitiveness of our
business versus other forms of transportation, such as truck or rail.
Increased inspection procedures, tighter import and export controls and new security
regulations could increase costs and cause disruption of our business.
The international containership sector is subject to additional security and customs
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inspection and related procedures in countries of origin, destination and trans-shipment points.
These security procedures can result in cargo seizure, delays in the loading, offloading, trans-
shipment, or delivery of containers and the levying of customs duties, fines or other penalties
against exporters or importers and, in some cases, carriers.
Since the events of September 11, 2001, U.S. authorities have significantly increased the
levels of inspection for all imported containers. Government investment in non-intrusive container
scanning technology has grown, and there is interest in electronic monitoring technology,
including so-called “e-seals” and “smart” containers that would enable remote, centralized
monitoring of containers during shipment to identify tampering with or opening of the containers,
along with potentially measuring other characteristics such as temperature, air pressure, motion,
chemicals, biological agents and radiation.
It is unclear what changes, if any, to the existing security procedures will ultimately be
proposed or implemented, or how any such changes will affect the containership sector. These
changes have the potential to impose additional financial and legal obligations on carriers and,
in certain cases, to render the shipment of certain types of goods by container uneconomical
or impractical. These additional costs could reduce the volume of goods shipped in containers,
resulting in a decreased demand for containerships. In addition, it is unclear what financial costs
any new security procedures might create for containership owners and operators. Any additional
costs or a decrease in container volumes could have an adverse impact on our ability to attract
customers and therefore have an adverse impact on our ability to operate our vessels profitably.
Compliance with safety and other vessel requirements imposed by classification societies
may be very costly and may adversely affect our business.
The hull and machinery of every commercial vessel must be classed by a classification society
authorized by its country of registry. The classification society certifies that a vessel is safe and
seaworthy in accordance with the applicable rules and regulations of the country of registry of the
vessel and the Safety of Life at Sea Convention.
A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of
a special survey, a vessel’s machinery may be on a continuous survey cycle under which the
machinery would be surveyed periodically over a five-year period. If any vessel does not maintain
its class and/or fails any annual survey, intermediate survey or special survey, the vessel will be
unable to trade between ports and will be unemployable. This could negatively impact our results
of operations and financial condition.
We are subject to regulation and liability under environmental laws that could require
significant expenditures and affect our cash flows and net income.
Our business and the operations of our containerships are materially affected by
environmental regulation in the form of international conventions, national, state and local
laws and regulations in force in the jurisdictions in which our containerships operate,
as well as in the country or countries of their registration, including those governing the
management and disposal of hazardous substances and wastes, the cleanup of oil spills
and other contamination, air emissions (including greenhouse gases), water discharges and
ballast water management.These regulations include, but are not limited to, European Union
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regulations, the U.S. Oil Pollution Act of 1990, or OPA, requirements of the U.S. Coast Guard
and the U.S. Environmental Protection Agency, or EPA, the U.S. Clean Air Act, the U.S. Clean
Water Act and the U.S. Marine Transportation Security Act of 2002, and regulations of the
United Nation’s International Maritime Organization, or the IMO, including the International
Convention on Civil Liability for Oil Pollution Damage of 1969, the International Convention for
the Prevention of Pollution from Ships of 1975, the International Convention for the Prevention
of Pollution from Ships of 1973, or MARPOL, including designations of Emission Control
Areas, or ECAs thereunder, the IMO International Convention for the Safety of Life at Sea of
1974, the International Convention on Load Lines of 1966, the International Convention of
Civil Liability for Bunker Oil Pollution Damage, and the International Management Code for
the Safe Operation of Ships and Pollution Prevention. Because such conventions, laws, and
regulations are often revised, we cannot predict the ultimate cost of complying with such
requirements or the impact thereof on the re-sale price or useful life of any containership that
we own or will acquire. Additional conventions, laws and regulations may be adopted that
could limit our ability to do business or increase the cost of our doing business and which
may materially adversely affect our operations. Government regulation of vessels, particularly
in the areas of safety and environmental requirements, continue to change, requiring us to
incur significant capital expenditures on our vessels to keep them in compliance, or even to
scrap or sell certain vessels altogether. In addition, we may incur significant costs in meeting
new maintenance and inspection requirements, in developing contingency arrangements
for potential environmental violations and in obtaining insurance coverage. For example, the
cost of compliance with any new emissions regulation that may be adopted by the United
Nations Framework Convention on Climate Change may be substantial, or we may face
substantial taxes on bunkers. Additionally, we cannot predict the cost of compliance with any
new regulation that may be promulgated by the United States as a result of the 2010 BP plc
Deepwater Horizon oil spill in the Gulf of Mexico.
The operation of our containerships is also affected by the requirements set forth in the
International Maritime Organization’s International Management Code for the Safe Operation
of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires shipowners 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.
Failure to comply with the ISM Code may subject us to increased liability, may decrease available
insurance coverage for the affected ships and may result in denial of access to, or detention in,
certain ports.
In addition, we are required by various governmental and quasi-governmental agencies to
obtain certain permits, licenses, certificates, approvals and financial assurances with respect
to our operations. Our failure to maintain necessary permits, licenses, certificates, approvals or
financial assurances could require us to incur substantial costs or temporarily suspend operation
of one or more of the vessels in our fleet, or lead to the invalidation or reduction of our insurance
coverage.
Environmental requirements can also affect the resale value or useful lives of our vessels,
require a reduction in cargo capacity, ship modifications or operational changes or restrictions,
lead to decreased availability of insurance coverage for environmental matters or result in the
denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under
local, national and foreign laws, as well as international treaties and conventions, we could incur
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material liabilities, including for cleanup obligations and natural resource damages, in the event
that there is a release of petroleum or hazardous substances from our vessels or otherwise in
connection with our operations. We could also become subject to personal injury or property
damage claims relating to the release of hazardous substances associated with our existing
or historic operations. Violations of, or liabilities under, environmental requirements can result
in substantial penalties, fines and other sanctions, including in certain instances, seizure or
detention of our vessels.
We may be unable to attract and retain qualified, skilled employees or crew necessary to
operate our business.
Our success will depend in large part on our ability and the ability of Unitized Ocean Transport
Limited, which we refer to as UOT or our Manager, our wholly-owned subsidiary, to attract and
retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled
employees with specialized training who can perform physically demanding work. Competition
to attract and retain qualified crew members is intense. If we are not able to increase our rates to
compensate for any crew cost increases, it could have a material adverse effect on our business,
results of operations, cash flows and financial condition. Any inability we, or our Manager,
experience in the future to hire, train and retain a sufficient number of qualified employees could
impair our ability to manage, maintain and grow our business, which could have a material
adverse effect on our financial condition, results of operations and cash flows.
Labor interruptions could disrupt our business.
Our vessels are manned by masters, officers and crews that are employed by our vessel-
owning subsidiaries. If not resolved in a timely and cost-effective manner, industrial action or other
labor unrest could prevent or hinder our operations from being carried out normally and could
have a material adverse effect on our financial condition, results of operations and cash flows.
Our vessels may suffer damage due to the inherent operational risks of the seaborne
transportation industry and we may experience unexpected drydocking costs, which may
adversely affect our business and financial condition.
Our vessels and their cargoes may be at risk of being damaged or lost because of events
such as:
Æ marine disasters;
Æ bad weather;
Æ business interruptions caused by mechanical failures;
Æ grounding, fire, explosions and collisions; and
Æ human error, war, terrorism, piracy and other circumstances or events.
These hazards may result in death or injury to persons, loss of revenues or property,
environmental damage, higher insurance rates, damage to our customer relationships, delay or
rerouting. If our vessels suffer damage, they may need to be repaired at a drydocking facility.
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The costs of drydock repairs are unpredictable and may be substantial. We may have to pay
drydocking costs that our insurance does not cover in full. The loss of earnings while these
vessels are being repaired and repositioned, as well as the actual cost of these repairs, would
decrease our earnings. In addition, space at drydocking facilities is sometimes limited and not
all drydocking facilities are conveniently located. We may be unable to find space at a suitable
drydocking facility or our vessels may be forced to travel to a drydocking facility that is not
conveniently located relative to our vessels’ positions. The loss of earnings while these vessels
are forced to wait for space or to steam to more distant drydocking facilities would decrease
our earnings. The involvement of our vessels in an environmental disaster may also harm our
reputation as a safe and reliable vessel owner and operator.
World events could affect our results of operations and financial condition.
Continuing conflicts and recent developments in the Ukraine, the Middle East, including
Iraq and Syria, and North Africa, including Libya and Egypt, and the presence of United States
and other armed forces in Afghanistan, 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, the Gulf of Guinea and the Gulf of Aden off
the coast of Somalia. Any of these occurrences could have a material adverse impact on our
operating results, revenues and costs.
Acts of piracy on ocean-going vessels could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world
such as the South China Sea and in the Gulf of Aden off the coast of Somalia. Although the
frequency of sea piracy worldwide continues to decline, sea piracy incidents continue to occur,
particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea.
If these piracy attacks result in regions in which our vessels are deployed being characterized
by insurers as “war risk” zones, as the Gulf of Aden has been since May 2008, or Joint War
Committee “war and strikes” listed areas, premiums payable for such coverage could increase
significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs,
due to employing onboard security guards, could increase in such circumstances. We may not
be adequately insured to cover losses from these incidents, which could have a material adverse
effect on us. In addition, detention hijacking, involving the hostile detention of a vessel, as a result
of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for
our vessels, could have a material adverse impact on our business, financial condition, results
of operations.
If our vessels call on ports located in countries that are subject to restrictions imposed by
the U.S. or other governments, that could adversely affect our reputation and the market
for our common stock.
Although we intend to comply with all applicable sanctions and embargo laws and
regulations, there can be no assurance that we will maintain such compliance, particularly as
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the scope of certain laws may be unclear and may be subject to changing interpretations. The
U.S. sanctions and embargo laws and regulations vary in their application, as they do not all
apply to the same covered persons or proscribe the same activities, and such sanctions and
embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S.
enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA,
which expanded the scope of the former Iran Sanctions Act. Among other things, CISADA
expanded the application of the prohibitions to additional activities of non-U.S. companies
and introduced limits on the ability of companies and persons to do business or trade with Iran
when such activities relate to the investment, supply or export of refined petroleum or petroleum
products. In addition, in 2012, President Obama signed Executive Order 13608 which prohibits
foreign persons from violating or attempting to violate, or causing a violation of any sanctions
in effect against Iran or facilitating any deceptive transactions for or on behalf of any person
subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be
deemed a foreign sanctions evader and will be banned from all contacts with the United States,
including conducting business in U.S. dollars. Also in 2012, President Obama signed into law
the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act,
which created new sanctions and strengthened existing sanctions. Among other things, the Iran
Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services,
infrastructure or technology to Iran’s petroleum or petrochemical sector. The Iran Threat
Reduction Act also includes a provision requiring the President of the United States to impose
five or more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person
the President determines is a controlling beneficial owner of, or otherwise owns, operates, or
controls or insures a vessel that was used to transport crude oil from Iran to another country and
(1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge
the vessel was so used or (2) if the person otherwise owns, operates, or controls, or insures the
vessel, the person knew or should have known the vessel was so used. Such a person could be
subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from
financial transactions subject to U.S. jurisdiction, and exclusion of that person’s vessels from
U.S. ports for up to two years.
On November 24, 2013, the P5+1 (the United States, United Kingdom, Germany, France,
Russia and China) entered into an interim agreement with Iran entitled the “Joint Plan of Action”
(“JPOA”). Under the JPOA it was agreed that, in exchange for Iran taking certain voluntary
measures to ensure that its nuclear program is used only for peaceful purposes, the U.S. and
E.U. would voluntarily suspend certain sanctions for a period of six months.
On January 20, 2014, the U.S. and E.U. indicated that they would begin implementing the
temporary relief measures provided for under the JPOA. These measures include, among other
things, the suspension of certain sanctions on the Iranian petrochemicals, precious metals, and
automotive industries from January 20, 2014 until July 20, 2014. The U.S. initially extended the
JPOA until November 24, 2014, and has since extended it until June 30, 2015. These regulations
and U.S. sanctions may be amended over time, and the U.S. retains the authority to revoke the
aforementioned relief if Iran fails to meet its commitments under the JPOA.
Although it is our intention to comply with the provisions of the JPOA, there can be no
assurance that we will be in compliance in the future as such regulations and U.S. Sanctions may
be amended over time, and the U.S. retains the authority to revoke the aforementioned relief if
Iran fails to meet its commitments under the JPOA.
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Due to the nature of our business and the evolving nature of the foregoing sanctions and
embargo laws and regulations, there can be no assurance that we will be in compliance at all
times in the future, particularly as the scope of certain laws may be unclear and may be subject to
changing interpretations. Any violation of such restrictions could result in fines, penalties or other
sanctions that could severely impact our ability to access U.S. capital markets and conduct our
business, and could result in some investors deciding, or being required, to divest their interest,
or not to invest, in us. In addition, certain institutional investors may have investment policies
or restrictions that prevent them from holding securities of companies that have contracts with
countries identified by the U.S. government as state sponsors of terrorism. The determination by
these investors not to invest in, or to divest from, our common stock may adversely affect the price
at which our common stock trades. Moreover, our charterers may violate applicable sanctions
and embargo laws and regulations as a result of actions that do not involve us or our vessels,
and those violations could in turn negatively affect our reputation. In addition, our reputation and
the market for our securities may be adversely affected if we engage in certain other activities,
such as entering into charters with individuals or entities in countries subject to U.S. sanctions
and embargo laws that are not controlled by the governments of those countries, or engaging
in operations associated with those countries pursuant to contracts with third parties that are
unrelated to those countries or entities controlled by their governments. Investor perception
of the value of our common stock may be adversely affected by the consequences of war, the
effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
Current or future counterparties of ours may be affiliated with persons or entities that are or
may be in the future the subject of sanctions imposed by the Obama administration, the European
Union and/or other international bodies as a result of the annexation of Crimea by Russia in March
2014. If we determine that such sanctions require us to terminate existing or future contracts
to which we or our subsidiaries are party or if we are found to be in violation of such applicable
sanctions, our results of operations may be adversely affected or we may suffer reputational harm.
Currently, we do not believe that any of our existing counterparties are affiliated with persons or
entities that are subject to such sanctions.
We conduct business in China, where the legal system is not fully developed and has
inherent uncertainties that could limit the legal protections available to us.
Some of our vessels could be chartered to Chinese customers and from time to time on our
charterers’ instructions, our vessels may call on Chinese ports. Such charters and voyages may
be subject to regulations in China that may require us to incur new or additional compliance or
other administrative costs and may require that we pay to the Chinese government new taxes
or other fees. Changes in Chinese laws and regulations, including with regards to tax matters,
or changes in their implementation by local authorities could affect our vessels if chartered to
Chinese customers as well as our vessels calling to Chinese ports and could have a material
adverse impact on our business, financial condition and results of operations.
Governments could requisition our vessels during a period of war or emergency, resulting
in loss of earnings.
A government of a vessel’s registry could requisition for title or seize our vessels. Requisition
for title occurs when a government takes control of a vessel and becomes the owner. A
government could also requisition our vessels for hire. Requisition for hire occurs when a
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government takes control of a vessel and effectively becomes the charterer at dictated charter
rates. Generally, requisitions occur during a period of war or emergency. Government requisition
of one or more of our vessels could have a material adverse effect on our business, results of
operations, cash flows and financial condition.
The smuggling of drugs or other contraband onto our vessels may lead to governmental
claims against us.
We expect that our vessels will call in ports in areas where smugglers attempt to hide drugs
and other contraband on vessels, with or without the knowledge of crew members. To the extent
our vessels are found with contraband, whether inside or attached to the hull of our vessel and
whether with or without the knowledge of any of our crew, we may face governmental or other
regulatory claims which could have an adverse effect on our business, results of operations, cash
flows and financial condition.
Maritime claimants could arrest our vessels, which would interrupt our business.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other
parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or
damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel
through foreclosure proceedings. The arrest or attachment of one or more of our vessels could
interrupt our business or require us to pay large sums of funds to have the arrest lifted, which
would have a negative effect on our cash flows.
In addition, in some jurisdictions, such as South Africa, under the “sister-ship” theory of liability,
a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any
“associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could
try to assert “sister-ship” liability against one vessel in our fleet for claims relating to another of our
ships.
There is a lack of historical operating history provided with our secondhand vessel
acquisitions and profitable operation of the vessels will depend on our skill and expertise.
Consistent with shipping industry practice, other than inspection of the physical condition of
the vessels and examinations of classification society records, neither we nor our Manager will
conduct any historical financial due diligence process when we acquire vessels. Accordingly,
neither we nor our Manager will obtain the historical operating data for any secondhand vessels
we may acquire in the future 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
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.
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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 also 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.
Due to the differences between the prior owners of these vessels and the Company with
respect to the routes we expect to operate, our future customers, the cargoes we expect to carry,
the freight rates and charter hire rates we will charge in the future and the costs we expect to incur
in operating our vessels, we believe that our operating results will be significantly different from
the operating results of the vessels while owned by the prior owners. Profitable operation of the
vessels will depend on our skill and expertise. If we are unable to operate the vessels profitably, it
may have an adverse effect on our financial condition, results of operations and cash flows.
Company Specific Risk Factors
The market values of our vessels have decreased, which could limit the amount of funds
that we can borrow under our credit facilities.
The fair market value of our vessels is related to prevailing freight charter rates. While the
fair market value of vessels and the freight charter market have a very close relationship as the
charter market moves from trough to peak, the time lag between the effect of charter rates on
market values of ships can vary. The fair market values of our vessels have generally experienced
high volatility, and you should expect the market value of our vessels to fluctuate depending on
a number of factors including:
Æ the prevailing level of charter hire rates;
Æ general economic and market conditions affecting the shipping industry;
Æ competition from other shipping companies and other modes of transportation;
Æ the types, sizes and ages of vessels;
Æ the supply and demand for vessels;
Æ applicable governmental regulations;
Æ technological advances; and
Æ the cost of newbuildings.
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The market values of our vessels may remain low or decrease, which could cause us to
breach covenants in our credit facility and adversely affect our operating results.
As of December 31, 2014, we were not in compliance with the covenant of minimum required
security cover (hull cover ratio) under our loan agreement with the Royal Bank of Scotland, or RBS.
However, the lenders waived their right to request prepayment or provision of additional security
and agreed to reassess the compliance with the covenant not earlier than March 31, 2015. In the
event that, upon expiration of our waiver with RBS, we are in breach of the minimum required
security cover covenant, we intend to seek a waiver or amendment of the loan agreement or to
provide additional security necessary to cure the potential breach. If the market values of our
vessels, which are already at relatively low levels, do not increase or decrease further prior to the
expiration of our waiver with RBS or afterward, we may breach some of the covenants contained
in the financing agreements relating to our indebtedness. If we do breach such covenants and
we are unable to remedy the relevant breach or obtain waivers or amendments to our loan
agreements, 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.
Our growth in the future depends on our ability to successfully charter our vessels, for
which we will face substantial competition.
The process of obtaining new long-term time charters is highly competitive and generally
involves an intensive screening process and competitive bids, and often extends for several
months. Containership charters are awarded based upon a variety of factors relating to the
vessel operator, including:
Æ shipping industry relationships and reputation for customer service and safety;
Æ containership experience and quality of ship operations, including cost effectiveness;
Æ quality and experience of seafaring crew;
Æ the ability to finance containerships at competitive rates and financial stability generally;
Æ relationships with shipyards and the ability to get suitable berths;
Æ construction management experience, including the ability to obtain on-time delivery of new
ships according to customer specifications;
Æ willingness to accept operational risks pursuant to the charter, such as allowing termination of
the charter for force majeure events; and
Æ competitiveness of the bid in terms of overall price.
We expect substantial competition for providing new containership service from a number
of experienced companies, including state-sponsored entities and major shipping companies.
Many of these competitors have significantly greater financial resources than we do, and can
therefore operate larger fleets and may be able to offer better charter rates. As a result of these
factors, we may be unable to obtain new customers on a profitable basis, if at all, which will
impede our ability to establish our operations and implement our growth successfully.
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Furthermore, if our vessels become available for employment under new time charters during
periods when charter rates are at depressed levels, we may have to employ our containerships at
depressed charter rates, if we are able to secure employment for our vessels at all, which would
lead to reduced or volatile earnings. Future charter rates may not be at a level that will enable us to
operate our containerships profitably to allow us to implement our growth strategy successfully,
pay dividends or repay our debt.
We cannot assure you that our board of directors will declare dividends.
In 2014, 2013 and 2012 we made dividend payments in the aggregate amount of $0.21,
$0.90 and $1.00 per share, respectively, and have declared a dividend of $0.0025 per share
on February 27, 2015, with respect to the fourth quarter of 2014. We currently intend to declare
a variable quarterly dividend each February, May, August and November equal to a substantial
portion of available cash from operations during the previous quarter after the payment of cash
expenses and reserves for scheduled drydockings, intermediate and special surveys and other
purposes as our board of directors may from time to time determine are required, after taking into
account contingent liabilities, the terms of any credit facility, our growth strategy and other cash
needs and the requirements of Marshall Islands law.
The declaration and payment of dividends, if any, will always be subject to the discretion
of our board of directors. 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 and provisions of Marshall Islands law affecting the payment of dividends. The
international containership sector 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 section of the annual report. Our growth strategy
contemplates that we will finance the acquisition of additional vessels through a combination
of debt and equity financing on terms acceptable to us. If financing is not available to us on
acceptable terms, our board of directors may determine to finance or refinance acquisitions with
cash from operations, which would reduce or even eliminate the amount of cash available for the
payment of dividends.
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. In addition, any credit facilities that we may enter into in the future
may include restrictions on our ability to pay dividends.
The failure of our counterparties to meet their obligations to us under any vessel purchase
agreements or time charter agreements could cause us to suffer losses or otherwise
adversely affect our business.
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Currently, we have secured time charters for our operating vessels with minimum remaining
durations between 1 and 12 months. Generally, we intend to selectively employ our vessels
under short-, medium- or long-term time charters. The ability and willingness of each of our
counterparties to perform its obligations under a vessel purchase agreement or time charter
agreement with us will depend on a number of factors that are beyond our control and may
include, among other things, general economic conditions, the condition of the containership
market and the overall financial condition of the counterparty. If the seller of a vessel fails to
deliver a vessel to us as agreed, or if we cancel a purchase agreement because a seller has
not met its obligations, this may have a material adverse effect on our business. In addition,
in depressed market conditions, there have been reports of charterers renegotiating their
charters or defaulting on their obligations under charters and our future customers may fail
to pay charterhire or attempt to renegotiate charter rates. If our future charterers fail to meet
their obligations to us or attempt to renegotiate our future charter agreements, we could
sustain significant losses which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We may be unable to locate suitable vessels or dispose of vessels at reasonable prices
which would adversely affect our ability to operate our business.
We intend to further grow our fleet through selective acquisitions. Our business strategy
is dependent on identifying and purchasing suitable vessels. Changing market and regulatory
conditions may limit the availability of suitable vessels because of customer preferences or
because they are not or will not be compliant with existing or future rules, regulations and
conventions. Additional vessels of the age and quality we desire may not be available for
purchase at prices we are prepared to pay or at delivery times acceptable to us, and we may
not be able to dispose of vessels at reasonable prices, if at all. If we are unable to purchase and
dispose of vessels at reasonable prices in accordance with our business strategy or in response
to changing market and regulatory conditions, our business would be adversely affected.
Our purchasing and operating secondhand vessels may result in increased operating
costs and vessels off-hire, which could adversely affect our earnings.
Our current business strategy includes growth through the acquisition of previously owned
vessels. While we will typically inspect secondhand vessels before purchase, this does not
provide us with the same knowledge about their condition that we would have had if these vessels
had been built for and operated exclusively by us. Accordingly, we may not discover defects
or other problems with such vessels before purchase. Any such hidden defects or problems,
when detected, may be expensive to repair, and if not detected, may result in accidents or
other incidents for which we may become liable to third parties. In addition, when purchasing
secondhand vessels, we do not receive the benefit of any builder warranties if the vessels we buy
are older than one year.
In general, the costs to maintain a vessel in good operating condition increase with the age of
the vessel. Older vessels are typically less fuel efficient than more recently constructed vessels
due to improvements in engine technology. Potential charterers may also choose not to charter
older vessels. Governmental regulations, safety and other equipment standards related to the age
of vessels may require expenditures for alterations or the addition of new equipment to some of
our vessels and may restrict the type of activities in which these 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. As a result, regulations
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and standards could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
We may not be able to implement our growth successfully.
Our business plan is to identify and acquire suitable vessels at favorable prices and trade
our vessels on short-, medium- or long-term time charters. Our business plan will therefore
depend upon our ability to identify and acquire suitable vessels to grow our fleet in the future and
successfully employ our vessels.
Growing any business by acquisition presents numerous risks, including undisclosed liabilities
and obligations, difficulty obtaining additional qualified personnel and managing relationships with
customers and suppliers. In addition, competition from other companies, many of which may
have significantly greater financial resources than us, may reduce our acquisition opportunities
or cause us to pay higher prices. We cannot assure you that we will be successful in executing
our plans to establish and grow our business or that we will not incur significant expenses and
losses in connection with these plans. Our failure to effectively identify, purchase, develop and
integrate any vessels could impede our ability to establish our operations or implement our growth
successfully. Our acquisition growth strategy exposes us to risks that may harm our business,
financial condition and operating results, including risks that we may:
Æ fail to realize anticipated benefits, such as cost savings or cash flow enhancements;
Æ incur or assume unanticipated liabilities, losses or costs associated with any vessels or
businesses acquired, particularly if any vessel we acquire proves not to be in good condition;
Æ be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate
our growing business and fleet;
Æ decrease our liquidity by using a significant portion of available cash or borrowing capacity to
finance acquisitions;
Æ significantly increase our interest expense or financial leverage if we incur debt to finance
acquisitions; or
Æ incur other significant charges, such as impairment of goodwill or other intangible assets, asset
devaluation or restructuring charges.
We have acquired re-sale newbuilding vessels in the past and we may in the future agree
to acquire additional newbuilding vessels, and any delay in the delivery of vessels under
contract could have a material adverse effect on us.
We have acquired re-sale newbuilding vessels in the past. As we grow our fleet in the future,
we may acquire additional newbuildings. The completion and delivery of newbuildings could be
delayed because of, among other things:
Æ quality or engineering problems;
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Æ changes in governmental regulations or maritime self-regulatory organization standards;
Æ work stoppages or other labor disturbances at the shipyard;
Æ bankruptcy of or other financial crisis involving the shipyard;
Æ a backlog of orders at the shipyard;
Æ political, social or economic disturbances;
Æ weather interference or a catastrophic event, such as a major earthquake or fire;
Æ requests for changes to the original vessel specifications;
Æ shortages of or delays in the receipt of necessary construction materials, such as steel;
Æ an inability to finance the constructions of the vessels; or
Æ an inability to obtain requisite permits or approvals.
If the seller of any newbuilding vessel we have contracted to purchase is not able to deliver
the vessel to us as agreed, or if we cancel a purchase agreement because a seller has not met
his obligations, it may result in a material adverse effect on our business, prospects, financial
condition, liquidity and results of operations.
Increased competition in technological innovation could reduce the demand for our
vessels and our ability to successfully implement our business strategy.
The charter hire rates and the value and operational life of a vessel are determined by a
number of factors including the vessel’s efficiency, operational flexibility and physical life.
Efficiency includes speed, fuel economy and the ability to be loaded and unloaded quickly.
Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through
canals and straits. Physical life is related to the original design and construction, maintenance
and the impact of the stress of operations. If new containerships are built that are more
efficient or flexible or have longer physical lives than our vessels, competition from these more
technologically advanced containerships could adversely affect the amount of charter hire
payments we receive for our vessels or our ability to charter our vessels at all.
Our executive officers and directors will not devote all of their time to our business,
which may hinder our ability to operate successfully.
Our executive officers and directors will be involved in other business activities, such as the
operation of Diana Shipping Inc., or Diana Shipping, which may result in their spending less time
than is appropriate or necessary to manage our business successfully. This could have a material
adverse effect on our business, results of operations, cash flows and financial condition.
Certain existing shareholders currently own a significant portion of our outstanding
common shares, which may limit your ability to influence our actions.
Diana Shipping currently owns approximately 26.1% of our outstanding common stock
and our executive officers collectively own approximately 11.5% of our outstanding common
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stock. In addition, 12 West Capital Management LP beneficially owns approximately 25.1%
of our outstanding common stock. Accordingly, certain of our existing shareholders have the
power to exert considerable influence over our actions, including the election of directors, the
adoption or amendment of provisions in our articles of incorporation and possible mergers or
other significant corporate transactions. This concentration of ownership may have the effect
of delaying, deferring or preventing a change in control, merger, consolidation, takeover or
other business combination. This concentration of ownership could also discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of us, which
could in turn have an adverse effect on the market price of our shares. So long as certain of
our existing shareholders continue to own a significant amount of our equity, even though the
amount held by each such shareholder represents less than 50% of our voting power, they will
continue to be able to exercise considerable influence over our decisions.
Diana Shipping will not provide any guarantee of the performance of our obligations
nor will you have any recourse against Diana Shipping should you seek to enforce a
claim against us.
Diana Shipping currently owns approximately 26.1% of our common stock, but will not provide
any guarantee of the performance of our obligations. Further, you will have no recourse against
Diana Shipping should you seek to enforce a claim against us.
The fiduciary duties of our officers and directors may conflict with those of the officers
and directors of Diana Shipping and/or its affiliates.
Our officers and directors have fiduciary duties to manage our business in a manner beneficial
to us and our shareholders. However, our Chief Executive Officer and Chairman, President, Chief
Operating Officer and Chief Financial Officer also serve as executive officers and/or directors of
Diana Shipping. As a result, these individuals have fiduciary duties to manage the business of
Diana Shipping and its affiliates in a manner beneficial to such entities and their shareholders.
Consequently, these officers and directors may encounter situations in which their fiduciary
obligations to Diana Shipping and us are in conflict. Although Diana Shipping is contractually
restricted from competing with us in the containership sector, there may be other business
opportunities for which Diana Shipping may compete with us such as hiring employees, acquiring
other businesses, or entering into joint ventures, which could have a material adverse effect on
our business. In addition, we are contractually restricted from competing with Diana Shipping in
the drybulk carrier sector, which limits our ability to expand our operations.
Because the Public Company Accounting Oversight Board is not currently permitted to
inspect our independent accounting firm, you may not benefit from such inspections.
Auditors of U.S. public companies are required by law to undergo periodic Public Company
Accounting Oversight Board (PCAOB) inspections that assess their compliance with U.S. law and
professional standards in connection with performance of audits of financial statements filed with
the Commission. Certain European Union countries, including Greece, do not currently permit the
PCAOB to conduct inspections of accounting firms established and operating in such European
Union countries, even if they are part of major international firms. Accordingly, unlike for most U.S.
public companies, the PCAOB is prevented from evaluating our auditor’s performance of audits
and its quality control procedures, and, unlike shareholders of most U.S. public companies, we
and our shareholders are deprived of the possible benefits of such inspections.
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Restrictive covenants in our credit facilities may impose financial and other restrictions
on us.
We entered into a $100.0 million secured revolving credit facility with the Royal Bank of
Scotland plc., or RBS, in December 2011 in order to refinance part of the acquisition costs of
certain of our vessels. In addition, in May 2013, we entered into an unsecured loan agreement
of up to $50.0 million with Diana Shipping Inc., one of our major shareholders, to be used to
fund vessels acquisitions and for general corporate purposes. As of December 31, 2014 and
the date hereof, we had $148.7 million of debt outstanding under our facilities. As of December
31, 2014 and the date hereof we did not have any remaining borrowing capacity under our loan
agreements.
Our credit facilities impose operating and financial restrictions on us. These restrictions may
limit our ability to, among other things:
Æ pay dividends or make capital expenditures if we do not repay amounts drawn under our loan
facilities, if there is a default under the loan facilities or if the payment of the dividend or capital
expenditure would result in a default or breach of a loan covenant;
Æ incur additional indebtedness, including through the issuance of guarantees;
Æ change the flag, class or management of our vessels;
Æ create liens on our assets;
Æ sell our vessels;
Æ enter into a time charter or consecutive voyage charters that have a term that exceeds, or which
by virtue of any optional extensions may exceed a certain period;
Æ merge or consolidate with, or transfer all or substantially all our assets to, another person; and
Æ enter into a new line of business.
Therefore, we may need to seek permission from our lenders in order to engage in some
corporate actions. Our lenders’ interests may be different from ours and we cannot guarantee
that we will be able to obtain our lenders’ permission when needed. This may limit our ability to
pay any dividends to you, finance our future operations, make acquisitions or pursue business
opportunities.
Our ability to obtain debt financing in the future may be dependent on the performance
of our then existing charters and the creditworthiness of our charterers.
The actual or perceived credit quality of our charterers, and any defaults by them, may
materially affect our ability to obtain the additional capital resources that we will require to
purchase additional vessels in the future or may significantly increase our costs of obtaining such
capital. Our inability to obtain financing at all or at a higher than anticipated cost may materially
affect our results of operation and our ability to implement our business strategy.
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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, our Chief Executive Officer, Mr. Symeon Palios; our President, Mr. Anastasios Margaronis;
our Chief Financial Officer and Treasurer, Mr. Andreas Michalopoulos; and our Chief Operating
Officer and Secretary, Mr. Ioannis Zafirakis. 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 adversely affect our business,
results of operations and ability to pay dividends. We do not intend to maintain “key man” life
insurance on any of our officers or other members of our management team.
If our insurance is insufficient to cover losses that may occur to our vessels or result
from our operations due to the inherent operational risks of the shipping industry, it
could adversely affect our financial condition.
The operation of an ocean-going vessel carries inherent risks, any of which could increase our
costs or lower our revenues. These risks include the possibility of:
Æ marine disaster;
Æ environmental accidents;
Æ cargo and property losses or damage;
Æ business interruptions caused by mechanical failure, human error, political action in various
countries, war, labor strikes, or adverse weather conditions; and
Æ loss of revenue during vessel off-hire periods.
Under the vessel management agreements, our Manager is responsible for procuring
and paying for insurance for our vessels. Our insurance policies contain standard limitations,
exclusions and deductibles. The policies insure against those risks that the shipping industry
commonly insures against, which are hull and machinery, protection and indemnity and war
risk. The Manager currently maintains hull and machinery coverage in an amount at least equal
to the vessels’ fair market value. The Manager maintains an amount of protection and indemnity
insurance that is at least equal to the standard industry level of coverage. We cannot assure you
that the Manager will be able to procure adequate insurance coverage for our fleet in the future
or that our insurers will pay any particular claim.
We expect to continue to operate substantially outside the United States, which will
expose us to political and governmental instability, which could harm our operations.
We expect that our operations will continue to be primarily conducted outside the United
States and may be adversely affected by changing or adverse political and governmental
conditions in the countries where our vessels are flagged or registered and in the regions where
we otherwise engage in business. Any disruption caused by these factors may interfere with
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the operation of our vessels, which could harm our business, financial condition and results
of operations. Past political efforts to disrupt shipping in these regions, particularly in the
Arabian Gulf, have included attacks on ships and mining of waterways. In addition, terrorist
attacks outside this region and continuing hostilities in the Middle East and the world may lead
to additional armed conflicts or to further acts of terrorism and civil disturbance in the United
States and elsewhere. Any such attacks or disturbances may disrupt our business, increase
vessel operating costs, including insurance costs, and adversely affect our financial condition
and results of operations. Our operations may also be adversely affected by expropriation of
vessels, taxes, regulation, tariffs, trade embargoes, economic sanctions or a disruption of or
limit to trading activities or other adverse events or circumstances in or affecting the countries
and regions where we operate or where we may operate in the future.
We generate all of our revenues in dollars and incur a portion of our expenses in other
currencies, and therefore exchange rate fluctuations could have an adverse impact on
our results of operations.
We generate all of our revenues in dollars and incur a portion of our expenses in currencies
other than the dollar. This difference could lead to fluctuations in net income due to changes in
the value of the dollar relative to the other currencies, in particular the Euro. Expenses incurred in
foreign currencies against which the dollar falls in value can increase, decreasing our revenues.
Further declines in the value of the dollar could lead to higher expenses payable by us.
We may have to pay tax on United States source income, which would reduce our
earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross
shipping income of a vessel owning or chartering corporation, such as us and our subsidiaries,
that is attributable to transportation that begins or ends, but that does not both begin and end,
in the United States may be subject to a 4% United States federal income tax without allowance
for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the
Code, or Section 883, and the applicable Treasury Regulations promulgated thereunder.
We intend to take the position that we qualified for this statutory tax exemption for U.S. federal
income tax return reporting purposes for our 2014 taxable year and we intend to so qualify for
future taxable years. However, there are factual circumstances beyond our control that could
cause us to lose the benefit of this tax exemption for any future taxable year and thereby become
subject to U.S. federal income tax on our U.S.-source shipping income. For example, in certain
circumstances we may no longer qualify for exemption under Code Section 883 for a particular
taxable year if shareholders, other than “qualified shareholders”, with a five percent or greater
interest in our common shares owned, in the aggregate, 50% or more of our outstanding common
shares for more than half the days during the taxable year. Due to the factual nature of the issues
involved, there can be no assurances on our tax-exempt status.
If we are not entitled to exemption under Section 883 for any taxable year, we would be
subject for those years to an effective 2% United States federal income tax on the shipping
income we derive during the year which is attributable to the transport of cargoes to or from the
United States. The imposition of this taxation would have a negative effect on our business and
would result in decreased earnings available for distribution to our shareholders.
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We may be treated as a “passive foreign investment company,” which could have certain
adverse U.S. Federal income tax consequences to U.S. holders.
A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for
U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable
year consists of certain types of “passive income” or (2) at least 50% of the average value of the
corporation’s assets produce or are held for the production of those types of “passive income.”
For purposes of these tests, cash will be treated as an asset held for the production of passive
income. For purposes of these tests, “passive income” generally includes dividends, interest, and
gains from the sale or exchange of investment property and rents and royalties other than those
received from unrelated parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does not constitute
“passive income.” U.S. holders of stock in a PFIC are subject to a disadvantageous U.S. federal
income tax regime with respect to the income derived by the PFIC, the distributions they receive
from the PFIC and the gain, if any, they derive from the sale or other disposition of their stock in
the PFIC.
Whether we will be treated as a PFIC will depend upon our method of operation. In this
regard, we intend to treat the gross income we derive or are deemed to derive from time or
voyage chartering activities as services income, rather than rental income. Accordingly, we
believe that any income from time or voyage chartering activities will not constitute “passive
income,” and any assets that we may own and operate in connection with the production of that
income will not constitute passive assets. However, any gross income that we may be deemed
to have derived from bareboat chartering activities will be treated as rental income and thus
will constitute “passive income,” and any assets that we may own and operate in connection
with the production of that income will constitute passive assets. There is substantial legal
authority supporting this position consisting of case law and Internal Revenue Service, or IRS,
pronouncements concerning the characterization of income derived from time charters and
voyage charters as services income for other tax purposes. However, it should be noted that
there is also authority which characterizes time charter income as rental income rather than
services income for other tax purposes. Accordingly, no assurance can be given that the IRS
or a court of law will accept our position with regard to our status from time to time as a PFIC,
and there is a risk that the IRS or a court of law could determine that we are or have been a PFIC
for a particular taxable year.
If we are or have been a PFIC for any taxable year, U.S. holders of our common stock will face
certain adverse U.S. federal income tax consequences and information reporting obligations.
Under the PFIC rules, unless such U.S. holders make certain elections available under the Code
(which elections could themselves have certain adverse consequences for such U.S. holders),
such U.S. holders would be liable to pay U.S. federal income tax at the then prevailing income
tax rates on ordinary income plus interest upon excess distributions and upon any gain from
the disposition of our common stock, as if the excess distribution or gain had been recognized
ratably over such U.S. holder’s holding period for such common stock. See Item 10.E “Taxation
— United States Federal Income Tax Considerations — United States Federal Income Taxation
of U.S. Holders — PFIC Status and Significant Tax Consequences” for a more comprehensive
discussion of the U.S. federal income tax consequences to U.S. holders of our common stock if
we are or were to be treated as a PFIC.
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We may be subject to increased premium payments, or calls, because we obtain some
of our insurance through protection and indemnity associations.
We may be subject to increased premium payments, or calls, in amounts based on our
claim records as well as the claim records of other members of the protection and indemnity
associations in the International Group, which is comprised of 13 mutual protection and indemnity
associations and insures approximately 90% of the world’s commercial tonnage and through
which we receive insurance coverage for tort liability, including pollution-related liability, as well as
actual claims. Amounts we may be required to pay as a result of such calls will be unavailable for
other purposes.
Risks Relating to our Common Shares
We may be unable to maintain our listing on the Nasdaq Global Select Market, which
would adversely affect the value of our common shares and make it more difficult for you
to monetize your investment.
Nasdaq Global Select Market and each national securities exchange have certain corporate
governance requirements that must be met in order for us to maintain our listing. If we fail to
maintain the relevant corporate governance requirements, our common shares could be delisted,
which would make it harder for you to monetize your investment in our common shares and
would cause the value of your investment to decline.
If the share price of our common shares fluctuates, you could lose a significant part of
your investment.
The market price of our common shares may be influenced by many factors, many of which
are beyond our control, including the other risks described herein and the following:
Æ the failure of securities analysts to publish research about us, or analysts making changes in
their financial estimates;
Æ announcements by us or our competitors of significant contracts, acquisitions or capital commitments;
Æ variations in quarterly operating results;
Æ general economic conditions;
Æ terrorist or piracy acts;
Æ future sales of our common shares or other securities; and
Æ investors’ perception of us and the international containership sector.
These broad market and industry factors may materially reduce the market price of our
common shares, regardless of our operating performance.
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Future offerings of debt securities and amounts outstanding under current and future
credit facilities or other borrowings, which would rank senior to our common stock upon
our liquidation, and future offerings of equity securities, which would dilute our existing
stockholders, may adversely affect the market value of our common stock.
On December 16, 2011, we entered into an agreement for a revolving credit facility of up to
$100 million with RBS, and on May 20, 2013 we entered into an unsecured loan agreement of $50
million with Diana Shipping. In the future, we may attempt to increase our capital resources with
further borrowing under credit facilities, making offerings of debt or additional offerings of equity
securities, including commercial paper, medium-term notes, senior or subordinated notes and
classes of preferred stock. Upon liquidation, holders of our debt securities and preferred stock
and lenders with respect to our credit facilities and other borrowings will receive a distribution of
our available assets prior to the holders of our common stock. Additional equity offerings may
dilute the holdings of our existing stockholders or reduce the market value of our common stock,
or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a
preference on dividend payments that would limit amounts available for distribution to holders
of our common stock. Because our decision to borrow additional amounts under credit facilities
or issue securities in any future offering will depend on market conditions and other factors
beyond our control, we cannot predict or estimate the amount, timing or nature of our future
indebtedness or offering of securities. Therefore, holders of our common stock bear the risk of our
future offerings reducing the market value of our common stock and diluting their shareholdings
in us or that in the event of bankruptcy, liquidation, dissolution or winding-up of the Company, all
or substantially all of our assets will be distributed to holders of our debt securities or preferred
stocks or lenders with respect to our credit facilities and other borrowings.
We are a holding company, and we will depend on the ability of our current and future
subsidiaries to distribute funds to us in order to satisfy our financial obligations or to
make dividend payments.
We are a holding company, and our current and future subsidiaries, which will all be wholly-
owned by us, either directly or indirectly, will conduct all of our operations and own all of our
operating assets. We will have no significant assets other than the equity interests in our wholly-
owned subsidiaries. As a result, our ability to satisfy our financial obligations and to pay dividends,
if any, to our shareholders will depend on the ability of our subsidiaries to distribute funds to us. In
turn, the ability of our subsidiaries to make dividend payments to us will depend on them having
profits available for distribution and, to the extent that we are unable to obtain dividends from
our subsidiaries, this will limit the discretion of our board of directors to pay or recommend the
payment of dividends. Also, our subsidiaries are limited by Marshall Islands law which 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.
Because we are a foreign corporation, you may not have the same rights or protections
that a shareholder in a United States corporation may have.
We are incorporated in the Republic of the Marshall Islands, which does not have a well-
developed body of corporate law and may make it more difficult for our shareholders to protect
their interests. Our corporate affairs are governed by our amended and restated articles of
incorporation and bylaws and the Marshall Islands Business Corporations Act, or BCA. The
provisions of the BCA resemble provisions of the corporation laws of a number of states in the
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United States. The rights and fiduciary responsibilities of directors under the law of the Marshall
Islands are not as clearly established as the rights and fiduciary responsibilities of directors under
statutes or judicial precedent in existence in certain U.S. jurisdictions and there have been few
judicial cases in the Marshall Islands interpreting the BCA. Shareholder rights may differ as well.
While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the
State of Delaware and other states with substantially similar legislative provisions, our public
shareholders may have more difficulty in protecting their interests in the face of actions by the
management, directors or controlling shareholders than would shareholders of a corporation
incorporated in a U.S. jurisdiction. Therefore, you may have more difficulty in protecting your
interests as a shareholder in the face of actions by the management, directors or controlling
stockholders than would shareholders of a corporation incorporated in a United States
jurisdiction.
Future sales of our common stock could cause the market price of our common stock to
decline.
As of December 31, 2014 we had 73,158,991 shares of common stock outstanding. The
market price of our common stock could decline from its current levels due to sales of a large
number of shares in the market, including sales of shares by our large shareholders, our
issuance of additional shares, or securities convertible into our common stock or the perception
that these sales could occur. These sales could also make it more difficult or impossible for us
to sell equity securities in the future at a time and price that we deem appropriate to raise funds
through future offerings of shares of our common stock. The issuance of such additional shares
of common stock would also result in the dilution of the ownership interests of our existing
shareholders. We have entered into a registration rights agreement with Diana Shipping that
will entitle it to have all the shares of our common stock that it owns registered for re-sale in the
public market under the Securities Act.
As a key component of our business strategy, we intend to issue additional shares of
common stock or other securities to finance our growth. These issuances, which would
generally not be subject to shareholder approval, may lower your ownership interests
and may depress the market price of our common stock.
As a key component of our business strategy, we plan to finance potential future expansions
of our fleet in large part with equity financing. Pursuant to our amended and restated articles
of incorporation, we are authorized to issue up to 500 million common shares and 25 million
preferred shares, each with a par value of $0.01 per share. Therefore, subject to the rules of the
Nasdaq Global Select Market that are applicable to us, we plan to issue additional shares of
common stock, and other equity securities of equal or senior rank, without shareholder approval,
in a number of circumstances from time to time.
The issuance by us of additional shares of common stock or other equity securities of equal
or senior rank will have the following effects:
Æ our existing shareholders’ proportionate ownership interest in us may decrease;
Æ the relative voting strength of each previously outstanding share may be diminished;
Æ the market price of our common stock may decline; and
Æ the amount of cash available for dividends payable on our common stock, if any, may decrease.
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It may not be possible for our investors to enforce U.S. judgments against us.
We are incorporated in the Republic of the Marshall Islands. Substantially all of our assets are
located outside the United States. As a result, it may be difficult or impossible for United States
shareholders to serve process within the United States upon us or to enforce judgment upon
us for civil liabilities in United States courts. In addition, you should not assume that courts in
the countries in which we are incorporated or where our assets are located (1) would enforce
judgments of United States courts obtained in actions against us based upon the civil liability
provisions of applicable United States federal and state securities laws or (2) would enforce, in
original actions, liabilities against us based upon these laws.
Anti-takeover provisions in our organizational documents could make it difficult for our
shareholders 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 value of our securities.
Several provisions of our amended and restated articles of incorporation and bylaws could
make it difficult for our shareholders to change the composition of our board of directors in any
one year, preventing them from changing the composition of management. In addition, the same
provisions may discourage, delay or prevent a merger or acquisition that shareholders may
consider favorable.
These provisions include:
Æ authorizing our board of directors to issue “blank check” preferred stock without shareholder
approval;
Æ providing for a classified board of directors with staggered, three-year terms;
Æ prohibiting cumulative voting in the election of directors;
Æ authorizing the removal of directors only for cause and only upon the affirmative vote of the
holders of two-thirds of the outstanding common shares entitled to vote generally in the
election of directors;
Æ limiting the persons who may call special meetings of shareholders; and
Æ establishing advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted on by shareholders at shareholder
meetings.
In addition, we have entered into a stockholders rights agreement pursuant to which our
board of directors may cause the substantial dilution of any person that attempts to acquire us
without the approval of our board of directors.
These anti-takeover provisions, including provisions of our stockholders rights agreement,
could substantially impede the ability of shareholders to benefit from a change in control and, as
a result, may adversely affect the value of our securities, if any, and the ability of shareholders to
realize any potential change of control premium.
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Item 4. Information on the Company
A. History and development of the Company
Diana Containerships Inc. is a corporation incorporated under the laws of the Republic of the
Marshall Islands on January 7, 2010. Each of the Company’s vessels is owned by separate wholly-
owned subsidiaries. Diana Containerships Inc. is the owner of all the issued and outstanding
shares of the subsidiaries listed in Exhibit 8.1 to this annual report. We maintain our principal
executive offices at Pendelis 18, 175 64 Palaio Faliro, Athens, Greece. Our telephone number at
that address is +30 216 600 2400. Our agent and authorized representative in the United States
is our wholly-owned subsidiary, Container Carriers (USA) LLC, established in July 2014, in the
State of Delaware, which is located at 2711 Centerville Road, Suite 400, Wilmington, Delaware
19808.
Business Development and Capital Expenditures and Divestitures
In December 2011, we entered into an agreement for a revolving credit facility of up to $100
million with the Royal Bank of Scotland plc. The credit facility has a term of five years and bore, up
to June 1, 2013, interest at the rate of 2.75% per annum over LIBOR. We also paid a commitment
fee of 0.99% per annum on the undrawn amount of the facility until October 31, 2013. In 2012 and
2013, we drew down an aggregate amount of $92.7 million and $6.0 million respectively, leaving
currently outstanding an amount of $98.7 million.
During 2012 we acquired five Panamax container vessels: two from APL (Bermuda) Ltd.,
the m/v APL Sardonyx and m/v APL Spinel, for $30 million each; two from Reederei Santa
Containerschiffe GmbH & Co. KG, the m/v Cap San Marco renamed subsequently to Cap
Domingo and m/v Cap San Raphael renamed subsequently to Cap Doukato, for $33 million
each; and one from Neptune Orient Lines Ltd., the m/v APL Garnet, for $30 million. All vessels
were chartered back to their respective sellers.
In July 2012, we completed a public offering in the United States under the United States
Securities Act at 1933, as amended, for 8,100,000 common shares at the price of $6.25 per
share. On August 10, 2012, the underwriters exercised an overallotment option and purchased
an additional amount of 1,015,803 shares. The net proceeds from the public offering, including the
overallotment option, amounted to $53.9 million (net of underwriting discounts and commissions
and offering expenses payable by the Company).
In February 2013, we entered into a Memorandum of Agreement with Hanjin Shipping Co.,
Ltd., Seoul, for the purchase of a 1993-built Panamax container vessel of approximately 4,024
TEU capacity, the m/v Hanjin Malta, for a purchase price of $22 million. The vessel was delivered
to us from the sellers in March 2013. The vessel was chartered back to her sellers.
Effective March 1, 2013, Unitized Ocean Transport Limited, the “Manager” or “UOT”, our wholly-
owned subsidiary, provides us and the vessels we own with management and administrative
services. Pursuant to the new management agreements, UOT receives a fixed commission of
2% on the gross charter hire and freight earned by each vessel plus a technical management
fee of $15,000 per vessel per month for employed vessels and $7,500 per vessel per month for
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laid-up vessels, if any. In addition, pursuant to the administrative agreement, UOT receives a fixed
monthly fee of $10,000. Since March 1, 2013 the management and administrative fees payable
to UOT are eliminated in consolidation as intercompany transactions. Until February 28, 2013,
similar fees were payable to Diana Shipping Services S.A., or DSS, a wholly-owned subsidiary
of Diana Shipping Inc., one of our major shareholders. On March 1, 2013, and in relation with the
appointment of UOT to act as our new Manager, the Administrative Services Agreement, the
Broker Services Agreement that DSS had entered into with Diana Enterprises Inc. on our behalf,
and the Vessel Management Agreements with DSS were terminated.
Following the termination agreement for brokerage services that were provided to us through
DSS on March 1, 2013, Diana Enterprises entered on the same date into an agreement with UOT
to provide brokerage services for a fixed monthly fee of $120,833. The agreement had a term of
thirteen months and the fees were payable quarterly in advance, effective April 1, 2013.
In April, May and December 2013, we sold the m/v Maersk Madrid, m/v Maersk Merlion, m/v
Maersk Malacca and m/v Apl Spinel to unrelated parties for demolition, for the aggregate sale
price of $37.5 million, net of address commissions. In May, June and December 2013, the vessels
were delivered to their new owners.
In May 2013, we entered into an unsecured loan agreement of up to $50.0 million with Diana
Shipping to be used to fund vessel acquisitions and for general corporate purposes. The loan
has a term of four years and bears interest at the rate of 5.0% per annum over LIBOR and a
fee of 1.25% per annum on any amounts repaid upon any repayment or voluntary prepayment
dates. In August 2013, the full amount of $50.0 million was drawn down, which currently remains
outstanding.
In May 2013, we filed a prospectus supplement pursuant to Rule 424(b) relating to the offer
and sale of an aggregate of up to $40.0 million in gross proceeds of our common stock under
an at-the-market offering, with Deutsche Bank Securities Inc., as sales agent. In 2013, a total
of 2,859,603 shares of our common stock were sold under the at-the-market offering and the
net proceeds, after deducting underwriting commissions and offering expenses payable by us,
amounted to $12.4 million. In 2014, a total of 1,092,596 shares of our common stock were sold
under the at-the-market offering and the net proceeds received, after deducting underwriting
commissions and offering expenses payable by us, amounted to $4.7 million. In July 2014, we
announced the suspension of the offer and sale of our common shares under the existing at-the-
market offering until there is a significant improvement in the containership market.
In August 2013, we entered into two Memoranda of Agreement for the purchase of two
2006-built Post-Panamax container vessels of approximately 6,541 TEU capacity each, the m/v
Puelo, and the m/v Pucon, for a purchase price of $47.0 million each. The vessels were delivered
to us from the sellers in August and September 2013, respectively. The vessels were chartered
to CSAV.
During 2013, we entered into various supplemental agreements with the Royal Bank of
Scotland plc. The supplemental agreements, dated July 22, 2013, September 11, 2013 and
December 6, 2013, provide for an increased margin of 3.10% per annum over LIBOR, effective
June 1, 2013, and certain other amendments of the terms of the initial facility agreement.
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In February 2014, we sold the m/v Apl Sardonyx, to unrelated parties for demolition, for the
sale price of $9.7 million, net of address commission. The vessel was delivered to her new owners
in the same month.
In March 2014, the Broker Services Agreement between UOT and Diana Enterprises Inc. was
terminated and replaced with a new agreement with retroactive effect from January 1, 2014 and
with a term of fifteen months, ending on March 31, 2015. Effective July 1, 2014, the agreement
between UOT and Diana Enterprises Inc. was terminated and replaced with a new one between
Diana Containerships Inc. and Diana Enterprises Inc. All other terms of the agreement remained
unchanged.
On July 28, 2014, we entered into an agreement to sell 36,653,386 shares of our common
stock in a private placement (the “Private Placement”) to a group of investors including Diana
Shipping, unaffiliated institutional investors, and our Chairman and Chief Executive Officer,
Mr. Symeon Palios, and a member of his family, along with other members of the Company’s
senior management, at a purchase price of $2.51 per share. In the transaction, Diana Shipping
purchased common shares of value $40.0 million, two institutional investors not affiliated with us
whose manager is based in the United States together purchased common shares of value $40.0
million, and Mr. Palios and a member of his family, along with other members of the Company’s
senior management, purchased common shares of an aggregate value $12.0 million. The
transaction closed on July 29, 2014. In connection with the Private Placement, we entered with
our respective counterparties, into amendments to the brokerage services agreement with Diana
Enterprises Inc., the loan agreement with Diana Shipping Inc., the facility agreement with the
Royal Bank of Scotland plc. and the Stockholders Rights Agreement. The net proceeds received
from the transaction, after deducting offering expenses payable by us, amounted to $91.3 million.
We intend to use the net proceeds for general corporate purposes, including vessel acquisitions
and working capital. The purchasers received customary registration rights with respect to the
shares purchased in the Private Placement. The transaction was approved by an independent
committee of our Board of Directors, which obtained a fairness opinion from Houlihan Lokey
Financial Advisors, Inc. regarding the financial fairness to us of the aggregate purchase price to
be received by us in the transaction. For more information on the Private Placement, see “Item 7.
Major Shareholders and Related Party Transactions.”
In August 2014, we signed, through two separate wholly-owned subsidiaries, two Memoranda
of Agreement to purchase from an unaffiliated third party two 2004-built Post-Panamax container
vessels of approximately 5,576 TEU capacity each, the m/v YM March and the m/v YM Great,
for a purchase price of $22.175 million each. The vessels were delivered to us in September and
October 2014, respectively and chartered to Yang Ming (UK) Ltd.
In November 2014, we signed, through a separate wholly-owned subsidiary, a Memorandum
of Agreement to purchase from an unaffiliated third party a 2005-built Panamax container vessel of
approximately 5,042 TEU capacity, the m/v Santa Pamina, for a purchase price of $15.95 million.
The vessel was delivered to us in November 2014, and chartered to The Shipping Corporation
of India Ltd.
In December 2014, we acquired, jointly with two other related parties, from unrelated
individuals, a plot of land, in Athens, Greece, for an aggregate price of Euro 2.0 million or $2.5
million, based on the exchange rate of US Dollar to Euro on the date of acquisition. The plot of
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land is under the common ownership of the joint purchasers. We paid one third of the purchase
price, and the total cost for the acquisition of the plot, including additional capitalized costs,
amounted to $0.9 million.
In March 2015, we entered, through newly established wholly-owned subsidiaries, into two
memoranda of agreement with unrelated individuals, to acquire the container vessels “YM New
Jersey” and “YM Los Angeles”, for the purchase price of $21.5 million each. The vessels’ are
expected to be delivered to us by the end of April 2015 and are chartered to Yang Ming (UK) Ltd.
through approximately the end of 2016. The closing of the transaction is subject to the signing of
a novation agreement to the time charter contract of each vessel.
B. Business Overview
We are a corporation formed under the laws of the Republic of the Marshall Islands on
January 7, 2010. We were founded to own containerships and pursue containership acquisition
opportunities.
As of the date of this annual report, our operating fleet consists of seven panamax and four
post-panamax containerships with a combined carrying capacity of 52,359 TEU and a weighted
average age of 11.4 years. In addition, we expect to take delivery of two 2006-built panamax
vessels, the YM Los Angeles and the YM New Jersey, of approximately 4,923 TEU capacity
each, by the end of April 2015. As at December 31, 2014, our fleet consisted of seven panamax
and four post-panamax containerships with a combined carrying capacity of 52,359 TEU and
a weighted average age of 11.2 years. As at December 31, 2013, our fleet consisted of seven
panamax and two post-panamax containerships with a combined carrying capacity of 40,894
TEU and a weighted average age of 11.5 years. As at December 31, 2012, our fleet consisted of
ten panamax containerships with a combined carrying capacity of 42,151 TEU and a weighted
average age of 15.6 years.
During 2014, 2013 and 2012, we had fleet utilization of 99.7%, 97.9%, and 99.8%,
respectively, our vessels achieved a daily time charter equivalent rate of $16,803, $15,162, and
$17,499, respectively, and we generated revenues, net of prepaid charter revenue amortization,
of $54.1 million, $54.0 million and $56.6 million, respectively.
Set forth below is summary information concerning our fleet as at March 20, 2015.
Vessel
BUILT TEU
Sister
Ships*
Gross Rate
(USD
Per Day)
Com**
Charterer
Delivery Date
to Charterer
Redelivery Date to
Owners***
Notes
SAGITTA
2010 3,426
CENTAURUS
2010 3,426
YM LOS ANGELES
2006 4,923
A
A
B
Panamax Container Vessels
$7,825
1.25%
A.P. M
ø
ller - Maersk
A/S
14-Nov-14
14-Sep-15 - 14-Nov-15
1,2,3
$8,000
3.50%
CMA CGM S.A.
13-Jun-14
28-Jan-15
4,5
$7,650
5.00%
Maersk Line A/S
22-Feb-15
22-Jul-15 - 22-Oct-15
$21,000
US$350
per day
Yang Ming (UK) Ltd.
9-Apr-15
19-Oct-16 - 19-Feb-17
6,7,8
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ANNUAL REPORT 2014
45
B
$21,000
US$350
per day
Yang Ming (UK) Ltd.
15-Apr-15
24-Sep-16 - 24-Jan-17
6,7,9
$9,500
5.00%
The Shipping
Corporation of India
Ltd.
28-Nov-14
4-Apr-15 - 14-Apr-15
10
C
$9,900
3.75% Rudolf A. Oetker KG 23-Dec-14
24-Dec-15 - 8-Mar-16
11,12
C
$9,900
3.75% Rudolf A. Oetker KG 23-Dec-14
23-Jan-16 - 23-Apr-16
11
$27,000
0%
NOL Liner (Pte) Ltd.
19-Nov-12
20-Aug-15 - 19-Oct-15
13
$25,550
US$150
per day
Hanjin Shipping Co.
Ltd.
15-Mar-13
30-Mar-16 - 15-May-16
13
Post - Panamax Container Vessels
D
$27,900
D
$27,900
US$150
per day
US$150
per day
CSAV Valparaiso
23-Aug-13
10-Apr-15 - 23-Feb-16 10,14,15
CSAV Valparaiso
20-Sep-13
8-May-15 - 20-Mar-16 10,14,16
YM NEW JERSEY
2006 4,923
SANTA PAMINA
2005 5,042
CAP DOMINGO
(ex Cap
San Marco)
2001 3,739
CAP DOUKATO
(ex Cap San
Raphael)
2002 3,739
APL GARNET
1995 4,729
HANJIN MALTA
1993 4,024
PUELO
2006 6,541
PUCON
2006 6,541
YM MARCH
2004 5,576
YM GREAT
E
E
$12,000
0%
Yang Ming (UK) Ltd.
12-Sep-14
15-Apr-15 - 15-May-15
10,17
2004 5,576
$17,475
2.50%
27-Mar-15
27-Jun-15 - 27-Aug-15
$12,000
0%
10-Oct-14
26-Mar-15
Yang Ming (UK) Ltd.
18
19
* Each container vessel is a “sister ship”, or closely similar, to other container vessels that have the same letter.
** Total commission paid to third parties.
*** Charterers’ optional period to redeliver the vessel to owners. Charterers have the right to add the off hire
days, if any, and therefore the optional period may be extended.
1. In October 2014, the Company agreed to extend as from November 14, 2014 the previous
charter party with A. P. Møller - Maersk A/S for a period of minimum 10 months to maximum 12
months at a gross charter rate of US$7,825 per day.
2. As per Novation Agreement signed in January 2015, with effect from February 1, 2015,
charterers have changed to Maersk Line A/S.
3. Vessel off-hire for drydocking from February 20, 2015 to March 8, 2015.
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4. In December 2014, the Company signed an addendum, extending the initially agreed
maximum redelivery date to January 21, 2015. In January 2015, the Company agreed to further
extend the maximum redelivery date till January 29, 2015.
5. Vessel on scheduled drydocking from January 28, 2015 to February 22, 2015.
6. Expected date of delivery to the Company.
7. We expect that, for financial reporting purposes, revenues to be derived from the time charter
agreement will be netted off during the term of the time charter with an amortization charge of the
asset that will be recognized at the delivery of the vessel, being the difference of the present value
of the contractual cash flows to the fair value.
8. The charterer has the option to employ the vessel for a further twenty-two (22) to twenty-six
(26) month period at the same daily gross charter rate less US$350 per day commission paid
to third parties. The optional period if exercised will start on December 19, 2016 and must be
declared six (6) months prior to this date.
9. The charterer has the option to employ the vessel for a further twenty-two (22) to twenty-six
(26) month period at the same daily gross charter rate less US$350 per day commission paid
to third parties. The optional period if exercised will start on November 24, 2016 and must be
declared six (6) months prior to this date.
10. Based on latest information.
11. Reederei Santa Containerschiffe GmbH & Co. KG has agreed to novate the time charter
contract to Rudolf A. Oetker KG.
12. During January 2015, the vessel was off-hire for approximately three days.
13. For financial reporting purposes, revenues derived from the time charter agreement are
netted off during the term of the time charter with an amortization charge of the asset that was
recognized at the delivery of the vessel, being the difference of the present value of the contractual
cash flows to the fair value.
14. In case the vessel is redelivered to the Company in any period between the earliest and the
maximum redelivery period, then the charterers will pay a lump sum equivalent to US$6,000
per day to the owners for the outstanding period between the redelivery date and up to the 30
months.
15. Charterers changed to Norasia Container Lines Limited, as per Novation Agreement signed
in September 2014 with a retroactive effect from July 1, 2014. As per same Novation Agreement,
with effect from February 1, 2015, charterers have changed to Hapag-Lloyd AG.
16. Charterers changed to Norasia Container Lines Limited, as per Novation Agreement signed
in September 2014 with a retroactive effect from July 1, 2014.
17. Charterers have exercised their right to add the off-hire days and therefore the optional period
has been extended up to May 15, 2015.
18. Charterers have exercised their right to add the off-hire days and therefore the optional period
has been extended up to March 26, 2015 (24:00 UTC).
19. In February 2015, the Company agreed to extend as from March 27, 2015 (00:01 UTC) the
previous charter party with Yang Ming (UK) Ltd. for a period of minimum 3 months to maximum 5
months at a gross charter rate of US$17,475 per day.
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Our Management Team
Our management team is responsible for the strategic management of our company, including
the development of our business plan. Strategic management also involves, among other things,
locating, purchasing, financing and selling vessels. Our management team is led by our Chairman
and Chief Executive Officer Mr. Symeon Palios, who founded the predecessors of Diana Shipping
and DSS in 1972. Mr. Palios has served as the Chairman and Chief Executive Officer of Diana
Shipping Inc. since 2005 and as a director since 1999. Mr. Anastasios Margaronis, our President
and a director, also serves as President and as a director of Diana Shipping Inc. and has been
employed by the Diana Shipping group of companies since 1979. Mr. Ioannis Zafirakis, our Chief
Operating Officer, Secretary and a director, serves as Executive Vice President and Secretary of
Diana Shipping Inc. and has been employed by the Diana Shipping group of companies since
1997. Mr. Andreas Michalopoulos, our Chief Financial Officer and Treasurer, has held these same
offices with Diana Shipping Inc. since 2006.
Our management team has experience in multiple sectors of the international shipping industry,
including the containership sector, and a proven track record of strategic growth beginning with
the formation of the Diana Shipping group of companies in 1972. Our management team is
responsible for identifying assets for acquisition and for the operation of our business in order to
build our fleet and effectively manage our growth.
Potential Conflicts of Interest
Our management team is comprised of four executive officers who are also executive officers
of Diana Shipping. Three of our executive officers serve on the board of directors of us and of
Diana Shipping. Our officers and directors have fiduciary duties to manage our business in a
manner beneficial to us and our shareholders. As a result, these individuals have fiduciary duties
to manage the business of Diana Shipping and its affiliates in a manner beneficial to such entities
and their shareholders. Consequently, these officers and directors may encounter situations in
which their fiduciary obligations to Diana Shipping and us are in conflict. Although Diana Shipping
is contractually restricted from competing with us in the containership industry, there may be other
business opportunities for which Diana Shipping may compete with us such as hiring employees,
acquiring other businesses, or entering into joint ventures, which could have a material adverse
effect on our business. In addition, we are contractually restricted from competing with Diana
Shipping in the dry bulk carrier sector, which limits our ability to expand our operations.
Management of Our Fleet
The business of Diana Containerships Inc. is the ownership of containerships. Diana
Containerships Inc. wholly owns, directly or indirectly, the subsidiaries which own the vessels
that comprise our fleet. The holding company sets general overall direction for the company and
interfaces with various financial markets. The commercial and technical management of our fleet,
as well as providing administrative services relating to the fleet’s operations, are carried out, since
March 1, 2013, by our wholly-owned subsidiary, Unitized Ocean Transport Limited, which we
refer to as UOT, or our fleet manager. In exchange for providing us with commercial and technical
services, we pay our Manager a commission that is equal to 2% of our gross revenues, a fixed
management fee of $15,000 per month for each vessel in operation and a fixed monthly fee of
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$7,500 for laid-up vessels, if any. In addition, pursuant to an Administrative Services Agreement,
we pay to UOT a fixed monthly administrative fee of $10,000, in exchange for providing us with
accounting, administrative, financial reporting and other services necessary for the operation
of our business. These amounts are considered inter-company transactions and are, therefore,
eliminated from our consolidated financial statements.
Until March 1, 2013, Diana Shipping Services S.A., or DSS, a wholly-owned subsidiary
of Diana Shipping Inc., provided us with commercial, technical, accounting, administrative,
financial reporting and other services, pursuant to an Administrative Services Agreement and
Vessel Management Agreements. In addition, pursuant to a Broker Services Agreement, DSS
had appointed Diana Enterprises Inc., a related party controlled by our Chief Executive Officer
and Chairman, Mr. Symeon Palios, as broker to assist it in providing services to us. Please see
“Item 7. Major Shareholders and Related Party Transactions” for a detailed description of these
agreements. On March 1, 2013, and in relation with the appointment of UOT to act as our new
Manager, the Administrative Services Agreement, the Broker Services Agreement that DSS had
entered into with Diana Enterprises Inc. on our behalf, and the Vessel Management Agreements
with DSS, were terminated.
On August 8, 2013, DSS was found guilty on felony counts and on December 5, 2013 was
sentenced by the United States District Court in Norfolk, Virginia to a fine of $1.1 million and a
period of probation of three years and six months as a result of a conviction in which DSS was
held vicariously liable for the actions of the chief engineer and second assistant engineer of one
of Diana Shipping Inc’s vessels. This conviction and fine payable by DSS did not result in the
payment of any additional fees or expenses to us prior to the time that UOT replaced DSS as
our Manager, and we do not believe that the conviction in any way affected the level of services
provided to us by DSS.
Business Strategy
To acquire high quality containerships throughout the shipping cycle.
We will seek to provide attractive returns to our investors by continuing to make accretive
acquisitions of high quality containerships in the secondhand market, including from shipyards
and lending institutions. We believe that the containership sector currently provides attractive
acquisition opportunities as asset values remain at low levels and will continue to present
attractive opportunities through the cycle. Over time, we expect that asset prices and charter
rates will increase and we will continue to seek to make acquisitions that meet our investment
criteria. Because members of our senior management team have successfully navigated previous
market cycles, we believe that we have the experience and discipline to capitalize on market
movements. In addition, we are not affected by issues such as high leverage and the purchase
of vessels at prices significantly above historical averages. We will continue to initially focus on
vessels ranging from 3,500 TEU to 8,500 TEU because we believe that the current orderbook
composition, coupled with global GDP growth, creates a favorable multi-year dynamic of supply
and demand for these mid-sized containerships. As industry dynamics change, we might
opportunistically acquire containerships outside of this range as well as enter into newbuilding
contracts with shipyards on terms that meet our acquisition criteria.
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Strategically deploy our vessels in order to optimize the opportunities in the time charter
market.
We intend to actively monitor market conditions, charter rates and vessel operating expenses
in order to selectively employ vessels as market conditions warrant. In the near term we intend to
enter into short-term time charters to allow our shareholders to benefit from what we believe to be
an improving charter rate environment. Depending on market conditions, in the future we might
enter into long-term time charters at rates that compare favorably to historical averages, shielding
us from charter rates decreases and cyclical fluctuations. We believe that maintaining staggered
charter maturities will provide us with the flexibility to capitalize on favorable market conditions,
while providing us with a base of strong, visible cash flows.
Maintain a strong balance sheet.
We have a strong balance sheet and we intend to maintain relatively low debt levels. We
believe that maintaining a strong balance sheet will continue to provide us with the flexibility to
capitalize on vessel purchase opportunities. Notwithstanding the foregoing, based on prevailing
conditions and our outlook for the containership market, we might consider incurring further
indebtedness in the future to enhance returns to our shareholders.
Provide an attractive yield to shareholders through quarterly dividends.
We currently intend to continue to declare a variable quarterly dividend each February, May,
August and November equal to a substantial portion of available cash from operations during the
previous quarter after the payment of cash expenses and reserves for scheduled drydockings,
intermediate and special surveys and other purposes as our board of directors may from time
to time determine are required, after taking into account contingent liabilities, the terms of any
credit facility, our growth strategy and other cash needs and the requirements of Marshall Islands
law. Our board of directors may review and amend our dividend policy from time to time, in
light of our plans for future growth and other factors. Furthermore, pursuant to the Securities
Purchase Agreement entered into on July 28, 2014 in connection with the Private Placement,
or the Securities Purchase Agreement, we agreed that, commencing with the dividend payable
with respect to the second quarter of 2014, and for not less than four consecutive fiscal quarters
thereafter, we would not declare or pay dividends in excess of $0.01 per share on an annualized
basis; provided, however, that in the event of a material improvement in the container shipping
market, our board of directors may amend this dividend policy to resume the payment of dividends
if our board of directors determines in good faith that such changed dividend policy is in the best
interests of the Company and its shareholders.
Our Customers
Our customers include national, regional, and international companies, such as A.P. Møller-
Maersk A/S, CSAV Valparaiso, Reederei Santa Containerschiffe, GMbH & Co. KG, Hanjin
Shipping Co. Ltd, NOL Liner (Pte) Ltd, The Shipping Corporation of India Ltd., and Yang Ming
(UK) Ltd. During 2014, four of our charterers accounted for 87% of our revenues; Reederei
Santa Containerschiffe, GMbH & Co. (25%), CSAV Valparaiso (31%), NOL Liner (Pte) Ltd (17%)
and Hanjin Shipping Co. Ltd (14%). During 2013, four of our charterers accounted for 87% of
our revenues; A.P. Møller-Maersk A/S (16%), Reederei Santa Containerschiffe, GMbH & Co.
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(23%), NOL Liner (Pte) Ltd (38%) and Hanjin Shipping Co. Ltd (10%). During 2012, three of
our charterers accounted for 90% of our revenues; A.P. Møller-Maersk A/S (46%), Reederei
Santa Containerschiffe, GMbH & Co. KG (22%) and APL (Bermuda) Ltd (22%). We believe that
developing strong relationships with the end users of our services allows us to better satisfy
their needs with appropriate and capable vessels. A prospective charterer’s financial condition,
creditworthiness, reliability and track record are important factors in negotiating our vessels’
employment.
The Container Shipping Industry
The containers used in maritime transportation are steel boxes of standard dimensions. The
standard unit of measure of volume or capacity in container shipping is the 20-foot equivalent
unit, or TEU, representing a container which is 20 feet long and typically 8.5 feet high and 8
feet wide. In recent years, 40-foot long containers (9.5 feet high), equivalent to two TEU, have
increasingly been used by large retailers to move lightweight, fast moving consumer goods
across the globe. There are specialized containers of both sizes to carry refrigerated perishables
or frozen products, as well as tank containers that carry liquids such as liquefied gases, spirits or
chemicals.
A container shipment begins at the shipper’s premises with the delivery of an empty
container. Once the container has been filled with cargo, it is transported by truck, rail or barge to
a container port, where it is loaded onto a containership. The container is shipped either directly
to the destination port or through an intermediate port where it is transferred to another vessel,
an activity referred to as transshipment. When the container arrives at its destination port, it is off-
loaded and delivered to the receiver’s premises by truck, rail or barge.
Container shipping has a number of advantages compared with other shipping methods,
including:
Less Cargo Handling:
Containers provide a secure environment for cargo. The contents of a container, once loaded
into the container, are not directly handled until they reach their final destination. Using other
shipping methods, cargo may be loaded and discharged several times, resulting in a greater risk
of breakage and loss.
Efficient Port Turnaround:
With specialized cranes and other terminal equipment, containerships can be loaded and
unloaded in significantly less time and at lower cost than other cargo vessels.
Highly Developed Intermodal Network:
Onshore movement of containerized cargo, from points of origin, around container ports,
staging or storage areas, and to final destinations, benefits from the physical integration of the
container with other transportation equipment such as road chassis, railcars and other means
of hauling the standard-sized containers. Sophisticated port and intermodal industries have
developed to support container transportation.
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Reduced Shipping Time:
Containerships can travel at a speed of up to 25 knots per hour, even in rough seas, thereby
transporting cargo over long distances in shorter periods of time. Such speed reduces transit
time and facilitates the timeliness of regular scheduled port calls, compared to general cargo
shipping. However, since 2008, due to higher fuel prices and the negative effects of the global
recession, most operators have reduced speeds and deployed more ships on some voyage
strings. This has also had a positive environmental effect in helping reduce ship emissions.
Types of Container Ship
Containerships are typically “cellular,” which means they are equipped with metal guide rails
to allow for rapid loading and unloading, and provide for more secure carriage. Partly cellular
containerships include roll-on/roll-off vessels, or “ro-ro” ships, designed to carry chassis and
trailers, and multipurpose ships which can carry a variety of cargo including containers.
The main categories of containerships are broadly as follows:
Æ Very Large:
“Very large” ships (with capacity in excess of 10,000 TEU) are currently exclusively deployed
on the Asia-North Europe and Mediterranean and Transpacific trades. Middle East trades may at
some stage see the regular deployment of ships with capacity exceeding 10,000 TEU.
Æ Large:
Large ships have a capacity of 8,000 to 9,999 TEU and are currently deployed on the
Transpacific, Asia-Middle East and Asia to Latin America trades.
Æ Post Panamax:
Ships with a capacity of 5,000 to 7,999 TEU, so-called because of their inability to transit
through the existing Panama Canal due to dimension restrictions. However, there are plans to
widen the existing Panama Canal, with completion expected in mid to late 2015, which would
allow ships with capacity of up to 13,500 TEU to transit the waterway. Ships of this size can be
considered the workhorses of many smaller or emerging trade routes outside of the main east-
west arteries.
Æ Panamax:
Ships with a capacity between 3,000 to 4,999 TEU, which is the maximum size that the
Panama Canal can currently handle. There is a fear that many of these ships may become
redundant once the widened Panama Canal is fully open and carriers continue to deploy the
largest vessels they can across their service portfolios in order to minimize slot costs.
Æ Intermediate:
In this category, the ships range in capacity between 2,000 and 2,999 TEU and are generally
able to operate on all trades.
Æ Handysize:
Smaller ships with capacities ranging from 1,000 to 1,999 TEU, for use in regional trades – a
primary example being the intra-Asian trades.
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Æ Feeder:
Ships with a capacity of less than 1,000 TEU, which are usually employed as feeder vessels on
trades to and from hub ports or on small niche trades or domestic routes.
Containership Newbuilding Prices
The factors which influence new-built prices include ship type, shipyard capacity, demand for
ships, “berth cover”, i.e., the forward book of business of shipyards, buyer relationships with the
yard, individual design specifications, including fuel efficiency or environmental features and the
price of ship materials, engine and machinery equipment and particularly the price of steel.
Containership Secondhand Prices
Vessel values are primarily driven by supply and demand for vessels. During extended periods
of high demand, as evidenced by high charter rates, secondhand vessel values tend to appreciate
and during periods of low demand, evidenced by low charter rates, vessel values tend to decline.
Vessel values are also influenced by age and specification and by the replacement cost (new-built
price) in the case of vessels up to five years old.
Values for younger vessels tend to fluctuate on a percentage, if not on a nominal, basis less
than values for older vessels. This is due to the fact that younger vessels with a longer remaining
economic life are less susceptible to the level of charter rates than older vessels with limited
remaining economic life.
Vessels are usually sold through specialized brokers who report transactions to the maritime
transportation industry on a regular basis. The sale and purchase market for vessels is usually
quite transparent and liquid, with a number of vessels changing hands on an annual basis.
Containership Charter Rates
The main factors affecting vessel charter rates are primarily the supply and demand for
container shipping. The shorter the charter period, the greater the vessel charter rate is affected
by the current supply to demand balance and by the current phase of the market cycle (high point
or low point). For longer charter periods, from three years to ten years, vessel charter rates tend
to be more stable and less cyclical because the period may cover not only a particular phase of a
market cycle, but a full market cycle or several market cycles. Other factors affecting charter rates
include the age and characteristics of the ships (including fuel consumption, speed, wide beam,
shallow draft, whether geared or gearless), the price of new-built and secondhand ships (buying
as an alternative to chartering ships) and market conditions.
According to industry sources, during 2014 time charter rates failed to strengthen and charter
periods remained relatively short. The Alphaliner charter index ended the year at 57.7 points, up
a marginal 3.7% compared to December 2013.
Container Freight Rates
Factors that drive vessel charter rates also affect container freight rates. Container freight rates
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are primarily driven by the supply and demand for container shipping, the cost of operating ships,
fuel prices, and carrier behaviour, including inter-carrier competition. To some extent, container
freight rates are also affected by market conditions.
According to industry sources, freight rates across global trade routes have, in general, seen
limited overall upside in 2014, a sign of continuing oversupply. The overall Shanghai Containerised
Freight Index ended 2014 at 1,049 points compared to its opening reading of 2014 at 1,113 points.
However, based on the Shanghai Containerised Freight Index, freight rates for boxes shipped
from Shanghai to Europe averaged US$1,238 per TEU in the first three quarters of 2014, which
was 14% higher than the full year 2013 average.
Global Container Trade
According to industry sources, the global container trade grew by approximately 6.0% in
2014 and is expected to grow by 6.7% in 2015, following an increase of 4.9% in 2013. In 2016,
global container trade is projected to grow by 6.8%.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our vessels.
We are subject to international conventions and treaties, and, in the countries in which our
vessels may operate or are registered, national, state and local laws and regulations in force
in the countries in which our vessels may operate or are registered relating to safety and health
and environmental protection, including the storage, handling, emission, transportation and
discharge of hazardous and non-hazardous materials, and the remediation of contamination
and liability for damage to natural resources. Compliance with such laws, regulations and other
requirements entails significant expense, including vessel modifications and implementation of
certain operating procedures.
A variety of governmental and private entities subject our vessels to both scheduled and
unscheduled inspections. These entities include the local port authorities (applicable national
authorities such as the U.S. Coast Guard and harbor masters), classification societies, flag state
administrations (countries of registry) and charterers. Some of these entities require us to obtain
permits, licenses, certificates or approvals for the operation of our vessels. Our failure to maintain
necessary permits, licenses, certificates, approvals or financial assurances could require us to
incur substantial costs or temporarily suspend operation of one or more of the vessels in our fleet,
or lead to the invalidation or reduction of our insurance coverage.
In recent periods, heightened levels of environmental and operational safety concerns among
insurance underwriters, regulators and charterers have led to greater inspection and safety
requirements on all vessels and may accelerate the scrapping of older vessels throughout the
shipping industry. Increasing environmental concerns have created a demand for vessels that
conform to the stricter environmental standards. We believe that the operation of our vessels
will be in substantial compliance with applicable environmental laws and regulations and that
our vessels will have all material permits, licenses, certificates or other authorizations necessary
for the conduct of our operations. However, because such laws and regulations are frequently
changed and may impose increasingly strict requirements, we cannot predict the ultimate cost of
complying with these requirements, or the impact of these requirements on the re-sale value or
useful lives of our vessels. In addition, a future serious marine incident, such as one comparable
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to the 2010 BP plc Deepwater Horizon oil spill, that results in significant oil pollution, release of
hazardous substances, loss of life, or otherwise causes significant adverse environmental impact
could result in additional legislation or regulation that could negatively affect our profitability.
International Maritime Organization (IMO)
The IMO has adopted the International Convention for the Prevention of Pollution from Ships,
1973, as modified by the Protocol of 1978 relating thereto (collectively referred to as MARPOL
73/78 and herein as “MARPOL”). MARPOL entered into force on October 2, 1983. It has been
adopted by over 150 nations, including many of the jurisdictions in which our vessels operate.
MARPOL is broken into six Annexes, each of which regulates a different source of pollution.
Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried, in
bulk, in liquid or packaged form, respectively; Annexes IV and V relate to sewage and garbage
management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately
adopted by the IMO in September of 1997.
Air Emissions
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective
May 2005, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines
were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits
“deliberate emissions” of “ozone depleting substances,” defined to include certain halons and
chlorofluorocarbons. “Deliberate emissions” are not limited to times when the ship is at sea; they
can for example include discharges occurring in the course of the ship’s repair and maintenance.
Emissions of “volatile organic compounds” from certain tankers, and the shipboard incineration
(from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated
biphenyls (PCBs)) are also prohibited. 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, known as ECAs (see below).
The IMO’s Maritime Environment Protection Committee, or MEPC, adopted amendments to
Annex VI on October 10, 2008, which entered into force on July 1, 2010. The amended Annex
VI seeks to further reduce air pollution by, among other things, implementing a progressive
reduction of the amount of sulphur contained in any fuel oil used on board ships. As of January
1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur (from the
current cap of 4.50%). By January 1, 2020, sulfur content must not exceed 0.50%, subject to a
feasibility review to be completed no later than 2018.
Sulfur content standards are even stricter within certain “Emission Control Areas” (“ECAs”).
As of July 1, 2010, ships operating within an ECA were not permitted to use fuel with sulfur
content in excess of 1.0% (from 1.50%), which was further reduced to 0.10% on January 1,
2015. Amended Annex VI establishes procedures for designating new ECAs. Currently, the
Baltic Sea and the North Sea have been so designated. Effective August 1, 2012, certain coastal
areas of North America were designated ECAs, and effective January 1, 2014, the applicable
areas of the United States Caribbean Sea were designated ECAs. If other ECAs are approved
by the IMO or other new or more stringent requirements relating to emissions from marine diesel
engines or port operations by vessels are adopted by the EPA or the states where we operate,
compliance with these regulations could entail significant capital expenditures, operational
changes, or otherwise increase the costs of our operations.
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Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards
for new marine engines, depending on their date of installation. The U.S. EPA promulgated
equivalent (and in some senses stricter) emissions standards in late 2009.
As of January 1, 2013, MARPOL made mandatory certain measures relating to energy
efficiency for ships in part to address greenhouse gas emissions. It made the Energy Efficiency
Design Index (EEDI) for new ships mandatory and the Ship Energy Efficiency Management Plan
(SEEMP) apply to all ships.
Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards
for new marine engines, depending on their date of installation. The U.S. Environmental Protection
Agency promulgated equivalent (and in some senses stricter) emissions standards in late 2009.
Safety Management System Requirements
The IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS,
and the International Convention on Load Lines, or LL Convention, which impose a variety of
standards that regulate the design and operational features of ships. The IMO periodically revises
the SOLAS and LL Convention standards. May 2012 SOLAS amendments entered into force as
of January 1, 2014, and May 2013 SOLAS amendments regarding emergency training and drills,
entered into force as of January 1, 2015. The Convention on Limitation of Liability for Maritime
Claims (LLMC) was recently amended and the amendments are expected to go into effect on
June 8, 2015. The amendments alter the limits of liability for loss of life or personal injury claim and
property claims against ship-owners.
Our operations are also subject to environmental standards and requirements contained
in the International Safety Management Code for the Safe Operation of Ships and for Pollution
Prevention, or ISM Code, promulgated by the IMO under SOLAS. The ISM Code requires the
owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop
an extensive “Safety Management System” that includes, among other things, the adoption of a
safety and environmental protection policy setting forth instructions and procedures for operating
its vessels safely and describing procedures for responding to emergencies. We rely upon the
safety management system that we and our Manager, UOT, implements for compliance with
the ISM Code. 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.
The ISM Code requires that vessel operators also obtain a safety management certificate for
each vessel they operate. This certificate evidences compliance by a vessel’s management with
code requirements for a safety management system. No vessel can obtain a certificate under
the ISM Code unless its manager has been awarded a document of compliance, issued in most
instances by the vessel’s flag state or by Classification Societies on behalf of the flag state. We
believe that we have all material requisite documents of compliance for our offices and safety
management certificates for all of our vessels for which such certificates are required by the ISM
Code. We will renew these documents of compliance and safety management certificates as
required.
Noncompliance with the ISM Code and other IMO regulations may subject the shipowner
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or bareboat charterer to increased liability, may lead to decreases in, or invalidation of, available
insurance coverage for affected vessels and may result in the denial of access to, or detention in,
some ports.
Pollution Control and Liability Requirements
The IMO has negotiated international conventions that impose pollution control and liability
in international waters and the territorial waters of the signatory nations to such conventions. For
example, many countries have ratified and follow the liability plan adopted by the IMO and set out
in the International Convention on Civil Liability for Oil Pollution Damage, or the CLC, although
the United States is not a party. Under this convention and depending on whether the country
in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered
owner is strictly liable, subject to certain defenses, for pollution damage caused in the territorial
waters of a contracting state by discharge of persistent oil. The limits on liability outlined in the
1992 Protocol use the International Monetary Fund currency unit of Special Drawing Rights, or
SDR. Amendments adopted in 2000, which entered into force in 2003, raised the compensation
limits set forth in the 1992 Protocol by 50 percent. The right to limit liability is forfeited under the
CLC where the spill is caused by the shipowner’s personal fault and under the 1992 Protocol
where the spill is caused by the shipowner’s personal act or omission by intentional or reckless
conduct. A state that is a party to the CLC may not allow a ship under its flag to trade unless that
ship has a certificate of insurance or something equivalent. In jurisdictions where the CLC has not
been adopted, various legislative schemes or common law govern, and liability is imposed either
on the basis of fault or in a manner similar to that of the CLC. We believe that our protection and
indemnity insurance will cover the liability under the plan adopted by the IMO.
The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution
Damage, or the Bunker Convention, to impose strict liability on ship owners for pollution damage
in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker
Convention requires registered owners of ships over 1,000 gross tons to maintain insurance
for pollution damage in an amount equal to the limits of liability under the applicable national or
international limitation regime (but not exceeding the amount calculated in accordance with the
Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to
non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is
determined by the national or other domestic laws in the jurisdiction where the events or damages
occur.
In addition, the IMO adopted the International Convention for the Control and Management
of Ships’ Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM
Convention will not become effective until 12 months after it has been adopted by 30 states,
the combined merchant fleets of which represent not less than 35% of the gross tonnage of the
world’s merchant shipping. To date, there has not been sufficient adoption of this standard for
it to take force, but it is close. Many of the implementation dates originally written in the BWM
Convention have already passed, so that once the BWM Convention enters into force, the period
for installation of mandatory ballast water exchange requirements would be extremely short, with
several thousand ships a year needing to install ballast water management systems (BWMS). For
this reason, on December 4, 2013, the IMO Assembly passed a resolution revising the application
dates of BWM Convention so that they are triggered by the entry into force date and not the dates
originally in the BWM Convention. This in effect makes all vessels constructed before the entry
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into force date ‘existing’ vessels, and allows for the installation of a BWMS on such vessels at the
first renewal survey following entry into force. Once mid-ocean ballast exchange or ballast water
treatment requirements become mandatory, the cost of compliance could increase for ocean
carriers. It is difficult to predict the overall impact of such a requirement on our operations.
The IMO continues to review and introduce new regulations. It is impossible to predict what
additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations
might have on our operations.
U.S. Regulations
The U.S. 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 U.S. waters, which includes the U.S. territorial sea and its 200 nautical mile
exclusive economic zone. The United States has also enacted the Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of
hazardous substances other than oil, whether on land or at sea. OPA and CERCLA both define
“owner and operator” “in the case of a vessel as any person owning, operating or chartering by
demise, the vessel.” Although OPA is primarily directed at oil tankers (which are not operated by
us), it also applies to non-tanker ships, including containerships, with respect to the fuel oil, or
bunkers, used to power such ships. CERCLA also applies to our operations.
Under OPA, vessel owners and operators 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:
Æ injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
Æ injury to, or economic losses resulting from, the destruction of real and personal property;
Æ net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction
or loss of real or personal property, or natural resources;
Æ loss of subsistence use of natural resources that are injured, destroyed or lost;
Æ lost profits or impairment of earning capacity due to injury, destruction or loss of real or
personal property or natural resources; and
Æ net cost of increased or additional public services necessitated by removal activities following
a discharge of oil, such as protection from fire, safety or health hazards.
OPA contains statutory caps on liability and damages; such caps do not apply to direct
cleanup costs. Effective July 31, 2009, the U.S. Coast Guard adjusted the limits of OPA liability
for non-tank vessels to the greater of $1,000 per gross ton or $854,400 (subject to periodic
adjustment for inflation). These limits of liability do not apply if an incident was proximately
caused by the violation of an applicable U.S. federal safety, construction or operating regulation
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by a responsible party (or its agent, employee or a person acting pursuant to a contractual
relationship), or a responsible party’s gross negligence or willful misconduct. The limitation on
liability similarly does not apply if the responsible party fails or refuses to (i) report the incident
where the responsibility party knows or has reason to know of the incident; (ii) reasonably
cooperate and assist as requested in connection with oil removal activities; or (iii) without
sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section
311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are
liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or
loss of, natural resources, including the reasonable costs associated with assessing same, and
health assessments or health effects studies. There is no liability if the discharge of a hazardous
substance results solely from the act or omission of a third party, an act of God or an act of war.
Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels
carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000
for any other vessel. These limits do not apply (rendering the responsible person liable for the
total cost of response and damages) if the release or threat of release of a hazardous substance
resulted from willful misconduct or negligence, or the primary cause of the release was a violation
of applicable safety, construction or operating standards or regulations. The limitation on liability
also does not apply if the responsible person fails or refused to provide all reasonable cooperation
and assistance as requested in connection with response activities where the vessel is subject
to OPA.
OPA and CERCLA each preserve the right to recover damages under existing law, including
maritime or tort law.
OPA and CERCLA both require owners and operators of vessels to establish and maintain
with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the maximum
amount of their potential liability under OPA and CERCLA. Vessel owners and operators may
satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond,
qualification as a self-insurer or a guarantee.
The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional
regulatory initiatives or statutes, including the raising of liability caps under OPA. For example,
on August 15, 2012, the U.S. Bureau of Safety and Environment Enforcement (BSEE) issued
a final drilling safety rule for offshore oil and gas operations that strengthens the requirements
for safety equipment, well control systems, and blowout prevention practices. Compliance with
any new requirements of OPA may substantially impact our cost of operations or require us to
incur additional expenses to comply with any new regulatory initiatives or statutes. Additional
legislation or regulations applicable to the operation of our vessels that may be implemented
in the future could adversely affect our business. 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 a material adverse effect
on our business, financial condition, results of operations and cash flows. The U.S. Clean Water
Act, or CWA, prohibits the discharge of oil or hazardous substances in U.S. navigable waters
unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form
of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and complements the remedies available under
OPA and CERCLA.
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The EPA regulates the discharge of ballast and bilge water and other substances in U.S.
waters under the CWA. EPA regulations require vessels 79 feet in length or longer (other than
commercial fishing and recreational vessels) to comply with a Vessel General Permit, or VGP,
authorizing ballast and bilge water discharges and other discharges incidental to the operation
of vessels. The VGP imposes technology and water-quality based effluent limits for certain types
of discharges and establishes specific inspection, monitoring, recordkeeping and reporting
requirements to ensure the effluent limits are met. On March 28, 2013, the EPA re-issued the
VGP for another five years; this VGP took effect on December 19, 2013. The new VGP focuses
on authorizing discharges incidental to operations of commercial vessels. The VGP also
contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive
species in US waters, more stringent requirements for exhaust gas scrubbers and the use of
environmentally acceptable lubricants. U.S. Coast Guard regulations adopted under the U.S.
National Invasive Species Act, or NISA, also impose mandatory ballast water management
practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters.
As of June 21, 2012, the U.S. Coast Guard implemented revised regulations on ballast water
management by establishing standards on the allowable concentration of living organisms in
ballast water discharged from ships in U.S. waters. The USCG must approve any technology
before it is placed on a vessel, but has not yet approved the technology necessary for vessels
to meet the foregoing standards. Notwithstanding the foregoing, as of January 1, 2014, vessels
are technically subject to the phrasing-in of these standards. As a result, the USCG has provided
waivers to vessels which cannot install the as-yet unapproved technology. The EPA on the other
hand has taken a different approach to enforcing ballast discharge standards under the VGP. On
December 27, 2013, the EPA issued an enforcement response policy in connection with the new
VGP in which the EPA indicated that it would take into account the reasons why vessels do not
have the requisite technology installed, but will not grant any waivers. The revised ballast water
standards are consistent with those adopted by the IMO in 2004. Compliance with the EPA and
the U.S. Coast Guard regulations could require the installation of equipment on our vessels to
treat ballast water before it is discharged or the implementation of other port facility disposal
arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels
from entering U.S. waters.
The U.S. Clean Air Act
The U.S. Clean Air Act of 1970 (including its amendments of 1977 and 1990), or the CAA,
requires the EPA to promulgate standards applicable to emissions of volatile organic compounds
and other air contaminants. The CAA also requires states to draft State Implementation Plans
(“SIPs”) designed to attain national health-based air quality standards in each state. Although
state-specific, SIPs may include regulations concerning emissions resulting from vessel loading
and unloading operations by requiring the installation of vapor control equipment.
Compliance with the EPA and the U.S. Coast Guard regulations could require the installation
of certain engineering equipment and water treatment systems to treat ballast water before it is
discharged or the implementation of other port facility disposal arrangements or procedures at
potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.
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European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for
illicit ship-source discharges of polluting substances, including minor discharges, if committed
with intent, recklessly or with serious negligence and the discharges individually or in the
aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a
polluting substance may also lead to criminal penalties. Member States were required to enact
laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution
may result in substantial penalties or fines and increased civil liability claims. The directive applies
to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where
human safety or that of the ship is in danger.
The European Union has adopted regulations and directives requiring, among other things,
more frequent inspections of high-risk ships, as determined by type, age, flag and the number
of time the ship has been detained. The European Union also adopted and then extended a
ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated
offenses. The regulation also provided the European Union with greater authority and control over
classification societies, by imposing more requirements on classification societies and providing
for fines or penalty payments for organizations that failed to comply.
Greenhouse Gas Regulation
Currently, the emissions of greenhouse gases from ships in international transport are not
subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change,
which entered into force in 2005 and pursuant to which adopting countries have been required
to implement national programs to reduce greenhouse gas emissions.
As of January 1, 2013, all ships must comply with mandatory requirements adopted by the
MEPC in July 2011 relating to greenhouse gas emissions. All ships are required to follow the Ship
Energy Efficiency Management Plans. Now the minimum energy efficiency levels per capacity
mile, outlined in the Energy Efficiency Design Index, applies to all new ships. These requirements
could cause us to incur additional compliance costs. The IMO is planning to implement market-
based mechanisms to reduce greenhouse gas emissions from ships at an upcoming MEPC
session.
The European Union has indicated that it intends to propose an expansion of the existing
European Union emissions trading scheme to include emissions of greenhouse gases
from marine vessels. In April 2013, the European Parliament rejected proposed changes to
the European Union Emissions Law regarding carbon trading. In June 2013 the European
Commission developed a strategy to integrate maritime emissions into the overall European
Union Strategy to reduced greenhouse gas emissions. If the strategy is adopted by the European
Parliament and Council large vessels using European Union ports would be required to monitor,
report, and verify their carbon dioxide emissions beginning in January 2018. In December 2013
the European Union environmental ministers discussed draft rules to implement monitoring
and reporting of carbon dioxide emissions from ships. In the United States, the EPA has issued
a finding that greenhouse gases endanger the public health and safety and has adopted
regulations to limit greenhouse gas emissions from certain mobile sources and large stationary
sources. Although the mobile source emissions regulations do not apply to greenhouse gas
emissions from vessels, the EPA is considering a petition from the California Attorney General
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and environmental groups to regulate greenhouse gas emissions from ocean-going vessels.
Any passage of climate control legislation or other regulatory initiatives by the IMO, European
Union, the U.S. or other countries where we operate, or any treaty adopted at the international
level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require
us to make significant financial expenditures, including capital expenditures to upgrade our
vessels, which we cannot predict with certainty at this time.
International Labour Organization
The International Labour Organization (ILO) is a specialized agency of the UN with
headquarters in Geneva, Switzerland. The ILO has adopted the Maritime Labor Convention
2006 (MLC 2006). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance
will be required to ensure compliance with the MLC 2006 for all ships above 500 gross tons
in international trade. The MLC 2006 entered into force on August 20, 2013. The MLC 2006
requires us to maintain developed procedures to ensure full compliance.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives
intended to enhance vessel security. On November 25, 2002, the U.S. Maritime Transportation
Security Act of 2002, or the MTSA, came into effect. To implement certain portions of the MTSA,
in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain
security requirements aboard vessels operating in waters subject to the jurisdiction of the United
States. The regulations also impose requirements on certain ports and facilities, some of which
are regulated by the U.S. Environmental Protection Agency (EPA).
Similarly, in December 2002, amendments to SOLAS created a new chapter of the
convention dealing specifically with maritime security. The new Chapter V became effective in
July 2004 and imposes various detailed security obligations on vessels and port authorities, and
mandates compliance with the International Ship and Port Facilities Security Code, or the ISPS
Code. The ISPS Code is designed to enhance the security of ports and ships against terrorism.
To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC
from a recognized security organization approved by the vessel’s flag state. Among the various
requirements are:
Æ on-board installation of automatic identification systems to provide a means for the automatic
transmission of safety-related information from among similarly equipped ships and shore
stations, including information on a ship’s identity, position, course, speed and navigational
status;
Æ on-board installation of ship security alert systems, which do not sound on the vessel but only
alert the authorities on shore;
Æ the development of vessel security plans;
Æ ship identification number to be permanently marked on a vessel’s hull;
Æ a continuous synopsis record kept onboard showing a vessel’s history including the name of
the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered
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with that state, the ship’s identification number, the port at which the ship is registered
and the name of the registered owner(s) and their registered address; and
Æ compliance with flag state security certification requirements.
Ships operating without a valid certificate, the ship may be detained at port until it obtains an
ISSC, or it may be expelled from port, or refused entry at port.
The U.S. Coast Guard regulations, intended to align with international maritime security
standards, exempt from MTSA vessel security measures non-U.S. vessels that have on board,
as of July 1, 2004, a valid ISSC attesting to the vessel’s compliance with SOLAS security
requirements and the ISPS Code. We have already implemented the various security measures
addressed by the MTSA, SOLAS and the ISPS Code.
Inspection by Classification Societies
Every oceangoing vessel must be constructed and classified in accordance of Rules &
Regulations of a classification society. The Class Certificate that will be issued upon completion
of vessel’s construction by the classification society certifies that the vessel complies with the
Class Rules and includes vessel’s Character of Classification and the applicable class notations
which provides useful information about the construction of the vessel. To maintain it’s ‘class’,
every vessel shall be inspected periodically by authorized surveyors of the classification
society that is classed with. During these periodical surveys it shall be confirmed compliance
with applicable class rules and regulations. In addition, the classification society acting as
Recognized Organization (RO) will carry out necessary statutory surveys and will issue the
statutory certificates on behalf of vessel’s Flag Administration which will ensure compliance with
all applicable International and National requirements and will enable the vessel to obtain sail
permit from the port authorities.
For maintenance of the class certification, regular (periodical) and extraordinary surveys of
hull, machinery, including the electrical plant, and any special equipment classed are required to
be performed as follows:
Æ 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,
within three months before or after each anniversary date of the date of commencement of the
class period indicated in the certificate.
Æ 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 are to be carried out at or between the occasion of the second or third
annual survey.
Æ 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 intervals indicated by the character of classification, (usually every 5 years).
At the special survey, the vessel is thoroughly examined, including UTM-gauging to determine
the thickness of the steel structures. Should the thickness be found to be less than class
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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. Upon shipowner’s request, 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.
Æ Bottom Surveys: Underwater parts of vessel’s hull shall be surveyed twice within a class
period which normally shall be carried out in drydock. However for vessels with special class
notation, one of the two bottom surveys may be carried out afloat with class approved diving
company.
Æ 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 IACS. All new and
secondhand vessels that we purchase must be certified prior to their delivery under our standard
agreements.
100% Container Screening
On August 3, 2007, the United States signed into law the Implementing Recommendations
of the 9/11 Commission Act of 2007 (the “9/11 Commission Act”). The 9/11 Commission Act
amends the SAFE Port Act of 2006 to require that all containers being loaded at foreign ports
onto vessels destined for the United States be scanned by nonintrusive imaging equipment and
radiation detection equipment before loading.
As a result of the 100% scanning requirements added to the SAFE Port Act of 2006, ports that
ship to the United States may need to install new x-ray machines and make infrastructure changes
in order to accommodate the screening requirements. Such implementation requirements may
change which ports are able to ship to the United States and shipping companies may incur
significant increased costs. It is impossible to predict how this requirement will affect the industry
as a whole, but changes and additional costs can be reasonably expected.
Risk of Loss and Insurance Coverage
General
The operation of any containership vessel includes risks such as mechanical failure, collision,
property loss, cargo loss or damage and business interruption due to political circumstances in
foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility
of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising
from owning and operating vessels in international trade. OPA, which imposes virtually unlimited
liability upon owners, operators and demise charterers of 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.
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While we maintain hull and machinery insurance, war risks insurance, protection and
indemnity cover and freight, demurrage and defense cover for our vessels in amounts that we
believe to be prudent to cover normal risks in our operations, we may not be able to achieve or
maintain this level of coverage throughout a vessel’s useful life. Furthermore, while we believe
we procure adequate insurance coverage, not all risks can be insured, and there can be no
guarantee that any specific claim will be paid, or that we will always be able to obtain adequate
insurance coverage at reasonable rates.
Hull and Machinery and War Risks Insurance
We maintain for our vessels marine hull and machinery and war risks insurance, which covers,
among other risks, the risk of actual or constructive total loss. Our vessels are each covered up
to at least fair market value with deductibles which vary according to the size and value of the
vessel.
Protection and Indemnity Insurance
Protection and indemnity insurance is generally 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 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.”
We procure protection and indemnity insurance coverage for pollution in the amount of $1
billion per vessel per incident. The 13 P&I Associations that comprise the International Group
insure approximately 90% of the world’s commercial tonnage and have entered into a pooling
agreement to reinsure each association’s liabilities. As a member of certain P&I Associations
which are members 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. Supplemental calls are made by the P&I Associations based on estimates of premium
income and anticipated and paid claims and such estimates are adjusted each year by the
Board of Directors of the P&I Associations until the closing of the relevant policy year, which
generally occurs within three years from the end of the policy year. We do not know whether any
supplemental calls will be charged in respect of any policy year by the P&I Associations in which
the Company’s vessels are entered. To the extent we experience supplemental calls; our policy
is to expense such amounts.
C. Organizational structure
We are a corporation incorporated under the laws of the Republic of the Marshall Islands
on January 7, 2010. We are the sole owner of all of the issued and outstanding shares of the
subsidiaries listed in Note 1 “General Information” of our consolidated financial statements under
Item 18 and in exhibit 8.1 to this annual report.
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D. Property, plants and equipment
Our Manager, UOT, currently rents our office space from an unrelated third party and owns
office furniture and equipment. Furthermore, in December 2014, UOT acquired, jointly with two
other related parties, from unrelated individuals, a plot of land, in Athens, Greece, for an aggregate
price of Euro 2.0 million or $2.5 million, based on the exchange rate of US Dollar to Euro on the
date of acquisition. The plot of land is under the common ownership of the joint purchasers. We
paid one third of the purchase price, and the total cost for the acquisition of the plot, including
additional capitalized costs, amounted to $0.9 million.
Other than this interest in real property, our only material properties are the vessels in our fleet.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following management’s discussion and analysis should be read in conjunction with
our consolidated financial statements and their notes included elsewhere in this report. This
discussion contains forward-looking statements that reflect our current views with respect
to future events and financial performance. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors, such as those set
forth in the section entitled “Risk Factors” and elsewhere in this report.
A. Operating results
We charter our vessels to customers primarily pursuant to short-term and long-term time
charters. Currently, we have secured time charters for the operating vessels of our fleet with
minimum remaining durations between 1 and 12 months. Under our time charters, the charterer
typically pays us a fixed daily charter hire rate and bears all voyage expenses, including the cost
of bunkers (fuel oil) and port and canal charges. We remain responsible for paying the chartered
vessel’s operating expenses, including the cost of crewing, insuring, repairing and maintaining
the vessel, the costs of spares and consumable stores, tonnage taxes, environmental costs and
other miscellaneous expenses, and we also pay commissions to one or more unaffiliated ship
brokers and to in-house brokers associated with the charterer for the arrangement of the relevant
charter.
Factors affecting our results of operations
We believe that the important measures for analyzing trends in our results of operations
consist of the following:
Æ 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.
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Æ 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 scheduled repairs or repairs under
guarantee, vessel upgrades or special surveys including the aggregate amount of time that we
spend positioning our vessels for such events. The shipping industry uses available days to
measure the number of days in a period during which vessels should be capable of generating
revenues.
Æ 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.
Æ 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 and special surveys including
vessel positioning for such events.
Æ Time Charter Equivalent (TCE) rates. We define TCE rates as our 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 non-GAAP measure, and
management believes it is useful to provide to investors because 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.
Æ Daily Operating Expenses. We define daily operating expenses as total vessel operating
expenses, which include crew wages and related costs, the cost of insurance and vessel registry,
expenses relating to repairs and maintenance, the costs of spares and consumable stores,
tonnage taxes, regulatory fees, environmental costs and other miscellaneous expenses divided
by total ownership days for the relevant period.
The following table reflects our ownerships days, available days, operating days, fleet
utilization, TCE rate and daily operating expenses for the periods indicated.
For the year ended
December 31, 2014
For the year ended
December 31, 2013
For the year ended
December 31, 2012
Ownership days
Available days
Operating days
Fleet utilization
Time charter equivalent rate (TCE) (1)
Daily operating expenses
$
$
3,198
3,198
3,189
99.7%
16,803
8,305
$
$
3,516
3,516
3,442
97.9%
15,162
8,780
$
$
3,156
3,156
3,150
99.8%
17,499
9,179
(1) Please see Item 3 A. for a reconciliation of TCE to GAAP measures.
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Time Charter Revenues
Our revenues are driven primarily by the number of vessels in our fleet, the number of voyage
days and the amount of daily charter hire that our vessels earn under charters which, in turn, are
affected by a number of factors, including:
Æ the duration of our charters;
Æ our decisions relating to vessel acquisitions and disposals;
Æ the amount of time that we spend positioning our vessels;
Æ the amount of time that our vessels spend in drydock undergoing repairs;
Æ maintenance and upgrade work;
Æ the age, condition and specifications of our vessels;
Æ levels of supply and demand in the container shipping industry; and
Æ other factors affecting spot market charter rates for container vessels.
Period charters refer to both time and bareboat charters. Vessels operating on time charters
for a certain period of time provide more predictable cash flows over that period of time, but
can yield lower profit margins than vessels operating in the spot charter market during periods
characterized by favorable market conditions. Vessels operating in the spot charter market
generate revenues that are less predictable but may enable their owners to capture increased
profit margins during periods of improvements in charter rates although their owners would be
exposed to the risk of declining charter rates, which may have a materially adverse impact on
financial performance. As we employ vessels on period charters, future spot charter rates may
be higher or lower than the rates at which we have employed our vessels on period charters.
Currently, all vessels in our fleet are employed on time charters. Our time charter agreements
subject us to counterparty risk. In depressed market conditions, charterers may seek to
renegotiate the terms of their existing charter agreements or avoid their obligations under those
contracts. Should a counterparty fail to honor its obligations under agreements with us, we could
sustain significant losses which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Voyage Expenses
We incur voyage expenses that include port and canal charges, bunker (fuel oil) expenses and
commissions. 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 owner of the vessels. Currently, we do not incur port and canal charges and bunker expenses
represent a relatively small portion of our vessels’ overall expenses because our vessels are
employed under time charters that require the charterer to bear all of those expenses.
We have paid commissions ranging from 0% to 5.00% of the total daily charter hire rate of
each charter to unaffiliated ship brokers, depending on the number of brokers involved with
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arranging the charter. In addition to commissions paid to third parties, we have historically paid to
our former fleet manager, DSS, a commission that was equal to 1% of our revenues in exchange
for providing us with technical and commercial management services in connection with the
employment of our fleet. Effective March 1, 2013, our new fleet manager, UOT, our wholly-
owned subsidiary, receives commission that is equal to 2% of our gross revenues in exchange
for providing us with technical and commercial management services in connection with the
employment of our fleet. However, this commission is eliminated from our consolidated financial
statements as an intercompany transaction.
Vessel Operating Expenses
Vessel operating expenses include crew wages and related costs, the cost of insurance
and vessel registry, expenses relating to repairs and maintenance, the costs of spares
and consumable stores, tonnage taxes, regulatory fees, environmental costs and other
miscellaneous expenses. Other factors beyond our control, some of which may affect the
shipping industry in general, including, for instance, developments relating to market prices for
crew wages and insurance, may also cause these expenses to increase. In conjunction with our
senior executive officers, our Manager has established an operating expense budget for each
vessel and performs the day-to-day management of our vessels under separate management
agreements with our vessel-owning subsidiaries. We monitor the performance of our Manager
by comparing actual vessel operating expenses with the operating expense budget for each
vessel. We are responsible for the costs of any deviations from the budgeted amounts.
Vessel Depreciation
We depreciate our vessels on a straight-line basis over their estimated useful lives which we
estimate to be 30 years from the date of their initial delivery from the shipyard. Depreciation is
based on the cost less the estimated salvage values. Each vessel’s salvage value is the product
of her light-weight tonnage and estimated scrap rate, which, effective July 1, 2013, is estimated
at $350 per light-weight ton for all vessels in the fleet. We believe that these assumptions are
common in the containership industry.
Management Fees
We paid to DSS, our former fleet manager, up to February 28, 2013, a fixed management fee
of $15,000 per month for employed vessels and would also pay $20,000 per vessel per month for
laid-up vessels, in exchange for providing us with commercial and technical services pursuant to
Vessel Management Agreements. Since March 1, 2013, our new fleet manager, UOT, receives a
fixed monthly management fee of $15,000 per vessel in operation, and will receive a fixed monthly
fee of $7,500 for laid-up vessels, if any. However, these management fees are eliminated from our
consolidated financial statements as intercompany transactions.
General and Administrative Expenses
We incur general and administrative expenses, including our onshore related expenses such
as legal and professional expenses. Certain of our general and administrative expenses are
provided for under our Broker Services Agreement with Diana Enterprises. We also incur payroll
expenses of employees and general and administrative expenses reflecting the costs associated
with running a public company, including board of director costs, director and officer insurance,
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investor relations, registrar and transfer agent fees and legal and accounting costs related to our
compliance with public reporting obligations and the Sarbanes-Oxley Act of 2002.
Interest and Finance Costs
We incur interest and finance costs in connection with our vessel-specific debt. As at
December 31, 2014, we had $148.7 million of outstanding indebtedness.
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 will 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
shares 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 in the past and we may, in the future,
acquire vessels with existing 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.
When we purchase a vessel and assume or renegotiate a related time charter, we must take,
among other things, the following steps before the vessel will be ready to commence operations:
Æ obtain the charterer’s consent to us as the new owner;
Æ obtain the charterer’s consent to a new technical manager;
Æ obtain the charterer’s consent to a new flag for the vessel;
Æ arrange for a new crew for the vessel;
Æ replace all hired equipment on board, such as gas cylinders and communication equipment;
Æ negotiate and enter into new insurance contracts for the vessel through our own insurance
brokers;
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Æ register the vessel under a flag state and perform the related inspections in order to obtain
new trading certificates from the flag state;
Æ implement a new planned maintenance program for the vessel; and
Æ ensure that the new technical manager obtains new certificates for compliance with the
safety and vessel security regulations of the flag state.
The following discussion is intended to help you understand how acquisitions of vessels affect
our business and results of operations.
Our business is mainly comprised of the following elements:
Æ acquisition and disposition of vessels;
Æ employment and operation of our vessels; and
Æ management of the financial, general and administrative elements involved in the conduct of
our business and ownership of our vessels.
The employment and operation of our vessels mainly require the following components:
Æ vessel maintenance and repair;
Æ crew selection and training;
Æ vessel spares and stores supply;
Æ contingency response planning;
Æ on board safety procedures auditing;
Æ accounting;
Æ vessel insurance arrangement;
Æ vessel chartering;
Æ vessel hire management;
Æ vessel surveying; and
Æ vessel performance monitoring.
The management of financial, general and administrative elements involved in the conduct of
our business and ownership of vessels, mainly requires the following components:
Æ management of our financial resources, including banking relationships, i.e., administration
of bank loans and bank accounts;
Æ management of our accounting system and records and financial reporting;
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Æ administration of the legal and regulatory requirements affecting our business and assets; and
Æ management of the relationships with our service providers and customers.
The principal factors that may affect our profitability, cash flows and shareholders’ return on
investment include:
Æ rates and periods of charterhire;
Æ levels of vessel operating expenses;
Æ depreciation expenses;
Æ financing costs; and
Æ fluctuations in foreign exchange rates.
See “Risk Factors” for additional factors that may affect our business.
Our Fleet – Comparison of Possible Excess of Carrying Value Over
Estimated Charter-Free Market Value of our Vessels
In “Critical Accounting Policies – Impairment of long-lived assets,” we discuss our policy
for impairing the carrying values of our vessels. Historically, the market values of vessels have
experienced volatility, which from time to time may be substantial. As a result, the charter-free
market value of certain of our vessels may have declined below those vessels’ carrying value,
even though we would not impair those vessels’ carrying value under our accounting impairment
policy. In 2014, our impairment test exercise did not result in an indication of impairment. In
2013, impairment losses were recorded for certain of our vessels, as our impairment test
exercise indicated that the carrying values of these vessels were not recoverable.
Based on: (i) the carrying value of each of our vessels as of December 31, 2014 and 2013,
and (ii) what we believe the charter-free market value of each of our vessels was as of December
31, 2014 and 2013, the aggregate carrying value of 8 vessels in our fleet as of December 31,
2014 and also of the same 8 vessels as of December 31, 2013 exceeded their aggregate
charter-free market value by approximately $77.9 million and $66.9 million, respectively, as
noted in the table below. This aggregate difference represents the approximate analysis of the
amount by which we believe we would have to reduce our net income or increase our loss if
we sold all of such vessels at December 31, 2014 and 2013, on industry standard terms, in
cash transactions, and to a willing buyer where we were not under any compulsion to sell, and
where the buyer was not under any compulsion to buy. For purposes of this calculation, we
have assumed that these 8 vessels would be sold at prices that reflect our estimate of their
charter-free market values as of December 31, 2014 and 2013. However, as of the same date,
certain of those container vessels were employed for their remaining charter duration, under
time charters which we believe were above market levels. We believe that if these vessels were
sold with those charters attached, we would have received a premium over their charter-free
market value. However, as of December 31, 2014, and currently, we have not entered into any
agreement to sell any of our vessels. In February 2014, the vessel APL Sardonyx was sold for
demolition, while the vessel’s carrying value had been impaired as of December 31, 2013.
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Our estimates of charter-free market value assume that our vessels were all in good and
seaworthy condition without need for repair and if inspected would be certified in class without
notations of any kind. Our estimates are based on information available from various industry
sources, including:
Æ reports by industry analysts and data providers that focus on our industry and related
dynamics affecting vessel values;
Æ news and industry reports of similar vessel sales;
Æ news and industry reports of sales of vessels that are not similar to our vessels where we
have made certain adjustments in an attempt to derive information that can be used as part
of our estimates;
Æ approximate market values for our vessels or similar vessels that we have received from
shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;
Æ offers that we may have received from potential purchasers of our vessels; and
Æ vessel sale prices and values of which we are aware through both formal and informal
communications with shipowners, shipbrokers, industry analysts and various other shipping
industry participants and observers.
As we obtain information from various industry and other sources, our estimates of charter-
free market values are inherently uncertain. In addition, vessel values are highly volatile; as such,
our estimates may not be indicative of the current or future charter-free market values of our
vessels or prices that we could achieve if we were to sell them. We also refer you to the risk factor
entitled “Vessel values may fluctuate which may adversely affect our financial condition, result in
the incurrence of a loss upon disposal of a vessel, impairment losses or increases in the cost of
acquiring additional vessels”.
Vessel
1
2
3
4
5
6
7
8
9
10
11
12
Sagitta
Centaurus
Cap Domingo
Cap Doukato
Apl Sardonyx
Apl Garnet
Hanjin Malta
Puelo
Pucon
YM March
YM Great
Santa Pamina
Vessels Net Book Value
TEU
3,426
3,426
3,739
3,739
4,729
4,729
4,024
6,541
6,541
5,576
5,576
5,042
Carrying Value
(in millions of US dollars)
Year Built
At December
31, 2014
At December
31, 2013
2010
2010
2001
2002
1995
1995
1993
2006
2006
2004
2004
2005
39.6*
41.0*
23.4*
24.0*
-
15.9*
12.3*
44.9*
45.0*
22.1
22.0
15.9
306.1
41.0*
42.4*
24.5*
25.1*
9.5
16.7*
13.0*
46.5*
46.7*
-
-
-
265.4
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*Indicates vessels for which we believe, as of December 31, 2014 and December 31, 2013,
the charter-free market value was lower than the vessel’s carrying value. We believe that the
aggregate carrying value of these vessels exceeded their aggregate charter-free market value by
approximately $77.9 million and $66.9 million, respectively.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues and expenses and
related disclosures 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 when we acquire
and operate vessels, 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 in this annual report.
Accounts Receivable, Trade
Accounts receivable, trade, at each balance sheet date, include receivables from charterers
for hire net of a provision for doubtful accounts. At each balance sheet date, all potentially
uncollectible accounts are assessed individually for purposes of determining the appropriate
provision for doubtful accounts.
Accounting for Revenues and Expenses
Revenues are generated from time charter agreements that we have entered into for our
vessels and may enter into in the future. Time charter agreements with the same charterer
are accounted for as separate agreements according to the terms and conditions of each
agreement. Time charter revenues are recorded over the term of the charter as service is
provided. Revenues are recorded when they become fixed and determinable. Revenues from
time charter agreements providing for varying annual rates over their term are accounted for
on a straight line basis. Income representing ballast bonus payments in connection with the
repositioning of a vessel by the charterer to the vessel owner is recognized in the period earned.
Deferred revenue includes cash received prior to the balance sheet date for which all criteria for
recognition as revenue would not be met, including any deferred revenue resulting from charter
agreements providing for varying annual rates, which are accounted for on a straight line basis.
Deferred revenue also may include the unamortized balance of liabilities associated with the
acquisition of secondhand vessels with time charters attached, acquired at values below fair
market value at the date the acquisition agreement is consummated.
Voyage expenses, primarily consisting of port, canal and bunker expenses that are unique
to a particular charter, are paid for by the charterer under time charter arrangements or by the
Company under voyage charter arrangements, except for commissions, which are always paid
for by the Company, regardless of charter type. All voyage and vessel operating expenses are
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expensed as incurred, except for commissions. Commissions are deferred over the related
voyage charter period to the extent revenue is deferred since commissions are earned as
revenues are earned.
Prepaid/Deferred Charter Revenue
The Company records identified assets or liabilities associated with the acquisition of a vessel
at their relative fair value, determined by reference to market data. The Company values any
asset or liability arising from the market value of the time charters assumed when a vessel is
acquired. The amount to be recorded as an asset or liability at the date of vessel delivery is based
on the difference between the current fair market value of the charter and the net present value
of future contractual cash flows. In determining the relative fair value, when the present value of
the contractual cash flows of the time charter assumed is different than its current fair value, the
difference, capped to the excess between the acquisition cost and the vessel’s fair value on a
charter free basis, is recorded as prepaid charter revenue or as deferred revenue, respectively.
Such assets and liabilities, respectively, are amortized as a reduction of, or an increase in, revenue
over the period of the time charter assumed.
Vessel Cost
Vessels are stated at cost which consists of the contract price and costs incurred upon
acquisition or delivery of a vessel from a shipyard. Subsequent expenditures for conversions
and major improvements are also capitalized when they appreciably extend the life, increase the
earnings capacity or improve the efficiency or safety of the vessels; otherwise these amounts are
charged to expense as incurred.
Vessel Depreciation
We have recorded the value of our vessels at their cost, which includes acquisition costs
directly attributable to the vessel and expenditures made to prepare the vessel for her initial
voyage, less accumulated depreciation. We depreciate our containership vessels on a straight-
line basis over their estimated useful lives, estimated to be 30 years from the date of initial delivery
from the shipyard which we believe is also consistent with that of other shipping companies.
Secondhand vessels are depreciated from the date of their acquisition through their remaining
estimated useful life. Depreciation is based on cost less the estimated salvage value. Furthermore,
we have historically estimated the salvage values of our vessels to be $200 to $350 per light-
weight ton depending on the vessels age and market conditions, while effective July 1, 2013
we adjusted prospectively the scrap rate used to $350 per light-weight ton for all vessels in the
fleet. A decrease in the useful life of a containership or in her salvage value would have the effect
of increasing the annual depreciation charge. When regulations place limitations on the ability
of a vessel to trade on a worldwide basis, the vessel’s useful life is adjusted at the date such
regulations are adopted.
Deferred Drydock Cost
Our vessels are required to be drydocked every five years for major repairs and maintenance
that cannot be performed while the vessels are operating. We defer the costs associated with
drydockings as they occur and amortize these costs on a straight-line basis over the period
through the date the next drydocking is scheduled to become due. Unamortized drydocking
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costs of vessels that are sold are written off and included in the calculation of the resulting gain
or loss in the year of the vessel’s sale. Costs capitalized as part of the drydocking include actual
costs incurred at the yard and parts used in the drydocking. We believe that these criteria are
consistent with industry practice and that our policy of capitalization reflects the economics and
market values of the vessels.
Impairment of Long-lived Assets
We evaluate the carrying amounts, primarily for vessels and related drydock costs, and
periods over which our long-lived assets are depreciated to determine if events have occurred
which would require modification to their carrying values or useful lives. When the estimate
of future undiscounted net operating cash flows, excluding interest charges, expected to be
generated by the use of the asset is less than its carrying amount, we should evaluate the
asset for an impairment loss. Measurement of the impairment loss is based on the fair value
of the asset. We determine the fair value of our assets based on management estimates and
assumptions and by making use of available market data and taking into consideration third
party valuations. In evaluating useful lives and carrying values of long-lived assets, management
reviews certain indicators of potential impairment, such as undiscounted projected operating
cash flows, vessel sales and purchases, business plans and overall market conditions. The
current economic and market conditions are having broad effects on participants in a wide
variety of industries. The current conditions in the containerships market with decreased
charter rates and decreased vessel market values are conditions that we consider indicators
of a potential impairment.
We determine future undiscounted net operating cash flows for each vessel and compare
them to the vessel’s carrying value. The projected net operating cash flows are determined by
considering the historical and estimated vessels’ performance and utilization, the charter revenues
from existing charters for the fixed fleet days and an estimated daily time charter equivalent for the
unfixed days, based, to the extent applicable, on the most recent ten-year blended, for modern
and older vessels, average historical 6-12 months time charter rates available for each type of
vessel, over the remaining estimated life of each vessel net of brokerage commissions, expected
outflows for scheduled vessels’ maintenance and vessel operating expenses assuming an
average annual inflation rate of 3%. Effective fleet utilization is assumed at 98%, taking into
account the period(s) each vessel is expected to undergo its scheduled maintenance (drydocking
and special surveys), as well as an estimate of 1% off hire days each year, which assumptions are
in line with our historical performance and our expectations for future fleet utilization under our
current fleet deployment strategy. The review of the vessel’s carrying amounts in connection with
the estimated recoverable amounts for the years ended December 31, 2014 and 2012 did not
indicate impairment charges for any of our vessels, while in 2013, the above mentioned review
indicated impairment charges for certain of our vessels, amounting to $42.3 million.
Set forth below is an analysis of the average estimated daily time charter equivalent rate used
in our impairment analysis as of December 31, 2014:
Up to 4,000 TEU
Between 4,000 TEU and 6,000 TEU
Above 6,000 TEU
Average estimated
daily Time charter
equivalent rate used
$ 17,774
$ 21,340
$ 26,750
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For the purposes of presenting our investors with additional information to determine how
the Company’s future results of operations may be impacted in the event that daily time charter
rates do not improve from their current levels in future periods, we set forth below an analysis that
shows the 1-year, 3-year and 5-year average blended rates and the effect the use of each of these
rates would have on the Company’s impairment analysis.
5-year
period
(in USD)
Impairment
charge
(in USD
million)
Up to 4,000 TEU
10,013
Between 4,000 -
6,000 TEU
13,228
Above 6,000 TEU
n/a *
53.0
4.4
n/a *
3-year
period
(in USD)
7,315
9,136
26,750
Impairment
charge
(in USD
million)
55.5
4.4
0.0
1-year
period
(in USD)
7,746
8,771
24,667
Impairment
charge
(in USD
million)
55.5
4.4
0.0
*For the vessels with capacity of more than 6,000 TEU, average daily rates were only available
since 2012.
Share Based Payment
According to Code 718 “Compensation – Stock Compensation” of the Accounting Standards
Codification, we are required to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award, with limited
exceptions. That cost is recognized over the period during which an employee is required to
provide service in exchange for the award—the requisite service period, which is usually the
vesting period. No compensation cost is recognized for equity instruments for which employees
do not render the requisite service. Employee share purchase plans will not result in recognition
of compensation cost if certain conditions are met. We initially measure the cost of employee
services received in exchange for an award or liability instrument based on its current fair value;
the fair value of that award or liability instrument is re-measured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite service period
are recognized as compensation cost over that period with the exception of awards granted
in the form of restricted shares which are measured at their grant date fair value and are not
subsequently re measured. The grant-date fair value of employee share options and similar
instruments are estimated using option-pricing models adjusted for the unique characteristics
of those instruments unless observable market prices for the same or similar instruments are
available. If an equity award is modified after the grant date, incremental compensation cost is
recognized in an amount equal to the excess of the fair value of the modified award over the fair
value of the original award immediately before the modification.
Results of Operations
Year ended December 31, 2014 compared to the year ended December 31, 2013
Net Income / (Loss). Net income for 2014 amounted to $3.2 million, compared to a net loss of
$57.3 million for 2013. The loss for 2013 was mainly the result of impairment charges and direct
sale and other charges totalling $58.8 million.
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Time Charter Revenues, net of prepaid charter revenue amortization. Time charter revenues,
net of prepaid charter revenue amortization of $11.6 million and $20.3 million for 2014 and 2013
respectively, amounted to $54.1 million for 2014, compared to $54.0 million in 2013. The net
time charter revenues remained relatively unchanged, despite the 12% decrease of the gross
time charter revenues and the 9% decrease of ownership days, as a result of the decrease of
the prepaid charter revenue amortization. In 2013, prepaid charter revenue amortization was
recognized for six vessels in total, while the time charter agreements for two of these vessels
expired in December 2013 and January 2014 and for another two vessels the time charter
agreements expired in December 2014.
Voyage Expenses. Voyage expenses for 2014 amounted to $0.3 million, compared to $0.7
million in 2013. Voyage expenses mainly consist of commissions paid to third party brokers,
and up to February 28, 2013 also included commissions paid to DSS on our gross charterhire
pursuant to our vessel management agreements. The decrease in voyage expenses in 2014
compared to 2013 was due to the decrease in commissions, as effective March 1, 2013, UOT
provides us with management services similar to those previously provided by DSS, and these
fees are eliminated in consolidation as intercompany transactions. In addition, as commissions
are a percentage of time charter revenues, they follow the same trend with time charter revenues.
Vessel Operating Expenses. Vessel operating expenses amounted to $26.6 million in
2014, compared to $30.9 million in the prior year and mainly consist of expenses for running
and maintaining the vessels, such as crew wages and related costs, consumables and stores,
insurances, repairs and maintenance and environmental compliance costs. The decrease in 2014
was primarily due to the decrease in the ownership days and also due to decreased average crew
costs, stores and spares expenses.
Depreciation. Depreciation for 2014 amounted to $10.3 million, compared to $11.1 million
in 2013 and represents the depreciation expense of our containerships during the respective
periods. The decrease in 2014 was mainly due to decreased ownership days during the year.
Management Fees. Management fees were zero in 2014, compared to $0.3 million in 2013
and consisted of fees payable to DSS pursuant to the vessel management agreements that we,
through our vessel-owning subsidiaries, had entered into for the provision of commercial and
technical management services for the vessels in our fleet. In 2014 there were no management
fees, as UOT, our wholly-owned subsidiary, provides us with similar services since March 1, 2013.
General and Administrative Expenses. General and administrative expenses for 2014
amounted to $6.3 million, compared to $5.1 million in 2013 and mainly consist of payroll
expenses of office employees, consultancy fees, brokerage services fees, compensation cost
on restricted stock awards, legal fees and audit fees. The increase in 2014 was mainly due to
the full operation of UOT in 2014, compared to the previous year when the company started its
operations in March and also due to increased salaries. The increase in general administrative
expenses was partly off-set by decreased legal expenses and employees’ retirement obligation.
Impairment losses. Impairment losses in 2014 were zero, compared to $42.3 million in 2013
and represented non-cash impairment charges recorded for the vessels Maersk Madrid, Maersk
Malacca, Maersk Merlion and Apl Sardonyx.
Loss on vessels’ sale. Loss on vessels’ sale amounted to $0.7 million in 2014, and relates to
the sale of the vessel Apl Sardonyx, while in 2013, loss on vessels’ sale amounted to $16.5 million
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and related to the sale of the vessels Maersk Madrid, Maersk Malacca, Maersk Merlion and Apl
Spinel.
Foreign Currency Losses / (Gains). Foreign currency losses for 2014 amounted to $17,029,
which mainly consists of unrealized exchange differences derived from the year-end valuation of
accounts other than the US Dollar. In 2013, there were foreign currency losses of $66,447.
Interest and Finance Costs. Interest and finance costs for 2014 amounted to $6.7 million,
compared to $4.6 million for 2013 and consist of the interest expenses relating to our average
debt outstanding during the respective periods and other loan fees and expenses. The increase
in 2014 was due to increased average debt compared to the prior period, after the drawdown of
$50.0 million from our loan agreement with Diana Shipping Inc. and $6.0 million from our credit
facility with RBS in August and September 2013 respectively, and increased average interest
rates, which increased to 3.9% in 2014 from 3.5% in 2013.
Interest Income. Interest income for 2014 amounted to $0.1 million, the same with 2013 and
consists of interest income received on deposits of cash and cash equivalents.
Year ended December 31, 2013 compared to the year ended December 31, 2012
Net Income / (Loss). Net loss for 2013 amounted to $57.3 million, compared to net income of
$6.0 million during 2012. The loss for 2013 was mainly the result of impairment charges and direct
sale and other charges totalling $58.8 million.
Time Charter Revenues, net of prepaid charter revenue amortization. Time charter revenues,
net of prepaid charter revenue amortization of $20.3 million and $12.2 million for 2013 and
2012 respectively, amounted to $54.0 million for 2013, compared to $56.6 million in 2012. The
decrease is due to decreased average time charter rates in 2013 compared to 2012 and was
partly offset by the increase in the ownership days in 2013 compared to 2012.
Voyage Expenses. Voyage expenses for 2013 amounted to $0.7 million, compared to $1.4
million in 2012. Voyage expenses mainly consist of commissions paid to third party brokers,
and up to February 28, 2013 also included commissions paid to DSS on our gross charterhire
pursuant to our vessel management agreements. The figure also includes bunkers expense
incurred during off-hire days. The decrease in voyage expenses in 2013 compared to 2012
was due to the decrease in commissions, as effective March 1, 2013, UOT provides us with
management services similar to those previously provided by DSS, and these fees are eliminated
in consolidation as intercompany transactions.
Vessel Operating Expenses. Vessel operating expenses amounted to $30.9 million in
2013, compared to $29.0 million in the prior year and mainly consist of expenses for running
and maintaining the vessels, such as crew wages and related costs, consumables and stores,
insurances, and repairs and maintenance. The increase in 2013 was due primarily to the increase
of our ownership days and also due to increased crew costs, insurances and tax expenses, partly
off-set by decreased stores, spares and maintenance costs.
Depreciation. Depreciation for 2013 amounted to $11.1 million, compared to $12.5 million
in 2012 and represents the depreciation expense of our containerships during the respective
periods. The decrease in 2013 was mainly due to decreased carrying values of certain vessels
which were impaired during the year.
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Management Fees. Management fees amounted to $0.3 million in 2013 compared to
$1.6 million in 2012 and consist of fees payable to DSS pursuant to the vessel management
agreements that we, through our vessel-owning subsidiaries, had entered into for the provision
of commercial and technical management services for the vessels in our fleet. The decrease of
these fees in 2013 compared to 2012 is, as described above, due to the appointment of UOT, our
wholly-owned subsidiary, to provide similar services since March 1, 2013.
General and Administrative Expenses. General and administrative expenses for 2013
amounted to $5.1 million, compared to $3.5 million in 2012 and mainly consist of payroll expenses
of office employees, consultancy fees, brokerage services fees, compensation cost on restricted
stock awards, legal fees and audit fees. The increase in 2013 compared to 2012 was mainly due
to the establishment of UOT to act as our Manager, and was partly off-set by decreased company
promotion expenses and compensation cost on restricted stock awards.
Impairment losses. Impairment losses amounted to $42.3 million in 2013, and represent
non-cash impairment charges recorded during the year for the vessels Maersk Madrid, Maersk
Malacca, Maersk Merlion and Apl Sardonyx.
Loss on vessels’ sale. Loss on vessels’ sale amounted to $16.5 million in 2013, and relates to
the sale of the vessels Maersk Madrid, Maersk Malacca, Maersk Merlion and Apl Spinel.
Foreign Currency Losses / (Gains). Foreign currency losses for 2013 amounted to $0.1 million,
which mainly consists of unrealized exchange differences derived from the year-end valuation
of accounts other than the US Dollar. In 2012, there were foreign currency gains of $0.2 million.
Interest and Finance Costs. Interest and finance costs for 2013 amounted to $4.6 million,
compared to $3.1 million for 2012 and consist of the interest expenses relating to our average debt
outstanding during the respective periods, commitment fees and other loan fees and expenses.
The increase in 2013 was due to increased average debt compared to the prior period, after the
drawdown of $50.0 million from our loan agreement with Diana Shipping Inc. and $6.0 million
from our credit facility with RBS, and increased average interest rates, which increased to 3.5%
in 2013 from 3.1% in 2012.
Interest Income. Interest income for 2013 amounted to $0.1 million, the same with 2012 and
consists of interest income received on deposits of cash and cash equivalents.
Inflation
Inflation does not have a material effect on our expenses given current economic conditions.
In the event that significant global inflationary pressures appear, these pressures would increase
our operating, voyage, administrative and financing costs.
B. Liquidity and Capital Resources
We have financed our capital requirements with cash flow from operations, equity
contributions from shareholders and long-term bank debt. Our main uses of funds have been
capital expenditures for the acquisition of new vessels, expenditures incurred in connection with
ensuring that our vessels comply with international and regulatory standards, repayments of bank
loans and payments of dividends. We will require capital to fund additional vessel acquisitions
and debt service.
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During 2012 and 2013, we drew down an aggregate amount of $148.7 million under our credit
facility with RBS and our loan agreement with DSI, which we utilized to acquire vessels. Our
operating cash flow is generated from charters on our vessels, through our subsidiaries. Working
capital, which is current assets minus current liabilities, amounted to $77.2 million at December
31, 2014 and $19.2 million at December 31, 2013. We anticipate that internally generated cash flow
will be sufficient to fund the operations of our fleet, including our working capital requirements.
Cash Flow
As at December 31, 2014, cash and cash equivalents amounted to $82.0 million compared to
$19.7 million for the prior year. We consider highly liquid investments such as time deposits and
certificates of deposit with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents are primarily held in U.S. dollars.
Net Cash Provided by Operating Activities
Net cash provided by operating activities in 2014, 2013 and 2012 amounted to $25.5 million,
$31.7 million, and $31.3 million, respectively. The decrease in cash from operating activities in
2014 compared to 2013, is mainly due to the decrease of our average fleet during 2014, after
the disposal of five vessels from May 2013 to February 2014, partly off-set with the addition of six
vessels to the Company’s fleet from March 2013 to November 2014, and also due to increased
payments of interest and general administrative expenses. The increase in 2013 compared to
2012 was due to the enlargement of our fleet, after the delivery of three vessels in 2013 and five
vessels in 2012, partly off-set by the disposal of four vessels during 2013.
Net Cash Used in Investing Activities
Net cash used in investing activities in 2014 was $51.6 million and consists of $60.4 million
paid for the three vessels that we acquired during the year, $0.9 million paid for the acquisition of
a plot of land and for equipment additions, $8.8 million received from the sale of one vessel during
the year, and finally $0.9 million received, representing insurance settlements.
Net cash used in investing activities in 2013 was $81.7 million and consists of $107.9 million
paid for the three vessels that we acquired during the year, $8.5 million paid for a time charter
agreement attached to the memorandum of agreement of a vessel acquired during the year,
$0.4 million paid for property and equipment additions, $33.7 million received from the sale of
four vessels during the year, and finally $1.4 million received representing insurance settlements.
Net cash used in investing activities in 2012 was $150.0 million and consists of $108.0 million
paid for the five vessels that we acquired during the year and $42.0 million paid for their respective
time charter agreements attached to the memoranda of agreement.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in 2014 was $88.5 million and consists of $96.0
million of net proceeds received from the offering of 1,092,596 shares of common stock under
our at-the-market program and of 36,653,386 shares under the private equity placement that
took place during the year, and $7.5 million of cash dividends paid to investors.
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Net cash provided by financing activities in 2013 was $38.1 million and consists of $12.4
million of net proceeds received from the offering of 2,859,603 shares of common stock under
our at-the-market program, $6.0 million of loan proceeds received under our loan agreement
with the Royal Bank of Scotland, and $50.0 million of loan proceeds received under our loan
agreement with DSI. It also includes $29.7 million of cash dividends paid to investors, and $0.6
million of additional restricted cash required under our credit facility.
Net cash provided by financing activities in 2012 was $108.8 million and consists of $53.9
million of net proceeds received from the offering of 9,115,803 shares of common stock, $92.7
million of loan proceeds received under our loan agreement with the Royal Bank of Scotland. It
also includes $28.5 million of cash dividends paid to investors, and $9.3 million of compensating
cash required under our credit facility.
Loan Facilities
The Royal Bank of Scotland plc.: On December 16, 2011, we entered into a revolving
credit facility with the Royal Bank of Scotland plc., where the lenders have agreed to make
available to the Borrower a revolving credit facility of up to $100.0 million, in order to refinance
part of the acquisition cost of vessels m/v Sagitta and the m/v Centaurus, and finance part of
the acquisition cost of additional containerships (“Additional Ships”).
The maximum amount available for drawing (the “Available Facility Limit”) is subject to limits
relating to the market value of the vessels m/v Sagitta and m/v Centaurus and the market value
or contract price and the age of the Additional Ships (“Vessel Limits”) combined with limits relating
with the average age of all the vessels under mortgage. The facility will be available for five years
after the first availability date, being January 17, 2012 with the Available Facility Limit assessed
at each draw down date and on a yearly basis, as well as, at the date in which the age of any
Additional Ship exceeds the 20 years. In the event that the amounts outstanding at that time
exceed the revised Available Facility Limit, the Company shall repay such part of the Loan that
exceeds the Available Facility Limit.
Up to June 1, 2013, the credit facility bore interest at Libor plus a margin of 2.75% per
annum and is secured by first priority mortgages over the financed fleet, general assignments
of earnings, insurances and requisition compensation, specific assignments of any charters
exceeding durations of twelve months, pledge of shares of the guarantors which will be the ship-
owning companies of the mortgaged vessels, manager’s undertakings and minimum security
hull value varying from 125% to 140% of the outstanding loan depending on the average age of
the mortgaged vessels. The credit facility also includes restrictions as to changes in management
and employment of vessels, a consolidated net debt of not more than 60% of market adjusted
assets, EBITDA to Interest of not less than 3:1, minimum cash of 10% of the drawings under
the revolving facility but not less than $5.0 million and a forward looking operating cash flow to
forward looking interest costs of not less than 1.2:1.
During 2013, we entered into various supplemental agreements with the Royal Bank of
Scotland plc. The amendments mainly provide for an increased margin of 3.10% per annum,
effective June 1, 2013, changes in the definition of tangible assets in the calculation of financial
covenants, as well as for security interest on the minimum cash held by us in favor of the lenders.
The supplemental agreements also restrict any security interest over our assets in favor of DSI.
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Furthermore, we were required to provide additional vessels as collateral to secure the revolving
credit facility, to amend the terms of the mandatory prepayment clause and to agree to certain
other consequential amendments of the terms of the facility agreement. In 2014, as per further
amendments in the loan agreement, we agreed to certain other changes in the beneficial
ownership clause and in the definition of the EBITDA to Interest ratio covenant.
As of December 31, 2014, we were in compliance with all covenants relating to the loan facility,
except for the minimum required security cover (hull cover ratio), which was 134%, while the
minimum required value for the ratio was 140%. This breach indicated that, to rectify the shortfall,
we would have to repay to the Royal Bank of Scotland plc. an amount of $4.2 million, or provide
additional security. However, the lenders waived their right to request prepayment or provision
of additional security and agreed to reassess the compliance with the covenant not earlier than
March 31, 2015.
We paid an arrangement fee of 1%, or $1 million, on signing of the agreement. We also paid
commitment commissions of 0.99% per annum on the available commitment up to October 31,
2013, date at which the available amount to be drawn from the credit facility became zero. As
of the date of this annual report and as of December 31, 2014, we had $98.7 million of debt
outstanding under our credit facility with RBS. Based on the current age of the financed vessels,
an amount of $6.0 million is repayable in August 2015 and the remaining $92.7 million is repayable
in January 2017.
Diana Shipping Inc. (“DSI”): On May 20, 2013, we, through our subsidiary Eluk
Shipping Company Inc., entered into an unsecured loan agreement of up to $50.0 million with
DSI, to be used to fund vessel acquisitions and for general corporate purposes. The loan bears
interest at a rate of Libor plus a margin of 5.0% per annum. In addition, the loan bears a fee
of 1.25% per annum (“back-end fee”) on any amounts repaid upon any repayment or voluntary
prepayments dates. In August 2013, the full amount of $50.0 million was drawn down under the
loan agreement, which remained outstanding as of December 31, 2014 and as of the date of this
annual report. The loan matures on the fourth anniversary of the drawdown date, or on August
20, 2017. We, or our subsidiaries, may not incur additional indebtedness during the term of the
loan without the prior consent of the lender.
As at December 31, 2014 and the date of this annual report, we have not used any derivative
instruments for hedging purposes or other purposes.
Capital Expenditures
Our future capital expenditures relate to the purchase of containerships and vessel upgrades.
In March 2015, we entered into two memoranda of agreement to acquire two panamax container
vessels, which are expected to be delivered to us by the end of April 2015. We expect to fund the
acquisition costs of these two vessels with cash on hand.
We also expect to incur additional capital expenditures when our vessels undergo surveys.
This process of recertification may require us to reposition these vessels from a discharge port
to shipyard facilities, which will reduce our operating days during the period. The loss of earnings
associated with the decrease in operating days, together with the capital needs for repairs and
upgrades results in increased cash flow needs which we fund with cash on hand.
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C. Research and Development, Patents and Licenses
From time to time, we incur expenditures relating to inspections for acquiring new vessels
that meet our standards. Such expenditures are capitalized to vessel’s cost upon such vessel’s
acquisition or expensed, if the vessel is not acquired, however, historically, such expenses were
not material.
D. Trend Information
Our results of operations depend primarily on the charter hire rates that we are able to realize.
Charter hire rates paid for containerships are primarily a function of the underlying balance
between vessel supply and demand.
With some exceptions, time charter rates for all containership sizes increased steadily from
2002 into 2005, in some cases rising by as much as 50.0%, as charter markets experienced
significant growth. Demand for vessels was largely spurred on by growth in the volume of exports
from China. In 2006, time charter rates weakened due to supply rising faster than demand and
also market perception. This trend continued in 2007 and 2008, and in 2009 rates fell even
further due to rising supply and very weak demand. With the recovery in demand since 2009
year-to-date charter rates across most sizes have improved from the lows of 2009, although in a
historical context they still remain low. As such, we cannot assure investors that we will be able to
fix our vessels, upon expiration of their current charters, at average rates higher than or similar to
those achieved in previous years.
E. Off-balance Sheet Arrangements
As of the date of this annual report, we do not have any off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
The following table presents our contractual obligations as of December 31, 2014, as adjusted
to reflect the two memoranda of agreement we entered into in March 2015 for the acquisition of
two panamax container vessels for $21.5 million each:
Payments due by period
Contractual Obligations
Total
Amount
Less than
1 year
2-3 years
4-5
years
More than
5 years
(in thousands of US dollars)
Broker Services Agreement (1)
$
362
$
362 $
-
$
- $
Long term bank debt (2)
Related party debt (2),(3)
Memoranda of Agreement (4)
98,700
50,000
43,000
6,000
-
43,000
92,700
50,000
-
-
-
-
Total
$
192,062
$
49,362 $
142,700
$
- $
-
-
-
-
-
(1) As per our agreement with Diana Enterprises Inc., we pay a fixed monthly fee of $120,833
for the brokerage services we are provided. The duration of the engagement based on the current
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agreement shall be for a term of fifteen months, ending on March 31, 2015. Please see “Item 6B.
- Compensation” and “Item 7B.-Related Party Transactions” for more details.
(2) The table above does not include projected interest payments which are based on Libor
plus a margin, which are estimated at about $5.8 million for 2015, $5.7 million for 2016 and $1.8
million for 2017, as long as the Libor rate remains at the levels of the year ended December 31,
2014.
(3) The table above does not include the “back-end” fee payable to Diana Shipping in 2017,
amounting to $2.5 million.
(4) In March 2015, we entered, through newly established subsidiaries, into two memoranda
of agreement with unrelated individuals, to acquire the container vessels “YM New Jersey” and
“YM Los Angeles”, for the purchase price of $21.5 million each. The vessels are expected to be
delivered to us by the end of April 2015.
G. Safe Harbor
See the section entitled “Forward-looking Statements” at the beginning of this annual report.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Set forth below are the names, ages and positions of our directors and executive officers. Our
board of directors is elected annually on a staggered basis, and each director elected holds office
for a three year term. Officers are appointed from time to time by our board of directors and hold
office until a successor is elected.
All of our executive officers are also executive officers of Diana Shipping.
Name
Symeon Palios
Anastasios Margaronis
Ioannis Zafirakis
Andreas Michalopoulos
Giannakis (John) Evangelou
Antonios Karavias
Nikolaos Petmezas
Reidar Brekke
Age
Position
73
59
43
43
70
73
66
54
Class III Director, Chief Executive Officer and Chairman
Class II Director and President
Class I Director, Chief Operating Officer and Secretary
Chief Financial Officer and Treasurer
Class III Director
Class I Director
Class III Director
Class II Director
The term of the Class II directors expires in 2015, the term of the Class III directors expires in
2016 and the term of the Class I directors expires in 2017.
The business address of each officer and director is the address of our principal executive
offices, which are located at Pendelis 18, 175 64 Palaio Faliro, Athens, Greece.
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Biographical information concerning the directors and executive officers listed above is set
forth below.
Symeon Palios has served as our Chief Executive Officer and Chairman since January
13, 2010 and has served as Chief Executive Officer and Chairman of Diana Shipping Inc. since
February 21, 2005 and as a Director of that company since March 9, 1999. Mr. Palios also serves
currently as the President of Diana Shipping Services S.A. Prior to November 12, 2004, Mr. Palios
was the Managing Director of Diana Shipping Agencies S.A. Since 1972, when he formed Diana
Shipping Agencies S.A., Mr. Palios has had the overall responsibility of the activities. Mr. Palios
has experience in the shipping industry since 1969 and expertise in technical and operational
issues. He has served as an ensign in the Greek Navy for the inspection of passenger boats
on behalf of Ministry of Merchant Marine and is qualified as a naval architect and engineer. Mr.
Palios is a member of various leading classification societies worldwide and he is a member of the
board of directors of the United Kingdom Freight Demurrage and Defense Association Limited.
He holds a bachelor’s degree in Marine Engineering from Durham University.
Anastasios Margaronis has served as our Director and President since January 13,
2010 and has served in these positions with Diana Shipping Inc. since February 21, 2005. Mr.
Margaronis also serves as an employee of Diana Shipping Services S.A. Prior to February 21,
2005, Mr. Margaronis was employed by Diana Shipping Agencies S.A. and performed the
services he now performs as President. He joined Diana Shipping Agencies in 1979 and has
been responsible for overseeing our insurance matters, including hull and machinery, protection
and indemnity, loss of hire and war risks insurances. Mr. Margaronis has experience in the
shipping industry, including in ship finance and insurance, since 1980. He is a member of the
Greek National Committee of the American Bureau of Shipping and a member of the board of
directors of the United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited
and of the United Kingdom Mutual Steam Ship Assurance Association (Europe) Limited. He
holds a bachelor’s degree in Economics from the University of Warwick and a master’s of
science degree in Maritime Law from the Wales Institute of Science and Technology.
Ioannis Zafirakis has served as our Director, Chief Operating Officer and Secretary since
January 13, 2010 and has served as Director and Executive Vice President and Secretary of
Diana Shipping Inc. since February 14, 2008, as the Director, Vice President and Secretary of
that company since February 21, 2005 and as a director of the same company since March 9,
1999. Mr. Zafirakis also serves as an employee of Diana Shipping Services S.A. Since 1997 and
prior to February 21, 2005 Mr. Zafirakis was employed by Diana Shipping Agencies S.A. where
he held a number of positions in its operations and finance department. Mr. Zafirakis is also a
member of the Business Advisory Committee of the MSc in International Shipping and Finance
at ICMA Centre, Henley Business School, University of Reading. He holds a bachelor’s degree
in Business Studies from City University Business School in London and a master’s degree in
International Transport from the University of Wales in Cardiff.
Andreas Michalopoulos has served as our Chief Financial Officer and Treasurer since
January 13, 2010 and has served in these positions with Diana Shipping Inc. since March 8,
2006. Mr. Michalopoulos started his career in 1993 when he joined Merrill Lynch Private
Banking in Paris. In 1995, he became an International Corporate Auditor with Nestle SA based
in Vevey, Switzerland and moved in 1998 to the position of Trade Marketing and Merchandising
Manager. From 2000 to 2002, he worked for McKinsey and Company in Paris, France as an
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Associate Generalist Consultant before joining a major Greek Pharmaceutical Group with U.S.
R&D activity as a Vice President of International Business Development and Member of the
Executive Committee in 2002 where he remained until 2005. From 2005 to 2006, he joined
Diana Shipping Agencies S.A. as a Project Manager. Mr. Michalopoulos graduated from Paris IX
Dauphine University with Honors in 1993 obtaining an MSc in Economics and a master’s degree
in Management Sciences specialized in Finance. In 1995, he also obtained a master’s degree in
Business Administration from Imperial College, University of London. Mr. Andreas Michalopoulos
is married to the youngest daughter of Mr. Symeon Palios.
Giannakis (John) Evangelou has served as an independent Director and as the Chairman of
our Audit Committee since February 8, 2011. Mr. Evangelou is a member of the Board of Directors
of Elgeka-Ferfelis Romania S.A. and Diakinisis Logistics Services (CY) Limited both members of
Elgeka S.A. Group of Companies which is listed on the A.S.E. Mr. Evangelou retired from Ernst
& Young (Hellas), which he joined as a partner in 1998, on June 30, 2010. During his 12 years at
Ernst & Young, he acted as Transaction Support leader for Greece and a number of countries
in Southeast Europe including Turkey, Bulgaria, Romania and Serbia. In addition to his normal
duties as a partner, Mr. Evangelou held the position of Quality and Risk Management leader for
Transaction Advisory Services responsible for a sub-area comprising 18 countries spanning
from Poland and the Baltic in the North to Cyprus and Malta in the South. From 1986 through
1997, Mr. Evangelou held the position of Group Finance director at Manley Hopkins Group, a
Marine Services Group of Companies. From 1991 through 1997, Mr. Evangelou served as Chief
Accounting Officer for Global Ocean Carriers, a shipping company that was listed on a U.S. stock
exchange during that time. From 1996 to 1998, Mr. Evangelou was an independent consultant
and a member of the team that prepared Royal Olympic Cruises for its listing on Nasdaq. From
1974 through 1986, Mr. Evangelou was a partner of Moore Stephens in Greece. Additionally,
Mr. Evangelou is a Fellow of the Institute of Chartered Accountants in England and Wales and a
member of the Institute of Certified Accountants — Auditors of Greece.
Antonios Karavias has served as an independent Director and as the Chairman of our
Compensation Committee and member of our Audit Committee since the completion of the
private offering in 2010. Since 2007 Mr. Karavias has served as an Independent Advisor to the
Management of Société Générale Bank and Trust and Marfin Egnatia Bank. Previously, Mr.
Karavias was with Alpha Bank from 1999 to 2006 as a Deputy Manager of Private Banking
and with Merrill Lynch as a Vice President from 1980 to 1999. He holds a bachelor’s degree in
Economics from Mississippi State University and a master’s degree in Economics from Pace
University. As of 2012, Mr. Karavias has been President of UNION F.Z., a financial services
company registered in the U.A.E.
Nikolaos Petmezas has served as an independent Director and as a member of our
Compensation Committee since the completion of the private offering in 2010. Mr. Petmezas
has served since 2001 as the Chief Executive Officer of Maersk-Svitzer-Wijsmuller B.V. Hellenic
Office and, prior to its acquisition by Maersk, as a Partner and as Chief Executive Officer of
Wijsmuller Shipping Company B.V. He has also served since 1989 as the Chief Executive Officer
of N.G. Petmezas Shipping and Trading, S.A., and since 1984 as the Chief Executive Officer of
Shipcare Technical Services Shipping Co. LTD. Since 1995 Mr. Petmezas has served as well as
the Managing Director of Kongsberg Gruppen A.S. (Hellenic Office) and, from 1984 to 1995, as
the Managing Director of Kongsberg Vaapenfabrik A.S. (Hellenic Branch Office). Mr. Petmezas
served on the Board of Directors of Neorion Shipyards, in Syros, Greece from 1989 to 1992. Mr.
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Petmezas began his career in shipping in 1977, holding sales positions at Austin & Pickersgill
Ltd. and British Shipbuilders Corporation until 1983. Mr. Petmezas has been an Advisor at
Westinghouse Electric and Northrop Grumman since 1983 and a Honorary Consul under the
General Consulate of Sri Lanka in Greece since 1995. Mr. Petmezas holds degrees in Law and
in Political Sciences and Economics from the Aristotle University of Thessaloniki and an LL.M. in
Shipping Law from London University.
Reidar Brekke has served as an independent Director since June 1, 2010. Mr. Brekke
has been a principal, advisor and deal-maker in the international energy, container logistics
and transportation sector for the last 15+ years. Mr. Brekke is currently President of Intermodal
Holdings LP, a company investing in intermodal assets. From 2008 – 2012, he was President of
Energy Capital Solutions Inc., (New York and Florida) providing strategic and financial advisory
services to international shipping, logistics and energy related companies. From 2003 - 2008 he
served as Manager of Poten Capital Services LLC, a registered broker-dealer specializing in the
maritime sector. Prior to 2003, Mr. Brekke was C.F.O., then President and C.O.O., of SynchroNet
Marine, a logistics service provider to the global container transportation industry. From 1994 to
2000, he held several senior positions with American Marine Advisors, including Fund Manager
of American Shipping Fund I LLC, and C.F.O. of its broker dealer subsidiary. Prior to this, Mr.
Brekke was an Advisor for the Norwegian Trade Commission in New York & Oslo, Norway, and
a financial advisor in Norway. Mr. Brekke graduated from the New Mexico Military Institute in
1986 and in 1990 he obtained an MBA from the University of Nevada, Reno. He has been an
adjunct professor at Columbia University’s School of International and Public Affairs – Center for
Energy, Marine Transportation and Public Policy, and is currently on the board of directors of four
privately-held companies involved in container logistics, container leasing and drybulk shipping.
B. Compensation
Since June 1, 2010, the members of our senior management were compensated through
their affiliation with Diana Enterprises Inc., a related party controlled by our Chief Executive Officer
and Chairman Mr. Symeon Palios, and its respective Broker Services Agreement with DSS. The
fee payable by DSS to Diana Enterprises (for which we reimbursed DSS) was $1.04 million per
annum and increased to $1.3 million following the completion the public offering in June 2011.
Following the termination agreement for brokerage services that were provided to us through
DSS on March 1, 2013, Diana Enterprises has entered on the same date into an agreement
with us to provide brokerage services for a fixed monthly fee of $120,833. The duration of the
engagement based on the current agreement shall be for a term of fifteen months, ending on
March 31, 2015. Please see “Item 7B. Related Party Transactions” for a full description of the
agreements. In 2014, 2013, and 2012, fees payable to Diana Enterprises for brokerage services
amounted to $1.5 million, $1.4 million and $1.3 million, respectively.
In 2010, our executive officers also received 213,331 shares of restricted stock awards, 25%
of which vested in 2010 and the remaining vested ratably over the next three years. In June 2011,
on the completion of our public offering, our executive officers also received 53,333 shares of
restricted stock awards, 25% of which vested on the grant date and the remainder of which
vested ratably over the next three years from the grant date. In May 2014, our executive officers
also received 361,442 shares of restricted stock awards, which will vest ratably over three years
from the grant date. Finally, in February 2015, our executive officers were further awarded 731,590
shares of restricted stock awards, which will vest ratably over three years from the grant date. In
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2014, 2013, and 2012, compensation cost relating to the aggregate amount of restricted stock
awards amounted to $0.3 million, $0.4 million and $0.9 million, respectively.
Our non-executive directors receive annual compensation in the aggregate amount of
$40,000 plus reimbursement of their out-of-pocket expenses incurred while attending any
meeting of the board of directors or any board committee. In addition, a committee chairman
receives an additional $20,000 annually, and other committee members receive an additional
$10,000. We do not have a retirement plan for our officers or directors. For 2014, 2013, and 2012,
fees, bonuses and expenses to non-executive directors amounted to $0.4 million, $0.3 million
and $0.3 million, respectively.
2010 Equity Incentive Plan, as Amended and Restated in 2012
We have adopted an equity incentive plan, which we refer to as the plan, under which directors,
officers, employees, consultants and service providers of us and our subsidiaries and affiliates will
be eligible to receive options to acquire common stock, stock appreciation rights, restricted stock,
restricted stock units and unrestricted common stock. We have reserved for issuance a total of
392,198 common shares under the plan, subject to adjustment for changes in capitalization as
provided in the plan. The plan is administered by our compensation committee, or such other
committee of our board of directors as may be designated by the board to administer the plan.
Under the terms of the plan, stock options and stock appreciation rights granted under the
plan will have an exercise price per common share equal to the fair market value of a common
share on the date of grant, unless otherwise specifically provided in an award agreement, but in
no event will the exercise price be less than the greater of (i) the fair market value of a common
share on the date of grant and (ii) the par value of one share of common stock. Options and stock
appreciation rights will be exercisable at times and under conditions as determined by the plan
administrator, but in no event will they be exercisable later than ten years from the date of grant.
The plan administrator may grant shares of restricted stock and awards of restricted stock
units subject to vesting and forfeiture provisions and other terms and conditions as determined
by the plan administrator in accordance with the terms of the plan. Following the vesting of a
restricted stock unit, the award recipient will be paid an amount equal to the number of restricted
stock units that then vest multiplied by the fair market value of a common share on the date of
vesting, which payment may be paid in the form of cash or common shares or a combination
of both, as determined by the plan administrator. The plan administrator may grant dividend
equivalents with respect to grants of restricted stock units.
Adjustments may be made to outstanding awards in the event of a corporate transaction
or change in capitalization or other extraordinary event. In the event of a “change in control” (as
defined in the plan), unless otherwise provided by the plan administrator in an award agreement,
awards then outstanding will become fully vested and exercisable in full.
Our board of directors may amend the plan and may amend outstanding awards, provided
that no such amendment may be made that would materially impair any rights, or materially
increase any obligations, of a grantee under an outstanding award without the consent of such
grantee. Shareholder approval of plan amendments will be required under certain circumstances.
Unless terminated earlier by our board of directors, the plan will expire ten years from the date
the plan is adopted. The plan administrator may cancel any award and amend any outstanding
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award agreement except no such amendment shall be made without shareholder approval if
such approval is necessary to comply with any tax or regulatory requirement applicable to the
outstanding award.
On February 21, 2012 we amended the 2010 Equity Incentive Plan and it was renamed as
the 2012 Amended and Restated Equity Incentive Plan. The sole material change from the 2010
Equity Incentive Plan to the 2012 Amended and Restated Equity Incentive Plan is the reservation
for issuance of an additional 2 million common shares.
As of the date of this annual report, we have issued a total of 1,359,696 restricted shares
under the plan to our executive officers, of which 266,664 shares have vested.
C. Board Practices
Actions by the Board of Directors of Diana Containerships
Our amended and restated bylaws provide that vessel acquisitions and disposals from or to
a related party and long term time charter employment with any charterer that is a related party
will require the unanimous approval of the independent members of our board of directors and
that all other material related party transactions shall be subject to the approval of a majority of the
independent members of the board of directors.
Committees of the Board of Directors
We have established an Audit Committee, comprised of two members of our board of
directors, who are responsible for reviewing our accounting controls, recommending to the
board of directors the engagement of our independent auditors, and pre-approving audit and
audit-related services and fees. Each member is an independent director. As directed by its
written charter, the Audit Committee is responsible for reviewing all related party transactions for
potential conflicts of interest and all related party transactions are subject to the approval of the
Audit Committee. Mr. John Evangelou has served as the Chairman of the Audit Committee since
February 8, 2011. We believe that Mr. Evangelou qualifies as an Audit Committee financial expert
as such term is defined under Securities and Exchange Commission rules. Mr. Antonios Karavias
serves as a member of our Audit Committee.
In addition, we have established a Compensation Committee, comprised of two independent
directors, which is responsible for recommending to the board of directors our senior executive
officers’ compensation and benefits. Mr. Antonios Karavias serves as the Chairman of the
Compensation Committee and Mr. Nikolaos Petmezas serves as a member of our Compensation
Committee.
We have also established an Executive Committee comprised of three directors, Mr. Symeon
Palios, Mr. Anastasios Margaronis and Mr. Ioannis Zafirakis. The Executive Committee is
responsible for the overall management of our business.
We also maintain directors’ and officers’ insurance, pursuant to which we provide insurance
coverage against certain liabilities to which our directors and officers may be subject, including
liability incurred under U.S. securities law.
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D. Crewing and Shore Employees
We crew our vessels primarily with Greek officers and Filipino officers and seamen. We are
responsible for identifying our Greek officers, which are hired by our fleet manager on behalf
of the vessel owning subsidiaries. Our Filipino officers and seamen are referred to us by
Crossworld Marine Services Inc., an independent crewing agency. The crewing agency handles
each seaman’s training and payroll. We ensure 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 supervise 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.
Up to February 28, 2013, we had no shore-based employees. Our former fleet manager, DSS,
through the Broker Services Agreement with Diana Enterprises and through the Administrative
Services Agreement was responsible for providing services to us and through the Vessel
Management Agreements was responsible for recruiting, either directly or through a technical
manager or a crew manager, the senior officers and all other crew members for the vessels in our
fleet. DSS had the responsibility to ensure that all seamen have the qualifications and licenses
required to comply with international regulations and shipping conventions, and that the vessels
are manned by experienced, competent and trained personnel. DSS was also responsible for
ensuring that seafarers’ wages and terms of employment conform to international standards or to
general collective bargaining agreements to allow unrestricted worldwide trading of the vessels.
Since March 1, 2013, UOT, our new fleet manager, a wholly-owned subsidiary, is responsible for
providing similar services to us and the vessels we own.
The following table presents the number of shoreside personnel employed by our manager
and the number of seafaring personnel employed by our vessel owning subsidiaries as of
December 31, 2014 and 2013:
As of December 31, 2014
As of December 31, 2013
32
266
298
31
236
267
Shoreside
Seafaring
Total
E. Share Ownership
With respect to the total amount of common stock owned by all of our officers and directors
individually and as a group, see Item 7. “Major Shareholders and Related Party Transactions.”
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information regarding the beneficial owners of more than five
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91
percent of our common shares and of our officers and directors individually and as a group as of
the date of this report. All of the shareholders, including the shareholders listed in this table, are
entitled to one vote for each common share held.
Beneficial ownership is determined in accordance with the Securities and Exchange
Commission’s rules. In computing percentage ownership of each person, common shares
subject to options held by that person that are currently exercisable or convertible, or exercisable
or convertible within 60 days of the date of this report, are deemed to be beneficially owned by
that person. These shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person.
As of March 20, 2015, we had 73,890,581 common shares issued and outstanding and the
percentage of beneficial ownership below is based on this figure:
Identity of person or group
Diana Shipping Inc. (1)
12 West Capital Management LP (2)
Symeon Palios (3)
Anastasios Margaronis
Ioannis Zafirakis
Andreas Michalopoulos
Shares Beneficially Owned
Number
Percentage
19,269,740
18,535,735
6,445,809
846,926
528,526
671,503
26.1 %
25.1 %
8.7 %
1.1 %
*
*
All directors and officers, as a group (4)
8,492,764
11.5 %
(1) As at December 31, 2014, 2013, and 2012, Diana Shipping Inc. owned 26.3%, 9.5% and
10.4% of our common stock, respectively.
(2) Based solely on the Schedule 13D/A filed on January 16, 2015 by 12 West Capital
Management LP, reporting beneficial ownership of these shares through 12 West Capital Fund
LP, a Delaware limited partnership, and 12 West Capital Offshore Fund LP, a Cayman Islands
exempted limited partnership. The general partner of 12 West Capital Management LP is 12 West
Capital Management, LLC, a Delaware limited liability company. Joel Ramin, as the sole member
of the General Partner, possesses the voting and dispositive power with respect to all securities
beneficially owned by 12 West Capital Management LP. The principal business address of 12
West Capital Management LP is 90 Park Avenue, 41st Floor, New York, New York 10001.
(3) Mr. Symeon Palios is our only director and officer that beneficially owns 5% or more of
our outstanding common stock. Of these shares, Mr. Palios may be deemed to beneficially
own 5,965,993 common shares through Taracan Investments S.A., 154,970 common shares
through Corozal Compania Naviera S.A., 309,941 common shares through Ironwood Trading
Corp., companies for which he is the controlling person. As at December 31, 2014, 2013, and
2012, Mr. Palios beneficially owned 8.5%, 5.9% and 6.4%, respectively.
(4) Of the total number of these shares, 1,359,696 were granted pursuant to the Company’s
2010 Equity Incentive Plan, as amended and restated in 2012.
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* Less than 1%
As of March 20, 2015, we had 129 shareholders of record, 114 of which were located in the
United States and held an aggregate of 52,395,745 of our common shares, representing 70.91%
of our outstanding common shares. However, one of the U.S. shareholders of record is CEDE
& CO., a nominee of The Depository Trust Company, which held 52,379,278 of our common
shares as of March 20, 2015. Accordingly, we believe that the shares held by CEDE & CO. include
common shares beneficially owned by both holders in the United States and non-U.S. beneficial
owners. We are not aware of any arrangements the operation of which may at a subsequent date
result in our change of control.
B. Related Party Transactions
Diana Shipping Services S.A.
We had entered into an Administrative Services Agreement with DSS, relating to the
provision of administrative services to us. Please see below for a description of this agreement.
In 2014, 2013 and 2012, fees for administrative services amounted to nil, $20,000 and $120,000
respectively.
We, through our wholly-owned subsidiaries, had also entered into Vessel Management
Agreements with DSS, relating to the provision of management services for our vessels. Please
see below for a description of these agreements. In 2014, 2013, and 2012, fees for management
services amounted to nil, $0.3 million and $1.6 million and commissions on charter hire amounted
to nil, $0.1 million and $0.7 million, respectively.
Administrative Services Agreement with DSS
On April 6, 2010, we entered into an Administrative Services Agreement with DSS, whereby
DSS provided to us accounting, administrative, financial reporting and other services necessary
for the operation of our business. We have agreed to pay to DSS a monthly fee of $10,000 for
these administrative services. The initial term of the agreement was for a period of one year and
would be automatically renewed for the successive twelve month periods unless the agreement
was terminated as provided therein. The agreement could be terminated by the Company (i) upon
thirty days’ written notice to the Manager; (ii) if the Manager materially breaches the agreement
and such breach is not resolved within ninety days; (iii) if the Manager has been convicted of
or entered a plea of guilty or nolo contendere with respect to a crime and such occurrence is
materially injurious to the Company; (iv) if the holders of a majority of the Company’s outstanding
common shares elect to terminate the agreement; (v) if the Manager commits fraud, gross
negligence or commits an act of willful misconduct, and the Company is materially injured thereby;
(vi) if the Manager becomes insolvent; or (vi) if there is a “change of control” (as defined therein)
of the Manager. The Administrative Services Agreement could be terminated by the Manager (i)
after the expiration of the initial term, with six months’ notice to the Company; (ii) if the Company
materially breaches the agreement and such breach is not resolved within ninety days; or (iii) at
any time upon the earlier to occur of (a) the occurrence of a change of control of the Company; (b)
the Manager’s receipt of written notice from the Company that a change of control will occur until
sixty (60) days after the later of (1) the occurrence of such a change of control or (2) the Manager’s
receipt of the written notice in the preceding clause (b). If the Company has knowledge that a
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change of control of the Company will occur, the Company is required to give prompt written
notice thereof to the Manager.
On March 1, 2013, and in relation with the appointment of UOT to act as our new Manager, the
Administrative Services Agreement with DSS was terminated.
Vessel Management Agreements with DSS
DSS also provided commercial and technical management services for our vessels
under separate vessel management agreements with our vessel owning subsidiaries. The
vessel management agreements would continue unless terminated by either party giving
three months’ written notice; provided that we may terminate the agreement without such
notice upon payment to the Manager of a fee equal to the average management fees paid
to the Manager during the last three full months immediately preceding such termination.
Commercial management includes, among other things, negotiating charters for vessels,
monitoring the performance of vessels under charter, and managing our relationships with
charterers, obtaining insurance coverage for our vessels, as well as supervision of the technical
management of the vessels. 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
the hire of qualified officers and crew, arranging and supervising drydocking and repairs,
arranging for the purchase of supplies, spare parts and new equipment for vessels, appointing
supervisors and technical consultants and providing technical support. Pursuant to each vessel
management agreement, DSS received a commission of 1% of the gross charterhire and freight
earned by the vessel and a technical management fee of $15,000 per vessel per month for
employed vessels and would receive $20,000 per vessel per month for laid-up vessels, if any.
On March 1, 2013, and in relation with the appointment of UOT to act as our new Manager,
the vessel management agreements with DSS were terminated.
Diana Enterprises Inc.
We had entered into a Broker Services Agreement, dated June 1, 2010, with Diana
Enterprises Inc., a related party controlled by our Chief Executive Officer and Chairman Mr.
Symeon Palios, through DSS pursuant to the Administrative Services Agreement. Following
the termination agreement for brokerage services that were provided to us through DSS on
March 1, 2013, Diana Enterprises has entered on the same date into an agreement with UOT
to provide brokerage services for a fixed monthly fee of $120,833. The agreement had an initial
term of thirteen months and the fees were payable quarterly in advance. In March 2014, the
Broker Services Agreement with Diana Enterprises Inc. was terminated and replaced with a
new agreement, according to which, with retroactive effect from January 1, 2014, the duration
of the engagement shall be for a term of fifteen months, ending on March 31, 2015. Effective
July 1, 2014, the agreement between UOT and Diana Enterprises was terminated and replaced
with a new one between DCI and Diana Enterprises on substantially similar terms. Finally, in
July 2014, and in relation with the private equity placement, the agreement was amended to
increase the percentage of beneficial ownership in the Change of Control clause. According
to this clause, in the event that Diana Enterprises terminates the agreement within six months
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following a Change of Control, as defined in the agreement, Diana Enterprises will be entitled to
a lump sum payment equal to three years’ annual commission. In 2014, 2013, and 2012, fees for
broker services amounted to $1.5 million, $1.4 million, and $1.3 million, respectively.
Pursuant to the Broker Services Agreement, DSS was obligated to pay a commission to
Diana Enterprises in the amount of $260,000 per quarter for a term of five years. The commission
increased to $325,000 per quarter following the offering completed in June 2011. DSS could pay
additional commissions with respect to a transaction as the same may be agreed in writing. In the
event that Diana Enterprises terminated the agreement within six months following a Change of
Control, as defined in the agreement, Diana Enterprises would be entitled to a lump sum payment
equal to three years’ annual commission. On March 1, 2013, and in relation with the appointment
of UOT to act as our new Manager, the Broker Services Agreement with DEI through DSS was
terminated.
Diana Shipping Inc.
We and Diana Shipping had entered into a non-competition agreement whereby we
have agreed that, during the term of the Administrative Services Agreement and any vessel
management agreements we enter into with DSS, and for six months thereafter, we will not
acquire or charter any vessel, or otherwise operate in, the drybulk sector and Diana Shipping will
not acquire or charter any vessel, or otherwise operate in, the containership sector. On March 1,
2013 we amended and restated the initial non-competition agreement with Diana Shipping Inc.,
where we have agreed that, as long as any of our current or continuing executive officers also
serves as an executive for Diana Shipping Inc., and for six months thereafter, we will not acquire
or charter any vessel, or otherwise operate in, the drybulk sector and Diana Shipping will not
acquire or charter any vessel, or otherwise operate in, the containership sector.
We have entered into a registration rights agreement, dated April 6, 2010, with FBR Capital
Markets & Co. and Diana Shipping Inc. The registration rights agreement covers the shares sold
in the private offering, including shares purchased by Diana Shipping Inc., plus any additional
shares of common stock issued in respect thereof whether by stock dividend, stock distribution,
stock split, or otherwise.
On October 19, 2010, we commenced a registered exchange offer for 2,558,997 common
shares pursuant to the registration rights agreement, which was completed on November 18,
2010. In addition, in January 2011, Diana Shipping distributed 2,667,015 of our common shares
it owned to its shareholders.
On June 9, 2011, we entered into a share purchase agreement with Diana Shipping pursuant
to which Diana Shipping purchased 2,666,667 of our common shares at a price of $7.50 per
share.
On June 15, 2011, in connection with Diana Shipping’s purchase of 2,666,667 shares in
a private placement in June 2011, we entered into a registration rights agreement with Diana
Shipping covering the common shares purchased by Diana Shipping in the private placement.
Pursuant to the terms of this registration rights agreement, Diana Shipping shall have the same
rights, and shall be subject to the same terms and conditions, as Diana Shipping has with respect
to its shares of common stock held prior to the June 2011 private placement under the April 2010
registration rights agreement.
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On May 20, 2013, we entered into a loan agreement of up to $50.0 million with Diana Shipping,
for which please refer to Item 5.B – Liquidity and Capital Resources – Loan Facilities.
Private Placement
We entered into a Securities Purchase Agreement, dated July 28, 2014, with Diana Shipping
and two institutional investors not affiliated with the Company or Diana Shipping (together, the
“Unaffiliated Entities”), Taracan Investments S.A., 4 Sweet Dreams S.A., Andreas Michalopoulos,
and Ioannis Zafirakis (collectively, the “Purchasers”), pursuant to which we issued and sold to
the Purchasers and the Purchasers purchased from the Company in the Private Placement an
aggregate of 36,653,386 common shares at a price of $2.51 per share, which reflected the 30-
day volume-weighted average price of the Company’s common stock over the 30 trading days
preceding the date of the Securities Purchase Agreement. The issuance and sale of the shares
was approved by an independent committee of our Board of Directors. The Purchasers were
also granted customary registration rights pursuant a registration rights agreement.
Pursuant to the terms of the Securities Purchase Agreement, Diana Shipping and the
Unaffiliated Entities have granted each other a right of first offer in connection with any proposed
privately negotiated block sale of our common shares constituting ten percent (10%) or more
of the outstanding common stock (other than sales of stock to us and certain other permitted
transfers). The Unaffiliated Entities have also agreed that for so long as they collectively own ten
percent (10%) or more of the outstanding common stock they will not, without our consent, (i)
acquire beneficial ownership of additional shares of our voting stock in excess of the amount
of shares owned as of the closing under the Securities Purchase Agreement or (ii) make or
otherwise participate in any “solicitation” of “proxies” to vote shares of our common stock, subject
to certain exceptions. Additionally, the Unaffiliated Entities have been granted one observer seat
at each meeting of our Board of Directors and Audit Committee and certain information rights.
The Securities Purchase Agreement also grants the Purchasers certain rights of first refusal over
subsequent equity offerings.
Pursuant to the Securities Purchase Agreement, we have agreed that, commencing with
the dividend payable with respect to the second quarter of 2014, and for not less than four
consecutive fiscal quarters thereafter, we will not declare or pay dividends in excess of $0.01 per
share on an annualized basis; provided, however, that in the event of a material improvement in
the container shipping market, our board of directors may amend this dividend policy to resume
the payment of dividends if the board of directors determines in good faith that such changed
dividend policy is in the best interests of the Company and its shareholders.
In connection with the Private Placement, we entered into amendments to the loan dated
May 20, 2013 between the Company, Eluk Shipping Inc. and Diana Shipping Inc., and the loan
agreement with The Royal Bank of Scotland plc. (the “RBS”) dated December 16, 2011. We also
amended our Stockholders Rights Plan, dated August 10, 2010, to provide that the Unaffiliated
Entities will not be considered an Acquiring Person, as defined therein.
Altair Travel Agency S.A.
Effective March 1, 2013, Altair Travel Agency S.A., or Altair, an affiliated entity that is controlled
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by our Chairman and Chief Executive Officer, Mr. Symeon Palios, provides us with travel related
services. In 2014 and 2013, the expenses we incurred in exchange for travel services provided
by Altair, amounted to $1.0 million and $1.0 million, respectively. We believe that the amounts that
we pay to Altair Travel Agency S.A. for acquiring tickets and other travel related services are no
greater than fees we would pay to an unrelated third party for comparable services in an arm’s
length transaction.
C. Interests Of Experts And Counsel
Not applicable.
Item 8. Financial information
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal proceedings
We have not been involved in any legal proceedings which may have, or have had a significant
effect on our business, financial position, results of operations or liquidity, nor are we aware of any
proceedings that are pending or threatened which may have a significant effect on our business,
financial position, results of operations or liquidity. From time to time, we may be subject to
legal proceedings and claims in the ordinary course of business, principally personal injury and
property casualty claims. We expect that these claims would be covered by insurance, subject
to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources.
Dividend Policy
We currently intend to declare a variable quarterly dividend each February, May, August
and November equal to a substantial portion of available cash from operations during the
previous quarter after the payment of cash expenses and reserves for scheduled drydockings,
intermediate and special surveys and other purposes as our board of directors may from time
to time determine are required, after taking into account contingent liabilities, the terms of any
credit facility, our growth strategy and other cash needs and the requirements of Marshall Islands
law. Our board of directors may review and amend our dividend policy from time to time, in light
of our plans for future growth and other factors. In 2014 and 2013, we made dividend payments
of $0.21 and $0.90 per share, respectively, and in February 2015 we declared a cash dividend of
$0.0025 per share with respect to the fourth quarter of 2014.
While we have declared and paid cash dividends on our common shares, there can be no
assurance that dividends will be paid in the future. The actual timing and amount of dividend
payments, if any, will be determined by our board of directors and could be affected by various
factors, including our cash earnings, financial condition and cash requirements, the loss of a
vessel, the acquisition of one or more vessels, required capital expenditures, reserves established
by our board of directors, increased or unanticipated expenses, a change in our dividend policy,
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additional borrowings or future issuances of securities, many of which will be beyond our control.
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. In addition, any
credit facilities that we may enter into in the future may include restrictions on our ability to pay
dividends.
Furthermore, pursuant to the Securities Purchase Agreement entered into on July 28, 2014
in connection with the Private Placement, or the Securities Purchase Agreement we agreed
that, commencing with the dividend payable with respect to the second quarter of 2014, and for
not less than four consecutive fiscal quarters thereafter, we would not declare or pay dividends
in excess of $0.01 per share on an annualized basis; provided, however, that in the event of
a material improvement in the container shipping market, our board of directors may amend
this dividend policy to resume the payment of dividends if our board of directors determines
in good faith that such changed dividend policy is in the best interests of the Company and its
shareholders.
Marshall Islands law generally prohibits the payment of dividends other than from surplus, or
whiles a company is insolvent or would be rendered insolvent by the payment of such a dividend.
In addition, we may incur expenses or liabilities, including extraordinary expenses, decreases
in revenues, including as a result of unanticipated off-hire days or loss of a vessel, or increased cash
needs that could reduce or eliminate the amount of cash that we have available for distribution
as dividends. The containership sector is cyclical and volatile. We cannot predict with accuracy
the amount of cash flows our operations will generate in any given period. Factors beyond our
control may affect the charter market for our vessels and our charterers’ ability to satisfy their
contractual obligations to us, and we cannot assure you that dividends will actually be declared
or paid in the future. We cannot assure you that we will be able to pay regular quarterly dividends,
and our ability to pay dividends will be subject to the limitations set forth above and in the section
of this annual report titled “Risk Factors.”
In times when we have debt outstanding, we intend to limit our dividends per share to the
amount that we would have been able to pay if we were financed entirely with equity. Our board
of directors may review and amend our dividend policy from time to time, in light of our plans for
future growth and other factors.
B. Significant Changes
See Item 18 – Financial Statements: Note 16 – Subsequent Events.
Item 9. The Offer and Listing
Our common shares have traded on the Nasdaq Global Market under the symbol “DCIX”
since January 19, 2011 and on the Nasdaq Global Select Market since January 2, 2013. The table
below sets forth the high and low closing prices for each of the periods indicated for the common
shares.
The high and low closing prices for our common shares for the periods set forth below were
as follows:
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Years
Low
High
For the period from January 19 to December 31, 2011
$
4.58
$
Year-ended December 31, 2012
Year-ended December 31, 2013
Year-ended December 31, 2014
Periods
1st Quarter ended March 31, 2013
2nd Quarter ended June 30, 2013
3rd Quarter ended September 30, 2013
4th Quarter ended December 31, 2013
1st Quarter ended March 31, 2014
2nd Quarter ended June 30, 2014
3rd Quarter ended September 30, 2014
4th Quarter ended December 31, 2014
Months
September 2014
October 2014
November 2014
December 2014
January 2015
February 2015
March 2015 (through March 20, 2015)
Item 10. Additional Information
A. Share Capital
Not Applicable.
5.22
3.51
1.85
Low
High
$
$
4.94
$
4.17
3.64
3.51
3.81
$
2.46
2.25
1.85
Low
High
$
2.25
$
1.93
1.85
1.88
1.94
2.15
2.32
13.15
7.76
7.03
4.26
7.03
5.93
4.64
4.51
4.26
3.94
2.85
2.36
2.61
2.23
2.30
2.36
2.55
2.50
2.66
B. Memorandum and Articles of Association
Our current amended and restated articles of incorporation have been filed as exhibit 3.1 to
our Form F-4 filed with the Securities and Exchange Commission on October 15, 2010 with file
number 333-169974. The information contained in this exhibit is incorporated by reference herein.
A description of the material terms of our amended and restated articles of incorporation
and bylaws is included in the section entitled “Description of Capital Stock” in our Registration
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Statement on Form F-4 filed with the Securities and Exchange Commission on October 15, 2010
with file number 333-169974 and is incorporated by reference herein, provided that since the
date of that Registration Statement, and up to December 31, 2014, the number of shares of our
common stock issued and outstanding has increased to 73,158,991.
C. Material Contracts
The contracts included as exhibits to this annual report are the contracts we consider to be
both material and not entered into in the ordinary course of business, for the two years immediately
preceding the date of this annual report. Each of these contracts is attached as an exhibit to this
annual report. Other than these agreements, we have no material contracts, other than contracts
entered into in the ordinary course of business, to which the Company or any member of the
group is as party. We refer you to Item 5.B for a discussion of our loan facilities, Item 4.B and Item
7.B for a discussion of our agreements with companies controlled by our Chairman and Chief
Executive Officer, Mr. Symeon Palios, and Item 6.B for a discussion of our 2010 Equity Incentive
Plan, as Amended and Restated in 2012.
D. Exchange Controls
Under Republic of the 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.
E. Taxation
The following is a discussion of the material Marshall Islands and U.S. federal income tax
considerations of the ownership and disposition by a U.S. Holder and a Non-U.S. Holder, each
as defined below, with respect to the common stock. This discussion does not purport to deal
with the tax consequences of owning common stock to all categories of investors, some of
which, such as dealers in securities or commodities, financial institutions, insurance companies,
tax-exempt organizations, U.S. expatriates, persons liable for the alternative minimum tax,
persons who hold common stock as part of a straddle, hedge, conversion transaction or
integrated investment, U.S. Holders whose functional currency is not the United States dollar
and investors that own, actually or under applicable constructive ownership rules, 10% or more
of the Company’s common stock, may be subject to special rules. This discussion deals only
with holders who hold the common stock as a capital asset. You are encouraged to consult your
own tax advisors concerning the overall tax consequences arising in your own particular situation
under U.S. federal, state, local or foreign law of the ownership of common stock.
Marshall Islands Tax Considerations
In the opinion of Seward & Kissel LLP, the following are the material Marshall Islands tax
consequences of the Company’s activities to the Company and of the ownership of the
Company’s common stock to its shareholders. The Company is incorporated in the Marshall
Islands. Under current Marshall Islands law, the Company is not subject to tax on income or
capital gains, and no Marshall Islands withholding tax will be imposed upon payments of
dividends by the Company to its shareholders.
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United States Federal Income Tax Considerations
In the opinion of Seward & Kissel LLP, the Company’s U.S. counsel, the following are the
material U.S. federal income tax consequences to the Company of its activities and to U.S.
Holders and Non-U.S. Holders, each as defined below, of the common stock. The following
discussion of U.S. federal income tax matters is based on the U.S. Internal Revenue Code of
1986, as amended, or the Code, judicial decisions, administrative pronouncements, and existing
and proposed regulations issued by the U.S. Department of the Treasury, all of which are subject
to change, possibly with retroactive effect.
Taxation of Operating Income: In General
The following discussion addresses the U.S. federal income taxation of our operating income
if we are engaged in the international operation of vessels.
Unless exempt from U.S. federal income taxation under the rules discussed below, a foreign
corporation is subject to U.S. federal income taxation in respect of any income that is derived
from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or bareboat
charter basis, from the participation in a pool, partnership, strategic alliance, joint operating
agreement, code sharing arrangements or other joint venture it directly or indirectly owns or
participates in that generates such income, or from the performance of services directly related
to those uses, which we refer to as “shipping income,” to the extent that the shipping income is
derived from sources within the United States. For these purposes, 50% of shipping income that
is attributable to transportation that begins or ends, but that does not both begin and end, in the
United States constitutes income from sources within the United States, which we refer to as
“U.S.-source shipping income.”
Shipping income attributable to transportation that both begins and ends in the United States
is considered to be 100% from sources within the United States. We are not permitted by law to
engage in transportation that produces income which is considered to be 100% from sources
within the United States. Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100% derived from sources outside the United States.
Shipping income derived from sources outside the United States will not be subject to any U.S.
federal income tax.
Exemption of Operating Income from U.S. Federal Income Taxation
Under Section 883 of the Code, or Section 883, we will be exempt from U.S. federal income
taxation on our U.S.-source shipping income if:
Æ we are organized in a foreign country that grants an “equivalent exemption” to corporations
organized in the United States, or U.S. corporations; and
either:
Æ more than 50% of the value of our common stock is owned, directly or indirectly, by qualified
shareholders, which we refer to as the “50% Ownership Test,” or
Æ our common stock is “primarily and regularly traded on an established securities market”
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in a country that grants an “equivalent exemption” to U.S. corporations or in the United
States, which we refer to as the “Publicly-Traded Test.”
The Marshall Islands, the jurisdiction where we are incorporated, grant an “equivalent
exemption” to U.S. corporations. We anticipate that any of our shipowning subsidiaries will
be incorporated in a jurisdiction that provides an “equivalent exemption” to U.S. corporations.
Therefore, we will be exempt from U.S. federal income taxation with respect to our U.S.-source
shipping income if either the 50% Ownership Test or the Publicly-Traded Test is met.
We do not currently anticipate a circumstance under which we would be able to satisfy the
50% Ownership Test. Our ability to satisfy the Publicly-Traded Test is discussed below.
Publicly-Traded Test
In order to satisfy the Publicly-Traded Test, our common stock must be primarily and regularly
traded on one or more established securities markets. The regulations under Section 883
provide, in pertinent part, that shares of a foreign corporation will be considered to be “primarily
traded” on an established securities market in a country if the number of shares of each class of
shares that are traded during any taxable year on all established securities markets in that country
exceeds the number of shares in each such class that are traded during that year on established
securities markets in any other single country. Our common shares are “primarily traded” on the
Nasdaq Global Select Market.
Under the regulations, stock of a foreign corporation will be considered to be “regularly traded”
on an established securities market if one or more classes of stock representing more than 50%
of the outstanding stock, by both total combined voting power of all classes of shares entitled to
vote and total value, are listed on such market, to which we refer as the “listing threshold.” Since
our common shares are listed on the Nasdaq Global Select Market, we expect to satisfy the
listing threshold.
It is further required that with respect to each class of stock relied upon to meet the listing
threshold, (i) such class of shares is traded on the market, other than in minimal quantities, on
at least 60 days during the taxable year or one-sixth of the days in a short taxable year, which
we refer to as the trading frequency test; and (ii) the aggregate number of stock of such class of
shares traded on such market during the taxable year is at least 10% of the average number of
shares of such class of stock outstanding during such year or as appropriately adjusted in the
case of a short taxable year, which we refer to as the trading volume test. Even if these tests are
not satisfied, the regulations provide that such trading frequency and trading volume tests will be
deemed satisfied if, as is expected to be the case with our common shares, such class of stock
is traded on an established securities market in the United States and such shares are regularly
quoted by dealers making a market in such shares.
Notwithstanding the foregoing, the regulations provide, in pertinent part, that a class of shares
will not be considered to be “regularly traded” on an established securities market for any taxable
year in which 50% or more of the vote and value of the outstanding shares of such class are
owned, actually or constructively under specified share attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the vote and value of such
class of stock, to which we refer as the “Five Percent Override Rule.”
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For purposes of being able to determine the persons who actually or constructively own 5%
or more of the vote and value of our common stock, or “5% Shareholders,” the regulations permit
us to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with
the Securities and Exchange Commission, as owning 5% or more of our common stock. The
regulations further provide that an investment company which is registered under the Investment
Company Act of 1940, as amended, will not be treated as a 5% Shareholder for such purposes.
In the event the Five Percent Override Rule is triggered, the regulations provide that the Five
Percent Override Rule will nevertheless not apply if we can establish that within the group of 5%
Shareholders, there are sufficient qualified shareholders for purposes of Section 883 to preclude
non-qualified shareholders in such group from owning 50% or more of our common stock for
more than half the number of days during the taxable year.
We believe that we satisfied the Publicly-Traded Test for the 2014 taxable year and were not
subject to the Five Percent Override Rule and we intend to take that position on our 2014 U.S.
federal income tax returns.
Taxation in Absence of Exemption
To the extent the benefits of Section 883 are unavailable, our U.S.-source shipping income,
to the extent not considered to be “effectively connected” with the conduct of a U.S. trade or
business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code
on a gross basis, without the benefit of deductions, which we refer to as the 4% gross basis
tax regime. Since under the sourcing rules described above, no more than 50% of our shipping
income would be treated as being derived from U.S. sources, the maximum effective rate of U.S.
federal income tax on our shipping income would never exceed 2% under the 4% gross basis tax
regime.
To the extent the benefits of the Section 883 exemption are unavailable and our U.S.-source
shipping income is considered to be “effectively connected” with the conduct of a U.S. trade or
business, as described below, any such “effectively connected” U.S.-source shipping income,
net of applicable deductions, would be subject to the U.S. federal corporate income tax currently
imposed at rates of up to 35%. In addition, we may be subject to an additional 30% “branch
profits” tax on earnings effectively connected with the conduct of such trade or business, as
determined after allowance for certain adjustments, and on certain interest paid or deemed paid
attributable to the conduct of such U.S. trade or business.
Our U.S.-source shipping income would be considered “effectively connected” with the
conduct of a U.S. trade or business only if:
Æ we have, or are considered to have, a fixed place of business in the United States involved in
the earning of shipping income; and
Æ substantially all of our U.S.-source shipping income is attributable to regularly scheduled
transportation, such as the operation of a vessel that follows a published schedule with
repeated sailings at regular intervals between the same points for voyages that begin or
end in the United States (or, in the case of income from the bareboat chartering of a vessel,
is attributable to a fixed place of business in the United States).
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We do not anticipate that we will have any vessel operating to or from the United States on
a regularly scheduled basis. Based on the foregoing and on the expected mode of our shipping
operations and other activities, we do not anticipate that any of our U.S.-source shipping income
will be “effectively connected” with the conduct of a U.S. trade or business.
United States Federal Income Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for exemption under Section 883 of the Code, we will not
be subject to U.S. federal income taxation with respect to gain realized on a sale of a vessel,
provided the sale is considered to occur outside of the United States under U.S. federal income
tax principles. In general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the
buyer outside of the United States. It is expected that any sale of a vessel by us will be considered
to occur outside of the United States.
United States Federal Income Taxation of U.S. Holders
As used herein, the term “U.S. Holder” means a beneficial owner of common stock that
is an individual U.S. citizen or resident, a U.S. corporation or other U.S. entity taxable as a
corporation, an estate the income of which is subject to U.S. 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 U.S. persons have the authority to control all
substantial decisions of the trust.
If a partnership holds the common stock, the tax treatment of a partner will generally depend
upon the status of the partner and upon the activities of the partnership. If you are a partner in a
partnership holding the common stock, you are encouraged to consult your tax advisor.
Distributions
Subject to the discussion of the passive foreign investment company, or PFIC, rules below,
distributions made by us with respect to our common stock, other than certain pro-rata
distributions of our common stock, to a U.S. Holder will generally constitute dividends, which may
be taxable as ordinary income or “qualified dividend income” as described in more detail below, to
the extent of our current and accumulated earnings and profits, as determined under U.S. federal
income tax principles. Distributions in excess of our current and accumulated earnings and
profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax
basis in his common stock on a dollar-for-dollar basis and thereafter as capital gain. Because we
are not a United States corporation, U.S. Holders that are corporations will not be entitled to claim
a dividends-received deduction with respect to any distributions they receive from us. Dividends
paid with respect to our common stock will generally be treated as income from sources outside
the United States and will generally constitute “passive category income” or, in the case of certain
types of U.S. Holders, “general category income” for purposes of computing allowable foreign
tax credits for U.S. foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate,
which we refer to as a U.S. Individual Holder, will generally be treated as “qualified dividend
income” that is taxable to such U.S. Individual Holders at preferential tax rates, provided that (1)
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the common stock is readily tradable on an established securities market in the United States
such as the Nasdaq Global Select Market, on which our common stock is traded; (2) we are not a
PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable
year, as discussed below; (3) the U.S. Individual Holder has held the common stock for more than
60 days in the 121-day period beginning 60 days before the date on which the common stock
becomes ex-dividend; and (4) the U.S. Individual Holder is not under an obligation to make related
payments with respect to positions in substantially similar or related property.
There is no assurance that any dividends paid on our common stock will be eligible for these
preferential rates in the hands of a U.S. Individual Holder. Any distributions out of earnings and
profits we pay which are not eligible for these preferential rates will be taxed as ordinary income
to a U.S. Individual Holder.
Special rules may apply to any “extraordinary dividend,” generally, a dividend paid by us in
an amount which is equal to or in excess of ten percent of a U.S. Holder’s adjusted tax basis,
or fair market value in certain circumstances, in a share of our common stock. If we pay an
“extraordinary dividend” on our common stock that is treated as “qualified dividend income,” then
any loss derived by a U.S. Individual Holder from the sale or exchange of such common stock will
be treated as long-term capital loss to the extent of such dividend.
Sale, Exchange or other Disposition of Common Stock
Subject to the discussion of the PFIC rules below, a U.S. Holder generally will recognize
taxable gain or loss upon a sale, exchange or other disposition of our common stock in an amount
equal to the difference between the amount realized by the U.S. Holder from such sale, exchange
or other disposition and the U.S. Holder’s tax basis in such stock. A U.S. Holder’s tax basis in
the common stock generally will equal the U.S. Holder’s acquisition cost less any prior return
of capital. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s
holding period is greater than one year at the time of the sale, exchange or other disposition and
will generally be treated as U.S.-source income or loss, as applicable, for U.S. foreign tax credit
purposes. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
3.8% Tax on Net Investment Income
A U.S. Holder that is an individual, estate, or, in certain cases, a trust, will generally be subject
to a 3.8% tax on the lesser of (1) the U.S. Holder’s net investment income for the taxable year
and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over
a certain threshold (which in the case of individuals will be between $125,000 and $250,000). A
U.S. Holder’s net investment income will generally include distributions we make on the common
stock which are treated as dividends for U.S. federal income tax purposes and capital gains from
the sale, exchange or other disposition of the common stock. This tax is in addition to any income
taxes due on such investment income.
If you are a U.S. Holder that is an individual, estate or trust, you are encouraged to consult
your tax advisors regarding the applicability of the 3.8% tax on net investment income to your
common stock.
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PFIC Status and Significant Tax Consequences
Special U.S. federal income tax rules apply to a U.S. Holder that holds stock in a foreign
corporation classified as a PFIC for U.S. federal income tax purposes. In general, we will be
treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder
held our common stock, either:
Æ 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), which we refer to as the income test; or
Æ at least 50% of the average value of our assets during such taxable year produce, or are held
for the production of, passive income, which we refer to as the asset test.
For purposes of determining whether we are a PFIC, cash will be treated as an asset which
is held for the production of passive income. In addition, we will be treated as earning and
owning our proportionate share of the income and assets, respectively, of any of our subsidiary
corporations in which we own at least 25% of the value of the subsidiary’s stock. Income earned,
or deemed earned, by us in connection with the performance of services would not constitute
passive income. By contrast, rental income would generally constitute “passive income” unless
we were treated under specific rules as deriving our rental income in the active conduct of a trade
or business.
Our status as a PFIC will depend upon the operations of our vessels. Therefore, we can give
no assurances as to whether we will be a PFIC with respect to any taxable year. In making the
determination as to whether we are a PFIC, we intend to treat the gross income we derive or
are deemed to derive from the time chartering and voyage chartering activities of us or any of
our wholly owned subsidiaries as services income, rather than rental income. Correspondingly,
in the opinion of Seward & Kissel LLP, such income should not constitute passive income, and
the assets that we or our wholly owned subsidiaries own and operate in connection with the
production of such income, should not constitute passive assets for purposes of determining
whether we are a PFIC. There is substantial legal authority supporting this position consisting of
case law and IRS pronouncements concerning the characterization of income derived from time
charters and voyage charters as services income for other tax purposes. However, there is also
authority which characterizes time charter income as rental income rather than services income
for other tax purposes. In the absence of any legal authority specifically relating to the statutory
provisions governing PFICs, the IRS or a court could disagree with the opinion of Seward &
Kissel LLP. On the other hand, any income we derive from bareboat chartering activities will likely
be treated as passive income for purposes of the income test. Likewise, any assets utilized in
bareboat chartering activities will likely be treated as generating passive income for purposes of
the asset test.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a
U.S. Holder would be subject to different taxation rules depending on whether the U.S. Holder
makes an election to treat us as a “Qualified Electing Fund,” which election we refer to as a “QEF
election,” or a “mark-to-market” election with respect to the common stock. In addition, if we
are a PFIC, a U.S. Holder will be required to file with respect to taxable years ending on or after
December 31, 2014 IRS Form 8621 with the IRS containing certain information regarding the
Company.
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Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as an “Electing
Holder,” the Electing Holder must report each year for U.S. federal income tax purposes his pro
rata share of our ordinary earnings and our net capital gain, if any, for our taxable year that ends
with or within the taxable year of the Electing Holder, regardless of whether or not distributions
were received from us by the Electing Holder. The Electing Holder’s adjusted tax basis in
the common stock will be increased to reflect taxed but undistributed earnings and profits.
Distributions of earnings and profits that had been previously taxed will result in a corresponding
reduction in the adjusted tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would generally recognize capital gain or loss on the sale,
exchange or other disposition of our common stock. A U.S. Holder would make a QEF election
with respect to any year that we are a PFIC by filing IRS Form 8621 with his U.S. federal income
tax return. After the end of each taxable year, we will determine whether we were a PFIC for such
taxable year. If we determine or otherwise become aware that we are a PFIC for any taxable
year, we will provide each U.S. Holder with all necessary information, including a PFIC Annual
Information Statement, in order to allow such holder to make a QEF election for such taxable year.
Taxation of U.S. Holders Making a “Mark-to-Market” Election
Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate will
continue to be the case, our shares are treated as “marketable stock,” a U.S. Holder would be
allowed to make a “mark-to-market” election with respect to our common stock, provided the
U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and
related Treasury regulations. If that election is made, the U.S. Holder generally would include as
ordinary income in each taxable year the excess, if any, of the fair market value of the common
stock at the end of the taxable year over such holder’s adjusted tax basis in the common stock.
The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the
U.S. Holder’s adjusted tax basis in the common stock over their fair market value at the end
of the taxable year, but only to the extent of the net amount previously included in income as a
result of the mark-to-market election. A U.S. Holder’s tax basis in his common stock would be
adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other
disposition of our common stock would be treated as ordinary income, and any loss realized on
the sale, exchange or other disposition of the common stock would be treated as ordinary loss
to the extent that such loss does not exceed the net mark-to-market gains previously included by
the U.S. Holder.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder who has not timely
made a QEF or mark-to-market election for the first taxable year in which it holds our common
stock and during which we are treated as PFIC, whom we refer to as a “Non-Electing Holder,”
would be subject to special rules with respect to (1) any excess distribution (i.e., the portion of
any distributions received by the Non-Electing Holder on our common stock in a taxable year
in excess of 125% of the average annual distributions received by the Non-Electing Holder in
the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for
the common stock), and (2) any gain realized on the sale, exchange or other disposition of our
common stock. Under these special rules:
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Æ the excess distribution or gain would be allocated ratably to each day over the Non-Electing
Holders’ aggregate holding period for the common stock;
Æ the amount allocated to the current taxable year and any taxable year before we became a
PFIC would be taxed as ordinary income; and
Æ 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 tax deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year.
These adverse tax consequences would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize leverage in connection with
its acquisition of our common stock. In addition, if a Non-Electing Holder who is an individual dies
while owning our common stock, such holder’s successor generally would not receive a step-up
in tax basis with respect to such common stock.
U.S. Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our common stock, other than a partnership or entity treated as a
partnership for U.S. Federal income tax purposes, that is not a U.S. Holder is referred to herein
as a Non-U.S. Holder.
Non-U.S. Holders generally will not be subject to U.S. federal income tax or withholding tax on
dividends received from us with respect to our common stock, unless that income is effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States.
In general, if the Non-U.S. Holder is entitled to the benefits of certain U.S. income tax treaties
with respect to those dividends, that income is taxable only if it is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States.
Non-U.S. Holders generally will not be subject to U.S. federal income tax or withholding tax
on any gain realized upon the sale, exchange or other disposition of our common stock, unless:
Æ the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business
in the United States. In general, if the Non-U.S. Holder is entitled to the benefits of certain
income tax treaties with respect to that gain, that gain is taxable only if it is attributable to a
permanent establishment maintained by the Non-U.S. Holder in the United States; or
Æ the Non-U.S. Holder is an individual who is present in the United States for 183 days or more
during the taxable year of disposition and other conditions are met.
If the Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal income tax
purposes, the income from the common stock, including dividends and the gain from the sale,
exchange or other disposition of the stock, that is effectively connected with the conduct of that
trade or business will generally be subject to regular U.S. federal income tax in the same manner
as discussed in the previous section relating to the taxation of U.S. Holders. In addition, if you
are a corporate Non-U.S. Holder, your earnings and profits that are attributable to the effectively
connected income, which are subject to certain adjustments, may be subject to an additional
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branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable U.S.
income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made within the United States
to you will be subject to information reporting requirements. Such payments will also be subject
to backup withholding tax if you are a non-corporate U.S. Holder and you:
Æ fail to provide an accurate taxpayer identification number;
Æ are notified by the IRS that you have failed to report all interest or dividends required to be
shown on your U.S. federal income tax returns; or
Æ in certain circumstances, fail to comply with applicable certification requirements.
Non-U.S. Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on an applicable IRS Form W-8.
If you sell your common stock through a U.S. office of a broker, the payment of the proceeds
is subject to both U.S. backup withholding and information reporting unless you certify that you
are a non-U.S. person, under penalties of perjury, or you otherwise establish an exemption. If you
sell your common stock through a non-U.S. office of a non-U.S. broker and the sales proceeds
are paid to you outside the United States then information reporting and backup withholding
generally will not apply to that payment. However, U.S. information reporting requirements, but
not backup withholding, will apply to a payment of sales proceeds, even if that payment is made
to you outside the United States, if you sell your common stock through a non-U.S. office of a
broker that is a U.S. person or has certain other contacts with the United States, unless you
certify that you are a non-U.S. person, under penalty of perjury, or you otherwise establish an
exemption.
Backup withholding is not an additional tax. Rather, you generally may obtain a refund of any
amounts withheld under the backup withholding rules that exceed your U.S. federal income tax
liability by timely filing a refund claim with the IRS.
U.S. Holders who are individuals (and to the extent specified in applicable Treasury
Regulations, certain U.S. entities) who hold “specified foreign financial assets” (as defined in
Section 6038D of the Code) are required to file IRS Form 8938 with information relating to the
asset for each taxable year in which the aggregate value of all such assets exceeds $75,000 at
any time during the taxable year or $50,000 on the last day of the taxable year (or such higher
dollar amount as prescribed by applicable Treasury Regulations). Specified foreign financial
assets would include, among other assets, our common stock, unless the common stock is held
through an account maintained with a U.S. financial institution. Substantial penalties apply to any
failure to timely file IRS Form 8938, unless the failure is shown to be due to reasonable cause and
not due to willful neglect. Additionally, in the event a U.S. Holder who is an individual (and to the
extent specified in applicable Treasury regulations, a U.S. entity) that is required to file IRS Form
8938 does not file such form, the statute of limitations on the assessment and collection of U.S.
federal income taxes of such holder for the related tax year may not close until three years after
the date that the required information is filed.
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F. Dividends and paying agents
Not Applicable.
G. Statement by experts
Not Applicable.
H. Documents on display
We file reports and other information with the SEC. These materials, including this annual
report and the accompanying exhibits, may be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549, or from the
SEC’s website http://www.sec.gov. You may obtain information on the operation of the public
reference room by calling 1 (800) SEC-0330 and you may obtain copies at prescribed rates.
I. Subsidiary information
Not Applicable.
Item 11. Quantitative and Qualitative Disclosures about
Market Risk
Interest Rates
Total interest incurred under our loan facilities and related interest rates during 2014, 2013 and
2012 were as follows:
2014
2013
2012
Interest expense (in millions of USD)
$
5.9 $
4.0 $
2.7
Weighted average interest rate (libor plus margin)
3.91%
3.49%
3.07%
Interest rates range during the year (libor including margin)
3.25% to
5.17%
2.94% to
5.18%
2.96% to
3.32%
An average increase of 1% in 2014 interest rates would have resulted in interest expenses of
$7.4 million, instead of $5.9 million, an increase of about 25%.
As of the date of this annual report, we have $148.7 million of debt outstanding and we expect
to incur additional debt in the future. We expect to manage any exposure in interest rates through
our regular operating and financing activities and, when deemed appropriate, through the use of
derivative financial instruments.
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Currency and Exchange Rates
We generate all of our revenues in U.S. dollars, but currently incur more than half of our
operating expenses (around 60% in 2014 and 58% in 2013) and about half of our general and
administrative expenses (around 51% in 2014 and also 51% in 2013) in currencies other than
the U.S. dollar, primarily the Euro. For accounting purposes, expenses incurred in Euros are
converted into U.S. dollars at the exchange rate prevailing on the date of each transaction. The
amount and frequency of some of these expenses, such as vessel repairs, supplies and stores,
may fluctuate from period to period. Since approximately 2002, the U.S. dollar has depreciated
against the Euro. Depreciation in the value of the dollar relative to other currencies increases
the dollar cost to us of paying such expenses. The portion of our expenses incurred in other
currencies could increase in the future, which could expand our exposure to losses arising from
currency fluctuations.
While we have not mitigated the risk associated with exchange rate fluctuations through the
use of financial derivatives, we may determine to employ such instruments from time to time in
the future in order to minimize this risk. Our use of financial derivatives would involve certain risks,
including the risk that losses on a hedged position could exceed the nominal amount invested in
the instrument and the risk that the counterparty to the derivative transaction may be unable or
unwilling to satisfy its contractual obligations, which could have an adverse effect on our results.
Currently, we do not consider the risk from exchange rate fluctuations to be material for our
results of operations and therefore, we are not engaged in derivative instruments to hedge part
of those expenses.
Item 12. Description of Securities Other than Equity
Securities
Not Applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
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A. Disclosure Controls and Procedures
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.
B. Management’s Annual Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s
internal control over financial reporting is a process designed under the supervision of the
Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States.
Management has conducted an assessment of the effectiveness of the Company’s internal
control over financial reporting based on the framework established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework). Based on this assessment, management has determined that
the Company’s internal control over financial reporting as of December 31, 2014 is effective.
C. Attestation Report of Independent Registered Public Accounting Firm
The attestation report on the Company’s internal control over financial reporting issued by
the registered public accounting firm that audited the consolidated financial statements, Ernst
Young (Hellas) Certified Auditors Accountants S.A., appears under Item 18, and such report is
incorporated herein by reference.
D. Changes in Internal Control over Financial Reporting
None.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls or our internal control over financial reporting will prevent
or detect all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s objectives
will be met. Further, because of the inherent limitations in all control systems, no evaluation of
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controls can provide absolute assurance that misstatements due to error or fraud will not occur
or that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions.
Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
Item 16A. Audit Committee Financial Expert
Mr. John Evangelou serves as the Chairman of the Company’s Audit Committee. Our board
of directors has determined that Mr. Evangelou qualifies as an “audit committee financial expert,”
as defined in Form 20-F and is “independent” according to Rule 10A-3 of the Exchange Act.
Item 16B. Code of Ethics
We have adopted a code of ethics that applies to officers and employees. Our code of ethics is
posted in our website: http://www.dcontainerships.com, under “About Us.” Copies of our Code
of Ethics are available in print, free of charge, upon request to Diana Containerships Inc., Pendelis
18, 175 64 Palaio Faliro, Athens, Greece. We intend to satisfy any disclosure requirements
regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such
information on our website.
Item 16C. Principal Accountant Fees and Services
A. Audit Fees
Our principal accountants, Ernst and Young (Hellas), Certified Auditors Accountants S.A.,
have billed us for audit services.
Audit fees in 2014 amounted to Euro 198,750 or about $271,000 and in 2013 amounted
to Euro 284,500 or about $383,000, and relate to audit services provided in connection with
the audit and SAS 100 interim reviews of our consolidated financial statements, the audit of
internal control over financial reporting as well as audit services performed in connection with the
Company’s public offerings and registration statements.
B. Audit-Related Fees
None.
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C. Tax Fees
None.
D. All Other Fees
None.
E. Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee is responsible for the appointment, replacement, compensation,
evaluation and oversight of the work of the independent auditors. As part of this responsibility, the
Audit Committee pre-approves all audit and non-audit services performed by the independent
auditors in order to assure that they do not impair the auditor’s independence from the Company.
The Audit Committee has adopted a policy which sets forth the procedures and the conditions
pursuant to which services proposed to be performed by the independent auditors may be pre-
approved.
F. Audit Work Performed by Other Than Principal Accountant if
Greater Than 50%
Not applicable.
Item 16D. Exemptions from the Listing Standards for
Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer
and Affiliated Purchasers
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
We have certified to Nasdaq that our corporate governance practices are in compliance
with, and are not prohibited by, the laws of the Republic of the Marshall Islands. Therefore,
we are exempt from many of Nasdaq’s corporate governance practices other than the
requirements regarding the disclosure of a going concern audit opinion, submission of a listing
agreement, notification to Nasdaq of non-compliance with Nasdaq corporate governance
practices, prohibition on disparate reduction or restriction of shareholder voting rights, and the
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establishment of an audit committee satisfying Nasdaq Listing Rule 5605(c)(3) and ensuring that
such audit committee’s members meet the independence requirement of Listing Rule 5605(c)(2)
(A)(ii). The practices we follow in lieu of Nasdaq’s corporate governance rules applicable to U.S.
domestic issuers are as follows:
Æ As a foreign private issuer, we are not required to have an audit committee comprised of at
least three members. Our audit committee is comprised of two members;
Æ As a foreign private issuer, we are not required to adopt a formal written charter or board
resolution addressing the nominations process. We do not have a nominations committee,
nor have we adopted a board resolution addressing the nominations process;
Æ As a foreign private issuer, we are not required to hold regularly scheduled board meetings
at which only independent directors are present;
Æ In lieu of obtaining shareholder approval prior to the issuance of designated securities, we
will comply with provisions of the Marshall Islands Business Corporations Act, which allows
the Board of Directors to approve share issuances;
Æ As a foreign private issuer, we are not required to solicit proxies or provide proxy statements
to Nasdaq pursuant to Nasdaq corporate governance rules or Marshall Islands law.
Consistent with Marshall Islands law and as provided in our bylaws, we will notify our
shareholders of meetings between 15 and 60 days before the meeting. This notification will
contain, among other things, information regarding business to be transacted at the
meeting. In addition, our bylaws provide that shareholders must give us between 150 and
180 days advance notice to properly introduce any business at a meeting of shareholders.
Other than as noted above, we are in compliance with all other Nasdaq corporate governance
standards applicable to U.S. domestic issuers.
Item 16H. Mine Safety Disclosure
Not applicable.
PART III
Item 17. Financial Statements
See Item 18.
Item 18. Financial Statements
The financial statements beginning on page F-1 are filed as a part of this annual report.
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Item 19. Exhibits
(a) Exhibits
Exhibit Number Description
1.1
1.2
2.1
2.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
Amended and Restated Articles of Incorporation (1)
Amended and Restated Bylaws of the Company (2)
Form of Share Certificate (3)
Statement of Designations of Rights, Preferences and Privileges of Series A Participating
Preferred Stock of Diana Containerships Inc., dated August 2, 2010 (4)
Registration Rights Agreement dated April 6, 2010 (5)
Stockholders Rights Agreement dated August 2, 2010 (6)
2010 Equity Incentive Plan (7)
2012 Amended and Restated Equity Incentive Plan (8)
Administrative Services Agreement with DSS (9)
Broker Services Agreement with Diana Enterprises Inc. (10)
Form of Vessel Management Agreement with DSS (11)
Administrative Services Agreement with UOT (15)
Broker Services Agreement with Diana Enterprises Inc., dated March 1, 2013 (16)
Broker Services Agreement with Diana Enterprises Inc., dated March 4, 2014 (17)
Form of Vessel Management Agreement with UOT (18)
Amended and Restated Non-Competition Agreement With Diana Shipping Inc. (19)
Loan Agreement dated July 7, 2010, by and between Likiep Shipping Company Inc. and
Orangina Inc., as Borrowers, and DnB NOR Bank ASA (13)
Loan Agreement, dated May 4, 2011, by and between DnB NOR Bank ASA , and Likiep
Shipping Company Inc., Orangina Inc., Mili Shipping Company Inc., Ebon Shipping
Company Inc., and Ralik Shipping Company Inc. (14)
Loan Agreement, dated December 16, 2011, by and between the Royal Bank of Scotland
plc. and Diana Containerships Inc. (15)
Loan Agreement, dated May 20, 2013, by and between Eluk Shipping Company Inc. and
Diana Shipping Inc. (20)
Supplemental Agreement, dated July 22, 2013, between Diana Containerships Inc. and
the Royal Bank of Scotland (21)
Supplemental Agreement, dated September 11, 2013, between Diana Containerships Inc.
and the Royal Bank of Scotland (22)
Supplemental Agreement, dated December 6, 2013, between Diana Containerships Inc.
and the Royal Bank of Scotland (23)
Memorandum of Agreement for m/v Maersk Madrid (16)
Addendum No. 1 to the Memorandum of Agreement for m/v Maersk Madrid (17)
Memorandum of Agreement for m/v Maersk Malacca (18)
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4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
4.36
4.37
4.38
4.39
8.1
12.1
12.2
13.1
13.2
15.1
101
Memorandum of Agreement for m/v Maersk Merlion (19)
Memorandum of Agreement for m/v Cap San Raphael (20)
Memorandum of Agreement for m/v Cap San Marco (23)
Memorandum of Agreement for m/v APL Sardonyx (24)
Memorandum of Agreement for m/v APL Spinel (25)
Memorandum of Agreement for m/v APL Garnet (22)
Memorandum of Agreement for m/v Hanjin Malta (26)
Memorandum of Agreement for m/v Puelo (24)
Memorandum of Agreement for m/v Pucon (25)
Registration Rights Agreement dated June 15, 2011(21)
Share Purchase Agreement dated June 9, 2011(27)
Securities Purchase Agreement, dated July 28, 2014 (26)
Registration Rights Agreement, dated July 28, 2014 (26)
Amendment to the Facility Agreement dated December 16, 2011 among the Company,
its subsidiaries party thereto and RBS, dated July 28, 2014 (26)
First Amendment to Loan Agreement dated May 20, 2013 among Diana Shipping Inc.,
Eluk Shipping Company Inc. and the Company, dated July 28, 2014 (26)
Broker Services Agreement, dated April 9, 2014, by and between the Company and Diana
Enterprises Inc. (26)
Amendment No. 1 to Stockholders Rights Agreement dated August 2, 2010 by and the
Company and Computershare Inc., dated July 28, 2014 (26)
List Of Subsidiaries
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of independent registered public accounting firm
The following financial information from Diana Containerships Inc.’s Annual Report on
Form 20-F for the fiscal year ended December 31, 2014, formatted in Extensible Business
Reporting Language (XBRL): (1) Consolidated Balance Sheets as at December 31, 2014
and 2013; (2) Consolidated Statements of Operations for the years ended December 31,
2014, 2013 and 2012; (3) Consolidated Statements of Comprehensive Income / (Loss)
for the years ended December 31, 2014, 2013 and 2012; (4) Consolidated Statements
of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012; (5)
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013
and 2012; and (6) Notes to Consolidated Financial Statements.
(1) Filed as Exhibit 2 to the Company’s Registration Statement on Form F-4 (File No. 333-169974)
on October 15, 2010.
(2) Filed as Exhibit 3 to the Company’s Registration Statement on Form F-4 (File No. 333-169974)
on October 15, 2010.
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(3) Filed as Exhibit 4.1 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(4) Filed as Exhibit 4.4 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(5) Filed as Exhibit 4.2 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(6) Filed as Exhibit 4.3 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(7) Filed as Exhibit 10.1 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(8) Filed as Exhibit 4.4 to the Company’s Annual Report on Form 20-F on February 23, 2012.
(9) Filed as Exhibit 10.2 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(10) Filed as Exhibit 10.3 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(11) Filed as Exhibit 10.4 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(13) Filed as Exhibit 10.6 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on October 15, 2010.
(14) Filed as Exhibit 10.7 to the Company’s Registration Statement on Form F-4 (File No. 333-
169974) on May 9, 2011.
(15) Filed as Exhibit 4.8 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(16) Filed as Exhibit 4.9 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(17) Filed as Exhibit 4.10 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(18) Filed as Exhibit 4.11 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(19) Filed as Exhibit 4.12 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(20) Filed as Exhibit 4.16 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(21) Filed as Exhibit 4.17 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(22) Filed as Exhibit 4.18 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(23) Filed as Exhibit 4.19 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(24) Filed as Exhibit 4.30 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(25) Filed as Exhibit 4.31 to the Company’s Annual Report on Form 20-F on March 26, 2014.
(26) Filed as an exhibit to the Company’s Current Report on Form 6-K on July 30, 2014.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
DIANA CONTAINERSHIPS INC.
By: /s/ Andreas Michalopoulos
Andreas Michalopoulos
Chief Financial Officer and Treasurer
Dated: March 23, 2015
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DIANA CONTAINERSHIPS INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
119
Page
Report of Independent Registered Public Accounting Firm......................................
F-2
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting .................................................................
Consolidated Balance Sheets as at December 31, 2014 and 2013...........................
Consolidated Statements of Operations for the years ended
December 31, 2014, 2013 and 2012 .......................................................................
Consolidated Statements of Comprehensive Income /(Loss) for the years
ended December 31, 2014, 2013 and 2012 .............................................................
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2014, 2013 and 2012 .......................................................................
Consolidated Statements of Cash Flows for the years ended
December 31, 2014, 2013 and 2012 .......................................................................
Notes to Consolidated Financial Statements ..........................................................
F-3
F-5
F-6
F-6
F-7
F-8
F-9
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F-1
ANNUAL REPORT 2014
120
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders of Diana Containerships Inc.
We have audited the accompanying consolidated balance sheets of Diana Containerships
Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations,
comprehensive income/ (loss), stockholders’ equity and cash flows for each of the three years
in the period ended December 31, 2014. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Diana Containerships Inc. at December 31, 2014 and 2013,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2014, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Diana Containerships Inc.’s internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated March 23, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young (Hellas) Certified Auditors-Accountants S.A.
Athens, Greece
March 23, 2015
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ANNUAL REPORT 2014 121
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders of Diana Containerships Inc.
We have audited Diana Containerships Inc.’s internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Diana Containerships Inc.’s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting 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 effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Diana Containerships Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Diana Containerships Inc.
as of December 31, 2014 and 2013, and the related consolidated statements of operations,
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comprehensive income/ (loss), stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2014 of Diana Containerships Inc. and our report dated March
23, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young (Hellas) Certified Auditors-Accountants S.A.
Athens, Greece
March 23, 2015
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DIANA CONTAINERSHIPS INC.
Consolidated Balance Sheets as at December 31, 2014 and 2013
(Expressed in thousands of U.S. Dollars, except for share and per share data)
2014
2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, trade
Inventories
Prepaid expenses and other assets
Restricted cash, current (Note 7)
Total current assets
FIXED ASSETS:
Vessels (Note 4)
Accumulated depreciation (Note 4)
Vessels’ net book value (Note 4)
Property and equipment, net (Note 5)
Total fixed assets
Restricted cash, non-current (Note 7)
Prepaid charter revenue (Note 6)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term bank debt, net of unamortized deferred
financing costs (Note 7)
Accounts payable, trade and other
Due to related parties, current (Note 3)
Accrued liabilities
Deferred revenue, current (Note 8)
Total current liabilities
Long-term bank debt, net of current portion and unamortized deferred
financing costs (Note 7)
Related party financing, non-current (Note 3)
Deferred revenue, non-current (Note 8)
Other liabilities, non-current
Commitments and contingencies (Note 9)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued
Common stock, $0.01 par value; 500,000,000 shares authorized; 73,158,991
and 35,051,567 issued and outstanding as at December 31, 2014 and 2013,
respectively (Note 10)
Additional paid-in capital (Note 10)
Other comprehensive loss
Accumulated deficit
Total stockholders’ equity
$
$
$
82,003
691
2,307
845
600
86,446
333,078
(26,984)
306,094
1,089
307,183
9,270
6,364
409,263
$
$
5,804
$
1,807
136
1,052
491
9,290
92,494
50,867
-
169
-
-
731
19,685
534
1,964
797
-
22,980
284,108
(18,736)
265,372
321
265,693
9,870
18,166
316,709
-
1,739
170
898
972
3,779
98,102
50,233
50
80
-
-
350
372,197
(68)
(116,417)
256,443
276,236
-
(112,121)
164,465
Total liabilities and stockholders’ equity
$
409,263
$
316,709
The accompanying notes are an integral part of these consolidated financial statements.
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DIANA CONTAINERSHIPS INC.
Consolidated Statements of Operations
For the years ended December 31, 2014, 2013 and 2012
(Expressed in thousands of U.S. Dollars – except for share and per share data)
2014
2013
2012
REVENUES:
Time charter revenues (Note 1)
$
65,678
$
74,337
$
(11,610)
54,068
(20,322)
54,015
Prepaid charter revenue amortization (Note 6)
Time charter revenues, net
EXPENSES:
Voyage expenses (Notes 3 and 11)
Vessel operating expenses (Note 11)
Depreciation (Notes 4 and 5)
Management fees (Note 3)
General and administrative expenses (Note 3)
Impairment losses (Note 4)
Loss on vessels’ sale (Note 4)
Foreign currency losses / (gains)
Operating income / (loss)
OTHER INCOME/(EXPENSES)
Interest and finance costs (Notes 3, 7 and 12)
Interest income
Total other expenses, net
Net income / (loss)
Earnings / (loss) per common share,
basic and diluted (Note 13)
Weighted average number of common
shares, basic and diluted (Note 13)
DIANA CONTAINERSHIPS INC.
68,835
(12,204)
56,631
1,404
28,969
12,476
1,551
3,468
-
-
(194)
8,957
705
30,870
11,070
305
5,059
42,323
16,481
66
(52,864)
$
(4,554)
$
(3,066)
72
(4,482)
(57,346)
(1.73)
$
$
$
78
(2,988)
5,969
0.22
332
26,559
10,309
-
6,306
-
695
17
9,850
(6,746)
134
(6,612)
3,238
0.06
$
$
$
$
$
$
$
$
$
$
51,645,071
33,159,328
26,934,533
Consolidated Statements of Comprehensive Income / (Loss)
For the years ended December 31, 2014, 2013 and 2012
(Expressed in thousands of U.S. Dollars)
Net income / (loss)
Other comprehensive loss (Actuarial loss)
Comprehensive income / (loss)
$
$
3,238
$
(57,346)
$
5,969
(68)
-
-
3,170
$
(57,346)
$
5,969
2014
2013
2012
The accompanying notes are an integral part of these consolidated financial statements.
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DIANA CONTAINERSHIPS INC.
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2014, 2013 and 2012
(Expressed in thousands of U.S. Dollars – except for share and per share data)
Common Stock
# of
Shares
Par
Value
Additional
Paid-in
Capital
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance, December 31, 2011
23,076,161 $
231 $ 208,827 $
- $
(2,525) $ 206,533
- Net income
-
-
-
- Issuance of common stock,
net of issuance costs
- Compensation cost on
restricted stock (Note 10)
- Dividends declared and paid
(at $0.15, $0.25, $0.30 and
$0.30 per share) (Note 13)
9,115,803
91
53,810
-
-
-
-
900
-
-
-
-
-
5,969
5,969
-
-
53,901
900
(28,545)
(28,545)
Balance, December 31, 2012
32,191,964 $
322 $ 263,537 $
- $
(25,101) $ 238,758
- Net loss
-
-
-
- Issuance of common stock,
net of issuance costs
- Compensation cost on
restricted stock (Note 10)
- Dividends declared and paid
(at $0.30, $0.30, $0.15 and
$0.15 per share) (Note 13)
2,859,603
28
12,328
-
-
-
-
371
-
-
-
-
-
(57,346)
(57,346)
-
-
12,356
371
(29,674)
(29,674)
Balance, December 31, 2013
35,051,567 $
350 $
276,236 $
- $
(112,121) $ 164,465
- Net income
-
-
-
- Issuance of common stock,
net of issuance costs (Note 10)
- Issuance of restricted stock
and compensation cost on
restricted stock (Note 10)
- Actuarial loss
- Dividends declared and paid
(at $0.15, $0.05, $0.0025 and
$0.0025 per share) (Note 13)
37,745,982
377
95,624
361,442
4
337
-
-
-
-
-
-
-
-
-
(68)
-
3,238
3,238
-
-
-
96,001
341
(68)
(7,534)
(7,534)
Balance, December 31, 2014
73,158,991 $
731 $
372,197 $
(68) $
(116,417) $ 256,443
The accompanying notes are an integral part of these consolidated financial statements.
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126
DIANA CONTAINERSHIPS INC.
Consolidated Statements of Cash Flows
For the years ended December 31, 2014, 2013 and 2012
(Expressed in thousands of U.S. Dollars)
Cash Flows provided by Operating Activities:
Net income / (loss)
Adjustments to reconcile net income / (loss) to net cash
provided by operating activities:
Depreciation (Notes 4 and 5)
Amortization of deferred financing costs (Note 12)
Amortization of deferred revenue (Note 8)
Amortization of prepaid charter revenue (Note 6)
Impairment losses (Note 4)
Loss on vessels’ sale (Note 4)
Compensation cost on restricted stock awards (Note 10)
Actuarial loss
(Increase) / Decrease in:
Accounts receivable, trade
Inventories
Prepaid expenses and other assets
Increase / (Decrease) in:
Accounts payable, trade and other
Due to related parties
Accrued liabilities
Deferred revenue
Other liabilities
Net Cash provided by Operating Activities
Cash Flows used in Investing Activities:
Vessel acquisitions and other vessel costs (Note 4)
Proceeds from sale of vessels, net of expenses
Acquisition of time charter (Note 6)
Land acquisition (Note 5)
Property and equipment additions (Note 5)
Insurance settlements
Net Cash used in Investing Activities
Cash Flows provided by Financing Activities:
Proceeds from long term debt from a related party (Note 3)
Proceeds from long term bank debt (Note 7)
Issuance of common stock, net of issuance costs (Note 10)
Cash dividends (Note 13)
Increase in restricted cash
Net Cash provided by Financing Activities
Net increase/ (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest payments, net of amounts capitalized
$
$
$
$
$
2014
2013
2012
$
3,238
$
(57,346)
$
5,969
10,309
196
(221)
11,610
-
695
341
(68)
(157)
(343)
(714)
68
600
154
(310)
89
25,487
(60,379)
8,784
-
(871)
(29)
859
$
11,070
197
(107)
20,322
42,323
16,481
371
-
(319)
1,242
(362)
(933)
(254)
(619)
(406)
80
31,740
(107,864)
33,665
(8,500)
-
(421)
1,457
$
$
12,476
197
(112)
12,204
-
-
900
-
(52)
(1,374)
(1,877)
755
339
741
1,180
-
31,346
(107,960)
-
(42,000)
-
-
-
$
(51,636)
$
(81,663)
$
(149,960)
-
-
96,001
(7,534)
-
50,000
6,000
12,356
(29,674)
(600)
88,467 $
62,318 $
19,685 $
82,003 $
38,082 $
(11,841)
$
31,526 $
19,685 $
-
92,700
53,901
(28,545)
(9,270)
108,786
(9,828)
41,354
31,526
6,106 $
3,783 $
2,546
The accompanying notes are an integral part of these consolidated financial statements.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
1. General Information
The accompanying consolidated financial statements include the accounts of Diana
Containerships Inc. (“DCI”) and its wholly-owned subsidiaries (collectively, the “Company”).
Diana Containerships Inc. was incorporated on January 7, 2010 under the laws of the Republic
of Marshall Islands for the purpose of engaging in any lawful act or activity under the Marshall
Islands Business Corporations Act.
The Company is engaged in the seaborne transportation industry through the ownership of
containerships and operates its fleet through Unitized Ocean Transport Limited, a wholly-owned
subsidiary. The Company is the sole owner of all outstanding shares of the following subsidiaries:
1.1 Subsidiaries incorporated in the Marshall Islands:
(a) Likiep Shipping Company Inc. (“Likiep”), owner of the Marshall Islands flag,
3,426 TEU capacity container vessel “Sagitta”, which was built and delivered in June 2010.
(b) Orangina Inc. (“Orangina”), owner of the Marshall Islands flag, 3,426 TEU capacity
container vessel, “Centaurus”, which was built and delivered in July 2010.
(c) Lemongina Inc. (“Lemongina”), owner of the Marshall Islands flag, 4,729 TEU
capacity container vessel, “Apl Garnet” (built in 1995), which was acquired in November 2012.
(d) Ralik Shipping Company Inc. (“Ralik”), owner of the Marshall Islands flag, 4,206
TEU capacity container vessel, “Madrid” (ex “Maersk Madrid”, built in 1989), which was acquired
in June 2011 and sold in April 2013 (Note 4).
(e) Mili Shipping Company Inc. (“Mili”), owner of the Marshall Islands flag, 4,714 TEU
capacity container vessel, “Malacca” (ex “Maersk Malacca”, built in 1990), which was acquired in
June 2011 and sold in May 2013 (Note 4).
(f) Ebon Shipping Company Inc. (“Ebon”), owner of the Marshall Islands flag, 4,714
TEU capacity container vessel, “Merlion” (ex “Maersk Merlion”, built in 1990), which was acquired
in June 2011 and sold in May 2013 (Note 4).
(g) Mejit Shipping Company Inc. (“Mejit”), owner of the Marshall Islands flag, 4,729
TEU capacity container vessel, “Sardonyx” (ex “Apl Sardonyx”, built in 1995), which was acquired
in February 2012 and sold in February 2014 (Note 4).
(h) Micronesia Shipping Company Inc. (“Micronesia”), owner of the Marshall
Islands flag, 4,729 TEU capacity container vessel, “Spinel” (ex “Apl Spinel”, built in 1996), which
was acquired in March 2012 and sold in December 2013 (Note 4).
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(i) Rongerik Shipping Company Inc. («Rongerik»), owner of the Marshall Islands
flag, 3,739 TEU capacity container vessel, “Cap Domingo” (ex “Cap San Marco”, built in 2001),
which was acquired in February 2012.
(j) Utirik Shipping Company Inc. (“Utirik”), owner of the Marshall Islands flag, 3,739
TEU capacity container vessel, “Cap Doukato” (ex “Cap San Raphael”, built in 2002), which was
acquired in February 2012.
(k) Nauru Shipping Company Inc. (“Nauru”), owner of the Marshall Islands flag, 4,024
TEU capacity container vessel, “Hanjin Malta” (built in 1993), which was acquired in March 2013
(Note 4).
(l) Eluk Shipping Company Inc. (“Eluk”), owner of the Marshall Islands flag, 6,541 TEU
capacity container vessel, “Puelo” (built in 2006), which was acquired in August 2013 (Note 4).
(m) Oruk Shipping Company Inc. (“Oruk”), owner of the Marshall Islands flag, 6,541
TEU capacity container vessel, “Pucon” (built in 2006), which was acquired in September 2013
(Note 4).
(n) Jabor Shipping Company Inc. (“Jabor”), owner of the Marshall Islands flag,
5,576 TEU capacity container vessel, “YM Great” (built in 2004), which was acquired in October
2014 (Note 4).
(o) Delap Shipping Company Inc. (“Delap)”, owner of the Marshall Islands flag, 5,576
TEU capacity container vessel, “YM March” (built in 2004), which was acquired in September
2014 (Note 4).
(p) Dud Shipping Company Inc. (“Dud”), owner of the Marshall Islands flag, 5,042
TEU capacity container vessel, “Santa Pamina” (built in 2005), which was acquired in November
2014 (Note 4).
(q) Unitized Ocean Transport Limited (the “Manager” or “UOT”), was established
for the purpose of providing the Company and its vessels with management and administrative
services, effective March 1, 2013. Pursuant to the management agreements, UOT receives a fixed
commission of 2% on the gross charter hire and freight earned by each vessel plus a technical
management fee of $15 per vessel per month for employed vessels and $8 per vessel per month
for laid-up vessels, if any. In addition, pursuant to the administrative agreement, UOT receives a
fixed monthly fee of $10. The management and administrative fees payable to UOT are eliminated
in consolidation as intercompany transactions. Similar fees for 2012 and the period from January
1, 2013 to February 28, 2013 were payable to Diana Shipping Services S.A. (Note 3).
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
1.2 Subsidiaries incorporated in the United States of America:
(a) Container Carriers (USA) LLC (“Container Carriers”), was established in July
2014 in the State of Delaware, USA, to act as the Company’s authorized representative in the
United States.
During 2014, 2013 and 2012, charterers that accounted for more than 10% of the Company’s
hire revenues were as follows:
Charterer
A
B
C
D
E
F
2014
-
25%
31%
-
17%
14%
2013
16%
23%
-
-
38%
10%
2012
46%
22%
-
22%
-
-
2. Significant Accounting Policies and Recent Accounting Pronouncements
(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 Diana Containerships Inc. and its wholly-owned subsidiaries referred to
in Note 1 above. All significant intercompany balances and transactions have been 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 / (loss): The Company follows the provisions of
Accounting Standard Codification (ASC) 220, “Comprehensive Income”, which requires separate
presentation of certain transactions, which are recorded directly as components of stockholders’
equity. The Company presents Other Comprehensive Income / (Loss) in a separate statement
according to ASU 2011-05.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(d) Foreign Currency Translation: The functional currency of the Company is the
U.S. Dollar because the Company operates its vessels in international shipping markets, and
therefore, primarily transacts business in U.S. Dollars. The Company’s accounting records are
maintained in U.S. Dollars. Transactions involving other currencies during the years presented
are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions.
At the balance sheet dates, monetary assets and liabilities which are denominated in other
currencies are translated into U.S. Dollars at the period-end exchange rates. Resulting gains or
losses are reflected separately in the accompanying consolidated statements of operations.
(e) Cash and Cash Equivalents: The Company considers highly liquid investments such
as time deposits, certificates of deposit and their equivalents with an original maturity of three
months or less to be cash equivalents.
(f) Restricted Cash: Restricted cash includes minimum cash deposits required to be
maintained under the Company’s borrowing arrangements.
(g) Accounts Receivable, Trade: The account includes receivables from charterers for
hire, freight and demurrage billings. At each balance sheet date, all potentially uncollectible accounts
are assessed individually for purposes of determining the appropriate provision for doubtful
accounts. No provision for doubtful accounts has been made as of December 31, 2014 and 2013.
(h) Inventories: Inventories consist of lubricants and victualling which are stated at the
lower of cost or market. Cost is determined by the first in, first out method. Inventories may also
consist of bunkers when the vessel operates under freight charter or when on the balance sheet
date a vessel has been redelivered by her previous charterers and has not yet been delivered to
new charterers, or remains idle. Bunkers are also stated at the lower of cost or market and cost
is determined by the first in, first out method.
(i) Prepaid/Deferred Charter Revenue: The Company records identified assets or
liabilities associated with the acquisition of a vessel at their relative fair value, determined by
reference to market data. The Company values any asset or liability arising from the market value
of the time charters assumed when a vessel is acquired. The amount to be recorded as an asset
or liability at the date of vessel delivery is based on the difference between the current fair market
value of the charter and the net present value of future contractual cash flows. In determining
the relative fair value, when the present value of the contractual cash flows of the time charter
assumed is different than its current fair value, the difference, capped to the excess between
the acquisition cost and the vessel’s fair value on a charter free basis, is recorded as prepaid
charter revenue or as deferred revenue, respectively. Such assets and liabilities, respectively,
are amortized as a reduction of, or an increase in, revenue over the period of the time charter
assumed.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(j) Property and Equipment: The Company acquired in December 2014 a plot of land,
described in Note 5. Land is presented at its fair value on the date of acquisition and it is not
subject to depreciation, but it qualifies to be reviewed for impairment. Equipment consists of
office furniture and equipment and computer software and hardware. The useful life of the
office furniture and equipment is 5 years and the computer software and hardware is 3 years.
Depreciation is calculated on a straight-line basis.
(k) Vessel Cost: Vessels are stated at cost which consists of the contract price and costs
incurred upon acquisition or delivery of a vessel from a shipyard. Subsequent expenditures for
conversions and major improvements are also capitalized when they appreciably extend the life,
increase the earnings capacity or improve the efficiency or safety of the vessels; otherwise these
amounts are charged to expense as incurred.
(l) Vessel Depreciation: The Company depreciates containership vessels on a straight-
line basis over their estimated useful lives, after considering the estimated salvage value. Each
vessel’s salvage value is the product of her light-weight tonnage and estimated scrap rate, which
is estimated at $0.35 per light-weight ton for all vessels in the fleet. Management estimates
the useful life of the Company’s vessels to be 30 years from the date of initial delivery from the
shipyard. Second-hand vessels are depreciated from the date of their acquisition through their
remaining estimated useful life. When regulations place limitations on the ability of a vessel to
trade on a worldwide basis, the vessel’s useful life is adjusted at the date such regulations are
adopted.
(m) Impairment of Long-Lived Assets: The Company follows ASC 360 - 10 - 40
“Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company reviews vessels for
impairment whenever events or changes in circumstances indicate that the carrying amount of
a vessel may not be recoverable. When the estimate of future undiscounted net operating cash
flows, excluding interest charges, expected to be generated by the use of the vessel over her
remaining useful life and her eventual disposition is less than her carrying amount, the Company
evaluates the vessel for impairment loss. Measurement of the impairment loss is based on the fair
value of the vessel. The fair value of the vessel is determined based on management estimates
and assumptions and by making use of available market data and third party valuations. The
Company evaluates the carrying amounts and periods over which vessels 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, management
reviews certain indicators of potential impairment, such as undiscounted projected operating
cash flows, vessel sales and purchases, business plans and overall market conditions. The current
conditions in the containerships market with decreased charter rates and decreased vessel
market values are conditions that the Company considers indicators of a potential impairment.
In developing estimates of future undiscounted cash flows, the Company makes assumptions
and estimates about the vessels’ future performance, with the significant assumptions being
related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ residual value and
the estimated remaining useful life of each vessel. The assumptions used to develop estimates
of future undiscounted cash flows are based on historical trends as well as future expectations.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
The Company determines undiscounted projected net operating cash flows for each vessel
and compares it to the vessel’s carrying value. The projected net operating cash flows are
determined by considering the historical and estimated vessels’ performance and utilization,
the charter revenues from existing time charters for the fixed fleet days and an estimated daily
time charter equivalent for the unfixed days (based, to the extent applicable, on the most recent
10 year average historical 6-12 months time charter rates available for each type of vessel,
considering also current market rates) over the remaining estimated life of each vessel, net of
commissions, expected outflows for scheduled vessels’ maintenance and vessel operating
expenses assuming an average annual inflation rate of 3%. Effective fleet utilization is assumed
to 98% in the Company’s exercise, taking into account the period(s) each vessel is expected to
undergo her scheduled maintenance (dry docking and special surveys), as well as an estimate of
1% off hire days each year, assumptions in line with the Company’s historical performance. The
review of the vessel’s carrying amounts in connection with the estimated recoverable amounts for
the years ended December 31, 2014 and 2012 did not result in an indication of impairment, while
in 2013, the above mentioned review indicated for certain of the Company’s vessels impairment
charges (Note 4), which are separately reflected in the accompanying consolidated statements
of operations.
(n) Assets held for sale: It is the Company’s policy to dispose of vessels and other fixed
assets when suitable opportunities occur and not necessarily to keep them until the end of their
useful life. The Company classifies assets or assets in disposal groups as being held for sale
in accordance with ASC 360-10-45-9 “Long-Lived Assets Classified as Held for Sale”, when the
following criteria are met: (i) management possessing the necessary authority has committed to
a plan to sell the asset (disposal group); (ii) the asset (disposal group) is immediately available
for sale on an “as is” basis; (iii) an active program to find the buyer and other actions required to
execute the plan to sell the asset (disposal group) have been initiated; (iv) the sale of the asset
(disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify
for recognition as a completed sale within one year; and (v) the asset (disposal group) is being
actively marketed for sale at a price that is reasonable in relation to its current fair value and actions
required to complete the plan indicate that it is unlikely that significant changes to the plan will be
made or that the plan will be withdrawn. In case a long-lived asset is to be disposed of other than
by sale (for example, by abandonment, in an exchange measured based on the recorded amount
of the nonmonetary asset relinquished, or in a distribution to owners in a spinoff) the Company
continues to classify it as held and used until its disposal date. Long-lived assets or disposal
groups classified as held for sale are measured at the lower of their carrying amount or fair value
less cost to sell. These assets are not depreciated once they meet the criteria to be held for sale.
(o) Accounting for Revenues and Expenses: Revenues are generated from time
charter agreements. Time charter agreements with the same charterer are accounted for as
separate agreements according to the terms and conditions of each agreement. Time-charter
revenues are recorded over the term of the charter as service is provided. Revenues from
time charter agreements providing for varying annual rates over their term are accounted for
on a straight line basis. Income representing ballast bonus payments, in connection with the
repositioning of a vessel by the charterer to the vessel owner, are recognized in the period
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
earned. Deferred revenue, if any, includes cash received prior to the balance sheet date for which
all criteria for recognition as revenue would not be met, including any deferred revenue resulting
from charter agreements providing for varying annual rates, which are accounted for on a straight
line basis.
Voyage expenses, primarily consisting of port, canal and bunker expenses that are unique to a
particular charter, are paid for by the charterer under time charter arrangements or by the Company
under voyage charter arrangements, except for commissions, which are always paid for by the
Company, regardless of charter type. All voyage and vessel operating expenses are expensed
as incurred, except for commissions. Commissions are deferred over the related voyage charter
period to the extent revenue has been deferred since commissions are due as revenues are earned.
(p) Earnings / (Loss) per Common Share: Basic earnings / (loss) per common share
are computed by dividing net income / (loss) attributable to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings / (loss) per
common share reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised.
(q) Segmental Reporting: The Company has determined that it operates under one
reportable segment, relating to its operations of the container vessels. The Company reports
financial information and evaluates the operations of the segment 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. 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.
(r) Accounting for Dry-Docking Costs: The Company follows the deferral method of
accounting for dry-docking costs whereby actual costs incurred are deferred and amortized on
a straight-line basis over the period through the date the next dry-docking will be 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 vessel’s sale.
(s) Financing Costs: Fees paid to lenders for obtaining new loans or refinancing existing
ones are deferred and recorded as a contra to debt. Other fees paid for obtaining loan facilities not
used at the balance sheet date are capitalized as deferred financing costs. Fees are amortized
to interest and finance costs over the life of the related debt using the effective interest method
and, for the fees relating to loan facilities not used at the balance sheet date, according to the loan
availability terms. Unamortized fees relating to loans repaid or refinanced as debt extinguishment
are expensed as interest and finance costs in the period the repayment or extinguishment is
made. Loan commitment fees are charged to expense in the period incurred.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(t) Repairs and Maintenance: All repair and maintenance expenses includingunderwater
inspection expenses are expensed in the period incurred. Such costs are included in vessel
operating expenses in the accompanying consolidated statements of operations.
(u) Share Based Payment: ASC 718 “Compensation – Stock Compensation”, requires the
Company to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost is
recognized over the period during which an employee is required to provide service in exchange
for the award—the requisite service period (usually the vesting period). No compensation cost
is recognized for equity instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of compensation cost if certain
conditions are met. The Company initially measures the cost of employee services received
in exchange for an award or liability instrument based on its current fair value; the fair value of
that award or liability instrument is remeasured subsequently at each reporting date through
the settlement date. Changes in fair value during the requisite service period are recognized as
compensation cost over that period, with the exception of awards granted in the form of restricted
shares which are measured at their grant date fair value and are not subsequently re-measured.
The grant-date fair value of employee share options and similar instruments are estimated using
option-pricing models adjusted for the unique characteristics of those instruments (unless
observable market prices for the same or similar instruments are available). If an equity award
is modified after the grant date, incremental compensation cost is recognized in an amount
equal to the excess of the fair value of the modified award over the fair value of the original award
immediately before the modification.
(v) Variable Interest Entities: ASC 810-10-50 “Consolidation of Variable Interest Entities”,
addresses the consolidation of business enterprises (variable interest entities) to which the
usual condition (ownership of a majority voting interest) of consolidation does not apply. The
guidance focuses on financial interests that indicate control. It concludes that in the absence of
clear control through voting interests, a company’s exposure (variable interest) to the economic
risks and potential rewards from the variable interest entity’s assets and activities are the
best evidence of control. Variable interests are rights and obligations that convey economic
gains or losses from changes in the value of the variable interest entity’s assets and liabilities.
The Company evaluates financial instruments, service contracts, and other arrangements to
determine if any variable interests relating to an entity exist, as the primary beneficiary would be
required to include assets, liabilities, and the results of operations of the variable interest entity in
its financial statements. The Company’s evaluation did not result in an identification of variable
interest entities as of December 31, 2014 and 2013.
(w) Fair Value Measurements: The Company follows the provisions of ASC 820 “Fair
Value Measurements and Disclosures”, which defines fair value and provides guidance for
using fair value to measure assets and liabilities. The guidance creates a fair value hierarchy of
measurement and describes fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants in the market
in which the reporting entity transacts. In accordance with the requirements of accounting
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
guidance relating to Fair Value Measurements, the Company classifies and discloses its assets
and liabilities carried at the fair value in one of the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market based inputs or unobservable inputs that are corroborated by
market data;
Level 3: Unobservable inputs that are not corroborated by market data.
(x) Concentration of Credit Risk: Financial instruments, which potentially subject
the Company to significant concentrations of credit risk, consist principally of cash and trade
accounts receivable. The Company places its temporary cash investments, consisting mostly
of deposits, with various qualified financial institutions and performs periodic evaluations of
the relative credit standing of those financial institutions that are considered in the Company’s
investment strategy. The Company limits its credit risk with accounts receivable by performing
ongoing credit evaluations of its customers’ financial condition and generally does not require
collateral for its accounts receivable and does not have any agreements to mitigate credit risk.
Recent Accounting Pronouncements
a) The FASB and the International Accounting Standards Board (IASB) (collectively, the
Boards) jointly issued a standard that will supersede virtually all of the existing revenue recognition
guidance in U.S. GAAP and International Financial Reporting Standards, or IFRS, and is effective
for annual periods beginning on or after December 15, 2016. The standard establishes a five-step
model that will apply to revenue earned from a contract with a customer (with limited exceptions),
regardless of the type of revenue transaction or the industry. The standard’s requirements will also
apply to the recognition and measurement of gains and losses on the sale of some non-financial
assets that are not an output of the entity’s ordinary activities (e.g., sales of property, plant and
equipment or intangibles). Extensive disclosures will be required, including disaggregation of
total revenue; information about performance obligations; changes in contract asset and liability
account balances between periods and key judgments and estimates. Management is in the
process of accessing the impact of the new standard on Company’s financial position and
performance.
b) In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15 –
Presentation of Financial Statements - Going Concern. ASU 2014-15 provides guidance about
management’s responsibility to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-
15 requires an entity’s management to evaluate at each reporting period based on the relevant
conditions and events that are known at the date of financial statements are issued, whether
there are conditions or events, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued and to
disclose the necessary information. ASU 2014-15 is effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Early application is
permitted.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
3. Transactions with Related Parties
a) Diana Shipping Services S.A. (“DSS” ): DSS, a wholly owned subsidiary of Diana
Shipping Inc., one of the Company’s major shareholders, was acting as the Company’s Manager
up to March 1, 2013 and provided (i) administrative services under an Administrative Services
Agreement, for a monthly fee of $10; (ii) brokerage services pursuant to a Broker Services
Agreement that DSS has entered into with Diana Enterprises Inc., a related party controlled by the
Company’s Chief Executive Officer and Chairman Mr. Symeon Palios, for annual fees of $1,300;
(iii) commercial and technical services pursuant to Vessel Management Agreements, signed
between each shipowning company and DSS, under which the Company paid a commission of
1% of the gross charterhire or freight earned by each vessel and a technical management fee of
$15 per vessel per month for employed vessels and would also pay $20 per vessel per month for
laid-up vessels. On March 1, 2013, and in relation with the appointment of UOT to act as Manager
(Note 1), the agreements with DSS were terminated.
For 2014, 2013 and 2012, DSS charged the Company the following amounts for (i)
management fees and commissions under the Vessel Management Agreements,
(ii)
administrative fees under the Administrative Services Agreement and (iii) brokerage fees
attributable to Diana Enterprises Inc. under the Broker Services Agreement between DSS and
Diana Enterprises Inc.:
Management fees, including capitalized fees
$
Commissions
Administrative fees
Brokerage fees
2014
-
$
-
-
-
$
2013
305
127
20
217
2012
1,641
687
120
1,300
Management fees for 2013 are separately presented in Management fees in the accompanying
consolidated statements of operations. For 2012, part of the management fees, amounting
to $1,551, is presented in Management fees in the accompanying consolidated statements of
operations, whereas the amount of $90, represents the management fees capitalized. In addition,
commissions are included in Voyage expenses, whereas administrative and brokerage fees are
included in General and administrative expenses in the accompanying consolidated statements
of operations. As at December 31, 2014 and 2013, there was no amount due from or due to DSS.
b) Diana Enterprises Inc. (“Diana Enterprises”): Following the termination agreement
for brokerage services that were provided to the Company through DSS on March 1, 2013 (see (a)
above), Diana Enterprises has entered on the same date into an agreement with UOT to provide
brokerage services for a fixed monthly fee of $121. The agreement had an initial term of thirteen
months and was amended in March 2014 to extend the term up to March 31, 2015. According to
the terms of the agreement, the fees are payable quarterly in advance. Effective July 1, 2014, the
agreement between UOT and Diana Enterprises was terminated and replaced with a new one
between DCI and Diana Enterprises. The new agreement includes similar terms to the former
agreement.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
For 2014, 2013 and 2012, total brokerage fees, including those charged by DSS until
February 28, 2013 (see (a) above), amounted to $1,450, $1,425 and $1,300 respectively, and are
included in General and administrative expenses in the accompanying consolidated statements
of operations. As at December 31, 2014 and 2013, an amount of $0 and $16, respectively, was
due to Diana Enterprises and is included in Due to related parties, current in the accompanying
consolidated balance sheets.
c) Altair Travel Agency S.A. (“Altair”): Effective March 1, 2013 the Company uses
the services of an affiliated travel agent, Altair, which is controlled by the Company’s CEO and
Chairman. Travel expenses payable to Altair for 2014, 2013 and 2012, were $1,007, $971 and
$0 respectively, and are included in Vessels and other vessels’ costs, in Operating expenses,
in General and administrative expenses and in Loss on vessel’s sale in the accompanying
consolidated financial statements. As at December 31, 2014 and 2013, an amount of $79 and
$68, respectively, was payable to Altair and is included in Due to related parties, current in the
accompanying consolidated balance sheets.
d) Diana Shipping Inc. (“DSI”): On May 20, 2013, the Company, through its subsidiary
Eluk, entered into an unsecured loan agreement of up to $50,000 with Diana Shipping Inc., one
of the Company’s major shareholders, to be used to fund vessel acquisitions and for general
corporate purposes. The loan is guaranteed by the Company and bears interest at a rate of Libor
plus a margin of 5.0% per annum and a fee of 1.25% per annum (“back-end fee”) on any amounts
repaid upon any repayment or voluntary prepayments dates. In August 2013, the full amount
was drawn down under the loan agreement, and is included in Related party financing, non-
current, in the accompanying consolidated balance sheets. The loan matures on August 20,
2017. In 2014 and 2013, interest and back-end fee expense incurred under the loan agreement
with DSI amounted to $3,247 and $1,195, respectively (Note 12), and is included in Interest and
finance costs in the accompanying consolidated statements of operations. Accrued interest as
of December 31, 2014 and 2013 amounted to $57 and $86, respectively, and is included in
Due to related parties, current, while accrued back-end fee as of December 31, 2014 and 2013
amounted to $867 and $233, respectively, and is included in Related party financing, non-current,
in the accompanying consolidated balance sheets. The weighted average interest rate of the loan
during 2014 and 2013 was 5.15% and 5.17%, respectively.
4. Vessels
In 2013, the Company, through its subsidiaries Nauru, Eluk and Oruk, acquired from
unaffiliated third parties the vessels “Hanjin Malta”, “Puelo” and “Pucon” respectively, for an
aggregate purchase price of $116,000. At the time of acquisition of the “Hanjin Malta”, the
Company has recognized an asset of $8,500 relating to the time charter assumed (Note 6).
During 2014, the Company, through its subsidiaries Delap, Jabor and Dud, acquired from
unaffiliated third parties the vessels “YM March”, “YM Great” and “Santa Pamina”, respectively,
for an aggregate purchase price of $60,300. An amount of $348 was deducted from the
purchase price of the vessels, representing lumpsum compensations agreed with the sellers.
As at December 31, 2014 and 2013, additional capitalized costs amounted to $427 and $364,
respectively.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
In 2013, the Company, after taking into account factors as the vessels’ age and employment
prospects under the current market conditions, determined the future undiscounted cash flows
for each of its vessels, considering its various alternatives, including that certain vessels would be
sold immediately after the expiration of their existing charter parties. This assessment concluded
that the carrying values of certain vessels in the fleet were not recoverable and accordingly, the
Company has recognized in 2013 an aggregate impairment loss of $42,323, which is separately
reflected in the 2013 accompanying statement of operations. The fair values of the vessels were
determined through Level 3 inputs of the fair value hierarchy as determined by management,
making also use of available market data for the market value of vessels with similar characteristics.
Between those vessels for which an impairment loss was recorded during 2013, the vessel “APL
Sardonyx” was the only vessel that remained within the Company’s fleet as at December 31,
2013, and was measured at fair value on a non-recurring basis as a result of the management’s
impairment test exercise. The fair value and impairment loss of the specific vessel are presented
below:
Vessel
APL Sardonyx
Fair Value Measurement
Vessel Impairment Loss
9,500
9,697
During 2013, the Company, through its subsidiaries Ralik, Ebon, Mili and Micronesia, sold the
vessels “Maersk Madrid”, “Maersk Merlion”, “Maersk Malacca” and “APL Spinel” to unaffiliated
third parties for demolition, for the aggregate sale price of $37,494, net of address commissions.
During 2014, the Company, through its subsidiary Mejit, sold the vessel “APL Sardonyx” to an
unaffiliated third party for demolition, for a sale price of $9,722, net of address commission. The
aggregate loss from the sale of vessels in 2014 and 2013, including direct to sale expenses,
amounted to $695 and $16,481, respectively, and is separately reflected in the accompanying
statements of operations.
The amounts in the accompanying consolidated balance sheets are analyzed as follows:
Vessels’ Cost
Accumulated
Depreciation
Net Book
Value
Balance, December 31, 2012
$
280,812
$
(19,867)
$
- Acquisitions and other vessels’ costs
- Vessels’ disposals
- Depreciation for the period
- Impairment charges
Balance, December 31, 2013
- Acquisitions and other vessels’ costs
- Vessels’ disposals
- Depreciation for the period
Balance, December 31, 2014
F-20
107,864
(62,245)
-
(42,323)
-
12,101
(10,970)
-
$
$
$
284,108
$
(18,736)
$
60,379
(11,409)
-
-
1,929
(10,177)
333,078
$
(26,984)
$
260,945
107,864
(50,144)
(10,970)
(42,323)
265,372
60,379
(9,480)
(10,177)
306,094
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
As at December 31, 2014, certain of the Company’s vessels, having a total carrying value of
$201,228, were provided as collateral to secure the revolving credit facility with the Royal Bank of
Scotland plc., discussed in Note 7.
5. Property and Equipment, net
The amounts in the accompanying consolidated balance sheets are analyzed as follows:
Balance, December 31, 2012
- Additions in equipment
- Depreciation for the period
Balance, December 31, 2013
- Land acquisition
- Additions in equipment
- Depreciation for the period
Balance, December 31, 2014
Property and
Equipment
Accumulated
Depreciation
Net Book
Value
$
$
$
-
$
$
421
-
421
871
29
-
1,321
$
-
-
(100)
(100)
-
-
(132)
(232)
$
$
$
-
421
(100)
321
871
29
(132)
1,089
In December 2014, UOT acquired, jointly with two other related parties, from unrelated
individuals a plot of land in Athens, Greece, for an aggregate purchase price of Euro 2.0 million or
$2,490, based on the exchange rate of US Dollar to Euro on the date of acquisition. The plot of
land is under the common ownership of the joint purchasers. The Company paid one third of the
purchase price, and the total cost for the acquisition of the plot, including additional capitalized
costs, amounted to $871.
6. Prepaid Charter Revenue
As at December 31, 2014 and 2013 the balance of the account is analyzed as follows:
Description
a) Deferred asset from varying charter rates
b) Prepaid charter revenue from time-charter attached
Total
2014
- $
6,364
6,364 $
2013
192
17,974
18,166
$
$
The amounts presented as Prepaid charter revenue in the accompanying consolidated
balance sheets as of December 31, 2014 and 2013 comprise (a) a deferred asset resulting from
charter agreements with varying charter rates over their term, for which revenue was recognized
on a straight-line basis at their average rates until the time charter agreements expiration, and
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(b) the unamortized balance of an asset associated with vessels acquired with time charters
attached at values above their charter-free fair market values at the time of acquisition, which is
amortized to revenue over the period of the respective time charter agreements. As of December
31, 2014, the unamortized balance of the account relates to the vessels “APL Garnet” and “Hanjin
Malta”, with the earliest redelivery dates of the vessels to the owners as per the respective time
charter agreements falling in August 2015 and March 2016, respectively.
The movement of the prepaid charter revenue from vessel acquisitions with time-charter
attached as of December 31, 2014 and 2013 was as follows:
Balance, December 31, 2012
$
42,000
$
(12,204)
$
$ 29,796
Gross
Amount
Accumulated
Amortization
Net Amount
Additions
Amortization for the period
Write-off of fully amortized assets
Balance, December 31, 2013
Amortization for the period
Write-off of fully amortized assets
Balance, December 31, 2014
8,500
-
(8,000)
-
(20,322)
8,000
42,500
$
(24,526)
$
-
(9,000)
(11,610)
9,000
8,500
(20,322)
-
$ 17,974
(11,610)
-
33,500
$
(27,136)
$
$ 6,364
$
$
The amortization to revenues for 2014, 2013 and 2012 is separately reflected in Prepaid
charter revenue amortization in the accompanying consolidated statements of operations. The
expected aggregate amortization of the prepaid charter revenue from vessel acquisitions with
time-charter attached for each of the succeeding years is as follows:
Period
Year 1
Year 2
Amount
5,669
695
$
$
7. Long-Term Bank Debt, Current and Non-Current
The amounts of long-term bank debt shown in the accompanying consolidated balance
sheets are analyzed as follows:
2014
Total
Current
Non-
current
2013
Total
Current
Non-
current
$
98,700 $
6,000 $
92,700 $ 98,700 $
- $ 98,700
(402)
(196)
(206)
(598)
-
(598)
$
98,298 $
5,804 $
92,494 $ 98,102 $
- $ 98,102
Royal Bank of Scotland
- Credit facility
less unamortized
deferred financing costs
Total bank debt, net of
unamortized deferred
financing costs
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
The Royal Bank of Scotland plc.: On December 16, 2011, the Company entered into
a revolving credit facility with the Royal Bank of Scotland plc. (“RBS”), where the lenders have
agreed to make available to it a revolving credit facility of up to $100,000 in order to refinance
part of the acquisition cost of the vessels m/v “Sagitta” and m/v “Centaurus” and finance part of
the acquisition costs of additional containerships (“Additional Ships”). An amount of $92,700 and
$6,000 was drawn down under the credit facility in 2012 and 2013, respectively, representing as
at December 31, 2014, a total loan outstanding balance of $98,700. The Company paid up to
October 31, 2013 commitment commissions of 0.99% per annum on the available commitment.
As at December 31, 2014, the Company does not have any remaining borrowing capacity under
the revolving credit facility.
The facility will be available for five years with the maximum available amount (the “Available
Facility Limit”) reducing based on the age of the financed vessels and being assessed on a yearly
basis, as well as, at the date on which the age of any Additional Ship exceeds the 20 years. In
the event that the amounts outstanding at that time exceed the revised Available Facility Limit
the Company shall repay such part of the loan that exceeds the Available Facility Limit. Based on
the current age of the financed vessels, an amount of $6,000 is repayable in August 2015 and is
included in Current portion of long-term bank debt, net of unamortized deferred financing costs
in the accompanying consolidated balance sheets, and the remaining $92,700 is repayable at
the end of the availability period in January 2017 and is included in Long-term bank debt, net
of current portion and unamortized deferred financing costs in the accompanying consolidated
balance sheets.
The credit facility provided up to June 1, 2013 (see below) for interest at Libor plus a margin of
2.75% per annum and is secured by first priority mortgages over certain vessels of the fleet, general
assignments of earnings, insurances and requisition compensation, minimum insurance coverage,
specific assignments of any charters exceeding durations of twelve months, pledge of shares of
the guarantors which will be the ship-owning companies of the mortgaged vessels, manager’s
undertakings and minimum security value depending on the average age of the mortgaged
vessels. The credit facility also includes restrictions as to changes in certain shareholdings,
management and employment of vessels, and requires minimum cash of 10% of the drawings
under the revolving facility, but not less than $5,000, to be deposited by the borrower with the
lenders. Furthermore, the financial covenants require that the Company maintains minimum
ratios of consolidated net debt to market adjusted assets, EBITDA to interest costs, minimum
contracted employment and forward looking operating net cash flows to forward looking interest
costs. Finally, the Company is not permitted to pay any dividends that would result in a breach of
the financial covenants of the facility. As of December 31, 2014, the Company was in compliance
with all covenants relating to the loan facility, except for the minimum required security cover (hull
cover ratio), the breach of which indicated that, to rectify the shortfall, the Company would have
to repay to the Royal Bank of Scotland plc. an amount of $4,236, or provide additional security.
However, the lenders waived their right to request prepayment or provision of additional security
and agreed to reassess the compliance with the covenant not earlier than March 31, 2015.
In 2013 and 2014, the Company entered into various supplemental agreements with the Royal
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
Bank of Scotland plc. The amendments mainly provided for an increased margin of 3.10% per
annum, effective June 1, 2013, for security interest on the minimum cash held by the borrower in
favour of the lenders and for changes in the definitions of certain financial covenants. In addition,
the Company was required to provide additional vessels as collateral to secure the facility and
was restricted from providing any security interest over the Company’s assets in favour of DSI.
During 2014, the Company obtained lenders’ consent for the private equity placement discussed
in Note 10.
The weighted average interest rate of the loan during 2014 and 2013 was 3.28% and 3.16%,
respectively. During 2014, 2013 and 2012, total interest incurred on long-term bank debt,
amounted to $3,282, $3,029 and $2,652, respectively, and is included in Interest and finance
costs in the accompanying consolidated statements of operations (Note 12). Commitment
fees incurred during 2014, 2013 and 2012 amounted to nil, $53 and $150, respectively, and are
also included in Interest and finance costs in the accompanying consolidated statements of
operations.
8. Deferred Revenue, Current and Non-Current
The amounts presented as current and non-current deferred revenue in the accompanying
consolidated balance sheets as of December 31, 2014 and 2013 reflect (a) cash received prior
to the balance sheet date for which all criteria to recognize as revenue have not been met, (b)
deferred revenue resulting from free quantities of lubricants provided to the vessels as a benefit
from the suppliers for entering into long term contracts with them. Deferred revenue under (b)
above is amortized to Operating expenses according to the terms of the respective contracts.
For 2014, 2013 and 2012, amortization of the deferred revenue from free lubricants amounted to
$221, $107 and $112, respectively.
Hires collected in advance
Deferred revenue from lubricants
Total
Less current portion
Non-current portion
$
$
$
$
2014
441
50
491
(491)
-
$
$
$
$
2013
751
271
1,022
(972)
50
9. Commitments and Contingencies
(a) Various claims, suits, and complaints, including those involving government regulations
and product liability, arise in the ordinary course of the shipping business. In addition, losses may
arise from disputes with charterers, agents, insurance and other claims with suppliers relating
to the operations of the Company’s vessels. Currently, management is not aware of any such
claims or contingent liabilities, which should be disclosed, or for which a provision should be
established in the accompanying consolidated financial statements.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
The Company accrues for the cost of environmental liabilities when management becomes
aware that a liability is probable and is able to reasonably estimate the probable exposure.
Currently, management is not aware of any such claims or contingent liabilities, which should
be disclosed, or for which a provision should be established in the accompanying consolidated
financial statements.
The Company’s vessels are covered for pollution in the amount of $1 billion per vessel per
incident, by the P&I Association in which the Company’s vessels are entered. The Company’s
vessels are subject to calls payable to their P&I Association and may be subject to supplemental
calls which are based on estimates of premium income and anticipated and paid claims. Such
estimates are adjusted each year by the Board of Directors of the P&I Association until the closing
of the relevant policy year, which generally occurs within three years from the end of the policy
year. Supplemental calls, if any, are expensed when they are announced and according to the
period they relate to. The Company is not aware of any supplemental calls outstanding in respect
of any policy year.
(b) As at December 31, 2014, all vessels were operating under time charter agreements. The
minimum contractual annual charter revenues, net of related commissions to third parties, to be
generated from the existing as at December 31, 2014, non-cancelable time charter contracts until
their expiration, are estimated at $36,890 until December 31, 2015 and $3,242 until December
31, 2016.
10. Changes in Capital Accounts
(a) Compensation cost on restricted common stock: In 2010 the Company
adopted an equity incentive plan which entitles the Company’s directors, officers, employees,
consultants and service providers to receive options to acquire the Company’s common
stock,stock appreciation rights, restricted stock, restricted stock units and unrestricted
common stock. The Equity Incentive plan was amended in 2012. A total of 2,392,198
common shares have been reserved under the Incentive plan (as amended) for issuance,
of which as at December 31, 2014, 1,764,092 common shares remain available to be issued.
The plan is administered by our compensation committee, or such other committee of the
Company’s Board of Directors as may be designated by the Board to administer the plan.
The plan will expire in ten years from the adoption of the plan by the Board of Directors.
In 2014, the Company’s Board of Directors approved the grant of restricted common stock to
the executive management pursuant to the Company’s 2010 equity incentive plan as amended
in 2012, and in accordance with terms and conditions of restricted shares award agreements
signed by the grantees. The restricted shares are subject to forfeiture until they vest. Unless they
forfeit, grantees have the right to vote, to receive and retain all dividends paid and to exercise all
other rights, powers and privileges of a holder of shares. The fair value of the restricted shares
has been determined with reference to the closing price of the Company’s stock on the date the
agreements were signed. The aggregate compensation cost is being recognized ratably in the
consolidated statement of operations over the respective vesting periods.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
During 2014, 2013 and 2012, compensation cost on restricted stock amounted to $341, $371
and $900, respectively, and is included in General and administrative expenses. At December 31,
2014 and 2013, the total unrecognized compensation cost relating to restricted share awards
was $1,049 and $45, respectively. At December 31, 2014, the weighted-average period over
which the total compensation cost related to non-vested awards not yet recognized is expected
to be recognized is 1.35 years. During 2014, 2013 and 2012, the movement of restricted stock
cost was as follows:
Outstanding at December 31, 2011
Granted
Vested
Outstanding at December 31, 2012
Granted
Vested
Outstanding at December 31, 2013
Granted
Vested
Outstanding at December 31, 2014
Number of Shares
Weighted Average
Grant Date Price
146,662
$
-
(66,664)
79,998
$
-
(66,664)
13,334
$
361,442
(13,334)
361,442
$
12.95
-
13.50
12.50
-
13.50
7.50
3.72
7.50
3.72
(b) ATM offering: On May 21, 2013, the Company filed a prospectus supplement pursuant
to Rule 424(b) relating to the offer and sale of an aggregate of up to $40.0 million in gross proceeds
of its common stock under an at-the market offering. In 2013, an aggregate of 2,859,603 shares
of the Company’s common stock have been issued, and the net proceeds received during the
year, after deducting underwriting commissions and offering expenses payable by the Company,
amounted to $12,356. In 2014, a number of 1,092,596 of additional shares were issued and
the net proceeds received during the period, after deducting underwriting commissions
and offering expenses payable by the Company, amounted to $4,652. On July 28, 2014, the
Company announced the suspension of the offer and sale of its common shares under the
existing at-the-market offering until there is a significant improvement in the containership market.
(c) Private Equity Placement: On July 28, 2014, the Company entered into an agreement
to sell 36,653,386 shares of its common stock in a private placement at a purchase price of
$2.51 per share. In the transaction, DSI purchased $40,000 of common shares, two unaffiliated
institutional investors together purchased $40,000 of common shares and the Company’s CEO
and Chairman, a member of his family and other members of the senior management, together
purchased $12,000 of common shares. The transaction was approved by an independent
committee of the Company’s Board of Directors, which obtained a fairness opinion from an
independent financial advisor regarding the financial fairness to the Company of the aggregate
purchase price to be received by the Company. Pursuant to the Securities Purchase Agreement,
the Company agreed that, commencing with the dividend payable with respect to the second
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
quarter of 2014, and for not less than four consecutive fiscal quarters thereafter, it will not declare
or pay dividends in excess of $0.01 per share on an annualized basis; provided, however, that in
the event of a material improvement in the container shipping market, the Company’s board of
directors may amend this dividend policy to resume the payment of dividends. In connection with
this transaction, the Company and its respective counter parties entered into amendments to the
brokerage services agreement with DEI, the loan agreement with DSI, both discussed in Note
3, the facility agreement with RBS discussed in Note 7 and the Stockholders Rights Agreement,
discussed under (d) below. The transaction closed on July 29, 2014 and the net proceeds
received, after deducting offering expenses payable by the Company, amounted to $91,349.
(d) Stockholders Rights Agreement: In 2010, the Company entered into a stockholders
rights agreement (the “Stockholders Rights Agreement”) with Mellon Investor Services LLC as
Rights Agent. Pursuant to this Stockholders Rights Agreement, each share of the Company’s
common stock includes one right (the “Right”) that will entitle the holder to purchase from the
Company a unit consisting of one one-thousandth of a share of our preferred stock at an exercise
price specified in the Stockholders Rights Agreement, subject to specified adjustments. Until a
Right is exercised, the holder of a Right will have no rights to vote or receive dividends or any other
stockholder rights. As at December 31, 2014 and 2013, no Rights were exercised.
11. Voyage and Vessel Operating Expenses
The amounts in the accompanying consolidated statements of operations are analyzed as
follows:
Voyage Expenses
Port charges
Bunkers
Commissions
Total
Vessel Operating Expenses
Crew wages and related costs
Insurance
Spares and consumable stores
Repairs and maintenance
Tonnage taxes (Note 14)
Environmental costs
Other operating expenses
Total
$
$
$
2014
2013
$
$
$
-
5
327
332
14,415
1,772
6,075
3,359
526
201
211
$
$
$
30
50
625
705
16,944
1,891
8,071
3,277
356
-
331
2012
33
43
1,328
1,404
14,460
1,392
8,216
4,403
136
-
362
$
26,559
$
30,870
$
28,969
A part of the commissions was charged by DSS under the Vessel Management Agreements
up to February 28, 2013 (Note 3).
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
12. Interest and Finance Costs
The amounts in the accompanying consolidated statements of operations are analyzed as
follows:
Interest expense on bank debt (Note 7)
$
3,282
$
3,029
$
2,652
2014
2013
2012
Interest expense and other fees on related party debt (Note 3)
3,247
1,195
197
133
-
197
217
196
21
$
6,746
$
4,554
$
3,066
Amortization of deferred financing costs
Commitment fees and other
Total
13. Earnings / (loss) per Share
All shares issued (including the restricted shares issued under the equity incentive plan)
are DCI’s common stock and have equal rights to vote and participate in dividends, subject to
forfeiture provisions set forth in the applicable award agreement. Unvested shares granted under
the Company’s incentive plan of 361,442 as at December 31, 2014, and 13,334 as at December
31, 2013 (Note 10), received dividends which are not refundable, even if such shares are forfeited,
and therefore are considered participating securities for basic earnings per share calculation
purposes. Dividends declared and paid during the 2014, 2013 and 2012 amounted to $7,534,
$29,674 and $28,545, respectively. The calculation of basic earnings/ (loss) per share does not
consider the non-vested shares as outstanding until the time-based vesting restrictions have
lapsed. For the purpose of calculating diluted earnings per share, the weighted average number
of diluted shares outstanding includes the incremental shares assumed issued as determined in
accordance with the antidilution sequencing provisions of ASC 260. For 2014, the effect of the
incremental shares assumed issued, determined in accordance with the antidilution sequencing
provision of ASC 260, was anti-dilutive. For 2013, and on the basis that the Company incurred
losses, the effect of the incremental shares would have been anti-dilutive and therefore basic
and diluted losses per share are the same amount. For 2012, the effect of the incremental shares
assumed issued, was also anti-dilutive.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
2014
2013
2012
Basic EPS Diluted EPS Basic LPS Diluted LPS
Basic EPS Diluted EPS
Net income / (loss)
$
3,238 $
3,238 $
(57,346) $
(57,346) $
5,969 $
5,969
Less distributed
earnings allocated to
restricted shares
Net income /
(loss) available
to common
stockholders
Weighted average
number of common
shares, basic
Effect of dilutive
restricted shares
Weighted average
number of
common shares,
diluted
(50)
(50)
-
-
(104)
(104)
3,188
3,188
(57,346)
(57,346)
5,865
5,865
51,645,071 51,645,071 33,159,328 33,159,328 26,934,533 26,934,533
-
-
-
-
-
-
51,645,071 51,645,071 33,159,328 33,159,328 26,934,533 26,934,533
Earnings / (loss)
per common share,
basic and diluted
$
14. Income Taxes
0.06 $
0.06 $
(1.73) $
(1.73) $
0.22 $
0.22
Under the laws of the countries of the companies’ incorporation and / or vessels’ registration,
the companies are not subject to tax on international shipping income; however, they are subject
to registration and tonnage taxes, which are included in vessel operating expenses in the
accompanying consolidated statements of operations (Note 11).
Under Section 883 of the Internal Revenue Code of the United States (the “Code”), a corporation
would be exempt from U.S. federal income taxation on its U.S.-source shipping income if: (a) it is
organized in a foreign country that grants an “equivalent exemption” to corporations organized
in the United States (“United States corporations”); and (b) either (i) more than 50% of the
value of its common stock is owned, directly or indirectly, by “qualified shareholders,”, which
is referred to as the “50% Ownership Test,” or (ii) its common stock is “primarily and regularly
traded on an established securities market” in a country that grants an “equivalent exemption”
to U.S. corporations or in the United States, which is referred to as the “Publicly-Traded Test.”
The Marshall Islands, the jurisdiction where DCI and each of its vessel-owning subsidiaries
are incorporated, grant an “equivalent exemption” to U.S. corporations. Therefore, the
Companywould be exempt from U.S. federal income taxation with respect to its U.S.-source
shipping income if either the 50% Ownership Test or the Publicly-Traded Test is met.
F-29
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
Notwithstanding the foregoing, the regulations provide, in pertinent part, that a class of shares
will not be considered to be “regularly traded” on an established securities market for any taxable
year in which 50% or more of the vote and value of the outstanding shares of such class are
owned, actually or constructively under specified share attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the vote and value of such
class of outstanding shares, to which we refer as the “Five Percent Override Rule.”
The Company believes that it satisfies the Publicly-Traded Test and is not subject to the Five
Percent Override Rule. However, there are factual circumstances beyond the control of the
Company that could cause it to lose the benefit of the Section 883 exemption. For example,
there is a risk that the Company could no longer qualify for exemption under Code section 883
for a particular taxable year if shareholders with a five percent or greater interest in its common
shares were to own 50% or more of its outstanding common shares on more than half the days
of the taxable year.
It is not anticipated that the Company will have any vessel operating to the United States on
a regularly scheduled basis. Based on the foregoing and on the expected mode of the shipping
operations and other activities of Diana Containerships, it is not anticipated that any of the U.S.-
source shipping income of the Company will be “effectively connected” with the conduct of a U.S.
trade or business.
15. Financial Instruments
The carrying values of temporary cash investments, accounts receivable and accounts
payable approximate their fair value due to the short-term nature of these financial instruments.
The fair value of long-term loans and restricted cash balances, bearing interest at variable interest
rates, approximate their recorded values as at December 31, 2014.
16. Subsequent Events
(a) Equity Incentive Plan: On February 24, 2015 the Company’s Board of Directors
approved an award of 731,590 of restricted common stock to the executive management,
pursuant to the Company’s 2010 equity incentive plan, as amended in 2012. The fair value of the
restricted shares based on the closing price on the date of granting was about $1,675 and will be
recognized in income ratably over the restricted shares vesting period which will be 3 years. The
Board of Directors also approved an aggregate cash bonus of about $285 to the employees and
non-executive directors of the Company, which has been accrued for as of December 31, 2014 in
the accompanying consolidated financial statements.
(b) Declaration of Dividends: On February 27, 2015 the Company declared dividends
amounting to $0.0025 per share, which will be paid on March 26, 2015 to stockholders of record
as of March 11, 2015.
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DIANA CONTAINERSHIPS INC.
Notes to Consolidated Financial Statements
December 31, 2014
(Expressed in thousands of US Dollars – except for share and per share data, unless otherwise stated)
(c) Vessels’ Acquisition: On March 19, 2015, the Company, through its newly established
subsidiaries Mago Shipping Company Inc. and Kapa Shipping Company Inc., entered into two
memoranda of agreement with unrelated individuals, to acquire the container vessels “YM New
Jersey” and “YM Los Angeles”, respectively, for the purchase price of $21,500 each. On March
20, 2015, the Company paid $4,300 for each vessel, representing a 20% advance payment, while
the balance of the purchase price will be paid upon vessels’ delivery. The vessels’ are expected
to be delivered to the Company by the end of April 2015 and are chartered to Yang Ming (UK) Ltd.
through approximately the end of 2016. The closing of the transaction is subject to the signing of
a novation agreement to the time charter contract of each vessel.
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ANNUAL REPORT 2014 150
The Annual Report on Form 20-F (including Exhibits)
is available for download on the Company’s
website: www.dcontainerships.com
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Legal Counsel
Seward and Kissel LLP
One Battery Park Plaza
New York, New York 10004
Tel: +1-212-547-1200
Independent Auditors
Ernst & Young (Hellas)
Certified Auditors Accountants SA
Chimarras 8B
151 25 Maroussi
Greece
Tel: +30-210-288-6905
Shareholder/Corporate Information
Any shareholder, investor, or analyst seeking
further information may contact:
Corporate Contact:
Ioannis Zafirakis
Director, Chief Operating Officer and
Secretary
Pendelis 18
17564 Palaio Faliro
Athens, Greece
Tel: +30-216-600-2400
Email: izafirakis@dcontainerships.com
Investor and Media Relations:
Edward Nebb
Comm-Counselors, LLC
724 Valley Road
New Canaan, Connecticut 06840
Tel: +1-203-972-8350
Email: enebb@optonline.net
Website
Press releases, fleet information, stock
quotes, corporate investor information,
and SEC filings can all be accessed on the
company’s website,
www.dcontainerships.com.
Corporate Directory
Directors and Executive Officers
Symeon Palios
Chairman of the Board of Directors
and Chief Executive Officer
Anastasios Margaronis
Director and President
Andreas Michalopoulos
Chief Financial Officer and Treasurer
Ioannis Zafirakis
Director, Chief Operating Officer and Secretary
Eleni Leontari
Chief Accounting Officer
Antonios Karavias
Non-Executive Director
Nikolaos Petmezas
Non-Executive Director
Giannakis Evangelou
Non-Executive Director
Reidar Brekke
Non-Executive Director
Corporate Offices
Diana Containerships Inc.
Pendelis 18
17564 Palaio Faliro
Athens, Greece
Tel: +30-216-600-2400
Email: ir@dcontainerships.com
Stock Listing
Diana Containerships Inc.’s stock
is traded on the Nasdaq Global Market
under the symbol “DCIX”.
Transfer Agent and Registrar
Computershare
P.O. Box 358015
Pittsburgh, PA 15252-8015
or 480 Washington Boulevard
Jersey City, NJ 07310
Toll Free Number: +1-800-231-5469
Outside of US: +1-201-680-6578
www.bnymellon.com/shareowner/equityaccess
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