Star BulkCARRIERS CORP.
2008 Annual Report
COMPANY PROFILE
Star Bulk owns and operates a fleet of 12 vessels consisting of four Capesize and eight Supramax
drybulk carriers with an average age of 10.2 years and a combined cargo carrying capacity of approxi-
mately 1,106,253 deadweight tons. Star Bulk’s vessels transport worldwide a variety of drybulk com-
modities including coal, iron ore, and grains, or major bulks, as well as bauxite, phosphate, fertilizers
and steel products, or minor bulks. Star Bulk manages its entire fleet commercially in-house by its
wholly owned subsidiary. Star Bulk Carriers is currently implementing its plan of taking in-house, the
technical management of its fleet, which aims at reduced cost and greater quality control going forward.
Star Bulk was incorporated in the Marshall Islands on December 13, 2006 and is headquartered
in Athens, Greece. Its common stock and warrants trade on the NASDAQ Global Market under the
symbols “SBLK” and “SBLKW” respectively.
Key Company Points:
(cid:129) One of only two dry bulk companies to achieve an operating status from
a blank check company.
(cid:129) Achieved 50% fleet growth and a 62% increase in tonnage in first year of operations.
(cid:129) Currently has a total of approximately $425 million in contracted revenue under
time charters and contract coverage of 100% of fleet operating days in 2009 and 71% in 2010.
(cid:129) Obtained covenant waivers until February 2010 from all lenders enhancing operational
and financial flexibility.
(cid:129) Hedged counter party risk with a maximum of two vessels per charterer and staggered
charter renewals to limit exposure to volatile dry bulk market
Positioned for Growth:
(cid:129) Experienced management team – Strong track record of well-timed asset transactions,
strong experience in efficient ship-management, strong industry relationships with
leading charterers, financial institutions, shipyards, insurance underwriters.
(cid:129) Low Indebtedness Level - Strong balance sheet enhances ability to implement growth plan.
No commitments to purchase new building vessels or similar capital expenditure obligations.
(cid:129) Shelf Registration of up to $250 million - Flexibility instrument for growth,
or other corporate purposes.
SOLID FINANCIAL POSITION
2008 Financial Highlights:
Gross Revenue
Net Income
EBITDA
EBITDA Adjusted
Earnings per Share (EPS)
EPS Adjusted
2008 Fleet Data:
Average Number of Vessels
Total Ownership Days
Total Voyage days for Fleet
Total Available Days
Fleet Utilization
Average Daily Results (In Dollars)
Time Charter Equivalent
Vessel operating expenses
Management Fees
General and Administrative Expenses
Total Vessel Operating Expenses
$238.9 million
$133.7 million
$193.8 million
$120.9 million
$2.46
$1.12
10.76
3,933
3,618
3,712
98%
42,799
6,661
348
3,159
10,168
Selected Financial Data:
Contracted Revenue
Senior Debt
Fleet Charter-adjusted value
Fleet Charter-free value
Current Cash Position
~$425 million (1)
~$272 million (3)
~$525 million (2)
~$320 million (2)
~$66 million (3)
Principal Repayment (remaining in 2009)
Debt at end of 2009
~$25 million (3)
~$247 million (3)
(1) As of May 1, 2009; (2) Company’s estimate; (3) As of June 18, 2009
LETTER FROM THE CEO
I must admit to a certain degree of pride when I reflect upon Star Bulk’s forma-
tion and completion of its first full year of operations. There were several ‘firsts’ involved
along the way and that is not a small accomplishment, by any measure. I wish to recall
Star Bulk evolving from the largest “Blank Check” company (or SPAC) at the time of its
formation in any industry, the first such company whose insiders guaranteed 100% of
the investor’s money in Trust, being the first such company to acquire assets rather than
a business, just to mention a few.
Star Bulk managed to hit the road running out of the starting block even though
acquiring assets rather than a business meant that there was no operational entity or staff
the day it became public. Within its first year Star Bulk grew 50% in terms of number
of vessels, from eight to twelve, all its quarters were profitable, managed to staff all its
operations with excellent professionals and established in-house technical management.
Circumstances dictated that no less that twice within a year, the company developed and
audited two separate Sarbanes-Oxley compliant systems one for Star Bulk and one for its ‘Blank Check’ predecessor Star
Maritime, somewhat of a record.
The accomplishments mentioned above would not be sufficient, in my opinion, had the company not also suc-
ceeded in another area of primary importance. That is, the achievement of a balanced profile, possibly the most balanced
of any public shipping company, in terms of revenue generated by each dollar invested, total debt, growth, balance sheet
strength, and revenue visibility through time charters.
We concluded our first full year of operations in 2008 by achieving our fifth consecutive profitable quarter despite
an environment of unprecedented volatility not witnessed in decades.
Our strong financial and operational performance during this period of economic downturn provided us with the
opportunity to show the investment public the sound operating and financial status of our company. As we enter 2009,
we still face a volatile dry bulk environment, but have more than adequate liquidity coupled with high time charter cov-
erage and with strong cash flow generation that provides revenue visibility. I am also pleased that as a result of our ex-
cellent relationship with our lenders and our strong balance sheet we able to obtain covenant waivers from all of our
lenders until February 2010, thereby enhancing our operational and financial flexibility.Since our inception as an oper-
ating company we formulated and executed a clear and focused strategy, adapting it to the changing market conditions
without, however, compromising its basic principles. These principles are to seek visible cash flows through the em-
ployment of our vessels predominantly under time charters, to minimize the risk of our charter portfolio through di-
versification in counterparties and contract maturities, to follow prudent fleet expansion and to make conservative use
of debt. Our current fleet includes 12 vessels with an average age of 10 years, well below the industry average, and with
a carrying capacity of 1.1 million tons. We have avoided the temptation of entering into new building contracts and we
presently have no such exposure that would require us to obtain financing.
Our growth was achieved without compromising our leverage which remains at a relatively modest level for our
industry. Our cash reserves continue growing given the high charter cover of our fleet at profitable rates. In order to pro-
vide us with additional flexibility to raise capital in the future, we have put in place during the first quarter of 2009, a
shelf registration for up to $250 million. We expect to continue our focus on taking advantage of opportunities and the
lower asset values in the dry bulk sector with the continued philosophy of maintaining moderate leverage. Our primary
focus remains on shareholder value.
The experience of our management team tested in previous market downturns enabled us to deal with the
challenges of the current market environment enhancing our fleet contract coverage and revenue visibility. During
the first quarter 2009, 10 of our 12 vessels were either contracted to new charters or been delivered to their char-
terers, or had modified and extended their existing charter agreements. Significantly, profit sharing schemes were in-
troduced in our chartering strategy. As of May 2009, we have secured a total of $425million in contracted revenue
under time charters. 100% of our fleet operating days in 2009 and 71% in 2010 are covered by contracts, with
several of them extending to 2014.
Shipping is a vital link to the global economy and we are
in this business for the long term. Today, the world is in a state
of flux without clear visibility as to when the current turmoil will
end. However, we believe that the developing economies partic-
ularly of China and India will remain the driving force for the
dry bulk market for the foreseeable future. Their urbanization
and industrialization are irreversible trends and will necessitate
continued infrastructure development which translates into
demand for dry bulk shipping. The concerted efforts of
governments around the world to inject liquidity in the
financial markets and to implement economic stimulus programs
mainly aimed at infrastructure development will ultimately pro-
duce results. Finally, scrapping has accelerated and the order
book of new buildings is expected to shrink significantly due to
cancellations and delays, thereby helping to restore a healthier
balance between supply and demand for ships.
We believe that with the strong foundation we built so far
and with our rapid response to the shifting market conditions,
we are properly positioned not only to weather the current
storm but also to benefit from opportunities which are tradi-
tionally presented in periods of volatility. Although we’ve been
in the public market just over a year, we continue to make
decisions based on shipping fundamentals.
I trust our investors will agree with me that the company
has been well positioned to face the future with optimism and
I wish reassure them, that the Board of Directors being the
stewards of their capital and aligned with their interests, is
always mindful of shareholders’ value.
In conclusion, on behalf of our management and board
of directors, I would like to thank all those involved in the
success of Star Bulk Carriers. I would like to extend our thanks
to our employees including the operational and technical
managers of our fleet, crew members, valued customers,
bankers, lawyers and advisors. I would also like to thank our
loyal shareholders and let them know that Star Bulk manage-
ment is committed on delivering shareholder value.
Sincerely,
Akis Tsirigakis
President, Chief Executive Officer
FLEET PROFILE
Vessel Name
Star Alpha
Star Beta
Star Sigma
Star Ypsilon
Star Gamma
Star Delta
Star Epsilon
Star Zeta
Star Theta
Star Kappa
Star Omicron
Star Cosmo
Type
Capesize
Capesize
Capesize
Capesize
Supramax
Supramax
Supramax
Supramax
Supramax
Supramax
Supramax
Supramax
Deadweight
Year Built
175,075
174,691
184,403
150,940
53,098
52,434
52,402
52,994
52,425
52,055
53,489
52,247
1992
1993
1991
1991
2002
2000
2001
2003
2003
2001
2005
2005
Star Alpha
Star Beta
Star Sigma
Star Ypsilon
Star Gamma
Star Delta
Star Epsilon
Star Zeta
Star Theta
Star Kappa
Star Omicron
Star Cosmo
STAR BULK’S FLEET EMPLOYMENT
Revenue Visibility
2009
2010
2011
SOLD
Time Charters
COA/FFA
Optional Periods
★ 2009: 100% coverage
★ 2010: 71% coverage
Jan-’14
Jan-’14
Mar-’12
Jun-’14
Jun-’14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12 (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2008
OR
[_]
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
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
For the transition period from ___________ to
Commission file number
STAR BULK CARRIERS CORP.
(Exact name of Registrant as specified in its charter)
(Translation of Registrant's name into English)
Republic of the Marshall Islands
(Jurisdiction of incorporation or organization)
7, Fragoklisias Street, 2nd floor, Maroussi 151 25, Athens, Greece
(Address of principal executive offices)
Prokopios Tsirigakis, 011 30 210 617 8400, atsirigakis@starbulk.com,
c/o Star Bulk Carriers Corp., 7, Fragoklisias Street, 2nd floor
Maroussi 151 25, Athens, Greece
(Name, telephone, email 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
Name of exchange on which registered
Common Stock, par value $0.01 per share
NASDAQ Global Market
Warrants to purchase Common Stock
NASDAQ Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
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: As of December 31, 2008, there were 58,412,402
shares of common stock and 5,916,150 warrants of the registrant outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
[_] Yes
[X] No
If this report is an annual report 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
[X] No
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.
[X] 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 during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
[_] Yes
[_] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer.
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
[X] US GAAP
[_] International Financial Reporting
Standards
the
International Accounting Standards
Board
issued
by
as
If "Other" has been
[_] Other -
checked in response to the previous
question, indicate by check mark
which financial statement item the
registrant has elected to follow.
[_] Item 17 or [_] Item 18.
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).
[ ] Yes
[X] No
FORWARD-LOOKING STATEMENTS
Star Bulk Carriers Corp. and its wholly owned subsidiaries, 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," "except," "anticipate,"
"intends," "estimate," "forecast," "project," "plan," "potential," "may," "should," "expect" and similar
expressions identify forward-looking statements.
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, important factors that, in our view, could cause actual results to differ materially from those
discussed in the forward-looking statements include; (i) the strength of world economies; (ii) fluctuations in
currencies and interest rates; (iii) general market conditions, including fluctuations in charterhire rates and
vessel values; (iv) changes in demand in the drybulk shipping industry; (v) changes in the Company's operating
expenses, including bunker prices, drydocking and insurance costs; (vi) changes in governmental rules and
regulations or actions taken by regulatory authorities; (vii) potential liability from pending or future litigation;
(viii) general domestic and international political conditions; (ix) potential disruption of shipping routes due to
accidents or political events; and (x) other important factors described from time to time in the reports filed by
the Company with the Securities and Exchange Commission, or the Commission.
TABLE OF CONTENTS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
Page
1
1
1
21
37
37
54
58
61
63
65
73
75
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
75
75
75
79
79
79
79
79
79
79
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
80
80
80
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
Throughout this report, the "Company," "Star Bulk," "we," "us" and "our" all refer to Star Bulk Carriers
Corp. and its wholly owned subsidiaries. We use the term deadweight ton, or dwt, in describing the size of
vessels. Dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum
weight of cargo and supplies that a vessel can carry. The Company operates drybulk vessels of two sizes:
Capesize, which are vessels with carrying capacities of more than 85,000 dwt, and Supramax, which are vessels
with carrying capacities of between 45,000 and 60,000 dwt. Unless otherwise indicated, all references to
"Dollars" and "$" in this report are to U.S. Dollars.
Financial data presented herein include the accounts of the Company and of Star Maritime Acquisition
Corp., or Star Maritime.
Star Maritime was organized under the laws of the State of Delaware on May 13, 2005 as a blank check
company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business
combination, one or more assets or target businesses in the shipping industry. Star Maritime's common stock
and warrants started trading on the American Stock Exchange under the symbols, SEA and SEA.WS,
respectively, on December 21, 2005. Star Bulk was incorporated in the Republic of the Marshall Islands on
December 13, 2006 as a wholly-owned subsidiary of Star Maritime.
On November 27, 2007, Star Maritime obtained shareholder approval for the acquisition of the initial
fleet of eight drybulk carriers and for effecting a redomiciliation merger whereby Star Maritime merged with
and into its wholly owned subsidiary at the time Star Bulk with Star Bulk as the surviving entity, or the
Redomiciliation Merger. The Redomiciliation Merger was completed on November 30, 2007 as a result of
which each outstanding share of Star Maritime common stock was converted into the right to receive one share
of Star Bulk common stock and each outstanding warrant of Star Maritime was assumed by Star Bulk with the
same terms and restrictions except that each became exercisable for common stock of Star Bulk. Star Bulk's
common stock and warrants are listed on the Nasdaq Global Market under the symbols "SBLK" and "SBLKW,"
respectively.
We commenced operations on December 3, 2007, which is the date we took delivery of our first
vessel. During the period from Star Maritime's inception on May 13, 2005 to December 3, 2007, we were a
development stage enterprise.
A. Selected Consolidated Financial Data
The table below summarizes the Company's recent financial information. The historical information
was derived from the audited consolidated financial statements of Star Maritime and its subsidiaries for the
period from May 13, 2005 (date of Star Maritime's inception) through December 31, 2005, and for the fiscal
year ended December 31, 2006. The information of Star Bulk and its wholly owned subsidiaries for the fiscal
years ended December 31, 2008 and 2007 includes the results for Star Maritime from January 1, 2007 to
November 30, 2007, which is the date that the Redomiciliation Merger was completed. We refer you to the
notes to our consolidated financial statements for a discussion of the basis on which our consolidated financial
statements are presented. The information provided below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and the consolidated financial statements, related notes and
other financial information included herein.
1
The historical results included below and elsewhere in this document are not necessarily indicative of
the future performance of Star Bulk.
3.A. (i) CONSOLIDATED INCOME STATEMENT
(In thousands of Dollars, except for per
share and share data)
Voyage revenues
Voyage expenses
Vessel operating expenses
Management fees
Dry-docking expenses
Depreciation
Vessel impairment loss
Gain on forward freight agreements
Time charter agreement termination fees
May 13, 2005
(date of
inception)
to December
31,
Year Ended December 31,
2005
2006
2007
2008
-
-
-
-
-
-
-
-
-
-
3,633
238,883
-
-
-
-
1
-
-
-
43
645
-
-
3,504
26,198
1,367
7,881
745
51,050
-
-
-
3,646
(251))
(9,711))
General and administrative expenses
50
1,210
7,756
12,424
Operating (loss)/income
(50)
(1,211)
(5,556)
142,775
Interest and finance costs
Interest and other income
Income before income taxes
Income taxes
Net Income
Basic and fully diluted earnings
Earnings per share, basic
Earnings per share, diluted
-
-
(45)
(10,238))
183
4,396
9,021
1,201
133
3,185
3,420
133,738
(23)
(207)
(9)
-
110
2,978
3,411
133,738
0.01
0.10
0.01
0.10
0.11
0.09
2.55
2.46
Weighted average number of shares outstanding,
basic
9,918,282 29,026,924 30,065,923 52,477,947
Weighted average number of shares outstanding,
diluted
9,918,282 29,026,924 36,817,616 54,447,985
2
3.A. (ii) CONSOLIDATED BALANCE SHEET AND OTHER FINANCIAL DATA
(In thousands of Dollars,
except per share and fleet data)
Cash and cash equivalents
Investments in Trust Account
Total assets
Current liabilities
Common stock
Stockholders' equity
Total liabilities and stockholders equity
Number of shares
OTHER FINANCIAL DATA
Dividends declared and paid ($0.98 per share)
Net cash (used in) / provided by operating activities
Net cash (used in)/ provided by investing activities
Net cash provided by /(used in) financing activities
FLEET DATA
Average number of vessels(1)
Total ownership days for fleet (2)
Total available days for fleet (3)
Total voyage days for fleet (4)
Fleet utilization (5)
AVERAGE DAILY RESULTS (in Dollars)
Time charter equivalent (6)
Vessel operating expenses
Management fees
General and administrative expenses
Total vessel operating expenses
May 13, 2005
(date of
inception)
to December 31,
Year Ended December 31,
2005
2006
2007
2008
593
188,859
189,580
4,345
3
120,555
189,580
29,475
-
891,376
57,287
584
560,140
891,376
29,026,924 29,026,924 42,516,433 58,412,402
18,985
-
403,742
3,057
425
375,378
403,742
2,118
192,915
195,186
6,973
3
123,533
195,186
-
(27 )
(188,675 )
189,295
-
1,699
(4 )
(170 )
-
370
12,963
3,534
52,614
110,747
(423,305)
323,048
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.21
75
71
69
93 %
31,203
-
-
-
-
10.76
3,933
3,712
3,618
98%
42,799
6,661
348
3,159
10,168
(1)
(2)
(3)
(4)
(5)
(6)
Average number of vessels is the number of vessels that comprised our fleet for the relevant period, as measured by the sum of
the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in that period.
Ownership days are the total calendar days each vessel in the fleet was owned by us for the relevant period.
Available days for the fleet are the ownership days after subtracting for off-hire days with major repairs dry-docking or special
or intermediate surveys or transfer of ownership.
Voyage days are the total days the vessels were in our possession for the relevant period after subtracting all off-hire days
incurred for any reason (including off-hire for dry-docking, major repairs, special or intermediate surveys).
Fleet utilization is calculated by dividing voyage days by available days for the relevant period and takes into account the dry-
docking periods.
Represents the weighted average time charter equivalent, or TCE, of our entire fleet. TCE rate is a measure of the average
daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE rate is determined by dividing
voyage revenues (net of voyage expenses and amortization of fair value of above/below market acquired time charter
agreements) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that
are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract, as well as
commissions. TCE rate is a standard shipping industry performance measure used primarily to compare period-to-period
changes in a shipping company's performance despite changes in the mix of charter types (i.e., spot charters, time charters and
bareboat charters) under which the vessels may be employed between the periods. We included TCE revenues, a non-GAAP
measure, as it provides additional meaningful information in conjunction with voyage revenues, the most directly comparable
GAAP measure, because it assists our management in making decisions regarding the deployment and use of its vessels and in
evaluating their financial performance. TCE rate is also included herein because it is a standard shipping industry performance
measure used primarily to compare period-to-period changes in a shipping company's performance despite changes in the mix
of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the
periods and because we believe that it presents useful information to investors. For further information concerning our
calculation of TCE rate, please see Item 5. "Operating and Financial Review and Prospects – Operating Results."
3
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. Other risks relate principally to the securities market and ownership of our common stock. The
occurrence of any of the events described in this section could significantly and negatively affect our business,
financial condition, operating results or cash available for dividends or the trading price of our common stock.
Industry Specific Risk Factors
Charterhire rates for drybulk carriers are volatile and may decrease in the future, which would adversely
affect our earnings and ability to pay dividends
We own and operate a fleet of 12 vessels consisting of four Capesize and eight Supramax drybulk
carriers with an average age of 10.0 years and a combined cargo carrying capacity of approximately 1.1 million
dwt. The drybulk shipping industry is cyclical with attendant volatility in charterhire rates and profitability. The
degree of charterhire rate volatility among different types of drybulk carriers varies widely. According to
Drewry Shipping Consultants, Ltd., or Drewry, charterhire rates for Capesize, Panamax and Supramax drybulk
carriers have decreased sharply from their historically high levels. The Baltic Dry Index, or BDI, a daily
average of charter rates in 26 shipping routes measured on a time charter and voyage basis and covering
Supramax, Panamax, and Capesize drybulk carriers, declined from a high of 11,793 in May 2008 to 1,986 at the
end of February 2009 after reaching a low of 663 in December 2008, which represents a decline of 94%. The
BDI fell over 70% in October 2008 alone. The decline in charter rates is due to various factors, including the
economic recession in the U.S. and other parts of the world, the lack of trade financing for purchases of
commodities carried by sea, which has resulted in a significant decline in cargo shipments, and the excess
supply of iron ore in China which has resulted in falling iron ore prices and increased stockpiles in Chinese
ports. If the drybulk shipping market remains depressed in the future our earnings and available cash flow may
decrease. Our ability to re-charter our vessels on the expiration or termination of their current time charters and
the charter rates payable under any renewal or replacement charters will depend upon, among other things,
economic conditions in the drybulk shipping market. Fluctuations in charter rates and vessel values result from
changes in the supply and demand for drybulk cargoes carried internationally at sea, including coal, iron, ore,
grains and minerals.
The factors affecting the supply and demand for vessel capacity are outside of our control, and the
nature, timing and degree of changes in industry conditions are unpredictable.
The factors that influence demand for vessel capacity include:
•
•
•
•
demand for and production of drybulk products;
global and regional economic and political conditions;
the distance drybulk cargo is to be moved by sea; and
changes in seaborne and other transportation patterns.
The factors that influence the supply of vessel capacity include:
•
•
•
•
•
the number of new building deliveries;
port and canal congestion;
the scrapping of older vessels;
vessel casualties; and
the number of vessels that are out of service.
4
We anticipate that the future demand for our drybulk carriers will be dependent upon continued
economic growth in the world's economies, including China and India, seasonal and regional changes in
demand, changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargo
to be transported by sea. The capacity of the global drybulk carrier fleet seems likely to increase and economic
growth may not continue. Adverse economic, political, social or other developments could also have a material
adverse effect on our business and operating results.
Sharp declines in the spot drybulk charter market may affect our earnings and cash flows from the vessels
we operate in the spot market
We currently do not employ any of our vessels in the spot market; however, we may in the future
determine to employ some of our vessels in the spot market. During 2008, our revenues that were derived from
the spot market were less than 1% of our total voyage revenues. Vessels trading in the spot market are exposed
to increased risk of declining charter rates and freight rate volatility compared to vessels employed on time
charters. Since mid-August 2008, the spot day rates in the drybulk charter market have declined very
significantly, and drybulk vessel values have also declined both as a result of a slowdown in the availability of
global credit and the significant deterioration in charter rates. Charter rates and vessel values have been affected
in part by the lack of availability of credit to finance both vessel purchases and purchases of commodities
carried by sea, resulting in a decline in cargo shipments, and the excess supply of iron ore in China which
resulted in falling iron ore prices and increased stockpiles in Chinese ports. Charter rates may remain at
depressed levels for some time which will adversely affect our revenue and profitability.
The market values of our vessels have declined and may further decline, which could limit the amount of
funds that we can borrow or trigger certain financial covenants under our current or future credit facilities
and/or we may incur a loss if we sell vessels following a decline in their market value
The fair market values of our vessels have generally experienced high volatility and have recently
declined significantly. According to Drewry, the market prices for secondhand Capesize and Supramax drybulk
carriers have decreased sharply from their historically high levels.
The fair market value of our vessels may continue to fluctuate (i.e., increase and decrease) depending
on a number of factors including:
•
•
•
•
•
•
•
•
prevailing level of charter rates;
general economic and market conditions affecting the shipping industry;
types and sizes of vessels;
supply and demand for vessels;
other modes of transportation;
cost of newbuildings;
governmental or other regulations; and
technological advances.
In addition, as vessels grow older, they generally decline in value. If the fair market value of our vessels
decline further, we may not be in compliance with certain provisions of our amended term loans and we may
not be able to refinance our debt or obtain additional financing. In addition, if we sell one or more of our vessels
at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our
consolidated financial statements, the sale may be less than the vessel's carrying value on our consolidated
financial statements, resulting in a loss and a reduction in earnings. Furthermore, if vessel values continue to
fall we may have to record an impairment adjustment in our consolidated financial statements which could
adversely affect our financial results.
5
World events could affect our results of operations and financial condition
Terrorist attacks in New York on September 11, 2001, in London on July 7, 2005 and in Mumbai on
November 26, 2008, and the continuing response of the United States and others to these attacks, as well as the
threat of future terrorist attacks in the United States or elsewhere, continues to cause uncertainty in the world's
financial markets and may affect our business, operating results and financial condition. The continuing
presence of U.S. and other armed forces in Iraq and 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 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.
Terrorist attacks on vessels, such as the October 2002 attack on the M.V. Limburg, a very large crude
carrier not related to us, may in the future also negatively affect our operations and financial condition and
directly impact our vessels or our customers. Future terrorist attacks could result in increased volatility and
turmoil of the financial markets in the United States and globally. Any of these occurrences could have a
material adverse impact on our revenues and costs.
Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our
business
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the
South China Sea, the Gulf of Aden and off the Nigerian coast. Throughout 2008, the frequency of incidents of
piracy has increased significantly, particularly in the Gulf of Aden, with drybulk vessels and tankers
particularly vulnerable to such attacks. For example, in November 2008, the Sirius Star, a tanker vessel not
affiliated with us, was captured by pirates in the Indian Ocean while carrying crude oil estimated to be worth
$100.0 million. In February 2009, the Saldanha, a drybulk carrier not related to us, was seized by pirates while
transporting coal through the Gulf of Aden. If these piracy attacks result in regions in which our vessels are
deployed being characterized by insurers as "war risk" zones, as the Gulf of Aden temporarily was in May
2008, or Joint War Committee (JWC) "war and strikes" listed areas, premiums payable for such coverage could
increase significantly and such insurance coverage may be more difficult to obtain. Crew costs, including those
due to employing onboard security guards, could increase in such circumstances. In addition, while we believe
the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute
this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by
pirates was not "on-hire" for a certain number of days and it is therefore entitled to cancel the charter party, a
claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which
could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy
against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material
adverse impact on our business, financial condition, results of operations and cash flows.
Disruptions in world financial markets and the resulting governmental action in the United States and in
other parts of the world could have a material adverse impact on our results of operations, financial
condition and cash flows, and could cause the market price of our common stock to further decline.
The United States and other parts of the world are exhibiting deteriorating economic trends and have
been in a recession. For example, the credit markets in the United States have experienced significant
contraction, de-leveraging and reduced liquidity, and the United States federal government and state
governments have implemented and are considering a broad variety of governmental action and/or new
regulation of the financial markets. Securities and futures markets and the credit markets are subject to
comprehensive statutes, regulations and other requirements. The Commission, other regulators, self-regulatory
organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies,
and may effect changes in law or interpretations of existing laws.
Recently, a number of financial institutions have experienced serious financial difficulties and, in some
cases, have entered bankruptcy proceedings or are in regulatory enforcement actions. The uncertainty
surrounding the future of the credit markets in the United States and the rest of the world has resulted in
reduced access to credit worldwide. As of April 9, 2009, we have total outstanding indebtedness of $284.5
million under our existing credit facilities.
6
We face risks attendant to changes in economic environments, changes in interest rates, and instability
in the banking and securities markets around the world, among other factors. Major market disruptions and the
current adverse changes in market conditions and regulatory climate in the United States and worldwide may
adversely affect our business or impair our ability to borrow amounts under our credit facilities or any future
financial arrangements. We cannot predict how long the current market conditions will last. However, these
recent and developing economic and governmental factors, together with the concurrent decline in charter rates
and vessel values, may have a material adverse effect on our results of operations, financial condition or cash
flows, have caused the trading price of our common shares on the Nasdaq Global Market to decline
precipitously and could cause the price of our common shares to continue to decline or impair our ability to
make distributions to our shareholders.
A further economic slowdown in the Asia Pacific region could exacerbate the effect of recent slowdowns in
the economies of the United States and the European Union and may have a material adverse effect on our
business, financial condition and results of operations
We anticipate a significant number of the port calls made by our vessels will continue to involve the
loading or discharging of dry bulk commodities in ports in the Asia Pacific region. As a result, negative changes
in economic conditions in any Asia Pacific country, particularly in China, may exacerbate the effect of recent
slowdowns in the economies of the United States and the European Union and may have a material adverse
effect on our business, financial position and results of operations, as well as our future prospects. In recent
years, China has been one of the world's fastest growing economies in terms of gross domestic product, which
has had a significant impact on shipping demand. Through the end of the fourth quarter of 2008, growth in
China's gross domestic product was approximately 4.2% lower than it was during the same period in 2007, and
it is likely that China and other countries in the Asia Pacific region will continue to experience slowed or even
negative economic growth in the near future. Moreover, the current economic slowdown in the economies of
the United States, the European Union and other Asian countries may further adversely affect economic growth
in China and elsewhere. China has recently announced a $586.0 billion stimulus package aimed in part at
increasing investment and consumer spending and maintaining export growth in response to the recent
slowdown in its economic growth. Our business, financial condition, results of operations, ability to pay
dividends as well as our future prospects, will likely be materially and adversely affected by a further economic
downturn in any of these countries.
Changes in the economic and political environment in China and policies adopted by the government to
regulate its economy may have a material adverse effect on our business, financial condition and results of
operations
The Chinese economy differs from the economies of most countries belonging to the Organization for
Economic Cooperation and Development, or OECD, in such respects as structure, government involvement,
level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of
payments position. Prior to 1978, the Chinese economy was a planned economy. Since 1978, increasing
emphasis has been placed on the utilization of market forces in the development of the Chinese economy.
Annual and five year State Plans are adopted by the Chinese government in connection with the development of
the economy. Although state-owned enterprises still account for a substantial portion of the Chinese industrial
output, in general, the Chinese government is reducing the level of direct control that it exercises over the
economy through State Plans and other measures. There is an increasing level of freedom and autonomy in
areas such as allocation of resources, production, pricing and management and a gradual shift in emphasis to a
"market economy" and enterprise reform. Limited price reforms were undertaken, with the result that prices for
certain commodities are principally determined by market forces. Many of the reforms are unprecedented or
experimental and may be subject to revision, change or abolition based upon the outcome of such experiments.
If the Chinese government does not continue to pursue a policy of economic reform the level of imports to and
exports from China could be adversely affected by changes to these economic reforms by the Chinese
government, as well as by changes in political, economic and social conditions or other relevant policies of the
Chinese government, such as changes in laws, regulations or export and import restrictions, all of which could,
adversely affect our business, operating results and financial condition.
Charter rates are subject to seasonal fluctuations and market volatility, which may adversely affect our
financial condition and ability to pay dividends
We employ all of our vessels on medium-to long-term time charters other than the Star Alpha, which is
currently employed under a contract of affreightment, or COA. For more information on COAs please see the
section of this Annual Report entitled "Item 4. Information on the Company – Business Overview – Our
7
Fleet." We may in the future determine to employ some of our vessels in the spot market. Demand for vessel
capacity has historically exhibited seasonal variations and, as a result, fluctuations in charter rates. This
seasonality may result in quarter-to-quarter volatility in our operating results for vessels trading in the spot
market. The drybulk sector is typically stronger in the fall and winter months in anticipation of increased
consumption of coal and other raw materials in the northern hemisphere. As a result, our revenues from our
drybulk carriers may be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, our
revenues from our drybulk carriers may be stronger in fiscal quarters ended December 31 and March 31.
Seasonality in the sector in which we operate could materially affect our operating results and cash available for
dividends in the future.
Rising fuel prices may adversely affect our profits
Fuel is a significant, if not the largest, expense in our shipping operations when vessels are not under
period charter. Changes in the price of fuel may adversely affect our profitability. The price and supply of fuel
is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply
and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing
countries and regions, regional production patterns and environmental concerns. Further, fuel may become
much more expensive in the future, which may reduce the profitability and competitiveness of our business
versus other forms of transportation, such as truck or rail.
We are subject to international safety regulations and the failure to comply with these regulations may
subject us to increased liability, may adversely affect our insurance coverage and may result in a denial of
access to, or detention in, certain ports
Our business and the operation of our vessels are materially affected by government regulation in the
form of international conventions, national, state and local laws and regulations in force in the jurisdictions in
which the vessels operate, as well as in the country or countries of their registration. Because such conventions,
laws, and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions,
laws and regulations or the impact thereof on the resale prices or useful lives of our vessels. Additional
conventions, laws and regulations may be adopted which could limit our ability to do business or increase the
cost of our doing business and which may materially adversely affect our operations. We are required by
various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates, and
financial assurances with respect to our operations.
The operation of our vessels is affected by the requirements set forth in the United Nations'
International Maritime Organization's International Management Code for the Safe Operation of Ships and
Pollution Prevention, or ISM Code. The ISM Code requires shipowners, ship managers and bareboat charterers
to develop and maintain an extensive "Safety Management System" that includes the adoption of a safety and
environmental protection policy setting forth instructions and procedures for safe operation and describing
procedures for dealing with emergencies. The failure of a shipowner or bareboat charterer to comply with the
ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available
insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
If we are subject to increased liability for noncompliance or if our insurance coverage is adversely impacted as
a result of noncompliance, we may have less cash available for distribution to our stockholders as dividends. If
any of our vessels are denied access to, or are detained in, certain ports, this may decrease our revenues.
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our
business
International shipping is subject to various security and customs inspection and related procedures in
countries of origin and destination. Inspection procedures may result in the seizure of contents of our vessels,
delays in the loading, offloading or delivery and the levying of customs duties, fines or other penalties against
us.
It is possible that changes to inspection procedures could impose additional financial and legal
obligations on us. Changes to inspection procedures could also impose additional costs and obligations on our
customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical.
Any such changes or developments may have a material adverse effect on our business, financial condition and
results of operations.
8
Maritime claimants could arrest one or more of our vessels, which could interrupt our cash flow
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be
entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a
claimant may seek to obtain security for its claim by arresting a vessel through foreclosure proceedings. The
arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums
of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under
the "sister ship" theory of liability, a claimant may arrest both the vessel which is subject to the claimant's
maritime lien and any "associated" vessel, which is any vessel owned or controlled by the same owner.
Claimants could attempt to assert "sister ship" liability against one vessel in our fleet for claims relating to
another of our vessels.
Governments could requisition our vessels during a period of war or emergency, resulting in a loss of
earnings
A government could requisition one or more of our vessels for title or for hire. Requisition for title
occurs when a government takes control of a vessel and becomes its owner, while requisition for hire occurs
when a government takes control of a vessel and effectively becomes its charterer at dictated charter rates.
Generally, requisitions occur during periods of war or emergency, although governments may elect to
requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a
requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government
requisition of one or more of our vessels may negatively impact our revenues and reduce the amount of cash we
have available for distribution as dividends to our stockholders.
Company Specific Risk Factors
Star Bulk has a limited operating history and may not operate profitably in the future
Star Bulk was formed December 13, 2006 and in January 2007 entered into agreements to acquire eight
drybulk carriers. We took delivery of our first vessel in December 2007. Accordingly, the year over year
comparisons contained in our consolidated financial statements do not provide a meaningful basis for you to
evaluate our operations and ability to be profitable in the future. We may not be profitable in the future.
Servicing debt will limit funds available for other purposes, including capital expenditures and payment of
dividends
On December 27, 2007, we entered into a term loan agreement with Commerzbank AG, or
Commerzbank, in the amount of $120.0 million to partially finance the Star Gamma, the Star Delta, the Star
Epsilon, the Star Zeta, and the Star Theta, which also provide the security for this loan agreement. This loan
bears interest at LIBOR plus a margin and is repayable in twenty-eight consecutive quarterly installments
commencing twenty-seven months after our initial borrowings, which was on January 2, 2008. As of April 9,
2009, we had outstanding borrowings in the amount of $120.0 million under this facility. On April 14, 2008, we
entered into a loan agreement, which was subsequently amended on April 17, 2008 and September 18, 2008, for
up to $150.0 million with Piraeus Bank A.E., or Piraeus Bank, as agent, in order to partially finance the
acquisition cost of vessels the Star Omicron, the Star Sigma and the Star Ypsilon and also to provide us with
additional liquidity. The loan is secured by a first priority mortgage on the Star Omicron, the Star Beta, and the
Star Sigma. The loan bears interest at LIBOR plus a margin and is repayable in twenty-four quarterly
installments through September 2014. As of April 9, 2009, we had outstanding borrowings in the amount of
$132.5 million under this loan. On July 1, 2008, the Company entered into a loan agreement of up to $35.0
million with Piraeus Bank, as lender, to partially finance the acquisition of the Star Cosmo which also provides
the security for this loan agreement. The loan bears interest at LIBOR plus a margin and is repayable in twenty-
four quarterly installments through July 2014. As of April 9, 2009, we had outstanding borrowings in the
amount of $30.0 million under this loan facility. We refer to Commerzbank and Piraeus Bank as our
lenders. Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources –
Senior Secured Credit Facilities."
We were in compliance with the loan covenants as of December 31, 2008 except for the covenant
related to the fair market value of mortgaged vessels to then outstanding borrowings, for which we have
obtained waivers in March 2009.
9
As of April 9, 2009, we had total outstanding borrowings under our three loan facilities in the aggregate
amount of $282.5 million.
We may be unable to comply with the covenants contained in our loan agreements, which would affect our
ability to conduct our business
Our loan agreements for our borrowings, which are secured by liens on our vessels, contain various
financial and other covenants. Among those covenants are requirements that relate to our financial position,
operating performance and liquidity. For example, under certain provisions of our loan agreements we are
required to maintain a ratio of the fair market value of our vessels to the aggregate amounts outstanding of
125% for the first three years and 135% thereafter.
The market value of drybulk vessels is sensitive, among other things, to changes in the drybulk charter
market, with vessel values deteriorating in times when drybulk charter rates are falling and improving when
charter rates are anticipated to rise. The current decline in charter rates in the drybulk market coupled with the
prevailing difficulty in obtaining financing for vessel purchases have adversely affected drybulk vessel values,
including the vessels in our fleet. As a result, we may not meet certain minimum asset coverage covenants in
our loan agreements.
In March 2009, we entered into agreements with each of our lenders to obtain waivers for certain
covenants including minimum asset coverage covenants contained in our loan agreements. The related terms
are described below.
With respect to the $120.0 million facility, during the waiver period from December 31, 2008 to
January 31, 2010, the required loan to value ratio, which is the ratio of outstanding indebtedness to the
aggregate market value of the collateral vessels, was amended to 90% from 80% including the value of the
additional security that will be provided by us pursuant to the waiver. In connection with this waiver, as further
security for this facility, we agreed to provide a first preferred mortgage on the Star Alpha and a pledge account
containing $6.0 million. During the waiver period, LIBOR will be adjusted to the cost of funds.
With respect to the $150.0 million facility, during the waiver period from December 31, 2008 to
February 28, 2010, the required security cover ratio, which is the ratio of the aggregate market value of the
collateral vessels and the outstanding loan amount, was waived and for the year ended February 28, 2011 and
the minimum security cover requirement will be reduced to 110% from 125% of the outstanding loan amount.
The lenders will also waive the required 60% corporate leverage ratio, which is the ratio of our total
indebtedness net of any unencumbered cash divided by the market value of our vessels, through February 28,
2010. In connection with this waiver, as further security for this facility we agreed to provide (i) first preferred
mortgages on and first priority assignments of all earnings and insurances of the Star Kappa and the Star
Ypsilon; (ii) corporate guarantees from each of the collateral vessel owning limited liability companies; (iii) a
subordination of the technical and commercial manager's rights to payment; and (iv) a pledge account
containing $9.0 million.
With respect to the $35.0 million facility, during the waiver period from December 31, 2008 to
February 28, 2010, the required security cover ratio was waived and for the year ended February 28, 2011 the
minimum security cover requirement will be reduced to 110% from 125% of the outstanding loan amount. The
lender also waived the 60% corporate leverage ratio covenant through February 28, 2010. In connection with
this waiver, as further security for this facility we agreed to provide (i) second preferred mortgages on and
second priority assignments of all earnings and insurances of the Star Alpha; (ii) a corporate guarantee from
Star Alpha's vessel owning limited liability company; (iii) a subordination of the technical and commercial
managers rights to payment; and (iv) a pledge account containing $5.0 million. This facility is repayable
beginning on April 2, 2009, in 22 consecutive quarterly installments: (i) the first two installments in the amount
of $2.0 million each; (ii) the third installment in the amount of $1.75 million; (iii) the fourth installment in the
amount of $1.25 million; (iv) the fifth through tenth installment in the amount of $875,000 each; and (v) the
final 12 installments in the amount of $500,000 each plus a balloon payment of $13.75 million payable with the
final installment.
Under the terms of the above referenced agreements our dividend payments, share repurchases and
investments are subject to the prior written consent of our lenders. In addition, for the duration of the waiver
periods the interest spread for each of the above referenced loans will be adjusted to 2% per annum and under
our $150.0 million and $35.0 million loan facilities, the interest spread following the waiver period will be
1.5%. Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources –
Senior Secured Credit Facilities."
10
If the value of our vessels continues to deteriorate, we may have to record an impairment adjustment in
our financial statements, which would adversely affect our financial results and further hinder our ability to
raise capital.
If we are not in compliance with our covenants and we are not able to obtain additional covenant
waivers or modifications, our lenders could require us to post additional collateral, enhance our equity and
liquidity, increase our interest payments or pay down our indebtedness to a level where we are in compliance
with our loan covenants, sell vessels in our fleet, or they could accelerate our indebtedness, which would impair
our ability to continue to conduct our business. If our indebtedness is accelerated, we might not be able to
refinance our debt or obtain additional financing and could lose our vessels if our lenders foreclose their liens.
In addition, if we find it necessary to sell our vessels at a time when vessel prices are low, we will recognize
losses and a reduction in our earnings, which could affect our ability to raise additional capital necessary for us
to comply with our loan agreements.
We may not be able to pay dividends
As a result of deteriorating market conditions in the international shipping industry and in particular the
sharp decline in charter rates and vessel values in the drybulk sector and restrictions imposed by our lenders,
including the restriction on dividend payments under the terms of our waiver agreements, we may not be able to
pay dividends.
We previously paid regular dividends on a quarterly basis from our operating surplus, in amounts that
allowed us to retain a portion of our cash flows to fund vessel or fleet acquisitions, and for debt repayment and
other corporate purposes, as determined by our management and board of directors. Under the terms of our
waiver agreements with our lenders, payment of dividends and repurchases of our shares and warrants are
subject to the prior written consent of our lenders. Any future dividend payments may be at reduced levels.
Please see "Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior
Secured Credit Facilities."
The declaration and payment of dividends will be subject at all times to the discretion of our board of
directors. The timing and amount of dividends will depend on our earnings, financial condition, cash
requirements and availability, fleet renewal and expansion, restrictions in our loan agreements, the provisions of
Marshall Islands law affecting the payment of dividends and other factors. Marshall Islands law generally
prohibits the payment of dividends other than from surplus or while a company is insolvent or would be
rendered insolvent upon the payment of such dividends, or if there is no surplus, dividends may be declared or
paid out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year.
If the recent volatility in LIBOR continues, it could affect our profitability, earnings and cash flow
Interest in most loan agreements in our industry has been based on published LIBOR rates. The London
market for Dollar loans between banks has recently been volatile, with the spread between published LIBOR
and the lending rates actually charged to banks in the London interbank market widening significantly at times.
These conditions are the result of the recent disruptions in the international credit markets. Because the interest
rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, if this volatility were to continue,
it would affect the amount of interest payable on our debt, which in turn, could have an adverse effect on our
profitability, earnings and cash flow.
In addition, in the waiver agreements with our lenders, we have agreed to replace published LIBOR as
the base for the interest calculation with their cost-of-funds rate. This could increase our lending costs
significantly, which would have an adverse effect on our profitability, earnings and cash flow.
We are dependent on medium- to long-term time charters in a volatile shipping industry and a decline in
charterhire rates would affect our results of operations and ability to pay dividends
We charter all of our vessels on medium- to long-term time charters with remaining terms of
approximately one to five years other than the Star Alpha, which is currently employed under a COA. The
time charter market is highly competitive and spot market charterhire rates (which affect time charter rates) may
fluctuate significantly based upon available charters and the supply of, and demand for, seaborne shipping
capacity. Our ability to re-charter our vessels on the expiration or termination of their current time charters and
the charter rates payable under any renewal or replacement charters will depend upon, among other things,
economic conditions in the drybulk shipping market. The drybulk carrier charter market is volatile, and in the
11
past, time charter and spot market charter rates for drybulk carriers have declined below operating costs of
vessels. If future charterhire rates are depressed, we may not be able to operate our vessels profitably or to pay
you dividends. Under the terms of our waiver agreements with our lenders, payment of dividends and
repurchases of our shares and warrants are subject to the prior written consent of our lenders. Please see "Item
5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit
Facilities."
Default by our charterers may lead to decreased revenues and a reduction in earnings
Consistent with drybulk shipping industry practice, we have not independently analyzed the
creditworthiness of the charterers. Our revenues may be dependent on the performance of our charterers and, as
a result, defaults by our charterers may materially adversely affect our revenues.
We depend upon a few significant customers for a large part of our revenues and the loss of one or more of
these customers could adversely affect our financial performance
We derive a significant part of our charterhire (net of commissions) from a small number of customers,
with 57% of our voyage revenues, as presented in our consolidated income statement, for the fiscal year ended
December 31, 2008 generated from five charterers. Currently, eleven of our vessels are employed under fixed
rate period charters to nine customers. If one or more of these customers is unable to perform under one or more
charters with us and we are not able to find a replacement charter, or if a customer exercises certain rights to
terminate the charter, we could suffer a loss of revenues that could materially adversely affect our business,
financial condition, results of operations and cash available for distribution as dividends to our shareholders.
We could lose a customer or the benefits of a time charter if, among other things:
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the customer fails to make charter payments because of its financial inability, disagreements
with us or otherwise;
the customer terminates the charter because we fail to deliver the vessel within a fixed period of
time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or
prolonged periods of off-hire, default under the charter; or
the customer terminates the charter because the vessel has been subject to seizure for more than
a specified number of days.
If we lose a key customer, we may be unable to obtain charters on comparable terms or may become
subject to the volatile spot market, which is highly competitive and subject to significant price
fluctuations. Most of our time charters on which we deploy our vessels provide for charter rates that are
significantly above current market rates, particularly spot market rates that most directly reflect the current
depressed levels of the drybulk charter market. If it were necessary to secure substitute employment, in the spot
market or on time charters, for any of these vessels due to the loss of a customer in these market conditions,
such employment would be at a significantly lower charter rate than currently generated by such vessel, or we
may be unable to secure a charter at all, in either case, resulting in a significant reduction in revenues. The loss
of any of our customers or time charters, or a decline in payments under our charters, could have a material
adverse effect on our business, results of operations and financial condition and our ability to pay dividends.
We are subject to certain risks with respect to our counterparties on contracts, and failure of such
counterparties to meet their obligations could cause us to suffer losses or otherwise adversely affect our
business
We enter into, among other things, charter parties with our customers, interest rate swaps and freight
forward agreements. Such agreements subject us to counterparty risks. The ability of each of our counterparties
to perform its obligations under a contract with us will depend on a number of factors that are beyond our
control and may include, among other things, general economic conditions, the condition of the maritime and
offshore industries, the overall financial condition of the counterparty, charter rates received for specific types
of vessels, and various expenses. Consistent with drybulk shipping industry practice, we have not independently
analyzed the creditworthiness of the charterers. In addition, in depressed market conditions, our charterers may
no longer need a vessel that is currently under charter or may be able to obtain a comparable vessel at lower
rates. As a result, charterers may seek to renegotiate the terms of their existing charter parties or avoid their
obligations under those contracts. Should a counterparty fail to honor its obligations under agreements with us,
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we could sustain significant losses which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Investment in derivative instruments such as freight forward agreements could result in losses
From time to time, we may take positions in derivative instruments including freight forward
agreements, or FFAs. Generally, FFAs and other derivative instruments may be used to hedge a vessel owner's
exposure to the charter market for a specified route and period of time. Upon settlement, if the contracted
charter rate is less than the average of the rates, as reported by an identified index, for the specified route and
time period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the
contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if
the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum.
If we take positions in FFAs or other derivative instruments we could suffer losses in the settling or termination
of the FFA. This could adversely affect our results of operation and cash flow.
In December 2008 and January 2009, we entered into a limited number of FFAs on the Capesize index.
The Capesize index refers to the daily hire rate of a modern Capesize dry bulk carrier. The FFAs are intended to
serve as an approximate hedge for our Capesize vessels trading in the spot market for 2009 and 2010,
effectively locking-in the approximate amount of revenue that we expect to receive from such vessels for the
relevant periods. Our FFAs do not qualify as cash flow hedges for accounting purposes and are recorded on our
balance sheet at fair value. All of our FFAs are cleared transactions and are intended as approximate hedges to
our physical exposure in the spot market. During the year ended December 31, 2008, the change in the fair
market value of our FFAs resulted in a gain of $0.25 million.
Our earnings may be adversely affected if we are not able to take advantage of favorable charter rates
We charter all of our drybulk carriers to customers on medium- to long-term time charters, which
generally last from one to five years other than the Star Alpha, which is currently employed under a COA. We
may in the future extend the charter periods for the vessels in our fleet. Our vessels that are committed to
longer-term charters may not be available for employment on short-term charters during periods of increasing
short-term charterhire rates when these charters may be more profitable than long-term charters.
We may have difficulty managing our planned growth properly.
We intend to continue to expand our fleet. Our growth will depend on:
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locating and acquiring suitable vessels;
identifying and consummating acquisitions or joint ventures;
obtaining required financing;
integrating any acquired vessels successfully with our existing operations;
enhancing our customer base; and
managing our expansion.
Growing any business by acquisition presents numerous risks such as undisclosed liabilities and
obligations, difficulty experienced in obtaining additional qualified personnel and managing relationships with
customers and suppliers and integrating newly acquired operations into existing infrastructures. We may not be
successful in executing our growth plans and may incur significant expenses and losses.
Our loan agreements may contain restrictive covenants that may limit our liquidity and corporate activities
Our current term loan agreement with Commerzbank and our term loan agreements with Piraeus Bank,
as lender and as agent, and any future loan agreements may impose operating and financial restrictions on us.
These restrictions may limit our ability to:
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incur additional indebtedness;
create liens on our assets;
sell capital stock of our subsidiaries;
make investments;
engage in mergers or acquisitions;
pay dividends;
make capital expenditures;
change the management of our vessels or terminate or materially amend the management
agreement relating to each vessel; and
sell our vessels.
Currently, under the terms of our waiver agreements with our lenders, payment of dividends,
repurchases of our shares and warrants and certain investments are subject to the prior written consent of our
lenders. Therefore, we need to seek permission from our lenders in order to engage in some important
corporate actions. The lenders' interests may be different from ours, and we cannot guarantee that we will be
able to obtain the lenders' permission when needed. This may prevent us from taking actions that are in our best
interest.
In the highly competitive international drybulk shipping industry, we may not be able to compete for charters
with new entrants or established companies with greater resources which may adversely affect our results of
operations
We employ our vessels in a highly competitive market that is capital intensive and highly fragmented.
Competition arises primarily from other vessel owners, some of whom have substantially greater resources than
us. Competition for the transportation of drybulk cargoes can be intense and depends on price, location, size,
age, condition and the acceptability of the vessel and its managers to the charterers. Due in part to the highly
fragmented market, competitors with greater resources could operate larger fleets through consolidations or
acquisitions and may be able to offer more favorable terms.
We may be unable to attract and retain key management personnel and other employees in the shipping
industry, which may negatively affect the effectiveness of our management and our results of operations
Our success depends to a significant extent upon the abilities and efforts of our management team. As
of April 9, 2009, we had twenty-five employees. Twenty-three of our employees, through our wholly owned
subsidiary, Star Bulk Management Inc., or Star Bulk Management, are engaged in the day to day management
of the vessels in our fleet. Our success depends upon our ability to retain key members of our management team
and the ability of Star Bulk Management to recruit and hire suitable employees. The loss of any members of our
senior management team could adversely affect our business prospects and financial condition. Difficulty in
hiring and retaining personnel could adversely affect our results of operations. We do not maintain "key-man"
life insurance on any of our officers or employees of Star Bulk Management.
As we expand our fleet, we will need to expand our operations and financial systems and hire new shoreside
staff and seafarers to staff our vessels; if we cannot expand these systems or recruit suitable employees, our
performance may be adversely affected
Our operating and financial systems may not be adequate as we expand our fleet, and our attempts to
implement those systems may be ineffective. In addition, we rely on our wholly-owned subsidiary, Star Bulk
Management, to recruit shoreside administrative and management personnel. Shoreside personnel are recruited
by Star Bulk Management through referrals from other shipping companies and traditional methods of securing
personnel, such as placing classified advertisements in shipping industry periodicals. Star Bulk Management
has sub-contracted crew management, which includes the recruitment of seafarers, to Bernhardt Schulte
Shipmanagement Ltd., or Bernhardt, a major international third-party technical management company, and
Union Commercial Inc., or Union. Star Bulk Management and its crewing agent may not be able to continue to
hire suitable employees as Star Bulk expands its fleet. If we are unable to operate our financial and operations
systems effectively, recruit suitable employees or if Star Bulk Management's unaffiliated crewing agent
encounters business or financial difficulties, our performance may be materially adversely affected.
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Risks involved with operating ocean going vessels could affect our business and reputation, which would
adversely affect our revenues
The operation of an ocean-going vessel carries inherent risks. These risks include the possibility of:
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crew strikes and/or boycotts;
marine disaster;
piracy;
environmental accidents;
cargo and property losses or damage; and
business interruptions caused by mechanical failure, human error, war, terrorism, piracy,
political action in various countries or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower our revenues.
We are subject to complex laws and regulations, including environmental regulations that can adversely
affect the cost, manner or feasibility of doing business
Our operations are subject to numerous laws and regulations in the form of international conventions
and treaties, national, state and local laws and national and international regulations in force in the jurisdictions
in which our vessels operate or are registered, which can significantly affect the ownership and operation of our
vessels. These requirements include, but are not limited to, the International Convention on Civil Liability for
Oil Pollution Damage of 1969, the International Convention for the Prevention of Pollution from Ships of 1975,
the International Maritime Organization, or IMO, International Convention for the Prevention of Marine
Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, the International
Convention on Load Lines of 1966, the U.S. Oil Pollution Act of 1990, or OPA, the U.S. Clean Air Act, U.S.
Clean Water Act and the U.S. Marine Transportation Security Act of 2002. Compliance with such laws,
regulations and standards, where applicable, may require installation of costly equipment or operational
changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in
order to comply with other existing and future regulatory obligations, including, but not limited to, costs
relating to air emissions, the management of ballast waters, maintenance and inspection, elimination of tin-
based paint, development and implementation of emergency procedures and insurance coverage or other
financial assurance of our ability to address pollution incidents. These costs could have a material adverse
effect on our business, results of operations, cash flows and financial condition. A failure to comply with
applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the
suspension or termination of our operations. Environmental laws often impose strict liability for remediation of
spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether
we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly
and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the
United States. An oil spill could result in significant liability, including fines, penalties and criminal liability
and remediation costs for natural resource damages under other federal, state and local laws, as well as third-
party damages. We are required to satisfy insurance and financial responsibility requirements for potential oil
(including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover
certain environmental risks, such insurance may not be sufficient to cover all such risks or any claims will not
have a material adverse effect on our business, results of operations, cash flows and financial condition and our
ability to pay dividends, if any, in the future.
If our vessels fail to maintain their class certification and/or fail any annual survey, intermediate survey,
dry-docking or special survey, that vessel would be unable to carry cargo, thereby reducing our revenues and
profitability and violating certain covenants under our credit facilities
The hull and machinery of every commercial drybulk vessel must be classed by a classification society
authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in
accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of
Life at Sea Convention, or SOLAS. All of our vessels are certified as being "in class" by all the major
Classification Societies (e.g., American Bureau of Shipping, Lloyd's Register of Shipping).
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A vessel must undergo annual surveys, dry-dockings 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. Every vessel is also required to be dry-docked every two to three years for
inspection of the underwater parts of such vessel.
If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, dry-
docking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and
uninsurable which could cause us to be in violation of certain covenants in our credit facilities. Any such
inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse
impact on our financial condition and results of operations. That status could cause us to be in violation of
certain covenants in our credit facility.
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 are at risk of being damaged or lost because of events such as marine
disasters, bad weather, business interruptions caused by mechanical failures, grounding, fire, explosions and
collisions, 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. For example, 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 to our vessels' positions. The loss of
earnings while these vessels are forced to wait for space or travel to more distant drydocking facilities would
decrease our earnings.
Purchasing and operating secondhand vessels may result in increased operating costs and vessel off-hire,
which could adversely affect our earnings
Our inspection of secondhand vessels prior to purchase does not provide us with the same knowledge
about their condition and cost of any required or anticipated repairs that we would have had if these vessels had
been built for and operated exclusively by us. We will not receive the benefit of warranties on secondhand
vessels.
Typically, the costs to maintain a vessel in good operating condition increase with the age of the vessel.
Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed
vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to
charterers.
Governmental regulations, safety or other equipment standards related to the age of vessels may require
expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of
activities in which the vessels may engage. As our vessels age, market conditions may not justify those
expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
We inspected the thirteen vessels that we acquired from both related and unrelated third parties,
considered the age and condition of the vessels in budgeting for their operating, insurance and maintenance
costs, and if we acquire additional secondhand vessels in the future, we may encounter higher operating and
maintenance costs due to the age and condition of those additional vessels.
We may not have adequate insurance to compensate us for the loss of a vessel, which may have a material
adverse effect on our financial condition and results of operation
We have procured hull and machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage and war risk insurance for our fleet. We do not
maintain, for our vessels, insurance against loss of hire, which covers business interruptions that result from the
loss of use of a vessel. We may not be adequately insured against all risks. We may not be able to obtain
adequate insurance coverage for our fleet in the future. The insurers may not pay particular claims. Our
16
insurance policies may contain deductibles for which we will be responsible and limitations and exclusions
which may increase our costs or lower our revenue. Moreover, insurers may default on claims they are required
to pay. If our insurance is not enough to cover claims that may arise, the deficiency may have a material adverse
effect on our financial condition and results of operations.
We are a holding company, and depend on the ability of our 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 subsidiaries, which are all wholly owned by us, either directly or
indirectly, conduct all of our operations and own all of our operating assets. As a result, our ability to satisfy
our financial obligations and to pay dividends to our shareholders depends on the ability of our subsidiaries to
generate profits available for distribution to us and, to the extent that they are unable to generate profits, we
may be unable to pay dividends to our shareholders.
We depend on officers who may engage in other business activities in the international shipping industry
which may create conflicts of interest
Prokopios (Akis) Tsirigakis, our Chief Executive Officer and a member of our board of directors, and
George Syllantavos, our Chief Financial Officer, Secretary and member of our board of directors participate in
business activities not associated with the Company. As a result, Mr. Tsirigakis and Mr. Syllantavos may
devote less time to the Company than if they were not engaged in other business activities and may owe
fiduciary duties to the shareholders of both the Company as well as shareholders of other companies with which
they may be affiliated, which may create conflicts of interest in matters involving or affecting the Company and
its customers. It is not certain that any of these conflicts of interest will be resolved in our favor.
In accordance with our Code of Ethics, all ongoing and future transactions between us and any of its
officers and directors or their respective affiliates, will be on terms believed by us to be no less favorable than
are available from unaffiliated third parties, and such transactions will require prior approval, in each instance
by a majority of our uninterested "independent" directors or the members of our board who do not have an
interest in the transaction, in either case who had access, at our expense, to its attorneys or independent legal
counsel.
We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of
corporate law, which may negatively affect the ability of public shareholders to protect their interests
We are incorporated under the laws of the Republic of the Marshall Islands, and our corporate affairs
are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations
Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in
the United States. However, there have been few judicial cases in the Republic of the Marshall Islands
interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the
Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under
statutes or judicial precedent in existence in certain United States jurisdictions. 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, 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 United States jurisdiction.
All of our assets are located outside of the United States. Our business is operated primarily from our
offices in Athens, Greece. In addition, our directors and officers are non-residents of the United States, and all
or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it
may be difficult or impossible for you to bring an action against us or against these individuals in the United
States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may
prevent or restrict you from enforcing a judgment against our assets or the assets of our directors and officers.
Although you may bring an original action against us, our officers and directors in the courts of the Marshall
Islands based on U.S. laws, and the courts of the Marshall Islands may impose civil liability, including
monetary damages, against us, our officers or directors for a cause of action arising under Marshall Islands law,
it may be impracticable for you to do so given the geographic location of the Marshall Islands.
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There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes
after the merger of Star Maritime with and into Star Bulk, with Star Bulk as the surviving corporation, or
Redomiciliation Merger, which would adversely affect our earnings
Section 7874(b) of the U.S. Internal Revenue Code of 1986, or the Code, provides that, unless certain
requirements are satisfied, a corporation organized outside the United States which acquires substantially all of
the assets (through a plan or a series of related transactions) of a corporation organized in the United States will
be treated as a U.S. domestic corporation for U.S. federal income tax purposes if shareholders of the U.S.
corporation whose assets are being acquired own at least 80% of the non-U.S. acquiring corporation after the
acquisition. If Section 7874(b) of the Code were to apply to Star Maritime and the Redomiciliation Merger,
then, among other consequences, the Company, as the surviving entity of the Redomiciliation Merger, would be
subject to U.S. federal income tax as a U.S. domestic corporation on its worldwide income after the
Redomiciliation Merger. Upon completion of the Redomiciliation Merger and the concurrent issuance of stock
to TMT Co. Ltd., or TMT, a shipping company headquartered in Taiwan, under the acquisition agreements, the
stockholders of Star Maritime owned less than 80% of the Company. Therefore, the Company believes that it
should not be subject to Section 7874(b) of the Code after the Redomiciliation Merger. Star Maritime obtained
an opinion of its counsel, Seward & Kissel LLP, that Section 7874(b) should not apply to the Redomiciliation
Merger. However, there is no authority directly addressing the application of Section 7874(b) to a transaction
such as the Redomiciliation Merger where shares in a foreign corporation such as the Company are issued
concurrently with (or shortly after) a merger. In particular, since there is no authority directly applying the
"series of related transactions" or "plan" provisions to the post-acquisition stock ownership requirements of
Section 7874(b), the United States Internal Revenue Service, or IRS, may not agree with Seward & Kissel's
opinion on this matter. Moreover, Star Maritime has not sought a ruling from the IRS on this point. Therefore,
IRS may seek to assert that we are subject to U.S. federal income tax on our worldwide income for taxable
years after the Redomiciliation Merger, although Seward & Kissel is of the opinion that such an assertion
should not be successful.
We may have to pay tax on United States source income, which would reduce our earnings
Under the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such
as the Company and its subsidiaries, that is attributable to transportation that begins or ends, but that does not
both begin and end, in the United States is characterized as U.S. source shipping income and such income is
subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for
exemption from tax under Section 883 of the Code and the Treasury regulations promulgated thereunder.
We expect that we will qualify for this statutory tax exemption and we have taken his position for U.S.
federal income tax return reporting purposes for 2007 and we intend to take this position for 2008. However,
there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption
and thereby become subject to U.S. federal income tax on our U.S. source income.
If we are not entitled to this exemption under Section 883 for any taxable year, we would be subject for
those years to a 4% U.S. federal income tax on its U.S.-source shipping income. The imposition of this taxation
could have a negative effect on our business and would result in decreased earnings.
The preferential tax rates applicable to qualified dividend income are temporary, and the enactment of
proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible
for the preferential rate
Certain of our distributions may be treated as qualified dividend income eligible for preferential rates of
U.S. federal income tax to U.S. shareholders. In the absence of legislation extending the term for these
preferential tax rates, all dividends received by such U.S. taxpayers in tax years beginning on January 1, 2011
or later will be taxed at graduated tax rates applicable to ordinary income.
In addition, legislation has been proposed in the U.S. Congress that would, if enacted, deny the
preferential rate of U.S. federal income tax currently imposed on qualified dividend income with respect to
dividends received from a non-U.S. corporation if the non-U.S. corporation is created or organized under the
laws of a jurisdiction that does not have a comprehensive income tax system. Because the Marshall Islands
imposes only limited taxes on entities organized under its laws, it is likely that if this legislation were enacted,
the preferential tax rates of federal income tax may no longer be applicable to distributions received from us. As
of the date hereof, it is not possible to predict with certainty whether this proposed legislation will be enacted.
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U.S. tax authorities could treat us as a "passive foreign investment company," which could have adverse
U.S. federal income tax consequences to U.S. holders
We 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 its assets produce or are held for the production of those
types of "passive income." For purposes of these tests, "passive income" includes dividends, interest, and gains
from the sale or exchange of investment property and rents and royalties other than rents and royalties which
are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of
these tests, income derived from the performance of services does not constitute "passive income." U.S.
shareholders of a PFIC may be subject to a disadvantageous U.S. federal income tax regime with respect to the
income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from
the sale or other disposition of their shares in the PFIC.
Based on our method of operation, we take the position for United States federal income tax purposes
we have not been and are not currently a PFIC with respect to any taxable year. In this regard, we intend to treat
the gross income we will derive or will be deemed to derive from our time chartering activities as services
income, rather than rental income. Accordingly, we take the position that our income from our time chartering
activities does not constitute "passive income," and the assets that we will own and operate in connection with
the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules addressing our method of operation. In
addition, we have not received an opinion of counsel with respect to this issue. Accordingly, the U.S. Internal
Revenue Service, or the IRS, or a court of law may not accept our position, and there is a risk that the IRS or a
court of law could determine that we are a PFIC. Moreover, we may constitute a PFIC for any future taxable
year if there were to be changes in the nature and extent of its operations. For example, if we were treated as
earning rental income from our chartering activities rather than services income, we would be treated as a PFIC.
If the IRS were to find that we are or have been a PFIC for any taxable year, its U.S. shareholders will
face adverse U.S. tax consequences. Under the PFIC rules, unless those shareholders make an election available
under the Code (which election could itself have adverse consequences for such shareholders), such
shareholders would be liable to pay U.S. federal income tax at the then highest income tax rates on ordinary
income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as
if the excess distribution or gain had been recognized ratably over the shareholder's holding period of our
common shares.
Risks Relating to Our Common Stock
There may be no continuing public market for you to resell our common stock and/or warrants
Our common shares and warrants commenced trading on the Nasdaq Global Market in December 2007.
We cannot assure you that an active and liquid public market for our common shares and/or warrants will
continue. The price of our common stock and/or warrants may be volatile and may fluctuate due to factors such
as:
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actual or anticipated fluctuations in our quarterly and annual results and those of other public
companies in our industry;
mergers and strategic alliances in the drybulk shipping industry;
market conditions in the drybulk shipping industry and the general state of the securities
markets;
changes in government regulation;
shortfalls in our operating results from levels forecast by securities analysts; and
announcements concerning us or our competitors.
You may not be able to sell your shares of our common stock in the future at the price that you paid for
them or at all. In addition, if the price of our common stock falls below $1.00, we may be involuntarily delisted
from the Nasdaq Global Market.
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Certain stockholders hold registration rights, which may have an adverse effect on the market price of our
common stock
Initial stockholders of Star Maritime who purchased common stock and units in private transactions
prior to Star Maritime's initial public offering have certain registration rights which would require us, under
certain circumstances, to register the resale of their shares and warrants at any time following the release of the
shares and warrants from escrow which occurred on December 15, 2008. Pursuant to those registration rights,
we have included in a universal shelf registration statement (File No. 333-156843), which was declared
effective by the Commission on February 17, 2009, the resale registration of 14,305,599 shares of common
stock, which includes 1,132,500 common shares which may be issued upon the exercise of the warrants, and
1,132,500 warrants, all of which are currently eligible for trading in the public market. The resale of these
common shares and warrants in addition to the registration of other securities included such registration
statement, may have an adverse effect on the market price of our common stock and warrants.
Future sales of our common stock or warrants could cause the market price of our common stock or
warrants to decline
Sales of a substantial number of shares of our common stock or warrants in the public market, or the
perception that these sales could occur, may depress the market price for our common stock. These sales could
also impair our ability to raise additional capital through the sale of our equity securities in the future.
As noted above, we have filed a universal shelf registration statement pursuant to which we may offer
and sell different types of securities and that includes the resale registration of an aggregate of 14,305,599
common shares, which includes 1,132,500 common shares which may be issued upon the exercise of warrants,
and 1,132,500 warrants. We may issue additional shares of our common stock, warrants or other equity
securities or securities convertible into our equity securities in the future and our stockholders may elect to sell
large numbers of shares held by them from time to time. Our amended and restated articles of incorporation
authorize us to issue 100,000,000 common shares with par value $0.01 per share. As of December 31, 2008, we
had 58,412,402 shares and 5,916,150 warrants outstanding. As of April 9, 2009, we had 60,301,279 shares and
5,916,150 warrants outstanding.
Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to
replace or remove our current board of directors or have the effect of discouraging, delaying or preventing a
merger or acquisition, which could adversely affect the market price of our common stock
Several provisions of our amended and restated articles of incorporation and bylaws could make it
difficult for our stockholders to change the composition of our board of directors in any one year, preventing
them from changing the composition of management. In addition, the same provisions may discourage, delay or
prevent a merger or acquisition that stockholders may consider favorable.
These provisions include:
•
•
•
•
authorizing our board of directors to issue "blank check" preferred stock without stockholder
approval;
providing for a classified board of directors with staggered, three year terms;
prohibiting cumulative voting in the election of directors; and
authorizing the board to call a special meeting at any time.
The market price of our common shares and warrants has fluctuated widely and may fluctuate widely in the
future
The market price of our common shares and warrants has fluctuated widely since our common shares
and warrants began trading in the Nasdaq Global Market in December 2007, and may continue to do so as a
result of many factors such as actual or anticipated fluctuations in our quarterly and annual results and those of
other public companies in our industry, mergers and strategic alliances in the shipping industry, market
conditions in the shipping industry, changes in government regulation, shortfalls in our operating results from
levels forecast by securities analysts, announcements concerning us or our competitors and the general state of
the securities market.
20
The market price of our common shares has recently dropped below $5.00 per share, and the last
reported sale price on The Nasdaq Global Market on April 14, 2009 was $2.90 per share. If the market price of
our common shares remains below $5.00 per share, under stock exchange rules, our shareholders will not be
able to use such shares as collateral for borrowing in margin accounts. This inability to continue to use our
common shares as collateral may lead to sales of such shares creating downward pressure on and increased
volatility in the market price of our common shares.
The shipping industry has been highly unpredictable and volatile. The market for common shares in this
industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our
common shares you may have purchased at a price greater than or equal to its original purchase price.
Item 4. Information on the Company
A. History and development of the Company
We were incorporated in the Marshall Islands on December 13, 2006. Our executive offices are located
at 7 Fragoklisias Street, 2nd floor, Maroussi 151 25, Athens, Greece and our telephone number is 011 30 210
617 8400.
Star Maritime Acquisition Corp., or Star Maritime, was organized under the laws of the State of
Delaware on May 13, 2005 as a blank check company formed to acquire, through a merger, capital stock
exchange, asset acquisition or similar business combination, one or more assets or target businesses in the
shipping industry. Following the formation of Star Maritime, our officers and directors were the holders of
9,026,924 shares of common stock representing all of our then issued and outstanding capital stock. On
December 21, 2005, Star Maritime consummated its initial public offering of 18,867,500 units, at a price of
$10.00 per unit, each unit consisting of one share of Star Maritime common stock and one warrant to purchase
one share of Star Maritime common stock at an exercise price of $8.00 per share. In addition, Star Maritime
completed during December 2005 a private placement of an aggregate of 1,132,500 units each unit consisting of
one share of common stock and one warrant, to Messrs. Tsirigakis and Syllantavos, our Chief Executive Officer
and Chief Financial Officer, respectively, and Messrs. Pappas and Erhardt, our Chairman of the Board and one
of our directors. The gross proceeds of the private placement of $11.3 million were used to pay all fees and
expenses of the initial public offering and as a result, the entire gross proceeds of the initial public offering
amounting to $188.7 million were deposited in a trust account maintained by American Stock Transfer & Trust
Company. Star Maritime's common stock and warrants started trading on the American Stock Exchange under
the symbols, SEA and SEA.WS, respectively on December 21, 2005.
On January 12, 2007, Star Maritime and Star Bulk entered into definitive agreements to acquire a fleet
of eight drybulk carriers with a combined cargo-carrying capacity of approximately 692,000 dwt. from certain
subsidiaries of TMT. These eight drybulk carriers are referred to as the initial fleet. The aggregate purchase
price specified in the Master Agreement by and among the Company, Star Maritime and TMT, or the Master
Agreement for the initial fleet was $224.5 million in cash and 12,537,645 shares of our common stock, which
were issued on November 30, 2007. As additional consideration for eight vessels, we agreed to issue 1,606,962
shares of our common stock to TMT in two installments as follows: (i) 803,481 additional shares of our
common stock, no more than 10 business days following the filing of our Annual Report on Form 20-F for the
fiscal year ended December 31, 2007, and (ii) 803,481 additional shares of our common stock, no more than 10
business days following the filing of our Annual Report on Form 20-F for the fiscal year ended December 31,
2008. The shares in respect of the first installment were issued to a nominee of TMT on July 17, 2008.
On November 2, 2007, the Commission declared effective our joint proxy/registration statement filed
on Forms F-1/F-4 and on November 27, 2007 we obtained shareholder approval for the acquisition of the initial
fleet and for effecting the Redomiciliation Merger as a result of which Star Maritime merged into Star Bulk
with Star Maritime merging out of existence and Star Bulk being the surviving entity. Each share of Star
Maritime common stock was exchanged for one share of Star Bulk common stock and each warrant of Star
Maritime was assumed by Star Bulk with the same terms and conditions except that each became exercisable
for common stock of Star Bulk. The Redomiciliation Merger became effective after stock markets closed on
Friday, November 30, 2007 and the common shares and warrants of Star Maritime ceased trading on the
American Stock Exchange under the symbols SEA and SEA.WS, respectively. Star Bulk shares and warrants
started trading on the Nasdaq Global Market on Monday, December 3, 2007 under the ticker symbols SBLK
and SBLKW, respectively. Immediately following the effective date of the Redomiciliation Merger, TMT and
its affiliates owned 30.2% of our outstanding common stock. F5 Capital filed a Schedule 13D/A on July 29,
2008 reporting beneficial ownership of 7.0% of our outstanding common stock. Mr. Nobu Su, a former
member of our board of directors, exercises voting and investment control over the securities held of record by
F5 Capital, a Cayman Islands corporation, which is a nominee of TMT.
21
We began our operations on December 3, 2007 with the delivery of our first vessel Star Epsilon. Three
of the eight vessels comprising our initial fleet were delivered to us by the end of December 2007. Additionally,
on December 3, 2007, we entered into an agreement to acquire an additional Supramax vessel, Star Kappa from
TMT, which was not included in the initial fleet and was delivered to us on December 14, 2007. In 2008, we
took delivery of the remaining five vessels that we purchased from TMT, plus an additional four vessels. In
April 2008, we entered into agreement to sell Star Iota, which was delivered to its purchaser in October 2008,
bringing our fleet to its current total of twelve vessels.
Vessel Acquisitions, Vessel Dispositions and Other Significant Transactions
Vessel Acquisitions
On January 12, 2007, pursuant to the Master Agreement, we agreed to acquire our initial fleet of eight
drybulk carriers with a combined cargo-carrying capacity of approximately 692,000 dwt. from certain
subsidiaries of TMT. The aggregate purchase price specified in the Master Agreement for the initial fleet was
$224.5 million in cash and 12,537,645 shares of our common stock. As additional consideration for the eight
vessels, we agreed to issue 1,606,962 additional shares of our common stock to TMT in two installments as
follows: (i) 803,481 additional shares of our common stock, no more than 10 business days following the filing
of our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, and (ii) 803,481 additional
shares of our common stock, no more than 10 business days following the filing of our Annual Report on Form
20-F for the fiscal year ended December 31, 2008. The shares in respect of the first installment were issued to a
nominee of TMT on July 17, 2008.
On December 3, 2007, we entered into an agreement with TMT, a company affiliated with Mr. Nobu
Su, one of our former directors, to acquire Star Kappa, a 2001 built Supramax drybulk carrier for the aggregate
purchase price of $72.0 million with a cargo carrying capacity of approximately 52,055 dwt. We financed the
total purchase price with proceeds from Star Maritime's initial public offering, which were deposited in a trust
account. Following the delivery of this vessel to us in December 2007, it commenced a three year time charter
at an average daily hire rate of $47,800.
On January 22, 2008, we entered into an agreement to acquire Star Sigma, a 1991 built Capesize
drybulk carrier for the aggregate purchase price of $82.6 million, which includes a discount of $1.1 million
related to the late delivery of the vessel to us by the sellers, with a cargo carrying capacity of approximately
184,403 dwt. We financed approximately $65.0 million of the purchase price with borrowings under the Piraeus
Bank term loan facility dated April 14, 2008, as amended. Star Sigma, which was on time charter to a Japanese
charterer at a gross daily charter rate of $100,000 per day from April 2008 until March 2009 (earliest
redelivery), was redelivered to us earlier pursuant to an agreement whereby the charterer agreed to pay the
contracted rate less $8,000 per day, which is the approximate operating cost for the vessel, from the date of the
actual redelivery in November 2008 through March 1, 2009. We received payment in full and the vessel was
trading in the spot market at a rate of approximately $14,100 per day, resulting in revenue for the vessel that is
effectively higher than it would have been under the original charter at the rate of $100,000. In March 2009, the
vessel was delivered to its new charterers and commenced a three year time charter at a gross daily average
charter rate of $63,000.
On March 11, 2008, we entered into an agreement to acquire Star Omicron, a 2005 built Supramax
drybulk carrier for the aggregate purchase price of $72.0 million with a cargo carry capacity of approximately
53,489 dwt. We financed the purchase price through a combination of the proceeds received from the
conversion of our warrants, working capital and borrowings under our Piraeus Bank term loan facility dated
April 14, 2008, as amended and the balance . Following the delivery of this vessel to us in April 2008, it
commenced a three year time charter at a daily hire rate of $43,000.
On May 22, 2008, we entered into an agreement to acquire Star Cosmo, a 2005 built Supramax drybulk
carrier for the aggregate purchase price of $70.2 million, which includes a $1.4 million payment by us to the
seller as additional compensation for the early delivery of the vessel to us, with a cargo carry capacity of
approximately 52,247 dwt. We financed the purchase price through a combination of the proceeds received
from the conversion of our warrants and borrowings under our Piraeus Bank term loan facility dated July 1,
2008. We entered into a three year time charter agreement to employ this vessel at an average daily hire rate of
$39,868 following its delivery to us in July 2008.
On June 3, 2008, we entered into an agreement to acquire Star Ypsilon, a 1991 built Capsize drybulk
carrier for the aggregate purchase price of $86.9 million, which includes a discount of $0.3 million related to
22
the late delivery of the vessel to us by the sellers, with a cargo carry capacity of approximately 150,940 dwt.
We financed the purchase price through a combination of the proceeds received from the conversion of our
warrants and borrowings under our Piraeus Bank term loan facility dated April 14, 2008, as amended. We
entered into a three year time charter agreement to employ this vessel at an average daily hire rate of $91,932
following its delivery to us in September 2008.
Vessel Dispositions
On April 24, 2008, we entered into an agreement to sell Star Iota for gross proceeds of $18.4 million
less $1.8 million of costs associated with the sale. We delivered this vessel to its purchasers on October 6, 2008.
Other Significant Transactions
On January 18, 2008, our board of directors approved a plan for the repurchase of up to an aggregate of
$50.0 million of our common stock and warrants, which the Company may repurchase from time to time until
December 31, 2008. The plan calls for the repurchases of both common stock and warrants to be made in the
open market or privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, to the extent applicable, subject to market and business conditions, applicable legal
requirements and other factors. The plan will be implemented by our management at its discretion. The plan
calls for the repurchased shares and warrants to be retired as soon as practicable following the repurchase. The
plan does not obligate us to purchase any particular number of shares, and may be suspended at any time in our
sole discretion in accordance with Rule 10b-18. As of December 31, 2008, we repurchased 1,247,000 shares of
common stock for an aggregate purchase price of $8.0 million, equal to $6.40 per share and 1,362,500 warrants
for an aggregate purchases price of $5.5 million, equal to $4.02 per warrant.
In March 2009, we entered into agreements with our lenders to obtain waivers for certain covenants
including minimum asset coverage covenants contained in our loan agreements. Under the terms of our waiver
agreements with our lenders, payment of dividends and repurchases of our shares and warrants are subject to
the prior written consent of our lenders. Please see "Item 5. Operating and Financial Review and Prospects –
Liquidity and Capital Resources – Senior Secured Credit Facilities."
As of December 31, 2008 and April 9, 2009, 12,721,350 warrants had been converted into shares of
common stock resulting in proceeds to us of $101.8 million.
B. Business overview
Introduction
We are an international company providing worldwide transportation of drybulk commodities through
our vessel-owning subsidiaries for a broad range of customers of major and minor bulk cargoes including iron
ore, coal, grain, cement and fertilizer. We were incorporated in the Marshall Islands on December 13, 2006 as a
wholly-owned subsidiary of Star Maritime Acquisition Corp., or Star Maritime. We merged with Star Maritime
on November 30, 2007 and commenced operations on December 3, 2007, which was the date we took delivery
of our first vessel.
Our Fleet
We own and operate a fleet of 12 vessels consisting of four Capesize and eight Supramax drybulk
carriers with an average age of 10.0 years and a combined cargo carrying capacity of approximately 1.1 million
dwt. Our fleet carries a variety of drybulk commodities including coal, iron ore, and grains, or major bulks, as
well as bauxite, phosphate, fertilizers and steel products, or minor bulks. We charter all of our vessels on
medium- to long-term time charters with terms of approximately one to five years, other than the Star Alpha,
which is currently employed under a COA.
23
The following table represents a list of all of the vessels in our fleet as of April 9, 2009:
Vessel Name
Star Alpha (ex A Duckling)(1)
Vessel
Type
Capesize
Size
(dwt.)
175,075
Year
Built
1992
Daily
Gross
Hire
Rate
N/A
Star Beta (ex B Duckling)(2)
Capesize
174,691
1993
$ 32,500
Star Gamma (ex C Duckling)
Supramax
53,098
2002
$ 38,000 (6)
Star Delta (ex F Duckling)(3)
Supramax
52,434
2000
$ 11,250
Star Epsilon (ex G Duckling)
Supramax
52,402
2001
$ 32,400
Star Zeta (ex I Duckling)
Supramax
52,994
2003
$ 42,500
Star Theta (ex J Duckling)
Supramax
52,425
2003
$ 8,200
Star Kappa (ex E Duckling)
Supramax
52,055
2001
$ 47,800
Star Sigma (ex Sinfonia)(4)
Capesize
184,403
1991
$ 63,000 (6)
Star Omicron (ex Nord Wave)
Supramax
53,489
2005
$ 43,000
Star Cosmo (ex Victoria)
Supramax
52,247
2005
$ 39,868 (6)
Star Ypsilon (ex Falcon Cape)
Capesize
150,940
1991
$ 91,932 (6)
Recently Sold
Star Iota (ex Mommy Duckling)(5)
Panamax
78,585
1983
18,000
Type/
Remaining
Term
COA
Time charter/
0.9 years
Time charter/
2.7 years
Time charter/
0.7 year
Time charter/
4.7 years
Time charter/
2.0 years
Time charter/
0.02 year
Time charter/
1.4 years
Time charter/
2.8 years
Time charter/
1.8 years
Time charter/
1.8 years
Time charter/
2.2 years
(1)
(2)
(3)
(4)
Star Alpha recently underwent unscheduled repairs which resulted in a 25 day off-hire period. Following the
completion of repairs, Star Alpha was redelivered to us by its charterers approximately one month prior to
the earliest redelivery date allowed under the time charter agreement. Prior to the redelivery, arbitration
proceedings had commenced pursuant to disputes that had arisen with the charterers of Star Alpha. The
disputes relate to vessel performance characteristics and hire. The arbitration panel is also handling
additional proceedings between third parties that sub-chartered the vessel. We notified the charterers of the
vessel that we intend to seek additional damages in connection with the early redelivery of Star Alpha in the
current arbitration proceedings.
On January 20, 2009, we entered into a contract of affreightment, or COA, with Companhia Vale do Rio
Doce. Under the terms of the COA, we expect to transport approximately 700,000 metric tons of iron ore
between Brazil and China in four separate Capesize vessel shipments with the first shipment scheduled in
the first quarter of 2009. On February 5, 2009, we committed Star Alpha to the first shipment under the
COA.
On February 10, 2009, we entered into a 13 to 15 month time charter agreement for Star Beta at a gross
daily rate of $32,500. The vessel was delivered to the new charterer on February 14, 2009.
On January 30, 2009, we entered into a one year time charter agreement for Star Delta at a gross daily rate
of $11,250. The vessel was delivered to the new charterer on February 7, 2009.
Star Sigma, which was on time charter to a Japanese charterer at a gross daily charter rate of $100,000 per
day until March 1, 2009 (earliest redelivery), was redelivered to us earlier pursuant to an agreement whereby
the charterer agreed to pay the contracted rate less $8,000 per day, which is the approximate operating cost
for the vessel, from the date of the actual redelivery in November 2008 through March 1, 2009. We received
payment in full and the vessel was traded in the spot market at a rate of approximately $14,100 per day,
which resulted in revenue for the vessel that is effectively higher than it would have been under the original
charter at the rate of $100,000. In March 2009, the vessel was delivered to its new charterers and
commenced a three year time charter at a gross daily average charter rate of $63,000.
24
(5)
On April 24, 2008, we entered into an agreement to sell Star Iota for gross proceeds of $18.4 million less
$1.8 million in costs associated with the sale. We delivered this vessel to its purchasers on October 6, 2008.
(6)
Calculated by taking the average daily gross hire rate over the term of the charter.
We actively manage the deployment of our fleet on time charters, which generally can last up to several
years. Currently, all of our vessels are employed on medium to long-term time charters other than Star Alpha,
which is currently employed under a COA. A time charter is generally a contract to charter a vessel for a fixed
period of time at a set daily rate. Under time charters, the charterer pays voyage expenses such as port, canal
and fuel costs. We pay for vessel operating expenses, which include crew costs, provisions, deck and engine
stores, lubricating oil, insurance, maintenance and repairs, as well as for commissions. We are also responsible
for the drydocking costs relating to each vessel. COAs relate to the carriage of multiple cargoes over the same
route and enables the COA holder to nominate different ships to perform individual voyages. Essentially, it
constitutes a number of voyage charters to carry a specified amount of cargo during the term of the COA, which
usually spans a number of years. All of the vessel's operating, voyage and capital costs are borne by the ship
owner. The freight rate is generally set on a per cargo ton basis.
Our vessels operate worldwide within the trading limits imposed by our insurance terms and do not
operate in areas where United States, European Union or United Nations sanctions have been imposed.
Competition
Demand for drybulk carriers fluctuates in line with the main patterns of trade of the major drybulk
cargoes and varies according to changes in the supply and demand for these items. We compete with other
owners of drybulk carriers in the Capesize, and Supramax size sectors. Ownership of drybulk carriers is highly
fragmented and is divided among approximately 1,500 independent drybulk carrier owners. We compete for
charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on our reputation
as an owner and operator.
Our wholly owned subsidiary, Star Bulk Management arranges our charters (whether voyage charters,
period time charters, bareboat charters or pools) through the use of a worldwide network of shipbrokers, who
negotiate the terms of the charters based on market conditions. These shipbrokers advise Star Bulk
Management on a continuous basis of the availability of cargo for any particular vessel. There may be several
shipbrokers involved in any one charter. The negotiation for a charter typically begins prior to the completion of
the previous charter in order to avoid any idle time. The terms of the charter are based on industry standards.
Customers
As of December 31, 2008, our vessels were chartered as follows: Worldlink Shipping Limited for Star
Alpha, Compania Vale do Rio Doce for Star Beta, TMT, for Star Gamma, ESSAR Shipping Ltd. for Star Delta,
North China Shipping Limited Bahamas for Star Epsilon, Norden A/S for Star Zeta, Hyundai Merchant Marine
for Star Theta, Ishaar Overseas for Star Kappa, BHP Billiton for Star Sigma, GMI Ltd. for Star Omicron,
Korea Line Corp. for Star Cosmo and Vinyl Navigation Inc., or Vinyl Navigation, for Star Ypsilon. Please see
Item 7 "Major Shareholders and Related Party Transactions – Related Party Transactions."
Management of the Fleet
As of December 31, 2008, we had twenty-two employees. Twenty of our employees, through Star Bulk
Management, were engaged in the day to day management of the vessels in our fleet. Star Bulk Management
performs operational and technical management services for the vessels in our fleet, including chartering,
marketing, capital expenditures, personnel, accounting, paying vessel taxes and maintaining insurance. Our
Chief Executive Officer and Chief Financial Officer are also the senior management of Star Bulk Management.
Star Bulk Management employs such number of additional shore-based executives and employees designed to
ensure the efficient performance of its activities.
We reimburse and/or advance funds as necessary to Star Bulk Management in order for it to conduct its
activities and discharge its obligations, at cost. We also maintain working capital reserves as may be agreed
between us and Star Bulk Management from time to time.
Star Bulk Management is responsible for the management of the vessels. Star Bulk Management's
responsibilities include, inter alia, locating, purchasing, financing and selling vessels, deciding on capital
25
expenditures for the vessels, paying vessels' taxes, negotiating charters for the vessels, managing the mix of
various types of charters, developing and managing the relationships with charterers and the operational and
technical management of the vessels. Technical management includes maintenance, drydocking, repairs,
insurance, regulatory and classification society compliance, arranging for and managing crews, appointing
technical consultants and providing technical support.
Star Bulk Management currently subcontracts the technical and crew management of our vessels to
Bernhardt Schulte Shipmanagement Ltd., or Bernhardt, and Union Commercial Inc, or Union.
We have entered into agreements with Bernhardt for the technical management of all of the vessels in
our fleet other than the Star Cosmo. Under these agreements we pay Bernhardt an aggregate annual
management fee ranging from $90,000 to $110,000 per vessel. Each agreement continues indefinitely unless
either party terminates the agreement upon three months' written notice or a certain termination event occurs.
We have entered into an agreement with Union for the technical management of the Star Cosmo. Under
the agreement, we pay a daily fee of $450, which is reviewed two months before the beginning of each calendar
year. The agreement continues indefinitely unless either party terminates the agreement upon two months'
written notice or a certain termination event occurs.
Under an agreement dated May 4, 2007, we appointed Combine Marine S.A., or Combine, a company
affiliated with Mr. Tsirigakis, our Chief Executive Officer, Mr. Pappas, the Chairman of our Board and one of
our directors and Mr. Christos Anagnostou, a former officer of Star Maritime, as interim manager of the vessels
in the initial fleet. Under the agreement, Combine provided interim technical management and associated
services, including legal services, to the vessels in exchange for a flat fee of $10,000 per vessel prior to delivery
and at a daily fee of $450 per vessel during the term of the agreement until such time as the technical
management of the vessel is transferred to another technical management company. Combine was entitled to
be reimbursed at cost by us for any and all expenses incurred by them in the management of the vessels and was
obligated to provide us the full benefit of all discounts and rebates enjoyed by them. The term of the agreement
was for one year from the date of delivery of each vessel. As of December 31, 2008, none of our vessels were
managed by Combine.
Crewing
Star Bulk Management is 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. Star Bulk
Management has 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 and competent and trained personnel. Star Bulk Management is also responsible for insuring 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. Star Bulk Management has subcontracted
the crewing of our entire fleet to Bernhart and Union.
The International Drybulk Shipping Industry
Drybulk cargo is cargo that is shipped in large quantities and can be easily stowed in a single hold with
little risk of cargo damage. In 2008, based on preliminary figures, Drewry estimates that approximately 3.2
billion tons of drybulk cargo was transported by sea, comprising approximately one-third of all international
seaborne trade.
The demand for drybulk carrier capacity is determined by the underlying demand for commodities
transported in drybulk carriers, which in turn is influenced by trends in the global economy. The demand for
drybulk carriers is determined by the volume and geographical distribution of seaborne dry bulk trade, which in
turn is influenced by trends in the global economy. During the 1980s and 1990s seaborne dry bulk trade
increased by 1-2% per annum. However, between 2000 and 2008, seaborne dry bulk trade increased at a
compound annual growth rate of 4.8%. Although no final data is available for dry bulk seaborne trade in 2008 it
is clear that the slowdown in the world economy has had an adverse impact on trade and the provisional growth
rates for 2008 of 4.2% are well below those recorded in 2007.
26
The global drybulk carrier fleet may be divided into four categories based on a vessel's carrying
capacity. These categories consist of:
•
•
•
•
Capesize vessels, which have carrying capacities of more than 85,000 dwt. These vessels
generally operate along long-haul iron ore and coal trade routes. There are relatively few ports
around the world with the infrastructure to accommodate vessels of this size.
Panamax vessels have a carrying capacity of between 60,000 and 85,000 dwt. These vessels
carry coal, grains, and, to a lesser extent, minor bulks, including steel products, forest products
and fertilizers. Panamax vessels are able to pass through the Panama Canal making them more
versatile than larger vessels.
Handymax vessels have a carrying capacity of between 35,000 and 60,000 dwt. The
subcategory of vessels that have a carrying capacity of between 45,000 and 60,000 dwt are
called Supramax. These vessels operate along a large number of geographically dispersed
global trade routes mainly carrying grains and minor bulks. Vessels below 60,000 dwt are
sometimes built with on-board cranes enabling them to load and discharge cargo in countries
and ports with limited infrastructure.
Handysize vessels have a carrying capacity of up to 35,000 dwt. These vessels carry
exclusively minor bulk cargo. Increasingly, these vessels have operated along regional trading
routes. Handysize vessels are well suited for small ports with length and draft restrictions that
may lack the infrastructure for cargo loading and unloading.
The supply of drybulk carriers is dependent on the delivery of new vessels and the removal of vessels
from the global fleet, either through scrapping or loss. As of end of February 2009, the global drybulk carrier
orderbook amounted to 294.0 million dwt, or 70% of the existing fleet at that time, with most vessels on the
orderbook expected to be delivered within 48 months. The level of scrapping activity is generally a function of
scrapping prices in relation to current and prospective charter market conditions, as well as operating, repair and
survey costs. Drybulk carriers at or over 25 years old are considered to be scrapping candidate vessels.
Charterhire Rates
Charterhire rates paid for drybulk carriers are primarily a function of the underlying balance between
vessel supply and demand, although at times other factors may play a role. Furthermore, the pattern seen in
charter rates is broadly mirrored across the different charter types and between the different drybulk carrier
categories. However, because demand for larger drybulk carriers is affected by the volume and pattern of trade
in a relatively small number of commodities, charterhire rates (and vessel values) of larger ships tend to be
more volatile than those for smaller vessels.
In the time charter market, rates vary depending on the length of the charter period and vessel specific
factors such as age, speed and fuel consumption. In the voyage charter market, rates are influenced by cargo
size, commodity, port dues and canal transit fees, as well as delivery and redelivery regions. In general, a larger
cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with costly ports or canals
generally command higher rates than routes with low port dues and no canals to transit.
Voyages with a load port within a region that includes ports where vessels usually discharge cargo or a
discharge port within a region with ports where vessels load cargo also are generally quoted at lower rates,
because such voyages generally increase vessel utilization by reducing the unloaded portion (or ballast leg) that
is included in the calculation of the return charter to a loading area.
Within the drybulk shipping industry, the charterhire rate references most likely to be monitored are the
freight rate indices issued by the Baltic Exchange. These references are based on actual charterhire rates under
charter entered into by market participants as well as daily assessments provided to the Baltic Exchange by a
panel of major shipbrokers. The Baltic Panamax Index is the index with the longest history. The Baltic
Capesize Index and Baltic Handymax Index are of more recent origin.
According to Drewry, charterhire rates have fallen sharply from the highs recorded in 2008. The Baltic
Dry Index, or BDI, a daily average of charter rates in 26 shipping routes measured on a time charter and voyage
basis and covering Supramax, Panamax, and Capesize drybulk carriers, declined from a high of 11,793 in May
2008 to 1986 at the end of February 2009 after reaching a low of 663 in December 2008, which represents a
decline of 94%. The BDI fell over 70% in October 2008 alone.
27
Vessel Prices
Newbuilding prices are determined by a number of factors, including the underlying balance between
shipyard output and capacity, raw material costs, freight markets and sometimes exchange rates. In the last few
years high levels of new ordering were recorded across all sectors of shipping. As a result, most of the major
shipyards in Japan, South Korea and China have full orderbooks until the end of 2010, although the downturn in
freight rates and the lack of funding to the wider global financial crisis will lead to some of these orders being
cancelled or delayed.
Newbuilding prices have increased significantly since 2003, due to tightness in shipyard capacity, high
levels of new ordering and stronger freight rates. However, with the sudden and steep decline in freight rates,
secondhand values and lack of new vessel ordering, newbuilding prices have started to decline.
In the secondhand market, the steep increase in newbuilding prices and the strength of the charter
market have also affected values, to the extent that prices rose sharply in 2004/2005, before dipping in the early
part of 2006, only to rise thereafter to new highs in the first half of 2008. However, the sudden and sharp
downturn in freight rates since August 2008 has had a very negative impact on secondhand values.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our vessels. We are subject
to international conventions and treaties, 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 government and private entities subject our vessels to both scheduled and unscheduled
inspections. These entities include the local port authorities (United States Coast Guard, harbor master or
equivalent), classification societies; flag state administrations (country of registry) and charterers, particularly
terminal operators. Certain of these entities require us to obtain permits, licenses and certificates for the
operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial
costs or temporarily suspend the operation of one or more of our vessels.
We believe that the heightened level of environmental and quality concerns among insurance
underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels
and may accelerate the scrapping of older vessels throughout the dry bulk shipping industry. Increasing
environmental concerns have created a demand for vessels that conform to the stricter environmental standards.
We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality
maintenance, continuous training of our officers and crews and compliance with United States and international
regulations. We believe that the operation of our vessels is in substantial compliance with applicable
environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other
authorizations necessary for the conduct of our operations. However, because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, we cannot predict the ultimate cost of
complying with these requirements, or the impact of these requirements on the resale value or useful lives of
our vessels. In addition, a future serious marine incident that causes significant adverse environmental impact
could result in additional legislation or regulation that could negatively affect our profitability.
International Maritime Organization
The International Maritime Organization, the United Nations agency for maritime safety and the
prevention of pollution by ships, or the IMO, has adopted the International Convention for the Prevention of
Marine Pollution, 1973, as modified by the related Protocol of 1978 relating thereto, which has been updated
through various amendments, or the MARPOL Convention. The MARPOL Convention establishes
environmental standards relating to oil leakage or spilling, garbage management, sewage, air emissions,
handling and disposal of noxious liquids and the handling of harmful substances in packaged forms. The IMO
adopted regulations that set forth pollution prevention requirements applicable to dry bulk carriers. These
regulations have been adopted by over 150 nations, including many of the jurisdictions in which our vessels
operate.
28
In September 1997, the IMO adopted Annex VI to the MARPOL Convention, Regulations for the
Prevention of Pollution from Ships, to address air pollution from ships. Effective May 2005, Annex VI sets
limits on sulfur oxide and nitrogen oxide emissions from all commercial vessel exhausts and prohibits
deliberate emissions of ozone depleting substances (such as halons and chlorofluorocarbons), emissions of
volatile compounds from cargo tanks, and the shipboard incineration of specific substances. Annex VI also
includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more
stringent controls on sulfur emissions. We believe that all our vessels are currently compliant in all material
respects with these regulations. Additional or new conventions, laws and regulations may be adopted that could
require the installation of expensive emission control systems and could adversely affect our business, results of
operations, cash flows and financial condition. In October 2008, the IMO adopted amendments to Annex VI
regarding nitrogen oxide and sulfur oxide emissions standards which are expected to enter into force on July 1,
2010. The amended Annex VI would reduce air pollution from vessels by, among other things, (i)
implementing a progressive reduction of sulfur oxide emissions from ships, with the global sulfur cap reduced
initially to 3.50% (from the current cap of 4.50%), effective from January 1, 2012, then progressively to 0.50%,
effective from January 1, 2020, subject to a feasibility review to be completed no later than 2018; and (ii)
establishing new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on
their date of installation. Once these amendments become effective, we may incur costs to comply with these
revised standards. Also in October 2008, the United States became a party to the MARPOL Convention by
depositing an instrument of ratification with the IMO for the amended Annex VI, thereby rendering U.S. air
emissions standards equivalent to IMO requirements.
Safety Management System Requirements
IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS and the
International Convention on Load Lines, or the 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. We believe that all our vessels are in material compliance with SOLAS and LL
Convention standards.
Under Chapter IX of SOLAS, the International Safety Management Code for the Safe Operation of
Ships and for Pollution Prevention, or ISM Code, our operations are also subject to environmental standards
and requirements contained in the ISM Code promulgated by the IMO. The ISM Code requires the party with
operational control of a vessel to develop an extensive safety management system that includes, among other
things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for
operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety
management system that we and our technical manager have developed 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. As of the date of this filing, each of our vessels is ISM code-certified.
The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they
operate. This certificate evidences compliance by a vessel's management with the ISM Code requirements for a
safety management system. No vessel can obtain a safety management certificate unless its manager has been
awarded a document of compliance, issued by each flag state, under the ISM Code. Our appointed ship
managers have obtained documents of compliance for their offices and safety management certificates for all of
our vessels for which the certificates are required by the IMO. The document of compliance, or the DOC, and
ship management certificate, or the SMC, are renewed every five years but the DOC is subject to audit
verification annually and the SMC at least every 2.5 years.
Pollution Control and Liability Requirements
IMO has negotiated international conventions that impose liability for oil pollution in international
waters and the territorial waters of the signatory to such conventions. For example, IMO adopted an
International Convention for the Control and Management of Ships' Ballast Water and Sediments, or the BWM
Convention, in February 2004. The BWM Convention's implementing regulations call for a phased introduction
of mandatory ballast water exchange requirements (beginning in 2009), to be replaced in time with mandatory
concentration limits. The BWM Convention will not become effective until 12 months after it has been adopted
by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the
world's merchant shipping. To date there has not been sufficient adoption of this standard for it to take force.
29
Although the United States is not a party to these conventions, many countries have ratified and follow
the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil
Pollution Damage of 1969, as amended in 2000, or the CLC. Under this convention and depending on whether
the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel's registered owner
is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of
persistent oil, subject to certain defenses. The limits on liability outlined in the 1992 Protocol use the
International Monetary Fund currency unit of Special Drawing Rights, or SDR. Under an amendment to the
1992 Protocol that became effective on November 1, 2003, for vessels between 5,000 and 140,000 gross tons (a
unit of measurement for the total enclosed spaces within a vessel), liability is limited to approximately $6.67
million (4.51 million SDR) plus $934 (631 SDR) for each additional gross ton over 5,000. For vessels of over
140,000 gross tons, liability is limited to $132.81 million (89.77 million SDR). As the convention calculates
liability in terms of a basket of currencies, these figures are based on currency exchange rates of 0.66177 SDR
per Dollar on March 20, 2009. The right to limit liability is forfeited under the CLC where the spill is caused by
the ship owner's actual fault and under the 1992 Protocol where the spill is caused by the ship owner's
intentional or reckless conduct. Vessels trading with states that are parties to these conventions must provide
evidence of insurance covering the liability of the owner. In jurisdictions where the CLC has not been adopted,
various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a
manner similar to that of the convention. We believe that our protection and indemnity insurance will cover the
liability under the plan adopted by the IMO.
In March 2006, the IMO amended Annex I to MARPOL, including a new regulation relating to oil fuel
tank protection, which became effective August 1, 2007. The new regulation will apply to various ships
delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks,
performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance,
inspection and engineering standards.
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, which became effective on
November 21, 2008, 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.
IMO regulations also require owners and operators of vessels to adopt Ship Oil Pollution Emergency
Plans. Periodic training and drills for response personnel and for vessels and their crews are required.
Anti-Fouling Requirements
In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling
Systems on Ships, or the Anti-fouling Convention. The Anti-fouling Convention prohibits the use of organotin
compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels after
September 1, 2003. The exteriors of vessels constructed prior to January 1, 2003 that have not been in drydock
must, as of September 17, 2008, either not contain the prohibited compounds or have coatings applied to the
vessel exterior that act as a barrier to the leaching of the prohibited compounds. Vessels of over 400 gross tons
engaged in international voyages must obtain an International Anti-fouling System Certificate and undergo a
survey before the vessel is put into service or when the anti-fouling systems are altered or replaced.
Compliance Enforcement
The flag state, as defined by the United Nations Convention on Law of the Sea, has overall
responsibility for the implementation and enforcement of international maritime regulations for all ships
granted the right to fly its flag. The "Shipping Industry Guidelines on Flag State Performance" evaluates flag
states based on factors such as sufficiency of infrastructure, ratification of international maritime treaties,
implementation and enforcement of international maritime regulations, supervision of surveys, casualty
investigations and participation at IMO meetings. Our vessels are flagged in the Marshall Islands. Marshall
Islands-flagged vessels have historically received a good assessment in the shipping industry. We recognize the
importance of a credible flag state and do not intend to use flags of convenience or flag states with poor
performance indicators.
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Noncompliance with the ISM Code or other IMO regulations may subject the ship owner or bareboat
charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and
may result in the denial of access to, or detention in, some ports. The U.S. Coast Guard and European Union
authorities have indicated that vessels not in compliance with the ISM Code by the applicable deadlines will be
prohibited from trading in U.S. and European Union ports, respectively. As of the date of this report, each of
our vessels is ISM Code certified. However, there can be no assurance that such certificate will be maintained.
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.
The U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response, Compensation and Liability
Act
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 United States
waters, which includes the United States' territorial sea and its two hundred 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. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are "responsible parties" and are jointly,
severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of
God or an act of war) for all containment and clean-up costs and other damages arising from discharges or
threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
•
•
•
•
•
•
natural resources damage and the costs of assessment thereof;
real and personal property damage;
net loss of taxes, royalties, rents, fees and other lost revenues;
lost profits or impairment of earning capacity due to property or natural resources damage;
net cost of public services necessitated by a spill response, such as protection from fire, safety
or health hazards; and
loss of subsistence use of natural resources.
Under amendments to OPA that became effective on July 11, 2006, the liability of responsible parties is
limited to the greater of $950 per gross ton or $0.8 million per non-tank (e.g. dry bulk) vessel that is over 300
gross tons (subject to periodic adjustment for inflation). CERCLA, which applies to owners and operators of
vessels, contains a similar liability regime and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels
carrying a hazardous substance as cargo and the greater of $300 per gross ton or $0.5 million for any other
vessel. These limits of liability do not apply if an incident was directly caused by violation of applicable U.S.
federal safety, construction or operating regulations or by a responsible party's gross negligence or willful
misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in
connection with oil removal activities.
We currently maintain pollution liability coverage insurance in the amount of $1 billion per incident for
each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage it could
have an adverse effect on our business and results of operation.
OPA also requires owners and operators of vessels to establish and maintain with the U.S. Coast Guard
evidence of financial responsibility sufficient to meet their potential liabilities under OPA and CERCLA. On
October 17, 2008, the U.S. Coast Guard regulatory requirements under OPA and CERCLA were amended to
require evidence of financial responsibility in amounts that reflect the higher limits of liability imposed by the
2006 amendments to OPA, as described above. The increased amounts became effective on January 15,
2009. In addition, on September 24, 2008, the U.S. Coast Guard proposed adjustments to the limits of liability
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for non-tank vessels that would further increase the limits to the greater of $1,000 per gross ton or $848,000 and
establish a procedure for adjusting the limits for inflation every three years. The Coast Guard is currently
soliciting comments on the proposal. Under the regulations, vessel owners and operators may evidence their
financial responsibility by showing proof of insurance, surety bond, self-insurance or guaranty. Under OPA, an
owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an
amount sufficient to cover the vessels in the fleet having the greatest maximum liability under OPA.
The U.S. Coast Guard's regulations concerning certificates of financial responsibility provide, in
accordance with OPA, that claimants may bring suit directly against an insurer or guarantor that furnishes
certificates of financial responsibility. In the event that such insurer or guarantor is sued directly, it is prohibited
from asserting any contractual defense that it may have had against the responsible party and is limited to
asserting those defenses available to the responsible party and the defense that the incident was caused by the
willful misconduct of the responsible party. Certain organizations, which had typically provided certificates of
financial responsibility under pre-OPA laws, including the major protection and indemnity organizations, have
declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or
are required to waive insurance policy defenses.
The U.S. Coast Guard's financial responsibility regulations may also be satisfied by evidence of surety
bond, guaranty or by self-insurance. Under the self-insurance provisions, the ship owner or operator must have
a net worth and working capital, measured in assets located in the United States against liabilities located
anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with
the U.S. Coast Guard regulations by providing a certificate of responsibility from third party entities that are
acceptable to the U.S. Coast Guard evidencing sufficient self-insurance.
OPA specifically permits individual states to impose their own liability regimes with regard to oil
pollution incidents occurring within their boundaries, and some states have enacted legislation providing for
unlimited liability for oil spills. In some cases, states, which have enacted such legislation, have not yet issued
implementing regulations defining vessels owners' responsibilities under these laws. We intend to comply with
all applicable state regulations in the ports where our vessels call. We believe that we are in substantial
compliance with all applicable existing state requirements. In addition, we intend to comply with all future
applicable state regulations in the ports where our vessels call.
Other Environmental Initiatives
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. In
addition, most U.S. states that border a navigable waterway have enacted environmental pollution laws that
impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release
of a hazardous substance. These laws may be more stringent than U.S. federal law.
The U.S. Environmental Protection Agency, or EPA, historically exempted the discharge of ballast
water and other substances incidental to the normal operation of vessels in U.S. waters from CWA permitting
requirements. However, on March 31, 2005, a U.S. District Court ruled that the EPA exceeded its authority in
creating an exemption for ballast water. On September 18, 2006, the court issued an order invalidating the
exemption in the EPA's regulations for all discharges incidental to the normal operation of a vessel as of
September 30, 2008, and directed the EPA to develop a system for regulating all discharges from vessels by that
date. The District Court's decision was affirmed by the Ninth Circuit Court of Appeals on July 23, 2008. The
Ninth Circuit's ruling meant that owners and operators of vessels traveling in U.S. waters would soon be
required to comply with the CWA permitting program to be developed by the EPA or face penalties.
In response to the invalidation and removal of the EPA's vessel exemption by the Ninth Circuit, the
EPA has enacted rules governing the regulation of ballast water discharges and other discharges incidental to
the normal operation of vessels within U.S. waters. Under the new rules, which took effect February 6, 2009,
commercial vessels 79 feet in length or longer (other than commercial fishing vessels), or Regulated Vessels,
are required to obtain a CWA permit regulating and authorizing such normal discharges. This permit, which the
EPA has designated as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels,
or VGP, incorporates the current U.S. Coast Guard requirements for ballast water management as well as
supplemental ballast water requirements, and includes limits applicable to 26 specific discharge streams, such
as deck runoff, bilge water and gray water.
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For each discharge type, among other things, the VGP establishes effluent limits pertaining to the
constituents found in the effluent, including best management practices, or BMPs, designed to decrease the
amount of constituents entering the waste stream. Unlike land-based discharges, which are deemed acceptable
by meeting certain EPA-imposed numerical effluent limits, each of the 26 VGP discharge limits is deemed to be
met when a Regulated Vessel carries out the BMPs pertinent to that specific discharge stream. The VGP
imposes additional requirements on certain Regulated Vessel types, that emit discharges unique to those
vessels. Administrative provisions, such as inspection, monitoring, recordkeeping and reporting requirements
are also included for all Regulated Vessels.
On August 31, 2008, the District Court ordered that the date for implementation of the VGP be
postponed from September 30, 2008 until December 19, 2008. This date was further postponed until February
6, 2009 by the District Court. Although the VGP became effective on February 6, 2009, the VGP application
procedure, known as the Notice of Intent, or NOI, has yet to be finalized. Accordingly, Regulated Vessels will
effectively be covered under the VGP from February 6, 2009 until June 19, 2009, at which time the "eNOI"
electronic filing interface will become operational. Thereafter, owners and operators of Regulated Vessels must
file their NOIs prior to September 19, 2009, or the Deadline. Any Regulated Vessel that does not file an NOI by
the Deadline will, as of that date, no longer be covered by the VGP and will not be allowed to discharge into
U.S. navigable waters until it has obtained a VGP. Any Regulated Vessel that was delivered on or before the
Deadline will receive final VGP permit coverage on the date that the EPA receives such Regulated Vessel's
complete NOI. Regulated Vessels delivered after the Deadline will not receive VGP permit coverage until 30
days after their NOI submission. Our fleet is composed entirely of Regulated Vessels, and we intend to submit
NOIs for each vessel in our fleet as soon after June 19, 2009 as practicable.
In addition, pursuant to section 401 of the CWA which requires each state to certify federal discharge
permits such as the VGP, certain states have enacted additional discharge standards as conditions to their
certification of the VGP. These local standards bring the VGP into compliance with more stringent state
requirements, such as those further restricting ballast water discharges and preventing the introduction of non-
indigenous species considered to be invasive. The VGP and its state-specific regulations and any similar
restrictions enacted in the future will increase the costs of operating in the relevant waters.
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or
the CAA, requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and
other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes
when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Our
vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that
satisfy these requirements. The CAA also requires states to draft State Implementation Plans, or SIPs, designed
to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas.
Several SIPs regulate emissions resulting from vessel loading and unloading operations by requiring the
installation of vapor control equipment. As indicated above, our vessels operating in covered port areas are
already equipped with vapor recovery systems that satisfy these existing requirements.
As referenced above, the amended Annex VI to the IMO's MARPOL Convention, which addresses air
pollution from ships, was ratified by the United States on October 9, 2008 and entered into force domestically
on January 8, 2009. The EPA and the state of California, however, have each proposed more stringent
regulations of air emissions from ocean-going vessels. On July 24, 2008, the California Air Resources Board of
the State of California, or CARB, approved clean-fuel regulations applicable to all vessels sailing within 24
miles of the California coastline whose itineraries call for them to enter any California ports, terminal facilities,
or internal or estuarine waters. The new CARB regulations require such vessels to use low sulfur marine fuels
rather than bunker fuel. By July 1, 2009, such vessels are required to switch either to marine gas oil with a
sulfur content of no more than 1.5% or marine diesel oil with a sulfur content of no more than 0.5%. By 2012,
only marine gas oil and marine diesel oil fuels with 0.1% sulfur will be allowed. CARB unilaterally approved
the new regulations in spite of legal defeats at both the district and appellate court levels, but more legal
challenges are expected to follow. If CARB prevails and the new regulations go into effect as scheduled on July
1, 2009, in the event our vessels were to travel within such waters, these new regulations would require
significant expenditures on low-sulfur fuel and would increase our operating costs. Finally, although the more
stringent CARB regime was technically superseded when the United States ratified and implemented the
amended Annex VI, the possible declaration of various U.S. coastal waters as Emissions Control Areas may in
turn bring U.S. emissions standards into line with the new CARB regulations, which would cause us to incur
further costs.
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The U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to growing reports
of harmful organisms being released into U.S. ports through ballast water taken on by ships in foreign ports.
NISA established a ballast water management program for ships entering U.S. waters. Under NISA, mid-ocean
ballast water exchange is voluntary, except for ships heading to the Great Lakes or Hudson Bay, or vessels
engaged in the foreign export of Alaskan North Slope crude oil. However, NISA's reporting and record-keeping
requirements are mandatory for vessels bound for any port in the United States. Although ballast water
exchange is the primary means of compliance with the act's guidelines, compliance can also be achieved
through the retention of ballast water on board the ship, or the use of environmentally sound alternative ballast
water management methods approved by the U.S. Coast Guard. If the mid-ocean ballast exchange is made
mandatory throughout the United States, or if water treatment requirements or options are instituted, the cost of
compliance could increase for ocean carriers. Although we do not believe that the costs of compliance with a
mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact of such a
requirement on the dry bulk shipping industry. The U.S. House of Representatives has recently passed a bill that
amends NISA by prohibiting the discharge of ballast water unless it has been treated with specified methods or
acceptable alternatives. Similar bills have been introduced in the U.S. Senate, but we cannot predict which bill,
if any, will be enacted into law. In the absence of federal standards, states have enacted legislation or
regulations to address invasive species through ballast water and hull cleaning management and permitting
requirements. For instance, the state of California has recently enacted legislation extending its ballast water
management program to regulate the management of "hull fouling" organisms attached to vessels and adopted
regulations limiting the number of organisms in ballast water discharges. In addition, in November 2008 the
Sixth Circuit affirmed a District Court's dismissal of challenges to the state of Michigan's ballast water
management legislation mandating the use of various techniques for ballast water treatment. Other states may
proceed with the enactment of similar requirements that could increase the costs of operating in state waters.
Our operations occasionally generate and require the transportation, treatment and disposal of both
hazardous and non-hazardous solid wastes that are subject to the requirements of the U.S. Resource
Conservation and Recovery Act or comparable state, local or foreign requirements. In addition, from time to
time we arrange for the disposal of hazardous waste or hazardous substances at offsite disposal facilities. If such
materials are improperly disposed of by third parties, we may still be held liable for clean up costs under
applicable laws.
European Union Regulations
In 2005, the European Union adopted a directive on ship-source pollution, imposing criminal sanctions
for intentional, reckless or negligent pollution discharges by ships. The directive could result in criminal
implementing
liability
legislation. Criminal liability for pollution may result in substantial penalties or fines and increased civil
liability claims.
in waters of European countries
for pollution
from vessels
that adopt
Greenhouse Gas Regulation
In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate
Change, or the Kyoto Protocol, entered into force. Pursuant to the Kyoto Protocol, adopting countries are
required to implement national programs to reduce emissions of certain gases, generally referred to as
greenhouse gases, which are suspected of contributing to global warming. Currently, the emissions of
greenhouse gases from international shipping are not subject to the Kyoto Protocol. However, the European
Union has indicated that it intends to propose an expansion of the existing European Union emissions trading
scheme to include emissions of greenhouse gases from vessels. In the United States, the Attorneys General from
16 states and a coalition of environmental groups in April 2008 filed a petition for a writ of mandamus, or
petition, with the DC Circuit Court of Appeals, or the DC Circuit, to request an order requiring the EPA to
regulate greenhouse gas emissions from ocean-going vessels under the Clean Air Act. Although the DC Circuit
denied the petition in June 2008, any future passage of climate control legislation or other regulatory initiatives
by the IMO, European Union or individual countries where we operate that restrict emissions of greenhouse
gases could entail financial impacts on our operations that we cannot predict with certainty at this time.
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
34
subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a
new chapter of the convention dealing specifically with maritime security. The new chapter became effective in
July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are
contained in the newly created International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS
Code is designed to protect ports and international shipping against terrorism. After July 1, 2004, to trade
internationally, a vessel must attain an International Ship Security Certificate from a recognized security
organization approved by the vessel's flag state. Among the various requirements are:
•
•
•
•
•
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;
on-board installation of ship security alert systems, which do not sound on the vessel but only
alert the authorities on shore;
the development of vessel security plans;
ship identification number to be permanently marked on a vessel's hull;
a continuous synopsis record kept onboard showing a vessel's history including the name of the
ship and of the state whose flag the ship is entitled to fly, the date on which the ship was
registered with that state, the ship's identification number, the port at which the ship is
registered and the name of the registered owner(s) and their registered address; and
•
compliance with flag state security certification requirements.
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
International Ship Security Certificate attesting to the vessel's compliance with SOLAS security requirements
and the ISPS Code. Our managers intend to implement the various security measures addressed by MTSA,
SOLAS and the ISPS Code, and we intend that our fleet will comply with applicable security requirements. We
have implemented the various security measures addressed by the MTSA, SOLAS and the ISPS Code.
Inspection by Classification Societies
Every oceangoing vessel must be "classed" by a classification society. The classification society
certifies that the vessel is "in class," signifying that the vessel has been built and maintained in accordance with
the rules of the classification society and complies with applicable rules and regulations of the vessel's country
of registry and the international conventions of which that country is a member. In addition, where surveys are
required by international conventions and corresponding laws and ordinances of a flag state, the classification
society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks that are required by
regulations and requirements of the flag state. These surveys are subject to agreements made in each individual
case and/or to the regulations of the country concerned.
For maintenance of the class certification, regular and extraordinary surveys of hull, machinery,
including the electrical plant, and any special equipment classed are required to be performed as follows:
Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery,
including the electrical plant and where applicable for special equipment classed, at intervals of 12 months from
the date of commencement of the class period indicated in the certificate.
Intermediate Surveys. Extended annual surveys are referred to as intermediate surveys and typically are
conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be
carried out on the occasion of the second or third annual survey.
Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out for the
ship's hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals
indicated by the character of classification for the hull. At the special survey the vessel is thoroughly examined,
35
including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be
less than class requirements, the classification society would prescribe steel renewals. The classification society
may grant a one-year grace period for completion of the special survey. Substantial amounts of money may
have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In
lieu of the special survey every four or five years, depending on whether a grace period was granted, a ship
owner has the option of arranging with the classification society for the vessel's hull or machinery to be on a
continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At an
owner's application, the surveys required for class renewal may be split according to an agreed schedule to
extend over the entire period of class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are required to be surveyed at least
once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between
two subsequent surveys of each area must not exceed five years.
Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for
repairs related to inspections. If any defects are found, the classification surveyor will issue a
"recommendation" which must be rectified by the ship owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as "in
class" by a classification society which is a member of the International Association of Classification Societies.
All our vessels are certified as being "in class" by Lloyd's Register of Shipping. All new and secondhand
vessels that we purchase must be certified prior to their delivery under our standard purchase contracts and
memorandum of agreement. If the vessel is not certified on the date of closing, we have no obligation to take
delivery of the vessel.
Risk of Loss and Liability Insurance
General
The operation of any dry bulk vessel includes risks such as mechanical failure, collision, property loss,
cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills 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.
While we maintain hull and machinery insurance, war risks insurance, protection and indemnity cover,
increased value insurance and freight, demurrage and defense cover for our operating fleet in amounts that we
believe to be prudent to cover normal risks in our operations, we may not be able to achieve or maintain this
level of coverage throughout a vessel's useful life. Furthermore, while we believe that our present insurance
coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be
paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.
Hull & Machinery and War Risks Insurance
We maintain marine hull and machinery and war risks insurance, which cover the risk of actual or
constructive total loss, for all of our vessels. Our vessels are each covered up to at least fair market value with
deductibles of $75,000 to $150,000 per vessel per incident. We also maintain increased value coverage for most
of our vessels. Under this increased value coverage, in the event of total loss of a vessel, we will be able to
recover the sum insured under the increased value policy in addition to the sum insured under the hull and
machinery policy. Increased value insurance also covers excess liabilities which are not recoverable under our
hull and machinery policy by reason of under-insurance.
Protection and Indemnity Insurance
Each of our vessels is entered either with the Standard Club or with the Britannia Club, or the Clubs,
for third party liability marine insurance coverage. The Clubs are mutual insurance vehicles. As a member of
the Clubs, we are insured, subject to agreed deductibles, and our terms of entry, for our legal liabilities and
expenses arising out of our interest in an entered ship, out of events occurring during the period of entry of the
ship in the Club and in connection with the operation of the ship, against the risks specified in the rules of the
Club. These risks include liabilities arising from death of crew and passengers, loss or damage to cargo,
collisions, property damage, oil pollution and wreck removal.
36
The Standard Club and the Britannia Club benefit from membership of the International Group of P&I
Clubs (the International Group) for their main reinsurance program (see below), coupled with their own
complementary insurance program for additional risks.
The Club's policy year commences on February 20th of each year. Calls levied are by way of Estimated
Total Premiums (ETP), with the amount of the final installment of the ETP being varied according to the actual
total premium ultimately required by the Club for a particular policy year. Members have a liability to pay
supplementary calls which might be levied by the Board of the Club if the ETP is insufficient to cover the
Club's outgoings.
Insurance coverage is limited to an unspecified sum, being the amount available from reinsurance plus
the maximum amount collectable from members of the International Group by way of 'overspill' calls. This is
currently around $5.5 billion. There are, however, certain exceptions. Owners are presently covered for claims
in respect of oil pollution up to a limit of $1.0 billion. Also, from 2007/2008 policy year a new limit has been
introduced on insurance coverage for passenger and crew claims, with a sub-limit of $2.0 billion for passenger
claims.
Under the International Group reinsurance program each P&I Club in the International Group currently
bears the first $7.0 million of each and every claim. The excess of every claim over $7.0 million up to $50.0
million is shared by the Clubs under a Pooling Agreement. The excess of each claim over $50.0 million is
reinsured by the International Group under the General Excess of Loss Reinsurance Contract. This policy
presently provides a further $3.0 billion of insurance coverage. Claims which exceed this figure are pooled by
way of 'overspill' calls as described above.
Permits and Authorizations
We are required by various governmental and quasi-governmental agencies to obtain certain permits,
licenses and certificates with respect to our vessels. The kinds of permits, licenses and certificates required
depend upon several factors, including the commodity transported, the waters in which the vessel operates, the
nationality of the vessel's crew and the age of a vessel. We have been able to obtain all permits, licenses and
certificates currently required to permit our vessels to operate. Additional laws and regulations, environmental
or otherwise, may be adopted which could limit our ability to do business or increase the cost of our doing
business.
C. Organizational structure
As of December 31, 2008, the Company is the sole owner of all of the outstanding shares of the
subsidiaries listed in Note 1 of our consolidated financial statements under Item 18. "Financial Statements."
D. Property, plant and equipment
We do not own any real property. Our interests in the vessels in our fleet are our only material
properties. See Item 4. "Information on the Company—Our Fleet".
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
Overview
The following management's discussion and analysis of financial condition and results of operations
should be read in conjunction with "Item 3. Key Information – Selected Financial Data", "Item 4. Information
on the Company" and our historical consolidated financial statements and accompanying 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.
We are an international company providing worldwide transportation solutions in the drybulk sector
through our vessels-owning subsidiaries for a broad range of customers of major and minor bulk cargoes
including iron ore, coal, grain, cement, fertilizer, along worldwide shipping routes.
37
A. Operating Results
Factors Affecting Our Results of Operations
We charter all of our vessels on medium- to long-term time charters with terms of approximately one to
five years other than the Star Alpha, which is currently employed, under a COA. Under our time charters, the
charterer typically pays us a fixed daily charterhire rate and bears all voyage expenses, including the cost of
bunkers (fuel oil) and port and canal charges. We remain responsible for paying the chartered vessel's operating
expenses, including the cost of crewing, insuring, repairing and maintaining the vessel, the costs of spares and
consumable stores, tonnage taxes and other miscellaneous expenses, and we also pay commissions to affiliated
and unaffiliated ship brokers and to in-house brokers associated with the charterer for the arrangement of the
relevant charter. COAs relate to the carriage of multiple cargoes over the same route and enables the COA
holder to nominate different ships to perform individual voyages. Essentially, it constitutes a number of voyage
charters to carry a specified amount of cargo during the term of the COA, which usually spans a number of
years. All of the vessel's operating, voyage and capital costs are borne by the ship owner. The freight rate is
generally set on a per cargo ton basis. Although the vessels in our fleet are primarily employed on medium- to
long-term time charters ranging from one to five years, we may employ these and additional vessels under
COAs, bareboat charters, in the spot market or in drybulk carrier pools in the future.
We believe that the important measures for analyzing trends in the results of operations consist of the
following:
•
•
•
•
•
Average number of vessels is the number of vessels that constituted our fleet for the relevant
period, as measured by the sum of the number of days each vessel was a part of our fleet during
the period divided by the number of calendar days in that period.
Ownership days are the total calendar days each vessel in the fleet was owned by us for the
relevant period.
Available days are the total calendar days the vessels were in possession for the relevant period
after subtracting for off-hire days with major repairs drydocking or special or intermediate
surveys or transfer of ownership.
Voyage days are the total days the vessels were in our possession for the relevant period after
subtracting all off-hire days incurred for any reason (including off-hire for drydocking, major
repairs, special or intermediate surveys).
Fleet utilization is calculated by dividing voyage days by available days for the relevant period
and takes into account the dry-docking periods.
The following table reflects our voyage days, ownership days, fleet utilization and TCE rates for the
periods indicated:
(In thousands of Dollars)
Average number of vessels
Number of vessels
Average age of operational fleet
Ownership days
Available days
Voyage days for fleet
Fleet Utilization
Time charter equivalent rate
Time Charter Equivalent (TCE)
Year Ended Year Ended
December
31, 2007
December
31, 2008
0.21
4
8.0
75
71
69
93 %
31,203 $
10.76
12
9.7
3,933
3,712
3,618
98%
42,799
$
Time charter equivalent rate, or TCE rate, is a measure of the average daily revenue performance of a
vessel on a per voyage basis. Our method of calculating TCE rate is determined by dividing voyage revenues
(net of voyage expenses and amortization of fair value of above/below market acquired time charter
38
agreements) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time
charter contract, as well as commissions. TCE rate is a standard shipping industry performance measure used
primarily to compare period-to-period changes in a shipping company's performance despite changes in the mix
of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be
employed between the periods. We included TCE revenues, a non-GAAP measure, as it provides additional
meaningful information in conjunction with voyage revenues, the most directly comparable GAAP measure,
because it assists our management in making decisions regarding the deployment and use of our vessels and in
evaluating their financial performance. TCE rate is also included herein because it is a standard shipping
industry performance measure used primarily to compare period-to-period changes in a shipping company's
performance despite changes in the mix of charter types (i.e. spot charters, time charters and bareboat charters)
under which the vessels may be employed between the periods and because we believe that it presents useful
information to investors.
The following table reflects the calculation of our TCE rates and reconciliation of TCE revenue as reflected in
the consolidated statement of income:
(In thousands of Dollars)
Year
Ended
December
31, 2007
Year Ended
December 31,
2008
Voyage revenues
Less:
Voyage expenses
Amortization of fair value of above/below market acquired
time charter agreements
3,633
238,883
(43)
(3,504)
(1,437)
(80,533)
Time Charter equivalent revenues
2,153
154,846
Total voyage days for fleet
69
3,618
Time charter equivalent (TCE) rate (in Dollars)
31,203
42,799
Voyage Revenues
Voyage revenues are driven primarily by the number of vessels in our fleet, the number of voyage days
and the amount of daily charterhire, or time charter equivalent, that our vessels earn under period charters,
which, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and
disposals, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend
in drydock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our
vessels, levels of supply and demand in the seaborne transportation market and other factors affecting spot
market charter rates for vessels.
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 us to capture increased profit margins during periods of
improvements in charter rates although we would be exposed to the risk of declining vessel rates, which may
have a materially adverse impact on our financial performance. If we employ vessels on period time charters,
future spot market rates may be higher or lower than the rates at which we have employed our vessels on period
time charters.
Vessel Voyage Expenses
Voyage expenses include port and canal charges, fuel (bunker) expenses and brokerage commissions
payable to related and third parties.
Our voyage expenses primarily consist of commissions paid for the chartering of our vessels.
39
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, technical management fees 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, bunkers and insurance, may also cause these expenses to increase. Technical
vessel managers established an operating expense budget for each vessel and perform the day-to-day
management of the vessels. Star Bulk Management monitors the performance of each of the technical vessel
managers 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.
Depreciation
We depreciate our vessels on a straight-line basis over their estimated useful lives determined to be 25
years from the date of their initial delivery from the shipyard. Depreciation is based on cost less the estimated
residual value.
Vessel Management
We actively manage the deployment of our fleet on time charters, which generally can last up to several
years. Currently, all of our vessels are employed on medium- to long-term time charters other than the Star
Alpha, which is currently employed under a COA. A time charter is generally a contract to charter a vessel for a
fixed period of time at a set daily rate. Under time charters, the charterer pays voyage expenses such as port,
canal and fuel costs. We pay for vessel operating expenses, which include crew costs, provisions, deck and
engine stores, lubricating oil, insurance, maintenance and repairs, as well as for commissions. We are also
responsible for the drydocking costs relating to each vessel. COAs relate to the carriage of multiple cargoes
over the same route and enables the COA holder to nominate different ships to perform individual voyages.
Essentially, it constitutes a number of voyage charters to carry a specified amount of cargo during the term of
the COA, which usually spans a number of years. All of the vessel's operating, voyage and capital costs are
borne by the ship owner. The freight rate is generally set on a per cargo ton basis.
Our vessels operate worldwide within the trading limits imposed by our insurance terms and do not
operate in areas where United States, European Union or United Nations sanctions have been imposed.
As of December 31, 2008, we had twenty-two employees. Twenty of our employees, through Star Bulk
Management, are engaged in the day to day management of the vessels in our fleet. Our wholly-owned
subsidiary, Star Bulk Management performs operational and technical management services for the vessels in
our fleet. Our Chief Executive Officer and Chief Financial Officer are also the senior management of Star Bulk
Management. Star Bulk Management employs such number of additional shore-based executives and
employees designed to ensure the efficient performance of its activities.
We reimburse and/or advance funds as necessary to Star Bulk Management in order for it to conduct its
activities and discharge its obligations, at cost. We also maintain working capital reserves as may be agreed
between us and Star Bulk Management from time to time.
Star Bulk Management is responsible for the management of the vessels. Star Bulk Management's
responsibilities include, inter alia, locating, purchasing, financing and selling vessels, deciding on capital
expenditures for the vessels, paying vessels' taxes, negotiating charters for the vessels, managing the mix of
various types of charters, developing and managing the relationships with charterers and the operational and
technical management of the vessels. Technical management includes maintenance, drydocking, repairs,
insurance, regulatory and classification society compliance, arranging for and managing crews, appointing
technical consultants and providing technical support. Please see Item 4. "Information on the Company –
History and development of the Company – Management of the Fleet" for a discussion of our management fees.
General and Administrative Expenses
We incur general and administrative expenses, including our onshore personnel related expenses, legal
and accounting expenses.
40
Interest and Finance Costs
We defer financing fees and expenses incurred upon entering into our credit facility and amortize them
to interest and financing costs over the term of the underlying obligation using the effective interest method.
Interest income
We earn interest income on our cash deposits with our lenders. Interest income was $1.2 million for the
year ended December 31, 2008.
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.
Special or Intermediate Survey and Drydocking Costs
Beginning with our first fiscal quarter ended March 31, 2008, we changed our policy for accounting for
vessel drydocking costs from the deferral method, under which drydocking costs are deferred and amortized
over the estimated period of benefit between drydockings, to the direct expense method, under which we
expense all drydocking costs as incurred.
We did not incur any drydocking costs prior to the first quarter of 2008; therefore, there was no impact
on the Company's prior consolidated financial statements as a result of the adoption of this change in policy for
the year ended December 31, 2007. The Company believes that the new direct expensing method eliminates the
significant amount of subjectivity that is needed to determine which costs and activities related to drydocking
should be deferred.
Lack of Historical Operating Data for Vessels before Their Acquisition by Us
Consistent with shipping industry practice, other than inspection of the physical condition of the vessels
and examinations of classification society records, there is no historical financial due diligence process when
we acquire vessels. Accordingly, we do not obtain the historical operating data for the vessels from the sellers
because that information is not material to our decision to make vessel acquisitions, nor do we believe it would
be helpful to potential investors in our stock in assessing our business or profitability. Most vessels are sold
under a standardized agreement, which, among other things, provides the buyer with the right to inspect the
vessel and the vessel's classification society records. The standard agreement does not give the buyer the right
to inspect, or receive copies of, the historical operating data of the vessel. Prior to the delivery of a purchased
vessel, the seller typically removes from the vessel all records, including past financial records and accounts
related to the vessel. In addition, the technical management agreement between the seller's technical manager
and the seller is automatically terminated and the vessel's trading certificates are revoked by its flag state
following a change in ownership.
Consistent with shipping industry practice, we treat the acquisition of a vessel (whether acquired with
or without charter) as the acquisition of an asset rather than a business, which we believe to be in accordance
with applicable US GAAP and Commission rules. 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. All of the vessels
in our current fleet have been acquired with time charters attached, with the exception of the Star Beta, the Star
Sigma and the Star Omicron. In most cases, when a vessel is under time charter and the buyer wishes to assume
that charter, the vessel cannot be acquired without the charterer's consent and the buyer entering into a separate
direct agreement (called a "novation agreement") with the charterer to assume the charter. The purchase of a
vessel itself does not transfer the charter because it is a separate service agreement between the vessel owner
and the charterer.
Where we identify any intangible assets or liabilities associated with the acquisition of a vessel, we
allocate the purchase price of acquired tangible and intangible assets based on their relative fair values. Where
we have assumed an existing charter obligation or entered into a time charter with the existing charterer in
connection with the purchase of a vessel with the time charter agreement at charter rates that are less than
market charter rates, we record a liability, based on the difference between the assumed charter agreement rate
and the market charter rate for an equivalent charter agreement. Conversely, where we assume an existing
41
charter obligation or enter into a time charter with the existing charterer in connection with the purchase of a
vessel with the charter agreement at charter rates that are above prevailing market charter rates, we record an
asset, based on the difference between the market charter rate and the assumed contracted charter rate for an
equivalent vessel. This determination is made at the time the vessel is delivered to us, and such assets and
liabilities are amortized to revenue over the remaining period of the charter.
From December 3, 2007 to March 31, 2008, we took delivery of nine secondhand vessels, the Star
Alpha, the Star Beta, the Star Gamma, the Star Delta, the Star Epsilon, the Star Zeta, the Star Theta, the Star
Kappa and the Star Iota, all with charter party arrangements attached with the exception of the Star
Beta. However, the Star Iota which was classified as a vessel held for sale upon its delivery to us and was
measured at the lower of its carrying amount or fair value less costs to sell.
Following the consummation of the Redomiciliation Merger, we took delivery from TMT, the vessels
indicated in Note 1 of our consolidated financial statements pursuant to the Master Agreement other than the
Star Kappa which was acquired from TMT separately. The aggregate purchase price paid to TMT consisted of
both cash and 12,537,645 of our common shares. The fair value of the common shares issued to TMT was
based on the closing share price of our common shares on the delivery date of each vessel. As additional
consideration for the eight vessels, we agreed to issue 1,606,962 additional shares of our common stock to TMT
in two installments as follows: (i) 803,481 additional shares of our common stock, no more than 10 business
days following the filing of our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, and
(ii) 803,481 additional shares of our common stock, no more than 10 business days following the filing of our
Annual Report on Form 20-F for the fiscal year ended December 31, 2008. The shares in respect of the first
installment were issued to a nominee of TMT on July 17, 2008. The total consideration for the Star Epsilon,
the Star Theta and the Star Beta, three vessels of initial fleet delivered to us during December 2007, was $166.8
million. In addition, on December 3, 2007, we entered into an agreement to acquire the Star Kappa from TMT
for $72.0 million, an additional vessel not included in the initial fleet, which was delivered to us on December
14, 2007.
During 2007, we acquired three drybulk carriers, the Star Epsilon, the Star Theta and the Star Kappa,
with attached time charter contracts, which we agreed to assume through arrangements with the respective
charterers. Upon delivery of the above vessels, we evaluated the charter contract and assumed and recognized
(a) an asset of approximately $2.0 million for one of the vessels with a corresponding decrease in the vessel'
purchase price and (b) a liability of approximately $26.8 million for the other two vessels with a corresponding
increase in the vessels' purchase price.
On January 22, 2008, we entered into an agreement to acquire the Star Sigma, a 1991 built Capesize
drybulk carrier for the aggregate purchase price of $82.6 million, which includes a discount of $1.1 million
related to the late delivery of the vessel to us by the Sellers, with a cargo carrying capacity of approximately
184,403 dwt.
On March 11, 2008, we entered into an agreement to acquire Star Omicron, a 2005 built Supramax
drybulk carrier for the aggregate purchase price of $72.0 million with a cargo carry capacity of approximately
53,489 dwt.
On May 22, 2008, we entered into an agreement to acquire Star Cosmo, a 2005 built Supramax drybulk
carrier for the aggregate purchase price of $70.2 million, which includes a $1.4 million payment by us to the
seller as additional compensation for the early delivery of the vessel to us, with a cargo carry capacity of
approximately 52,247 dwt.
On June 3, 2008, we entered into an agreement to acquire Star Ypsilon, a 1991 built Capsize drybulk
carrier for the aggregate purchase price of $86.9 million which includes a discount of $0.3 million related to the
late delivery of the vessel to us by the seller, with a cargo carry capacity of approximately 150,940 dwt.
When we purchase a vessel and assume or renegotiate a related time charter, we must take the
following steps before the vessel will be ready to commence operations:
•
•
•
obtain the charterer's consent to us as the new owner;
obtain the charterer's consent to a new technical manager;
in some cases, obtain the charterer's consent to a new flag for the vessel;
42
•
•
•
•
•
•
arrange for a new crew for the vessel, and where the vessel is on charter, in some cases, the
crew must be approved by the charterer;
replace all hired equipment on board, such as gas cylinders and communication equipment;
negotiate and enter into new insurance contracts for the vessel through our own insurance
brokers;
register the vessel under a flag state and perform the related inspections in order to obtain new
trading certificates from the flag state;
implement a new planned maintenance program for the vessel; and
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 comprised of the following main elements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
employment and operation of our drybulk vessels; and
management of the financial, general and administrative elements involved in the conduct of
our business and ownership of our drybulk vessels.
The employment and operation of our vessels require the following main components:
vessel maintenance and repair;
crew selection and training;
vessel spares and stores supply;
contingency response planning;
onboard safety procedures auditing;
accounting;
vessel insurance arrangement;
vessel chartering;
vessel security training and security response plans (ISPS);
obtain ISM certification and audit for each vessel within the six months of taking over a vessel;
vessel hire management;
vessel surveying; and
vessel performance monitoring.
The management of financial, general and administrative elements involved in the conduct of our
business and ownership of our vessels requires the following main components:
•
•
•
•
management of our financial resources, including banking relationships (i.e., administration of
bank loans and bank accounts);
management of our accounting system and records and financial reporting;
administration of the legal and regulatory requirements affecting our business and assets; and
management of the relationships with our service providers and customers.
43
The principal factors that affect our profitability, cash flows and shareholders' return on investment
include:
•
•
•
•
•
rates and periods of charterhire;
levels of vessel operating expenses;
depreciation and amortization expenses;
financing costs; and
fluctuations in foreign exchange rates.
Critical Accounting Policies
We make certain estimates and judgments in connection with the preparation of our consolidated
financial statements, which are prepared in accordance with accounting principles generally accepted in the
United States, or US GAAP, that affect the reported amount of assets and liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Actual
results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially
result in materially different results under different assumptions and conditions. We have described below what
it believes will be the most critical accounting policies that involve a high degree of judgment and the methods
of their application.
Impairment of long-lived assets. We follow SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets," which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The standard requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows,
excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, we
should evaluate the asset for an impairment loss. Measurement of the impairment loss is based on the fair value.
In this respect, management regularly reviews the carrying amount of the vessels on vessel by vessel basis when
events and circumstances indicate that the carrying amount of the vessels might not be recoverable. As of
December 31, 2008, we performed an impairment review of our vessels due to the global economic downturn
and the prevailing conditions in the shipping industry. We compared undiscounted cash flows to the carrying
values for our vessels to determine if the assets were impaired. Our management's subjective judgment is
required in making assumptions that are used in forecasting future operating results used in this method. Such
judgment is based on historical trends as well as future expectations regarding future charter rates, vessel
operating expenses and fleet utilization that were applied over the remaining useful life of the vessel. Expected
expenditures for scheduled vessels' maintenance and vessels' operating expenses are based on historical data
and adjusted annually for inflation. The Company has assumed no change in the remaining useful life of the
current fleet. These estimates are consistent with the plans and forecasts used by management to conduct our
business. As a result of this analysis, no assets were considered to be impaired, and we did not recognize any
impairment charge for our vessels other than one vessel which was classified as held for sale during the year
ended December 31, 2008.
Vessel Acquisitions. Vessels are stated at cost, which consists of the purchase price and any material
expenses incurred upon acquisition, such as (initial repairs, improvements, delivery expenses and other
expenditures to prepare the vessel for its initial voyage). Otherwise these amounts are charged to expense as
incurred.
The aggregate purchase price paid for the eight vessels in our initial fleet from certain subsidiaries of
TMT consisted of cash and our common shares. The stock consideration was measured based on the fair market
value of the shares at the time each vessel was delivered. The additional stock consideration of 1,606,962
common shares was measured when TMT's performance under the Master Agreement was complete when it
delivered the last of the eight vessels in our initial fleet on March 7, 2008. The aggregate purchase price, which
consisted of cash and stock consideration, was allocated to the acquired vessels based on the relative fair values
of the vessels on their respective dates of delivery to us.
44
Depreciation. The cost of each of our vessels is depreciated beginning when the vessel is ready for its
intended use, on a straight-line basis over the vessel's remaining economic useful life, after considering the
estimated residual value (vessel's residual value is equal to the product of its lightweight tonnage and estimated
scrap rate per ton). Management estimates the useful life of our vessels to be 25 years from the date of initial
delivery from the shipyard. When regulations place limitations over the ability of a vessel to trade on a
worldwide basis, its remaining useful life is adjusted at the date such regulations are adopted. Depreciation
expense is calculated based on cost less the estimated residual scrap value. We estimate scrap value by taking
the cost of steel times the weight of the ship noted in lightweight ton, or lwt. There was no change in this
estimate during the years ending December 31, 2007 and 2008 and we believe there will be no change in the
near future.
Fair value of above/below market acquired time charter: We record all identified tangible and
intangible assets associated with the acquisition of a vessel or liabilities at fair value. Fair value of above or
below market acquired time charters is determined by comparing existing charter rates in the acquired time
charter agreements with the market rates for equivalent time charter agreements prevailing at the time the
foregoing vessels are delivered. The present values representing the fair value of the above or below market
acquired time charters are recorded as an intangible asset or liability, respectively. Such intangible asset or
liability is recognized ratably as an adjustment to revenues over the remaining term of the assumed time charter.
As a result of downturn in the shipping industry during the fourth quarter of 2008, we revised our
original assumptions of the latest available redelivery dates used in determining the term of its below and above
market acquired time charter agreements. Under the provision of SFAS No. 154 "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3," this revision was treated
as a change in accounting estimate and was accounted for prospectively beginning October 1, 2008. The
unamortized balance of below market acquired time charter agreements was amortized on an accelerated basis
assuming the earliest redelivery dates of vessels under existing time charter agreements. This change had a
positive impact on revenue of $13.0 million for the year ended December 31, 2008.
Revenue recognition. We generate our revenues from charterers and the charterhire paid for our vessels.
Vessels are chartered mainly using time charters, where a contract is entered into for the use of a vessel for a
specific period of time and a specified daily charterhire rate. Under time charters, voyage costs, such as fuel and
port charges are borne and paid by the charterer. Our time charter agreements are classified as operating leases.
Revenues under operating lease arrangements are recognized when a charter agreement exists, charter rate is
fixed and determinable, the vessel is made available to the lessee, and collection of the related revenue is
reasonably assured. Revenues are recognized ratably on a straight line basis over the period of the respective
time charter agreement in accordance with SFAS No. 13 "Accounting for Leases." The charter agreements of
the Star Cosmo and the Star Ypsilon have multiple time charter rates during the terms of the agreements. As of
December 31, 2008, we deferred revenue of $5.1 million relating to these charter agreements which represents
the difference between the charterhire payments received in advance of the charters and the charterhire revenue
recognized.
Voyage charter agreements are used in the spot market and provide for the use of a vessel for a specific
voyage for a specified charter rate. Revenue from voyage charter agreements is recognized on a pro-rata basis
over the duration of the voyage. Under voyage charter agreements, all voyage costs are borne and paid by
us. Demurrage income, which is included in voyage revenues, represents payments by the charterer to the
vessel owner when loading or discharging time exceeds the stipulated time in the voyage charter and is
recognized when arrangement exists, services have been performed, the amount is fixed or determinable and
collection is reasonably assured.
Deferred revenue includes cash received prior to the consolidated balance sheet date and is related to
revenue earned after such date. The portion of the deferred revenue that will be earned within the next twelve
months is classified as current liability and the rest as long-term liability.
Equity incentive plan awards. Stock-based compensation represents vested and non-vested restricted
shares granted to employees and to non-employee directors, for their services as directors, and is included in
"General and administrative expenses" in the consolidated statements of income. These shares are measured at
their fair value equal to the market value of our common stock on the grant date. The shares that do not contain
any future service vesting conditions are considered vested shares and a total fair value of such shares is
expensed on the grant date. The shares that contain a time-based service vesting conditions are considered non-
vested shares on the grant date and a total fair value of such shares is recognized using the accelerated method.
45
We currently assume that all unvested shares will vest and do not include estimated forfeitures in
determining the total stock-based compensation expense. We will, however, re-evaluate the reasonableness of
our assumption at each reporting period. We pay dividends on all unvested shares regardless of whether they
have has vested and there is no obligation of the employee to return the dividend when employment ceases. The
retained dividends on restricted share grantee awards that are expected to vest were charged to retained
earnings.
Recent Accounting Pronouncements
(i)
(ii)
(iii)
(iv)
(v)
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No.
141(R)"). The Statement is a revision of SFAS No. 141, "Business Combinations", issued in
June 2001 and is designed to improve the relevance, representational fairness and comparability
and information that a reporting entity provides about a business combination and its effects.
The Statement establishes principles and requirements for how the acquirer recognizes assets,
liabilities and non-controlling interests, how to recognize and measure goodwill and the
disclosures to be made. SFAS No. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. As the provisions of SFAS 141(R) are applied
prospectively, the impact to the Company cannot be determined until the transactions occur.
In December 2007, the FASB issued SFAS No. 160 (SFAS No. 160) "Non-controlling Interests
in Consolidated Financial Statements", an amendment of ARB No. 51. SFAS No. 160 amends
ARB No. 151 to establish accounting and reporting standards for the non-controlling interest in
a subsidiary and for the deconsolidation of a subsidiary. This Standard applies to all entities
that prepare consolidated financial statements, except not-for-profit organizations. The
objective of the Standard is to improve the relevance, compatibility and transparency of the
financial information that a reporting entity provides in its consolidated financial statements.
SFAS No. 160 is effective as of the beginning of an entity's fiscal year that begins on or after
December 15, 2008. Earlier adoption is prohibited. This statement will be effective for the
Company for the fiscal year beginning January 1, 2009. The adoption of this standard is not
expected to have a material effect on the consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") FASB 157-2 "Effective Date
of FASB Statement No. 157" ("FSP FASB 157-2"). FSP FASB 157-2, which was effective
upon issuance, delays the effective date of SFAS 157 for nonfinancial assets and liabilities,
except for items recognized or disclosed at fair value at least once a year, to fiscal years
beginning after November 15, 2008. FSP FASB 157-2 also covers interim periods within the
fiscal years for items within the scope of this FSP. The adoption of this statement is not
expected to have a material effect on our financial position, results of operations and cash
flows.
In March 2008 the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities" ("SFAS No. 161"). The new standard is intended to improve financial
reporting about derivative instruments and heding activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this standard is not
expected to have a material effect on the consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP No. FAS 142-3"). FSP No. FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") in order to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141(R), "Business Combinations" ("SFAS No.
141(R)"), and other GAAP. FSP No. FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. The adoption of FSP No. FAS 142-3 will not have a material impact on
the Company's Consolidated Financial Statements.
46
(vi)
(vii)
In May 2008, the FASB issued SFAS No. 162. "The Hierarchy of Generally Accepted
Accounting Principles" (SFAS No. 162), which identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with US GAAP. SFAS No. 162 was
effective December 31, 2008 following the Commission's approval of certain amendments to
auditing standards proposed by the Public Company Accounting Oversight Board. We adopted
SFAS No. 162 as of December 31, 2008. The adoption of SFAS No. 162 did not have an effect
on our consolidated financial statements for the year ended December 31, 2008.
On June 16, 2008, the FASB issued FSP EITF 03-6-1 "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities." The FASB
concluded that all unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and must
be included in the computation of earnings per share pursuant to the two-class method. The
FSP is effective for fiscal years beginning after December 15, 2008, and quarterly periods
within those fiscal years. Early adoption is prohibited. We adopted this FSP in the first quarter
of 2009 and will present earnings per share pursuant to the two-class method.
Results of Operations
Star Maritime was organized under the laws of the State of Delaware on May 13, 2005 as a blank check
company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business
combination, one or more assets or target businesses in the shipping industry.
On November 27, 2007, the Company obtained shareholder approval for the acquisition of the initial
fleet of eight drybulk carriers and for effecting the Redomiciliation Merger whereby Star Maritime merged with
and into its wholly owned subsidiary at the time Star Bulk with Star Bulk as the surviving entity. The
Redomiciliation Merger was completed on November 30, 2007. Our first vessel was delivered on December 3,
2007. Thus, we cannot present a meaningful comparison of our results of operations for the years ended
December 31, 2008 to any of the prior reporting periods.
During the period from the Star Maritime's inception to the date Star Bulk commenced operations, the
Company was a development stage enterprise in accordance with Statement of Financial Accounting Standards
("SFAS") No. 7 "Accounting and Reporting By Development Stage Companies."
Year ended December 31, 2008 compared to the year ended December 31, 2007
Voyage Revenues: Voyage revenues for the years ended December 31, 2008 and 2007 were
approximately $238.9 million and $3.6 million, respectively, which amounts include the amortization of the fair
value of below/above market attached time charters in the amount of $80.5 million and $1.4 million,
respectively. The increase in voyage revenues was primarily due to the fact that an average of 10.8 vessels
were owned and operated during the year ended December 31, 2008, earning an average TCE rate, a non US
GAAP measure of $42,799 per day as compared to an average of 0.21 vessels owned and operated during the
year ended December 31, 2007, earning an average TCE rate of $31,203 per day. For further information
concerning our calculation of TCE rate, please see Item 5. "Operating and Financial Review and Prospects -
Operating Results."
Voyage Expenses: For the years ended December 31, 2008 and 2007, voyage expenses, which mainly
consist of commissions payable to brokers, were approximately $3.5 million and $0.04 million, respectively.
Consistent with drybulk industry practice, we paid broker commissions ranging from 0% to 2.50% of the total
daily charterhire rate of each charter to ship brokers associated with the charterers, depending on the number of
brokers involved with arranging the charter.
Vessel Operating Expenses: For the years ended December 31, 2008 and 2007, our vessel operating
expenses were approximately $26.2 million and $0.6 million, respectively. Vessel operating expenses include
crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of
spares and consumable stores, tonnage taxes 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 insurance, may also cause these expenses to increase. The increase in operating
expenses during the year ended December 31, 2008, was primarily due to the growth of our fleet.
Drydocking Expenses: For the year ended December 31, 2008, our drydocking expenses were $7.9
million. During the year ended December 31, 2008, five vessels underwent their periodic drydocking survey
47
and one vessel underwent unscheduled repairs. For the year ended December 31, 2007, we did not incur any
drydocking expenses.
Depreciation: We depreciate our vessels based on a straight line basis over the expected useful life of
each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on
the cost of the vessel less its estimated residual value, which is estimated at $200 per lwt, at the date of the
vessel's acquisition. Secondhand vessels are depreciated from the date of their acquisition through their
remaining estimated useful life. For years ended December 31, 2008 and 2007, we recorded vessel depreciation
charges of approximately $51.1 million and $0.7 million, respectively.
Vessel Impairment Loss: On April 24, 2008, we entered into an agreement to sell the Star Iota for
gross proceeds of $18.4 million less $1.8 million of costs associated with the sale. We delivered this vessel to
its purchasers on October 6, 2008. The Star Iota was classified as a vessel held for sale during the first quarter
of 2008 which resulted in an impairment loss of $3.6 million as the vessel was recorded at the lower of its
carrying amount or fair value less cost to sell.
Gain on forward freight agreements: During December 2008, we entered into two FFAs on the
Capesize index. During the year ended December 31, 2008, the change in fair market value of our FFAs
resulted in a gain of $0.25 million.
Time charter agreement termination fees: The Star Sigma, which was on time charter to a Japanese
charterer at a gross daily charter rate of $100,000 per day from April 2008 until March 2009 (earliest
redelivery), was redelivered to us earlier, in mid-November 2008, pursuant to an agreement whereby the
charterer agreed to pay the contracted rate less $8,000 per day, which is the approximate operating cost for the
vessel, from the date of the actual redelivery in November 2008 through March 1, 2009. This amount net of
commissions was approximately $9.7 million, which was collected and recognized under operating results in
the consolidated statements of income for the year ended December 31, 2008.
General and Administrative Expenses: For the years ended December 31, 2008 and 2007, we incurred
general and administrative expenses of approximately $12.4 million and $7.8 million, respectively. For the year
ended December 31, 2008, our general and administrative expenses include the salaries and other related costs
of the executive officers and other employees ($2.9 million), our office renovation costs and rents, legal,
accounting costs and consultancy fees, regulatory compliance costs ($3.8 million related to professional fees)
and costs related to restricted stock grants under the equity incentive plan ($4.0 million).
Interest Expenses and Finance Costs: For the year ended December 31, 2008, our interest and finance
costs under our term loan facilities totalled approximately $10.2 million. In 2007, we did not pay interest under
our term loan facility, since we had not drawn down any amount as of December 31, 2007.
Interest Income: For the years ended December 31, 2008 and 2007, interest income was $1.2 million
and $9.0 million, respectively. Star Maritime did not have any operations for the period from May 13, 2005
(date of inception of Star Maritime) to December 3, 2007 (date of operations of Star Bulk). During this period,
all of our income was derived from interest income, and unrealized and realized gains on investments, the
majority of which was earned on the proceeds of $188.7 million from Star Maritime's initial public offering
which were held in a trust account. On November 2, 2007, the Commission declared effective our joint
proxy/registration statement on Forms F-1/F-4 and on November 27, 2007 we obtained shareholder approval
for the acquisition of our initial fleet and for effecting the Redomiciliation Merger. All trust account proceeds
were released to us on November 28, 2007 to complete the transaction pursuant to the terms of the Master
Agreement. The Redomiciliation Merger was effective as of November 30, 2007.
Year ended December 31, 2007 compared to the year ended December 31, 2006
Voyage Revenues: Voyage revenues for 2007 were $3.6 million. All of our revenues for the year ended
December 31, 2007 were earned from time charters.
Voyage Expenses: Voyage expenses, which mainly consist of commissions payable to brokers, were
$42,548 for the year ended December 31, 2007. Consistent with drybulk industry practice, we paid
commissions ranging from 0% to 2.5% of the total daily charterhire rate of each charter to ship brokers
associated with the charterers, depending on the number of brokers involved with arranging the charter. In
2007, our brokerage commissions totaled $33,298.
48
Vessel Operating Expenses: For 2007, our vessel operating expenses were $0.6 million. Vessel
operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and
maintenance, the cost of spares and consumable stores, tonnage taxes 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 insurance, may also cause these expenses to increase. In future fiscal
years, vessel operating expenses will likely increase as we operate our existing fleet for the full year.
Depreciation: We depreciate our vessels based on a straight line basis over the expected useful life of
each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on
the cost of the vessel less its estimated residual value, which is estimated at $200 per lightweight ton or lwt, at
the date of the vessel's acquisition. Secondhand vessels are depreciated from the date of their acquisition
through their remaining estimated useful life. For 2007, we recorded $0.7 million of vessel depreciation
charges.
General and Administrative Expenses: For the years ended December 31, 2007 and 2006, we incurred
general and administrative expenses of $7.8 million $1.2 million, respectively. For the year ended December
31, 2007, our general and administrative expenses include the salaries and other related costs of the executive
officers and other employees, our office rents, legal and accounting costs, regulatory compliance costs and costs
related to restricted stock grants under our equity incentive plan. For the year ended December 31, 2006, our
operating expenses consisted primarily of expenses related to professional fees, insurance costs, and due
diligence fees in connection with the search for a business target.
Interest Income: For the years ended December 31, 2007 and 2006, interest income was $9.0 million
and $4.4 million, respectively. We did not have any operations for the period from May 13, 2005 (date of
inception of Star Maritime) to December 3, 2007. During this period, all of our income was derived from
interest income, unrealized and realized gains on investments, the majority of which was earned on funds held
in a trust account which consisted of the entire gross proceeds of the initial public offering in the amount of
$188.7 million.
Income taxes: For the years ended December 31, 2007 and 2006, income taxes refer to Delaware State
taxes for Star Maritime.
B. Liquidity and Capital Resources
Our principal source of funds has been equity provided by our shareholders, long-term borrowing, and
operating cash flow. Our principal use of funds has been capital expenditures to establish and grow our fleet,
maintain the quality of our drybulk carriers, comply with international shipping standards and environmental
laws and regulations, fund working capital requirements, make interest and principal repayments on outstanding
loan facilities, and pay dividends.
Our short-term liquidity requirements relate to servicing our debt, payment of operating costs, funding
working capital requirements and maintaining cash reserves against fluctuations in operating cash flows and
paying cash dividends when permissible. Sources of short-term liquidity include our revenues earned from our
charters.
We believe that our current cash balance and our operating cash flow will be sufficient to meet our
2009 liquidity needs, despite that the drybulk charter market declined sharply beginning in the third quarter of
2008. Our results of operations may be adversely affected if market conditions do not improve.
Our medium- and long-term liquidity requirements include funding the equity portion of investments in
additional vessels and repayment of long-term debt balances. Sources of funding for our medium- and long-
term liquidity requirements include new loans or equity issuance or vessel sales. As of December 31, 2008, we
had outstanding borrowings of $296.5 million, which is the maximum amount permitted under our current
credit facilities. As of April 9, 2009, we had outstanding borrowings of $282.5 million under our loan
facilities. If the current conditions in the credit market continue, we may not be able to refinance our existing
credit facilities or secure new credit facilities at all or on terms agreeable to us.
We may fund possible growth through our cash balances, operating cash flow, additional long-term
borrowing and the issuance of new equity. Our practice has been to acquire drybulk carriers using a
combination of funds received from equity investors and bank debt secured by mortgages on our drybulk
carriers. Our business is capital-intensive and its future success will depend on our ability to maintain a high-
49
quality fleet through the acquisition of newer drybulk carriers and the selective sale of older drybulk carriers.
These acquisitions will be principally subject to management's expectation of future market conditions as well
as our ability to acquire drybulk carriers on favorable terms.
As of December 31, 2008, we had cash and cash equivalents of approximately $29.5 million net of
$14.5 million of restricted cash due to minimum liquidity covenants contained in our loan agreements and
margin collateral with London Clearing House, or LCH. As of April 9, 2009, we had cash and cash equivalents
of $35.1 million net of $22.3 million of restricted cash due to minimum liquidity covenants contained in our
loan agreements and margin collateral requirements of LCH and MF Global UK Ltd., a British clearing house.
Cash Flows
Year ended December 31, 2008 compared to year ended December 31, 2007
For the year ended December 31, 2008, cash and cash equivalents increased to $29.5 million compared
to $19.0 million for the year ended December 31, 2007, which is primarily due to increased cash generated
from operating and financing activities. Our working capital is equal to current assets minus current liabilities,
including the current portion of long-term debt. Our working capital deficit was $15.0 million for the year
ended December 31, 2008, compared to a working capital surplus of $16.8 million for the year ended December
31, 2007. Our working capital deficit is primarily due to the significant increase of current liabilities for the
year ended December 31, 2008, due to the current portion of loan proceeds amounting to $49.3 million.
If our working capital deficit continues to grow, lenders may be unwilling to provide future financing
or will provide future financing at significantly increased interest rates, which will negatively affect our
earnings, liquidity and capital position.
We have increased our restricted cash from $12.0 million as of December 31, 2008 compared to $21.5
million as of April 9, in order to meet our obligations under the terms of the waiver agreements. For further
information please see Item 5. "Operating and Financial Review and Prospects – Senior Secured Credit
Facilities".
We believe that our current cash balance and our operating cash flow will be sufficient to meet our
current liquidity needs.
Net Cash Provided By Operating Activities
Net cash provided by operating was $110.7 million for the year ended December 31, 2008 compared to
$0.4 million for the year ended December 31, 2007. This increase is primarily due to the growth of our fleet.
We expect our net cash provided by operating activities to increase due to the full operation of our 12 vessel
fleet during the year ended December 31, 2009.
Net Cash Provided By/Used In Investing Activities
Net cash used in investing activities was $423.3 for the year ended December 31, 2008 of which $413.5
million was paid for our initial fleet and the respective purchases of additional vessels, $14.4 million
represented amounts attributable to the fair value of above market time charters and $12.0 million represented
an increase in restricted cash due to loan covenants, which was offset by $16.6 million which represented
amounts received from the sale of the Star Iota.
Net cash provided by investing activities for the year ended December 31, 2007 was $13.0 million of
which $194.1 million represented amounts received from a trust account which consisted of the gross proceeds
of the initial public offering in the amount of $188.7 million. During 2007, following the Redomiciliation
Merger, the funds were released to us from a trust account and were used to purchase vessels from our initial
fleet. This amount was partially offset by $179.1 million including the amounts we paid to acquire the vessels
delivered in 2007 and advances we made for vessels to be acquired. It also includes a $2.0 million payment for
the above market acquired time charter agreement for the Star Kappa.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $323.0 million for the year ended December 31, 2008
representing $120.0 million from borrowings under our Commerzbank AG loan facility, $197.5 million from
borrowings under our Piraeus Bank term loan facilities and $94.2 million received from the exercise of
50
warrants, offset mainly by $52.6 million of cash dividends paid, $21.0 million of repayments under our loan
agreements and payments of $13.4 million in connection with our repurchase of our common stock and
warrants.
Net cash provided by financing activities was $3.5 million for the year ended December 31, 2007
representing $7.5 million received from warrants exercised, offset by $4.0 million of deferred underwriting fees
paid based on the underwriting agreement signed prior to the initial public offering in December 2005.
Senior Secured Credit Facilities
As of December 31, 2008, we had total indebtedness of $296.5 million, which is the maximum amount
available under our three senior secured credit facilities.
Commerzbank AG
On December 27, 2007, we entered into a loan agreement with Commerzbank AG, Commerzbank, in
the amount of up to $120.0 million to partially finance the acquisition of the secondhand vessels the Star
Gamma, the Star Delta, the Star Epsilon, the Star Zeta, and the Star Theta, which also provide the security for
this loan agreement. Under the terms of this loan facility, the repayment of $120.0 million is over a nine year
term and divided into two tranches. The first tranche of up to $50.0 million is repayable in twenty-eight
consecutive quarterly installments commencing twenty-seven months after the initial borrowings but no later
than March 31, 2010 as follows: (i) the first four installments amount to $2.25 million each, (ii) the next thirteen
installments amount to $1.0 million each (iii) the remaining eleven installments amount to $1.3 million each
and a final balloon payment of $13.7 million is payable together with the last installment. The second tranche of
up to $70.0 million is repayable in twenty-eight consecutive quarterly installments commencing twenty-seven
months after draw down but no later than March 31, 2010 as folows: (i) the first four installments amount to
$4.0 million each (ii) the remaining twenty-four installments amount to $1.75 million each and a final balloon
payment of $12.0 million is payable together with the last installment. The loan bears interest at LIBOR plus a
margin at a minimum of 0.8% per annum to a maximum of 1.25% per annum depending on whether the
aggregate drawdown ranges from 60% up to 75% of the aggregate market value of the 'initial fleet'.
This loan contains financial covenants, including requirements to maintain (i) a minimum liquidity of
$10.0 million or $1.0 million per vessel, whichever is greater (ii) a market value adjusted equity ratio of not less
than 25%, as defined therein and (iii) an aggregate market value of the vessels pledged as security under this
loan agreement of not less than (a) 125% of the then outstanding borrowings for the first three years and (b)
135% of the then outstanding borrowings thereafter. As of December 31, 2008, our recognized restricted cash
based on this covenant amounted to $12.0 million.
We were in compliance with the loan covenants as of December 31, 2008 except for the covenant
related to the fair market value of mortgaged vessels to then outstanding borrowings, for which we have
obtained waivers in March 2009.
On March 13, 2009, we entered into an agreement with Commerzbank to obtain waivers for certain
covenants on the following terms: during the waiver period from December 31, 2008 to January 31, 2010, the
required loan to value ratio, which is the ratio of outstanding indebtedness to the aggregate market value of the
collateral vessels, was amended to 90% from 80% including the value of the additional security that will be
provided by us pursuant to the waiver. In connection with this waiver, as further security for this facility, we
agreed to provide a first preferred mortgage on the Star Alpha and a pledge account containing $6.0
million. During the waiver period LIBOR will be adjusted to the cost of funds, the interest spread was
increased to 2%, and the payment of dividend and the repurchase of our common shares and warrants are
subject to the prior written consent of the lenders.
As of April 9, 2009, the Company had outstanding borrowings of $120.0 million, which is the
maximum amount of borrowings permitted under this loan facility.
Piraeus Bank A.E. Loan Facility dated April 14, 2008, as amended
On April 14, 2008, we entered into a loan agreement with Piraeus Bank A.E., or Piraeus Bank, as agent,
which was subsequently amended on April 17, 2008 and September 18, 2008. Under the amended terms, the
agreement provides for a term loan of $150.0 million to partially finance the acquisition of the Star Omicron,
the Star Sigma and the Star Ypsilon. This loan agreement is secured by the Star Omicron, the Star Beta,
51
and the Star Sigma. Under the terms of this term loan facility, the repayment period is six years, beginning three
months after our first draw down and is divided into twenty-four consecutive quarterly installments as follows:
(i) the first installment amounts to $7.0 million, (ii) the second through fifth installments amount to $10.5
million each, (iii) the sixth to eighth installments amount to $8.8 million each, (iv) the ninth through fourteenth
installments amount to $4.4 million each, (v) the fifteenth through twenty-fourth installments amount to $2.7
million each, and a final balloon payment in the amount of $21.2 million is payable together with the last
installment. The loan bears interest at LIBOR plus a margin of 1.3% per annum.
This loan agreement contains financial covenants, including requirements to maintain (i) a minimum
liquidity of $0.5 million per vessel, (ii) total indebtedness over the market value of all vessels owned not greater
than 0.6:1, (iii) the interest coverage ratio not less than 2:1 and (iv) an aggregate market value of the vessels
pledged as security under this loan agreement of not less than (a) 125% of the then outstanding borrowings for
the first three years and (b) 135% of the then outstanding borrowings thereafter.
We were in compliance with the loan covenants as of December 31, 2008 except for the covenant
related to the fair market value of mortgaged vessels to then outstanding borrowings, for which we have
obtained waivers in March 2009.
On March 11, 2009, we entered into an agreement with Piraeus Bank to obtain waivers for certain
covenants on the following terms: during the waiver period from December 31, 2008 to February 28, 2010, the
required security cover ratio, which is the ratio of the aggregate market value of the collateral vessels and the
outstanding loan amount, will be waived and for the year ended February 28, 2011 and the minimum security
cover requirement will be reduced to 110% from 125% of the outstanding loan amount. The lenders will also
waive the required 60% corporate leverage ratio, which is the ratio of our total indebtedness net of any
unencumbered cash divided by the market value of our vessels, through February 28, 2010. In connection with
this waiver, as further security for this facility we agreed to provide (i) first preferred mortgages on and first
priority assignments of all earnings and insurances of the Star Kappa and the Star Ypsilon; (ii) corporate
guarantees from each of the collateral vessel owning limited liability companies; (iii) a subordination of the
technical and commercial manager's rights to payment; and (iv) a pledge account containing $9.0 million.
In addition, during the waiver period the interest spread was increased to 2% per annum and thereafter
will be adjusted to 1.5% per annum until the margin review date of the facility, and the payment of dividend
and the repurchase of our common shares and warrants are subject to the prior written consent of the lenders.
As of April 9, 2008, we had outstanding borrowings of $132.5 million which is the maximum amount
of borrowings permitted under this loan facility.
Piraeus Bank A.E. Loan Facility dated July 1, 2008
On July 1, 2008, we entered into a loan agreement with Piraeus Bank, as lender, in the amount of $35.0
to partially finance the acquisition of the Star Cosmo, which also provides the security for this loan agreement.
Under the terms of this term loan facility, the repayment of $35.0 million is over six years and begins three
months following the full drawn down of the loan amount, which was July 1, 2008, and is divided into twenty-
four consecutive quarterly installments as follows: (i) the first through fourth installments amount to $1.5
million each, (ii) the fifth through eighth installments amount to $1.250 million each, (iii) the ninth to twelfth
installments amount to $0.875 million each, (iv) the thirteenth through twenty-fourth installments amount to
$0.5 million each and a final balloon payment of $14.5 is payable together with the last installment. The loan
bears interest at LIBOR plus a margin of 1.325% p.a.
The loan agreement contains financial covenants, including requirements to maintain (i) a minimum
liquidity of $0.5 million per vessel, (ii) the total indebtedness of the borrower over the market value of all
vessels owned shall not be greater than 0.6:1, (iii) the interest coverage ratio shall not be less than 2:1 and (iv)
an aggregate market value of the vessels pledged as security under this loan agreement not less than (a) 125%
of the then outstanding borrowings for the first three years and (b) 135% of the then outstanding borrowings
thereafter.
We were in compliance with the loan covenants as of December 31, 2008 except for the covenant
related to the fair market value of mortgaged vessels to then outstanding borrowings, for which we have
obtained waivers in March 2009.
52
On March 11, 2009, we entered into agreements with Piraeus Bank to obtain waivers for certain
covenants on the following terms: during the waiver period from December 31, 2008 to February 28, 2010, the
required security cover ratio was waived and for the year ended February 28, 2011 and the minimum security
cover requirement will be reduced to 110% from 125% of the outstanding loan amount. The lender will also
waive the required 60% corporate leverage ratio through February 28, 2010. In connection with this waiver, as
further security for this facility agreed to provide (i) second preferred mortgages on and second priority
assignments of all earnings and insurances of the Star Alpha; (ii) a corporate guarantee from Star Alpha's vessel
owning limited liability company; (iii) a subordination of the technical and commercial managers rights to
payment; and (iv) a pledge account containing $5.0 million. This facility is repayable beginning on April 2,
2009, in 22 consecutive quarterly installments: (i) the first two installments in the amount of $2.0 million each;
(ii) the third installment in the amount of $1.75 million; (iii) the fourth installment in the amount of $1.25
million; (iv) the fifth through tenth installment in the amount of $875,000 each; and (v) the final 12 installments
in the amount of $500,000 each plus a balloon payment of $13.75 million payable with the final installment.
In addition, during the waiver period the interest spread was increased to 2% per annum and thereafter
will be adjusted to 1.5% per annum until the margin review date of the facility, and the payment of dividend
and the repurchase of our common shares and warrants are subject to the prior written consent of the lenders.
As of April 9, 2008, we had outstanding borrowings of $30.0 million which is the maximum amount of
borrowings permitted under this loan facility.
Dividend Payments
On February 14, April 16, and July 29, 2008, we declared dividends amounting to approximately $4.6
million ($0.10 per share, paid on February 28, 2008 to the shareholders of record on February 25, 2008),
approximately $18.8 million ($0.35 per share, paid on May 23, 2008 to the shareholders of record on May 16,
2008), and approximately $19.4 million ($0.35 per share, paid on August 18, 2008 to the shareholders of record
on August 8, 2008), respectively. On November 17, 2008, we declared a cash and stock dividend on our
common stock totaling $0.36 per common share for the quarter ended September 30, 2008. The cash portion of
the dividend in the amount of $9.8 million was paid on December 5, 2008 to stockholders of record on
November 28, 2008. The dividend payment consisted of a cash portion in the amount of $0.18 per share with
the remaining half of the dividend paid in the form of newly issued common shares. The amount of 4,255,002
newly issued shares was based on the volume weighted average price of our shares on the Nasdaq Global
Market during the five trading days before the ex-dividend date or November 25, 2008. In addition, as of
January 20, 2009 management and the directors reinvested the cash portion of their dividend for the quarter
ended September 30, 2008 in the amount of $1.9 million into 818,877 newly issued shares in a private
placement at the same weighted average price as the stock portion of such dividend, effectively electing to
receive the full amount of the dividend in the form of newly issued shares. Under the terms of our waiver
agreements with our lenders, payment of dividends and the repurchasing of our common shares is subject to the
prior written consent of our lenders. Please see "Item 5. Operating and Financial Review and Prospects –
Liquidity and Capital Resources – Senior Secured Credit Facilities."
C. Research and Development, Patents and Licenses
Not Applicable.
D. Trend Information
Not Applicable.
E. Off-balance Sheet Arrangements
As of the date of this annual report, we do not have any off-balance sheet arrangements.
53
F. Tabular Disclosure of Contractual Obligations
The following table presents our contractual obligations as of December 31, 2008:
In thousands of Dollars
Payments due by period
Obligations
Total
Less than
1 year
1-3 years
(2010-
2011)
3-5 years
(2012-
2013)
More
than 5
years
(After
January
1, 2014)
Principal Loan Payments(1)
Interest payments (1) (2)
Operating lease obligation(3)
296,500 49,250
51,650 14,211
278
4,101
91,400
18,216
597
49,300 106,550
7,284
11,939
2,568
658
Total
352,251 63,739
110,213
61,897 116,402
(1)
Based on our outstanding indebtedness as of December 31, 2008.
(2)
(3)
Based on an estimated interest rate of 4.39%, which is the weighted average interest rate on all our
outstanding indebtedness for the year ended December 31, 2008. Calculations also include the
increased margins contained in our waiver agreements with our lenders. Please see "Item 5. Operating
and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit
Facilities."
In April 2008, we entered into a twelve-year operating lease for our new office facilities which will
expire in April 2020. For the first year our monthly lease payments are $21,300 (14,500 Euros). Our
monthly payments are adjusted annually according to the inflation rate plus 2% and it is estimated at
5%.
G. Safe Harbor
See section "forward looking statements" at the beginning of this annual report.
Item 6. Directors, Senior Management and Employees
A. Directors, Senior Management and Employees
Set forth below are the names, ages and positions of our directors, executive officers and key
employees. The board of directors is elected annually on a staggered basis, and each director elected holds
office until his successor shall have been duly elected and qualified, except in the event of his death,
resignation, removal or the earlier termination of his term of office. Officers are elected from time to time by
vote of our board of directors and hold office until a successor is elected.
At our 2008 annual general meeting Messrs Pappas and Softeland were elected as a Class A
directors. Upon Mr. Softeland's election, he resigned as a Class B director and, pursuant to a duly authorized
action of the Board, the number of directors that constitutes the entire membership of the Board was reduced
from seven (7) to six (6). The term of our Class B directors is set to expire at our 2009 annual meeting of
shareholders.
Age
Name
Prokopios (Akis) Tsirigakis 52
45
George Syllantavos
54
Petros Pappas
42
Peter Espig
51
Koert Erhardt
47
Tom Sшfteland
Position
Chief Executive Officer, President and Class C Director
Chief Financial Officer, Secretary and Class C Director
Chairman and Class A Director
Class B Director
Class B Director
Class A Director
On October 20, 2008, Mr. Nobu Su resigned from our board of directors.
54
Prokopios (Akis) Tsirigakis serves as our Chief Executive Officer, President and director. He has been
Star Maritime's Chairman of the Board, Chief Executive Officer and President since inception. Mr. Tsirigakis is
experienced in ship management, ship ownership and overseeing new shipbuilding projects. Since November
2003, he has been the Joint Managing Director of Oceanbulk Maritime S.A., a dry cargo shipping company that
has operated and managed vessels aggregating as much as 1.6 million deadweight tons of cargo capacity and
which is part of the Oceanbulk Group of affiliated companies involved in the service sectors of the shipping
industry. Since November 1998, Mr. Tsirigakis has been the Managing Director of Combine Marine Inc., a
company which he founded that provides ship management services to third parties and which is part of the
Oceanbulk Group. From 1991 to 1998, Mr. Tsirigakis was the Vice-President and Technical Director of Konkar
Shipping Agencies S.A. of Athens, after having served as Konkar's Technical Director from 1984 to 1991,
which at the time managed 16 drybulk carriers, multi-purpose vessels and tanker/combination carriers. From
1982 to 1984, Mr. Tsirigakis was the Technical Manager of Konkar's affiliate, Arkon Shipping Agencies Inc. of
New York, a part of the Archirodon Construction Group. He is a member of the Technical Committee
(CASTEC) of Intercargo, the International Association of Dry Cargo Shipowners, and of the Technical
Committees of Classification Societies. Mr. Tsirigakis received his Masters and B.Sc. in Naval Architecture
from The University of Michigan, Ann Arbor and has three years of seagoing experience. Mr. Tsirigakis
formerly served on the board of directors of Dryships Inc., a company listed on the Nasdaq Global Market
which provides international seaborne transportation services carrying various dry-bulk cargoes.
George Syllantavos serves as our Chief Financial Officer, Secretary and director. He has also been Star
Maritime's Chief Financial Officer, Secretary and a member of its board of directors since inception and it's
Secretary since December 2005. From May 1999 to December 2007, he was the President and General Manager
of Vortex Ltd., an aviation consulting firm specializing in strategic and fleet planning. From January 1998 to
April 1999, he served as a financial advisor to Hellenic Telecommunications Organization S.A., where, on
behalf of the Chief Executive Officer, he coordinated and led the company's listing on the New York Stock
Exchange (NYSE:OTE) and where he had responsibilities for the strategic planning and implementation of
multiple acquisitions of fixed-line telecommunications companies, including RomTelecom. Mr. Syllantavos
served as a financial and strategic advisor to both the Greek Ministry of Industry & Energy (from June 1995 to
May 1996) and the Greek Ministry of Health (from May 1996 to January 1998), where, in 1997 and 1998, he
helped structure the equivalent of a US$700 million bond issuance for the payment of outstanding debts to the
supplier of the Greek National Health System. From 1998 to 2004, he served as a member of the Investment
Committee of Rand Brothers & Co., a small U.S. merchant banking firm, where he reviewed and analyzed more
than 35 acquisition targets of small or medium sized privately-held manufacturing firms in the U.S. and
internationally, of which he negotiated, structured and directed the acquisition of three such firms with
transactions ranging in size from $7 million to $11 million. Mr. Syllantavos has a B.Sc. in Industrial
Engineering from Roosevelt University and an MBA in Operations Management, International Finance and
Transportation Management from Northwestern University (Kellogg).
Petros Pappas serves as our non-executive Chairman of the board of directors. He has been a member
of Star Maritime's board of directors since inception. Throughout his career as a principal and manager in the
shipping industry, Mr. Pappas has been involved in over 120 vessel acquisitions and disposals. In 1989, he
founded Oceanbulk Maritime S.A., a dry cargo shipping company that has operated managed vessels
aggregating as much as 1.6 million deadweight tons of cargo capacity. He also founded the Oceanbulk Group of
affiliated companies, which are involved in the service sectors of the shipping industry. The Oceanbulk Group
is comprised of Oceanbulk Maritime S.A., Interchart Shipping Inc., Oceanbulk Shipping and Trading S.A.,
Oceanbulk S&P, Combine Marine Inc., More Maritime Agencies Inc., and Sentinel Marine Services
Inc. Additionally, Mr. Pappas ranked among the top 25 Greek ship owners (by number of ocean going vessels)
as evaluated by the U.S. Department of Commerce's 2004 report on the Greek shipping industry. Mr. Pappas
has been a Director of the UK Defense Club, a leading insurance provider of legal defense services in the
shipping industry worldwide, since January 2002, and is a member of the Union of Greek Shipowners (UGS).
Mr. Pappas received his B.A. in Economics and his MBA from The University of Michigan, Ann Arbor.
Peter Espig serves as a member of our board of directors. Mr. Espig is experienced in the analysis of
investment opportunities, raising capital, deal sourcing and financial structuring. In August 2006, he founded
and currently serves as CEO of Advance Capital Japan, a private equity and consulting firm focused on raising
capital for mid-sized companies and pre-IPO investment and consulting. From 2005 to 2006, Mr. Espig served
as Vice-President of the Principal Finance and Securitization Group and Asia Special Situations Group for
Goldman Sachs Japan where he was responsible for sourcing and analyzing investment opportunities, balance
sheet restructuring and IPO and exit preparations for various corporate and real estate investments. Prior to
joining Goldman Sachs, Mr. Espig served from 2004 to 2005 as Vice-President of the New York private equity
firm, Olympus Capital, where he participated in corporate restructurings, investment analysis and financing
55
negotiations for both domestic and international investments. From 2003 to 2004, Mr. Espig worked as a
leveraged finance, special situations banker for Shinsei bank where he participated in leverage buyouts and debt
restructurings. In 1989, Mr. Espig received his B.A. from the University of British Columbia and in 2003, Mr.
Espig received his MBA from Columbia Business School where he was honored as a Chazen Society
International Scholar.
Koert Erhardt serves as a member of our board of directors. He has been a member of Star Maritime's
board of directors since inception. From September 2004 to December 2004, he served as the Chief Executive
Officer and a member of the board of directors of CC Maritime S.A.M., an affiliate of the Coeclerici Group, an
international conglomerate whose businesses include shipping and transoceanic transportation of drybulk
materials. From 1998 to September 2004, he served as General Manager of Coeclerici Armatori S.p.A. and
Coeclerici Logistics S.p.A., affiliates of the Coeclerici Group, where he created a shipping pool that
commercially managed over 130 vessels with a carrying volume of 72 million tons and developed the use of
Freight Forward Agreement trading as a hedging mechanism to the pool's exposure and positions. From 1994 to
1998, he served as the General Manager of Bulkitalia, a prominent shipping concern which at the time owned
and operated over 40 vessels. From 1990 to 1994, Mr. Erhardt served in various positions with Bulk Italia.
From 1988 to 1990, he was the Managing Director and Chief Operating Officer of Nedlloyd Drybulk, the
drybulk arm of the Nedlloyd Group, an international conglomerate whose interests include container ship liner
services, tankers, oil drilling rigs, pipe laying vessels and ship brokering. Mr. Erhardt received his Diploma in
Maritime Economics and Logistics from Hogere Havenen Vervoersschool (now Erasmus University),
Rotterdam, and received his MBA International Executive Program at INSEAD, Fontainebleau, France. Mr.
Erhardt has also studied at the London School of Foreign Trade.
Tom Sшfteland serves as a member of our board of directors. He has been a member of Star Maritime's
board of directors since inception. Since October 1996, he has been the Chief Executive Officer of Capital
Partners A.S. of Bergen, Norway, a financial services firm that he founded and which specializes in shipping
and asset finance. From 1990 to October 1996, he held various positions at Industry & Skips Banken, ASA, a
bank specializing in shipping, most recently as its Deputy Chief Executive Officer. Mr. Søfteland received his
B.Sc. in Economics from the Norwegian School of Business and Administration (NHH).
B. Compensation of Directors and Senior Management
For the period ended December 31, 2008, our Chief Executive Officer and President Prokopios
Tsirigakis and Chief Financial Officer and Secretary, George Syllantavos received aggregate compensation
from the Company in the amount of $572,809 and $395,743, respectively. Non-employee directors of Star Bulk
receive an annual cash retainer of $15,000, plus a fee of $1,000 for each board and committee meeting attended,
including meetings attended telephonically. The chairman of the audit committee receives an additional $7,500
per year and each chairman of our other standing committees will receive an additional $5,000 per year. In
addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the
board of directors or committees. We do not have a retirement plan for our officers or directors.
The table below summarizes the fees of the board of directors for the year ended December 31, 2008.
In Dollars
George Syllantavos
Petros Pappas
Nobu Su
Tom Softeland
Koert Erhardt
Peter Espig
5,000
21,000
18,000
41,500
39,000
24,000
148,500
Equity Incentive Plan
We have adopted an equity incentive plan, which we refer to as the 2007 Equity Incentive Plan, under
which officers, key employees, directors and consultants of the Company and its subsidiaries will be eligible to
receive options to acquire shares of common stock, stock appreciation rights, restricted stock and other stock-
based or stock-denominated awards. We have reserved a total of 2,000,000 shares of common stock for
issuance under the plan, subject to adjustment for changes in capitalization as provided in the plan. The purpose
of the 2007 Equity Incentive Plan is to encourage ownership of shares by, and to assist us in attracting, retaining
and providing incentives to, its officers, key employees, directors and consultants whose contributions to us are
or will be important to our success and to align the interests of such persons with our stockholders. The various
56
types of incentive awards that may be issued under the 2007 Equity Incentive Plan will enable us to respond to
changes in compensation practices, tax laws, accounting regulations and the size and diversity of its business.
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. The plan permits grants of options to
purchase common stock, stock appreciation rights, restricted stock, restricted stock units and unrestricted stock.
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 determined by the plan administrator, but in no event will the exercise price be less than the
fair market value of a common share on the date of grant. Options and stock appreciation rights are 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.
Upon 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 shall become
fully vested and exercisable in full.
The Board may amend or terminate the plan and may amend outstanding awards, provided that no such
amendment or termination may be made that would materially impair any rights, or materially increase any
obligations, of a grantee under an outstanding award. Stockholder approval of plan amendments may be
required in certain definitive, pre-determined circumstances if required by applicable rules of a national
securities exchange or the Commission. Unless terminated earlier by the board of directors, the plan will expire
ten years from the date on which the plan was adopted by the board of directors.
Pursuant to our equity incentive plan, we have issued the following securities:
•
•
•
•
On December 3, 2007, 90,000 restricted common shares to Prokopios (Akis) Tsirigakis, our
President and Chief Executive Officer, subject to applicable vesting of 30,000 common shares
on each of July 1, 2008, 2009 and 2010;
On December 3, 2007, 75,000 restricted common shares to George Syllantavos, our Chief
Financial Officer and Secretary, subject to applicable vesting of 25,000 common shares on each
of July 1, 2008, 2009 and 2010;
On March 31, 2008, 150,000 restricted common shares to Peter Espig, our Director, subject to
applicable vesting of 75,000 common shares on each of April 1, 2008 and 2009; and
On December 5, 2008, an aggregate of 130,000 unvested restricted common shares to all of our
employees and an aggregate of 940,000 unvested restricted common shares to the members of
our board of directors. All of these shares vested on January 31, 2009.
C. Board Practices
Our board of directors is divided into three classes with only one class of directors being elected in each
year and following the initial term for each such class, each class will serve a three-year term. The initial term
of our board of directors is as follows:
•
•
•
The term of the Company's Class A directors expires in 2011;
The term of Class B directors expires in 2009; and
The term of Class C directors expires in 2010.
57
Committees of the Board of Directors
We have established an audit committee comprised of two independent members of our board of
directors who are responsible for reviewing our accounting controls and recommending to the board of directors
the engagement of our outside auditors. Our 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. We have established a compensation committee comprised of three independent directors
which is responsible for recommending to the board of directors our senior executive officers' compensation
and benefits. We have also established a nominating and corporate governance committee comprised of two
members which is responsible for recommending to the board of directors nominees for director and directors
for appointment to board committees and advising the board with regard to corporate governance practices.
Shareholders may also nominate directors in accordance with procedures set forth in our bylaws. The members
of the audit, compensation and nominating and corporate governance committees are Mr. Tom Softeland, who
also serves as the chairman of our audit committees, Mr. Koert Erhardt who also acts as the chairman of our
nominating and corporate governance committee, and Mr. George Syllantavos who serves only on the
compensation committee and acts as its chairman.
D. Employees
As of December 31, 2008, we had twenty-two employees and as of April 9, 2009, twenty-five
employees including our Chief Executive Officer and Chief Financial Officer. As of December 31, 2008 and
April 9, 2009, twenty and twenty-three employees, respectively, were engaged in the day to day management of
the vessels in our fleet.
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 presents certain information as of April 9, 2009 regarding the ownership of our
shares of common stock with respect to each shareholder, who we know to beneficially own more than five
percent of our outstanding shares of common stock, and our directors.
Beneficial Owner
Petros Pappas (3)
Shares of common stock
Amount (1) Percentage (2)
16.1%
9,738,354
Oceanwood Capital Management LLP (4)
3,052,341
5.1%
Giovine Capital Group LLC (5)
7,989,429
13.2%
F5 Capital (6)
Prokopios Tsirigakis
George Syllantavos
Koert Erhardt
Tom Softeland
Peter Espig
3,803,481
2,127,345
875,703
573,471
297,827
378,879
6.3%
3.5%
1.5%
*%
*%
*%
(1)
Includes all shares of our common stock underlying our warrants which are exercisable within 60 days.
The warrants included herein will expire on December 16, 2009.
(2)
Percentage amounts based on 60,301,279 shares of our common stock outstanding as of April 9, 2009.
58
(3)
(4)
(5)
(6)
Information derived from the Schedule 13G/A of Mr. Pappas which was filed with the Commission on
February 13, 2009. Mr. Pappas is the Chairman of our board of directors.
Information derived from the Schedule 13G/A of Oceanwood Capital Management LLP which was
filed with the Commission on February 17, 2009.
Information derived from the Schedule 13G/A of Giovine Capital Group LLC which was filed with the
Commission on January 8, 2009.
Information derived from the Schedule 13D/A of F5 Capital which was filed with the Commission on
July 29, 2008. According to such filing, Mr. Nobu Su, a former member of our board of directors,
exercises voting and investment control over the securities held of record by F5 Capital, a Cayman
Islands corporation, which is the nominee of TMT.
*
Less than 1%
Our major shareholders have the same voting rights as our other shareholders. No corporation or
foreign government owns more than 50% of our outstanding shares of common stock. We are not aware of any
arrangements, the operation of which may at a subsequent date result in a change in control of Star Bulk.
B. Related Party Transactions
Under the Master Agreement Star Bulk and Star Maritime agreed to acquire a fleet of eight drybulk
carriers with a combined cargo-carrying capacity of approximately 692,000 dwt. from certain subsidiaries of
TMT, a company controlled by Nobu Su, a former director of Star Bulk. The aggregate purchase price specified
in the Master Agreement for the initial fleet was $224.5 million in cash and 12,537,645 shares of our common
stock, issued on November 30, 2007. As additional consideration for eight vessels, 1,606,962 shares of common
stock of Star Bulk to be issued to TMT in two installments as follows: (i) 803,481 additional shares of our
common stock, no more than 10 business days following the filing of our Annual Report on Form 20-F for the
fiscal year ended December 31, 2007, and (ii) 803,481 additional shares of our common stock, no more than 10
business days following the filing of our Annual Report on Form 20-F for the fiscal year ended December 31,
2008. The shares in respect of the first installment were issued to a nominee of TMT on July 17, 2008.
Under the Master Agreement we agreed, with some limited exceptions, to include the shares of our
common stock comprising the stock consideration portion of the aggregate purchase price and the additional
stock consideration (collectively the "Registrable Securities"), in our registration statement filed in connection
with the Redomiciliation Merger. In addition, we granted TMT (on behalf of itself or its affiliates that hold
Registrable Securities) the right, under certain definitive, pre-determined circumstances and subject to certain
restrictions, including lock-up and market stand-off restrictions, to require us to in the future register the
Registrable Securities under the Securities Act. Under the Master Agreement, TMT also has the right to require
us to make available shelf registration statements (if Star Bulk is eligible to do so) permitting sales of shares
into the market from time to time over an extended period. In addition, TMT has the ability to exercise certain
piggyback registration rights, 180 days following the effective date of the Redomiciliation Merger. All expenses
relating to such registration will be borne by us. On September 2, 2008, we filed a registration statement on
Form F-3 (File No. 333-153304), which was declared effective on November 3, 2008, registering for resale an
aggregate of 4,606,962 shares on behalf of F5 Capital.
Star Gamma LLC, a wholly-owned subsidiary of Star Bulk, entered into time a charter agreement
dated, February 23, 2007, with TMT for the Star Gamma. Star Iota Inc., a wholly-owned subsidiary of Star
Bulk, entered into time charter agreement, dated February 26, 2007, with TMT for the Star Iota. Both time
charters commenced on the date of their delivery to us, have a duration of one year and daily charterhire rates of
$28,500 and $18,000 respectively. Neither of the above mentioned vessels were delivered to the Company as
of December 31, 2007, consequently no amounts relating thereto have been included in the consolidated
statement of income in 2007. For the year ended December 31, 2008, the Company earned $13.0 million net
revenue under the time charter party agreements with TMT and included in Voyage revenues in the
Consolidated Statements of Income.
Star Maritime has used the services of Combine to conduct certain vessel inspection services for the
vessels in the initial fleet. Under an agreement dated May 4, 2007 we appointed Combine, a company affiliated
with our Chief Executive Officer, Mr. Tsirigakis and our directors Messrs. Pappas and Anagnostou as interim
59
manager of the vessels in the initial fleet. Given the start-up nature of Star Bulk, under the agreement, Combine
provided technical management and associated services, including legal services, to the vessels so as to affect
the smooth delivery and operation of the vessels to Star Bulk. Such services provided at a lump-sum fee of
$10,000 per vessel for services leading up to and including taking delivery of each vessel and at a daily fee of
$450 per vessel from the delivery of each vessel to Star Bulk onwards during the term of the agreement.
Combine was entitled to be reimbursed at cost by Star Bulk for any and all expenses incurred by them in the
management of the vessels, was obligated to provide Star Bulk the full benefit of all discounts and rebates
enjoyed by them. The term of the agreement is for one year from the date of delivery of each vessel. As of
December 31, 2008, none of Star Bulk's vessels were managed by Combine.
During 2007, Combine charged us approximately $91,000 for legal and other services, which are
included in the consolidated statement of income for the year ended December 31, 2007, $84,000 related to
vessel pre-delivery expenses, which represents $10,000 per vessel from initial fleet plus $4,000 of other
capitalized expenses that were capitalized as vessel cost as of December 31, 2007 and $0 for daily management
fees since there were no vessels under its management. During the year ended December 31, 2008, we incurred
costs of approximately $2.1 million for operational and technical management services of Combine. As of
December 31, 2008, we had an outstanding receivable balance of $11,345. As of December 31, 2007 and 2006,
Star Bulk had no outstanding balance with Combine.
Oceanbulk Maritime, S.A., a related party, has paid for certain expenses on behalf of Star Maritime.
Star Bulk's director Mr. Petros Pappas is also the Honorary Chairman of Oceanbulk, a ship management
company of drybulk vessels. Star Bulk's Chief Executive Officer, Mr. Prokopios (Akis) Tsirigakis, as well as
its officer Mr. Christos Anagnostou had been employees of Oceanbulk until November 30, 2007. There were
no expenses incurred or charged by Oceanbulk Maritime S.A. during the year ended December 31,
2006. Included in the consolidated statement of income for December 31, 2007 are legal and office support
expenses paid to Oceanbulk Maritime S.A. in the amount of approximately $196,000. For the year ended
December 31, 2008, we earned $11.6 million net revenue under the time charter party agreements with Vinyl
Navigation which is included in voyage revenues in the consolidated statements of income. We also paid to
Oceanbulk a brokerage commission in the amount of $183,500 regarding the sale of Star Iota. As of December
31, 2008, we had an outstanding payable balance of $418. As of December 31, 2007 and 2006, we had no
outstanding balance with Oceanbulk.
On December 3, 2007, we entered into an agreement with TMT, a company affiliated with Nobu Su,
one of our former directors, to acquire, Star Kappa, a 2001 built Supramax drybulk carrier for the aggregate
purchase price of $72.0 million with a cargo carrying capacity of approximately 52,055 dwt.
On March 24, 2008, Mr. Tsirigakis, our President and Chief Executive Officer transferred in a private
transaction an aggregate of 2,473,893 of his shares and 300,000 of his warrants to Mr. Petros Pappas, the
Company's Chairman.
On March 24, 2008, Mr. George Syllantavos, our Chief Financial Officer and Secretary transferred in a
private transaction an aggregate of 981,524 of his shares and 102,500 of his warrants to Mr. Petros Pappas, the
Company's Chairman.
On June 3, 2008, we entered into an agreement with Vinyl Navigation, a company affiliated with
Oceanbulk Maritime, S.A., a company founded by Star Bulk's Chairman, Mr. Petros Pappas, to acquire the Star
Ypsilon, a Capesize drybulk carrier for the purchase price of $87.2 million, which was the same price that Vinyl
Navigation had paid when it acquired the vessel from an unrelated third party. We ultimately paid $86.9 million
due to the late delivery of the vessel to us. The Star Ypsilon was delivered to us on September 18, 2008. No
commissions were charged to us on the sale or the chartering of the Star Ypsilon. We acquired the Star Ypsilon
with an existing above market time charter at an average daily hire rate of $91,932, and we recorded the fair
market value of time charter acquired at $14.4 million which is being amortized as a decrease to revenues
during the remaining approximate three years period of the respective acquired time charter. Vinyl Navigation
has a back-to back charter agreement with TMT, a company controlled by a former director of the Company,
Mr. Nobu Su, on the same terms as Star Bulk's charter agreement with Vinyl Navigation.
Interchart Shipping Inc. or Interchart, a company affiliated to Oceanbulk acts as a chartering broker of
the Star Zeta, the Star Omicron, Star Beta, Star Sigma and the Star Cosmo. During the year ended December
31, 2008 the brokerage commission of 1.25% on charter revenue paid to Interchart amounted approximately to
$396,533. As of December 31, 2008, Star Bulk had an outstanding liability of approximately $6,451 to
Interchart.
60
On July 10, 2007, we entered into separate employment agreements with each of Mr. Tsirigakis and
Mr. Syllantavos to employ them in their capacities as Chief Executive Officer and President, and Chief
Financial Officer and Secretary, respectively. Each of these agreements has a term of three years unless
terminated earlier in accordance with the terms of such agreements. Under the employment agreements, each of
Mr. Tsirigakis and Mr. Syllantavos is expected to receive an annual salary of €80,000, or approximately
$118,000 and €70,000, or approximately $103,000, respectively. Mr. Tsirigakis and Mr. Syllantavos will also
receive additional incentive compensation as determined annually by the compensation committee of our board
of directors.
On October 3, 2007, we also entered into separate consulting agreements with companies owned and
controlled by our Chief Executive Officer and Chief Financial Officer respectively. Each of these agreements
has a term of three years unless terminated earlier in accordance with the terms of such agreements. Under the
consulting agreements, each company controlled by Mr. Tsirigakis and Mr. Syllantavos respectively, is
expected to receive an annual consulting fee of €370,000, or approximately $544,000 and €250,000, or
approximately $368,000. Mr. Tsirigakis and Mr. Syllantavos will also receive a discretionary bonus and
additional incentive compensation as determined annually by the compensation committee of our board of
directors.
The related expenses for 2007 and 2008 were $658,777 and $968,552, respectively, and are included in
general and administrative expenses in the consolidated statement of income.
Our Chief Executive Officer and Chief Financial Officer are also subject to non-competition and non-
solicitation covenants during the term of the agreement and for a period of three months following termination
for any reason.
Additionally, our Chief Executive Officer and Chief Financial Officer are entitled to receive an annual
discretionary bonus which is determined by our board of directors in its sole discretion. For the year ended
December 31, 2008, our Chief Executive Officer and Chief Financial Officer received 200,000 and 175,000
restricted common shares, respectively, respectively, as a discretional bonus.
On January 20, 2009, management and the directors reinvested the cash portion of their dividend for the
quarter ended September 30, 2008, in the amount of $1.9 million, into 818,877 newly issued shares in a private
placement effectively electing to receive the full amount of the dividend in the form of newly issued
shares. Please see Item 5, "Operating and Financial Review and Prospects – Dividend Payments."
All ongoing and future transactions between us and any of our officers and directors or their respective
affiliates, including loans by our officers and directors, if any, will be on terms believed by us to be no less
favorable than are available from unaffiliated third parties, and such transactions or loans, including any
forgiveness of loans, will require prior approval, in each instance by a majority of our uninterested
"independent" directors or the members of our board who do not have an interest in the transaction, in either
case who had access, at our expense, to our attorneys or independent legal counsel.
C. Interests of Experts and Counsel
Not Applicable.
Item 8. Financial Information
A. Consolidated statements and other financial information.
See Item 18. "Financial Statements."
Legal Proceedings
In August 2008, TMT, an indirect shareholder of Star Bulk through its nominee, F5 Capital, alleged
that it had suffered unspecified damages arising from an alleged breach by Star Bulk of a purported obligation
under the Master Agreement to maintain a registration statement in effect so as to permit TMT to sell its
13,341,126 Star Bulk shares freely on the open market. Among other things, TMT had demanded that Star Bulk
repurchase approximately 3.8 million shares from TMT at a share price of $14.04 per share, which was the
closing price of Star Bulk's common shares on the Nasdaq Global Market on June 2, 2008, which demand was
withdrawn by TMT in connection with discussions between Star Bulk and TMT. Star Bulk denies that it has
any such obligation under the Master Agreement. On November 3, 2008, the Commission declared effective a
61
registration statement on Form F-3 relating to the resale of shares held by F5 Capital. As of the date hereof, no
claim has been filed by TMT or any affiliate thereof against Star Bulk.
Arbitration proceedings have commenced pursuant to disputes that have arisen with the charterers of
the Star Alpha. The disputes relate to vessel performance characteristics and hire. We are seeking damages for
repudiations of the charter due to the early redelivery of the vessel as well as unpaid hire, while the charterers
are seeking contingent damages resulting from the vessel's off-hire. Submissions have been filed by the parties
with the arbitration panel. The arbitration panel is also handling additional proceedings between third parties
that sub-chartered the vessel. In the first quarter of 2009 the vessel underwent unscheduled repairs which
resulted in a 25 day off-hire period. Following the completion of the repairs, the Star Alpha was redelivered to
us by its charterers approximately one month prior to the earliest redelivery date allowed under the time charter
agreement.
We commenced an arbitration proceeding as complainant against Oldendorff Gmbh & Co. KG of
Germany, or Oldendorff, seeking damages resulting from Oldendorff's repudiation of a charter relating to the
Star Beta. The Star Beta had been time chartered by a subsidiary of the Company to Industrial Carriers Inc. of
Ukraine, or ICI. Under that time charter, ICI was obligated to pay a gross daily charterhire rate of $106,500
until February 2010. In January 2008, ICI sub-chartered the vessel to Oldendorff for one year at a gross daily
charterhire rate of $130,000 until February 2009. In October 2008, ICI assigned its rights and obligations under
the sub-charter to one of our subsidiaries in exchange for ICI being released from the remaining term of the ICI
charter. Oldendorff notified us that it considers the assignment of the sub-charter to be an effective repudiation
of the sub-charter by ICI. ICI subsequently filed an application for protection from its creditors in a Greek
insolvency proceeding which was dismissed. ICI is appealing the dismissal. In January 2009, we made a written
submission to our appointed arbitrator asserting claims against Oldendorff and alleged damages in the amount
of approximately $14.8 million. In March 2009, we made a written submission to respond to claims that we
overpaid under the relevant time charter agreement and submitted counterclaims in connection with the early re-
delivery of the vessel. We believe that the assignment was valid and that Oldendorff has erroneously repudiated
the sub-charter.
We have not been involved in any legal proceedings which we believe 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 we believe 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
Under the terms of our waiver agreements with our lenders, payment of dividends and repurchases of
our shares and warrants are subject to the prior written consent of our lenders. Please see "– Senior Secured
Credit Facilities." We previously paid regular dividends on a quarterly basis from our operating surplus, in
amounts that allowed us to retain a portion of our cash flows to fund vessel or fleet acquisitions, and for debt
repayment and other corporate purposes, as determined by our management and board of directors. The
declaration and payment of dividends will be subject at all times to the discretion of our board of directors. The
timing and amount of dividends will depend on our earnings, financial condition, cash requirements and
availability, fleet renewal and expansion, restrictions in our loan agreements, the provisions of Marshall Islands
law affecting the payment of dividends and other factors. Marshall Islands law generally prohibits the payment
of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the
payment of such dividends, or if there is no surplus, dividends may be declared or paid out of net profits for the
fiscal year in which the dividend is declared and for the preceding fiscal year.
We believe that, under current law, our dividend payments from earnings and profits would constitute
"qualified dividend income" and as such will generally be subject to a 15% United States federal income tax
rate with respect to non-corporate individual stockholders. Distributions in excess of our earnings and profits
will be treated first as a non-taxable return of capital to the extent of a United States stockholder's tax basis in
its common stock on a Dollar-for-Dollar basis and thereafter as capital gain. Please see Item 10 "Additional
Information—Taxation" for additional information relating to the tax treatment of our dividend payments.
62
On February 14, April 16, and July 29, 2008, we declared dividends amounting to approximately $4.6
million ($0.10 per share, paid on February 28, 2008 to the shareholders of record on February 25, 2008),
approximately $18.8 million ($0.35 per share, paid on May 23, 2008 to the shareholders of record on May 16,
2008), and approximately $19.4 million ($0.35 per share, paid on August 18, 2008 to the shareholders of record
on August 8, 2008), respectively. On November 17, 2008, we declared a cash and stock dividend on our
common stock totaling $0.36 per common share for the quarter ended September 30, 2008. This dividend was
paid on December 5, 2008 to stockholders of record on November 28, 2008. The dividend payment consisted of
a cash portion in the amount of $0.18 per share with the remaining half of the dividend paid in the form of
newly issued common shares. The amount of 4,255,002 newly issued shares was based on the volume weighted
average price of Star Bulk's shares on the Nasdaq Global Market during the five trading days before the ex-
dividend date or November 25, 2008. In addition, as of January 20, 2009 management and the directors
reinvested the cash portion of their dividend for the quarter ended September 30, 2008, in the amount of $1.9
million, into 818,877 newly issued shares in a private placement at the same weighted average price as the stock
portion of such dividend, effectively electing to receive the full amount of the dividend in the form of newly
issued shares. Under the terms of our waiver agreements with our lenders, payment of dividends and
repurchases of our shares and warrants are subject to the prior written consent of our lenders. Please see "Item
5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit
Facilities."
B. Significant Changes
On January 22, 2009, we filed with the Commission a universal shelf registration statement, as
amended, on Form F-3 (File No. 333-156843), which was declared effective on February 17, 2009, covering the
registration of up to $250.0 million of the Company's securities, including common shares, preferred shares,
debt securities, guarantees, warrants, purchase contracts and units and covering up to 14,305,599 shares of the
Company's common stock and 1,132,500 warrants under the U.S. Securities Act of 1933, as amended.
In March 2009, we entered into agreements with our lenders to obtain waivers for certain covenants
including minimum asset coverage covenants contained in our loan agreements. Under the terms of our waiver
agreements with our lenders, payment of dividends and repurchases of our shares and warrants are subject to
the prior written consent of our lenders. Please see "Item 5. Operating and Financial Review and Prospects –
Liquidity and Capital Resources – Senior Secured Credit Facilities."
Item 9. The Offer and Listing
A. Offer and Listing Details
The Company's common stock and warrants are traded on the Nasdaq Global Market under the symbols
"SBLK" and "SBLKW," respectively. Since the Redomiciliation Merger on November 30, 2007, the price
history of our common stock and warrants was as follows:
COMMON STOCK
2009
January 2009
February 2009
March 2009
April 2009*
2008
1st Quarter ended March 31, 2008
2nd Quarter ended June 30, 2008
Six months ended June 30, 2008
3rd Quarter ended September 30, 2008
4th Quarter ended December 31, 2008
Six months ended December 31, 2008
For the year ended December 31, 2008
September 2008
October 2008
November 2008
December 2008
2007
December 3, 2007 to December 31, 2007
* Through April 14, 2009.
63
Low
Low
High
$
$
$
$
3.34 $
3.00 $
2.46 $
2.90 $
High
$
$
$
$
$
$
$
$
$
$
$
12.37 $
14.34 $
14.34 $
11.47 $
7.03 $
11.47 $
14.34 $
10.18 $
7.03 $
4.23 $
3.11 $
2.20
1.45
1.21
2.29
9.36
11.39
9.36
6.73
1.80
1.80
1.80
6.73
3.30
2.03
1.80
High
$
Low
14.05 $
13.34
WARRANTS
2009
January 2009
February 2009
March 2009
April 2009*
2008
1st Quarter ended March 31, 2008
2nd Quarter ended June 30, 2008
Six months ended June 30, 2008
3rd Quarter ended September 30, 2008
4th Quarter ended December 31, 2008
Six months ended December 31, 2008
For the year ended December 31, 2008
September 2008
October 2008
November 2008
December 2008
2007
December 3, 2007 to December 31, 2007
* Through April 14, 2009.
Low
High
$
$
$
$
0.25 $
0.14 $
0.08 $
0.06 $
0.18
0.05
0.04
0.04
High
$
$
$
$
$
$
$
$
$
$
$
4.46
6.40
6.40
3.74
1.50
3.74
6.40
2.86
1.50
0.85
0.29
Low
$
$
$
$
$
$
$
$
$
1.99
3.70
1.99
1.52
0.10
0.10
0.10
1.52
0.40
0.10
0.11
High
Low
$ $
7.03
$
0.72
Until November 30, 2007, Star Maritime's common stock and warrants traded on the American Stock
Exchange under the symbols "SEA" and SEA.WS," respectively, Since Star Maritime's initial public offering in
December 2005, the price history of its common stock and warrants was as follows:
COMMON STOCK
2007
1st Quarter ended March 31, 2007
2nd Quarter ended June 30, 2007
Six months ended June 30, 2007
3rd Quarter ended September 30, 2007
4th Quarter ended December 31, 2007
Six months ended December 31, 2007
For the year ended December 31, 2007
2006
1st Quarter ended March 31, 2006
2nd Quarter ended June 30, 2006
Six months ended June 30, 2006
3rd Quarter ended September 30, 2006
4th Quarter ended December 31, 2006
Six months ended December 31, 2006
For the year ended December 31, 2006
2005
December 15, 2005 to December 31, 2005
WARRANTS
2007
1st Quarter ended March 31, 2007
2nd Quarter ended June 30, 2007
Six months ended June 30, 2007
3rd Quarter ended September 30, 2007
4th Quarter ended December 31, 2007
Six months ended December 31, 2007
For the year ended December 31, 2007
Low
High
$
$
$
$
$
$
$
10.30 $
12.31 $
12.31 $
14.03 $
14.05 $
14.05 $
14.05 $
9.86
10.34
9.86
11.30
13.34
11.30
9.86
High
$ 9.92
$ 10.16
$ 10.16
9.74
$
9.90
$
$
9.90
$ 10.16
Low
$ 9.62
9.47
$
9.47
$
9.45
$
9.60
$
9.45
$
9.45
$
High
N/A
Low
N/A
High
Low
2.15 $
4.25 $
4.25 $
5.85 $
7.03 $
7.03 $
7.03 $
0.72
2.18
0.72
3.10
4.36
3.10
0.72
$
$
$
$
$
$
$
64
2006
1st Quarter ended March 31, 2006
2nd Quarter ended June 30, 2006
Six months ended June 30, 2006
3rd Quarter ended September 30, 2006
4th Quarter ended December 31, 2006
Six months ended December 31, 2006
For the year ended December 31, 2006
2005
December 15, 2005 to December 31, 2005
B. Plan of Distribution
Not Applicable.
C. Markets
High
Low
1.25 $
1.20 $
1.25 $
1.06 $
0.84 $
1.06 $
1.25 $
0.87
0.87
0.87
0.70
0.55
0.55
0.55
$
$
$
$
$
$
$
High
Low
N/A
N/A
Shares of our common stock and warrants trade on the Nasdaq Global Market under the symbols "SBLK" and
"SBLKW," respectively.
D. Selling Shareholders
Not Applicable.
E. Dilution
Not Applicable.
F. Expenses of the Issue
Not Applicable.
Item 10. Additional Information
A. Share Capital
Not Applicable.
B. Memorandum and Articles of Association
Directors
Our directors are elected by a majority of the votes cast by stockholders entitled to vote in an election.
Our amended and restated articles of incorporation provide that cumulative voting shall not be used to elect
directors. Our board of directors must consist of at least three members. The exact number of directors is fixed
by a vote of at least 66 2/3% of the entire board. Our amended and restated articles of incorporation provide for
a staggered board of directors whereby directors shall be divided into three classes: Class A, Class B and Class
C which shall be as nearly equal in number as possible. Shareholders, acting as at a duly constituted meeting, or
by unanimous written consent of all shareholders, initially designated directors as Class A, Class B or Class C
with only one class of directors being elected in each year and following the initial term for each such class,
each class will serve a three-year term. The initial term of our board of directors is as follows: (i) the term of the
Company's Class A directors expires in 2011; (ii) the term of Class B directors expires in 2009; and (iii) the
term of Class C directors expires in 2010. Each director serves his respective term of office until his successor
has been elected and qualified, except in the event of his death, resignation, removal or the earlier termination
of his term of office. Our board of directors has the authority to fix the amounts which shall be payable to the
members of the board of directors for attendance at any meeting or for services rendered to us.
Stockholder Meetings
Under our amended and restated bylaws, annual stockholder meetings will be held at a time and place
selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Special
65
meetings may be called by the board of directors, chairman of the board or by the president. Our board of
directors may set a record date between 10 and 60 days before the date of any meeting to determine the
stockholders that will be eligible to receive notice and vote at the meeting.
Dissenters' Rights of Appraisal and Payment
Under the BCA, our stockholders have the right to dissent from various corporate actions, including
any merger or consolidation, sale of all or substantially all of our assets not made in the usual course of our
business, and receive payment of the fair value of their shares. In the event of any further amendment of our
amended and restated articles of incorporation, a stockholder also has the right to dissent and receive payment
for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder
must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting
stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the
institution of proceedings in the high court of the Republic of the Marshall Islands or in any appropriate court in
any jurisdiction in which the Company's shares are primarily traded on a local or national securities exchange.
Stockholders' Derivative Actions
Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our
favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of
common stock both at the time the derivative action is commenced and at the time of the transaction to which
the action relates.
Indemnification of Officers and Directors
Our amended and restated bylaws includes a provision that entitles any our directors or officers to be
indemnified by us upon the same terms, under the same conditions and to the same extent as authorized by the
BCA if he acted in good faith and in a manner reasonably believed to be in and not opposed to our best
interests, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
We are also authorized to carry directors' and officers' insurance as a protection against any liability
asserted against our directors and officers acting in their capacity as directors and officers regardless of whether
we would have the power to indemnify such director or officer against such liability bylaw or under the
provisions of our bylaws. We believe that these indemnification provisions and insurance are useful to attract
and retain qualified directors and executive officers.
The indemnification provisions in our amended and restated bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. There is currently no pending material litigation or
proceeding involving any of our directors, officers or employees for which indemnification is sought.
Anti-takeover Provisions of our Charter Documents
Several provisions of our amended and restated articles of incorporation and bylaws may have anti-
takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a
hostile change of control and enhance the ability of our board of directors to maximize stockholder value in
connection with any unsolicited offer to acquire us. However, these anti -takeover provisions, which are
summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by
means of a tender offer, a proxy contest or otherwise, that a stockholder may consider in its best interest and (2)
the removal of incumbent officers and directors.
Blank Check Preferred Stock
Under the terms of our amended and restated articles of incorporation, our board of directors has
authority, without any further vote or action by our stockholders, to issue up to 25.0 million shares of blank
check preferred stock. Our board of directors may issue shares of preferred stock on terms calculated to
discourage, delay or prevent a change of control of our company or the removal of our management.
66
Classified Board of Directors
Our amended and restated articles of incorporation provide for a board of directors serving staggered,
three-year terms. Approximately one-third of our board of directors will be elected each year. The classified
board provision could discourage a third party from making a tender offer for our shares or attempting to obtain
control of our company. It could also delay stockholders who do not agree with the policies of the board of
directors from removing a majority of the board of directors for two years.
Election and Removal of Directors
Our amended and restated articles of incorporation prohibit cumulative voting in the election of
directors. Our articles of incorporation also require shareholders to give advance written notice of nominations
for the election of directors. Our articles of incorporation further provide that our directors may be removed
only for cause and only upon affirmative vote of the holders of at least 70% of the outstanding voting shares of
the Company. These provisions may discourage, delay or prevent the removal of incumbent officers and
directors.
Limited Actions by Stockholders
Our bylaws provide that if a quorum is present, and except as otherwise expressly provided by law, the
affirmative vote of a majority of the shares of stock represented at the meeting shall be the act of the
shareholders. Shareholders may act by way of written consent in accordance with the provisions of Section 67
of the BCA.
Advance Notice Requirements for Shareholder Proposals and Director Nominations
Our amended and restated articles of incorporation provide that shareholders seeking to nominate
candidates for election as directors or to bring business before an annual meeting of shareholders must provide
timely notice of their proposal in writing to the corporate secretary. Generally, to be timely, a shareholder's
notice must be received at our principal executive offices not less than 120 days nor more than 180 days prior to
the one year anniversary of the preceding year's annual meeting. Our articles of incorporation also specify
requirements as to the form and content of a shareholder's notice. These provisions may impede shareholders'
ability to bring matters before an annual meeting of shareholders or make nominations for directors at an annual
meeting of shareholders.
C. Material Contracts
We have entered into three credit facilities with Commerzbank A.G. and Piraeus Bank, as agent and as
lender. For a discussion of our term loan facilities, please see the section of this annual report entitled
"Operating and Financial Review and Prospects – Liquidity and Capital Resources – Senior Secured Credit
Facilities." We have no other material contracts, other than contracts entered into in the ordinary course of
business, to which the Company or any member of the group is a party.
D. Exchange Controls
Under Marshall Islands and Greek 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
United States Taxation
The following discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed U.S. Treasury Department regulations, administrative rulings,
pronouncements and judicial decisions, all as of the date of this Annual Report. This discussion assumes that
decisions, all as of the date of this Annual Report. This discussion assumes that we do not have an office or
other fixed place of business in the United States.
Tax Classification of the Company
Star Maritime was a Delaware corporation which merged into the Company pursuant to the
Redomiciliation Merger as more specifically described above.
67
Section 7874(b) of the Code ("Section 7874(b)") provides that a corporation organized outside the
United States, such as the Company, which acquires (pursuant to a "plan" or a "series of related transactions")
substantially all of the assets of a corporation organized in the United States, such as Star Maritime, will be
treated as a U.S. domestic corporation for U.S. federal income tax purposes if shareholders of the U.S.
corporation whose assets are being acquired own at least 80 % of the non-U.S. acquiring corporation after the
acquisition. If Section 7874(b) were to apply to Star Maritime and the Redomiciliation Merger, then the
Company, as the surviving entity of the Redomiciliation Merger, would be subject to U.S. federal income tax as
a U.S. domestic corporation on its worldwide income after the Redomiciliation Merger. In addition, as a
domestic corporation, any dividends paid by us to a Non-U.S. Holder, as defined below, would be subject to a
U.S. federal income tax withholding at the rate of 30 % or such lower rate as provided by applicable tax treaty.
After the completion of the Redomiciliation Merger, the shareholders of Star Maritime owned less than
80 % of the Company. Star Maritime received an opinion of its counsel, Seward & Kissel LLP, that Star Bulk
should not be subject to Section 7874(b) after the Redomiciliation Merger. Based on the structure of the
Redomiciliation Merger, the Company believes that it is not subject to U.S. federal income tax as a U.S.
domestic corporation on its worldwide income for taxable years after the Redomiciliation Merger. However,
there is no authority directly addressing the application of Section 7874(b) to a transaction such as the
Redomiciliation Merger where shares in a foreign corporation such as the Company are issued concurrently
with (or shortly after) a merger. In particular, since there is no authority directly applying the "series of related
transactions" or "plan" provisions to the post-acquisition stock ownership requirements of Section 7874(b),
there is no assurance that the IRS will agree with Seward & Kissel's opinion on this matter. Moreover, Star
Maritime has not sought a ruling from the IRS on this point. Therefore, there is no assurance that the IRS would
not seek to assert that the Company is subject to U.S. federal income tax on its worldwide income after the
Redomiciliation Merger, although the Company believes that such an assertion should not be successful.
The remainder of this discussion assumes that the Company will not be treated as a U.S. domestic
corporation for any taxable year.
Taxation of the Company's Shipping Income
We anticipate that we will derive substantially all of our gross income from the use and operation of
vessels in international commerce and that this income will principally consist of freights from the
transportation of cargoes (including COAs), hire or lease from time or voyage charters and the performance of
services directly related thereto, which we refer to as "shipping income."
Shipping income that is attributable to transportation that begins or ends, but that does not both begin
and end, in the United States will be considered to be 50% derived from sources within the United States.
Shipping income attributable to transportation that both begins and ends in the United States will be considered
to be 100% derived from sources within the United States. We are not permitted by law to engage in
transportation that gives rise to 100% U.S. source income. Shipping income attributable to transportation
exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United
States. Shipping Income derived from sources outside the United States will not be subject to U.S. federal
income tax.
Based upon our anticipated shipping operations, our vessels will operate in various parts of the world,
including to or from U.S. ports. Unless exempt from U.S. taxation under Section 883 of the Code, we will be
subject to U.S. federal income taxation, in the manner discussed below, to the extent our shipping income is
considered derived from sources within the United States.
Application of Code Section 883
Under the relevant provisions of Section 883 of the Code and the final regulations interpreting Section
883, as promulgated by the U.S. Treasury Department, we will be exempt from U.S. taxation on our U.S. source
shipping income if:
(i) we are organized in a "qualified foreign country" which is one that grants an equivalent
exemption from tax to corporations organized in the United States in respect of each category of shipping
income for which exemption is being claimed under Section 883 and which we refer to as the "country of
organization requirement"; and
68
(ii) we can satisfy any one of the following two (2) stock ownership requirements:
•
•
more than 50% of our stock, in terms of value, is beneficially owned by individuals who are
residents of a qualified foreign country, which the Company refers to as the "50% Ownership
Test"; or
our stock is "primarily and regularly" traded on an established securities market located in the
United States or in a qualified foreign country, which we refer to as the "Publicly Traded Test".
The U.S. Treasury Department has recognized the Marshall Islands, our country of incorporation and
the country of incorporation our ship-owning subsidiaries as qualified foreign countries. Accordingly, we
satisfy the country of organization requirement.
Therefore, our eligibility to qualify for exemption under Section 883 is wholly dependent upon being
able to satisfy one of the stock ownership requirements. For the 2008 taxable year, we believe that it satisfied
the Publicly-Traded Test since, for more than half the days of our 2008 taxable year, our stock was "primarily
and regularly traded" on the Nasdaq Global Market which is an "established securities market" in the United
States within the meaning of the Section 883 regulations and we intend to take this position on our 2008 United
States income tax return.
Taxation in Absence of Internal Revenue Code Section 883 Exemption
To the extent the benefits of Section 883 are unavailable with respect to any item of U.S. source
income, our U.S. source shipping income would be subject to a 4% tax imposed by Section 887 of the Code on
a gross basis, without the benefit of deductions. Since under the sourcing rules described above, no more than
50% of our shipping income would be treated as being derived from 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.
Based on the U.S. source Shipping Income for 2008, we would be subject to U.S. federal income tax of
approximately $258,212 under Section 887 in the absence of an exemption under Section 883.
Gain on Sale of Vessels
Regardless of whether we qualify for exemption under Section 883, we will not be subject to United
States federal income taxation with respect to gain realized on a sale of a vessel, provided the sale is considered
to occur outside of the United States under 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 Holders of Common Stock
The following is a discussion of the material United States federal income tax consequences applicable
to a U.S. Holder and a Non-U.S. Holder, each as defined below, of our common stock. This discussion does not
purport to deal with the tax consequences of owning common stock to all categories of investors, some of
which, such as dealers in securities, investors whose functional currency is not the Dollar and investors that
own, actually or under applicable constructive ownership rules, 10% or more of our common stock, may be
subject to special rules. This discussion deals only with holders who hold the common stock as a capital asset.
Shareholders are encouraged to consult their own tax advisors concerning the overall tax consequences arising
in their particular situation under United States federal, state, local or foreign law of the ownership of common
stock.
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 a United
States citizen or resident, United States corporation or other United States entity taxable as a corporation, an
estate the income of which is subject to United States federal income taxation regardless of its source, or a trust
if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and
one or more United States persons have the authority to control all substantial decisions of the trust.
If a partnership holds our common stock, the tax treatment of a partner will generally depend upon the
status of the partner and upon the activities of the partnership. If you are a partner in a partnership holding our
common stock, you are encouraged to consult your tax advisor.
69
Distributions
Subject to the discussion of passive foreign investment companies below, any distributions made by us
with respect to 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
or accumulated earnings and profits, as determined under United States federal income tax principles.
Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the
extent of the 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 "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 United States foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate (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 (through 2010) provided that (1) the common stock is readily
tradable on an established securities market in the United States (such as the Nasdaq Global Market, on which
our common stock is listed); (2) we are not a passive foreign investment company for the taxable year during
which the dividend is paid or the immediately preceding taxable year (which we do not believe we are, have
been or will be); and (3) the U.S. Individual Holder has owned the common stock for more than 60 days in the
121-day period beginning 60 days before the date on which the common stock becomes ex-dividend. There is
no assurance that any dividends paid on our common stock will be eligible for these preferential rates in the
hands of a U.S. Individual Holder. Legislation has been previously introduced in the U.S. Congress which, if
enacted in its present form, would preclude our dividends from qualifying for such preferential rates
prospectively from the date of the enactment. Any dividends paid by us which are not eligible for these
preferential rates will be taxed as ordinary income to a U.S. Holder.
Special rules may apply to any "extraordinary dividend" generally, a dividend in an amount which is
equal to or in excess of ten percent of a stockholder's adjusted basis (or fair market value in certain
circumstances) in a share of common stock paid by us. If we pay an "extraordinary dividend" on our common
stock that is treated as "qualified dividend income," then any loss derived by a 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
Assuming we do not constitute a passive foreign investment company for any taxable year, 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. 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. Such capital gain or loss 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.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder that holds stock in a foreign
corporation classified as a passive foreign investment company for United States federal income tax purposes.
In general, we will be treated as a passive foreign investment company with respect to a U.S. Holder if, for any
taxable year in which such holder held our common stock, either:
•
•
at least 75% of our gross income for such taxable year consists of passive income (e.g.,
dividends, interest, capital gains and rents derived other than in the active conduct of a rental
business); or
at least 50% of the average value of the assets held by the corporation during such taxable year
produce, or are held for the production of, passive income.
For purposes of determining whether we are a passive foreign investment company, we will be treated
as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary
70
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.
Based on our current operations and future projections, we do not believe that we are, nor do we expect
to become, a passive foreign investment company with respect to any taxable year. Although there is no legal
authority directly on point, and we are not relying upon an opinion of counsel on this issue, our belief is based
principally on the position that, for purposes of determining whether we are a passive foreign investment
company, the gross income we derive or are deemed to derive from the time chartering and voyage chartering
activities of our wholly-owned subsidiaries should constitute services income, rather than rental income.
Correspondingly, such income should not constitute passive income, and the assets that we or our wholly-
owned subsidiaries own and operate in connection with the production of such income, in particular, the
tankers, should not constitute passive assets for purposes of determining whether we are a passive foreign
investment company. We believe there is substantial legal authority supporting our position consisting of case
law and Internal Revenue Service pronouncements concerning the characterization of income derived from time
charters and voyage charters as services income for other tax purposes. However, in the absence of any legal
authority specifically relating to the statutory provisions governing passive foreign investment companies, the
Internal Revenue Service or a court could disagree with our position. In addition, although we intend to conduct
our affairs in a manner to avoid being classified as a passive foreign investment company with respect to any
taxable year, we cannot assure you that the nature of our operations will not change in the future.
As discussed more fully below, if we were to be treated as a passive foreign investment company for
any taxable year, a U.S. Holder would be subject to different taxation rules depending on whether the U.S.
Holder makes an election to treat us as a "Qualified Electing Fund," which election we refer to as a "QEF
election." As an alternative to making a QEF election, a U.S. Holder should be able to make a "mark-to-market"
election with respect to our common stock, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as an "Electing Holder,"
the Electing Holder must report each year for United States federal income tax purposes his pro rata share of
our ordinary earnings and our net capital gain, if any, for our taxable year that ends with or within the taxable
year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing
Holder. The Electing Holder's adjusted tax basis in the common stock will be increased to reflect taxed but
undistributed earnings and profits. Distributions of earnings and profits that had been previously taxed will
result in a corresponding reduction in the adjusted tax basis in the common stock and will not be taxed again
once distributed. An Electing Holder would generally recognize capital gain or loss on the sale, exchange or
other disposition of our common stock. A U.S. Holder would make a QEF election with respect to any year that
our company is a passive foreign investment company by filing IRS Form 8621 with his United States federal
income tax return. If we were aware that we were to be treated as a passive foreign investment company for any
taxable year, we would provide each U.S. Holder with all necessary information in order to make the QEF
election described above.
Taxation of U.S. Holders Making a "Mark-to-Market" Election
Alternatively, if we were to be treated as a passive foreign investment company for any taxable year
and, as we anticipate, our stock is treated as "marketable stock," a U.S. Holder would be allowed to make a
"mark-to-market" election with respect to our common stock, provided the U.S. Holder completes and files IRS
Form 8621 in accordance with the relevant instructions and related Treasury Regulations. 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 its fair market value at the end of the taxable year,
but only to the extent of the net amount previously included in income as a result of the mark-to-market
election. A U.S. 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.
71
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a passive foreign investment company for any taxable year, a U.S.
Holder who does not make either a QEF election or a "mark-to-market" election for that year, whom we refer to
as a "Non-Electing Holder," would be subject to special rules with respect to (1) any excess distribution (i.e.,
the portion of any distributions received by the Non-Electing Holder on our common stock in a taxable year in
excess of 125% 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:
•
•
•
the excess distribution or gain would be allocated ratably over the Non-Electing Holders'
aggregate holding period for the common stock;
the amount allocated to the current taxable year and any taxable year before we became a
passive foreign investment company would be taxed as ordinary income; and
the amount allocated to each of the other taxable years would be subject to tax at the highest
rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for
the deemed deferral benefit would be imposed with respect to the resulting tax attributable to
each such other taxable year.
These penalties would not apply to a pension or profit sharing trust or other tax-exempt organization
that did not borrow funds or otherwise utilize leverage in connection with its acquisition of our common stock.
If a Non-Electing Holder who is an individual dies while owning our common stock, such holder's successor
generally would not receive a step-up in tax basis with respect to such stock.
United States Federal Income Taxation of "Non-U.S. Holders"
A beneficial owner of common stock (other than a partnership) that is not a U.S. Holder is referred to
herein as a "Non-U.S. Holder."
Dividends on Common Stock
Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax
on dividends received from us with respect to our common stock, unless that income is effectively connected
with the Non-U.S. Holder's conduct of a trade or business in the United States. If the Non-U.S. Holder is
entitled to the benefits of a United States income tax treaty with respect to those dividends, that income is
taxable only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United
States.
Sale, Exchange or Other Disposition of Common Stock
Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax
on any gain realized upon the sale, exchange or other disposition of our common stock, unless:
•
•
the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in
the United States. If the Non-U.S. Holder is entitled to the benefits of an income tax treaty with
respect to that gain, that gain is taxable only if it is attributable to a permanent establishment
maintained by the Non-U.S. Holder in the United States; or
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 United States trade or business for United States federal income
tax purposes, the income from the common stock, including dividends and the gain from the sale, exchange or
other disposition of the stock that is effectively connected with the conduct of that trade or business will
generally be subject to regular United States federal income tax in the same manner as discussed in the previous
section relating to the taxation of 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 branch profits tax at a rate of 30%, or at a lower rate as may be
specified by an applicable income tax treaty.
72
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:
•
•
•
fail to provide an accurate taxpayer identification number;
are notified by the Internal Revenue Service that you have failed to report all interest or
dividends required to be shown on your federal income tax returns; or
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 Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY, as
applicable.
If you sell your common stock to or through a United States office or broker, the payment of the
proceeds is subject to both United States backup withholding and information reporting unless 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-United States office of a non-United States 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, United States 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-United States office of a broker that is a United States person or has some
other contacts with the United States.
Backup withholding tax is not an additional tax. Rather, you generally may obtain a refund of any
amounts withheld under backup withholding rules that exceed your income tax liability by filing a refund claim
with the Internal Revenue Service.
Marshall Islands Tax Consequences
We are incorporated in the Marshall Islands. Under current Marshall Islands law, we are not subject to
tax on income or capital gains, and no Marshall Islands withholding tax will be imposed upon payments of
dividends by us to our stockholders.
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 Commission. These materials, including this annual
report and the accompanying exhibits, may be inspected and copied at the public reference facilities maintained
by the Commission at 100 F Street, N.E., Washington, D.C. 20549, or from the Commission'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
The international drybulk industry is a capital intensive industry, requiring significant amounts of
investment. Much of this investment is provided in the form of long-term debt. Our debt usually contains
interest rates that fluctuate with LIBOR. Increasing interest rates could adversely impact future earnings.
73
Under our amended term loans with both Commerzebank AG and Piraeus Bank we pay an interest rate
of LIBOR plus a margin of 2%. As of April 9, 2009, we had $120.0 million outstanding under our term loan
with Commerzebank AG and a total of $162.5 million outstanding under our term loans with Piraeus Bank.
Our interest expense for the year ended December 31, 2008 was $10.2 million. Our estimated interest
expense for the year ended December 31, 2009 is $14.2 million. Our interest expense estimate is based on the
amount of our outstanding borrowings under our term loan facilities as of December 31, 2008 and the weighted
average interest rate of our term loan facilities for the year ended December 31, 2008, in the amount of
4.39%. Our interest expense is affected by changes in the general level of interest rates. As an indication of the
extent of our sensitivity to interest rate changes, an increase of 100 basis points will increase our interest
expense for the year ended December 31, 2009 by $2.8 million assuming the same debt profile throughout the
year.
The following table sets forth the sensitivity of loans in millions of Dollars to a 100 basis points
increase in LIBOR during the next five years:
For the year
ended
December 31,
2009
2010
2011
2012
2013
Estimated
amount
of interest
expense
14.2
10.3
7.9
6.5
5.5
44.4
Estimated amount
of interest expense after an
increase of 100 basis points
17.0
12.5
9.7
7.9
6.7
53.8
Sensitivity
2.8
2.2
1.8
1.4
1.2
9.4
Currency and Exchange Rates
We generate all of our revenues in Dollars and operating expenses in currencies other than the Dollar
are less than 1% of total operation expenses. However, 41% of our general and administrative expenses
including consulting fees, salaries and traveling expenses were incurred in Euros. For accounting purposes,
expenses incurred in Euros are converted into Dollars at the exchange rate prevailing on the date of each
transaction. Because a significant portion of our expenses are incurred in currencies other than the Dollar, our
expenses may from time to time increase relative to our revenues as a result of fluctuations in exchange rates,
particularly between the Dollar and the Euro, which could affect the amount of net income that we report in
future periods. As of December 31, 2008, the effect of a 1% adverse movement in Dollar/Euro exchange rates
would have resulted in an increase of $51,526 in our general and administrative expense. While we historically
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, including interest rate swaps, 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.
Forward Freight Agreements
From time to time, we may take positions in derivative instruments including freight forward
agreements, or FFAs. Generally, FFAs and other derivative instruments may be used to hedge a vessel owner's
exposure to the charter market for a specified route and period of time. Upon settlement, if the contracted
charter rate is less than the average of the rates, as reported by an identified index, for the specified route and
time period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the
contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if
the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum.
If we take positions in FFAs or other derivative instruments we could suffer losses in the settling or termination
of the FFA. This could adversely affect our results of operation and cash flow.
During the year ended December 31, 2008, we entered into a limited number of FFAs on the Capesize
index. The FFAs are intended to serve as an approximate hedge for our Capesize vessels trading in the spot
market for 2009 and 2010, effectively locking-in the approximate amount of revenue that we expect to receive
from such vessels for the relevant periods. Our FFAs do not qualify as cash flow hedges for accounting
74
purposes and expect that such FFAs are recorded on our balance sheet at fair value. All of our FFAs are cleared
transactions and are intended as approximate hedges to our physical exposure in the spot market.
During the year ended December 31, 2008, the gain from FFAs amounted to $250,620. As of April 9,
2009, an unrealized loss of $1.9 million was incurred as a result of the adjustment in the fair value of the FFAs.
Item 12. Description of Securities Other than Equity Securities
A. Debt securities
Not Applicable.
B. Warrants and rights
Not Applicable.
C. Other securities
Not Applicable.
D. American depository shares
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
(a) Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have conducted an evaluation of
the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2008.
The Company's disclosure controls and procedures are designed to ensure that information required to be
disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and
that such information is accumulated and communicated to the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding
required disclosures.
Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2008, the Company's disclosure controls and procedures are effective to
provide reasonable assurance that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms. Our management recognizes that any controls and
procedures no matter how well designed or operated, can only provide reasonable assurance that the objectives
of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Our disclosure controls and
procedures have been designed to provide reasonable assurance of achieving their objectives. However,
because of the inherent limitations in all control systems, even after the remediation efforts described above, no
evaluation of controls can provide absolute assurance that all control issues, if any, within the Company, have
been detected.
75
(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 defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as
amended. 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, and carried out by our board of
directors, management, and other personnel, to provide reasonable assurance regarding the reliability of the
Company's financial reporting and the preparation of the Company's consolidated financial statements for
external reporting purposes in accordance with US GAAP. The Company's internal control over financial
reporting includes policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of consolidated financial statements in accordance with US GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of management and
directors of the Company; and
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
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. In addition, 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.
Management has assessed the effectiveness of the Company's internal control over financial reporting
at December 31, 2008, based on the framework established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the aforementioned
assessment, management concluded that internal control over financial reporting is effective as of December 31,
2008.
(c) Attestation Report of the Registered Public Accounting Firm
Deloitte, Hadjipavlou Sofianos & Cambanis S.A., our independent registered public accounting firm, as
auditors of the consolidated financial statements of the Company for the year ended December 31, 2008, has
also audited the effectiveness of the Company's internal control over financial reporting as stated in their audit
report which is included below.
(d) Changes in Internal Control over Financial Reporting
During the evaluation performed as of December 31, 2007, we and our independent registered
accounting firm identified material weaknesses in our internal controls. The material weaknesses related to the
absence of sufficient time for management to (1) design and implement a comprehensive system of internal
controls and (2) hire sufficient accounting personnel with the requisite US GAAP expertise that are required to
support our operation as a shipping company. However, management believes it made the adjustments to
present the annual consolidated financial statements for the year ended December 31, 2007 in accordance with
US GAAP.
The following changes were made to the Company's internal control over financial reporting during the
year ended December 31, 2008 to remediate the material weaknesses, as disclosed in our Annual Report on
Form 20-F for the year ended December 31, 2007:
•
We have appointed external consultants (one of the 4 largest consulting companies) to assist us
with completing our implementation of a comprehensive system of internal controls over
financial closing and reporting. In addition, the consultants have assisted us with documenting
and evaluating the adequacy and operating effectiveness of our company's internal control
environment for the year ended December 31, 2008.
76
•
•
•
We have hired key employees with the appropriate level of US GAAP expertise and significant
professional experience in the shipping industry. These individuals together with management,
effectively completed the financial and reporting process for the year ended December 31,
2008.
We have established a policy regarding the training of our accounting personnel in US GAAP.
We have evaluated the overall effectiveness of our remediation plan and concluded that we
have established and maintained adequate internal control over financial reporting.
There were no other changes in our internal controls over financial reporting that occurred during the
period covered by this Annual Report that have materially effected, or are reasonably likely to materially affect,
our internal control over financial reporting.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Star Bulk Carriers Corp.
Majuro, Republic of the Marshall Islands
We have audited the internal control over financial reporting of Star Bulk Carriers Corp. and
subsidiaries (the "Company") as of December 31, 2008, based on criteria established in Internal Control —
Integrated Framework
the Treadway
Commission. The Company'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.
the Committee of Sponsoring Organizations of
issued by
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 by, or under the supervision
of, the company's principal executive and principal financial officers, or persons performing similar functions,
and effected by the company's board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the 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, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of
the Company and our report dated April 15, 2009 expressed an unqualified opinion on those financial
statements.
Deloitte
Hadjipavlou Sofianos & Cambanis S.A.
Athens, Greece
April 15, 2009
78
Item 16A. Audit Committee Financial Expert
The Board of Directors of the Company has determined that Mr. Softeland, whose biographical details
are included in Item 6 "Directors and Senior Management," a member of our Audit Committee qualifies as a
financial expert and is considered to be independent according to the Commission rules.
Item 16B. Code of Ethics
The Company has adopted a code of ethics that applies to its directors, officers and employees. A copy
of our code of ethics is posted in the "Investor Relations" section of the Star Bulk Carriers Corp. website, and
may be viewed at http://www.starbulk.com. Shareholders may be direct their requests to the attention of
Investor Relations, Star Bulk Carriers Corp., 7, Fragoklisias Street, 2nd floor, Maroussi 151 25, Athens, Greece.
Item 16C. Principal Accountant Fees and Services
Deloitte, Hadjipavlou, Sofianos & Cambanis S.A., Certified Auditors Accountants S.A, or Deloitte,
have audited our annual consolidated financial statements acting as our Independent Registered Public
Accounting Firm for the fiscal years ended December 31, 2007 and 2008.
The table below sets forth the total fees for the services performed by Deloitte in 2007 and 2008, and
breaks these amounts by category of services.
(In thousands of Dollars)
2007
2008
Audit fees
Audit-related fees
Tax fees
All other fees
Total fees
748
-
-
-
748
1,183
-
-
-
1,183
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 the 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.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
As of December 31, 2008, we had repurchased under the share and warrant repurchase program
announced on January 24, 2008, a total of 1,247,000 of our common shares at an aggregate purchase price of
approximately $8.0 million (average of $6.40 per common share) and a total of 1,362,500 of our warrants at an
aggregate purchase price of approximately $5.5 million (average of $4.02 per warrant). Under the terms of the
amendments to our three credit facilities, the payment of dividends and repurchases of our shares and warrants
are subject to the prior written consent of our lenders. Please see "Item 5. Operating and Financial Review and
Prospects – Liquidity and Capital Resources – Senior Secured Credit Facilities."
Item 16F. Change in Registrants 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 Marshall Islands. As a foreign private issuer, we will be 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 of material noncompliance with Nasdaq
79
corporate governance practices and the establishment and composition of an audit committee and a formal
written audit committee charter. A description of the significant differences between our corporate governance
practices and the Nasdaq's requirements are as follows:
•
•
•
•
Our board is comprised of six directors.
Consistent with Marshall Islands law requirements, in lieu of obtaining an independent review
of related party transactions for conflicts of interests, our amended and restated bylaws require
any director who has a potential conflict of interest to identify and declare the nature of the
conflict to the board of directors at the next meeting of the board of directors. Our amended and
restated bylaws additionally provide that related party transactions must be approved by
independent and disinterested directors.
In accordance with Marshall Islands law, we will not be required to obtain shareholder approval
if it chooses to issue additional securities.
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 amended and restated 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 amended and restated bylaws provide that shareholders must give between 150
and 180 days advance notice to properly introduce any business at a meeting of the
shareholders.
Other than as noted above, we are in full compliance with applicable Nasdaq corporate governance
standard requirements for foreign private issuers.
PART III
Item 17. Financial Statements
See Item 18. "Financial Statements."
Item 18. Financial Statements
The following consolidated financial statements, beginning on page F-1, together with the report of
Deloitte thereon, are filed as a part of this report.
Item 19. Exhibits
Amended and Restated Articles of Incorporation of Star Bulk Carriers Corp. (1)
Amended and Restated bylaws of the Company (2)
Form of Share Certificate (3)
Form of Warrant Certificate (4)
Form of 2007 Equity Incentive Plan (5)
Stock Escrow Agreement (6)
Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant (7)
Registration Rights Agreement (8)
Management Agreement with Combine Marine Inc. (9)
Agreement and Plan of Merger (10)
Master Agreement, as amended (11)
Supplemental Agreement (12)
Loan Agreement with Commerzbank AG dated December 27, 2007 (13)
Loan Agreement with Piraeus Bank A.E. dated April 14, 2008 (14)
Amendment No. 1 to Loan Agreement with Piraeus Bank A.E. dated April 17, 2008 (15)
Amendment No. 2. to Loan Agreement with Piraeus Bank A.E. dated September 18, 2008 (16)
Loan Agreement with Piraeus Bank A.E. dated July 1, 2008 (17)
Number Description of Exhibition
1.1
1.2
2.1
2.2
2.3
2.4
2.5
2.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10 Waiver Agreement with Commerzbank AG dated March 12, 2009
4.11 Waiver Agreement with Piraeus Bank A.E., as Agent, dated March 10, 2009
80
4.12 Waiver Agreement with Piraeus Bank A.E. dated March 10, 2009
8.1
12.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Subsidiaries of the Company
Securities Exchange Act, as amended
12.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
13.1 Certification of the Principal Executive Officer pursuant to 18 USC Section 1350, as adopted, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
13.2 Certification of the Principal Financial Officer pursuant to 18 USC Section 1350, as adopted, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
15.1 Consent of Independent Registered Public Accounting Firm (Deloitte)
15.2 Consent of Independent Registered Public Accounting Firm (Goldstein Golub Kessler LLP)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Incorporated by reference to Exhibit 3.2 of the Company's Joint Proxy/Registration Statement (File
No. 333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 3.1 of the Company's Joint Proxy/Registration Statement (File No.
333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 4.1 of the Company's Joint Proxy/Registration Statement (File No.
333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 4.3 of Star Maritime's Registration Statement (File No. 333-
125662), which was filed with the Commission on October 26, 2005.
Incorporated by reference to Exhibit 10.2 of the Company's Joint Proxy/Registration Statement (File
No. 333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 10.9 of Star Maritime's Registration Statement (File No. 333-
125662), which was filed with the Commission on June 9, 2005.
Incorporated by reference to Exhibit 4.4 of Star Maritime's Registration Statement (File No. 333-
125662), which was filed with the Commission on June 9, 2005.
Incorporated by reference to Exhibit 10.13 of Star Maritime's Registration Statement (File No. 333-
125662), which was filed with the Commission on June 9, 2005.
Incorporated by reference to Exhibit 10.16 of the Company's Joint Proxy/Registration Statement (File
No. 333-141296), which was filed with the Commission on May 24, 2007.
Incorporated by reference to Exhibit 1.1 of the Company's Joint Proxy/Registration Statement (File No.
333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 10.19 of the Company's Joint Proxy/Registration Statement (File
No. 333-141296), which was filed with the Commission on October 12, 2007.
Incorporated by reference to Exhibit 10.11 of the Company's Joint Proxy/Registration Statement (File
No. 333-141296), which was filed with the Commission on March 14, 2007.
Incorporated by reference to Exhibit 4.5 of he Company's Annual Report for the year ended December
31, 2007 (File No. 001-33869), which was filed with the Commission on June 30, 2008.
Incorporated by reference to Exhibit 4.6 of the Company's Annual Report for the year ended December
31, 2007 (File No. 001-33869), which was filed with the Commission on June 30, 2008.
Incorporated by reference to Exhibit 4.7 of the Company's Annual Report for the year ended December
31, 2007 (File No. 001-33869), which was filed with the Commission on June 30, 2008.
Incorporated by reference to Exhibit 10.24 of the Company's Registration Statement on Form F-3 (File
No. 333-153304), which was filed with the Commission on October 10, 2008.
Incorporated by reference to Exhibit 10.23 of the Company's Registration Statement on Form F-3 (File
No. 333-153304), which was filed with the Commission on September 2, 2008.
81
STAR BULK CARRIERS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Goldstein Golub Kessler
LLP)
Report of Independent Registered Public Accounting Firm (Deloitte. Hadjipavlou,
Sofianos & Cambanis S.A.)
Consolidated Balance Sheets as of December 31, 2007 and 2008
Consolidated Statements of Income for the years ended December 31, 2006, 2007 and
2008
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2006, 2007 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007
and 2008
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Star Bulk Carriers Corp.
We have audited the statements of income, stockholders' equity and cash flows of Star Bulk Carriers Corp.
(formerly Star Maritime Acquisition Corp.) (a corporation in the development stage) for the year ended
December 31, 2006. These financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results
of operations of Star Bulk Carriers Corp. and its cash flows for the year ended December 31, 2006 in
conformity with United States generally accepted accounting principles.
/s/ GOLDSTEIN GOLUB KESSLER LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 10, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Star Bulk Carriers Corp.
Majuro, Republic of the Marshall Islands
We have audited the accompanying consolidated balance sheets of Star Bulk Carriers Corp. and subsidiaries
(the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
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, such 2008 and 2007 consolidated financial statements present fairly, in all material respects, the
financial position of Star Bulk Carriers Corp. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 15, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.
Deloitte.
Hadjipavlou, Sofianos & Cambanis S.A.
Athens, Greece
April 15, 2009
F-3
STAR BULK CARRIERS CORP.
Consolidated Balance Sheets
December 31, 2007 and 2008
(In thousands of Dollars except for share and per share data)
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash (Note 2i)
Trade accounts receivable
Inventories (Note 4)
Due from related party (Note 3)
Due from managers
Forward freight agreements (Note 17)
Prepaid expenses and other receivables
Deposit on forward freight agreements
Total Current Assets
FIXED ASSETS
Advances for vessels to be acquired
Vessels and other fixed assets, net (Note 5)
Total Fixed Assets
OTHER NON-CURRENT ASSETS
Deferred finance charges (Note 6)
Due from managers
Fair value of above market acquired time charter (Note 7)
Restricted cash (Note 8)
TOTAL ASSETS
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 8)
Accounts payable
Due to related party (Note 3)
Accrued liabilities (Note 12)
Deferred revenue (Note 2u)
Total Current Liabilities
NON CURRENT LIABILITIES
Long-term debt (Note 8)
Fair value of below market acquired time charter (Note 7)
Deferred revenue (Note 2u)
Other non-current liability
TOTAL LIABILITIES
Commitments & Contingencies (Note 15)
Stockholders' Equity
Preferred Stock; $0.01 par value authorized 25,000,000 shares; none issued
or outstanding at December 31, 2007 and 2008 (Note 9)
Common Stock, $0.01 par value, 100,000,000 shares authorized at
December 31, 2007 and 2008; 42,516,433 and 58,412,402 shares
issued and outstanding at December 31, 2007 and 2008, respectively (Note 9)
Additional paid in capital (Note 9)
Retained earnings
Total Stockholders' Equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
2007
2008
$ 18,985 $
-
-
598
-
-
-
299
-
29,475
2,486
3,379
1,276
465
1,747
251
680
2,514
19,882
42,273
118,242
262,946
-
821,284
381,188
821,284
600
120
1,952
-
$ 403,742 $
1,391
270
14,148
12,010
891,376
$
- $
168
480
1,493
916
3,057
49,250
1,031
156
3,296
3,554
57,287
-
25,307
-
-
28,364
247,250
21,574
5,072
53
331,236
-
-
-
-
425
368,454
6,499
375,378
403,742
584
479,592
79,964
560,140
891,376
The accompanying notes are an integral part of these consolidated financial statements
F-4
STAR BULK CARRIERS CORP.
Consolidated Statements of Income
For the years ended December 31, 2006, 2007 and 2008
(In thousands of Dollars except for share and per share data)
REVENUES:
Voyage revenues
EXPENSES/(INCOME):
Voyage expenses (Note 16)
Vessel operating expenses (Note 16)
Management fees
Management fees-related party
Drydocking expenses
Depreciation (Note 5)
Vessel impairment loss (Note 5)
Gain on forward freight agreements (Note 17)
Time charter agreement termination fees (Note 13)
General and administrative expenses
Year ended Year ended Year ended
December
December
31, 2008
31, 2007
December
31, 2006
-
3,633
238,883
-
-
-
-
-
1
-
-
-
1,210
1,211
43
622
23
-
-
745
-
-
-
7,756
3,504
26,198
975
392
7,881
51,050
3,646
(251)
(9,711)
12,424
9,189
96,108
Operating (loss)/profit
(1,211 )
(5,556 )
142,775
OTHER INCOME/(EXPENSES):
Interest and finance costs (Note 8)
Interest and other income
Total other income/(expense), net
Income before income taxes
Income tax (Note 14)
Net income
Earnings per share, basic (Note 10)
Earnings per share, diluted (Note 10)
-
4,396
(45 )
9,021
(10,238)
1,201
4,396
8,976
(9,037)
3,185
3,420
133,738
(207 )
(9 )
-
2,978
3,411
133,738
0.10
0.10
0.11
0.09
2.55
2.46
Weighted average number of shares outstanding, basic (Note 10)
29,026,924 30,065,923 52,477,947
Weighted average number of shares outstanding, diluted(Note 10)
29,026,924 36,817,616 54,447,985
The accompanying notes are an integral part of these consolidated financial statements
F-5
STAR BULK CARRIERS CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
For the years ended December 31, 2006, 2007 and 2008
(In thousands of Dollars except for share and per share data)
Common Stock
Additional
Paid-in
Total
stockholders'
# of Shares
Par Value
Capital
Retained
earnings
Equity
BALANCE, January 1, 2006
Net income for the year ended December 31,
2006
BALANCE, December 31, 2006
29,026,924
-
29,026,924
Net income for the year ended December 31,
2007
Redomiciliation Merger common stock par
value change
Issuance of common stock to TMT
Warrants exercised
Reclassification of common stock subject to
redemption
Stock-based compensation
BALANCE, December 31, 2007
Net income for the year ended December 31,
2008
Warrants exercised
Warrants and common stock buyback
Issuance of common stock to TMT
Stock dividend
Issuance of restricted shares and
amortization of stock based compensation
Dividends declared and paid ($0.98 per
share)
BALANCE, December 31, 2008
-
12,537,645
951,864
42,516,433
-
11,769,486
(1,247,000)
803,481
4,255,002
3
-
3
-
287
125
10
-
-
425
-
118
(12)
8
42
120,442
110
120,555
-
120,442
2,978
3,088
2,978
123,533
-
3,411
3,411
(287)
175,830
7,605
64,680
184
368,454
-
-
-
-
-
6,499
-
94,037
(13,437)
18,938
7,617
133,738
-
-
-
(7,659 )
-
175,955
7,615
64,680
184
375,378
133,738
94,155
(13,449)
18,946
-
315,000
3
3,983
-
3,986
-
58,412,402
-
584
479,592
(52,614)
79,964
(52,614)
560,140
The accompanying notes are an integral part of these consolidated financial statements
F-6
STAR BULK CARRIERS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2007 and 2008
(In thousands of Dollars except for share and per share data)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Amortization of fair value of above market acquired time charter
Amortization of fair value of below market acquired time charter
Amortization of deferred finance charges
Vessel impairment loss
Stock- based compensation
Gain on forward freight agreements
Other non-cash charges
Changes in operating assets and liabilities:
(Increase)/Decrease in:
Fair value of trust account
Restricted cash by forward freight agreements
Trade accounts receivable
Inventories
Prepaid expenses and other receivables
Deposit on forward freight agreements
Due from related party
Due from managers
Deferred tax asset
Increase/(Decrease) in:
Accounts payable
Due to related party
Accrued liabilities
Income taxes payable
Deferred revenue
Deferred interest
Net Cash provided by Operating Activities
Cash Flows from Investing Activities:
Cash disbursements from trust account
Advances for vessels to be acquired
Additions to vessel cost and other fixed assets
Cash paid for above market acquired time charter
Cash proceeds from vessel sale
Increase in restricted cash
Net cash provided by/(used in) Investing Activities
Cash Flows from Financing Activities:
Proceeds from bank loans
Loan repayment
Repurchase of shares and warrants
Proceeds from exercise of warrants
Deferred underwriting fees paid
Financing fees paid
Cash Dividend
Payment of offering costs
Net cash (used in)/ provided by Financing Activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Year
ended
December
31, 2006
Year
ended
December
31, 2007
Year
ended
December
31, 2008
2,978
3,411 133,738
1
-
-
-
-
-
-
-
(4,057)
-
-
(31)
-
-
9
93
-
336
207
-
2,163
1,699
-
-
(4)
-
-
-
(4)
-
-
-
-
-
-
-
(170)
(170)
1,525
593
745
28
51,050
2,221
(1,465) (82,754)
234
3,646
3,986
(251)
53
-
-
184
-
-
(1,179)
-
(598)
(68)
-
(2,486)
(3,379)
(678)
(462)
- (2,514)
(465
-
(1,897)
(120)
-
-
(31)
480
437
(207)
916
(2,163)
864
(324
2,455
-
7,710
-
370 110,747
194,094
(83,444)
(95,707)
(1,980)
-
-
12,963
-
-
(413,457)
(14,417)
16,579
(12,010
(423,305)
- 317,500
- (21,000)
- (13,449)
94,236
7,534
-
(4,000 )
-
(1,625)
- (52,614)
-
-
3,534 323,048
16,867
2,118
10,490
18,985
Cash and cash equivalents at end of the year
2,118
18,985
29,475
F-7
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest
Income taxes
Non-cash items:
Issue of common stock at fair value for delivery of vessels
Deferred finance charges
Receivable from exercise of warrants
Amount owed for capital expenditures
Fair value of below market acquired time charters
Issuance of common stock to stockholders (non-cash stock dividend)
-
-
-
-
-
-
-
216
9,378
-
175,955
600
81
52
26,772
18,946
-
-
-
79,021
7,659
The accompanying notes are an integral part of these consolidated financial
statements
F-8
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
1. Basis of Presentation and General Information:
On November 30, 2007, Star Maritime Acquisition Corp. ("Star Maritime") incorporated in the state of
Delaware, merged into its wholly-owned subsidiary at the time, Star Bulk Carriers Corp. ("Star Bulk") a
company incorporated in Marshall Islands, with Star Bulk being the surviving entity (collectively, the
"Company," "we" or "us"). This Merger is referred to as the Redomiciliation Merger or the Merger.
The accompanying consolidated financial statements as of and for the years ended December 31, 2007 and
2008 include the accounts of Star Bulk and its wholly owned subsidiaries. The accompanying consolidated
financial statements for the year ended December 31, 2006, and for the period from January 1, 2007 to
November 30, 2007 (date of Redomiciliation Merger) include the accounts of Star Maritime.
Star Bulk was incorporated on December 13, 2006 under the laws of the Marshall Islands and is the sole owner
of all of the outstanding shares of Star Bulk Management Inc. and the ship-owning subsidiaries as set forth
below.
Star Maritime was organized on May 13, 2005 as a blank check company formed to acquire, through a merger,
capital stock exchange, asset acquisition or similar business combination, one or more assets or target
businesses in the shipping industry. On December 21, 2005, Star Maritime consummated its initial public
offering of 18,867,500 units, at a price of $10.00 per unit, each unit consisting of one share of Star Maritime
common stock and one warrant to purchase one share of Star Maritime common stock at an exercise price of
$8.00 per share. In addition, we completed during December 2005 a private placement of an aggregate of
1,132,500 units, each unit consisting of one share of common stock and one warrant. The entire gross proceeds
of the initial public offering amounting to $188,675 were deposited in a trust account.
On January 12, 2007, Star Maritime and Star Bulk entered into definitive agreements (the "Master Agreement")
to acquire a fleet of eight drybulk carriers (the "Transaction") from certain subsidiaries of TMT Co. Ltd.
("TMT"), a shipping company headquartered in Taiwan. These eight drybulk carriers are referred to as the
"initial fleet," or "initial vessels." The aggregate purchase price specified in the Master Agreement for the
initial fleet was $224,500 in cash and 12,537,645 shares of common stock of Star Bulk, issued on November
30, 2007. The Company also agreed to issue to TMT an additional stock consideration of 1,606,962 common
shares of Star Bulk in 2008 and 2009. On July 17, 2008 the Company issued 803,481 shares out of additional
stock consideration of 1,606,962 of common stock of Star Bulk to TMT. The remaining 803,481 shares of Star
Bulk's common stock will be issued to TMT within 10 business days following Star Bulk's filing of its Annual
Report on Form 20-F for the fiscal year ended December 31, 2008.
On November 27, 2007 the Company obtained shareholder approval for the acquisition of the initial fleet and
for effecting the Redomiciliation Merger, which became effective on November 30, 2007. The shares of Star
Maritime were exchanged on one-for-one basis with shares of Star Bulk and Star Bulk assumed the outstanding
warrants of Star Maritime. Subsequently, Star Maritime shares ceased trading on the American Stock
Exchange.
Holders of Star Maritime common stock had the right to redeem their shares for cash by voting against the
Redomiciliation Merger. Accordingly, at December 31, 2005, the Company had a liability of $64,680 due to a
possible redemption of 6,599,999 shares of common stock. Upon completion of the Redomiciliation Merger
none of the redemption rights were exercised therefore, the liability for the possible redemption was reclassified
as additional paid-in capital during the year ended December 31, 2007. Deferred interest attributable to
common stock subject to a possible redemption in the amount of $2,163 was recognized in the consolidated
statement of income during the year ended December 31, 2007.
In addition, upon completion of the Redomiciliation Merger, all Trust Account proceeds were released to the
Company to complete the Transaction as per the Master Agreement. Star Bulk shares and warrants started
trading on the Nasdaq Global Market on December 3, 2007 under the ticker symbols SBLK and SBLKW,
respectively. Immediately following the effective date of the Redomiciliation Merger, TMT and its affiliates
owned 30.2% of Star Bulk's outstanding common stock. During the year 2008, F5 Capital (a TMT affiliate)
filed a Schedule 13D/A on July 29, 2008 reporting beneficial ownership of approximately 7.0% of our
F-9
outstanding common stock.
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
1. Basis of Presentation and General Information – (continued):
The Company began operations on December 3, 2007 with the delivery of its first vessel Star Epsilon.
Below is a table containing information regarding the Company's wholly owned ship-owning subsidiaries as of
December 31, 2008:
Wholly Owned
Subsidiaries
Vessel
Name
DWT
Date
Delivered to Star
Bulk
Year
Built
Star Bulk Management
Inc.
Vessels in operation at December 31, 2008
-
-
-
-
Star Epsilon LLC
Star Theta LLC
Star Kappa LLC
Star Beta LLC
Star Zeta LLC
Star Delta LLC
Star Gamma LLC
Star Alpha LLC
Lamda LLC
Star Omicron LLC
Star Cosmo LLC
Star Ypsilon LLC
52,402
52,425
52,055
174,691
52,994
52,434
53,098
Star Epsilon (ex G
Duckling)*
Star Theta (ex J Duckling)*
Star Kappa (ex E Duckling)
Star Beta (ex B Duckling)*
Star Zeta (ex I Duckling)*
Star Delta (ex F Duckling)*
Star Gamma (ex C
Duckling)*
Star Alpha (ex A Duckling)* 175,075
Star Sigma
Star Omicron
Star Cosmo
Star Ypsilon
December 3, 2007
2001
December 6, 2007
December 14, 2007
December 28, 2007
January 2, 2008
January 2, 2008
January 4, 2008
2003
2001
1993
2003
2000
2002
January 9, 2008
184,403 April 15, 2008
53,489 April 17, 2008
52,247
150,940
1992
1991
2005
2005
July 1, 2008
September 18, 2008 1991
Vessel sold
Star Iota LLC
* Initial fleet or initial vessels
** On April 24, 2008 the Company entered into an agreement to sell Stat Iota (which was a vessel in our initial
fleet) for gross proceeds of $18.4 million less costs to sell of $1.8 million. The vessel was delivered to its
purchasers on October 6, 2008.
March 7, 2008
Star Iota**
78,585
1983
Charterers individually accounting for more than 10% of the Company's voyage revenues during the years
ended December 31, 2006, 2007 and 2008 are as follows:
Charterer
A
B
C
D
E
2006
-
-
-
-
-
2007
2008
44 %
36 %
20 %
-
-
-
-
-
19%
10%
F-10
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies:
a) Principles of Consolidation: The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which
include the accounts of Star Maritime, prior to the Redomiciliation Merger, and of Star Bulk and its wholly
owned subsidiaries referred to in Note 1 above. All inter-company accounts and transactions have been
eliminated in consolidation.
b) Use of estimates: The preparation of the accompanying consolidated financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities at the date of the accompanying
consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
c) Other Comprehensive Income: The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires separate presentation of
certain transactions, which are recorded directly as components of stockholders' equity. The Company has no
such transactions which affect comprehensive income and, accordingly, comprehensive income equals net
income for all periods presented.
d) Concentration of Credit Risk: Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments, and trade
accounts receivable. The Company's policy is to place cash and cash equivalents and short-term investments
with financial institutions evaluated as being creditworthy, or in short–term market money market funds which
are exposed to minimal interest rate and credit risk. The Company, consistent with drybulk shipping industry
practice, has not independently analyzed the creditworthiness of the charterers, and generally does not require
collateral for its trade accounts receivable.
e) Income taxes:
e.i) Star Bulk: is not liable for any income tax on its income derived from shipping operations because the
countries in which the subsidiaries ship-owning companies and the management company are incorporated do
not levy tax on income, but rather a tonnage tax on vessels.
e.ii) Star Maritime: was incorporated in Delaware, thus, deferred income taxes were provided for the
differences between the bases of assets and liabilities for financial reporting and income tax purposes. A
valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be
realized.
f) Foreign Currency Translation: The functional currency of the Company is the U.S. Dollar since the
Company's vessels operate in international shipping markets, and therefore primarily transact business in U.S.
Dollars. The Company's books of accounts are maintained in U.S. Dollars. Transactions involving other
currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the
transactions. At the consolidated balance sheet dates, monetary assets and liabilities, which are denominated in
other currencies, are translated into U.S. Dollars at the year-end exchange rates. Resulting gains or losses are
included in General and administrative expenses in the accompanying consolidated statements of income.
g) Cash and Cash Equivalents: The Company considers highly liquid investments such as time deposits
and certificates of deposit with an original maturity of three months or less to be cash equivalents.
h) Cash Held in Trust: Investments held in trust during the years ending December 31, 2006 and 2007, were
held in short-term investments. The Company invested in various short-term tax free money market funds
promulgated under the Investment Company Act of 1940. Interest income earned on such investments and
unrealized and realized gains and losses were the Company's source of income until the consummation of the
Merger. For the years ended December 31, 2006 and 2007 the realized gain on such investments amounted to
$4,057 and $1,179, respectively.
F-11
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies – (continued):
i) Restricted Cash: Restricted cash reflects deposits that are required to be maintained with certain banks under
the Company's loan agreements (Note 8). Restricted cash also consists of the restricted portion of forward
freight agreements (FFA's) base and margin collaterals with London Clearing House (LCH). As of December
31, 2008, the restricted balance with LCH amounted to $2,486 and is presented under current assets in the
accompanying consolidated balance sheet.
j) Trade accounts receivable: The amount shown as trade accounts receivable, at each balance sheet date,
includes estimated recoveries from each voyage or time charter. At each balance sheet date, the Company
provides for doubtful accounts on the basis of specific identified doubtful receivables. At December 31, 2008,
no provision for doubtful debts was considered necessary.
k) Inventories: Inventories consist of consumable bunkers and lubricants, which are stated at the lower of cost
or market value. Cost is determined by the first in, first out method.
l) Vessels, Net: Vessels are stated at cost, which consists of the purchase price and any material expenses
incurred upon acquisition, such as (initial repairs, improvements, delivery expenses and other expenditures to
prepare the vessel for its initial voyage). Otherwise these amounts are charged to expense as incurred.
The aggregate purchase price paid for our eight vessels in the initial fleet from certain subsidiaries of TMT
consisted of cash and common shares of Star Bulk. The stock consideration was measured based on the fair
market value of the Company's shares at the time each vessel was delivered. The additional stock consideration
of 1,606,962 common shares (Note 1) was measured when performance by TMT was complete upon delivery
of the last vessel of the initial fleet on March 7, 2008. The aggregate purchase price consisting of cash and stock
consideration was allocated to the acquired vessels based on relative fair values of the vessel on its respective
dates of delivery to Star Bulk.
The cost of each of the Company's vessels is depreciated beginning when the vessel is ready for its intended
use, on a straight-line basis over the vessel's remaining economic useful life, after considering the estimated
residual value (vessel's residual value is equal to the product of its lightweight tonnage and estimated scrap rate
per ton). Management estimates the useful life of the Company's vessels to be 25 years from the date of initial
delivery from the shipyard. When regulations place limitations over the ability of a vessel to trade on a
worldwide basis, its remaining useful life is adjusted at the date such regulations are adopted.
m) Fair value of above/below market acquired time charter: The Company records all identified tangible and
intangible assets associated with the acquisition of a vessel or liabilities at fair value. Fair value of above or
below market acquired time charters is determined by comparing existing charter rates in the acquired time
charter agreements with the market rates for equivalent time charter agreements prevailing at the time the
foregoing vessels are delivered. The present values representing the fair value of the above or below market
acquired time charters are recorded as an intangible asset or liability, respectively. Such intangible asset or
liability is recognized ratably as an adjustment to revenues over the remaining term of the assumed time charter.
As a result of downturn in the shipping industry during the fourth quarter of 2008 the Company has revised its
original assumptions of the latest available redelivery dates used in determining the term of its below and above
market acquired time charter agreements. Under the provision of SFAS No. 154 "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3," this revision was treated
as a change in accounting estimate and was accounted for prospectively beginning October 1, 2008. The
unamortized balance of below market acquired time charter agreements was amortized on an accelerated basis
assuming the earliest redelivery dates of vessels under existing time charter agreements. This change had a
positive impact on revenue of $13,018 for the year ended December 31, 2008.
n) Impairment of Long-Lived Assets: The Company follows SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-lived Assets," which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The standard requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows,
F-12
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies – (continued):
excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the
Company should evaluate the asset for an impairment loss. Measurement of the impairment loss is based on the
fair value. In this respect, management regularly reviews the carrying amount of the vessels on vessel by vessel
basis when events and circumstances indicate that the carrying amount of the vessels might not be recoverable.
At December 31, 2008, the Company performed an impairment review of the Company's vessels due to the
global economic downturn and the prevailing conditions in the shipping industry. The Company compared
undiscounted cash flows to the carrying values for the Company's vessels to determine if the assets were
impaired. Significant management judgment is required in forecasting future operating results, used in this
method. These estimates are consistent with the plans and forecasts used by management to conduct its
business. As a result of this analysis, no assets were considered to be impaired and the Company has not
recognized any impairment charge for its vessels other than one vessel classified as held for sale during the year
ended December 31, 2008.
o) Vessels held for sale: It is the Company's policy to dispose of vessels when suitable opportunities occur and
not necessarily to keep them until the end of their useful life. The Company classifies vessels as being held for
sale when: management has committed to a plan to sell the vessels; the vessels are available for immediate sale
in its present condition; an active program to locate a buyer and other actions required to complete the plan to
sell the vessels have been initiated; the sale of the vessels is probable, and transfer of the asset is expected to
qualify for recognition as a completed sale within one year; the vessels are 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.
Vessels classified as held for sale are measured at the lower of their carrying amount or fair value less cost to
sell. These vessels are not depreciated once they meet the criteria to be classified as held for sale.
On April 24, 2008, the Company entered into an agreement to sell the Star Iota, for gross proceeds of $18.4
million less costs to sell of $1.8 million. The Company delivered this vessel to its purchasers on October 6,
2008. The Star Iota was classified as vessel held for sale during the first quarter of 2008 resulting in $3,646 of
impairment loss to record vessel at a lower of its carrying amount or fair value less cost to sell that is included
in the accompanying consolidated statements of income for the year ended December 31, 2008. (Note 5)
p) Financing Costs: Fees paid to lenders or required to be paid to third parties on the lender's behalf for
obtaining loans or refinancing existing ones are recorded as deferred charges. 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 using the effective interest method.
q) Pension and retirement benefit obligations—crew: The ship-owning subsidiaries included in the
consolidated financial statements employ the crew on board under short-term contracts (usually up to eight
months) and, accordingly, are not liable for any pension or post-retirement benefits.
r) Pension and retirement benefit obligations—administrative personnel: Administrative employees are
covered by state-sponsored pension funds. Both employees and the Company are required to contribute a
portion of the employees' gross salary to the fund. Upon retirement, the state-sponsored pension funds are
responsible for paying the employees retirement benefits without recourse to the Company.
s) Equity incentive plan awards: Stock-based compensation represents vested and nonvested restricted shares
granted to employees and to non-employee directors, for their services as directors, and is included in "General
and administrative expenses" in the consolidated statements of income. These shares are measured at their fair
value equal to the market value of the Company's common stock on the grant date. The shares that do not
contain any future service vesting conditions are considered vested shares and the total fair value of such shares
is expensed on the grant date. SFAS No. 123(R) describes two generally accepted methods of recognizing
expense for restricted share awards with a graded vesting schedule for financial reporting purposes: 1) the
"accelerated method," which treats an award with multiple vesting dates as multiple awards and results in a
F-13
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies – (continued):
front-loading of the costs of the award and 2) the ''straight-line method'' which treats such awards as a single
award and results in recognition of the cost ratably over the entire vesting period. The shares that contain a
time-based service vesting condition are considered nonvested shares on the grant date and the total fair value
of such shares is recognized using the accelerated method.
t) Dry-docking and special survey expenses: Dry-docking and special survey expenses are expensed when
incurred.
u) Accounting for Revenue and Related Expenses: The Company generates its revenues from charterers for
the charterhire of its vessels. Vessels are chartered mainly using time charters, where a contract is entered into
for the use of a vessel for a specific period of time and a specified daily charterhire rate. Under time charters,
voyage costs, such as fuel and port charges are borne and paid by the charterer. Company's time charters
agreements are classified as operating leases. Revenues under operating lease arrangements are recognized
when a charter agreement exists, charter rate is fixed and determinable, the vessel is made available to the
lessee, and collection of the related revenue is reasonably assured. Revenues are recognized ratably on a straight
line basis over the period of the respective charter agreement in accordance with SFAS No. 13 "Accounting for
Leases." The Star Cosmo and the Star Ypsilon charter agreements have multiple time charter rates during the
life of the agreement. As of December 31, 2008, the Company had deferred revenue of $5,072 relating to these
charters which represents the difference between the charterhire payments received in advance of the charters
and the charterhire revenue recognized and was classified under non-current liabilities.
Voyage charter agreements are charterhires, where a contract is made in the spot market for the use of a vessel
for a specific voyage for a specified charter rate. Revenue from voyage charter agreements is recognized on a
pro-rata basis over the duration of the voyage. Under voyage charter agreements, all voyage costs are borne and
paid by the Company. Demurrage income, which is included in voyage revenues, represents payments by the
charterer to the vessel owner when loading or discharging time exceeds the stipulated time in the voyage charter
and is recognized when arrangement exists, services have been performed, the amount is fixed or determinable
and collection is reasonably assured.
Deferred revenue includes cash received prior to the consolidated balance sheet date and is related to revenue
earned after such date. The portion of the deferred revenue that will be earned within the next twelve months is
classified as current liability and the rest as long-term liability. As of December 31, 2007 and 2008,
the Company had deferred revenue of $916 and $3,554, respectively.
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, technical management fees and other miscellaneous expenses.
Brokerage commissions are paid by the Company. Brokerage commissions are recognized over the related
charter period and included in voyage expenses. All the other voyage expenses and vessel operating expenses
are expensed as incurred.
v) Fair value of financial instruments: On January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements", ("SFAS No. 157") for financial assets and liabilities and any other assets and liabilities carried
at fair value and are measured on recurring basis. This pronouncement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. The Company's
adoption of SFAS No. 157 did not have a material effect on the Company's Consolidated Financial Statements
for financial assets and liabilities and any other assets and liabilities carried at fair value. The Company has
provided additional fair value disclosures in Note 17.
w) Fair Value Option: On January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to
measure financial instruments and certain other items at fair value, with changes in fair value recognized in
earnings. The adoption of SFAS No. 159 did not have a material impact on the Company's financial statements
as the Company made no election to account for its monetary assets and liabilities at fair value.
F-14
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies – (continued):
x) Earnings per Common Share: Earnings per share is computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share are calculated by dividing net income available to common
shareholders by the basic weighted average number of common shares outstanding during the period. Diluted
net income per share reflects the potential dilution assuming common shares were issued for the exercise of
outstanding in-the-money warrants and unvested restricted shares and assuming the hypothetical proceeds,
including proceeds from warrant exercise and average unrecognized stock-based compensation cost, thereof
were used to purchase common shares at the average market price during the period such warrants and unvested
restricted shares were outstanding (Note 10).
y) Segment Reporting: The Company reports financial information and evaluates its operations by total charter
revenues and not by the type of vessel, length of vessel employment, customer or type of charter. As a result,
management, including the chief operating decision makers, reviews operating results solely by revenue per day
and operating results of the fleet, and thus, the Company has determined that it operates under one reportable
segment. Furthermore, when the Company charters a vessel to a charterer, the charterer is free to trade the
vessel worldwide and, as a result, the disclosure of geographic information is impracticable.
z) Recent Accounting Pronouncements :
(i)
(ii)
(iii)
(iv)
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No.
141(R)"). The Statement is a revision of SFAS No. 141, "Business Combinations", issued in June
2001 and is designed to improve the relevance, representational fairness and comparability and
information that a reporting entity provides about a business combination and its effects. The
Statement establishes principles and requirements for how the acquirer recognizes assets,
liabilities and non-controlling interests, how to recognize and measure goodwill and the
disclosures to be made. SFAS No. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. As the provisions of SFAS 141(R) are applied
prospectively, the impact to the Company cannot be determined until future transactions occur.
In December 2007, the FASB issued SFAS No. 160 (SFAS No. 160) "Non-controlling Interests
in Consolidated Financial Statements", an amendment of ARB No. 51. SFAS No. 160 amends
ARB No. 151 to establish accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. This Standard applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations. The objective of
the Standard is to improve the relevance, compatibility and transparency of the financial
information that a reporting entity provides in its consolidated financial statements. SFAS No.
160 is effective as of the beginning of an entity's fiscal year that begins on or after December 15,
2008. Earlier adoption is prohibited. This statement will be effective for the Company for the
fiscal year beginning January 1, 2009. The adoption of this standard is not expected to have a
material effect on the consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") FASB 157-2 "Effective Date of
FASB Statement No. 157" ("FSP FASB 157-2"). FSP FASB 157-2, which was effective upon
issuance, delays the effective date of SFAS 157 for nonfinancial assets and liabilities, except for
items recognized or disclosed at fair value at least once a year, to fiscal years beginning after
November 15, 2008. FSP FASB 157-2 also covers interim periods within the fiscal years for
items within the scope of this FSP. The adoption of this statement is not expected to have a
material effect on the Company's financial position, results of operations and cash flows.
In March 2008 the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities" ("SFAS No. 161"). The new standard is intended to improve financial
reporting about derivative instruments and heding activities by requiring enhanced disclosures to
enable investors to better understand their effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this standard is not
expected to have a material effect on the consolidated financial statements.
F-15
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
2. Significant Accounting Policies – (continued):
(v)
(vi)
(vii)
In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP No. FAS 142-3"). FSP No. FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") in order to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"),
and other GAAP. FSP No. FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of FSP No. FAS 142-3 will not have a material impact on the Company's
Consolidated Financial Statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No.162"), which identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with US GAAP. SFAS No.162 was
effective December 31, 2008 following the Commission's approval of certain amendments to
auditing standards proposed by the Public Company Accounting Oversight Board. The Company
has adopted SFAS No.162 as of December 31, 2008. The adoption of SFAS No. 162 did not
have an effect on the Company's Consolidated Financial Statements for the year ended December
31, 2008.
On June 16, 2008, the FASB issued FSP EITF 03-6-1 "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities". The FASB
concluded that all unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method. The FSP
is effective for fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The Company will adopt this FSP in the first quarter of
2009 and will present earnings per share pursuant to the two-class method.
3. Transactions with Related Parties:
Transactions and balances with related parties are analyzed as follows:
December
31, 2007
December
31, 2008
Assets
TMT Co ltd. (a)
Combine Marine S.A. (b)
Total assets
$-
$-
454
$11
$465
Liabilities
TMT Co ltd. (a)
$
Oceanbulk Maritime, S.A.(c)
Interchart Shipping Inc. (d)
Management and Directors
Total Liabilities
$
480 $
-
-
-
480 $
-
1
6
149
156
(a) TMT Co. Ltd.: Under the Master Agreement (Note 1) the Company issued to TMT 12,537,645 shares of
Star Bulk's common stock representing the stock consideration portion of the aggregate purchase price of initial
vessels and agreed to issue to TMT the additional stock consideration of 1,606,962 common shares of Star Bulk
in 2008 and 2009. On July 17, 2008 The Company issued 803,481 of the additional consideration of 1,606,962
shares of common stock of Star Bulk to TMT. During the year 2008, F5 Capital (TMT affiliate) filed a
Schedule 13D/A on July 29, 2008 reporting beneficial ownership of 7.0% of the Company's outstanding
F-16
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
3. Transactions with Related Parties – (continued):
common stock. Under the Master Agreement, Star Bulk filed with the Commission a registration statement on
Form F-3 (File No. 333-153304), which was declared effective on November 3, 2008, which covered the shares
beneficially owned by TMT. In addition, in certain circumstances, TMT may exercise certain piggyback
registration rights.
Under the Master Agreement, as of December 31, 2007, Star Bulk took delivery of three vessels from the initial
fleet as indicated in Note 1. In addition, in December 2007, Star Bulk took delivery of the Star Kappa from
TMT, which was not part of the initial fleet for a cash consideration of $72,000. During the year ended
December 31, 2008, Star Bulk had taken delivery of the remaining five vessels from the initial fleet as indicated
in Note 1.
Star Gamma LLC, a wholly-owned subsidiary of Star Bulk, entered into a time charter agreement dated,
February 23, 2007, with TMT for the Star Gamma. The charter rate for the Star Gamma is $28.5 per day for a
term of one year. Star Iota LLC, a wholly-owned subsidiary of Star Bulk, entered into a time charter agreement,
dated February 26, 2007, with TMT for the Star Iota. The charter rate for the Star Iota was $18 per day for a
term of one year. Neither of the above mentioned vessels were delivered to the Company as of December 31,
2007, consequently no amounts relating thereto have been included in the consolidated statement of income in
2007. For the year ended December 31, 2008, the Company earned $13,009 net revenue under the time charter
party agreements with TMT and included in Voyage revenues in the Consolidated Statements of Income.
On October 20, 2008, Mr. Nobu Su resigned from the board of directors of Star Bulk with immediate
effect. TMT is a company controlled by Mr. Nobu Su. Since that date TMT ceased to be a related party to Star
Bulk.
As of December 31, 2007 Star Bulk has an outstanding balance of $480 (liability) representing bunker and
lubricants on board payable from the company. As of December 31, 2008, the outstanding balance of $454
with TMT mainly represented receivable for bunkers.
(b) Combine Marine S.A. (or "Combine"): Under an agreement dated May 4, 2007, Star Bulk appointed
Combine, a company affiliated with Mr. Tsirigakis, Mr. Pappas and Mr. Christos Anagnostou, as interim
manager of the vessels in the initial fleet. Under the agreement, Combine provided interim technical
management and associated services, including legal services, to the vessels starting with their delivery to Star
Bulk, and also provided such services and shore personnel prior to and during vessel delivery to Star Bulk in
exchange for a flat fee of $10 per vessel prior to delivery and at a daily fee of $450 per vessel after vessel's
delivery and during the term of the agreement. Combine was entitled to be reimbursed by Star Bulk for out-of-
pocket expenses incurred by Combine while managing the vessels and was obligated to provide Star Bulk with
the full benefit of all discounts and rebates available to Combine. The term of the agreement was for one year
from the date of delivery of each vessel. Either party may terminate the agreement upon thirty days' notice. As
of December 31, 2008, none of Star Bulk's vessels were managed by Combine.
As of December 31, 2007 and 2008 Star Bulk has an outstanding receivable balance of $0, and $11 respectively
from Combine. During the years ended December 31, 2006, 2007 and 2008 Combine Marine S.A. charged $0,
$91 and $2,059 respectively for operational and technical management services. Combine also charged $84
related to vessel pre-delivery expenses, which represents $10 per vessel from initial fleet plus $4 of other
capitalized expenses that were capitalized as vessel cost as of December 31, 2007.
(c) Oceanbulk Maritime, S.A., or Oceanbulk: Oceanbulk Maritime, S.A., a related party, paid for certain
expenses on behalf of Star Maritime. Mr. Petros Pappas, the Company's Chairman of the Board, is also the
Honorary Chairman of Oceanbulk, a ship management company of drybulk vessels. Star Bulk's Chief Executive
Officer, Mr. Prokopios (Akis) Tsirigakis, as well as its officer, Mr. Christos Anagnostou had been employees of
Oceanbulk until November 30, 2007. On June 3, 2008, we entered into an agreement with Vinyl Navigation, a
company affiliated with Oceanbulk Maritime, S.A., a company founded by Star Bulk's Chairman, Mr. Petros
Pappas, to acquire the Star Ypsilon, a Capesize drybulk carrier for the purchase price of $87,180, which was the
same price that Vinyl Navigation had paid when it acquired the vessel from an unrelated third party. The
Company eventually paid $86,940 due to the late delivery of the vessel. The Star Ypsilon was delivered to the
F-17
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
3. Transactions with Related Parties – (continued):
Company on September 18, 2008. No commissions were charged to us on the sale or the chartering of the Star
Ypsilon. We acquired the Star Ypsilon with an existing above market time charter at an average daily hire rate
of $91,932, and we recorded the fair market value of time charter acquired at $14,417 which is being amortized
as a decrease to revenues during the remaining approximate three years period of the respective acquired time
charter. Vinyl Navigation has a back-to-back charter agreement with TMT, a company controlled by a former
director of the Company, Mr. Nobu Su, on the same terms as Star Bulk's charter agreement with Vinyl
Navigation.
There were no expenses incurred or charged by Oceanbulk Maritime S.A. during the year ended December 31,
2006. Included in the consolidated statement of income for December 31, 2007 are legal and office support
expenses paid to Oceanbulk Maritime S.A. in the amount of $196. For the year ended December 31, 2008, the
Company earned $11,611 net revenue under the time charter party agreements with Vinyl and included in
Voyage revenues in the Consolidated Statements of Income. The company also paid to Oceanbulk a brokerage
commission amounting to $184 regarding the sale of the Star Iota (Note 5). As of December 31, 2008, Star
Bulk had an outstanding payable balance of $1.
(d) Interchart Shipping Inc. or Interchart: Interchart –a company affiliated to Oceanbulk- acting as a
chartering broker of Star Zeta, Star Omicron, Star Beta , Star Sigma and Star Cosmo. As of December 31, 2007
and 2008 Star Bulk had an outstanding liability of $0 and $6 respectively to Interchart. During the year ended
December 31, 2006, 2007 and 2008 the brokerage commission of 1.25% on charter revenue paid to Interchart
amounted $0, $0 and $396, respectively and included in Voyage expenses in the Consolidated Statements of
Income.
(e) Consultancy Agreements
On October 3, 2007, Star Bulk has entered into separate consulting agreements with companies owned and
controlled by the Chief Executive Officer and the Chief Financial Officer, for the services provided by the
Chief Executive Officer and the Chief Financial Officer, respectively. Each of these agreements has a term of
three years unless terminated earlier in accordance with the terms of such agreements. Under the consulting
agreements, each company controlled by the Chief Executive Officer and the Chief Financial Officer is
expected to receive an annual consulting fee of €370 (approx. $544) and €250 (approx. $368) respectively,
commencing on the Merger date on a pro-rata basis.
Additionally, the Chief Executive Officer and the Chief Financial Officer are entitled to receive benefits under
each of their consultancy agreements with Star Bulk, amongst others each is entitled to receive an annual
discretionary bonus, to be determined by Star Bulk's board of directors in its sole discretion. The related
expenses for the years ended December 31, 2007 and 2008 were $659 and $969, respectively and are included
under general and administrative expenses.
4. Inventories:
The amounts shown in the accompanying consolidated balance sheets are analyzed as follows:
Bunkers
Lubricants
2007
2008
$
$
280 $
318
598 $
412
864
1,276
F-18
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
5. Vessels and other fixed assets:
The amount shown in the accompanying consolidated balance sheets are analyzed as follows:
As of December 31,
2008
2007
Cost
Vessels
Other fixed assets
Total cost
Accumulated depreciation
Vessels and other fixed assets, net
106
263,691
$ 263,585 $ 872,577
502
873,079
(51,795)
$ 262,946 $ 821,284
(745)
The impact of cash and stock consideration for vessels acquired in 2007 and 2008 and sold in 2008 to financial
statements is analyzed as follows:
Consolidated statements
of
cash flows
Cash paid
for vessels
delivered
and time
charters
acquired
Cash paid
for vessels
to be
acquired
Consolidated
statements of
stockholders'
equity
Consolidated balance
sheets
Fair value
of (below)/
above
market
acquired
time
charter
Stock
consideration
Additions
to cost
$
83,444 $
-
-
$
83,444 $
25,541 $
72,043
103
97,687 $
175,955 $
-
-
175,955 $
193,522 $
70,063
103
263,688 $
(26,772)
1,980
-
(24,792)
$
- $
-
-
115,696 $
18,946 $
-
311,783
395
-
-
-
327,974 $
(20,204)
301,222
395
(75,164)
-
10,561
-
Year ended December 31, 2007
Initial vessels
Star Kappa
Other fixed assets
Total
Year ended December 31, 2008
Initial vessels
Disposal of initial vessel
Additional vessels
Other fixed assets
Total
$
- $
427,874 $
18,946 $
609,387 $
(64,603)
Vessels acquisitions for the year ended December 31, 2007
Following the consummation of the Redomiciliation Merger, Star Bulk took delivery from TMT, three out of
eight initial vessels indicated in Note 1. The total purchase price for all eight vessels included stock
consideration of 12,537,645 shares and cash consideration of $224,500. The purchase price of the first three
vessels from initial fleet delivered to Star Bulk in December, 2007 was first satisfied by issuing 12,537,645
shares to TMT and a cash payment of $25,541. In addition Star Bulk paid in advance to TMT the amount of
$83,444 for vessels from initial fleet that were delivered in 2008. The stock consideration of $175,955 was
measured based on the fair market value of Star Bulk's shares at the time of vessel delivery. The total purchase
price for all eight vessels from initial fleet consisting of cash and stock consideration included in a table above
was allocated to the acquired vessels based on vessel relative fair values on the date of delivery of each vessel
in 2007 and 2008.
The total purchased price of $263,585 for vessels delivered in 2007 also includes cash consideration of $72,043
for Star Kappa and above market acquired time charter (Note 7), additional vessel acquired by Star Bulk from
TMT and delivered to the Company on December 14, 2007.
F-19
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
5. Vessels and other fixed assets – (continued):
Vessels acquisition for the year ended December 31, 2008
During the first quarter of 2008, Star Bulk took delivery of the remaining five vessels from initial fleet (Note 1)
and paid the remaining cash consideration of $115,515 to TMT and $181 of capitalizable costs. The additional
stock consideration of 1,606,962 common shares (Note 1) was determined to be $18,946 and was measured
based on the Company's share price on March 7, 2008 when performance by TMT was complete upon delivery
of the last initial vessel, Star Iota.
In addition to the initial vessels, during the year ended December 31, 2008 the Company acquired four
additional vessels: Star Sigma, Star Omicron, Star Cosmo and Star Ypsilon (Note 3) and related time charter
agreements (Note 7) for a cash purchase price of $311,783 in aggregate.
Vessel disposed during the year ended December 31, 2008
On April 24, 2008, the Company entered into an agreement to sell the Star Iota, a vessel from Initial fleet for
gross proceeds of $18.4 million less costs to sell of $1.8 million. The Company delivered this vessel to its
purchasers on October 6, 2008. Star Iota was classified as vessel held for sale during the first quarter of 2008
resulting in $3,646 of impairment loss to record vessel at a lower of its carrying amount or fair value less cost to
sell that is included in the accompanying consolidated statements of income for the year ended December 31,
2008.
6. Deferred finance charges
Deferred charges comprise deferred financing costs, consisting of fees and commissions associated with
obtaining loan facilities which are amortized to interest and finance costs over the life of the related debt using
the effective interest rate method. On December 27, 2007, April 14 (amended September 18), and July 1,
2008 the Company entered into loan agreements for an amount up to $317,500 ($305,000 as amended, Note 8)
in aggregate, resulting
to
$1,625. Amortization for the year ended December 31, 2008 amounted to $234 and is included under interest
and finance costs.
loan management fees amounting
the deferral of
the associated
in
7. Fair value of acquired time charters
The fair value of the time charters acquired at below/above fair market charter rates on the acquisition of the
vessels is summarized below. These amounts are amortized on a straight-line basis to the end of each charter
period.
Fair value
of
acquired
time
charter
Amortiz
ation
2007
Balance
December
31, 2007
Amortiz
ation
2008
Balance as
at
December
31, 2008
Vessel
$
Fair value of below market acquired time charter
Star Epsilon
Star Theta
Star Alpha
Star Delta
Star Gamma
Star Zeta
Star Cosmo
Total
14,375 $
12,397
46,966
13,815
11,649
2,735
3,856
105,793 $
$
Fair value of above market acquired time charter
Star Kappa
Star Ypsilon
Total
$
$
1,980
14,417
16,397 $
F-20
889
576
13,486 $
11,821
-
-
-
-
1,465
25,307 $
12,469 $
8,745
34,462
12,011
11,649
2,735
683
82,754 $
1,017
3,076
12,504
1,804
0
0
3,173
21,574
28
28
$
1,952
- $
1,952 $
746
1,475 $
2,221 $
1,206
12,942
14,148
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
8. Long-term Debt:
a)
On December 27, 2007 the Company entered into a loan agreement with Commerzbank AG in the
amount of up to $120,000 in order to partially finance the acquisition cost of the second hand vessels,
Star Gamma, Star Delta, Star Epsilon, Star Zeta, and Star Theta, which also provide the security for this
loan agreement. Under the terms of this loan facility, the repayment of $120,000 is over a nine year
term and divided into two tranches. The first of up to $50,000 is repayable in twenty-eight consecutive
quarterly installments commencing twenty-seven months after the initial borrowings but no later than
March 31, 2010: (i) the first four installments amount to $2,250 each, (ii) the next thirteen installments
amount to $1,000 each (iii) the remaining eleven installments amount to $1,300 each and a final balloon
payment of $13,700 is payable together with the last installment. The second tranche of up to $70,000
is repayable in twenty-eight consecutive quarterly installments commencing twenty-seven months after
draw down but no later than March 31, 2010: (i) the first four installments amount to $4,000 each (ii)
the remaining twenty-four installments amount to $1,750 each and a final balloon payment of $12,000
is payable together with the last installment. The loan bears interest at LIBOR plus a margin at a
minimum of 0.8% per annum to a maximum of 1.25% p.a. depending on whether the aggregate
drawdown ranges from 60% up to 75% of the aggregate market value of the initial fleet.
The loan contains financial covenants, including requirements to maintain (i) a minimum liquidity of
$10,000 or $1,000 per vessel, whichever is greater (ii) the market value adjusted equity ratio shall not
be less than 25%, as defined therein and (iii) an aggregate market value of the vessels pledged as
security under this loan agreement not less than (a) 125% of the then outstanding borrowings for the
first three years and (b) 135% of the then outstanding borrowings thereafter. As of December 31, 2008,
the Company's recognized restricted cash based on this covenant amounted to $12,000.
The Company was in compliance with the loan covenants as of December 31, 2008, except for the
covenant related to fair market value of mortgaged vessels to then outstanding borrowings, for which
the Company has obtained waivers in March 2009.
On March 13, 2009, the Company entered into agreement with Commerzbank to obtain waivers for
certain covenants and the following loan and covenants amendments were agreed: during the waiver
period from December 31, 2008 to January 31, 2010, the loan to value covenant shall at all times be
less than 90% including the value of the additional securities provided by the waiver. As further
security for this facility, the Company shall provide a first preferred mortgage on the vessel Star Alpha
and shall pledge an amount of $6,000 to the lenders. Furthermore, the interest spread was increased to
2.00% per annum for the duration of the waiver period and LIBOR was replaced by cost of funds. In
addition, during the waiver period, payments of dividend, share repurchases and investments are subject
to the prior written consent of the lenders.
As of December 31, 2008, the Company had outstanding borrowings of $120,000, which is the
maximum amount of borrowings permitted under this loan facility.
b)
On April 14, 2008, the Company entered into a loan agreement with Piraeus Bank A.E., or Piraeus
Bank, or Piraeus Bank, acting as an agent, which was subsequently amended on April 17, 2008 and
September 18, 2008. Under the amended terms, the agreement provides for a term loan of $150,000 to
partially finance the acquisition of the Star Omicron, the Star Sigma and Star Ypsilon. This loan
agreement is secured by the vessels Star Omicron, the Star Beta, and the Star Sigma. Under the terms of
this term loan facility, the repayment of $150,000 is over six years and begins three months after the
Company's first draw down amount and is divided into twenty-four consecutive quarterly installments:
(i) the first installment amounts to $7,000, (ii) the second through fifth installments amount to $10,500
each, (iii) the sixth to eighth installments amount to $8,800 each, (iv) the ninth through fourteenth
installments amount to $4,400 each, (v) the fifteenth through twenty-fourth installments amount to
$2,700 each, and a final balloon payment in the amount of $21,200 is payable together with the last
installment. The loan bears interest at LIBOR plus a margin of 1.3% p.a.
F-21
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
8. Long-term Debt – (continued):
This loan agreement with Piraeus Bank contains financial covenants, including requirements to
maintain (i) a minimum liquidity of $500 million per vessel, (ii) the total indebtedness of the borrower
over the market value of all vessels owned shall not be greater than 0.6:1, (iii) the interest coverage
ratio shall not be less than 2:1 and (iv) an aggregate market value of the vessels pledged as security
under this loan agreement should not be less than (a) 125% of the then outstanding borrowings for the
first three years and (b) 135% of the then outstanding borrowings thereafter.
The Company was in compliance with the loan covenants as of December 31, 2008, except for the
covenant related to fair market value of mortgaged vessels to then outstanding borrowings, for which
the Company has obtained waivers in March 2009.
On March 11, 2009, the Company entered into agreements with Piraeus Bank to obtain waivers for
certain covenants and the followings loan and covenants amendments were agreed: during the waiver
period from December 31, 2008 to February 28, 2010, the required security cover covenant of 125%
shall be waived. After the end of the waiver period, for the period from February 28, 2010 to February
28, 2011 the required security cover shall be reduced to 110% from 125% of the outstanding loan
amount. The lenders shall waive the 60% corporate leverage ratio, which is the ratio of the Company's
total indebtedness net of any unencumbered cash balances over the market value of all vessels owned
by the Company, through February 28, 2010. As further security for this facility, the Company shall
provide (i) first priority mortgages on and first priority assignments of all earnings and insurances of the
vessels Star Kappa and Star Ypsilon; (ii) corporate guarantees from each of the collateral vessel owning
limited liability companies; (iii) a subordination of the technical and commercial manager's rights to
payment; (iv) a pledge amount of $9,000 to the lenders; and (v) the hedging obligation of the Company
shall be waived until December 31, 2009. Furthermore, the interest spread was increased to 2% p.a.
applicable for the period from January 1, 2009 to December 31, 2010, and thereafter shall be adjusted
to 1.5% per annum until the margin review date of the facility. In addition, during the waiver period,
payments of dividend are subject to the prior written consent of the lenders.
As of December 31, 2008, the Company had outstanding borrowings of $143,000, which is the
maximum amount of borrowings permitted under this loan facility.
c)
On July 1, 2008, the Company entered into a loan agreement with Piraeus Bank A.E., acting as an
agent, in the amount of $35,000 to partially finance the acquisition of the Star Cosmo, which also
provides the security for this loan agreement. The full amount of the loan was drawn down, on the same
date. Under the terms of this term loan facility, the repayment of $35,000 is over six years and begins
three months after the Company draw down the full amount but no later than July 30, 2008 and is
divided into twenty-four consecutive quarterly installments: (i) the first through fourth installments
amounts to $1,500 each, (ii) the fifth through eighth installments amount to $1,250 each, (iii) the ninth
to twelfth installments amount to $875 each, (iv) the thirteenth through twenty-fourth installments
amount to $500 each and a final balloon payment of $14,500 is payable together with the last
installment. The loan bears interest at LIBOR plus a margin of 1.325% p.a.
The loan agreement contains financial covenants, including requirements to maintain (i) a minimum
liquidity of $500 per vessel, (ii) the total indebtedness of the borrower over the market value of all
vessels owned shall not be greater than 0.6:1, (iii) the interest coverage ratio shall not be less than 2:1
and (iv) an aggregate market value of the vessels pledged as security under this loan agreement not less
than (a) 125% of the then outstanding borrowings for the first three years and (b) 135% of the then
outstanding borrowings thereafter.
The Company was in compliance with the loan covenants as of December 31, 2008, except for the covenant
related to fair market value of mortgaged vessels to then outstanding borrowings, for which the Company has
obtained waivers in March 2009.
F-22
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
8. Long-term Debt – (continued):
On March 11, 2009, the Company entered into agreements with Piraeus Bank to obtain waivers for
certain covenants and the followings loan and covenants amendments were agreed: during the waiver
period from December 31, 2008 to February 28, 2010, the required security cover covenant of 125%
shall be waived. After the end of the waiver period, for the period from February 28, 2010 to February
28, 2011 the required security cover shall be reduced to 110% from 125% of the outstanding loan
amount. The lender shall waive the 60% corporate leverage ratio, which is the ratio of the Company's
total indebtedness net of any unencumbered cash balances over the market value of all vessels owned
by the Company, through February 28, 2010. Also, during the waiver period, no dividend payments are
made without the prior written consent of the lenders.
As further security for this facility the Company will provide (i) second priority mortgage on and
second priority assignment of all earnings and insurances of the Star Alpha; (ii) a corporate guarantee
from Star Alpha's vessel owning limited liability company; (iii) a subordination of the technical and
commercial managers rights to payment; and (iv) shall pledge an amount of $5,000 to the lenders. This
facility is repayable beginning on April 2, 2009, in twenty-two consecutive quarterly installments: (i)
the first two installments in the amount of $2,000 each; (ii) the third installment in the amount of
$1,750; (iii) the fourth installment in the amount of $1,250; (iv) the fifth through tenth installment in
the amount of $875 each; and (v) the final twelve installments in the amount of $500 each plus a
balloon payment of $13,750 is payable together with the last installment. In addition, the interest
spread was adjusted to 2% p.a. applicable for the period from March 1, 2009 to February 28, 2010, and
thereafter shall be adjusted to 1.5% p.a. until the final maturity date of the facility.
As of December 31, 2008, the Company had outstanding borrowings of $33,500, which is the maximum
amount of borrowings permitted under this loan facility.
The weighted average interest rate (including the margin) was 3.63% as of December 31, 2008.
The principal payments required to be made after December 31, 2008, are as follows:
Years ending
2009
2010
2011
2012
2013
2014 and thereafter
Total
Amount
$ 49,250
59,675
31,725
25,500
23,800
106,550
$ 296,500
Interest expense for the year ended December 31, 2008 amounting to $9,655, amortization of deferred finance
fees amounting to $234 and other finance fees amounting to $349 are included under "Interest and finance
costs" in the accompanying consolidated statements of income.
9. Preferred, Common stock and Additional paid in capital:
As of December 31, 2007 and 2008 the Company had common stock and warrants outstanding.
Preferred Stock: Star Bulk is authorized to issue up to 25,000,000 shares of preferred stock, $0.01 par value
with such designations, as voting, and other rights and preferences, as determined by the Board of Directors.
As of December 31, 2007 and 2008 the Company had not issued any preferred stock.
F-23
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
9. Preferred, Common stock and Additional paid in capital – (continued):
Common Stock: Pursuant to the Agreement and Plan of Merger by and between Star Maritime and Star Bulk,
or the Merger Agreement, each outstanding share of Star Maritime common stock, par value $0.0001 per
share, converted into the right to receive one share of Star Bulk common stock, par value $0.01 per share. Star
Bulk is authorized to issue 100,000,000 shares of common stock, par value $0.01.
Each outstanding share of Star Bulk common stock entitles the holder to one vote on all matters submitted to a
vote of shareholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock,
holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by Star Bulk's
board of directors out of funds legally available for dividends. Holders of common stock do not have
conversion, redemption or preemptive rights to subscribe to any of Star Bulk's securities. All outstanding shares
of common stock are fully paid and non-assessable. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of any shares of preferred stock which Star Bulk may
issue in the future.
On November 30, 2007, the date of consummation of the Redomiciliation Merger, Star Bulk had outstanding
41,564,569 shares of common stock. This included the 12,537,645 shares of common stock that had been issued
to TMT in connection with the Master Agreement (Note 1). On July 17, 2008 the Company issued 803,481
shares of additional stock consideration of 1,606,962 of common stock of Star Bulk to TMT (Note 1). The
stock consideration was measured based on the fair market value of the shares at the time the vessels were
delivered (Note 5) amounting to $175,955 for the initial 12,537,645 shares issued in 2007. The additional stock
consideration of 1,606,962 common shares (Note 1) was determined to be $18,946 and was measured based on
the Company's share price on March 7, 2008 when performance by TMT was complete upon delivery of the last
vessel of the initial fleet, the Star Iota (Note 5).
For the year ended December 31, 2008 Star Bulk have repurchased under the share and warrant repurchase
program announced on January 24, 2008, a total of 1,247,000 of our common shares at an aggregate purchase
price of $7,976.
Warrants: On November 30, 2007, the date of consummation of the Redomiciliation Merger, Star Bulk had
20,000,000 shares of common stock reserved for issuance upon the exercise of the warrants. Each outstanding
Star Maritime warrant was assumed by Star Bulk with the same terms and restrictions except that each would
be exercisable for common stock of Star Bulk.
Each warrant entitles the registered holder to purchase one share of common stock at a price of $8.00 per share,
subject to adjustment as discussed below, at any time commencing on the completion of a business
combination. Following the effectiveness of the Redomiciliation Merger, the warrants became exercisable. The
warrants will expire on December 16, 2009. There is no cash settlement option for the Warrants.
Star Bulk may call the warrants for redemption:
in whole and not in part;
at a price of $0.01 per warrant at any time after the warrants become exercisable;
upon not less than 30 days' prior written notice of redemption to each warrant holder; and
if, and only if, the reported last sale price of the common stock equals or exceeds $14.25 per share, for
any 20 trading days within a 30 trading day period ending on the third business day prior to the notice
of redemption to warrant holders.
Following the effectiveness of the Redomiciliation Merger, the warrants became exercisable and warrant
holders exercised their right to purchase shares of the Company's common stock. Star Bulk as of December 31,
2007 and 2008 received a total of $7,534 and $94,236 respectively, representing 951,864 and 11,769,486
warrants respectively, at $8.00 per warrant exercised. Following the exercise of 951,864 and 11,769,486
warrants in 2007 and 2008 respectively, 19,048,136 and 5,916,150 warrants remained outstanding as of
December 31, 2007 and 2008, respectively.
F-24
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
9. Preferred, Common stock and Additional paid in capital – (continued):
Share and Warrant re-purchase plan: Following the consummation of the Redomiciliation Merger, in 2008
the Company announced a repurchase plan of shares and warrants of up to an aggregate value of $50,000. As at
December 31, 2008 an amount of 1,247,000 shares and an amount of 1,362,500 warrants had been
repurchased.
The Company paid $7,976 for the shares and $5,473 for the above mentioned warrants. Under the terms of the
waiver agreements (Note 8) with the Company's lenders, any share and warrant repurchase are subject to their
prior written consent.
Declaration of dividends: On February 14, 2008, the Company declared dividends amounting to $4,599 or
$0.10 per share paid on February 28, 2008, to the stockholders of record as of February 25, 2008.
On April 16, 2008, the Company declared dividends amounting to $18,844 or $0.35 per share paid on May 23,
2008, to the stockholders of record as of May 16, 2008.
On July 29, 2008, the Company declared dividend amounting to $19,371 of $0.35 per share paid on August 18,
2008, to the stockholders of record as of August 8, 2008.
On November 17, 2008, the Company declared a cash dividend ($0.18 per share), amounting to $9,800, and
stock dividend (4,255,002 shares issued) on Star Bulk's common stock totaling $0.36 equivalent per common
share for the quarter ended September 30, 2008. This cash dividend was paid and shares were issued on
December 5, 2008 to stockholders of record on November 28, 2008. The number of newly issued shares was
based on the volume weighted average price of Star Bulk's shares on the Nasdaq Global Market during the five
trading days before the ex-dividend date or November 25, 2008. The stock dividend issue of 4,255,002 shares
was valued at $7,659, fair value based on the date shares were issued, on December 5, 2008. This equity value
was deducted from the retained earnings and included in the additional paid in capital and common stock as
indicated in the Consolidated Statements of Shareholders Equity. The management and the directors reinvested
the cash portion of their dividend in 2009 (Note 18).
Under the terms of the waiver agreements (Note 8) with the Company's lenders, dividends payments are subject
to their prior written consent.
10. Earnings per Share:
The Company calculates basic and diluted earnings per share as follows:
Income:
Net income
Basic earnings per share:
Weighted average common shares outstanding, basic
Basic earnings per share
Effect of dilutive securities:
Dilutive effect of Warrants and unvested restricted shares
Weighted average common shares outstanding, diluted
Diluted earnings per share
F-25
Year
ended
December
31,
2006
Year
ended
December
31,
2007
Year
ended
December
31,
2008
$
2,978 $
3,411 $ 133,738
29,026,92
4
0.10 $
$
30,065,92
52,477,94
3
0.11 $
7
2.55
- 6,751,693 1,970,038
29,026,92
4
0.10 $
$
36,817,61
54,447,98
6
0.09 $
5
2.46
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
10. Earnings per Share – (continued):
During the years ended December 31, 2007 and 2008 951,864 and 11,769,486 (Note 9) warrants were
exercised, respectively. At December 31, 2007 and 2008, a total of 19,048,136 and 5,916,150 warrants were
outstanding, respectively at an exercise price of $8 per warrant. The exercise price of warrants was below the
average market price of the Company's shares during the years ended December 31, 2007 and
2008. Consequently, the Company's warrants were dilutive and included in the computation of the diluted
weighted average common shares outstanding based on the treasury stock method. The weighted average
diluted common shares outstanding for the year ended December 31, 2007 excludes the effect of 165,000 (Note
11) of unvested restricted shares, because their effect would be anti-dilutive. The weighted average diluted
common shares outstanding for the year ended December 31, 2008 includes the effect of 1,255,000 (Note 11) of
unvested restricted shares, because their effect would be dilutive.
11. Equity Incentive Plan:
On February 8, 2007 the Company's Board of Directors adopted a resolution approving the terms and
provisions of the Company's Equity Incentive Plan (the Plan). The Plan is designed to provide certain key
persons, whose initiative and efforts are deemed to be important to the successful conduct of the business of the
Company with incentives to enter into and remain in the service of the Company, acquire a propriety interest in
the success of the Company, maximize their performance and enhance the long-term performance of the
Company.
Under the Plan, officers, key employees, directors and consultants of Star Bulk and its subsidiaries will be
eligible to receive options to acquire shares of common stock, stock appreciation rights, restricted stock and
other stock-based or stock-denominated awards. Star Bulk has reserved a total of 2,000,000 shares of common
stock for issuance under the plan, subject to adjustment for changes in capitalization as provided in the Plan.
i) On December 3, 2007, the Company granted to Mr. Tsirigakis, the Company's Chief Executive Officer, and
Mr. Syllantavos, the Company's Chief Financial Officer, 90,000 and 75,000 unvested restricted shares of Star
Bulk common stock, respectively. The fair value of each share was $15.34 which is equal to the market value
of the Company's common stock on the grant date. As of December 31, 2008 an amount of 110,000 shares are
still unvested and will vest in two equal installments on July 1, 2009 and July 1, 2010, respectively. All
165,000 shares granted were issued during the year ended December 31, 2008.
ii) On March 31, 2008, the Company concluded an agreement with Company's Director Mr. P. Espig. Under
this agreement, which is part of Company's Equity incentive plan, Mr. Espig received 150,000 restricted shares
of Star Bulk common stock. The fair value of each share was $11.39 which is equal to the market value of the
Company's common stock on the grant date. As of December 31, 2008 an amount of 75,000 shares are still
unvested and will vest on April 1, 2009. All 150,000 shares granted were issued during the year ended
December 31, 2008.
iii) On December 5, 2008, pursuant to the terms of the Plan the Company authorized the issuance of an
aggregate of 130,000 unvested restricted common shares to all of our employees and an aggregate of 940,000
unvested restricted common shares to the members of its board of directors. The fair value of each share was
$1.80 which is equal to the market value of the Company's common stock on the grant date. As of December
31, 2008, 1,070,000 shares were still unvested. These shares were issued on January 20, 2009 and vested on
January 31, 2009.
All unvested restricted shares are conditional upon the grantee's continued service as an employee of the
Company, or as a director until the applicable vesting date. The grantee does not have the right to vote such
unvested restricted shares until they vest or exercise any right as a shareholder of these shares, however, the
unvested shares will accrue dividends as declared and paid which will be retained by the Company until the
share vest at which time they are payable to the grantee. For the year ended December 31, 2008, the Company
paid dividends on unvested restricted shares which amounted to $206. As unvested restricted share grantees
retained dividends on awards that are expected to vest, such dividends were charged to retained earnings.
F-26
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
11. Equity Incentive Plan – (continued):
The Company estimates the forfeitures of restricted shares to be immaterial. The Company will, however, re-
evaluate the reasonableness of its assumption at each reporting period.
For the years ended December 31, 2006, 2007 and 2008, stock based compensation was $0, $184 and $3,986
and is included in the general and administrative expenses in the accompanying consolidated statement of
income and the deferred compensation costs from nonvested stock have been classified as a component of paid-
in capital in accordance with SFAS No. 123(R).
A summary of the status of the Company's unvested shares as December 31, 2008, and movement during the
year ended December 31, 2008, is presented below.
Unvested
Weighted Average Grant
Date Fair Value
Unvested at January 1, 2008
Granted
Vested
Unvested at Decemeber 31,
2008
165,000
1,220,000
(130,000)
1,255,000
$
$
15.34
2.97
13.06
4.91
As of December 31, 2008, there was $1,996 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 0.56 years. The total fair value of shares vested during the year ended December
31, 2008 was $1,484.
12. Accrued liabilities
The amounts shown in the accompanying consolidated balance sheets are analysed as follows:
$
Audit fees
Legal fees
Other professional fees
Stores, spares and repairs
Other Operating & voyage expenses
Other general and administrative expenses
Loan interest and Financing fees
Totals:
$
2007
2008
312 $
-
-
289
126
125
641
1,493 $
644
64
90
1,219
545
168
566
3,296
13. Time charter agreement termination fees
The vessel Star Sigma, which was on time charter to a charterer at a gross daily charter rate of $100,000 per day
from April 2008 until March 2009, was redelivered to us earlier pursuant to an agreement whereby the charterer
agreed to pay the contracted rate less $8,000 per day, which is the approximate operating cost for the vessel,
from the date of the actual redelivery in November 2008 through March 1, 2009. The total amount received
(net of commissions) was $9,711.
14. Income Taxes:
a) Taxation on Marshall Islands registered companies
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 have been included in vessel operating expenses.
F-27
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
14. Income Taxes – (continued):
b) Taxation on US source income – shipping income
The Company believes that it and its subsidiaries are exempt from U.S. federal income tax at 4% on U.S. source
shipping income, as each vessel-operating subsidiary is organized in a foreign country that grants an equivalent
exemption to corporations organized in the United States and the Company's stock is primarily and regularly
traded on an established securities market in the United States, as defined by the Internal Revenue Code (IRS)
of the United States. Under IRS regulations, a Company's stock will be considered to be regularly traded on an
established securities market if (i) one or more classes of its stock representing 50% or more of its outstanding
shares, by voting power and value, is listed on the market and is traded on the market, other than in minimal
quantities, on at least 60 days during the taxable year; and (ii) the aggregate number of shares of stock traded
during the taxable year is at least 10% of the average number of shares of the stock outstanding during the
taxable year.
Based on the U.S. source Shipping Income for 2007 and 2008, the Company would be subject to U.S. federal
income tax of approximately $17 and $258 under Section 887 in the absence of an exemption under Section
883.
c) Taxation on US source income – pre-Redomiciliation Merger
The provision of income taxes for Star Maritime., prior to merging into Star Bulk (Note 1) consists of the
following:
Current-Federal
Current-State and Local
Deferred-Federal
Deferred-State and Local
Total
2006
2007
2008
$
$
207
-
-
-
207
$
$
9 $
-
-
-
9 $
-
-
-
-
-
The total provision for income taxes differs from the amount which would be computed by applying the U.S.
Federal income tax rate to income before the provision for income taxes as follows:
Expenses deferred for income taxes
Valuation allowance
Total deferred tax asset
15. Commitments and Contingencies:
2006
2007
2008
$
$
447 $
(447)
- $
- $
- $
-
-
-
-
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.
The Company commenced an arbitration proceeding as complainant against Oldendorff Gmbh & Co. KG of
Germany ("Oldendorff"), seeking damages resulting from Oldendorff's repudiation of a charter relating to the
Star Beta. The Star Beta had been time chartered by a subsidiary of the Company to Industrial Carriers Inc. of
Ukraine ("ICI"). Under that time charter, ICI was obligated to pay a gross daily charter hire rate of $106,500
until February 2010. In January 2008, ICI sub-chartered the vessel to Oldendorff for one year at a gross daily
charter hire rate of $130,000 until February 2009. In October 2008, ICI assigned its rights and obligations under
the sub-charter to one of our subsidiaries in exchange for ICI being released from the remaining term of the ICI
charter. According to press reports, ICI subsequently filed for protection from its creditors in a Greek
insolvency proceeding. Oldendorff notified the Company that it considers the assignment of the sub-charter to
F-28
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
15. Commitments and Contingencies – (continued):
be an effective repudiation of the sub-charter by ICI. The Company believes that the assignment was valid and
that Oldendorff has erroneously repudiated the subcharter.
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. Up to $1 billion of the liabilities associated
with the individual vessels' actions, mainly for sea pollution, are covered by the Protection and Indemnity (P&I)
Club Insurance.
In May 2007, the Company entered into a one-year cancelable operating lease for its office facilities that
terminated in May 2008. In May 2008, the Company extended the operating lease for its office facilities until
August 2008. In April 2008 the company entered into a twelve-year cancelable operating lease for its new
office facilities that will be terminated in April 2020. Monthly lease payments were $21.3 for the first
year. Obligation's calculation is adjusted annually to the inflation rate plus 2% and it is estimated 5%.
Rental expense for the year ended December 31, 2007 and 2008 was $11 and $179 respectively.
Future rental commitments were payable as follows:
Years ending December 31,
2009
2010
2011
2012
2013
2014 and thereafter
Total
$
$
Amount
278
291
306
321
337
2,568
4,101
Future minimum contractual charter revenue, based on vessels committed to noncancelable, long-term time
charter contracts as of December 31, 2008 will be:
Years ending December 31,
2009
2010
2011
2012
2013
2014 and thereafter
Total
$
$
Amount
162,652
136,600
67,728
15,373
11,826
1,037
395,216
These amounts do not include any assumed off–hire.
F-29
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
16. Voyage and Vessel Operating Expenses:
The amounts in the accompanying consolidated statements of income are analyzed as follows:
Year
ended
December
31,
2006
Year
ended
December
31,
2007
Year
ended
December
31,
2008
$
$
$
$
- $
-
-
-
- $
- $
-
-
-
-
-
-
- $
7 $
3
33
-
43 $
660
571
1,824
396
53
3,504
417 $ 10,350
2,225
40
6,037
126
2,147
-
120
35
4,580
-
739
4
622 $ 26,198
Voyage expenses
Port charges
Bunkers
Commissions paid – third parties
Commissions paid – related parties
Miscellaneous
Total voyage expenses
Vessel operating expenses
Crew wages and related costs
Insurances
Maintenance, Repairs, Spares and Stores
Lubricants
Tonnage taxes
Upgrading expenses
Miscellaneous
Total vessel operating expenses
17. Fair value disclosures:
SFAS No. 157 requires that assets and liabilities carried at fair value will be classified and disclosed in one of
the following three categories based on the inputs used to determine its fair value:
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.
The Company trades in the FFAs market with an objective to utilize those instruments as economic hedge
instruments that are highly effective in reducing the risk on specific vessels trading in the spot market and to
take advantage of short term fluctuations in the market prices. FFAs trading does not qualify for cash flow
hedges for accounting purposes, therefore resulting gains or losses are recognized in the accompanying
consolidated statements of income.
Dry bulk shipping FFAs generally have the following characteristics: they cover periods from several days and
months to one year; they can be based on time charter rates or freight rates on specific quoted routes; they are
executed between two parties. All Company's FFA's are cleared transactions.
The fair value of the Company's investments in FFA contracts entered into in 2008 are determined based on
quoted prices in active markets on the last day of the reporting period and therefore are considered having Level
1 inputs of the fair value hierarchy as defined in SFAS No. 157. The FFA contracts did not qualify for hedge
accounting treatment. Accordingly, all gains or losses have been recorded in the consolidated statement of
income.
Gains recognized during the reporting period on FFA contracts still held at the reporting date amounted to $251
for the year ended December 31, 2008.
F-30
STAR BULK CARRIERS CORP.
Notes to Consolidated Financial Statements
December 31, 2007 and 2008
17. Fair value disclosures – (continued):
As of December 31, 2008 no fair value measurements for assets or liabilities under Level 2 and 3 were
recognized in the Company's consolidated financial statements.
The carrying value of cash and cash equivalents, trade accounts receivable, accounts payable and current
accrued liabilities approximates their fair value due to the short term nature of these financial instruments. The
fair values of long-term variable rate bank loans approximate the recorded values, due to their variable interest.
18. Subsequent Events:
a) Filing of a universal shelf registration statement: On January 22, 2009, the Company filed with the
Commission a universal shelf registration statement, as amended, on Form F-3 (File No. 333-156843), which
was declared effective on February 17, 2009, covering the registration of up to $250.0 million of the Company's
securities, including common shares, preferred shares, debt securities, guarantees, warrants, purchase contracts
and units and covering up to 14,305,599 shares of the Company's common stock and 1,132,500 warrants under
the U.S. Securities Act of 1933, as amended.
b) Dispute relating to the earlier redelivery of a vessel by its Charterer: Arbitration proceedings have
commenced pursuant to disputes that have arisen with the charterers of the Star Alpha. The disputes relate to
vessel performance characteristics and hire. The Company is seeking damages for repudiations of the charter
due to early redelivery of the vessel as well as unpaid hire, while the charterers are seeking contingent damages
resulting from the vessel's off-hire. Submissions and counterclaim submissions have been filed by parties with
the arbitration panel. Arbitration proceeding, before a common panel, are also running between third parties that
sub-chartered the vessel. In the first quarter of 2009 the vessel underwent unscheduled repairs which resulted in
a 25 day off-hire period. Following the completion of the repairs, the Star Alpha was redelivered to the
Company by its charterers approximately one month prior to the earliest redelivery date allowed under the time
charter agreement.
c) Further developments on Dispute with Oldendorff: In January 2009, the Company made a written
submission to its appointed arbitrator asserting claims against Oldendorff and alleged damages in the amount of
approximately $14,709. In March 2009, Star Bulk made a written submission to respond to claims that the
Company overpaid under the relevant time charter agreement and submitted counterclaims in connection with
the early re-delivery of the vessel. The Company believes that the assignment was valid and that Oldendorff has
erroneously repudiated the sub-charter.
d) Reinvestment of the cash portion of the dividend for the quarter ended September 30, 2008: On January
20, 2009, management and the directors reinvested the cash portion of their dividend for the quarter ended
September 30, 2008 (Note 9), amounting to $1,886 into 818,877 newly issued shares in a private placement at
the same weighted average price as the stock portion of such dividend, effectively electing to receive the full
amount of the dividend in the form of newly issued shares.
e) FFA's transactions: During 2009, we entered into a significant number of FFAs on the Capesize and
Panamax indices. As of April 9, 2009, an unrealized loss of $1,904 was incurred as a result of the adjustment in
the fair value of the FFAs.
F-31
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.
SIGNATURES
Date: April 15, 2009
Star Bulk Carriers Corp.
(Registrant)
By:
Name: Prokopios (Akis) Tsirigakis
Title: President and Chief Executive Officer
F-32
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CORPORATE DIRECTORY
Directors and Management:
Prokopios (Akis) Tsirigakis
Chief Executive Officer, President
George Syllantavos
Chief Financial Officer, Secretary
Petros Pappas
Chairman
Peter Espig
Director
Koert Erhardt
Director
Tom Søfteland
Director
Corporate Offices and Headquarters:
7, Fragoklisias Street, 2nd floor
Maroussi 151 25,
Athens, Greece
Tel: +30 210 6178400
Fax: +30 210 6178378
www.starbulk.com
Stock Listing:
Star Bulk Carriers
Corp.’s common
stock and warrants
are listed on the
NASDAQ Global
Select Market
and trades under
the symbol “SBLK”
and “SBLKW”
respectively.
Transfer Agent:
American Stock Transfer &
Trust Company
59 Maiden Lane Plaza
New York, NY 10038
Tel.: 212-936-5100
Legal Counsel:
Seward & Kissel LLP
One Battery Park Plaza
New York, New York 10004
Tel.: 212-574-1200
Independent Auditors:
Deloitte Hadjiapavlou,
Sofianos & Cambanis S.A.
250-254 Kifissias Ave,
Halandri Athens 15232,
Greece
Tel.: +30-210-678-1100
Investor Relations Contacts:
Capital Link, Inc.
Nicolas Bornozis
President
230 Park Avenue Suite 1536
New York, NY 10169
Tel: 212- 661-7566
starbulk@capitallink.com
Star Bulk CARRIERS CORP.
Corporate Offices and Headquarters:
7, Fragoklisias Street, 2nd floor
Maroussi 151 25,
Athens, Greece
Tel: +30 210 6178400
Fax: +30 210 6178378
www.starbulk.com