Item 4. Information on the Company
A. History and development of the Company
We are Diana Shipping Inc., a holding company incorporated under the laws of
Liberia in March 1999 as Diana Shipping Investments Corp. In February 2005, the
Company's articles of incorporation were amended. Under the amended articles of
incorporation the Company was renamed Diana Shipping Inc. and was redomiciled
from the Republic of Liberia to the Marshall Islands. Our executive offices are
located at Pentelis 16, 175 64 Palaio Faliro, Athens Greece. Our telephone
number is +30-210-947-0100.
B. Business overview
Our fleet consists of dry bulk carriers that transport iron ore, coal, grain and
other dry cargoes along worldwide shipping routes that currently has a total
capacity of 0.8 million dwt. Please see information in the section "Our Fleet",
below. During 2002, 2003 and 2004, we had a fleet utilization of 99.9%, 99.6%
and 99.8%, respectively, our vessels achieved daily time charter equivalent
rates of $7,532 $12,812 and $25,661, respectively, and we generated revenues of
$11.9 million, $25.3 million and $63.8 million, respectively.
We believe that we possess a number of strengths that provide us with a
competitive advantage in the dry bulk shipping industry:
o We own a modern, high quality fleet of dry bulk carriers that enable
us to reduce operating costs, improve safety and have a competitive
advantage in securing favorable time charters.
o Our fleet includes two groups of sister ships that provides us with
operational and scheduling flexibility, operational efficiency and
enables us to realize cost savings when maintaining, supplying and
crewing our vessels.
o We have an experienced management team, which consists of experienced
executives that have an average of more than 20 years of operating
experience in the shipping industry.
o We benefit from strong relationships with members of the shipping and
financial industries that will enable us to continue to grow our
business.
o We have a strong balance sheet and we do not have any indebtedness
outstanding that enable us to use cash flow that would otherwise be
dedicated to servicing debt for other purposes, including funding
operations and making dividend payments.
Our Business Strategy
Our main objective is to manage and expand our fleet in a manner that enables us
to pay attractive dividends to our stockholders. To accomplish this objective,
we intend to:
o Continue to operate a high quality fleet. We believe that our ability to
maintain and increase our customer base will depend on the quality of our
fleet. We intend to limit our acquisition of ships to vessels that meet
rigorous industry standards and that are capable of meeting charterer
certification requirements. At the same time, we intend to maintain the
quality of our existing fleet by carrying out regular inspections of our
vessels and implementing appropriate maintenance programs for each vessel.
o Strategically expand the size of our fleet. We intend to grow our fleet
through timely and selective acquisitions of vessels in a manner that is
accretive to earnings and dividends per share. We expect to focus our dry
bulk carrier acquisitions primarily on Panamax and Capesize dry bulk
carriers. We believe that Panamax dry bulk carriers are subject to
relatively less volatility in charter hire rates and are able to access a
greater number of ports and carry a broader range of cargo compared to
larger vessels. Capesize dry bulk carriers offer economies of scale due to
their increased cargo carrying capacity and provide relatively stable cash
flows and high utilization rates due to their generally being employed on
longer term time charters compared to smaller carriers. We intend to
continue to monitor developments in market conditions regularly and may
acquire other dry bulk carriers when those acquisitions would, in our view,
present favorable investment opportunities. We may also consider
acquisitions of other types of vessels but do not intend to acquire
tankers. We intend to capitalize on the experience and expertise of our
management team when making acquisition related decisions and expect to
continue to place an emphasis on sister ships.
o Pursue an appropriate balance of short-term and long-term time charters. We
historically have chartered our vessels to customers primarily pursuant to
short-term time charters. While we expect to continue to pursue short-term
time charter employment for our Panamax dry bulk carriers, we entered into
time charters in excess of two and one-half years for three of the vessels
in our combined fleet. We believe that employing short-term time charters
generally increases our flexibility in responding to market developments
and assists us in enhancing the amount of charter hire that we are paid,
particularly during periods of increasing charter hire rates, while
long-term time charters provide us the benefit of relatively stable cash
flows. We will continue to strategically monitor developments in the dry
bulk shipping industry on a regular basis and adjust our charter hire
periods according to market conditions. We may in the future extend the
charter periods for additional vessels in our fleet to take advantage of
the relatively stable cash flow and high utilization rates that are
associated with long-term time charters. Given the size of our fleet, we
believe that adding one or more additional long-term time charters to our
charter portfolio will reduce our potential exposure to the adverse effects
of any market downturn without materially affecting our ability to take
advantage of short-term market opportunities.
o Maintain a strong balance sheet with low leverage. After completion of the
offering in March 2005, we used a portion of the net proceeds to repay all
of our outstanding indebtedness. In the future, we expect to draw funds
under our credit facility to fund vessel acquisitions and to finance our
acquisition of our fleet manager. We intend to repay our acquisition
related debt from time to time with the net proceeds of equity issuances.
While our leverage will vary according to our acquisition strategy and our
ability to refinance acquisition related debt through equity offerings on
terms acceptable to us, we intend to limit the amount of indebtedness that
we have outstanding at any time to relatively conservative levels. We
believe that maintaining a low level of leverage will allow us to maintain
a strong balance sheet and will provide us with flexibility in pursuing
acquisitions that are accretive to earnings and dividends per share. We
also believe that maintaining a low level of indebtedness will allow us to
remain competitive in adverse market conditions, particularly when compared
to competitors who are burdened with significant levels of debt.
o Maintain low cost, highly efficient operations. We believe that we are a
cost-efficient and reliable owner and operator of dry bulk carriers due to
the strength of our management team and the quality of our vessels. We
intend to actively monitor and control vessel operating expenses without
compromising the quality of our vessel management by utilizing regular
inspection and maintenance programs, employing and retaining qualified crew
members and taking advantage of the economies of scale that result from
operating a fleet of sister ships.
o Capitalize on our established reputation. We believe that we have an
established reputation in the dry bulk shipping industry for maintaining
high standards of performance, reliability and safety. We intend to
capitalize on this reputation in establishing and maintaining relationships
with major international charterers who consider the reputation of a vessel
owner and operator when entering into time charters and with shipyards and
financial institutions who consider reputation to be an indicator of
creditworthiness.
Our Fleet
Our fleet consists of dry bulk carriers that transport iron ore, coal, grain and
other dry cargoes along worldwide shipping routes. As of December 31, 2004, our
operating fleet consisted of seven modern Panamax dry bulk carriers that had a
combined carrying capacity of more than 525,000 dwt and a weighted average age
of 3.4 years.
We took delivery of two Panamax dry-bulk carrier newbuildings from a Chinese
shipyard that have a carrying capacity of 73,691 dwt each, in February and May,
2005. We also purchased a secondhand Capesize dry bulk carrier with a carrying
capacity of 169,883 dwt that we took delivery of in February, 2005. Upon the
delivery of these three vessels, our combined fleet consisted of nine Panamax
dry bulk carriers and one Capesize dry bulk carrier that had a combined carrying
capacity of 842,278 dwt and a weighted average age of 3.6 years as of May 9,
2005. We funded the $18.0 million balance of the final payment installment due
upon delivery of the first Panamax dry bulk carrier and the $58.0 million
balance of the purchase price due upon delivery of the Capesize dry bulk carrier
with borrowings under new bank loans. We repaid this indebtedness and financed
the final payment installment due on the second Panamax dry bulk carrier with a
portion of the net proceeds from our initial public offering in March 2005. In
connection with our acquisition of the Capesize dry bulk carrier, we also were
required to pay an unaffiliated ship broker a commission equal to two percent of
the purchase price and one time additional expenses of approximately $0.8
million for initial provisioning, stores and spare parts, which we also financed
with a portion of the net proceeds from our initial public offering in March,
2005.
As of May 9, 2005, our fleet consists of nine Panamax dry bulk carriers and one
Capesize dry bulk carrier that have a combined carrying capacity of 842,278 dwt
and a weighted average age of 3.6 years.
The following table presents certain information concerning the dry bulk
carriers in our combined fleet.
Daily Time
Time Charter Charter Sister
Vessel Operating Status Dwt Age (1) Expiration Date (2) Hire Rate Ships (3)
----------- -------------------- ------- --------- ------------------------------- ----------- ---------
Nirefs Delivered Jan. 2001 75,311 4.3 years Aug. 6, 2005 to Oct. 6, 2005 $ 40,000 A
Alcyon Delivered Feb. 2001 75,247 4.2 years Oct. 15, 2007 to Feb. 15, 2008 $ 22,582 A
Triton Delivered March 2001 75,336 4.1 years Nov. 27, 2005 to Jan. 27, 2006 $ 37,300 A
Oceanis Delivered May 2001 75,211 3.9 years Aug. 20, 2005 to Nov. 5, 2005 $ 30,650 A
Dione Acquired May 2003 75,172 4.3 years Nov. 4, 2005 to Jan. 19, 2006 $ 32,500 A
Danae Acquired July 2003 75,106 4.3 years Jan. 13, 2007 to April 12, 2007 $ 30,000 A
Protefs Delivered Aug. 2004 73,630 0.7 years Aug. 5, 2005 to Oct. 20, 2005 $ 31,000 B
Calipso Delivered Feb. 2005 73,691 0.3 years July 5, 2005 to Sept. 5, 2005 $ 40,000 B
Pantelis SP Delivered Feb. 2005 169,883 6.2 years Jan. 25, 2008 to March 25, 2008 $ 47,500 -
Clio Delivered May 2005 73,691 0.0 years On about July 11, 2005 $ 19,800 B
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(1) As of May 9, 2005.
(2) The date range provided represents the earliest and latest date on
which the charterer may redeliver the vessel to us upon the
termination of the charter.
(3) Each dry bulk carrier is a sister ship of each other dry bulk carrier
that has the same letter.
Each of our vessels is owned through a separate wholly-owned Panamanian
subsidiary.
We charter our dry bulk carriers to customers primarily pursuant to time
charters. A time charter involves the hiring of a vessel from its owner for a
period of time pursuant to a contract under which the vessel owner places its
ship (including its crew and equipment) at the disposal of the charterer. Under
a time charter, the charterer periodically pays a fixed daily charter hire rate
and bears all voyage expenses, including the cost of bunkers and port and canal
charges. Subject to any restrictions in the contract, the charterer determines
the type and quantity of cargo to be carried and the ports of loading and
discharging. The technical operation and navigation of the vessel at all times
remains the responsibility of the vessel owner, which is generally responsible
for the vessel's operating expenses, including the cost of crewing, insuring,
repairing and maintaining the vessel, costs of spares and consumable stores,
tonnage taxes and other miscellaneous expenses. In connection with the charter
of each of our vessels, we pay (through our fleet manager) commissions ranging
from 1.25% to 6.25% of the total daily charter hire rate of each charter to
unaffiliated ship brokers and to in-house ship brokers associated with the
charterers, depending on the number of brokers involved with arranging the
relevant charter. We also pay a commission equal to 2% of the total daily
charter hire rate of each vessel charter to our fleet manager.
We strategically monitor developments in the dry bulk shipping industry on a
regular basis and adjust the charter hire periods for our vessels according to
market conditions. Historically, we have primarily employed short-term time
charters that have ranged in duration from three to twelve months. However, we
have recently entered into time charters in excess of two and one-half years for
three of the vessels in our combined fleet and we may in the future extend the
charter periods for some of the vessels in our fleet.
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.
Sale of the Amfitrite
In 2002, we entered into a newbuilding contract with the Jiangnan shipyard
providing for the construction of the Amfitrite, a Panamax dry bulk carrier with
a carrying capacity of 74,000 dwt, for a total price of $20.2 million. In
October 2004, prior to the completion of the vessel's construction, we entered
into a memorandum of agreement to sell the Amfitrite to an unaffiliated third
party on the vessel's delivery to us for cash consideration of $42.0 million. We
elected to dispose of the vessel rather than include it in our operating fleet
in order to take advantage of the opportunity to sell the newbuilding at a
favorable price. In November 2004, we took delivery of the Amfitrite from the
shipyard and thereupon delivered the vessel to the buyer. Because we did not
operate the Amfitrite prior to the sale, and because we took possession of the
vessel only for the purposes of redelivering it to the buyer, we do not consider
the vessel to have been part of our fleet. In December 2004, we distributed a
portion of the cash received from the sale as part of a $34.0 million cash
dividend distributed to our stockholders as of December 31, 2004.
Seafaring Employees
We crew our vessels primarily with Greek officers and Filipino officers and
seamen. Our fleet manager is responsible for identifying our Greek officers,
which are hired by our vessel owning subsidiaries. Our Filipino officers and
seamen are referred to our fleet manager by Cosmos Marine Management S.A. and
Crossworld Marine Services Inc., two independent crewing agencies. The crewing
agencies handle each seaman's training, travel and payroll. We ensure that all
our seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions. Additionally, our seafaring
employees perform most commissioning work and supervise work at shipyards and
drydock facilities. We typically man our vessels with more crew members than are
required by the country of the vessel's flag in order to allow for the
performance of routine maintenance duties.
Competition
Our business fluctuates in line with the main patterns of trade of the major dry
bulk cargoes and varies according to changes in the supply and demand for these
items. We operate in markets that are highly competitive and based primarily on
supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation as
an owner and operator. We compete with other owners of dry bulk carriers in the
Panamax and smaller class sectors and with owners of Capesize dry bulk carriers.
Ownership of dry bulk carriers is highly fragmented and is divided among
approximately 1,500 independent dry bulk carrier owners.
Credit Facility
We have entered into a $230.0 million secured revolving credit facility with The
Royal Bank of Scotland Plc. The credit facility may be used to fund our
acquisitions of vessels and companies with shipping interests and our working
capital requirements in an amount not to exceed $30.0 million, including up to
$20.0 million for our acquisition of our fleet manager. Please see Item 5.B. for
additional information about our credit facility.
Our Customers
We generally charter our vessels to major trading houses (including commodities
traders), major producers and government-owned entities rather than to more
speculative or undercapitalized entities. Our customers include national,
regional and international companies, such as Sangamon Transportation (Dreyfus),
Deiulemar Compagnia di Navigazione, Green Island Shipping, Cobelfret S.A.,
Navios International Inc., Cargill International S.A., Bottiglieri di
Navigazione S.p.A. and Cosco Europe GmBH. During 2004, four of our customers
accounted for 76% of our revenues. These customers were Cosco Bulk Carriers
(25%), Cobelfret S.A. (15%), Cargill International S.A. (20%) and Navios
International Inc. (16%). During 2003, four customers accounted for
approximately 75% of our revenues. These customers were Cosco Europe GmBH (25%),
Bottiglieri di Navigazione S.p.A. (20%), Cobelfret S.A. (15%) and Deiulemar
Compagnia di Navigazione (15%).
Management of Our Fleet
The strategic, commercial and technical management of our fleet historically has
been carried out by an affiliated company pursuant to separate management
agreements between each of our wholly-owned vessel owning subsidiaries and our
fleet manager. Diana Shipping Agencies S.A., or DSA, provided us with these
management services from our founding through November 12, 2004, at which time
responsibility for the commercial and technical management of our fleet was
transferred to Diana Shipping Services S.A., or DSS, and the strategic
management of our fleet was assumed by us. DSA and DSS are each majority owned
and controlled by Mr. Simeon Palios, our Chairman and Chief Executive Officer.
The stockholders of DSA and DSS also include Mr. Anastassis Margaronis, our
President and a member of our board of directors, and Mr. Ioannis Zafirakis, our
Vice President and a member of our board of directors.
Under our management agreements, our fleet manager has historically been
responsible for providing us with:
o commercial management services, which include obtaining employment for
our vessels and managing our relationships with charterers;
o strategic management services, which include providing us with
strategic guidance with respect to locating, purchasing, financing and
selling vessels;
o technical management services, which include managing day-to-day
vessel operations, performing general vessel maintenance, ensuring
regulatory and classification society compliance, supervising the
maintenance and general efficiency of vessels, arranging our hire of
qualified officers and crew, arranging and supervising dry docking and
repairs, arranging insurance for vessels, purchasing stores, supplies,
spares and new equipment for vessels, appointing supervisors and
technical consultants and providing technical support; and
o shoreside personnel who carry out the management functions described
above.
In addition, we have entered into a separate agreement with our fleet manager
pursuant to which the fleet manager has agreed to provide us with office space
and secretarial services at its offices in Athens, Greece until our acquisition
of DSS. The fair value of the annual rental for the office space and the
secretarial services during 2004 was $146 thousand.
Prior to February 21, 2005, the shoreside personnel provided by our fleet
manager included Mr. Simeon Palios, Mr. Anastassis Margaronis, Mr. Ioannis
Zafirakis and Evangelos Monastiriotis, who, as employees of our fleet manager,
performed services that were substantially identical to services provided by
executive officers. On February 21, 2005, Mr. Simeon Palios, Mr. Anastassis
Margaronis, and Mr. Ioannis Zafirakis became executive officers and employees of
our Company. On February 21, 2005, Mr. Monastiriotis became an executive officer
of our Company, although he continues to provide his services to us pursuant to
his employment with our fleet manager.
In exchange for providing us with the services, personnel and office space
described above, we have historically paid our fleet manager a commission that
is equal to 2% of our revenues and a fixed management fee of $12 thousand per
month for each vessel in our operating fleet, which increased to $15 thousand
per month per vessel as of November 12, 2004.
Acquisition of Our Fleet Manager
We have entered into an agreement with the stockholders of DSS pursuant to which
the DSS stockholders may sell all, but not less than all, of their outstanding
shares of DSS to us during the 12 month period following our initial public
offering for $20.0 million in cash. Under the terms of the agreement, if the DSS
stockholders do not sell their outstanding shares to us prior to the one year
anniversary of the initial public offering, we may exercise an option to
purchase the shares from them for the same consideration at any time prior to
the second anniversary of the initial public offering. We expect the DSS
stockholders to sell their outstanding shares of DSS to us during the 12 months
following the initial public offering and intend to exercise our option if they
do not do so.
If we acquire DSS, DSS will become our wholly-owned subsidiary and the 2%
commission and management fees that we pay for its management services will be
eliminated from our consolidated financial statements as intercompany
transactions. A historical breakdown of the amounts that we have paid to DSA and
DSS (after November 12, 2004) is presented in the following table.
Year Ended December 31,
----------------------------------
2002 2003 2004
----- ----- -----
(in thousands of U.S. dollars)
Commissions 239 506 1,276
Management fees 576 728 947
----- ----- -----
Total 815 1,234 2,223
===== ===== =====
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If we acquire DSS, we will also be required to pay its operating and other
expenses. We expect that the incurrence of these additional expenses, together
with the expenses for running a public company, following our initial public
offering, and the enlargement of our fleet, will increase the amount of general
and administrative expenses that we report during future periods and that such
amounts will likely offset the effect of the elimination of the 2% commissions
and management fees from our reported results.
The International Dry Bulk Shipping Industry
Dry bulk 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 2004, approximately
2.4 billion tons of dry bulk cargo was transported by sea, comprising more than
one-third of all international seaborne trade.
The demand for dry bulk carrier capacity is determined by the underlying demand
for commodities transported in dry bulk carriers, which in turn is influenced by
trends in the global economy. Between 1999 and 2004, trade in all dry bulk
commodities increased from 1.97 billion tons to 2.45 billion tons, an increase
of 24.3%. One of the main reasons for the resurgence in dry bulk trade has been
the growth in imports by China of iron ore, coal and steel products during the
last five years. Chinese imports of iron ore alone increased from 55.3 million
tons in 1999 to more than 148 million tons in 2003. Demand for dry bulk carrier
capacity is also affected by the operating efficiency of the global fleet, with
port congestion, which has been a feature of the market in 2004, absorbing
additional tonnage.
The global dry bulk carrier fleet may be divided into four categories based on a
vessel's carrying capacity. These categories consist of:
o 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.
o 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.
o Handymax vessels have a carrying capacity of between 35,000 and 60,000
dwt. 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.
o 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 dry bulk 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 January 2005, the global dry bulk carrier orderbook amounted to 66.89
million dwt, or 20.7% of the existing fleet, with most vessels on the orderbook
expected to be delivered within 36 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.
The average age at which a vessel is scrapped over the last five years has been
26 years. However, due to recent strength in the dry bulk shipping industry, the
average age at which the vessels are scrapped has increased.
Charter Hire Rates
Charter hire rates paid for dry bulk 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
dry bulk carrier categories. However, because demand for larger dry bulk vessels
is affected by the volume and pattern of trade in a relatively small number of
commodities, charter hire 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 dry bulk shipping industry, the charter hire rate references most
likely to be monitored are the freight rate indices issued by the Baltic
Exchange. These references are based on actual charter hire 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. In 2003 and 2004, rates for all sizes of dry
bulk carriers strengthened appreciably to historically high levels, primarily
due to the high level of demand for raw materials imported by China.
Vessel Prices
Vessel prices, both for newbuildings and secondhand vessels, have increased
significantly during the past two years as a result of the strength of the dry
bulk shipping industry. Because sectors of the shipping industry (dry bulk
carrier, tanker and container ships) are in a period of prosperity, newbuilding
prices for all vessel types have increased significantly due to a reduction in
the number of berths available for the construction of new vessels in shipyards.
In the secondhand market, the steep increase in newbuilding prices and the
strength in the charter market have also affected vessel prices. With vessel
earnings running at relatively high levels and a limited availability of
newbuilding berths, the ability to deliver a vessel early has resulted in a
premium to the purchase price. Consequently, the market has witnessed secondhand
prices for five year old Panamax and Capesize dry bulk carriers reaching higher
levels than those being "quoted" for comparably sized newbuildings for delivery
about three years forward.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our
vessels. We are subject to international conventions, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered.
A variety of government and private entities subject our vessels to both
scheduled and unscheduled inspections. These entities include the local port
authorities (United States Coast Guard, harbor master or equivalent),
classification societies, flag state administrations (country of registry) and
charterers, particularly terminal operators. Certain of these entities require
us to obtain permits, licenses and certificates for the operation of our
vessels. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend the operation of one or more of
our vessels.
We believe that the heightened level of environmental and quality concerns among
insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the dry bulk shipping industry.
Increasing environmental concerns have created a demand for vessels that conform
to the stricter environmental standards. We are required to maintain operating
standards for all of our vessels that emphasize operational safety, quality
maintenance, continuous training of our officers and crews and compliance with
United States and international regulations. We believe that the operation of
our vessels is in substantial compliance with applicable environmental laws and
regulations applicable to us as of the date of this report.
International Maritime Organization
The International Maritime Organization, or IMO, has negotiated international
conventions that impose liability for oil pollution in international waters and
a signatory's territorial waters. Annex VI to the International Convention for
the Prevention of Pollution from Ships has been adopted by the IMO to address
air pollution from ships. Annex VI, which became effective in May 2005, set
limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and
prohibit deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. All of our vessels now comply with Annex VI.
The operation of our vessels is also affected by the requirements set forth in
the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires ship owners and bareboat
charterers to develop and maintain an extensive "Safety Management System" that
includes the adoption of a safety and environmental protection policy setting
forth instructions and procedures for safe operation and describing procedures
for dealing with emergencies. The failure of a ship owner or bareboat charterer
to comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels and may result in
a denial of access to, or detention in, certain ports. As of the date of this
report, each of our vessels is ISM code-certified.
The United States Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions or whose vessels
operate in United States waters, which includes the United States' territorial
sea and its two hundred nautical mile exclusive economic zone.
Under OPA, vessel owners, operators and bareboat charterers are "responsible
parties" and are jointly, severally and strictly liable (unless the spill
results solely from the act or omission of a third party, an act of God or an
act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels. OPA defines
these other damages broadly to include:
o natural resources damage and the costs of assessment thereof;
o real and personal property damage;
o net loss of taxes, royalties, rents, fees and other lost revenues;
o lost profits or impairment of earning capacity due to property or
natural resources damage; and
o net cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards, and loss of
subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $600 per gross
ton or $0.5 million per dry bulk vessel that is over 300 gross tons (subject to
possible adjustment for inflation). These limits of liability do not apply if an
incident was directly caused by violation of applicable United States federal
safety, construction or operating regulations or by a responsible party's gross
negligence or willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with oil removal
activities.
We 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 requires owners and operators of vessels to establish and maintain with the
United States Coast Guard evidence of financial responsibility sufficient to
meet their potential liabilities under the OPA. In December 1994, the United
States Coast Guard implemented regulations requiring evidence of financial
responsibility in the amount of $1,500 per gross ton, which includes the OPA
limitation on liability of $1,200 per gross ton and the United States
Comprehensive Environmental Response, Compensation, and Liability Act liability
limit of $300 per gross ton. Under the regulations, vessel owners and operators
may evidence their financial responsibility by showing proof of insurance,
surety bond, self-insurance or guaranty. Under OPA, an owner or operator of a
fleet of vessels is required only to demonstrate evidence of financial
responsibility in an amount sufficient to cover the vessels in the fleet having
the greatest maximum liability under OPA.
The United States Coast Guard's regulations concerning certificates of financial
responsibility provide, in accordance with OPA, that claimants may bring suit
directly against an insurer or guarantor that furnishes certificates of
financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defense that it may
have had against the responsible party and is limited to asserting those
defenses available to the responsible party and the defense that the incident
was caused by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of financial
responsibility under pre-OPA laws, including the major protection and indemnity
organizations, have declined to furnish evidence of insurance for vessel owners
and operators if they are subject to direct actions or required to waive
insurance policy defenses.
The United States Coast Guard's financial responsibility regulations may also be
satisfied by evidence of surety bond, guaranty or by self-insurance. Under the
self-insurance provisions, the ship owner or operator must have a net worth and
working capital, measured in assets located in the United States against
liabilities located anywhere in the world, that exceeds the applicable amount of
financial responsibility. We have complied with the United States Coast Guard
regulations by providing a certificate of responsibility from third party
entities that are acceptable to the United States Coast Guard evidencing
sufficient self-insurance.
OPA specifically permits individual states to impose their own liability regimes
with regard to oil pollution incidents occurring within their boundaries, and
some states have enacted legislation providing for unlimited liability for oil
spills. In some cases, states, which have enacted such legislation, have not yet
issued implementing regulations defining vessels owners' responsibilities under
these laws. We intend to comply with all applicable state regulations in the
ports where our vessels call.
Other Environmental Initiatives
The European Union is considering legislation that will affect the operation of
vessels and the liability of owners for oil pollution. It is difficult to
predict what legislation, if any, may be promulgated by the European Union or
any other country or authority.
Although the United States is not a party thereto, many countries have ratified
and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended, or the CLC, and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended. Under these
conventions, a vessel's registered owner is strictly liable for pollution damage
caused on the territorial waters of a contracting state by discharge of
persistent oil, subject to certain complete defenses. Many of the countries that
have ratified the CLC have increased the liability limits through a 1992
Protocol to the CLC. The liability limits in the countries that have ratified
this Protocol are currently approximately $4.0 million plus approximately $566.0
per gross registered ton above 5,000 gross tons with an approximate maximum of
$80.5 million per vessel, with the exact amount tied to a unit of account which
varies according to a basket of currencies. The right to limit liability is
forfeited under the CLC where the spill is caused by the owner's actual fault or
privity and, under the 1992 Protocol, where the spill is caused by the owner's
intentional or reckless conduct. Vessels trading to contracting states must
provide evidence of insurance covering the limited liability of the owner. In
jurisdictions where the CLC has not been adopted, various legislative schemes or
common law govern, and liability is imposed either on the basis of fault or in a
manner similar to the CLC.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the
Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the United States Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the
convention dealing specifically with maritime security. The new chapter came
into effect in July 2004 and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
International Ship and Port Facilities Security Code or ISPS Code. Among the
various requirements are:
o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The United States Coast Guard regulations, intended to align with international
maritime security standards, exempt non-United States vessels from MTSA vessel
security measures provided such vessels have on board a valid International Ship
Security Certificate, or ISSC, that attests to the vessel's compliance with
SOLAS security requirements and the ISPS Code. We have implemented the various
security measures addressed by the MTSA, SOLAS and the ISPS Code.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society. The
classification society certifies that the vessel is "in class," signifying that
the vessel has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the
vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks
that are required by regulations and requirements of the flag state. These
surveys are subject to agreements made in each individual case and/or to the
regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of hull,
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:
o Annual Surveys. For seagoing ships, annual surveys are conducted for
the hull and the machinery, including the electrical plant and where
applicable for special equipment classed, at intervals of 12 months
from the date of commencement of the class period indicated in the
certificate.
o Intermediate Surveys. Extended annual surveys are referred to as
intermediate surveys and typically are conducted two and one-half
years after commissioning and each class renewal. Intermediate surveys
may be carried out on the occasion of the second or third annual
survey.
o Class Renewal Surveys. Class renewal surveys, also known as special
surveys, are carried out for the ship's hull, machinery, including the
electrical plant and for any special equipment classed, at the
intervals indicated by the character of classification for the hull.
At the special survey the vessel is thoroughly examined, including
audio-gauging to determine the thickness of the steel structures.
Should the thickness be found to be less than class requirements, the
classification society would prescribe steel renewals. The
classification society may grant a one year grace period for
completion of the special survey. Substantial amounts of money may
have to be spent for steel renewals to pass a special survey if the
vessel experiences excessive wear and tear. In lieu of the special
survey every four or five years, depending on whether a grace period
was granted, a ship owner has the option of arranging with the
classification society for the vessel's hull or machinery to be on a
continuous survey cycle, in which every part of the vessel would be
surveyed within a five year cycle. At an owner's application, the
surveys required for class renewal may be split according to an agreed
schedule to extend over the entire period of class. This process is
referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are
required to be surveyed at least once per class period, unless shorter intervals
between surveys are prescribed elsewhere. The period between two subsequent
surveys of each area must not exceed five years.
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 $100,000
per vessel per incident. We also maintain increased value coverage for each of
our vessels. Under this increased value coverage, in the event of total loss of
a vessel, we are entitled to recover amounts not recoverable under our hull and
machinery policy due to under-insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which insure our third party
liabilities in connection with our shipping activities. This includes
third-party liability and other related expenses resulting from the injury or
death of crew, passengers and other third parties, the loss or damage to cargo,
claims arising from collisions with other vessels, damage to other third-party
property, pollution arising from oil or other substances and salvage, towing and
other related costs, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or "clubs." Subject to the "capping" discussed below, our
coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution is $1
billion per vessel per incident. The fourteen P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. As a member of a P&I Association, which is a member of the
International Group, we are subject to calls payable to the associations based
on the group's claim records as well as the claim records of all other members
of the individual associations and members of the pool of P&I Associations
comprising the International Group.
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 us doing business.
C. Organizational structure
Diana Shipping Inc. 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.
D. Property, plants and equipment
We do not own any real property. Our interests in the vessels in our fleet are
our only material properties.
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