Paragon Shipping (PRGN)

On July 25, 2007, we repaid in full the outstanding amount of $108.3 million under the term HSH Nordbank senior secured credit facility, by drawing the same amount under a Commerzbank AG revolving bridge loan facility The purpose of the loan was to finance the acquisition costs of the vessels Sapphire Seas, Pearl Seas and Diamond Seas and to refinance the term $108.3 million HSH Nordbank senior secured credit facility. The Commerzbank AG revolving bridge loan facility was later replaced by the Commerzbank AG Senior Secured Revolving Credit Facility described below.

Commerzbank AG Senior Secured Revolving Credit Facility:> On November 29, 2007 we signed a loan agreement for $250.0 million. Until Commerzbank AG transfers $50.0 million of its commitments to other banks or financial institutions, the maximum principal amount which shall be available to us is limited to $200.0 million. Under the terms of the loan agreement, we are required to make periodic interest payments and to repay any principal amount drawn under the credit facility on the final maturity date which will be no later than December 31, 2010. Borrowings under the senior secured revolving credit facility bear interest at an annual interest rate of LIBOR plus a margin of 1.10% if the leverage ratio (defined as the ratio of our total outstanding liabilities by the total assets, adjusted for the difference between the fair market value and book value of the vessels securing the facility and for any lease transaction relating to the vessels) is greater than 55%, and 0.95% if the leverage ratio is equal to or less than 55%.

 

 

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The senior secured revolving credit facility is secured by a first priority mortgage on five vessels, a first assignment of all freights, earnings, insurances, and cross default with all ship-owning companies owned by us. The purpose of the senior secured revolving credit facility was to refinance five mortgaged vessels and in part-finance up to 50% of the lower of the fair market value and the purchase price of future drybulk carrier acquisitions. The senior secured revolving credit facility contains several financial and other covenants and includes events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation and warranty, a cross-default to other indebtedness and non-compliance with security documents. Furthermore, the senior secured revolving credit facility prohibits us from paying dividends if we are in default on the facility and if, after giving effect to the payment of the dividend, we are in breach of a covenant. We were in breach of the indebtedness to EBITDA ratio covenant as of December 31, 2007.  This breach was subsequently waived by the lender.  We believe we will comply with the covenant within the first quarter 2008. The amount available to be drawn down under this senior secured revolving credit facility at December 31, 2007 was $61.0 million. Any undrawn amounts under the facility are subject to 0.25% annual commitment fee.

Bayerische Hypo-und Vereinsbank AG Secured Credit Facility:> On November 19, 2007 we entered into a secured credit facility with Bayerische Hypo-und Vereinsbank AG that, subject to certain provisions, provided us with an amount of up to $100.0 million to be used in financing up to 50% of the lower of the aggregate market value and the purchase price of three vessels and of future drybulk carrier acquisitions. Under the terms of the loan agreement, we are required to make periodic interest payments and to repay any principal amount drawn under the credit facility on the final maturity date which will be no later than December 31, 2010. Borrowings under the secured credit facility bear interest at an annual interest rate of LIBOR plus a margin of 1.40% if the leverage ratio (defined as the ratio of our total outstanding liabilities by the total assets, adjusted for the difference between the fair market value and book value of the vessels securing the facility and for any lease transaction relating to the vessels) is greater than 55%, and 1.20% if the leverage ratio is equal to or less than 55%.

The facility is secured by a first priority mortgage on three vessels, a first assignment of all freights, earnings, insurances, and cross default with all ship-owning companies owned by us. The secured credit facility contains financial and other covenants and includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation and warranty, a cross-default to other indebtedness and non-compliance with security documents and prohibits us from paying dividends if we are in default on the facility and if, after giving effect to the payment of the dividend, we are in breach of a covenant. We were in breach of the indebtedness to EBITDA ratio covenant as of December 31, 2007.  This breach was subsequently waived by the lender.  We believe we will comply with the covenant within the first quarter 2008. The amount available to be drawn down under this secured credit facility at December 31, 2007 was $10.0 million. Any undrawn portion of the facility amount is subject to 0.375% annual commitment fee.

Bank of Scotland plc Secured Revolving Credit Facility:>  On December 4, 2007 we entered into a secured revolving credit facility with Bank of Scotland plc that, subject to certain conditions, provided us with an amount of up to $89.0 million to be used in part-financing or re-financing the acquisition of two vessels and of future drybulk carrier acquisitions. Under the terms of the loan agreement, we are required to make quarterly interest payments and to reduce the initial facility limit by 20 quarterly mandatory limit reductions, commencing three months after the delivery date of the second vessel as follows: twelve payments of $2,250,000 each and eight payments of $562,500 each, plus a final repayment of up to $57,500,000 on the final maturity date which will be no later than December 31, 2012. Subject to the scheduled mandatory facility limit reductions, the facility limit will be available for drawing throughout the facility duration on a fully revolving basis. In the balance sheet as at December 31, 2007, an amount of $9.0 million was recorded as current portion of a long-term debt and an amount of $80.0 million was recorded as long-term debt. Drawn amounts bear interest at the rate of LIBOR plus a margin of 1.30% if the leverage ratio (defined as the ratio of our total outstanding liabilities by the total assets, adjusted for the difference between the fair market value and book value of the vessels securing the facility and for any lease transaction relating to the vessels) is greater than 55%, and 1.15% if the leverage ratio is equal to or less than 55%.

 

 

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The facility is secured by a first priority mortgage on the two vessels, a first assignment of all freights, earnings, insurances, and cross default with all ship-owning companies owned by us. The facility contains financial and other covenants and includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation and warranty, a cross-default to other indebtedness and non-compliance with security documents and prohibits us from paying dividends if we are in default on the facility and if, after giving effect to the payment of the dividend, we are in breach of a covenant. The full amount was drawn down under this facility. Any undrawn portion of the facility amount is subject to 0.5% annual commitment fee.

First Business Bank S.A. Secured Revolving Credit Facility:> On April 16, 2008 we entered into a secured revolving credit facility with First Business Bank S.A. for up to $30.0 million to provide us with working capital. The full amount of $30.0 million was drawn down under this facility. Under the terms of the loan agreement we are required to make periodic interest and capital payments to reduce the initial facility limit commencing from the drawdown date of the loan as follows: twelve payments of $0.85 million each and twenty payments of $0.69 million each, plus a final repayment of up to $6.0 million on the final maturity date which will be in eight years from the drawdown date of the loan. Drawn amounts under the secured revolving credit facility bear interest at an annual interest rate of LIBOR plus a margin of 1.20%.

The facility is secured by a first priority mortgage on one vessel, a first assignment of all freights, earnings, insurances, and cross default with all ship-owning companies owned by us. The ship-owning company of the mortgaged vessel is a party to this facility as corporate guarantor. The facility contains financial and other covenants and includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation and warranty, a cross-default to other indebtedness and non-compliance with security documents and prohibits us from paying dividends if we are in default on the facility and if, after giving effect to the payment of the dividend, we are in breach of a covenant. The full amount was drawn down under this facility. Any undrawn portion of the facility amount is subject to 0.375% annual commitment fee. 

 

INTEREST RATE SWAP

Effective December 20, 2007, we entered into an interest rate swap with Bayerische Hypo-und Vereinsbank AG on a notional amount of $50.0 million, based on expected principal outstanding under our credit facility, in order to manage interest costs and the risk associated with changing interest rates. Under the terms of the swap, we make quarterly payments to Bayerische Hypo-und Vereinsbank AG on the relevant amount at a fixed rate of 5% if 3 month LIBOR is greater than 5%, at three months LIBOR if 3 month LIBOR is between 3.15% and 5%, and at 3.15% if 3 month LIBOR is equal to or less than 3.15%. Bayerische Hypo-und Vereinsbank AG makes quarterly floating-rate payments to us for the relevant amount based on the 3 month LIBOR. The term of the derivative is 3 years and coincides with the maturity of the senior secured credit facility with Bayerische Hypo-und Vereinsbank AG of which a maximum of $50.0 million was conditional on entering into the interest-rate swap.

Effective December 20, 2007, we entered into an interest rate multi callable swap with Bayerische Hypo-und Vereinsbank AG on a notional amount of $50.0 million, based on expected principal outstanding under our credit facility, in order to manage interest costs and the risk associated with changing interest rates. Under the terms of the swap, Bayerische Hypo-und Vereinsbank AG makes a quarterly payment to us based on 3 month LIBOR less 3.5% on the relevant amount if 3 month LIBOR is greater than 3.5%. If 3 month LIBOR is less than 3.5% Bayerische Hypo-und Vereinsbank AG receives an amount from us based on 3.5% less 3 month LIBOR for the relevant amount.  If LIBOR is equal to 3.5% no amount is due or payable to us. Bayerische Hypo-und Vereinsbank AG may at its sole discretion cancel permanently this swap agreement commencing on March 20, 2008 up to and including September 20, 2010 upon five business days notice. The term of the derivative is 3 years and coincides with the maturity of our senior secured credit facility with Bayerische Hypo-und Vereinsbank AG.

 

 

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Effective December 21, 2007, we entered into an interest rate swap with Bank of Scotland plc on a notional amount of $50.0 million, based on expected principal outstanding under our credit facility, in order to manage interest costs and the risk associated with changing interest rates. Under the terms of the swap, we make quarterly payments to Bank of Scotland plc on the relevant amount at a fixed rate of 5% if 3 month LIBOR is greater than 5%, at three months LIBOR if 3 month LIBOR is between 3.77% and 5%, and at 3.77% if 3 month LIBOR is equal to or less than 3.77%.  Bank of Scotland plc makes quarterly floating-rate payments to us for the relevant amount based on the 3 month LIBOR. The swap transaction effectively limits our expected floating-rate interest obligation under its secured revolving credit facility with Bank of Scotland plc to a range of 3.77% and 5%, exclusive of margin due to its lenders. The term of the derivative is 5 years and coincides with the maturity of our secured revolving credit facility with the Bank of Scotland plc of which a maximum of $50.0 million was conditional on entering into the interest-rate swap.

 

On January 15, 2008 the HSH Nordbank interest rate swap has been novated to Commerzbank AG and the $3.0 million restricted cash that was placed as security deposit for the contractual obligation under the interest rate swap agreement with HSH Nordbank, has been released.  All other terms of the interest rate swap agreement remained unchanged.

 

 

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C.        Research and development, patents and licenses

 

We incur from time to time expenditures relating to inspections for acquiring new vessels that meet our standards. Such expenditures are insignificant and they are expensed as they incur.

 

D.        Trend information

 

Our results of operations depend primarily on the charter hire rates that we are able to realize.  Charter hire rates paid for drybulk carriers are primarily a function of the underlying balance between vessel supply and demand.

 

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. According to analysts, between 2001 and 2007, trade in all drybulk commodities increased from approximately 2.1 billion tons to 3.0 billion tons, equivalent to a compound average growth rate of 5.2%.

 

The increasingly active grain market, with Asia again the largest contributor to growth, should be incremental for transportation distances as shipments are being sourced from origins such as the Black Sea, the U.S. Gulf and Argentina. One of the primary reasons for the resurgence in drybulk trade has been the growth in imports by China of iron ore, coal and steel products during the last five years.  The driver of this dramatic upsurge in charter rates was primarily the high level of demand for raw materials imported by China. Rates declined somewhat in 2006, but in 2007 have risen again to record highs on the strength of continued high demand for drybulk shipping capacity. During the first quarter in 2008 the charter hire rates for Panamax and Capesize drybulk carries have declined from their historical highs but still remain close to those levels. Demand for drybulk carrier capacity is also affected by the operating efficiency of the global fleet, with port congestion, which has been a feature of the market since 2004, absorbing tonnage and therefore leading to a tighter balance between supply and demand.

 

It is expected that increases in cargo demand will continue in 2008, and this is likely to be broadly matched by increases in tonnage supply. Factors affecting the supply and demand balance such as the ton-mile effect and congestion will continue having a generally beneficial effect on this balance. Given the imbalance in iron ore flows, it is more likely than not that the second half of 2008 will be stronger than the first half. Risks on the downside include the down side risks of the whole commodity cycle, the growing bottlenecks in cargo generation and over investment in ships and shipbuilding capacity.

 

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. Currently, newbuilding statistics from shipping analysts, show that approximately 129 million tons dwt of drybulk vessels are on order, representing approximately 48% of the existing fleet.  These vessels are scheduled for delivery over the next four years.  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 drybulk shipping industry, the current average age at which drybulk vessels are being scrapped has increased.  

 

 

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E.        Off-balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

F.        Contractual Obligations

 

The following table sets forth our contractual obligations, in thousands of U.S.$, and their maturity dates as of December 31, 2007:

 

		Payments due by period
Obligations		Total contractual obligations		1 year		2-3 years		4-5 years		More than 5 years
		(in thousands of U.S. dollars)
Senior Secured Credit Facility (1)		318,000		9,000		247,000		62,000		0
Management Agreements (2)		13,122		3,076		6,135		3,911		0
Rental Agreements (3)		165		35		70		60		0
Interest Payments (1)		64,924		19,799		37,792		7,333		0
Total		396,211		31,910		290,997		73,304

 

________________

(1)	During 2007, we drew down $318.0 million, in the aggregate, under our credit facilities to fund a portion of the aggregate purchase price of the vessels in our fleet. Interest Payments refer to our expected interest payments over the credit facilities on an interest rate of 6.2%.

(2)

The vessels in our initial fleet entered into management agreements with Allseas upon their delivery to us. Each of the management agreements has a five-year renewable term. The agreements will be terminable upon the occurrence of certain events as specified in the agreements and will not be subject to any severance payable by us upon termination. The amounts indicated in the above table are the minimum contractual obligations based on a management fee of $764 per day, per vessel, exclusive of an additional fee of 1.25% of gross revenues which will be paid to Allseas. The management agreements provide for a fixed management fee of $650 per day per vessel is based on a Euro/U.S. dollar exchange rate of €1.268:$1.00. The management fee is adjusted quarterly based on the Euro/U.S. dollar exchange rate as published by EFG Eurobank Ergasias S.A. two days prior to the end on the previous calendar quarter. The management agreements also provide for an annual inflationary increase based on the official Greek inflation rate (as published by the Greek National Statistical Office) for the previous year. The management fee of $764 per day derives by adjusting the fixed management fee of $650 per day by a Euro/U.S. dollar exchange rate of €1.4487:$1.00 as published by EFG Eurobank Ergasias S.A. on December  27, 2007 and by an annual inflationary increase based on the official Greek inflation rate for 2007 of 2.9%. Management does not believe that these amendments will impact our future results of operations in any material respect. We will also pay Allseas a fee equal to 1.0% of the purchase price of any vessel bought or sold on our behalf, calculated in accordance with the relevant memorandum of agreement.

(3)

We lease office space in Athens, Greece. The term of the lease will expire on September 30, 2012 and the monthly rental for the first year is 2,000 Euros and it will be adjusted thereafter annually for inflation increases. For the future minimum rent commitments we assumed a Euro/U.S. dollar exchange rate of € 1.00:$1.4487 and we excluded inflation increases as the impact on future results of operations will not be material.

 

G.        Safe Harbor

 

See section “forward looking statements” at the beginning of this annual report.

 

Shareholders Rights Plan

 

We adopted a shareholders rights plan on January 4, 2008 and declared a dividend distribution of one preferred share purchase right to purchase one one-thousandth of our Series A Participating Preferred Stock for each outstanding share of our common stock, par value $0.001 per share to shareholders of record at the close of business on February 1, 2008. Each right entitles the registered holder, upon the occurrence of certain events, to purchase from us one one-thousandth of a share of Series A Participating Preferred Stock at an exercise price of $75, subject to adjustment. The rights will expire on the earliest of (i) February 1, 2018 or (ii) redemption or exchange of the rights. The plan was designed to enable us to protect shareholder interests in the event that an unsolicited attempt is made for a business combination with or takeover of us. We believe that the shareholder rights plan should enhance the Board’s negotiating power on behalf of shareholders in the event of a coercive offer or proposal. We are not currently aware of any such offers or proposals and adopted the plan as a matter of prudent corporate governance.

 

 

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Critical Accounting policies

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions 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 we believe are our most critical accounting policies that involve a high degree of judgment and the methods of their application. For a description of all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere herein.

Revenue and Expenses: Revenues are generated from voyage and time charter agreements.

Time Charter Revenues:>  Time charter revenues are recorded over the term of the charter as service is provided. When two or more time charter rates are involved during the life term of a charter agreement, the Company is recognizing revenue on a straight line basis. Time charter revenues received in advance are recorded as deferred income, until charter service is rendered.

When vessels are acquired with time charters attached and the charter rate on such charters is above or below market, we allocate the fair value of the above or below market charter to the cost of the vessel on a relative fair value basis and records a corresponding asset or liability for the above or below market charter. The fair value is computed as the present value of the difference between the contractual amount to be received over the term of the time charter and the management's estimate of the then current market charter rate for equivalent vessels at the time of acquisition. The asset or liability record is amortized over the remaining period of the time charter as a reduction or addition to charter hire revenue.

Impairment of Long-Lived Assets:> We apply SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard requires that, long-lived assets and certain identifiable intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss for an asset held for use should be recognized 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. Measurement of the impairment loss is based on the fair value of the asset. In this respect, we regularly review the carrying amount of the vessels to determine if they are recoverable and no amount has been deemed necessary to be recorded as an impairment loss, following impairment tests we carried out.

Vessel Depreciation:> Depreciation is computed using the straight-line method over the estimated useful life of the vessels, after considering the estimated salvage value. Each vessel's salvage value is equal to the product of its lightweight tonnage and estimated scrap rate.

We estimate the useful life of the Company's vessels to be 25 years from the date of initial delivery from the shipyard (secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life).

Vessel Cost: > Vessels are stated at cost, which consists of the contract price less discounts, plus any material expenses incurred upon acquisition (delivery expenses and other expenditures to prepare the vessel for her initial voyage). Subsequent expenditures for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. Repairs and maintenance are charged to expense as incurred.

 

 

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Dry-Docking and Special Survey Costs:> For the period from inception (April 26, 2006) to December 31, 2006 we followed the deferral method of accounting for dry-docking costs whereby actual costs incurred are deferred and are amortized on a straight-line basis over the period through the expected date of the next dry-docking but no dry-docking costs were incurred during this period. In the fourth quarter in 2007, we elected to change our method of accounting for dry-docking costs, to the direct expense method as we believe that the direct expense method eliminates the significant amount of time and subjectivity that is needed to determine which costs and activities related to dry-docking should be deferred. In respect of SFAS No. 154, "Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and SFAS 3" ("SFAS 154") there is no prior-period information that has been retrospectively adjusted as the first dry-docking only occurred in the fourth quarter in 2007. For the year ended December 31, 2007 the effect in net income by applying the direct expense method was the cost of the dry-docking of $1.18 million or $0.07 per share, basic and diluted.

Recent Accounting Pronouncements:> In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement" ("SFAS 157"). SFAS 157 addresses standardizing the measurement of fair value for companies that are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109, "Accounting for Income Taxes", by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized.

Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. In 2007, the adoption of FIN 48 did not have a material impact on our financial position, results of operations or cash flows.

In September 2006, the FASB Staff issued FSP No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities," ("FSP No. AUG AIR-1"). FSP No. AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods, if no liability is required to be recorded for an asset retirement obligation based on a legal obligation for which the event obligating the entity has occurred. FSP No. AUG AIR-1 also requires disclosures regarding the method of accounting for planned major maintenance activities and the effects of implementing the FSP. The guidance in FSP No. AUG AIR-1 is effective for us as of January 1, 2007. No planned major maintenance activities took place during the period from inception (April 26, 2006) to December 31, 2006. There were two planned major maintenance activities, that took place in the fourth quarter in 2007 following the adoption of the new policy and we accounted for those expenses by adopting the direct expense method and recorded those expenses as incurred for the year ended December 31, 2007. The new accounting principle will be presented in all periods presented in future earning releases and filings. The retrospective effect in net income and per share information will be nil as there was no planned major maintenance activity before the adoption of the new accounting principle. For the year ended December 31, 2007 the effect in net income by applying the direct expense method was the cost of the dry-docking of $1,184,140 or $0.07 per share, basic and diluted.

 

 

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On September 13, 2006, the SEC released staff accounting bulleting ("SAB") No. 108, which provides guidance on materiality. SAB No. 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement, contains guidance on correcting errors under the dual approach, and provides transition guidance for correcting errors existing in prior years. If prior-year errors that had been previously considered immaterial (based on the appropriate use of the registrant's prior approach) now are considered material based on the approach in the SAB, the registrant need not restate prior period financial statements. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. This statement is effective for us for the fiscal year ending December 31, 2006 and onwards. SAB No. 108 did not have a material impact on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Earlier adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, "Fair Value Measurements." We are currently evaluating the impact of SFAS 159, but do not expect the adoption of SFAS 159 to have a material impact on our financial consolidated position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations” (“SFAS 141 (revised)”). SFAS No. 141 (revised) relates to the business combinations and requires the acquirer to recognize the assets acquired, the liabilities assumed, and any non controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisitions date is on or after the beginning of the first reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. We are currently evaluating the impact, if any, of SFAS No. 141 (revised) on its financial position, results of operations and cash flows.

 

Item 6. Directors, Senior Management and Employees

 

A.        Directors and Senior Management

 

Set forth below are the names, ages and positions of our directors and executive officers. Our board of directors is elected annually, and each director elected holds office for a three year term or 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. The business address for each director and executive officer is c/o Paragon Shipping Inc., 15 Karamanli Ave, Voula 16673, Athens, Greece.

 

Name		Age		Position
Michael Bodouroglou		53		Chairman and Chief Executive Officer
George Skrimizeas		42		Chief Operating Officer and Director
Christopher J. Thomas		47		Chief Financial Officer
Nigel D. Cleave		49		Director
Dimitrios Sigalas *		64		Director
Bruce Ogilvy		65		Director

 

Our board of directors is elected annually, and each director elected holds office for a three year term or 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.

 

Mr. Dimitrios Sigalas became a member of our board of directors on March 20, 2008 upon the resignation of Mr. Ian Davis, who served as a member of our board of directors since our initial public offering until his resignation effective March 20, 2008.

 

 

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Biographical information with respect to each of our directors and executive officers is set forth below.

 

Michael Bodouroglou> has been our chairman and chief executive officer since June 2006. Mr. Bodouroglou has co-founded and co-managed an independent shipping group since 1993 and has served as co-managing director of Eurocarriers and Allseas, which he co-founded, since 1994 and 2000, respectively. Mr. Bodouroglou disposed of his interest in Eurocarriers in September 2006. Prior to founding Eurocarriers, Mr. Bodouroglou served from 1984 to 1992 as technical superintendent for Thenamaris (Ships Management) Inc., where he was responsible for all technical matters of a product tanker fleet. Mr. Bodouroglou served as technical superintendent for Manta Line, a dry cargo shipping company, in 1983 and as technical superintendent for Styga Compania Naviera, a tanker company, from 1981 to 1983. Mr. Bodouroglou graduated from the University of Newcastle-upon-Tyne in the United Kingdom with a Bachelor of Science in Marine Engineering, with honors, in 1977, and received a Masters of Science in Naval Architecture in 1978. Mr. Bodouroglou is a member of the Cayman Islands Shipowners' Advisory Council and is also a member of the Board of Academic Entrepreneurship of the Free University of Varna, Bulgaria.

 

George Skrimizeas> has been our executive director and chief operating officer since June 2006. Mr. Skrimizeas has been general manager of Allseas since May 2006. From 1996 to 2006, Mr. Skrimizeas has held various positions in Allseas, Eurocarriers and their affiliates, including general manager, accounts and human resources manager, and finance and administration manager. Mr. Skrimizeas worked as account manager for ChartWorld Shipping from 1995 to 1996 and as accounts and administration manager for Arktos Investments Inc. from 1994 to 1995. From 1988 to 1994, Mr. Skrimizeas was accounts and administration manager for Candia Shipping Co. S.A. and accountant and chief accounting officer—deputy human resources manager in their Athens, Romania, Hong Kong and London offices. Mr. Skrimizeas received his Bachelor of Science degree in Business Administration from the University of Piraeus, Greece in 1988 and completed the coursework necessary to obtain his Masters of Science in Finance from the University of Leicester, in the United Kingdom, in 2002. Mr. Skrimizeas is a member of the Hellenic Chamber of Economics and the Association of Chief Executive Officers.

 

Christopher J. Thomas> has been our chief financial officer since October 2006. Prior to joining us, Mr. Thomas served as director, vice president, treasurer and chief financial officer of DryShips Inc., a Nasdaq-listed drybulk company. Since November 2001, Mr. Thomas has been an independent financial consultant to numerous international shipowning and operating companies. Mr. Thomas is also on the board of directors of TOP Ships Inc., which is a publicly listed company with securities registered under the Exchange Act. From 1999 to 2004, Mr. Thomas was the chief financial officer and a director of Excel Maritime Carriers Ltd. which is also a publicly traded company currently listed on the New York Stock Exchange. Prior to joining Excel, he was Financial Manager of Cardiff Marine Inc. and Alpha Shipping plc. Mr. Thomas holds a degree in Business Administration from Crawley University, England.

 

Nigel D. Cleave> is a non-executive director. In 2006, Mr. Cleave was appointed to his current position as chief executive officer of Epic Ship Management Limited, a ship management company engaged in the provision of a complete range of ship management services on behalf of an international clientele base, with offices located in Cyprus, Singapore, Germany, the U.K. and the Philippines. Prior to this, Mr. Cleave served as group managing director of Dobson Fleet Management Limited from 1993 to 2006, a ship management company based in Cyprus and, prior to his position at Dobson, Mr. Cleave was the deputy general manager for Hanseatic Shipping Company Limited from 1991 to 1993. From 1988 to 1991, Mr. Cleave held fleet operation roles with PPI Lines, including that of fleet operations manager. From 1975 to 1986, Mr. Cleave held various positions at The Cunard Steamship Company plc, including navigation cadet officer, third officer, second officer, financial and planning assistant, assistant to the group company secretary and assistant operations manager. Mr. Cleave graduated from the Riversdale College of Technology in the United Kingdom with an O.N.C. in Nautical Science in 1979. Mr. Cleave is a board member of the Marine Shipping Mutual Insurance Company Limited, and is the Chairman of the Cayman Islands Shipowners' Advisory Council. Mr. Cleave is a Fellow of the Chartered Institute of Shipbrokers, acts as a Member of the Cyprus Committee of Germanischer Lloyd and the Cyprus Technical Committee of DnV (both being advisory committees covering technical related issues with the Classification Society). Mr. Cleave also serves as the Chairman of the Mission to Seafarers Cyprus Branch.

 

 

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Bruce Ogilvy> is a non-executive director. From 2003 to 2005 Mr. Ogilvy served as a consultant to Stelmar Tankers (Management) Ltd. and from 1992 to 2002, he was managing director of Stelmar Tankers (U.K.) Ltd., a subsidiary of Stelmar Tankers (Management) Ltd., through which the group's commercial business, including chartering and sale and purchase activities, were carried out. In 1992, Mr. Ogilvy joined Stelios Haj-Ioannou to form Stelmar Tankers (Management) Ltd., and served on its board of directors from its inception to 2002. During his ten years with Stelmar Tankers (Management) Ltd., Stelmar Shipping Ltd. completed an initial public offering on the New York Stock Exchange in 2001 and a secondary listing in 2002. Prior to his association with Stelmar Tankers (Management) Ltd., Mr. Ogilvy served in various capacities, including chartering and sale and purchase activities with Shell International. Mr. Ogilvy graduated from Liverpool University, in the United Kingdom, in 1963 with a degree as Ship Master. Mr. Ogilvy served on the Council of Intertanko, an industry body that represents the interests of independent tanker owners, since 1994 and on its Executive Board from 2003 until 2005. Mr. Ogilvy has been an active member of the Chartered Institute of Shipbrokers for nearly 30 years. He served as Chairman of the London Branch from 1999 to 2001 and currently serves as Chairman of the Institute.

 

Dimitrios Sigalas> has been a non-executive director since March 2008.  Mr. Sigalas was appointed to his current position as shipping journalist to the Greek daily newspaper “Kathimerini” in 1988. Prior to this he served within the chartering department of Glafki (Hellas) Maritime Corporation an Athens based shipowning company which he joined in 1972. In 1980 Mr. Sigalas was appointed to Head of the Dry and Tanker Chartering Department within Glafki (Hellas) Maritime Corporation.  Mr. Sigalas graduated from Cardiff University, Wales, with a diploma in Shipping.

 

B.        Compensation

 

The aggregate compensation that we paid members of our senior management in 2007 was approximately $1.63 million. This amount does not reflect an additional amount of $3.87 million bonus awards in the aggregate, that was paid to certain of our senior executive officers for 2007 performance. We paid aggregate compensation of $165,520 to members of our senior management in 2006. Each of our non-employee directors received annual compensation in the aggregate amount of $30,000 per year, plus reimbursements for actual expenses incurred while acting in their capacity as a director. Our officers and directors are eligible to receive awards under our equity incentive plan which is described below under “Equity Incentive Plan”. During 2006, we granted options to our chief executive officer and other directors and officers and restricted common shares to our directors and officers, other than our chief executive officer, as described below under “Equity Incentive Plan”. We do not have a retirement plan for our officers or directors. We also recognized non-cash compensation expenses of $18.25 million in connection with the conversion of our Class B common shares and vesting of certain equity awards upon consummation of our initial public offering.

 

C.        Board Practices

 

Our board of directors has determined that each of Messrs. Cleave, Sigalas and Ogilvy, constituting a majority of our board of directors, is independent under the Nasdaq Global Market listing requirements and the rules and regulations promulgated by the SEC. We have established an audit committee comprised of three members, all of whom are independent, which is responsible for reviewing our accounting controls and recommending to the board of directors the engagement of our outside auditors. The members of the audit committee are Nigel Cleave, Bruce Ogilvy and Dimitrios Sigalas. Mr. Cleave serves as the chairman of our audit committee.

 

The audit committee is responsible for assisting our Board of Directors with its oversight responsibilities regarding the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent registered public accounting firm's qualifications and independence, and the performance of our internal audit functions. We have not determined that any member of our Audit Committee constitutes a financial expert as such term is defined in Item 407 of SEC Regulation S-X. Our board of directors has determined that each member of the audit committee does have the financial experience required by NASDAQ Marketplace Rule 4350(d)(2) and other relevant experience necessary to carry out the duties and responsibilities of the company's audit committee.

 

 

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We have established a compensation committee 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 which is responsible for recommending to the board of directors nominees for directors for appointment to board committees and advising the board with regard to corporate governance practices. The members of each of the compensation committee and the nominating and corporate governance committee are Messrs. Cleave, Ogilvy, and Sigalas.

 

Corporate Governance Practices

 

We have certified to Nasdaq that our corporate governance practices are in compliance with, and are not prohibited by, the laws of the Republic of the Marshall Islands. Therefore, we are exempt from many of Nasdaq's corporate governance practices other than the requirements regarding the disclosure of a going concern audit opinion, submission of a listing agreement, notification of material non-compliance with Nasdaq corporate governance practices and the establishment of an audit committee in accordance with Nasdaq Marketplace Rules 4350(d)(3) and 4350(d)(2)(A)(ii). The practices we follow in lieu of Nasdaq's corporate governance rules are as follows:

In lieu of obtaining shareholder approval prior to the issuance of designated securities, we will comply with provisions of the Marshall Islands Business Corporations Act, or BCA, providing that the board of directors approves share issuances.

As a foreign private issuer, we are not required to solicit proxies or provide proxy statements to Nasdaq pursuant to Nasdaq corporate governance rules or Marshall Islands law. Consistent with Marshall Islands law and as provided in our bylaws, we will notify our shareholders of meetings between 15 and 60 days before the meeting. This notification will contain, among other things, information regarding business to be transacted at the meeting. In addition, our bylaws provide that shareholders must give us between 150 and 180 days advance notice to properly introduce any business at a meeting of shareholders.

 

Other than as noted above, we expect to be in full compliance with all other Nasdaq corporate governance standards applicable to U.S. domestic issuers.

 

D.        Crewing and Shore Employees

 

We currently have four shoreside personnel, our chief executive officer, Michael Bodouroglou, our chief operating officer, George Skrimizeas, our chief financial officer, Christopher Thomas and our internal legal counsel and corporate secretary, Maria Stefanou. In addition, we employee through our wholly-owned vessel owning subsidiaries approximately 500 seafarers that crew the vessels in our fleet. Allseas is responsible for recruiting, either directly or through a crewing agent, the senior officers and all other crew members for our vessels. We believe the streamlining of crewing arrangements helps to ensure that all our vessels will be crewed with experienced seamen that have the qualifications and licenses required by international regulations and shipping conventions.

 

The following table presents the average number of shoreside personnel and the number of seafaring personnel employed by our vessel owning subsidiaries during the periods indicated.

 

			2007		2006
	Shoreside		4		4
	Seafaring		500		100
	Total		504		104

 

 

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 Stockholders and Related Party Transactions”.

 

 

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Equity Incentive Plan

 

We adopted an equity incentive plan, which we refer to as the plan, under which our officers, key employees and directors are eligible to receive equity awards. We have reserved a total of 1,500,000 shares of common shares for issuance under the plan. Our board of directors administers the plan. Under the terms of the plan, our board of directors are able to grant new options exercisable at a price per common share to be determined by our board of directors but in no event less than fair market value of the common share as of the date of grant. The plan also permits our board of directors to award restricted stock, restricted stock units, stock appreciation rights and unrestricted stock. All options will expire ten years from the date of the grant. The plan will expire ten years from the completion of the private placement.

 

Upon the completion of our private placement in the forth quarter of 2006, we granted our chairman and chief executive officer options to purchase an aggregate of 500,000 common shares, all of which have been exercised.  Of these options, 250,000 vested immediately upon the closing of the private placement and the balance vested upon the completion of our initial public offering in August 2007. We also granted our other executive officers and directors and employees of Allseas options to purchase an aggregate of 70,000 of our common shares, which initially vested ratably over a four year period from the date of grant.  The vesting terms of the options were amended by our board of directors on the first anniversary of the grant date such that all options vested immediately.  All of the options granted at the closing of the private placement have an exercise price of $12.00 per common share.

 

We also granted an aggregate of 40,000 restricted common shares to our executive officers and directors, other than our chief executive officer, and to employees of Allseas upon the completion of the initial closing of our private placement in the fourth quarter of 2006, which continue to vest ratably over four years.  In addition, we granted 46,500 restricted common shares to our directors, executive officers and certain employees of Allseas on August 27, 2007 following the completion of our initial public offering that vest ratably over two years from the grant date. 

 

On December 28, 2007 we granted 20,000 additional restricted common shares to our directors, executive officers and employees, that vest ratably over three years from December 31, 2007.  In addition, on December 31, 2007, 6,000 restricted common shares were authorized to be granted to employees of Allseas and the vesting schedule of outstanding restricted shares were amended so that December 31 of the relevant year is the vesting date for restricted shares that vest in the second half of the year and June 30 of the relevant year is vesting date for shares that vest in the first half of the year.

 

Item 7. Major Shareholders and Related Party Transactions

 

A.	Major Shareholders

 

The following table sets forth information regarding (i) the owners of more than five percent of outstanding common shares that we are aware of and (ii) the total number of common shares owned by all of our officers and directors, individually and as a group, in each case as of March 6, 2008. All of the shareholders, including the shareholders listed in this table, are entitled to one vote for each common share held.

 

 

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Title of Class		Identity of Person or Group		Number of Shares Owned		Percent of Class
Common Shares, par value $0.001		Michael Bodouroglou (1)		5,203,288		19.3%
		Trafelet Capital Management, L.P. (2)		3,435,866		12.7%
		Kenmont Investment Management L.P. (3)		1,512,853		5.6%
		All officers and directors, other than Michael Bodouroglou, as a group (4)		114,000		*

(1)

As of April 16, 2008, Innovation Holdings, a company beneficially owned by our chairman and chief executive officer and members of his family, is the record holder of 4,703,288 of our common shares and, in addition, our chairman and chief executive officer additionally owns 500,000 of our common shares, representing, in the aggregate, 19.3% of our currently issued and outstanding common shares.  Innovation Holdings  is controlled by our chairman and chief executive officer.

 

(2)

Trafelet Capital Management, L.P. beneficially owns common shares through one or more investment funds for which it serves as investment manager. Trafelet & Company LLC is the general partner of Trafelet Capital Management, LP and Mr. Remy W. Trafelet has sole investment and voting discretion with respect to the common shares beneficially owned by Trafelet Capital Management, L.P.

 

(3)

Kenmont Investment Management L.P. beneficially owns common shares through one or more investment funds for which it serves as investment advisor. KIP GP, LLC is the general partner of Kenmont Investment Management L.P.

 

(4)

All of our officers and directors, other than our chairman and chief executive officer, Mr. Michael Bodouroglou, collectively own less than 1% of our outstanding common shares.

 

B.        Related Party Transactions

 

Commercial and Technical Management Agreements

We outsource the technical and commercial management of our vessels to Allseas pursuant to management agreements with an initial term of five years. Our chairman and chief executive officer, Mr. Bodouroglou, is the sole shareholder and managing director of Allseas. These agreements automatically extend to successive five year terms, unless, in each case, at least one year's advance notice of termination is given by either party. We are obligated to pay Allseas a technical management fee of $650 (based on a Euro/U.S. dollar exchange rate of 1.00:1.268) per vessel per day on a monthly basis in advance, pro rata for the calendar days these vessels are owned by us. The management fee is adjusted quarterly based on the Euro/U.S. dollar exchange rate as published by EFG Eurobank Ergasias S.A. two days prior to the end of the previous calendar quarter. For the first quarter in 2007 the management fee was $675 per day, for the second quarter in 2007 was $683 per day, for the third quarter in 2007 was $687 per day and for the fourth quarter in 2007 was $725 per day. The management fee increased as of January 1, 2008 by reference to the official Greek inflation rate for the previous year, as published by the Greek National Statistical Office. During 2007 an amount of $250,000 was paid to Allseas for legal, accounting and finance services that were provided throughout the year and were not covered under the management agreements described above. We also pay Allseas 1.25% of the gross freight, demurrage and charter hire collected from the employment of our vessels. Allseas will also earn a fee equal to 1.0% of the purchase price of any vessel bought or sold on our behalf, calculated in accordance with the relevant memorandum of agreement. Management fees were $170,750 and $2,076,678 for the period from inception (April 26, 2006) through December 31, 2006 and for the year ended December 31, 2007, respectively. As at December 31, 2006, the chartering and vessel commissions incurred and due to Allseas amounted to $6,661 and $825,000, respectively. During 2007, chartering and vessels commissions incurred were $841,442 and $4,172,000, respectively, and $976,923 of such commissions were due to Allseas at December 31, 2007.

 

 

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Right of First Refusal

Our chairman and chief executive officer, Michael Bodouroglou, has entered into a letter agreement with us which includes a provision requiring Mr. Bodouroglou to use commercially reasonable efforts to cause each company controlled by Mr. Bodouroglou to allow us to exercise a right of first refusal to acquire any drybulk carrier, after Mr. Bodouroglou or an affiliated entity of his enters into an agreement that sets forth terms upon which he or it would acquire a drybulk carrier. Pursuant to this letter agreement, Mr. Bodouroglou will notify a committee of our independent directors of any agreement that he or an affiliated entity has entered into to purchase a drybulk carrier and will provide the committee of our independent directors a seven calendar day period in respect of a single vessel transaction, or a 14 calendar day period in respect of a multi-vessel transaction, from the date that he delivers such notice to our audit committee, within which to decide whether or not to accept the opportunity and nominate a subsidiary of ours to purchase the vessel or vessels, before Mr. Bodouroglou will accept the opportunity or offer it to any of his other affiliates. The opportunity offered to us will be on no less favorable terms than those offered to Mr. Bodouroglou and his affiliates. A committee of our independent directors will require a simple majority vote to accept or reject this offer.

Acquisition of Blue Seas and Deep Seas

We purchased the Blue Seas and the Deep Seas from corporate entities controlled by our chairman and chief executive officer. The purchase price that we paid for these two vessels is equal to the price paid by the affiliated seller. We also reimbursed approximately $0.40 million to those entities for pre-delivery expenses. The amount paid over and above the carrying value of these vessels in the books of our affiliated entities at the date purchased by us is treated as a deemed dividend to Innovation Holdings as explained below. We purchased the remaining four vessels in our initial fleet from unaffiliated third parties. We did not pay Allseas a 1% fee with respect to our acquisition of these two vessels, although we paid Allseas a 1% fee, which is approximately $1.4 million, with respect to the acquisition of the other four vessels in our initial fleet.

Deemed Dividend

The vessels purchased from our affiliated entities are reflected in our financial statements using the historical carrying value since the transaction was between parties under common control. The amount paid for these acquisitions of the Blue Seas and the Deep Seas in excess of the carrying value on the books of our affiliated entities of $2.9 million is treated as a deemed dividend to Innovation Holdings at the date of delivery to us.

Registration Rights Agreement

In connection with the Class A common shares and warrants sold in the private placement, we agreed to register for resale on a shelf registration statement under the Securities Act of 1933, as amended, and applicable state securities laws, up to 2,250,000 of our Class A common shares and 450,000 warrants held by Innovation Holdings 12 months following the registration of our Class A common shares issued in the private placement. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions.

Lease of Office Space

We lease office space in Athens, Greece from Granitis Glyfada Real Estate Ltd., a company beneficiary owned by our chief executive officer commencing on October 1, 2007. The term of the lease is for five years and commenced on October 1, 2007 and expires on September 30, 2012. The monthly lease payment for the first year is Euro 2,000, plus 3.6% tax and thereafter it will be adjusted annually for inflation increases.

 

C.        Interests of Experts and Counsel

 

Not Applicable.

 

Item 8. Financial information

 

A.        Consolidated statements and other financial information

 

See Item 18.

 

 

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Legal Proceedings

 

To our knowledge, we are not currently a party to any material lawsuit that, if adversely determined, would have a material adverse effect on our financial position, results of operations or liquidity. As such, we do not believe that pending legal proceedings, taken as a whole, should have any significant impact on our financial statements. From time to time in the future we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We have not been involved in any legal proceedings which may have, or have had a significant effect on our financial position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our financial position, results of operations or liquidity.

 

Dividend Policy

 

We intend to pay quarterly dividends to the holders of our common shares in February, May, August and November of each year in amounts substantially equal to our available cash flow from operations during the previous quarter, less cash expenses for that quarter (principally vessel operating expenses and interest expense) and any reserves our board of directors determines we should maintain for reinvestment in our business. These reserves may cover, among other things, drydocking, intermediate and special surveys, liabilities and other obligations, interest expense and debt amortization, acquisitions of additional assets and working capital.

 

On May 17, 2007 we declared a dividend of $0.4375 per Class A and Class B common share in respect of the period from the commencement of our operations through March 31, 2007, which we paid to holders of our Class A common shares on May 31, 2007 and on July 20, 2007 we declared a dividend of $0.4375 per Class A and Class B common share in respect of the period from April 1, 2007 through June 30, 2007 payable to shareholders of record on July 23, 2007. In addition, on June 26, 2007 we declared a special dividend of $0.60 per existing Class A and Class B common share payable to our shareholders of record on July 2, 2007.

 

Since our initial public offering in August 2007, we have declared and paid dividends of $0.875 per common share, representing our cash available from operations for 2007. On November 15, 2007 we declared a dividend of $0.4375 per common share in respect of the period from July 1, 2007 through September 30, 2007 payable to shareholders of record on November 21, 2007. On February 12, 2008 we declared a dividend of $0.4375 per common share in respect of the period from October 1, 2007 through December 31, 2007 payable to shareholders of record on February 19, 2008.

 

The declaration and payment of any dividend is subject to the discretion of our board of directors. We intend to expand our fleet through acquisitions of additional vessels in a manner that is accretive to earnings and free cash flow per share. We expect to fund our future vessel acquisitions through a combination of cash from operations, borrowings under our credit facilities and future equity offerings. In periods when we make acquisitions, our board of directors may limit the amount or percentage of our cash from operations available to pay dividends. In addition, the timing and amount of dividend payments will depend on our earnings, financial condition, cash requirements and availability, the restrictions in our senior secured credit facility, the provisions of Marshall Islands law affecting the payment of dividends and other factors. Because we are a holding company with no material assets other than the shares of our subsidiaries, which will directly own the vessels in our fleet, our ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay dividends to us. We cannot assure you that, after the expiration or earlier termination of our charters, we will have any sources of income from which dividends may be paid.

 

We believe that, under current law, after our shares are listed on the Nasdaq Global Market, our dividend payments from earnings and profits will be eligible for treatment as "qualified dividend income" and as such non-corporate United States stockholders that satisfy certain conditions will generally be subject to a 15% United States federal income tax rate with respect to such dividend payments. 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 a capital gain. Proposed legislation in the United States Congress would, if enacted, make it unlikely that our dividends would qualify for the reduced rates. As of the date hereof, it is not possible to predict whether such proposed legislation would be enacted. Please see the section of this annual report entitled "United States Taxation and Marshall Islands Tax Considerations" for additional information relating to the tax treatment of our dividend payments.

 

 

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B.        Significant Changes

 

There have been no significant changes since the date of the annual financial statements included in this annual report.

 

Item 9. Listing Details

 

The trading market for shares of our common stock is the Nasdaq Global Market, on which our shares trade under the symbol “PRGN”. The following table sets forth the high and low closing prices for shares of our common stock since our initial public offering on August 9, 2007, as reported by the Nasdaq Global Market:

 

		2008			2007
Period		High	Low		High	Low
Annual			-		$27.34	$13.75
1st quarter		$19.34	$12.51
2nd quarter		-	-
3rd quarter		-	-		$17.25	$13.75
4th quarter		-	-		$27.34	$16.87
November					$26.16	$16.87
December					$23.24	$18.00
January		$18.84	$12.51
February		$19.34	$16.02
March		$16.40	$13.41
April		$18.13	$15.00

 

Item 10. Additional Information

 

A.	Share Capital

 

Not Applicable.

 

B.	Memorandum and articles of association

 

Our amended and restated articles of incorporation and amended and restated bylaws have been filed as exhibit 3.1 and 3.2 to our Registration Statement on form F-1 filed with the Securities and Exchange Commission on June 4, 2007 with file number 333-143481 The information contained in these exhibits is incorporated by reference herein.

 

Information regarding the rights, preferences and restrictions attaching to each class of the shares is described in section “Description of Capital Stock” in our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on July 19, 2007 with file number 333-144687, provided that since the date of that Registration Statement, our outstanding shares of common stock has increased to 26,961,612 as of April 4, 2008.

 

C.	Material Contracts

 

We refer you to Item 7.B for a discussion of our registration rights agreement with our stockholders of record before our initial public offering and agreements with companies controlled by our chairman and chief executive officer, Mr. Michael Bordouroglou. Other than these agreements, we have no material contracts, other than contracts entered into in the ordinary course of business, to which the Company or any affiliate of the Company is a party.

 

 

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D.	Exchange Controls

 

Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of our common stock.

 

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 we do not have an office or other fixed place of business in the United States. Unless the context otherwise requires, the reference to Company below shall be meant to refer to both the Company and its vessel owning and operating subsidiaries.

 

Taxation of the Company’s Shipping Income: In General

 

The Company anticipates that it will derive substantially all of its gross income from the use and operation of vessels in international commerce and that this income will principally consist of freights from the transportation of cargoes, hire or lease from time or voyage charters and the performance of services directly related thereto, which the Company refers 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. The Company is 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.

 

The Company’s 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, the Company will be subject to U.S. federal income taxation, in the manner discussed below, to the extent its shipping income is considered derived from sources within the United States.

 

In the year ended December 31, 2007, approximately 12%, of the Company’s shipping income was attributable to the transportation of cargoes either to or from a U.S. port. Accordingly, 6% of the Company’s shipping income would be treated as derived from U.S. sources for the year ended December 31, 2007. In the absence of exemption from tax under Section 883, the Company would have been subject to a 4% tax on its gross U.S. source shipping income equal to approximately $0.17 million for the year ended December 31, 2007.

 

Application of Code Section 883

 

Under the relevant provisions of Section 883 of the Code and the final regulations promulgated thereunder, or the final regulations, a foreign corporation will be exempt from U.S. taxation on its U.S. source shipping income if:

 

 

(1)

It is organized in a qualified foreign country which, as defined, is one that grants an equivalent exemption from tax to corporations organized in the United States in respect of the shipping income for which exemption is being claimed under Section 883, or the “country of organization requirement”; and

 

 

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(2)

It can satisfy any one of the following two (2) stock ownership requirements:

 

 

§

more than 50% of its stock, in terms of value, is beneficially owned by qualified stockholders which, as defined, includes individuals who are residents of a qualified foreign country, or the “50% Ownership Test”; or

 

§

its stock or that of its 100% parent is “primarily and regularly” traded on an established securities market located in the United States, or the “Publicly Traded Test”.

 

The U.S. Treasury Department has recognized each of the Marshall Islands, the country of incorporation of the Company and certain of its subsidiaries, and Liberia, the country of incorporation of certain of the Company’s subsidiaries, as a qualified foreign country.  Accordingly, the Company and each of its subsidiaries satisfy the country of organization requirement.  

 

For the 2007 tax year, the Company believes that it will be unlikely to satisfy the 50% Ownership Test.  Therefore, the eligibility of the Company and each subsidiary to qualify for exemption under Section 883 is wholly dependent upon being able to satisfy the Publicly Traded Test.

 

As a result of the Company’s concentrated ownership prior to being listed on the Nasdaq Global Market, the Company does not believe that it satisfied the Publicly-Traded Test for the 2007 tax year.  As a result, the Company will be subject to U.S. federal income tax on its U.S. source shipping income as described in more detail below.

 

The Company anticipates that it will satisfy the Publicly-Traded Test and qualify for the benefits of Section 883 for the 2008 tax year since its Class A common stock, is anticipated to be “primarily traded” and “regularly traded” on the Nasdaq Global Market.  However, there is no assurance this will be the case and there can be no assurance that the Company will qualify for the benefits of Section 883 for the 2008 tax year or any subsequent tax year.

 

Taxation in Absence of Internal Revenue Code Section 883 Exemption

 

Assuming that the Company does not qualify for the benefits of Section 883 for the 2007 tax year, the Company and each of its subsidiaries will be subject to a 4% tax imposed on its shipping income derived from U.S. sources 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 the Company’s shipping income would be treated as being derived from U.S. sources, the maximum effective rate of U.S. federal income tax on the Company’s shipping income would never exceed 2% under the 4% gross basis tax regime.

 

Based on its shipping income derived from U.S. sources for 2007, the Company will be subject to U.S. federal income tax of approximately $0.17 million under Section 887.

 

 

 

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Gain on Sale of Vessels.

 

Regardless of whether the Company qualifies for exemption under Section 883, the Company 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 United States 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 the Company will be considered to occur outside of the United States.

 

Marshall Islands Tax Considerations

 

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 SEC. 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 SEC’s website http://www.sec.gov. You may obtain information on the operation of the public reference room by calling 1 (800) SEC-0330 and you may obtain copies at prescribed rates.

 

I.	Subsidiary information

 

Not Applicable.

 

Item 11. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rates

 

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 London Inter-Bank Offered Rate ("LIBOR"). Increasing interest rates could adversely impact future earnings.  In order to mitigate this specific market risk we entered into interest rate swap agreements. The purpose of the agreements was to manage interest cost and the risk associated with changing interest rates by limiting our exposure to interest rate fluctuations within the ranges stated below. Interest rate fluctuations at all times during 2006 and 2007 were within the cap and floor range, thus we paid three month LIBOR. The maximum annualized impact in terms of total debt interest payable owing to a one percent increase in interest rates, would have been approximately $3.2 million in the year ended December 31, 2007, as an indication of the extent of our sensitivity to interest rates changes, based upon our debt level at December 31, 2007.

 

 

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Foreign exchange rate fluctuation

We generate all of our revenues in United States dollars and currently incur approximately 11% of our expenses in currencies other than United States dollars (mainly in Euros). For accounting purposes, expenses incurred in currencies other than into United States dollars, are converted into United States dollars at the exchange rate prevailing on the date of each transaction. We have not hedged currency exchange risks and our operating results could be adversely affected as a result. However due to our relatively low percentage exposure to currencies other than our base currency which is the United States dollar we believe that such currency movements will not have a material effect on us and as such we do not hedge these exposures as the amounts involved do not make hedging economic. The impact of a 10% increase in exchange rates, on the current level of expenses incurred in currencies other than United States dollars, is approximately $0.7 million.

 

Item 12. Description of Securities Other than Equity Securities

 

Not Applicable.

 

 

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PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

None.

 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

Warrant Agreement Amendment

We entered into a Warrant agreement in connection with the private placement whereby we issued one fifth of a Warrant, which was attached to each Class A common share. In total 2,299,531 Warrants were issued by us. Each Warrant entitles the holder to purchase one Class A common share at an exercise price of $10.00 per share and became exercisable upon the public offering of our Class A common shares and may be exercised at any time thereafter until expiration. Each Warrant expires on November 21, 2011. In total 660,000 warrants had been exercised as of December 31, 2007 and the number of warrants as at December 31, 2007 was 1,639,531.

We and the majority of the Warrant holders agreed to amend the exercise features of the Warrants on May 7, 2007; which agreement is binding to all Warrant holders. The Warrants, as amended, may only be exercised through physical settlement, removing the prior exercise terms which also allowed the Warrant holders at their option for a cash settlement.

On October 26, 2007 the 450,000 Warrants issued to Innovation Holdings were exercised and on November 1, 2007 another 210,000 Warrants were exercised by another shareholder. We received in total $6.6 million in net proceeds and 660,000 common shares were issued from the exercise of those warrants at an exercise price of $10.00 per share.

 

Item 15. Controls and Procedures

 

a) Disclosure Controls and Procedures

 

Management, including our chief executive officer and chief financial officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include controls and procedures designed to ensure that information is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. 

 

Based upon that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective.

 

b) Management’s Annual Report on Internal Control over Financial Reporting / c) Attestation Report of the Registered Public Accounting Firm

 

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm on the Company’s internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

 

d) Changes in Internal Control over Financial Reporting

 

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There have been no changes that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

 

Item 16A. Audit Committee Financial Expert

 

We have not determined that any member of our Audit Committee constitutes a financial expert as such term is defined in Item 407 of SEC Regulation S-X. We do not believe it is necessary to have a financial expert, as defined in Item 407 of SEC Regulation S-X, because our board of directors has determined that each member of the audit committee does have the financial experience required by NASDAQ Marketplace Rule 4350(d)(2) and other relevant experience necessary to carry out the duties and responsibilities of the company's audit committee.

 

Item 16B. Code of Ethics

 

We have adopted a code of ethics that applies to officers and employees. Our code of ethics is posted in our website: http://www.Paragonship.com, under “Code of Ethics” and was filed as Exhibit 99.2 to the Form 6-K filed with the Securities and Exchange Commission on August 15, 2007 with number 001-33655.  Copies of our Code of Ethics are available in print upon request to Paragon Shipping Inc., 15 Karamanli Ave., Voula 16673, Athens, Greece. We intend to satisfy any disclosure requirements regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website.

 

Item 16C. Principal Accountant Fees and Services

 

Our principal Accountants, Deloitte Hadjipavlou Sofianos & Cambanis S.A., an independent registered public accounting firm and member of Deloitte Touche Tohmatsu, have billed us for audit, audit-related and non-audit services as follows:

 

 

 

	2007		2006
	Stated in Usd
Audit fees	460,983		1,274,046
Audit-related fees	-		-
Tax fees	-		-
All other fees	-		-
Total	460,983		1,274,046

Audit fees paid to Deloitte Hadjipavlou, Sofianos and Cambanis S.A. in respect of 2006 were compensation for professional services rendered for the audit of the consolidated financial statements of the Company at December 31, 2006 and for the registration statements in connection with the initial public offering.

Audit fees paid to Deloitte Hadjipavlou, Sofianos and Cambanis S.A. in respect of 2007 were compensation for professional services rendered for the audit of the consolidated financial statements of the Company at December 31, 2007 and for the review of the quarterly financial information in 2007.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Our Audit Committee consists of three independent members of our Board of Directors. Our Audit Committee also conforms to each other requirement applicable to audit committees as required by the applicable listing standards of the Nasdaq Global Market.

 

 

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

PART III

 

Item 17. Financial Statements

 

See Item 18.

 

Item 18. Financial Statements

 

The following financial statements beginning on page F-1 are filed as a part of this annual report.

 

Item 19. Exhibits

 

(a)      Exhibits

	Exhibit Number	Description
	1.1	Amended and Restated Articles of Incorporation of Paragon Shipping Inc. (1)
	1.2	Amended and Restated By-laws of the Company (4)
	2.1	Form of Share Certificate (1)
	4.1	Amended Registration Rights Agreement (2)
	4.2	Initial Purchaser Registration Rights Agreement (1)
	4.3	Innovation Holdings Registration Rights Agreement (1)
	4.4	Form of Equity Compensation Plan
	4.5	Form of Management Agreement (1)
	4.6	Loan Agreement with HSH Nordbank AG (1)
	4.7	Amended Warrant Agreement (2)
	4.8	Bridge Loan Facility with Commerzbank AG (3)
	4.9	Form of Commerzbank AG Senior Secured Revolving Credit Facility, dated November 29, 2007
	4.10	Form of Bayerische Hypo-und Vereinsbank AG Secured Credit Facility, dated November 19, 2007
	4.11	Form of Bank of Scotland plc Secured Revolving Credit Facility, dated December 4, 2007
	4.12	Form of First Business Bank S.A. Secured Revolving Credit Facility, dated April 16, 2008
	8.1	Subsidiaries of the Company
	11.1	Code of Ethics (4)
	12.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	12.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
	13.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	13.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Filed as an Exhibit to the Company’s Registration Statement (File No. 333-143481) on June 4, 2007.

(2)	Filed as an Exhibit to the Company’s Amended Registration Statement (File No. 333-144687) on July 30, 2007.

(3)	Filed as an Exhibit to the Company’s Amended Registration Statement (File No. 333-144687) on August 6, 2007.

(4)	Filed as an Exhibit to Form 6-K filed on August 15, 2007.

 

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SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 

PARAGON SHIPPING INC.

By: /s/ Christopher J. Thomas

Christopher J. Thomas

Chief Financial Officer

Dated: May 2, 2008

 

 

62

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of independent registered public accounting firm	F-2
Consolidated balance sheet as of December 31, 2006 and 2007	F-3
Consolidated statement of operations for the period from inception (April 26, 2006) to December 31, 2006 and for the year ended December 31, 2007	F-4
Consolidated statement of shareholders' equity for the period from inception (April 26, 2006) to December 31, 2006 and for the year ended December 31, 2007	F-5
Consolidated statement of cash flows for the period from inception (April 26, 2006) to December 31, 2006 and for the year ended December 31, 2007	F-6
Notes to the consolidated financial statements	F-7

 

 

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Paragon Shipping Inc.

We have audited the accompanying consolidated balance sheets of Paragon Shipping Inc (the "Company") as of December 31, 2006 and 2007 and the related consolidated statements of operations, shareholder's equity, and cash flows for the period from April 26, 2006 (inception) to December 31, 2006 and for the year ended December 31, 2007. 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. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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 consolidated financial statements present fairly, in all material respects, the financial position of Paragon Shipping Inc. as of December 31, 2006 and 2007, and the results of its operations and its cash flows for the period from April 26, 2006 (inception) to December 31, 2006 and for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte

Hadjipavlou, Sofianos & Cambanis S.A.

Athens, Greece

March 28, 2008

 

 

F-2

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Paragon Shipping Inc.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2006 and 2007

(Expressed in United States Dollars)

		December 31, 2006		December 31, 2007
Assets
Current assets
Cash and cash equivalents			32,331,848	31,328,637
Trade receivables			—	354,154
Other receivables	Note 3		876,537	287,546
Prepaid expenses			—	654,576
Inventories			201,659	801,373
Total current assets			33,410,044	33,426,286
Fixed assets
Office equipment, net of accumulated depreciation			2,767	—
Advances for vessel acquisitions			2,963,391	—
Vessels at cost			152,554,289	633,378,703
Less: accumulated depreciation			(1,066,527)	(18,268,064)
Total fixed assets	Note 4		154,453,920	615,110,639
Other assets	Note 5		375,895	1,584,950
Restricted cash			—	8,010,000
Other long term receivables	Note 3			1,340,602
Total Assets			188,239,859	659,472,477
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable			650,064	2,487,291
Accrued expenses	Note 6		1,099,918	5,494,431
Due to management company	Note 7		1,741,872	1,642,805
Interest rate swap	Note 11		117,965	—
Below market acquired time charters	Note 8		123,750	—
Deferred income	Note 9		516,056	3,176,938
Current portion of long-term debt	Note 10		—	9,000,000
Total current liabilities			4,249,625	21,801,465
Long-term debt	Note 10		77,437,500	309,000,000
Obligations for warrants	Note 12		10,266,969	—
Other long-term payable			—	586,499
Interest rate swap	Note 11		—	1,370,701
Below market acquired time charters	Note 8		—	51,077,602
Total long-term liabilities			87,704,469	362,034,802
Total Liabilities			91,954,094	383,836,267
Commitments and Contingencies	Note 17
Shareholders' equity:
Preferred shares: $0.001 par value, 25,000,000 authorized, none issued, none outstanding at December 31, 2006 and December 31, 2007
Class A Common Shares, $0.001 par value; 120,000,000 authorized 11,497,656 issued and outstanding at December 31, 2006 and 25,744,983 issued and outstanding at December 31, 2007	Note 12		11,498	25,745
Class B common shares, $0.001 par value; 5,000,000 authorized, 2,003,288 issued and outstanding at December 31, 2006 and none issued and outstanding at December 31, 2007	Note 12		2,003	—
Additional paid-in capital			98,738,185	304,408,972
Accumulated deficit			(2,465,921)	(28,798,507)
Total shareholders' equity			96,285,765	275,636,210
Total Liabilities and Shareholders' Equity			188,239,859	659,472,477

The accompanying notes are an integral part of the consolidated financial statements

 

 

F-3

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Paragon Shipping Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

For the period from inception (April 26, 2006) to December 31, 2006 and for the year ended December 31, 2007

		Period from inception (April 26, 2006) to December 31, 2006		Year ended December 31, 2007
Revenue
Time charter revenue	Note 8		4,949,426	76,657,595
Less: commissions			220,266	3,472,468
Net Revenue			4,729,160	73,185,127
Expenses
Voyage expenses			18,970	348,452
Vessels operating expenses	Note 14		559,855	11,474,480
Management fees charged by a related party	Note 7		170,750	2,076,678
Depreciation	Note 4		1,066,527	17,204,304
General and administrative expenses (including share based compensation of $1,476,717 for the period from inception (April 26, 2006) to December 31, 2006 and $20,212,149 for the year ended December 31, 2007	Note 15		1,782,429	27,010,327
Operating Income			1,130,629	15,070,886
Other Income (Expenses)
Interest and finance costs			(951,798)	(10,328,845)
Unrealized loss on interest rate swap			(117,965)	(1,252,736)
Interest income			404,409	997,178
Gain from the change in fair value of warrants	Note 12		—	493,962
Foreign currency losses			(3,511)	(76,709)
Total Other Expenses, net			(668,865)	(10,167,150)
Net Income			461,764	4,903,736
Income allocable to Class B common shares			259,036	2,954,848
Income available to Class A common shares			202,728	1,948,888
Earnings per Class A common share, basic	Note 16		$0.14	$0.12
Earnings per Class A common share, diluted	Note 16		$0.14	$0.11
Earnings per Class B common share, basic and diluted	Note 16		$0.00	—
Weighted average number of Class A Common Shares, basic	Note 16		1,441,887	16,495,980
Weighted average number of Class A Common Shares, diluted	Note 16		1,442,639	17,438,463
Weighted average number of Class B common shares, basic and diluted	Note 16		1,842,381	—

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

F-4

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Paragon Shipping Inc.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

For the period from inception (April 26, 2006) to December 31, 2006 and the year ended December 31, 2007

	Class A Shares		Class B Shares
	Number of Shares	Par Value	Number of Shares	Par Value	Additional Paid-in Capital	Accumulated Deficit	Total
	(Expressed in United States Dollars)
Balance at inception (April 26, 2006)
Issuance of Class A common shares through private placement	9,062,000	9,062			82,516,573		82,525,635
Issuance of Class A common shares issued to initial purchasers	185,656	186			1,690,770		1,690,956
Class A common shares offering costs					(7,444,622)		(7,444,622)
Issuance of Class B common  shares			2,003,288	2,003	7,997		10,000
Issuance of Class A common shares to Innovation Holdings SA	2,250,000	2,250			20,490,750		20,493,000
Share based compensation					1,476,717		1,476,717
Deemed dividend						(2,927,685)	(2,927,685)
Net income						461,764	461,764
Balance, December 31, 2006	11,497,656	11,498	2,003,288	2,003	98,738,185	(2,465,921)	96,285,765
Issuance of Class A Common Shares, net of issuance costs	11,497,539	11,498			169,086,377		169,097,875
Issuance of Class A Common Shares, from the exercise of warrants	660,000	660			6,599,340		6,600,000
Conversion of Class B Common Shares to Class A Common Shares	2,003,288	2,003	(2,003,288)	(2,003)			—
Share based compensation					20,212,149		20,212,149
Issuance of Restricted Class A Common Shares	86,500	86			(86)		—
Obligations for warrants					9,773,007		9,773,007
Dividends paid						(31,236,322)	(31,236,322)
Net Income						4,903,736	4,903,736
Balance, December 31, 2007	25,744,983	25,745	—	—	304,408,972	(28,798,507)	275,636,210