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Bird Acquisition Corp. 10-K 2008
Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 000-51412

 

 

Quintana Maritime Limited

(Exact name of registrant as specified in its charter)

 

 

 

Republic of the Marshall Islands   98-0454094

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o Quintana Management LLC

Attention: Vassilis Koutsolakos

Pandoras 13 & Kyprou Street

166 74 Glyfada

Greece

(address of principal executive offices)

+30 210 898 6820

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Exchange on which Registered

Common Stock    NASDAQ Global Select Market
Class A Warrants    NASDAQ Global Select Market
Preferred Share Purchase Rights    NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None.

 

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨


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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $741.1 million (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 25, 2008, 58,235,266 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
PART I
Item 1.    Business    1
Item 1A.    Risk Factors    13
Item 1B.    Unresolved Staff Comments    26
Item 2.    Properties    26
Item 3.    Legal Proceedings    26
Item 4.    Submission of Matters to a Vote of Security Holders    27
PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    28
Item 6.    Selected Financial and Other Data    29
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    42
Item 8.    Financial Statements and Supplementary Data    44
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    76
Item 9A.    Controls and Procedures    76
Item 9B.    Other Information    77
PART III
Item 10.    Directors, Executive Officers and Corporate Governance    78
Item 11.    Executive Compensation    85
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    94
Item 13.    Certain Relationships and Related Transactions, and Director Independence    95
Item 14.    Principal Accounting Fees and Services    98
PART IV
Item 15.    Exhibits and Financial Statement Schedules    99
Signatures    101
Exhibits    102

 

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FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provided for under these sections. These statements may include words such as “believe,” “estimate,” “project,” “intend,” “expect,” “plan,” “anticipate,” and similar expressions in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements reflect management’s current expectations and observations with respect to future events and financial performance. Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by those forward-looking statements. The principal factors that affect our financial position, results of operations and cash flows include, charter market rates, which are currently above historic averages, and periods of charter hire, vessel operating expenses and voyage costs, which are incurred primarily in U.S. dollars, depreciation expenses, which are a function of the cost of our vessels, significant vessel improvement costs and our vessels’ estimated useful lives, and financing costs related to our indebtedness. Our actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors, including those discussed in this Annual Report in the section “Risk Factors.” You should carefully review the risks described herein and in other documents we file with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We disclaim any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

PART I

 

ITEM 1. BUSINESS

We are an international provider of dry bulk marine transportation services that was incorporated in the Marshall Islands on January 13, 2005 and began operations in April 2005. Our dry bulk vessels transport a variety of cargoes including coal, iron ore and grain. As of December 31, 2007, we operated a total fleet of 29 vessels, consisting of 11 Panamax vessels, 14 Kamsarmax vessels and 4 Capesize vessels. Of these 29 vessels, we acquired 10 in 2005, 13 in 2006, and the remaining 6 in 2007. In 2007, we sold 7 Panamax vessels to third parties; we continue to operate those vessels under bareboat charters. As of December 31, 2007, our total fleet, which includes owned and leased vessels, had a combined carrying capacity of approximately 2.6 million deadweight tons (dwt) and a dwt-weighted-average age of approximately 4.7 years. In addition, we contracted in 2007 to purchase an additional 8 Capesize vessels, 7 of which will be purchased through joint ventures, and one of which will be wholly owned. These vessels are expected to be delivered between 2008 and 2010.

Unless otherwise indicated, the terms “we,” “us,” “Quintana,” or “the Company” as used herein refer to Quintana Maritime Limited and its wholly owned subsidiaries. Unless otherwise indicated, all references to currency amounts in this annual report are in U.S. dollars.

Merger Agreement

On January 29, 2008, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Excel Maritime Carriers Ltd. (“Excel”) and Bird Acquisition Corp. (“Bird Acquisition”), a direct wholly owned subsidiary of Excel.

The Merger Agreement provides that Bird Acquisition will merge with and into the Company, with the Company as the surviving corporation. In the merger, each share of common stock of the Company, other than (a) those shares owned by the Company or any of its wholly owned subsidiaries, (b) those shares owned by Excel or Bird Acquisition or (c) those shares with respect to which dissenters rights are properly exercised, will be converted into the right to receive (i) 0.4084 Excel Class A common shares and (ii) $13.00 in cash, without interest (collectively, the “Merger Consideration”). In the event the average closing price of Excel Class A common shares during the fifteen trading days immediately preceding the closing date of the merger exceeds $45.00 per share, the 0.4084 exchange ratio will be adjusted downward to equal the quotient of $18.38 divided by the average closing price of Excel Class A common shares for the fifteen trading days immediately preceding the closing date of the merger. In all cases, the amount of Excel Class A common shares to be delivered per share of Quintana

 

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common stock will be reduced to reflect any cash dividends paid by Quintana prior to the closing date of the merger, including the dividend of $0.31 per common share declared in February 2008 and payable in March 2008.

Completion of the merger is subject to various conditions, including, among others, (i) approval of the Merger Agreement by holders of a majority in voting power of the outstanding shares of the Company common stock, (ii) Excel’s receipt of the debt financing, (iii) absence of any order, injunction or other judgment or decree prohibiting the consummation of the merger, (iv) receipt of required governmental consents and approvals and (v) subject to certain exceptions, the accuracy of the representations and warranties of the Company and Excel, as applicable, and compliance by the Company and Excel with their respective obligations under the Merger Agreement.

The special shareholders’ meeting to consider the authorization and approval of the merger agreement has not yet been scheduled.

The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is Exhibit 2.1 hereto and is incorporated herein by reference. The Merger Agreement has been included to provide you with information regarding its terms. The terms and information in the Merger Agreement should not be relied on as disclosure about the Company, Excel or Bird Acquisition without consideration of the information provided elsewhere in this document and the other documents that we file with the U.S. Securities and Exchange Commission and in the documents incorporated by reference herein and therein. The terms of the Merger Agreement (such as the representations and warranties) govern the contractual rights and relationships, and allocate risks, among the parties in relation to the merger. In particular, the representations and warranties made by the parties to each other in the Merger Agreement have been negotiated among the parties with the principal purpose of setting forth their respective rights with respect to their obligation to close the merger should events or circumstances change or be different from those stated in the representations and warranties. Matters may change from the state of affairs contemplated by the representations and warranties. None of the Company, Excel or Bird Acquisition undertakes any obligation to publicly release any revisions to these representations and warranties, except as required under U.S. federal or other applicable securities laws.

Background

We were formed in 2005 by affiliates of each of Corbin J. Robertson, Jr., First Reserve Corporation and American Metals & Coal International, which we refer to collectively as our Founders. In July 2005, we completed our initial public offering. We used the net proceeds from that offering, together with capital contributions from our Founders and bank indebtedness, to finance or refinance the purchase price of our initial fleet of eight Panamax vessels. Since that time, we have continued to grow our fleet, as discussed below.

Business Strategy

Historically, our business strategy has included generating visible cash flows through long-term time charters, levering the relationships of our Founders, and growing the Company through accretive acquisitions of high-quality vessels. Given our agreement to merge with Excel, however, our current strategy is to take all necessary steps to consummate the merger, which is subject to a number of closing conditions, some of which are mentioned above under “—Merger Agreement.”

2007 Acquisitions and Dispositions

Acquisitions and Deliveries

In January 2007, we agreed to purchase a 1999-built, 170,162 dwt Capesize bulk carrier named Lowlands Beilun. We initially advanced $7.3 million on that date and paid the remaining balance of $65.7 million upon the delivery of the vessel on April 10, 2007.

In addition, we took delivery of Iron Knight, a 2004-built 76,429 dwt Panamax vessel, Iron Lindrew, a 2007-built 82,300 dwt Kamsarmax vessel, Iron Brooke, a 2007-built 82,300 dwt Kamsarmax vessel, and Iron Manolis, a 2007-built 82,300 dwt Kamsarmax vessel, from affiliates of Metrobulk, S.A. in 2007. We had agreed to purchase these vessels under Memoranda of Agreement dated May 3, 2006 for an aggregate of $170.6 million. In March 2007, we took delivery of Iron Miner, a newbuilding Capesize bulk carrier of 177,000 dwt from Shanghai Waigaoqiao Shipbuilding Co. in China. We funded the $92.5 million purchase price with borrowings under our credit facility and cash on hand.

 

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In April 2007, the Company entered into an agreement with Cosmos World Maritime S.A., an affiliate of Itochu Corporation, for the purchase of a 180,000 dwt Capesize bulk carrier to be constructed at Imabari Shipbuilding Co., Ltd. and scheduled to be delivered in 2008, for a purchase price of approximately $92 million. The vessel will be named Iron Endurance. On May 4, 2007, the Company paid the sellers $9.2 million under the contract and on October 31, 2007, the Company paid a further $9.2 million to the sellers as payment for the second installment under the contract. Both installments were financed through existing cash reserves. The remaining 2 installments are due under the memorandum of agreement between March 2008 and delivery of the vessel, expected in the fourth quarter of 2008.

We also agreed to acquire seven newbuilding Capesize vessels through joint ventures. In April 2007, we entered into a joint venture with Robertson Maritime Investors LLC (“RMI”), an affiliate of Corbin J. Robertson, Jr. and AMCIC Cape Holdings LLC (“AMCIC”), an affiliate of Hans J. Mende, to purchase a 180,000 dwt Capesize bulk carrier to be constructed at Imabari Shipbuilding Co., Ltd. and delivered in 2010 for a purchase price of $72.4 million. We own 42.8% of the joint venture, and each of RMI and AMCIC owns a 28.6% stake.

On April 16, 2007, we entered into agreements with STX Shipbuilding Co., Ltd. for the construction of two 181,000 dwt newbuilding Capesize bulk carriers for expected delivery in mid- to late 2010 for an aggregate purchase price of approximately $159 million. We subsequently nominated joint ventures that are 50% owned by us and 50% owned by AMCIC to purchase these vessels.

On April 27, 2007, we executed agreements with Korea Shipyard Co., Ltd., a new Korean shipyard, for the construction of four 180,000 dwt newbuilding Capesize bulk carriers for delivery in mid-2010 at a purchase price of approximately $77.7 million per vessel, or an aggregate purchase price of approximately $310.8 million. We have nominated four joint ventures that are 50% owned by us and 50% owned by AMCIC to purchase these vessels.

Dispositions

In July 2007, we sold 7 Panamax vessels to 2 unaffiliated third parties. Coal Glory, Iron Man, and Linda Leah were sold to three Norwegian partnerships managed by Glitnir Marine Finance AS, and Coal Age, Fearless I, Barbara, and King Coal were sold to two German partnerships managed by KG Allgemeine Leasing GmbH & Co. The total sales price of the vessels, net of sales costs, was approximately $249.4 million, and all vessels were delivered to the buyers in July 2007. Simultaneous with the sale of the vessels, the Company entered into bareboat charter agreements to lease the vessels back for 8 years. The Company will continue to generate revenues from the time charters relating to the vessels.

2006 Acquisitions

In May 2006, we entered into memoranda of agreement with affiliates of Metrobulk Holding S.A., or Metrobulk, an unaffiliated third party, to purchase 3 Panamax vessels and 14 Kamsarmax vessels for an aggregate cash purchase price of $735 million. Kamsarmaxes are a Panamax sub-class that have more carrying capacity than typical Panamax designs. We financed the acquisition of these vessels with a $735-million revolving credit facility and proceeds from a private placement of mandatorily convertible preferred stock and warrants, which was also completed in May 2006.

In December 2006, we agreed to purchase a newbuilding Capesize bulk carrier of 177,000 dwt, to be named Iron Miner, for $92.5 million. We advanced the sellers a deposit of $9.3 million and expect to pay the balance of the purchase price upon delivery, which occurred in 2007.

 

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2005 Acquisitions

Prior to the completion of our initial public offering in 2005, we financed the acquisition of eight Panamax vessels through capital contributions by our Founders and through borrowings under a $150 million bridge loan facility, which we repaid in full through borrowings under a subsequent term loan facility. In July 2005, we completed our initial public offering and used the net proceeds from that offering to repay all our debt outstanding under our term-loan facility immediately prior to the closing of the offering and to fund a portion of the purchase price of the remaining vessels in our initial fleet.

In October 2005, we entered into a $250-million revolving credit facility, and we drew down amounts under that facility to pay down amounts outstanding under the term-loan facility and terminate that facility, as well as to finance a portion of the acquisition price of the two Capesize vessels, Kirmar and Iron Beauty, delivered in the fourth quarter of 2005.

Plan of Operations

As of February 25, 2008, all of our 29 operating vessels were employed under fixed-rate time charters of varying durations to well-established and reputable charterers. Under our fixed-rate time charters, the charterer is obligated to pay us charter hire at a fixed daily rate and to bear all voyage expenses, including the cost of bunkers and canal and port charges. During 2007, one vessel, Barbara, was fixed on a variable-rate time charter, in which the charter hire is tied to prevailing spot rates and also operated on a spot charter for a short period of time. Under all these charters, we remain responsible for paying the vessels’ operating expenses, including the cost of crewing, insuring, repairing and maintaining the vessels, and paying brokers’ commissions on gross charter hire rates. When a charter expires, we assess market conditions in the industry and determine whether to seek to re-employ the vessel under a long-term time charter, a short-term time charter, or in the spot voyage market. For more information about our time charters, please read “—Time Charters.”

We commercially manage our fleet through a wholly owned subsidiary, Quintana Management LLC, which arranges the charters for our vessels and the management of our relationships with charterers, and the purchase and sale of vessels into and out of our fleet. We also oversee technical management of all our vessels. Technical management services include arranging for and managing crews, maintenance, drydocking, repairs, insurance, ensuring regulatory and classification society compliance, appointing supervisors and technical consultants and providing technical support. In October 2005, we obtained our final International Safety Management Code (“ISM Code”) certification, which is valid for five years.

We employ our vessels primarily on time charters to provide predictable cash flows, but we also consider trading some vessels in the spot market if we determine that market conditions are appropriate. As of February 25, 2008, all of our 29 operating vessels were employed on fixed-rate time charters.

In addition to acquisitions we may undertake in future periods, we will incur additional capital expenditures due to special surveys and drydockings. We incurred total drydocking expenses of approximately $5.4 million in 2007, $5.0 million in 2006 and $1.2 million in 2005. The period in which drydocking of a vessel is due is typically every 30 to 60 months. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Drydocking.” The drydocking process requires us to reposition these vessels from a discharge port to shipyard facilities and upon completion of the dry dock, from the shipyard facilities to a designated point of redelivery. The dry docking and repositioning periods will reduce our operating days, and related earnings, during the period by an estimated 25 days per drydocked vessel. We fund drydocking costs out of cash from operations.

In December 2005, the Company formed a wholly owned subsidiary, Quintana Logistics LLC, or Quintana Logistics, to engage in limited chartering activities, including entry into contracts of affreightment. Under a contract of affreightment, Quintana Logistics would agree to ship a specified amount of cargo at a specified rate per ton between designated ports over a particular period of time. Contracts of affreightment generally do not specify particular vessels, so Quintana Logistics would be permitted either to use a free vessel that it owned or to charter in a third-party vessel. Quintana Logistics conducted limited operations during 2006 and no operations during 2007.

Our Fleet

The following table presents certain information concerning the dry bulk carriers in our fleet or that we have agreed to purchase as of February 25, 2008. All the dry bulk carriers in our current fleet fly the Marshall Islands flag other than the Lowlands Beilun , which is Malta flagged.

 

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Vessel

  

Type

   Dwt    Delivery
Date
    Year
Built
  

Shipbuilder

   Time Charter
Expiration
Date
(Maximum
Period)
   Daily Hire
Gross
Rate ($)
    Charterer

Fearless I

   Panamax    73,427    4/05     1997    Hyundai    6/08    25,000 (1)   Deiulemar
King Coal    Panamax    72,873    4/05     1997    CSSC Taiwan    5/08    26,300     Energy Shipping
Coal Glory    Panamax    73,670    4/05     1995    Hyundai    8/08    15,800     Cosco
Coal Age    Panamax    72,861    5/05     1997    Hyundai    12/08    20,500     BHP Billiton
Iron Man    Panamax    72,861    5/05     1997    Hyundai    8/10    18,500     C& Merchant Marine
Barbara    Panamax    73,390    7/05     1997    Halla Samho    6/08    83,100     Cargill
Coal Pride    Panamax    72,600    8/05     1999    Imabari    5/09    26,500 (2)   BHP Billiton
Linda Leah    Panamax    73,390    8/05     1997    Halla Samho    2/08    25,000 (3)   Fratelli D’Amato
Iron Beauty    Capesize    165,500    10/05     2001    CSSC Taiwan    6/10    36,500     STX Panocean
Kirmar    Capesize    165,500    11/05     2001    CSSC Taiwan    3/08    27,250     Swissmarine
Grain Express    Panamax    76,466    10/06     2004    Tsuneishi    12/10    22,666 (4)   Bunge
Grain Harvester    Panamax    76,417    9/06     2004    Tsuneishi    12/10    20,000 (4)   Bunge
Iron Bradyn    Kamsarmax    82,769    8/06     2005    Tsuneishi    12/10    23,000 (4)   Bunge
Iron Fuzeyya    Kamsarmax    82,229    8/06     2006    Tsuneishi    12/10    22,666 (4)   Bunge
Iron Kalypso    Kamsarmax    82,204    9/06     2006    Tsuneishi    12/10    22,833 (4)   Bunge
Ore Hansa    Kamsarmax    82,229    9/06     2006    Tsuneishi    12/10    22,833 (4)   Bunge
Santa Barbara    Kamsarmax    82,266    9/06     2006    Tsuneishi    12/10    23,000 (4)   Bunge
Iron Bill    Kamsarmax    82,000    9/06     2006    Tsuneishi    12/10    23,000 (4)   Bunge
Iron Vassilis    Kamsarmax    82,000    7/06     2006    Tsuneishi    12/10    22,833 (4)   Bunge
Iron Anne    Kamsarmax    82,000    9/06     2006    Tsuneishi    12/10    22,833 (4)   Bunge
Pascha    Kamsarmax    82,300    12/06     2006    Tsuneishi    12/10    22,000 (4)   Bunge
Coal Gypsy    Kamsarmax    82,300    11/06     2006    Tsuneishi    12/10    22,666 (4)   Bunge
Coal Hunter    Kamsarmax    82,300    12/06     2006    Tsuneishi    12/10    23,000 (4)   Bunge
Iron Knight    Panamax    76,429    1/07     2004    Tsuneishi    12/10    22,666 (4)   Bunge
Iron Lindrew    Kamsarmax    82,300    2/07     2007    Tsuneishi    12/10    22,333 (4)   Bunge
Iron Brooke    Kamsarmax    82,300    3/07     2007    Tsuneishi    12/10    22,333 (4)   Bunge
Iron Manolis    Kamsarmax    82,300    4/07     2007    Tsuneishi    12/10    23,000 (4)   Bunge
Iron Miner    Capesize    177,000    3/07     2007    SWS    4/12    42,105     Transfield ER
Lowlands Beilun    Capesize    170,162    4/07     1999    Halla Samho    6/10    36,000 (1)   Cobelfret S.A.
Iron Endurance    Capesize    180,000    12/08 (5)   2008    Imabari    2/14    39,000     Transfield ER
Christine    Capesize    180,000    5/10 (5)   2010    Imabari    4/16    26,000 (6)   EDF Trading
Fritz    Capesize    180,000    5/10 (5)   2010    KSC    2/14    28,000 (6)   EDF Trading
Benthe    Capesize    180,000    6/10 (5)   2010    KSC    N/A    N/A     N/A
Gayle Frances    Capesize    180,000    7/10 (5)   2010    KSC    N/A    N/A     N/A
Iron Lena    Capesize    180,000    8/10 (5)   2010    KSC    2/15    28,000 (6)   EDF Trading
Hope    Capesize    181,000    11/10 (5)   2010    STX    N/A    N/A     N/A
Lillie    Capesize    181,000    12/10 (5)   2010    STX    6/16    28,000 (6)   EDF Trading

 

(1) No commissions are payable on the revenue generated from the time charters on these vessels.
(2) The charterer of the vessel has an option to extend the charter until June 2010 at a rate of $27,250 per day.
(3) The charterer of the vessel has an option to extend the charter until October 2009 at a rate of $23,650 per day.
(4) Average expected daily rate for years 2008, 2009, and 2010.
(5) Expected delivery date.
(6) We will also earn 50% of the difference between the base rate and the spot rate, which is based on the monthly average of the AV4 BCI routes as published by the Baltic Exchange London.

Each of our vessels is owned through a separate wholly owned Marshall Islands subsidiary. Each of our vessels is certified as being “in class” by one of two major classification societies: American Bureau of Shipping or Det Norske Veritas. Our fleet includes seven groups of sister ships, including one group of four sister ships (Fearless I, Coal Glory, Coal Age, and Iron Man), two groups of two sister ships (Linda Leah/Barbara and Iron Beauty/Kirmar), two groups of two sister ships (Iron Endurance/Christine and Hope/Lillie), one group of four sister ships (Fritz, Benthe, Gayle Frances and Iron Lena) and the Kamsarmaxes and Panamaxes acquired from Metrobulk, all of which were built by Tsuneishi. We believe that sister ships enhance our revenue-generating potential by providing us with operational and maintenance scheduling flexibility, as sister ships generally can be substituted for similar voyages. Sister ships also increase our operating efficiencies because technical knowledge can be applied to all vessels in a series and create cost efficiencies and economies of scale when ordering spare parts, supplying and crewing these vessels.

Our Customers

In 2007, our customers included national, regional and international companies. One company – Bunge Limited, or Bunge – accounted for over 50% of our consolidated net revenues in 2007. If we were to lose this customer, we believe that

 

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we would be able to replace it with a different charterer at equal or higher rates given the liquidity of the prevailing chartering market.

Our assessment of a charterer’s financial condition and reliability is an important factor in negotiating employment for our vessels. We charter our vessels to major trading houses (including commodities traders), publicly traded companies, reputable vessel owners and operators, major producers of raw materials and government-owned entities rather than to more speculative or undercapitalized entities. We evaluate the counterparty risk of potential charterers based on our management’s long experience in the shipping industry with the input of two independent credit risk consultants.

Time Charters

The following discussion describes the material terms common to all our time charters.

Initial Term; Extensions

The initial term for a time charter commences upon the vessel’s delivery. All our customers have rights to terminate their charters prior to expiration of the original term in specified circumstances as described in more detail below.

Hire Rate

“Hire” rate refers to the basic payment from the customer for the use of the vessel. Hire is payable every fifteen or thirty days, in advance, in U.S. Dollars as specified in the charter, less a specified commission for the chartering broker and from 0% to 3.75% of the hire rate as a commission for the charterer. Hire payments may be reduced, or under some charters, we must pay liquidated damages, if the vessel does not perform to certain of its specifications, such as if the average vessel speed falls below a guaranteed speed or the amount of fuel consumed to power the vessel under normal circumstances exceeds a guaranteed amount.

Expenses

We are responsible for the provision and payment of vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. The charterer generally pays the voyage expenses, which include all expenses relating to particular voyages, including the cost of any bunkers (fuel), port fees, cargo loading and unloading expenses, canal tolls, and agency fees.

Off-hire

When the vessel is “off-hire”—which means it is not available for service—the charterer generally is not required to pay the hire rate, and we are responsible for all costs. A vessel generally will be deemed off-hire if there is a loss of operating time due to, among other things:

 

   

operational deficiencies; drydocking for repairs, maintenance or inspection; equipment breakdowns; or delays due to accidents, fires or similar problems;

 

   

our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew;

 

   

seizure or detention by any authority unless such seizure or detention is occasioned by any personal act or omission or default of the charterers or their agents, or by reason of cargo carried; or

 

   

arrest of the vessel on behalf of any party having or purporting to have a claim against the vessel.

Ship Management and Maintenance

Under all of our time charters, we are responsible for the technical management of the vessel and for maintaining the vessel, periodic drydocking, cleaning and painting and performing work required by regulations.

Termination

Each time charter terminates automatically upon loss of the vessel. In addition, we are generally entitled to suspend performance (but with the continuing accrual to our benefit of hire payments and default interest) and, under most time charters, terminate the charter if the customer defaults in its payment obligations. Under most of our time charters, either party may also terminate the charter in the event of war in specified countries or in locations that would significantly disrupt the free trade of the vessel or if the vessel is requisitioned by its flag state for more than three months.

 

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Other Vessel Employment

Spot Charter Market

We may from time to time employ some of our vessels in the spot charter market. A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed upon total fee. Under spot market voyage charters, the vessel owner pays voyage expenses such as port, canal and fuel costs.

Contracts of Affreightment

Through our Quintana Logistics subsidiary, we may enter into contracts of affreightment, in which we receive a per-ton rate for cargoes carried but will either charter in ships from third parties on a daily-rate basis or use existing ships in our fleet to carry the cargoes. Please see “Risk Factors—Contracts of affreightment may result in losses.

Crewing; Employees

Our internal management team arranges for the crewing of the vessels in our fleet. We staff each of our vessels with officers and crew who share a common nationality. We believe that on many of our competitors’ vessels, language barriers and other tensions between officers and crew of diverse nationalities can lead to poor performance and inefficiency. In addition, we believe that by providing entire crews from a similar national background we will improve morale, retain better personnel, and increase efficiency. We have entered into contracts with Seaworld Marine Services Inc., a manning agent, which we believe has a good track record of providing experienced, educated and trained seamen. The crew manning agent’s performance during the period of its contracts with us is subject to evaluation at the end of each period. We believe that the crewing arrangements will ensure that our vessels will be crewed with qualified seamen that have the licenses required by international regulations and conventions. As of February 25, 2008, Quintana had 61 full-time employees, which is sufficient to manage the commercial operations and the technical operations of our entire fleet.

Permits and Authorizations

We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates and financial assurances with respect to our vessels. The kinds of permits, licenses, certificates and financial assurances required depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the age of a vessel. We have obtained all permits, licenses, certificates and financial assurances currently required to permit our vessels to operate. Additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase our cost of doing business.

Environmental and Other Regulations

Government regulation significantly affects the ownership and operation of our vessels. We are subject to international conventions and national, state and local laws and regulations in effect in the countries in which our vessels may operate or are registered. A variety of government and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administrations (country of registry), charterers and particularly terminal operators. Certain of these entities require us to obtain permits, licenses and certificates for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels.

We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the dry bulk shipping industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We are required to maintain operating standards for all of our vessels that emphasize safety, quality maintenance, continuous training of our officers and crews and compliance with U.S. and international regulations. We believe that the operation of our vessels is in compliance with material environmental laws and regulations applicable to us as of February 25, 2008. Moreover, as a result of highly publicized accidents in recent years, we believe that the regulation of the shipping industry, particularly in the area of environmental requirements, will continue to become more stringent and more expensive for us and our competitors. Because environmental laws and regulations are periodically changed and may impose increasingly stricter requirements, future requirements may limit shipowners’ ability to do business, increase operating costs, force the early retirement of vessels, or affect their resale values. See “Risk Factors—We are subject to regulation and liability under environmental laws that could require significant expenditures and affect our cash flow and net income.”

 

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International Maritime Organization

The International Maritime Organization, or IMO, has negotiated international conventions that impose liability for oil and other pollution in international waters and a signatory’s territorial waters. For example, the International Convention for the Prevention of Pollution from Ships (“MARPOL”) imposes environmental standards on the shipping industry relating to oil spills, management of garbage, the handling and disposal of noxious liquids, harmful substances in packaged forms, sewage and air emissions. Annex III of MARPOL regulates the transportation of marine pollutants, including standards on packing, marking, labeling, documentation, stowage, quality limitations and pollution prevention. These requirements have been expanded by the International Maritime Dangerous Goods Code, which imposes additional standards for all aspects of the transportation of dangerous goods and marine pollutants by sea. Annex VI to MARPOL, which became effective on May 19, 2005, addresses air pollution from ships. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. The Marshall Islands has ratified Annex VI of MARPOL. Pursuant to a Marine Notice issued by the Marine Maritime Administrator as revised in March 2005, ships flagged by the Marshall Islands, and that are subject to Annex VI must, if built before the effective date, obtain an International Air Pollution Prevention Certificate evidencing compliance with Annex VI not later than either the first drydocking after May 19, 2005, or May 19, 2008. All ships subject to Annex VI that are built after May 19, 2005 must have the Air Pollution Prevention Certificate. Implementing these requirements may require modifications to the engines or the addition of post-combustion emission controls, or both as well as the use of lower sulfur fuels. We are still evaluating the costs of implementing these requirements but do not expect them to have a material adverse effect on our operating costs. Additional conventions, laws and regulations may be adopted that could adversely affect our ability to operate our vessels.

The operation of our vessels is also affected by the requirements set forth in the IMO’s Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires ship owners and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. No vessel can obtain ISM Code certification unless its manager has been awarded a document of compliance under the ISM Code. The failure of a ship owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. We have our own ISM Code certification.

The United States Oil Pollution Act

The United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its two hundred nautical mile exclusive economic zone. Although OPA is primarily directed at oil tankers (which we do not operate), it applies to non-tanker ships, including dry bulk carriers, with respect to fuel oil, or bunkers, used to power such vessels. Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels, including bunkers. OPA defines these other damages broadly to include:

 

   

natural resources damages and the costs of assessment thereof;

 

   

real and personal property damages;

 

   

net loss of taxes, royalties, rents, fees and other lost revenues;

 

   

lost profits or impairment of earning capacity due to property or natural resources damage; and

 

   

net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

OPA 90 had historically limited the liability of responsible parties to the greater of $600 per gross ton or $500,000 per dry bulk vessel, unless the incident was caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited. OPA 90 was amended in 2006 to increase these limits on the liability of responsible parties for non-tank vessels to $950 per gross ton or $800,000, whichever is greater. These limits of liability do not apply if an incident was directly caused by violation of applicable United States federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities.

 

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In addition, the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, which applies to the discharge of hazardous substances (other than oil) whether on land or at sea, contains a similar liability regime and provides for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $0.5 million for vessels not carrying hazardous substances as cargo or residue, unless the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited.

OPA requires owners and operators of all vessels over 300 gross tons, even those that do not carry petroleum or hazardous substances as cargo, to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OPA. The U.S. Coast Guard has implemented regulations requiring evidence of financial responsibility for non-tank vessels in the amount of $900 per gross ton, which includes the OPA limitation on liability of $600 per gross ton and the CERCLA liability limit of $300 per gross ton for vessels not carrying hazardous substances as cargo or residue. Under the regulations, vessel owners and operators may evidence their financial responsibility by showing proof of insurance, surety bond, self-insurance or guaranty. The U.S. Coast Guard recently proposed amendments to its financial responsibility regulations that would increase the required amount of evidence of financial responsibility to reflect the higher limits on liability imposed by the 2006 amendments to OPA 90, as described above.

Under OPA, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum liability under OPA. Under the self-insurance provisions, the ship owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the U.S. Coast Guard regulations by providing a certificate of responsibility from third party entities that are acceptable to the U.S. Coast Guard evidencing sufficient self-insurance.

The U.S. Coast Guard’s regulations concerning certificates of financial responsibility provide, in accordance with OPA, that claimants may bring suit directly against an insurer or guarantor that furnishes certificates of financial responsibility. In the event that such insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain organizations, which had typically provided certificates of financial responsibility under pre-OPA laws, including the major protection and indemnity organizations, have declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses. This requirement may have the effect of limiting the availability of the type of coverage required by the Coast Guard and could increase our costs of obtaining this insurance as well as the costs of our competitors that also require such coverage.

We currently maintain pollution liability coverage insurance in the amount of $1 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage, it could have an adverse effect on our business and results of operation.

Title VII of the Coast Guard and Maritime Transportation Act of 2004 (the “CGMTA”) recently amended OPA to require the owner or operator of any non-tank vessel of 400 gross tons or more, that carries oil of any kind as a fuel for main propulsion, including bunkers, to prepare and submit a response plan for each vessel on or before August 8, 2005. Previous law was limited to vessels that carry oil in bulk as cargo. The vessel response plans include detailed information on actions to be taken by vessel personnel to prevent or mitigate any discharge or substantial threat of such a discharge of ore from the vessel due to operational activities or casualties. We have prepared a response plan for each of our vessels that conforms to the requirements of the CGMTA and OPA.

OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessels owners’ responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call.

The Clean Water Act

The U.S. Environmental Protection Agency (or EPA) has exempted the discharge of ballast water and other substances incidental to the normal operation of vessels in U.S. ports from the Clean Water Act permitting requirements. However, on March 30, 2005, a U.S. District Court ruled that the EPA exceeded its authority in crafting an exemption for ballast water. On September 18, 2006, the court issued an order invalidating the exemption in the EPA’s regulations for all discharges incidental to the normal operation of a vessel as of September 30, 2008, and directing the EPA to develop a system for regulating all discharges from vessels by that date. The EPA has appealed this decision, but it is proceeding with development of the regulations. If the exemption is ultimately repealed, we would be subject to Clean Water Act permit

 

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requirements that could include ballast water treatment obligations that could increase the cost of operating in the United States. For example, this could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost or otherwise restrict our vessels from entering waters in the United States that are subject to this ruling. Because we do not know how this matter will ultimately be resolved, we cannot estimate the financial impact on our operations and, therefore, cannot assure you that the associated costs and effects will not be material.

Vessel Security Regulations

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002 (MTSA) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the convention dealing specifically with maritime security. The new chapter came into effect in July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security Code or ISPS Code. Among the various requirements are:

 

   

on-board installation of automatic information systems, or AIS, to enhance vessel-to-vessel and vessel-to-shore communications;

 

   

on-board installation of ship security alert systems;

 

   

the development of vessel security plans; and

 

   

compliance with flag state security certification requirements.

The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures provided such vessels have on board a valid International Ship Security Certificate (ISSC) that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have implemented the various security measures addressed by the MTSA, SOLAS and the ISPS Code.

Inspection by Classification Societies

Every seagoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.

The classification society also undertakes, on request, other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned. For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:

 

   

Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.

 

   

Intermediate Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.

 

   

Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery, including the electrical plant and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a ship owner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five year cycle. At an owner’s application, the surveys

 

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required for class renewal may be split according to an agreed schedule to extend over the entire class period. This process is referred to as continuous class renewal. All of our vessels are on continuous class renewal.

All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years. Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a “recommendation,” which must be rectified by the ship owner within prescribed time limits.

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society that is a member of the International Association of Classification Societies. Each of our vessels is certified as being “in class” by one of three major classification societies: Lloyd’s Register of Shipping, American Bureau of Shipping, or Det Norske Veritas. All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard purchase contracts and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, we have no obligation to take delivery of the vessel.

Risk of Loss and Liability Insurance

General

The operation of any dry bulk vessel includes risks such as loss or damage to the vessel arising from peril of the sea, mechanical failure, property loss, loss or damage to/of cargo and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers (charterers who control chartered vessels and bear all expenses under the charter) of vessels trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for ship owners and operators trading in the United States market.

While we maintain hull and machinery insurances, increased value insurances, war and strikes risks insurances, protection and indemnity coverage, freight, demurrage and defense coverage for all of our vessels in amounts that we believe to be prudent to cover normal risks in our every day operations, we may not be able to achieve or maintain this level of coverage throughout a vessel’s entire trading life. Furthermore, while we believe that our present insurance covers are adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid by insurers, or that we will always be able to obtain adequate insurance coverage at reasonable premium rates.

Hull & Machinery and War and Strikes Risks Insurance

We currently maintain marine hull and machinery insurances which cover our fleet against physical loss and damage arising from perils of the sea during the normal course of navigation. In addition to this policy, we also purchase a separate increased value insurance which covers the vessel against the risk of actual or constructive total loss as a result of an insured peril. Accordingly, following a total and/or constructive total loss of the vessel, which is recoverable under the respective vessels’ hull and machinery policy, in addition to the hull insured value we can also recover the ‘agreed’ amount insured under the vessels’ respective increased value insurance. The combined aggregate sum insured under these two policies are at least equal to the fair market values of our fleet at the time of placement. Indeed during the current policy period we undertook a complete review of the market values of all our vessels and subsequently increased the insured values/amounts insured under both the above policies to reflect the upward change in market trends.

The deductibles for particular average claims under our current marine hull and machinery policies are $100,000 per vessel per incident for the Panamax and Kamsarmax vessels and $150,000 per vessel per incident for the Capesize vessels.

The war and strikes risks insurances are covered with the Hellenic War Club and the insured values under these covers are equal to those insured for marine perils.

Protection and Indemnity Insurance

Protection and indemnity insurance is a form of mutual indemnity insurance provided by mutual protection and indemnity associations, or P&I “clubs,” which insure our third party liabilities in connection with our shipping activities. This includes third-party liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal.

 

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Apart from certain specific types of claim the limit of P&I cover is very high and is calculated on the basis of 2.5% of the property limitation fund of the 1976 Limitation Convention of all ships entered in the International Group Pool Clubs. This amounts to approximately $5.25 billion. Our current protection and indemnity insurance coverage for pollution is $1 billion per vessel per incident. Clubs also have an aggregate limit of liability for any and all claims in respect of liability to passengers each event of $2 billion and $3 billion each event in respect of liability to passengers and seamen, in respect of each ship entered by or on behalf of an owner. We are a member of a P&I club that is a member of the International Group. The thirteen P&I clubs that comprise the International Group insure approximately 90% of the world’s commercial shipping tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. The International Group of P&I clubs exists to arrange collective insurance and reinsurance for P&I clubs, to represent the views of shipowners and charterers who belong to those clubs on matters of concern to the shipping industry and to provide a forum for the exchange of information. Each of the constituent P&I clubs is an independent, non-profit mutual insurance association providing coverage for its shipowner and charterer members against liabilities of their respective businesses. Each club is controlled by its members through a board of directors (or Committee) elected from the membership; the Board (or Committee) retains responsibility for strategic and policy issues but delegates to full-time managers the technical running of the club.

Although the clubs compete with each other for business, they have found it beneficial to pool their larger risks under the auspices of the International Group. This pooling is regulated by a contractual agreement which defines the risks that are to be pooled and exactly how these are to be shared between the participating clubs. As a member of a P&I club that is a member of the International Group, we are subject to calls payable to the associations based on the group’s claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I clubs comprising the International Group.

The pool provides a mechanism for sharing all claims in excess of $7 million up to a limit of about $5.25 billion. For a layer of claims between $50 million and $2.05 billion, the International Group’s clubs purchase reinsurance from the commercial market. The clubs also purchase overspill reinsurance protection for all categories of claim up to $1 billion in excess of the Group’s reinsurance programme of $2.1 billion. The pooling system provides participating clubs with reinsurance protection at cost to much higher levels than would normally be available in the commercial reinsurance market.

Competition

We operate in markets that are highly competitive and based primarily on supply and demand. We compete for charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on our reputation as an owner and operator. We compete with other owners of dry bulk carriers in the Panamax, Kamsarmax, and Capesize class sectors. Some of these competitors have larger fleets and greater financial resources than we do, which may make them more competitive.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the investor-relations portion of our Web site (www.quintanamaritime.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). In addition, the public may view and copy materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We also make available on our Web site our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter, and Compensation, Nominating and Governance Committee Charter, which have been adopted by our board of directors. We will make immediate disclosure by a Current Report on Form 8-K and on our Web site of any change to, or waivers of, the Code of Business Conduct and Ethics with respect to our principal executive and senior financial officers. We are not including the information contained on our Web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.

 

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ITEM 1A. RISK FACTORS

You should consider carefully the following factors, as well as the other information set forth in this Form 10-K and Quintana’s other SEC filings. Some of the following risks relate principally to the industry in which we operate and our business in general. Other risks relate principally to the securities market and ownership of our common stock. The occurrence of any of the events described in this section could significantly and negatively affect our business, financial condition, operating results or cash available for dividends or the trading price of our common stock and cause you to lose all or part of your investment.

Risks Related to Our Business

The merger agreement contains a number of conditions to closing: if those conditions are not satisfied or waived, the merger may not occur, which may cause our stock price to decline.

We entered into a merger agreement on January 29, 2008 with Excel Maritime Carriers, Ltd., pursuant to which Excel agreed to purchase all our outstanding shares for a combination of cash and stock. The merger agreement contains a number of conditions to closing, including (a) the affirmative vote of a majority of our shareholders, (b) Excel’s receipt of financing, (c) the lack of a material adverse change in Excel’s or our business, and (d) other customary conditions. If any one of these conditions is not satisfied or waived, the merger may not close, and our share price may decline as a result.

Our substantial debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

We currently have substantial indebtedness and will have even more significant indebtedness upon the delivery of the eight additional Capesize vessels we have agreed to buy, 7 of which are to be purchased through joint venture arrangements with related parties. As of December 31, 2007, we had $689.8 million of total debt outstanding, of which $29.8 related to the credit facilities of consolidated joint ventures, as compared to total debt of $612.0 million as of December 31, 2006. We may incur more indebtedness in connection with future acquisitions. Our high level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

we may need to use a substantial portion of our cash from operations to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and dividends to our shareholders;

 

   

our debt level could make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally;

 

   

our debt level may limit our flexibility in responding to changing business and economic conditions; and

 

   

our rate of growth may slow if we choose not to incur significant additional debt to acquire vessels.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing dividends, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

As we expand our business, we may need to improve our operating and financial systems and expand our commercial and technical management staff, and will need to recruit suitable employees and crew for our vessels.

Since the Company’s incorporation in 2005, our size of our fleet has experienced rapid growth. If we continue to expand our fleet, we will need to recruit suitable additional administrative and management personnel. We cannot guarantee that we will be able to continue to hire suitable employees as we expand our fleet. If we encounter business or financial difficulties, we may not be able to adequately staff our vessels. If we are unable to grow our financial and operating systems or to recruit suitable employees as we expand our fleet, our financial performance may be adversely affected and, among other things, the amount of cash available for dividends to our shareholders may be reduced.

 

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Restrictive covenants in our revolving credit facility impose financial and other restrictions on us, including our ability to pay dividends.

Our revolving credit facility imposes operating and financial restrictions on us and requires us to comply with certain financial covenants. These restrictions and covenants limit our ability to, among other things:

 

   

pay dividends if an event of default has occurred and is continuing under our proposed new revolving credit facility or if the payment of the dividend would result in an event of default;

 

   

incur additional indebtedness, including through the issuance of guarantees;

 

   

change the flag, class or management of our vessels;

 

   

create liens on our assets;

 

   

sell our vessels without replacing such vessels or prepaying a portion of our loan;

 

   

merge or consolidate with, or transfer all or substantially all our assets to, another person; or

 

   

change our business.

Therefore, we may need to seek permission from our lenders or terminate the facility in order to engage in some corporate actions, including the proposed merger. Our lenders’ interests may be different from ours and we cannot guarantee that we will be able to obtain our lenders’ consent when needed. If we do not comply with the restrictions and covenants in our revolving credit facility, we will not be able to pay dividends to you, finance our future operations, make acquisitions or pursue business opportunities.

We derive a substantial portion of the revenues generated by our fleet from one charterer, and the loss of that charterer or any time charter or any vessel could result in a significant loss of revenues and cash flow.

Bunge and its affiliates currently charter the 17 vessels we bought from Metrobulk in 2006. As a result, Bunge’s payments to us will be our sole source of operating cash flow from these vessels over the term of the governing master time charter expiring December 31, 2010. Bunge and its affiliates, therefore, account for a substantial majority of our revenues. As a result, Bunge will have a substantial amount of leverage in any discussions or disputes it may have with us, which it may choose to exercise to our disadvantage. In addition, at any given time in the future, if Bunge were to experience financial difficulties, we cannot assure you that Bunge would be able to make charter payments to us or make them at the levels provided for in our master time charter with Bunge. If Bunge is unable to make charter payments to us, or makes them at a significantly lower level than we expect, our results of operations and financial condition will be materially adversely affected.

We could lose Bunge or another party as a charterer or the benefits of a time charter if:

 

   

the charterer fails to make charter payments to us;

 

   

the vessel is off-hire for more than 20 days in any year for reasons other than drydocking required to maintain a vessel’s status with its classification society; or

 

   

we are unable to reach an agreement in advance with Bunge on the level of charter hire to be paid to us within a specified daily hire rate range in any year.

If we lose a time charter, we may be unable to re-deploy the related vessel on terms as favorable to us as in the original time charter. In the worst case, we may not receive any revenues from that vessel, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition.

The loss of any of our charterers, time charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our shareholders.

We depend on Bunge, which is an agribusiness, for all of our revenues from a substantial portion of our fleet and are therefore exposed to risks in the agribusiness market.

Bunge and its affiliates charter seventeen of our vessels. Accordingly, our business is indirectly exposed to economic and other risks inherent in the agribusiness market. Changes in the economic, political, legal and other conditions in agribusiness could adversely affect our business and results of operations. Based on Bunge’s filings with the SEC, these risks include the following, among others:

 

   

The availability and demand for the agricultural commodities and agricultural commodity products that Bunge uses and sells in its business can be affected by weather, disease and other factors beyond its control;

 

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Bunge is vulnerable to cyclicality in the oilseed processing industry;

 

   

Bunge is vulnerable to increases in raw material prices; and

 

   

Bunge is subject to economic and political instability and other risks of doing business globally and in emerging markets.

Deterioration in Bunge’s business as a result of these or other factors could have a material adverse impact on Bunge’s ability to make timely charter hire payments to us and to renew its time charters with us. This could have a material adverse impact on our financial condition and results of operations.

If we do not adequately manage the construction of the newbuilding vessels, the vessels may not be delivered on time or in compliance with their specifications.

We have recently entered into contracts to purchase eight newbuilding vessels through wholly owned subsidiaries or through joint ventures in which we participate. We are obliged to supervise the construction of these vessels. If we are denied supervisory access to the construction of these vessels by the relevant shipyard or otherwise fail to adequately manage the shipbuilding process, the delivery of the vessels may be delayed or the vessels may not comply with their specifications, which could compromise their performance. Both delays in delivery and failure to meet specifications could result in lower revenues from the operations of the vessels, which could reduce our earnings.

If our joint venture partners do not honor their commitments under the joint venture agreements, the joint ventures may not take delivery of the newbuilding vessels.

We rely on our joint venture partners to honor their financial commitments under the joint venture agreements, including the payment of their portions of installments due under the shipbuilding contracts or memoranda of agreement. If our partners do not make these payments, we may be in default under these contracts.

Delays in deliveries of or failure to deliver newbuildings under construction could materially and adversely harm our operating results and could lead to the termination of related time charter agreements.

We have recently entered into contracts to purchase eight newbuilding vessels through wholly owned subsidiaries or joint ventures in which we participate. Four of these vessels are under construction at Korea Shipyard Co., Ltd., a greenfield shipyard for which there is no historical track record. The relevant joint ventures have not yet received refund guarantees with respect to these vessels, which may imply that the shipyard will not be able to timely deliver the vessels. The delivery of any one or more of these vessels could be delayed or may not occur, which would delay our receipt of revenues under the time charters for these vessels or otherwise deprive us of the use of the vessel, and thereby adversely affect our results of operations and financial condition. In addition, under some time charters, we may be required to deliver a vessel to the charterer even if the relevant newbuilding has not been delivered to us. If the delivery of the newbuildings is delayed or does not occur, we may be required to enter into a bareboat charter at a rate in excess of the charterhire payable to us. If we are unable to deliver the newbuilding or a vessel that we have chartered at our cost, the customer may terminate the time charter which could adversely affect our results of operations and financial condition.

The delivery of the newbuildings could be delayed or may not occur because of:

 

   

work stoppages or other labor disturbances or other event that disrupts the operations of the shipbuilder;

 

   

quality or engineering problems;

 

   

changes in governmental regulations or maritime self-regulatory organization standards;

 

   

lack of raw materials and finished components;

 

   

failure of the builder to finalize arrangements with sub-contractors;

 

   

faiure to provide adequate refund guarantees;

 

   

bankruptcy or other financial crisis of the shipbuilder;

 

   

a backlog of orders at the shipbuilder;

 

   

hostilities, political or economic disturbances in the country where the vessels are being built;

 

   

weather interference or catastrophic event, such as a major earthquake or fire;

 

   

our requests for changes to the original vessel specifications;

 

   

shortages of or delays in the receipt of necessary construction materials, such as steel;

 

   

our inability to obtain requisite permits or approvals; or

 

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a dispute with the shipbuilder.

In addition, the shipbuilding contracts for the new vessels contain a “force majeure” provision whereby the occurrence of certain events could delay delivery or possibly terminate the contract. If delivery of a vessel is materially delayed or if a shipbuilding contract is terminated, it could adversely affect our results of operations and financial condition and our ability to pay dividends to our shareholders.

Some of our directors and executive officers may have conflicts of interest, and the resolution of these conflicts of interest may not be in our or our shareholders’ best interest.

Some of our directors and executive officers may have conflicts of interests relating to the joint ventures or to the proposed merger.

We have entered into seven joint ventures to purchase vessels. One of the ventures, named Christine Shipco LLC, is a joint venture among the Company, Robertson Maritime Investors LLC, or RMI, an affiliate of Corbin J. Robertson, Jr. and AMCIC Cape Holdings LLC, or AMCIC, an affiliate of Hans J. Mende, to purchase the Christine, a newbuilding Capesize drybulk carrier. In addition, we have entered into six additional joint ventures with AMCIC to purchase six newbuilding Capesize vessels. It is currently anticipated that each of these joint ventures will enter into a management agreement with us for the provision of construction supervision prior to delivery of the relevant vessel and technical management of the relevant vessel subsequent to delivery.

Mr. Robertson is the chairman of our Board, the chairman of the CNG Committee of our Board and also serves as a director on the board of directors of Christine Shipco LLC. Members of Mr. Robertson’s family, including Corbin J. Robertson, III, a member of our Board, will also participate in the Christine Shipco LLC joint venture through Mr. Robertson. Mr. Mende is a member of our Board and serves on the board of directors of Christine Shipco LLC, Hope Shipco LLC, Lillie Shipco LLC, Fritz Shipco LLC, Iron Lena Shipco LLC, Gayle Frances Shipco LLC, and Benthe Shipco LLC. Stamatis Molaris, our chief executive officer, president and a member of our Board, will also serve, at the request of the Board of Directors of the Company, as a director of the seven joint ventures.

While our Board has put in place a conflicts committee composed of independent directors to resolve actual and potential conflicts of interest, the presence of Mr. Robertson, Mr. Mende and Mr. Molaris on the board of directors of Christine Shipco LLC and the presence of Mr. Mende and Mr. Molaris on the board of directors of each of the other six joint ventures may create conflicts of interest because Mr. Robertson, Mr. Mende and Mr. Molaris have responsibilities to these joint ventures. Their duties as directors of the joint ventures may conflict with their duties as our directors regarding business dealings between the joint ventures and us. In addition, Mr. Robertson, Mr. Robertson III, and Mr. Mende each have a direct or indirect economic interest in Christine Shipco LLC, and Mr. Mende has direct or indirect economic interests in each of the other six joint ventures. Their economic interest in the joint ventures may conflict with their duties as our directors regarding business dealings between the joint ventures and us.

As a result of these joint venture transactions, conflicts of interest may arise between the joint ventures and us. These conflicts may include, among others, the following situations:

 

   

each joint venture will be engaged in the business of chartering or rechartering its drybulk carrier and may compete with us for customers;

 

   

Mr. Molaris, our chief executive officer, president, and a member of our Board, will also serve as a director of each of the seven joint ventures, which may result in his spending less time than is appropriate or necessary in order to manage our business successfully; and

 

   

disputes may arise under the joint venture agreements and the related management agreement and resolutions of such disputes by our chief executive officer and members of our Board could be influenced by such individuals’ investment in or their capacity as members or directors of the joint ventures.

In addition, some executive officers and directors of Quintana have interests in the merger that are different from the interests of our shareholders. For example, Quintana has entered into severance agreements with certain of its executive officers that provide for severance payments under certain circumstances as a result of the merger. These and certain other additional interests of Quintana’s directors and executive officers may create potential conflicts of interest and cause some of these persons to view the proposed merger differently than a shareholder may view it.

 

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We cannot assure you that our board of directors will declare dividends.

In 2007, our board of directors set its current dividend policy, which is to establish a minimum annualized dividend each year. The declaration and payment of dividends, if any, will always be subject to the discretion of our board of directors and the requirements of Marshall Islands law. The timing and amount of any dividends declared, if any, will depend on, among other things, our earnings, financial condition and cash requirements and availability, our ability to obtain debt and equity financing on acceptable terms as contemplated by our growth strategy, provisions of Marshall Islands law governing the payment of dividends, restrictive covenants in our existing and future debt instruments, and current and expected market conditions. The international dry bulk shipping industry is highly volatile, and we cannot predict with certainty the amount of cash, if any, that will be available for distribution as dividends in any period. Also, there may be a high degree of variability from period to period in the amount of cash, if any, that is available for the payment of dividends. We may incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have available for distribution as dividends, if any, including as a result of the risks described in this section of the prospectus. Our growth strategy contemplates that we will finance the acquisition of additional vessels through a combination of our operating cash flow and debt and equity financing. If financing is not available to us on acceptable terms, our board of directors may determine to finance or refinance acquisitions with a greater percentage of cash from operations to the extent available, which would reduce or even eliminate the amount of cash available for the payment of dividends. We may also enter into new financing or other agreements that will restrict our ability to pay dividends.

Under the terms of our revolving credit facility, we will not be permitted to pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividend. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent by the payment of such a dividend. We may not have sufficient surplus in the future to pay dividends. We can give no assurance that dividends will be paid in the future.

Future sales of our common stock may result in a decrease in the market price of our common stock, even if our business is doing well.

The market price of our common stock could decline due to the issuance and subsequent sales of a large number of shares of our common stock in the market pursuant to an equity offering or the perception that such sales could occur following the exercise of the outstanding warrants. This could make it more difficult to raise funds through future offerings of common stock or securities convertible into common stock.

An affiliate of Mr. Robertson, the Chairman of the Board of the Company, has the right in certain circumstances to require us to register its shares of common stock in connection with a public offering and sale. In addition, in connection with other registered offerings by us, affiliates of Mr. Robertson and certain other shareholders will have the ability to exercise certain piggyback registration rights with respect to their shares.

We had 56,515,218 shares of our common stock outstanding as of December 31, 2007, not including 1,407,650 shares of unvested restricted stock that had been issued but are subject to forfeiture and 56,822,813 shares outstanding as of February 25, 2008, not including 1,412,453 shares of unvested restricted stock that had been issued at that date. Assuming exercise of the remaining 815,520 warrants to purchase common stock remaining outstanding as of February 25, 2008 we would have a total of 59,050,786 shares of common stock outstanding.

Our earnings may be adversely affected if we do not successfully employ our vessels on medium- or long-term time charters or take advantage of favorable opportunities in the spot market.

We expect to employ the majority of our vessels primarily on medium- and long-term time charters. Although medium- and long-term charters provide relatively steady streams of revenue, our vessels committed to such charters may not be available for immediate chartering for spot charters during periods of increasing charter hire rates when spot voyages might be more profitable. If we cannot recharter these vessels on new medium- or long-term charters following the expiration of previous charters, or employ them in the spot market profitably, our results of operations and operating cash flow may suffer. We cannot assure you that future charter hire rates will enable us to operate our vessels profitably.

We may have difficulty properly managing our planned growth through acquisitions of additional vessels.

We intend to grow our business through selective acquisitions of additional vessels. Our future growth will primarily depend on:

 

   

locating and acquiring suitable vessels or shipbuilding contracts;

 

   

identifying and consummating vessel acquisitions or joint ventures relating to vessel acquisitions;

 

   

enlarging our customer base;

 

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managing our expansion; and

 

   

obtaining required financing on acceptable terms.

During periods in which charter hire rates are high, vessel values generally are high as well, and it may be difficult to consummate vessel acquisitions at favorable prices. In addition, growing any business by acquisition presents numerous risks, such as obtaining additional qualified personnel, managing relationships with customers and integrating newly acquired assets into existing infrastructure. We cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth efforts.

We cannot assure you that we will be able to borrow further amounts under our revolving credit facility, which we will need to fund the acquisition of additional vessels.

Our ability to borrow further amounts under our revolving credit facility will be subject to satisfaction of certain customary conditions precedent and compliance with terms and conditions included in the loan documents. Prior to each borrowing, we will be required, among other things, to provide the lenders with acceptable valuations of the vessels in our fleet confirming that they are sufficient to satisfy minimum security requirements. To the extent that we are not able to satisfy these requirements, including as a result of a decline in the value of our vessels, we may not be able to borrow further amounts under our revolving credit facility.

We may be in default under existing contracts to acquire vessels if we do not obtain additional financing.

In order to complete the acquisition of vessels we have agreed to buy, including those to be purchased by the joint ventures, we must obtain additional financing. We cannot assure you that we will be able to do so or will be able to do so in time to complete the acquisitions. If we do not obtain this financing, we may be in default under the contracts to acquire those vessels, and we may forfeit our deposit and our right to acquire those vessels.

Servicing future indebtedness will limit funds available for other purposes, such as the payment of dividends.

We intend to finance our fleet expansion program in part with secured indebtedness. We may incur other indebtedness in the future. While we may seek to refinance amounts drawn or incurred, we cannot assure you that we will be able to do so on terms that are acceptable to us or at all. If we are not able to refinance these amounts on terms acceptable to us or at all, we will have to dedicate cash flow from operations to pay the principal and interest of this indebtedness. If we are not able to satisfy these obligations, we may have to undertake alternative financing plans. The actual or perceived credit quality of our charterers, any defaults by them, and the market value of our fleet, among other things, may materially affect our ability to obtain alternative financing. In addition, debt service payments under any future debt agreements or alternative financing may limit funds otherwise available for working capital, capital expenditures and other purposes, such as the payment of dividends. If we are unable to meet our debt obligations, or if we otherwise default under any future debt agreements, our lenders could declare the debt, together with accrued interest and fees, to be immediately due and payable and foreclose on our fleet, which could result in the acceleration of other indebtedness that we may have at such time and the commencement of similar foreclosure proceedings by other lenders.

Unless we set aside reserves for vessel replacement, at the end of a vessel’s useful life our revenue will decline.

Unless we maintain cash reserves for vessel replacement, we may be unable to replace the vessels in our fleet upon the expiration of their useful lives. Our cash flows and income are dependent on the revenues earned by the chartering of our vessels to customers. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition and ability to pay dividends will be adversely affected. Any reserves set aside for vessel replacement would not be available for other cash needs or dividends. While we have not set aside cash reserves to date, pursuant to our dividend policy, we expect to pay less than all of our available cash from operations so as to retain funds for capital expenditures, working capital and debt service. In periods where we make acquisitions, our board of directors may limit the amount or percentage of our cash from operations available to pay dividends. See “Dividend Policy.”

Purchasing and operating secondhand vessels may result in increased operating costs and reduced fleet utilization.

In the past, we have acquired high-quality secondhand vessels. While we have the right to inspect previously owned vessels prior to purchase, such an inspection does not provide us with the same knowledge about their condition that we would have if these vessels had been built for and operated exclusively by us. Secondhand vessels may have conditions or defects that we were not aware of when we bought the vessel and that may require us to incur costly repairs to the vessels. If this were to occur, such hidden defects or problems may be expensive to repair when detected, and if not detected may result in accidents or other incidents for which we may become liable to third parties. Repairs may require us to put a vessel into drydock, which would reduce our fleet utilization and increase our costs. We do not expect to receive the benefit of warranties on secondhand vessels. In general, the costs to maintain a vessel in good operating condition increase with the age

 

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of the vessel. Older vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology.

Governmental regulations, safety and other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to some of our vessels and may restrict the type of activities in which these vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

When our time charters end, we may not be able to replace them promptly or with profitable ones.

We cannot assure you that we will be able to obtain charters at comparable rates or with comparable charterers, if at all, when the charters on the vessels in our fleet expire. The charterers under these charters have no obligation to renew or extend the charters. We will generally attempt to recharter our vessels at favorable rates with reputable charterers as the charters expire, unless management determines at that time to employ the vessel in the spot market. We cannot assure you that we will succeed. Failure to obtain replacement charters will reduce or eliminate our revenue, our ability to expand our fleet and our ability to pay dividends to shareholders.

If dry bulk vessel charter hire rates are lower than those under our current charters, we may have to enter into charters with lower charter hire rates. Also, it is possible that we may not obtain any charters. In addition, we may have to reposition our vessels without cargo or compensation to deliver them to future charterers or to move vessels to areas where we believe that future employment may be more likely or advantageous. Repositioning our vessels would increase our vessel operating costs.

Charterers may default on time charters that provide for above-market rates.

If we enter into time charters with charterers when charter rates are high and charter rates subsequently fall significantly, charterers may default under those charters. We intend to enter into time charters only with reputable counterparties, but we cannot assure you that such counterparties will not default on the charters. If a charterer defaults on an above-market time charter, we will seek the remedies available to us, which may include arrest of the vessel and arbitration or litigation to enforce the contract. After a charterer defaults on a time charter, we will likely have to enter into charters at lower rates. It is also possible that we would be unable to secure a charter at all. If we recharter the vessel at lower rates, our revenues will be reduced.

Contracts of affreightment may result in losses.

Our subsidiary Quintana Logistics LLC may seek to enter into contracts of affreightment. Contracts of affreightment may subject us to risks we do not usually bear in our time-charter business. Because we will usually be paid a per-ton rate under a contract of affreightment but will charter in ships from third parties on a daily-rate basis, we will be exposed to volatility in freight rates between our execution of the contract of affreightment and chartering in of vessels. In addition, we will generally bear risks associated with the length of the voyages, including canal-passage delays, inclement weather, and other factors. If these delays occur, we will still be bound to pay charterhire on the ships carrying the cargo, but we will not receive additional amounts under the contract of affreightment. Consequently, delays may reduce our profits under the contract or result in significant losses.

The international dry bulk shipping industry is highly competitive, and we may not be able to compete successfully for charters with new entrants or established companies with greater resources.

We will employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than we do. Competition for the transportation of dry bulk cargo by sea is intense and depends on price, location, size, age, condition and the acceptability of the vessel and its operators to the charterers. Due in part to the highly fragmented market, competitors with greater resources could enter the dry bulk shipping industry and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter hire rates than we are able to offer.

We may be unable to retain key management personnel and other employees in the shipping industry, which may negatively impact the effectiveness of our management and results of operations.

Our success depends to a significant extent upon the abilities and efforts of our management team, which was formed beginning in January 2005. Our success will depend upon our ability to retain key members of our management team and to hire new management as may be necessary. The loss of any of these individuals could adversely affect our business prospects and financial condition. Difficulty in hiring and retaining replacement personnel could have a similar effect. We do not maintain “key man” life insurance on any of our officers.

 

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Our vessels may suffer damage and we may face unexpected costs, which could adversely affect our cash flow and financial condition.

If our vessels suffer damage, they may need to be repaired. The costs of repairs are unpredictable and can be substantial. The loss of earnings while our vessels are being repaired and repositioned, as well as the actual cost of these repairs, would decrease our earnings and reduce the amount of cash that we have available for dividends. We may not have insurance that is sufficient to cover all or any of these costs or losses and may have to pay costs not covered by our insurance.

The aging of our fleet may result in increased operating costs in the future, which could adversely affect our earnings.

In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. Our operating fleet has a dwt-weighted-average age of approximately 4.7 years as of December 31, 2007. As our fleet ages, we will incur increased costs. Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates also increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations, including environmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which our vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

The shipping industry has inherent operational risks that may not be adequately covered by our insurance.

We procure insurance for our fleet against risks commonly insured against by vessel owners and operators. Our current insurance for the vessels of which we have taken delivery includes hull and machinery insurance, war risks insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance. We can give no assurance that we are adequately insured against all risks or that our insurers will pay a particular claim. Even if our insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a loss. Furthermore, we may not be able to maintain or obtain adequate insurance coverage at reasonable rates for our fleet. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions which increase our costs in the event of a claim or decrease any recovery in the event of a loss.

If we acquire additional dry bulk carriers and those vessels are not delivered on time or are delivered with significant defects, our earnings and financial condition could suffer.

We expect to acquire additional vessels in the future. A delay in the delivery of any of these vessels to us or the failure of the contract counterparty to deliver a vessel at all could cause us to breach our obligations under a related time charter and could adversely affect our earnings, our financial condition and the amount of dividends, if any, that we pay in the future. The delivery of these vessels could be delayed or certain events may arise which could result in us not taking delivery of a vessel, such as a total loss of a vessel, a constructive loss of a vessel, or substantial damage to a vessel prior to delivery. In addition, the delivery of any of these vessels with substantial defects could have similar consequences.

We depend upon a limited number of customers for a large part of our revenues and the loss of one or more of these customers could adversely affect our financial performance.

We expect to derive a significant part of our revenue from a limited number of customers. If one or more of these customers terminates its charter or chooses not to recharter our vessel or is unable to perform under its charter with us and we are not able to find a replacement charter, or if a customer exercises certain rights to terminate the charter, we could suffer a loss of revenues that could adversely affect our financial condition, results of operations and cash available for distribution as dividends to our shareholders.

We could lose a customer or the benefits of a time charter for many different reasons, including if:

 

   

the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise; or

 

   

the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter.

If we lose a key customer, we may be unable to obtain charters on comparable terms or may have increased exposure to the volatile spot market, which is highly competitive and subject to significant price fluctuations. The loss of any of our customers, time charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations, financial condition and our ability to pay dividends.

 

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We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make dividend payments.

We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to make dividend payments depends on our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third party, including a creditor, or by Marshall Islands law, which regulates the payment of dividends by companies. If we are unable to obtain funds from our subsidiaries, our board of directors may exercise its discretion not to declare or pay dividends. We do not intend to seek to obtain funds from other sources to pay dividends.

We may not be able to draw down the full amount under our revolving credit facility if the market value of our vessels declines.

The fair market value of dry bulk vessels has generally experienced high volatility and market prices for secondhand dry bulk carriers are currently above historical averages. You should expect the market value of our vessels to fluctuate depending on general economic and market conditions affecting the shipping industry and prevailing charter hire rates, competition from other shipping companies and other modes of transportation, types, sizes and age of vessels, applicable governmental regulations and the cost of newbuildings.

The terms of our revolving credit facility include the requirement that, in connection with vessel acquisitions, amounts borrowed not exceed a specified percentage of the value of the vessels securing our obligations under the facility. If the value of our vessels declines because of the factors described in the previous paragraph or for any other reason, we might not be able to satisfy this requirement and, accordingly, may not be able to draw down funds to fund potential vessel acquisitions.

We may breach some of the covenants under our revolving credit facility if the market price of our vessels, which are currently near historically high levels, declines.

Our revolving credit facility contains a covenant requiring that the aggregate market value of the vessels in our fleet at all times exceeds a specified percentage of the aggregate principal amount of debt outstanding under the facility. If the market value of our vessels decreases, we may breach some of the covenants contained in our revolving credit facility. If we do breach such covenants and we are unable to remedy the relevant breach, our lenders could accelerate our debt and foreclose on our fleet. In addition, if the book value of a vessel is impaired due to unfavorable market conditions or a vessel is sold at a price below its book value, we would incur a loss that could have a material adverse effect on our financial condition and results of operations.

Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our operations.

Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered. Future hostilities or political instability in regions where we operate or may operate could have a material adverse effect on our business, results of operations and ability to pay dividends. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries where our vessels trade may limit trading activities with those countries, which could also harm our business, financial condition, results of operations and ability to pay dividends.

We are subject to regulation and liability under environmental laws that could require significant expenditures and affect our cash flow and net income.

Our business and the operations of our vessels are regulated under international conventions, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country of their registration in order to protect against potential environmental impacts. As a result of highly publicized accidents in recent years, government regulation of vessels, particularly in the area of environmental requirements, can be expected to become more stringent in the future and could require us to incur significant capital expenditure on our vessels to keep them in compliance, or even to scrap or sell certain vessels altogether. For example, various jurisdictions are considering regulating the management of ballast waters to prevent the introduction of non-indigenous species that are considered invasive, and others are considering more stringent controls on air emissions from vessels. While we cannot in every instance predict the extent of the costs that will be required to comply with these requirements, environmental regulations should apply to all vessels registered in countries that have ratified the various conventions upon which such requirements are based, and should therefore apply to most of our competitors to the same extent as they apply to us.

These requirements can also affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of or more costly insurance coverage

 

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for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, natural resource damages, personal injury and property damage claims in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations.

Violations of, or liabilities under, environmental requirements can result in substantial penalties, fines and other sanctions, including in certain instances, seizure or detention of our vessels. Events of this nature would have a material adverse impact on our financial condition, results of operations and our ability to pay dividends to our shareholders.

We are subject to international safety regulations and the failure to comply with these regulations may subject us to increased liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention.

A vessel must undergo Annual Surveys, Intermediate Surveys and Special Surveys. In lieu of a Special Survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is required to be drydocked every 30 to 36 months for inspection of the underwater parts of such vessel. If any of our vessels does not maintain its class or fails any Annual Survey, Intermediate Survey or Special Survey, the vessel will be unable to trade between ports and will be unemployable. Moreover, as a result, we could be in violation of certain covenants in our revolving credit facility, all of which would negatively impact our revenues and liquidity.

The operation of our vessels is affected by the requirements set forth in the International Maritime Organization’s International Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires shipowners and ship managers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. We have obtained our own ISM Code certification to operate our vessels.

Because we expect to generate all of our revenues in U.S. Dollars but may incur a portion of our expenses in other currencies, exchange rate fluctuations could hurt our results of operations.

We expect to generate all of our revenues in U.S. Dollars. We expect to incur a portion of our operating expenses in currencies other than U.S. Dollars. This difference could lead to fluctuations in net income due to changes in the value of the U.S. Dollar relative to the other currencies, in particular the Euro. Expenses, including extraordinary expenses, incurred in foreign currencies against which the U.S. Dollar falls in value will be higher in U.S. Dollar terms, resulting in a decrease in our operating income. We have in the past, and may in future, put limited hedges in place to guard against exchange-rate risk, but our operating results could suffer as a result of fluctuating exchange rates.

Risks Related to the Industry

The international dry bulk shipping sector is extremely cyclical and volatile; these factors may lead to reductions and volatility in our charter hire rates, vessel values and results of operations.

The dry bulk shipping industry is extremely cyclical with attendant volatility in charter hire rates and industry profitability. The degree of charter hire rate volatility among different types of dry bulk carriers has varied widely, and charter hire rates for dry bulk carriers are currently above historical averages. When we enter into a charter when charter hire rates are low, our revenues and earnings will be adversely affected as we do not expect to be able to substantially lower our operating costs during periods of industry weaknesses. In addition, a decline in charter hire rates will likely cause the value of our vessels to decline. We cannot assure you that we will be able to successfully charter our vessels in the future or renew existing charters at rates sufficient to allow us to meet our obligations or to pay dividends to our shareholders. Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.

Factors that influence demand for vessel capacity include:

 

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demand for and production of dry bulk products;

 

   

global and regional economic conditions;

 

   

environmental and other regulatory developments;

 

   

the distance dry bulk is to be moved by sea; and

 

   

changes in seaborne and other transportation patterns.

Factors that influence the supply of vessel capacity include:

 

   

the number of newbuilding deliveries;

 

   

the scrapping rate of older vessels;

 

   

vessel casualties;

 

   

the number of vessels that are out of service;

 

   

the price of steel;

 

   

changes in environmental and other regulations that may limit the useful lives of vessels; and

 

   

port congestion.

We anticipate that the future demand for our dry bulk carriers will be dependent upon, among other things, continued economic growth in the world’s economies, including China and India, and will be influenced by seasonal and regional changes in demand, changes in the capacity of the global dry bulk carrier fleet and the sources and supply of dry bulk cargo to be transported by sea. We believe the capacity of the global dry bulk carrier fleet will increase. If the supply of dry bulk carrier capacity increases and the demand for dry bulk carrier capacity does not increase or increases less quickly, the charter hire rates paid for our vessels could materially decline. Adverse economic, political, social or other developments could have a material adverse effect on our business, financial condition, results of operations and ability to pay dividends.

Charter hire rates in the dry bulk sector are above historical averages and future growth will depend on continued economic growth in the world economy that exceeds the capacity of the growing world fleet’s ability to match it.

Charter hire rates for the dry bulk sector are above historical averages. We anticipate that future demand for our dry bulk carriers, and in turn our future charter hire rates, will be dependent upon continued economic growth in the world’s economy, particularly in China and India, and will be influenced by seasonal and regional changes in demand and changes in the capacity of the world’s fleet. We believe the capacity of the world’s fleet will increase and there can be no assurance that economic growth will continue. A decline in demand for commodities transported in dry bulk carriers or an increase in supply of dry bulk carriers could cause a decline in charter hire rates which could have a material adverse effect on our business, financial condition, results of operations and ability to pay dividends.

Risks associated with operating oceangoing vessels could negatively affect our business and reputation, which could adversely affect our revenues and stock price.

The operation of oceangoing vessels carries inherent risks. These risks include the possibility of:

 

   

marine disaster;

 

   

environmental accidents;

 

   

cargo and property losses or damage;

 

   

business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions; and

 

   

piracy.

Any of these circumstances or events could increase our costs or lower our revenues. Although we have 29 vessels in our current operating fleet, loss or damage to any one or more of our vessels could have a material adverse effect on our business, results of operations, financial condition and our ability to pay dividends. In addition to any economic cost, the involvement of our vessels in an environmental disaster may harm our reputation. Our short operating history may increase these risks.

The operation of dry bulk carriers has certain unique operational risks.

With a dry bulk carrier, the cargo itself and its interaction with the ship may create operational risks. By their nature, dry bulk cargoes are often heavy, dense and easily shifted, and they may react badly to water exposure. In addition, dry bulk

 

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carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold), and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach to the sea. Hull breaches in dry bulk carriers may lead to the flooding of the vessels’ holds. If a dry bulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we are unable to adequately maintain our vessels, we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business, financial condition, results of operations and ability to pay dividends. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.

Maritime claimants could arrest one or more of our vessels, which could interrupt our cash flow.

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek to obtain security for its claim by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could cause us to default on a charter, interrupt our cash flow and require us to pay large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could attempt to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our vessels.

Governments could requisition our vessels during a period of war or emergency, resulting in a loss of earnings.

A government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated charter hire rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our vessels may negatively impact our business, financial condition, results of operations and ability to pay dividends.

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of contents of our vessels, delays in the loading, offloading or delivery and the levying of customs, duties, fines and other penalties against us.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, results of operations and our ability to pay dividends.

A downturn in general economic conditions may adversely affect our results of operations.

Our business operations are affected by international and national and local economic conditions. A recession or downturn in the general economy, or in a region constituting a significant source of demand for our services could adversely affect our revenues.

An economic slowdown in Asia could have a material adverse effect on our business, financial position and results of operations.

We expect that a significant number of the port calls made by our vessels will involve the loading or discharging of raw materials in ports in Asia. As a result, a negative change in economic conditions in any Asian country, particularly China or India, may have an adverse effect on our business, financial position and results of operations, as well as our future prospects. In recent years, India and China have been some of the world’s fastest growing economies in terms of gross domestic product, which has had a significant impact on shipping demand. We cannot assure you that such growth will be sustained or that the Chinese and Indian economies will not experience negative growth in the future. Moreover, any slowdown in the economies of the United States, the European Union or certain Asian countries may adversely affect economic growth in China, India and elsewhere. Our business, financial position, results of operations, ability to pay dividends, as well as our future prospects, will likely be materially and adversely affected by an economic downturn in any of these countries.

 

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Seasonal fluctuations in industry demand could adversely affect our operating results and the amount of available cash with which we can pay dividends.

We will operate our vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results, which could affect the amount of dividends, if any, that we pay to our shareholders from quarter to quarter. The dry bulk carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere during the winter months. As a result, we expect revenues with respect to any of our vessels trading on the spot market to be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, we expect those revenues to be stronger in fiscal quarters ended December 31 and March 31. In addition, time charters that we enter into during historically weaker seasons may generate less revenue than those entered into during stronger seasonal periods. This seasonality could materially affect our business, financial condition, results of operations and ability to pay dividends.

World events could affect our results of operations and financial condition.

Terrorist attacks such as the attacks on the United States on September 11, 2001, the bombings in Spain on March 11, 2004 and the continuing response of the United States to these attacks, as well as the threat of future terrorist attacks in the United States or elsewhere, continues to cause uncertainty in the world financial markets, which may affect our business, operating results and financial condition. The continuing conflict in Iraq may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. In addition, political tensions or conflicts in the Asia Pacific Region, particularly involving China, may reduce the demand for our services. These uncertainties could also adversely affect our ability to obtain any additional financing or, if we are able to obtain additional financing, to do so on terms favorable to us. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea. Any of these occurrences could have a material adverse impact on our business, financial condition, results of operations and our ability to pay dividends.

Tax Risks to Our Shareholders

We may earn United States source income that is subject to tax, thereby reducing our earnings.

Under the U.S. Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a ship owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States is characterized as U.S. source shipping income and as such is subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder.

We believe that we and each of our subsidiaries qualified for this statutory tax exemption for the year ended December 31, 2007 (the “2007 Year”) and we will take this position for U.S. federal income tax return reporting purposes. However, there are circumstances, including some that are beyond our control, which could cause us to lose the benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S.-source shipping income. For example, 5% shareholders could acquire and own 50% or more of our outstanding common stock. This would preclude us from being eligible for the Section 883 exemption unless we can establish that among those 5% shareholders there are sufficient 5% shareholders that are qualified shareholders for purposes of Section 883 to preclude non-qualified 5% shareholders from owning 50% or more of such shares for more than half the number of days during the taxable year. Therefore, we can give no assurances regarding our qualification for this tax exemption or that of any of our subsidiaries.

If we or our subsidiaries are not entitled to this exemption under Section 883 for the 2007 Year or any other taxable year, we or our subsidiaries would be subject for such year or years to a 4% U.S. federal gross income tax on our U.S.-source shipping income. While we did not have a material amount of gross income attributable to shipping transportation that begins or ends in the United States for the 2007 Year, we can give no assurance that the trading pattern of our ships will not change in the future. As a result, the imposition of this tax could have a negative effect on our business and could result in decreased earnings available for distribution to our shareholders.

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.

A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties

 

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in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.

Based on our assets, income and operations, we do not believe that for our 2007 Year we were a PFIC. For our 2007 Year, we derived substantially all of our income from time chartering activities of our wholly owned subsidiaries and we expect this to continue in future years. We believe that such time chartering income should be treated for relevant U.S. federal income tax purposes as services income, rather than rental income. Correspondingly, we intend to take the position that such services income should not constitute “passive income,” and the assets that we own and operate in connection with the production of that income, in particular our vessels, should not constitute passive assets for purposes of determining whether we were a PFIC for the 2007 Year. There is, however, no direct legal authority under the PFIC rules addressing our method of operation. Accordingly, no assurance can be given that the IRS or a court will accept our position, and there is a risk that the IRS or a court could determine that we were a PFIC for the 2007 Year. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.

The preferential tax rates applicable to qualified dividend income are temporary, and the enactment of previously proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for the preferential rate.

Certain of our distributions may be treated as qualified dividend income eligible for preferential rates of U.S. federal income tax to U.S. individual shareholders (and certain other U.S. shareholders). In the absence of legislation extending the term for these preferential tax rates, all dividends received by such U.S. taxpayers in tax years beginning on January 1, 2011 or later will be taxed at ordinary graduated tax rates.

In addition, legislation proposed during a preceding legislative session of the U.S. Congress would deny the preferential rate of U.S. federal income tax currently imposed on qualified dividend income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits of a comprehensive income tax treaty with the United States or is created or organized under the laws of a foreign country that has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the United States and imposes only limited taxes on entities organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted the preferential rate of federal income tax imposed on qualified dividend income may no longer be applicable to dividends received from us. As of the date hereof, it is not possible to predict with any certainty whether this previously proposed legislation will be reintroduced and enacted.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We do not own any real property or any significant material property other than our vessels. For a description of our vessels and our office leases in Athens and Geneva, see “Business—Our Fleet” and Note 11 to our consolidated financial statements, “Commitments and Contingent Liabilities,” respectively.

 

ITEM 3. LEGAL PROCEEDINGS

We have not been involved in any legal proceedings which may have, or have had a significant effect on our business, financial position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our business, financial position, results of operations or liquidity. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally disputes with charterers, personal injury and property casualty claims. We expect that these claims would be covered by insurance, subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.

Legal Proceedings Related to Mr. Molaris

A private individual filed a complaint with the public prosecutor of the Athens Magistrates Court against Mr. Molaris and four others relating to allegations that, while Mr. Molaris was employed by Stelmar Shipping Ltd., they conspired to defraud the individual of a brokerage fee of €1.2 million purportedly owed by a shipyard in connection with the repair of a

 

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Stelmar vessel. During the year ended December 31, 2007, the competent Magistrates Judiciary Board acquitted Mr. Molaris and the four other defendants of the relevant charges and consequently ruled that they should not face full trial. The plaintiff filed an appeal, and the public prosecutor issued a pleading on December 28, 2007, stating that the appeal should be dismissed. Mr. Molaris expects the final dismissal of the appeal to be forthcoming.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2007.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Global Select Market under the symbol “QMAR.” As of February 11, 2008, there were approximately 13,703 beneficial holders of our common stock. The following table sets forth the high and low sales price per share of our common stock and the cash dividends paid per share, for the periods indicated.

 

Period

   High    Low    Cash Dividend
Per Share

Fiscal 2005:

        

First Quarter(1)

     —        —        —  

Second Quarter(1)

     —        —      $ 0.05

Third Quarter

   $ 12.00    $ 9.85    $ 0.20

Fourth Quarter

   $ 11.70    $ 9.40    $ 0.21

Fiscal 2006:

        

First Quarter

   $ 10.45    $ 8.60    $ 0.21

Second Quarter

   $ 8.95    $ 7.30    $ 0.21

Third Quarter

   $ 11.06    $ 7.89    $ 0.21

Fourth Quarter

   $ 11.41    $ 10.05    $ 0.24

Fiscal 2007:

        

First Quarter

   $ 14.52    $ 11.03    $ 0.24

Second Quarter

   $ 17.24    $ 13.74    $ 0.24

Third Quarter

   $ 20.20    $ 14.63    $ 0.31

Fourth Quarter (2)

   $ 29.00    $ 18.96    $ 0.31

Fiscal 2008:

        

First Quarter (through February 25) (3)

   $ 25.49    $ 12.21   

 

(1) The Company commenced operations in April 2005 and did not begin trading on the Nasdaq Global Select Market until July 19, 2005. Accordingly, sales prices are not presented for the first or second fiscal quarters of 2005.
(2) The dividend with respect to this period was declared on February 14, 2008 and will be paid on March 7, 2008 to shareholders of record on February 22, 2008.
(3) The dividend with respect to this period, if any, will not be declared until the second quarter of 2008.

Equity Compensation Plan Information

The following table provides information as of December 31, 2007 regarding the number of shares or our common stock that may be issued under our 2005 Stock Incentive Plan, which is our sole equity compensation plan:

 

Plan category

   Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights

(a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights

(b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))

(c)
        

Equity compensation plans approved by security holders

   —      —      1,231,250

Equity compensation plans not approved by security holders

   —      —      —  
              

Total

   —      —      1,231,250
              

Dividend Policy

Our policy is to declare and pay quarterly dividends to shareholders. Each year, our board of directors estimates a minimum annualized dividend, to be declared and paid quarterly, which is subject to reduction or elimination under certain circumstances, including restrictions under Marshall Islands law, covenants under our debt instruments, and changing market conditions.

Our board of directors may review and amend our dividend policy from time to time in light of our plans for future growth and other factors. In 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, we may incur expenses or liabilities, including unbudgeted or extraordinary expenses, or decreases in revenues, including as a result of unanticipated off-hire days or loss of a vessel, that could reduce or eliminate the amount of cash that we have available for distribution as dividends. We cannot assure you that we will be able to pay dividends in accordance with our dividend policy, and our ability to pay dividends will be subject to the limitations set forth above and in the item of this report entitled “Risk Factors—We cannot assure you that our Board of Directors will declare dividends.

Under the terms of our revolving credit facility, we are generally not permitted to pay dividends if there is an event of default, including if the value of the collateral securing the credit facility is less than 115% of the amount of loans and letters of credit outstanding under the facility. As of December 31, 2007, the value of the collateral was approximately 300% of the amount of loans outstanding under the facility.

Our ability to make dividend payments will depend on the ability of our subsidiaries to distribute funds to us. In addition, Marshall Islands law generally prohibits the payment of dividends other than from surplus or when a company is insolvent or if the payment of the dividend would render the company insolvent.

 

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ITEM 6. SELECTED FINANCIAL AND OTHER DATA

The following selected consolidated financial data (presented in thousands, except per share amounts) are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. All share amounts and per share data referred to in the table below have been adjusted to reflect (1) the 7,628.984-for-one stock split on July 12, 2005, (2) the stock dividend payable to Company’s sole shareholder on July 14, 2005, which was distributed on the closing date of the initial public offering, and (3) the conversion of outstanding preferred stock into common stock on a 12.5-to-1 basis on August 11, 2006.

Summary of Selected Historical Financial Data

(in thousands of U.S. dollars except share data)

 

     Year ended
December 31, 2007
    Year ended
December 31, 2006
    Period from
January 13, 2005
(inception) to
December 31, 2005
 

Income Statement Data:

      

Net revenue

   $ 236,403     $ 103,317     $ 40,275  
                        

Costs and expenses:

      

Vessel operating expenses

     36,721       17,489       7,411  

Voyage expenses

     104       4,083       —    

Charter hire expense

     14,592       —         —    

General and administrative expenses

     17,063       10,790       5,301  

Costs related to sale process

     1,380       —         —    

Depreciation and amortization

     52,124       30,486       11,648  
                        

Operating income

     114,419       40,469       15,915  
                        

Interest expense

     (44,379 )     (16,615 )     (5,367 )

Interest income

     3,200       1,199       228  

Interest-rate swap loss, net

     (19,367 )     (9,840 )     —    

Finance costs

     (1,085 )     (2,169 )     (5,190 )

Foreign exchange gains / (losses) and other, net

     800       (300 )     (58 )
                        

Total other expenses

   $ (60,831 )   $ (27,725 )   $ (10,387 )
                        

Minority interest in net loss of consolidated joint ventures

     180       —         —    

Net income

   $ 53,768     $ 12,744     $ 5,528  
                        

Weighted average shares outstanding

      

Basic

     54,675,962       33,568,793       14,134,268  
                        

Diluted

     56,630,332       34,680,371       14,239,907  
                        

Earnings per share

      

Basic

   $ 0.98     $ 0.38     $ 0.39  
                        

Diluted

   $ 0.95     $ 0.37     $ 0.39  
                        

Cash dividends declared per ordinary share

   $ 1.10     $ 0.84     $ 0.25  
                        

Other Data:

      

Net cash from operating activities

   $ 147,896     $ 56,960     $ 25,856  

Net cash used in investing activities

     (123,868 )     (597,299 )     (467,727 )

Net cash from financing activities

     70,596       557,415       446,130  
      
     At December 31,  
     2007     2006     2005  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 115,959     $ 21,335     $ 4,259  

Total current assets, including cash

     123,206       26,325       7,228  

Property and equipment

     1,084,690       1,014,362       446,859  

Total assets

     1,229,230       1,057,440       466,026  

Total current liabilities, including current portion of long-term debt

     110,257       57,922       6,603  

 

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     At December 31,
     2007    2006    2005

Long-term debt, excluding current portion

           612,600            564,960            210,000

Total shareholders’ equity

   467,227    424,718    249,423

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this filing.

Executive Overview

We are an international provider of dry bulk marine transportation services that was incorporated in the Marshall Islands on January 13, 2005 and began operations in April 2005. Our dry bulk vessels transport a variety of cargoes including coal, iron ore and grain. As of December 31, 2007, we operated a total fleet of 29 vessels, consisting of 11 Panamax vessels, 14 Kamsarmax vessels and 4 Capesize vessels. Of these 29 vessels, we acquired 10 in 2005, 13 in 2006, and the remaining 6 in 2007. In 2007, we sold 7 Panamax vessels to third parties; we continue to operate those vessels under bareboat charters. As of December 31, 2007, our operating fleet had a combined carrying capacity of approximately 2.6 million deadweight tons (dwt) and a dwt-weighted-average age of approximately 4.7 years. In addition, we contracted in 2007 to purchase an additional 8 Capesize vessels, 7 of which will be purchased through joint ventures, and one of which will be wholly owned. These vessels are expected to be delivered between 2008 and 2010. Upon delivery of the 8 Capesize vessels, we expect our fleet to have a combined carrying capacity of approximately 4.1 million deadweight tons.

Merger Agreement

On January 29, 2008, we entered into the Merger Agreement with Excel and Bird Acquisition Corp., a direct wholly owned subsidiary of Excel. For a summary of the details of the Merger Agreement, please see “Item 1. Business—Merger Agreement.”

Results of Operations

Charters

We generate revenues by charging customers for the transportation of dry bulk cargo using our vessels. All our vessels are currently employed under time charters to well-established and reputable charterers. During part of the fiscal year 2007, one vessel, Barbara, was fixed on a variable-rate time charter, in which the charter hire was tied to prevailing spot rates. Barbara also undertook a voyage charter for a short period of time in 2007. A time charter is a contract for the use of a vessel for a specific period of time during which the charterer pays substantially all of the voyage expenses, including port and canal charges and the cost of bunkers, but the vessel owner pays the vessel operating expenses. In addition, we may employ vessels in the spot market. Under a spot-market charter, the vessel owner pays both the voyage expenses (less specified amounts covered by the voyage charterer) and the vessel operating expenses. Vessels operating in the spot-charter market generate revenues that are less predictable than time charter revenues but may enable us to capture increased profit margins during periods of improvements in dry bulk rates. However, we will be exposed to the risk of declining dry bulk rates when operating in the spot market, which may have a materially adverse impact on our financial performance. As of December 31, 2007, for our current operating fleet, our charters had remaining terms of between 3 months and 52 months, based on the latest redelivery date under the time charter agreements. We believe that these long-term charters provide better stability of earnings and consequently increase our cash flow visibility to our shareholders.

Fleet Utilization

In the year ended December 31, 2007, our fleet had a utilization of 98.8%, compared to 98.0% in 2006 and 95.2% in 2005. We calculate fleet utilization by dividing the number of our operating days during a period by the number of our ownership days during the period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee, vessel upgrades, special surveys or vessel positioning.

Logistics Operations

In December 2005, the Company formed a wholly owned subsidiary, Quintana Logistics LLC, to engage in chartering operations, including entry into contracts of affreightment. Under a contract of affreightment, Quintana Logistics would agree to ship a specified amount of cargo at a specified rate per ton between designated ports over a particular period of time. Contracts of affreightment generally do not specify particular vessels, so Quintana Logistics would be permitted either to use a free vessel that it owned or to charter in a third-party vessel. Quintana Logistics had no operations during 2007 and limited operations during 2006.

 

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net Revenues

Net revenues for the year ended December 31, 2007 were $236.4 million after brokerage commissions of $11.4 million, compared to $103.3 million after brokerage commissions of $4.8 million for the corresponding period in 2006, an increase of 129%. In the year ended December 31, 2007, $244.7 million of our revenues was earned from time charters, and $3.1 million was earned from voyage charters. In the 2006 period, $103.7 million of our revenues was earned from time charters, and $4.5 million was earned from our Quintana Logistics operations. The increase in revenues during the year ended December 31, 2007 over the corresponding period in 2006 is primarily due to our operation of an average of 27.9 vessels during 2007 compared to an average of 13.4 ships during the corresponding 2006 period. Our net daily revenues per ship per day for the total fleet for 2007 were $23,443, compared to $20,225 in 2006. The increase in the 2007 period was primarily due to the Metrobulk vessels being delivered and chartered at rates higher than the 2006 average rates, comparatively higher rates earned on the Barbara, which was on a variable-rate time charter tied to spot rates, and higher charter rates realized on vessels that were fixed on charters during 2007.

Time Charter Value Amortization

One of our vessels, Iron Beauty, was acquired in October 2005 with an existing time charter at an above-the-market rate. We deduct the fair value of above-market time charters from the purchase price of the vessel and allocate it to a deferred asset which is amortized over the remaining period of the time charter as a reduction to hire revenue. With respect to Iron Beauty, this results in a daily rate of approximately $30,600 as recognized revenue. For cash flow purposes, the Company will continue to receive $36,500 per day less commissions until the charter expires. For the year ended December 31, 2007 and 2006, we recorded $2.1 million of time charter amortization charges. If we acquire additional vessels in the future that have above-market time charters attached to them, our time charter amortization is likely to increase.

Vessel Operating Expenses

For the year ended December 31, 2007, our vessel operating expenses were $36.7 million, or an average of $3,611 per ship per day, compared to operating expenses of $17.5 million during the corresponding period in 2006, or an average of $3,590 per ship per day. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. The 110% increase in total operating expenses for the 2007 period was primarily due to the enlargement of our fleet: we operated an average of 27.9 vessels during the 2007 period, compared to an average of 13.4 vessels during the 2006 period.

Voyage Expenses

When we employ our vessels on spot market voyage charters, including those associated with our Quintana Logistics operations, we incur expenses that include port and canal charges and bunker expenses. We expect that port and canal charges and bunker expenses will continue to represent a relatively small portion of our vessels’ overall expenses because we expect the majority of our vessels to continue to be employed under time charters that require the charterer to bear all of those expenses. We incurred voyage expenses for the year ended December 31, 2007 of $0.1 million compared to $4.1 million for the corresponding period of 2006. The decrease in the 2007 period is because Quintana Logistics had no operations during 2007.

Charter Hire Expenses

For the year ended December 31, 2007, we incurred charter hire expenses of $14.6 million. There were no such expenses in 2006. These expenses relate to bareboat charter hire payable on the 7 Panamax vessels that were sold and leased-back in July 2007.

General and Administrative Expenses

For the year ended December 31, 2007, we incurred $17.1 million of general and administrative expenses, compared to $10.8 million for the 2006 period, an increase of approximately 58%. Our general and administrative expenses include the salaries and other related costs of the executive officers and other employees, our office rents, legal and auditing costs, regulatory compliance costs, other miscellaneous office expenses, long-term compensation costs, and corporate overhead. Our general and administrative expenses for 2007 were comparatively higher than those in the corresponding period in 2006, due principally to higher payroll costs as a result of the increased number of staff hired to manage the larger fleet and higher restricted stock compensation. In 2007, general and administrative expenses represented 7.2% of our net revenues for the period, as

 

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compared to 10.4% for the corresponding period in 2006. The percentage reduction is principally due to operating efficiencies achieved by adding vessels to the fleet.

Depreciation

We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on the cost of the vessel less its estimated residual value, which is estimated at $220 per lightweight ton, at the date of the vessel’s acquisition, which we believe is consistent with amounts used by other companies in the dry bulk shipping industry. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted to end at the date such regulations become effective. For the year ended December 31, 2007, we recorded $49.8 million of vessel depreciation charges, compared to approximately $29.6 million in 2006, an increase of 68.2%. We incurred significantly higher depreciation charges in 2007 than in the corresponding period in 2006 because we owned an average of 24.8 vessels in 2007, compared to an average of 13.4 vessels in 2006. As a result of the expected delivery of 1 additional vessel in 2008 and our agreement to purchase interests in additional 7 vessels, we expect our depreciation charges to increase on a period-by-period basis as those vessels are delivered.

Drydocking

We capitalize the total costs associated with a drydocking and amortize these costs on a straightline basis through the expected date of the next drydocking, which is typically 30 to 60 months. Regulations or incidents may change the estimated dates of the next drydocking for our vessels. For the year ended December 31, 2007, amortization expense related to drydocking totaled $2.0 million, compared to $0.7 million for the corresponding period in 2006, an increase of 186%. This increase was primarily due to the fact that we were amortizing drydocking expense for nine vessels in 2007, compared to six vessels in 2006.

Interest Expense

We incurred $44.4 million of interest expense in 2007, compared to $16.6 million in 2006. The 167% increase is primarily attributable to larger principal amounts outstanding under our revolving credit facility as a result of the additional acquisitions in the 2007 period compared to amounts outstanding under our debt facilities in the 2006 period.

Interest-rate Swap Loss, Net

In the year ended December 31, 2007, we recognized $20.3 million in unrealized interest-rate swap loss attributable to the mark-to-market valuation of the interest rate swap, compared to $9.8 million for the corresponding period in 2006. The 107% increase is attributable to both the larger notional amounts relating to the swap facility in 2007 compared to 2006 as well as the lower LIBOR rates in 2007 compared to 2006, to which the variable-rate portion of the swap is tied. The unrealized swap loss is net of cash received from Fortis bank or payable to Fortis bank under the swap agreement.

Finance Costs

Fees incurred for obtaining new loans or refinancing existing ones, including related legal and other professional fees, are deferred and amortized to interest expense over the life of the related debt. Unamortized fees relating to loans repaid or refinanced are expensed in the period the repayment or refinancing occurs. In 2007, we incurred $1.1 million in finance costs, compared to $2.2 million in the corresponding period in 2006. Of the $2.2 million incurred in the 2006 period, $1.8 million was attributable to the write-off of unamortized portion of fees paid in connection with our old revolving credit facility.

Net Income

Net income for the year ended December 31, 2007 was $53.8 million, compared to $12.7 million for the corresponding period in 2006, an increase of 324%. The increase in net income during the year ended December 31, 2007 over the corresponding period in 2006 is primarily due to increased revenues in the 2007 period, resulting from our operation of an average of 27.9 vessels during the 2007 period, compared to an average of 13.4 vessels during the 2006 period, while per-ship operating costs remained flat, and general and administrative expenses, as a percentage of revenues, declined.

 

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Year Ended December 31, 2006 Compared to Period from January 13, 2005 (inception) to December 31, 2005

Net Revenues

Net revenues for the year ended December 31, 2006 were $103.3 million after brokerage commissions of $4.8 million, compared to $40.3 million after brokerage commissions of $1.8 million for the corresponding period in 2005, an increase of 156.3%. In the year ended December 31, 2006, $103.7 million of our revenues was earned from time charters, and $4.5 million was earned from our Quintana Logistics operations. In the 2005 period, all of our revenues were earned from time charters. The increase in revenues during the year ended December 31, 2006 over the corresponding period in 2005 is primarily due to our operation of an average of 13.4 vessels during 2006 compared to partial operations during the corresponding 2005 period of an average of 5.2 ships. Our net daily revenues per ship per day for the total fleet for 2006 were $20,225, compared to $22,188 in 2005. The decrease in the 2006 period was primarily due to lower charter rates realized on some vessels that were fixed on charters during early 2006, when charter rates were comparatively lower than rates later in the period.

Time Charter Value Amortization

One of our vessels, Iron Beauty, was acquired in October 2005 with an existing time charter at an above-the-market rate. We deduct the fair value of above-market time charters from the purchase price of the vessel and allocate it to a deferred asset which is amortized over the remaining period of the time charter as a reduction to hire revenue. With respect to Iron Beauty, this results in a daily rate of approximately $30,600 as recognized revenue. For cash flow purposes the company will continue to receive $36,500 per day less commissions until the charter expires. For the year ended December 31, 2006, we recorded $2.1 million of time charter amortization charges, compared to $0.4 million in 2005. This increase was attributable to a full year of amortization in the 2006 period compared to a partial quarter of amortization in 2005. If we acquire additional vessels in the future that have above-market time charters attached to them, our amortization of time charter value is likely to increase.

Vessel Operating Expenses

For the year ended December 31, 2006, our vessel operating expenses were $17.5 million, or an average of $3,590 per ship per day, compared to operating expenses of $7.4 million during the corresponding period in 2005, or an average of $4,038 per ship per day, which included $322 per day for third-party management fees. We took over technical management of all our vessels in the fourth quarter of 2005; accordingly, technical management fees that were previously included in vessel operating expenses are now reflected in our general and administrative expenses. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. The 136.5% increase in total operating expenses for the 2006 period was primarily due to the enlargement of our fleet: we operated an average of 13.4 vessels during the 2006 period, compared to an average of 5.2 vessels during the 2005 period. Per ship per day operating expenses decreased, however, by 3.4%. This decrease was primarily attributable to efficiencies gained associated with the enlargement of the fleet.

Voyage Expenses

When we employ our vessels on spot market voyage charters, including those associated with our Quintana Logistics operations, we incur expenses that include port and canal charges and bunker expenses. We expect that port and canal charges and bunker expenses will continue to represent a relatively small portion of our vessels’ overall expenses because we expect the majority of our vessels to continue to be employed under time charters that require the charterer to bear all of those expenses.

We incurred voyage expenses for the year ended December 31, 2006 of $4.1 million attributable to our Quintana Logistics operations. We did not incur any voyage expenses for the 2005 period because we did not conduct any of our chartering activities under Quintana Logistics until 2006.

General and Administrative Expenses

For the year ended December 31, 2006, we incurred $10.8 million of general and administrative expenses, compared to $5.3 million for the 2005 period, an increase of approximately 103.8%. Our general and administrative expenses include the salaries and other related costs of the executive officers and other employees, our office rents, legal and auditing costs, regulatory compliance costs, other miscellaneous office expenses, long-term compensation costs, and corporate overhead. Our general and administrative expenses for 2006 were comparatively higher than those in the corresponding period in 2005 because we operated an average of 13.4 vessels during the 2006 period, compared to an average of 5.2 vessels during the 2005 period. In 2006, general and administrative expenses represented 10.5% of our net revenues for the period, as compared

 

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to 13.1% for the corresponding period in 2005. The percentage reduction is principally due to operating efficiencies achieved by adding vessels to the fleet.

Depreciation

We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 25 years from the date of their initial delivery from the shipyard. Depreciation is based on the cost of the vessel less its estimated residual value, which is estimated at $220 per lightweight ton, at the date of the vessel’s acquisition, which we believe is common in the dry bulk shipping industry. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted to end at the date such regulations become effective. For the year ended December 31, 2006, we recorded $29.6 million of vessel depreciation charges, compared to approximately $11.3 million in 2005, an increase of 161.9%. We incurred significantly higher depreciation charges in 2006 than in the corresponding period in 2005 because we owned an average of 13.4 vessels for 2006, compared to an average of 5.2 vessels in 2005. As a result of the delivery of 13 vessels in 2006 and our agreement to purchase an additional 6 vessels in 2007, we expect our depreciation charges to increase on a period-by-period basis as those vessels are delivered.

Drydocking

We capitalize the total costs associated with a drydocking and amortize these costs on a straightline basis through the expected date of the next drydocking, which is typically 30 to 60 months. Regulations or incidents may change the estimated dates of the next drydocking for our vessels. For the year ended December 31, 2006, amortization expense related to drydocking totaled $ 0.7 million, compared to $0.3 million for the corresponding period in 2005, an increase of 133.3%. This increase was primarily due to the fact that we were amortizing drydocking expense for six vessels in 2006, compared to two vessels in 2005.

Interest Expense

We incurred $16.6 million of interest expense in 2006, compared to $5.4 million in 2005. The 207.4% increase is primarily attributable to larger principal amounts outstanding under our revolving credit facility as a result of the Metrobulk acquisition in the 2006 period compared to amounts outstanding under our debt facilities in the 2005 period.

Unrealized Swap Loss

In the year ended December 31, 2006, we incurred $9.8 million in unrealized swap loss attributable to our interest-rate swap. There was no corresponding loss in 2005 because we did not have any swaps in place at that time. The loss on the swap is due to the decrease in LIBOR, to which the variable-rate portion of the swap is tied, under forward rate curves in 2006.

Finance Costs

Fees incurred for obtaining new loans or refinancing existing ones, including related legal and other professional fees, are deferred and amortized to interest expense over the life of the related debt. Unamortized fees relating to loans repaid or refinanced are expensed in the period the repayment or refinancing occurs. In 2006, we incurred $2.2 million in finance costs, compared to $5.2 million in the corresponding period in 2005. Of the $2.2 million incurred in the 2006 period, $1.8 million was attributable to the write-off of unamortized portion of fees paid in connection with our old revolving credit facility. Of the $5.2 million incurred in the 2005 period, $4.7 million was attributable to the write-off of unamortized fees paid in connection with the termination of the bridge loan and term loan facilities.

Net Income

Net income for the year ended December 31, 2006 was $12.7 million, compared to $5.5 million for the corresponding period in 2005, an increase of 130.9%. The increase in net income during the year ended December 31, 2006 over the corresponding period in 2005 is primarily due to increased revenues in the 2006 period, resulting from our operation of an average of 13.4 vessels during 2006 compared to partial operations during the corresponding 2005 period of an average of 5.2 ships.

Inflation

Inflation does not have significant impact on vessel operating or other expenses for vessels under time charter. We may bear the risk of rising fuel prices if we enter into spot-market charters or other contracts under which we bear voyage expenses. We do not consider inflation to be a significant risk to costs in the current and foreseeable future economic

 

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environment. However, should the world economy be affected by inflationary pressures this could result in increased operating and financing costs.

Liquidity and Capital Resources

Cash and Capital Expenditures

We satisfy our working capital requirements with cash generated from operations. In 2007, we financed our capital requirements with cash from operations, proceeds from our sale-leaseback transaction, and drawdowns under our revolving credit facility. In 2006, we financed our capital requirements with cash from operations, drawdowns under our revolving credit facility, and the issuance of preferred stock and warrants. In 2005, we financed our capital requirements with the issuance of equity in connection with our initial public offering, cash from operations, and borrowings under debt facilities. As of December 31, 2007, our cash balance was approximately $116.0 million, compared to approximately $21.3 million on December 31, 2006. We incurred a substantial amount of debt during 2006 in connection with vessel acquisitions and incurred additional debt in 2007 in connection with vessel acquisitions and newbuilding installments. We repaid approximately $200 million under our debt facilities in both years. This resulted in a ratio of net debt to total capitalization of 55% as of December 31, 2007, compared to 58% as of December 31, 2006. We believe that cash flow from operations, drawdowns under our revolving credit facility, if any, and proceeds from the ongoing exercise of outstanding warrants, if any, will be sufficient to fund our working capital requirements for the next twelve months.

We intend to fund our future acquisition or newbuilding-related capital requirements principally through borrowings under our existing revolving credit facility, under the existing joint venture credit facilities or new credit facilities or through equity issuances and to repay all or a portion of such borrowings from time to time with a combination of cash from operations and the net proceeds of potential equity issuances and potential asset dispositions. In order to pay for the installments of newbuilding vessels we have agreed to purchase, we must borrow additional amounts under our revolving credit facility and obtain additional financing to finance the capital requirements of our joint ventures. If we do not obtain this financing or do not obtain it timely, we may be in default under the acquisition contracts. Please read “Risk Factors—We may be in default under existing contracts to acquire vessels if we do not obtain additional financing” and “—If our joint venture partners do not honor their commitments under the joint venture agreements, the joint ventures may not take delivery of the newbuilding vessels.”

Our existing and expected debt obligations discourage us from incurring significant capital expenditures that do not immediately generate cash, such as entry into shipbuilding contracts for the purchase of newbuildings. Consequently, if we wish to incur such obligations, we may be required to arrange alternative financing arrangements, such as joint ventures like those we have entered into in the past. The issuance of equity to consummate such transactions may dilute our earnings. In connection with the acquisition or agreement to acquire 17 vessels in 2006, we issued a significant amount of equity, but did not realize the full benefit of the cash flows generated by the additional ships until the third quarter of 2007. Consequently, the Metrobulk acquisition was dilutive to our earnings in 2006.

Net cash provided by operating activities was $147.9 million for the year ended December 31, 2007, compared to $57.0 million for the year ended December 31, 2006. Substantially all our cash from operating activities is from revenues generated under our time charters.

Net cash used in investing activities was $123.9 million for the year ended December 31, 2007, compared to $597.3 million for the year ended December 31, 2006. Of the cash used in investing activities for the 2007 period, $309.4 million was attributable to the acquisition of vessels during the year, $63.1 million was paid as advances for vessel acquisitions / newbuildings and $249.4 million, net of commissions, was received upon the sale of 7 Panamax vessels in July 2007 through a sale-leaseback transaction. The majority of the cash used in investing activities in 2006 was used to acquire the Metrobulk fleet purchased in that year, under which 17 vessels were delivered in 2006 and early 2007.

Net cash from financing activities was $70.6 million for the year ended December 31, 2007, compared to $557.4 million for the year ended December 31, 2006. During 2007, we drew down $253.1 million under our revolving credit facility to partially finance the vessel acquisitions made during the year and $29.8 million was drawn down by the joint ventures to partially finance the installments due under the newbuilding contracts. We repaid $205.0 million of debt under our revolving credit facility, $180.0 million of which was paid from the proceeds from the sale of 7 Panamax vessels sold through the sale-leaseback transaction in July 2007. We received $46.8 million, net of commissions from the exercise of warrants during 2007 and we paid dividends during the year of $62.2 million. In 2006, we repaid a portion of the $210.0 million outstanding under our old revolving credit facility with $191.0 million in proceeds from the issuance of units, consisting of preferred stock and warrants. We drew down approximately $612.0 million under our revolving credit facility to repay the

 

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remaining portion outstanding under our old revolving credit facility and to finance the acquisition of vessels. In addition, we received $8.5 million of proceeds from the exercise of warrants in 2006 and paid $32.4 million of dividends during 2006.

Dividends

Our policy is to declare and pay quarterly dividends to shareholders. Each year, our board of directors estimates a minimum annualized dividend, to be declared and paid quarterly, which is subject to reduction or elimination under certain circumstances, including restrictions under Marshall Islands law, covenants under our debt instruments, and changing market conditions. In 2007, we paid $62.2 million in dividends. In 2006, we paid an aggregate of $32.4 million in dividends, including dividends paid on common shares and an aggregate $1.2 million dividend paid on the preferred stock during the period it was outstanding. In 2005, we paid $5.9 million in dividends.

Contractual Obligations and Commercial Commitments

Revolving Credit Facility

On July 19, 2006, the Company entered into an 8.25 year, $735 million senior secured revolving credit facility. The Company has amended the facility, most recently on July 5, 2007. Following these amendments, which are described below and were made as a result of the changing capital requirements of the Company, the maximum available amount under the facility is $735.2 million. Under the amended facility, the Company can borrow a further $55.2 million, which is equal to 60% of the purchase price of a newbuilding Capesize vessel to be purchased by the Company from an affiliate of Itochu Corporation, and is expected to be delivered in the fourth quarter of 2008. As of December 31, 2007, the facility had remaining borrowing capacity of $55.2 million.

Amendments to the Revolving Credit Facility

First Amendment

On March 14, 2007, the Company executed an amendment (the “Amendment”) to the facility. The material terms of the Amendment were:

 

   

To increase the maximum available amount for borrowing to $865 million;

 

   

To reschedule the quarterly commitment reductions as follows:

 

   

Two reductions of $14.5 million each, beginning on July 1, 2007, followed by

 

   

Four reductions of $18 million each, followed by

 

   

23 reductions of $15 million each, with the final reduction occurring on the maturity date together with a balloon reduction equal to the lesser of $419 million or remaining amounts outstanding under the facility.

 

   

To waive compliance with the minimum-liquidity covenant through December 31, 2007.

On March 28, 2007, the Company received a waiver permitting it to form the shipowning company to purchase a Capesize vessel through a joint venture and to exclude that shipowning company from coverage under the facility until its delivery.

On April 27, 2007, the Company received an additional waiver under the facility with respect to the formation of six additional shipowning companies and to clarify that only the Company’s interest in the relevant shipowning companies will be used in calculating compliance with the financial covenants under the facility.

Second Amendment

On July 5, 2007, the Company further amended the credit facility (the “Second Amendment”). The Second Amendment contemplated the completion of the Company’s transaction relating to the sale-leaseback of seven vessels in its existing fleet and the effectiveness of the terms of the Second Amendment was contingent upon the completion of that transaction and the mandatory prepayment of $185 million of the amount outstanding under the Facility from the funds received in the sale-leaseback. As of July 25, 2007, the Company had completed the sale-leaseback and prepaid $185.0 million. The material terms of the Amendment are:

 

   

approval of the release of the security interests on the ships sold in the sale-leaseback and other related collateral contemporaneously with consummation of the sale-leaseback;

 

   

approval of the Company’s guarantee of the obligations under the sale-leaseback;

 

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permission to borrow up to $55.2 million, which is equal to 60% of the purchase price of a newbuilding Capesize vessel to be purchased by the Company from an affiliate of Itochu Corporation, and is expected to be delivered in the fourth quarter of 2008, thereby adjusting the maximum available amount under the facility to $735.2 million after the borrowings for this vessel; and

 

   

a revised schedule of quarterly commitment reductions as follows:

 

  ¡  

Two reductions of $10,000,000 each, beginning on July 1, 2007, followed by

 

  ¡  

Four reductions of $13,750,000 each, followed by

 

  ¡  

23 reductions of $12,125,000 each, with the final reduction occurring on the maturity date together with a balloon reduction equal to the lesser of $381,325,000 or remaining amounts outstanding under the Facility.

In addition, the Second Amendment contains customary representations and warranties made by the Company to its lenders. Except as specified in the Second Amendment, the Facility remains in full force and effect.

Security. Our obligations under the credit facility are secured by (i) first priority cross-collateralized mortgages over the vessels; (ii) first priority assignment of all insurances, operational accounts and earnings of the vessels; (iii) first priority pledges over the operating accounts held with the agent, (iv) assignments of existing and future charters for the vessels, and (v) assignments of interest rate swaps.

Interest. Borrowings under the revolving credit facility bear interest at the rate of LIBOR plus 0.85% per annum (until December 31, 2010) and LIBOR plus 1.10% per annum thereafter. The full amount borrowed under the revolving credit facility will mature on September 30, 2014.

Commitment Fee. We pay a commitment fee of 0.45% per annum on the undrawn amount of commitments under the credit facility. This fee is payable quarterly in arrears.

Repayment. Under the facility in effect as at December 31, 2007 the remaining 27 installments are as follows:

 

•        Reductions 1-4 (January 1, 2008 – December 31, 2008):

   $ 13,750,000

•        Reductions 5 to 27 (January 1, 2009 through September 30, 2014):

   $ 12,125,000

Together with the final repayment, there is a balloon reduction equal to the lesser of either $381,325,000 or the remaining commitments after the last reduction. The repayment schedule takes into account the permission to borrow an additional $55.2 million to part finance the delivery installments of Iron Endurance as discussed under Second Amendment above. The Company may prepay the loans at any time in whole or part without penalty. If the outstanding amount of the loan exceeds the maximum available amount following permanent commitment reduction, a mandatory prepayment is required equal to such excess.

Conditions. We are subject to customary conditions precedent before we may borrow under the facility, including that no event of default is ongoing or would result from the borrowing, that our representations and warranties are true and that no material adverse change has occurred.

Financial Covenants. The loan agreement also requires us to comply with the following financial covenants:

 

   

maintenance of fair market value of ship collateral equal to at least 115% of the outstanding loans (until December 31, 2010) and 125% of the outstanding loans thereafter;

 

   

maintenance of an interest coverage ratio of not less than 2.0 to 1;

 

   

maintenance of a leverage ratio (total debt to market adjusted total assets) of no greater than 0.75 to 1;

 

   

maintenance of market value adjusted net worth of at least $200,000,000.

 

   

maintenance of minimum liquidity (cash or time deposits plus available credit line) of $550,000 per ship increasing to $741,000 per ship in 8 quarterly adjustments starting April 1, 2009.

As of December 31, 2007, the Company was in compliance with all relevant covenants.

Restrictive Covenants. The facility contains customary restrictive covenants.

Use of Borrowings. The Company may use borrowings under the loan agreement to (i) refinance the debt outstanding under the old credit facility, (ii) partially finance the acquisition cost of seventeen new vessels that the Company has contracted to acquire, (iii) finance part of the acquisition cost of other additional vessels, which acquisitions are subject to approval of the facility agent and the satisfaction of certain other conditions on the vessels, and (iv) finance up to $20 million

 

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of working capital. In addition, the Company was permitted to draw down under the facility to pay down the old revolving credit facility. We may not use borrowings to pay dividends.

Events of Default. The loan agreement contains customary events of default, including nonpayment of principal or interest, breach of covenants or material inaccuracy of representations, default under other material indebtedness, bankruptcy, and change of control. We are not permitted to pay dividends if an event of default has occurred or if the payment of such dividend would result in an event of default. Consummation of the proposed merger would result in an event of default under the facility. Consequently, it is currently proposed that the facility be refinanced immediately prior to the consummation of the merger.

Waivers. Under the facility, we were required to raise an additional $33 million through the issuance of equity before we drew down on the facility to finance any of the last six vessels to be delivered in connection with the Metrobulk acquisition. On December 15, 2006, we obtained a waiver of that requirement for a period of three months, until March 15, 2007. As of February 28, 2007, the Company had received sufficient proceeds from the exercise of warrants to satisfy this requirement.

Old Revolving Credit Facility

Our terminated revolving credit facility, dated October 4, 2005, was a secured, 8-year, $250 million revolving credit facility. Indebtedness under the old revolving credit facility bore interest at a rate equal to LIBOR + 0.975%. As of December 31, 2005, $210 million was outstanding under the revolving credit facility at an average interest rate of 5.28%. On July 21, 2006, we repaid the outstanding principal amount of $90.0 million and terminated the facility. In connection with the termination of the facility, we wrote off approximately $1.8 million of deferred finance fees and related legal fees, which was a non-cash item.

Shelf Registration Statement

On June 19, 2006 we filed a resale registration statement on Form S-1 with the Securities and Exchange Commission, registering 2,045,558 units, 2,045,558 shares of 12% Mandatorily Convertible Preferred Stock, and 8,182,232 Class A Warrants. Subsequent to the conversion of the preferred stock and the Company’s eligibility to file a registration statement on Form S-3, this registration was amended to be filed on Form S-3 and cover only the warrants and the common stock issued upon conversion of the preferred stock and the common stock issuable upon exercise of the warrants. We received proceeds from the initial sale of preferred stock and we continue to receive proceeds from the ongoing exercise of warrants, but we do not receive any proceeds from the sales of these securities by third parties, including subsequent sales of the common stock into which the preferred stock was converted and sales of common stock issued as a result of warrant exercises. On September 20, 2006, this registration statement was declared effective by the SEC.

Contractual Obligations

The following table sets forth our expected contractual obligations and their maturity dates as of December 31, 2007 (in millions):

 

     Within
One Year
   One to
Three
Years
   Three to
Five Years
   More
Than Five
Years
   Total

Revolving credit facility (1)

   $ 55.0    $ 97.0    $ 97.0    $ 466.2    $ 715.2

Interest on credit facility (2)

     38.1      66.8      51.4      35.8      192.1

Acquisition of vessels (3)

     73.2      —        —        —        73.2

Property leases

     0.8      0.6      —        —        1.4

Bareboat charter hire cost (4)

     32.9      65.7      65.8      81.9      246.3

Company obligations to joint ventures (5)

     35.1      220.1      —        —        255.2
                                  

Total

   $ 235.1    $ 450.2    $ 214.2    $ 583.9    $ 1,483.4
                                  

 

(1) The repayment schedule assumes that the Company draws down on the additional $55.2 million permitted under Amendment 2 of the revolving credit facility, which remained undrawn as of December 31, 2007.
(2) The revolving credit facility bears interest at a variable rate based on LIBOR, but the Company has fixed the rate at 5.985% until December 31, 2010 in connection with its swap agreement. Interest payable from the expiration of the swap agreement until the expiration of the facility has been calculated using interest rate of 5.6%, the most recent interest rate fixed for the loan.

 

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(3) Represents the advances payable to the seller of Iron Endurance. Refer to Note 4 of the accompanying consolidated financial statements for further details.
(4) Represents amounts payable under bareboat charters to buyers of vessels in sale-leaseback transaction.
(5) Represents the Company’s contractual obligations for payments due to the joint ventures under the joint venture contracts. The following table sets forth the expected contractual obligations and their maturity dates (in millions) of the six joint ventures, including the portions payable by the Company’s partners, as of December 31, 2007:

 

     Within
One Year
   One to
Three
Years
   Three to
Five Years
   More
Than Five
Years
   Total

Royal Bank of Scotland credit facility (1)

   $ 22.2    $ 7.6    —      —      $ 29.8

Interest on Royal Bank of Scotland credit facility (2)

     1.1      0.6    —      —        1.7

Advances due for Christine newbuilding (3)

     10.9      50.7    —      —        61.6

Advances due for newbuilding STX vessels (4)

     8.1      119.1    —      —        127.2

Advances due for newbuilding KSC vessels (5)

     62.2      248.6    —      —        310.8
                              

Total

   $ 104.5    $ 426.6    —      —      $ 531.1
                              

 

(1) Represents the scheduled loan repayments to be made by the joint ventures under the loan facilities relating to Christine Shipco LLC, Lillie Shipco LLC, and Hope Shipco LLC (the “JV Loans”) for amounts drawn down under the facilities as at December 31, 2007. Refer to Note 9 of the accompanying consolidated financial statements for further information.
(2) Interest obligations on the JV Loans have been calculated using an interest rate of 5.4%, the most recent interest rate fixed for the loans.
(3) Represents the advances payable by Christine Shipco LLC to Imabari for the construction of the Capesize newbuilding. Under the joint venture agreement, the company is not required to pay any capital contributions to Christine Shipco LLC until delivery of the vessel. On delivery, the Company will pay approximately $36.2 million, which may be financed through a new loan facility, cash on hand, or both. Refer to Note 9 of the accompanying consolidated financial statements for further information.
(4) Represents the advances payable by Hope Shipco LLC and Lillie Shipco LLC to STX for the construction of the 2 Capesize newbuildings. Refer to Note 10 of the accompanying consolidated financial statements for further information.
(5) Represents the advances payable to KSC for the construction of 4 Capesize newbuildings. Refer to Note 10 of the accompanying consolidated financial statements for further information.

Off-balance Sheet Arrangements

We do not have any contractual off-balance sheet arrangements.

Critical Accounting Policies

Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. We have described below what we believe will be our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application.

Impairment of long-lived assets

Long-lived assets and certain identifiable intangibles held and used or disposed of by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company evaluates the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset as provided by third parties. In this respect, management regularly reviews the carrying amount of the vessels in connection with the estimated recoverable amount for each of our vessels.

Vessel depreciation

Depreciation is computed using the straight-line method over the estimated useful lives 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

 

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rate. Management estimates the useful lives of our 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 lives. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted to end at the date such regulations become effective.

Drydocking costs

There are two methods that are used by the shipping industry to account for drydockings; first, the deferral method, whereby specific costs associated with a drydocking are capitalized when incurred and amortized on a straight-line basis over the period to the next scheduled drydock; and secondly, the direct expensing method, whereby drydocking costs are expensed in the period incurred. The Company uses the deferral method of accounting for drydock expenses. Under the deferral method, drydock expenses are capitalized and amortized on a straight-line basis until the date that the vessel is expected to undergo its next drydock, generally between 30 and 60 months, depending on the age of the vessel and the category of drydocking the vessel will undergo. We believe the deferral method better matches costs with revenue. We use judgment when estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense. With the exception of vessels sold under a sale-leaseback transaction, if the vessel is disposed of before the next drydock, the unamortized drydock balance is written-off to the gain or loss upon disposal of vessels in the period the sale is concluded. For vessels sold under sale-leaseback transactions, their associated dry docking costs remain on the consolidated balance sheet and are amortized on a straight-line basis through the next drydocking date. We expect that our vessels will be required to be drydocked approximately every 30 to 60 months in accordance with class requirements for major repairs and maintenance. Costs capitalized as part of the drydocking include actual costs incurred at the drydock yard and parts and supplies used in undertaking the work necessary to meet class requirements.

Fair Value of Time Charter

When vessels are acquired with time charters attached and the charterhire on such charters is above market, we allocate the total purchase price of the vessel between the vessel and a deferred asset equal in amount to the present value of the charter. This present value is computed as the difference between the contractual amount to be received over the term of the time charter and management’s estimate of the fair value of the time charter at the time of acquisition. The discount rate reflects the risks associated with the acquired time charter. The deferred time charter premium is amortized over the remaining period of the time charter as a reduction to hire revenue.

Consolidated Joint Ventures

As of December 31, 2007, the Company had entered into 7 joint venture agreements for the formation of joint venture ship-owning companies. Each of the joint ventures were formed to purchase a newbuilding capesize drybulk carrier (refer to “Note 10—Related Party Transactions” of the accompanying consolidated financial statements for further details). Christine Shipco LLC is owned 42.8% by the Company and 28.6% by each of Robertson Maritime Investors LLC (“RMI”), an affiliate of Corbin J. Robertson, Jr. and AMCIC Cape Holdings LLC (“AMCIC”), an affiliate of Hans J. Mende. Each of the other 6 joint ventures, Lillie Shipco LLC, Hope Shipco LLC, Fritz Shipco LLC, Benthe Shipco LLC, Gayle Frances Shipco LLC, and Iron Lena Shipco LLC are each owned 50% by the Company and 50% by AMCIC.

The Company evaluates its relationships with other entities to identify whether they are variable interest and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements. The Company does not hold a majority voting interest in any of the joint ventures but has determined that each joint venture is a variable interest entity and that the Company is, in each case, the primary beneficiary. As such, the Company consolidates the joint ventures. The joint venture partners’ share of the net income or loss of the joint ventures is presented separately in the accompanying consolidated income statements as minority interests. The partners’ share of net assets is presented separately in the accompanying consolidated balance sheets as minority interests.

Recent accounting pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and

 

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penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective beginning in fiscal year 2007. Based on our expectation that the Company will continue not to be liable for income taxes in either the Marshall Islands or in the United States, the adoption of FIN 48 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities.” FSP AUG AIR-1 addresses the accounting for planned major maintenance activities. Specifically, the FSP prohibits the practice of the accrue-in-advance method of accounting for planned major maintenance activities. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. Because the Company does not use the accrue-in-advance method, the adoption of FSP AUG AIR-1 did not have a material impact on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which enhances existing guidance for measuring assets and liabilities at fair value. Previously, guidance for applying fair value was incorporated in several accounting pronouncements. The new statement provides a single definition of fair value, together with a framework for measuring it and requires additional disclosure about the use of fair value to measure assets and liabilities. While the statement does not require any new fair value measurements, it does change certain current practices. The Company has adopted SFAS 157 for the fiscal year starting January 1, 2008 and does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). Under this statement, entities may voluntarily and irrevocably choose to measure certain financial assets and liabilities, on an instrument-by-instrument basis, at fair value. Subsequent changes for the elected instruments must be reported in earnings. The Company has adopted SFAS 159 for the fiscal year starting January 1, 2008 and does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). The statement is an amendment to ARB No. 51 and establishes accounting and reporting standards for minority interests, including disclosures relating to presentation of minority interests on the face of the balance sheet and income statement as well as reporting requirements relating to changes in a parent’s ownership interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of this standard but believes that its implementation is unlikely to have a material impact on the financial position of the Company.

In December, 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). The Statement is a revision of SFAS No. 141, Business Combinations, issued in June 2001, designed to improve the relevance, representational fairness and comparability and information that a reporting entity provides about a business combination and its effects. The Statement establishes principals and requirements for how the acquirer recognizes assets, liabilities and non-controlling interests, how to recognize and measure goodwill and the disclosures to be made. The statement applies to all transactions in which an entity obtains control of a business and is effective for the Company for acquisitions on or after January 1, 2009. The Company is currently evaluating the impact of the adoption of this standard, if any.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

Effective July 1, 2006, we entered into an interest-rate swap transaction with respect to our revolving credit facility. Because the revolving credit facility provided for variable-rate interest, management determined that an interest-rate swap would best protect the Company from interest-rate risk on amounts outstanding under its revolving credit facility. This swap effectively insulates us from interest-rate risk relating to the floating rates payable under the facility until December 31, 2010, as we are required to pay a fixed rate of 5.135%, exclusive of spread due our lenders. On December 31, 2010, the counterparty to the swap may exercise an option to lock our fixed rate at 5.00% through June 30, 2014. If the counterparty does not exercise this option, we will be exposed to interest-rate risk on the outstanding balance of the revolving credit facility at that time. Additionally, we are subject to interest-rate risk relating to the floating-rate interest on the Joint Venture loan facilities with The Royal Bank of Scotland. A 1% increase in LIBOR would have resulted in an increase in interest expense payable by the joint ventures for the year ended December 31, 2007 of approximately $0.2 million.

We may have sensitivity to interest rate changes with respect to future debt facilities.

 

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Currency and Exchange Rates

We expect to generate all of our revenue in U.S. Dollars. The majority of our operating expenses and management expenses are in U.S. Dollars, and we expect to incur up to approximately 20% of our operating expenses in currencies other than U.S. Dollars. The majority of these expenses are denominated in Euros. This difference could lead to fluctuations in net income due to changes in the value of the U.S. Dollar relative to other currencies, but we do not expect such fluctuations to be material.

As of December 31, 2007, we had no open foreign currency exchange contracts. During 2007, we were party to the following foreign currency exchange contract:

 

Contract Date

   Notional Amount (€)    For Value    Rate ($/€)

August 14, 2007

   1,000,000    September 14, 2007    1.345

We were party to the following forward currency exchange contracts during 2006, all of which closed during 2006 and 2007:

 

Contract Date

   Notional Amount (€)    For Value    Rate ($/€)

September 26, 2006

   1,000,000    March 26, 2007    1.2800

September 29, 2006

   1,000,000    December 29, 2006    1.2745

October 6, 2006

   1,000,000    June 29, 2007    1.2795

October 10, 2006

   1,000,000    September 28, 2007    1.2725

We were not party to any foreign currency exchange contracts during the period January 13, 2005 (inception) to December 31, 2005.

In the future, we may enter into additional financial derivatives to mitigate the risk of exchange rate fluctuations.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of independent registered public accounting firm

   45

Consolidated balance sheets as of December 31, 2007 and 2006

   46

Consolidated income statements for the years ended December 31, 2007 and 2006 and the period from January 13, 2005 (inception) to December 31, 2005

   47

Consolidated statements of shareholders’ equity for the years ended December 31, 2007 and 2006 and the period from January 13, 2005 (inception) to December 31, 2005

   48

Consolidated statements of cash flows for the year ended December 31, 2007 and 2006 and the period from January 13, 2005 (inception) to December 31, 2005

   49

Notes to consolidated financial statements

   50

Supplementary Data

   75

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Quintana Maritime Limited

We have audited the accompanying consolidated balance sheets of Quintana Maritime Limited and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2007 and the period from January 13, 2005 (inception) through December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Quintana Maritime Limited and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007 and the period from January 13, 2005 (inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2008, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte

Deloitte.

Hadjipavlou, Sofianos & Cambanis S.A.

Athens, Greece

February 27, 2008

 

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QUINTANA MARITIME LIMITED

CONSOLIDATED BALANCE SHEETS

(All amounts expressed in thousands of U.S. Dollars except share data)

 

      December 31,  
      2007     2006  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 115,959     $ 21,335  

Inventories

     2,402       1,649  

Due from charterers, net

     371       1,159  

Other receivables

     1,782       1,196  

Prepaid expenses and other current assets

     2,692       986  
                

Total current assets

     123,206       26,325  

Property and equipment:

    

Vessels, net of accumulated depreciation of $55,883 and $40,899

     1,020,735       987,623  

Advances for acquisition of vessels / newbuildings

     63,137       26,310  

Other fixed assets, net of accumulated depreciation of $601 and $265

     818       429  
                

Total property and equipment

     1,084,690       1,014,362  

Deferred charges:

    

Financing costs, net of accumulated amortization of $1,295 and $210

     4,657       4,588  

Time charter premium, net of accumulated amortization of $4,662 and $2,551

     4,838       6,949  

Dry docking costs, net of accumulated amortization of $1,721 and $970

     8,659       5,216  

Loss on sale-leaseback, net of accumulated amortization of $188 and $0

     3,180       —    
                

Total assets

   $ 1,229,230     $ 1,057,440  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 77,218     $ 47,000  

Accounts payable

     4,309       5,369  

Sundry liabilities and accruals

     14,233       2,776  

Deferred income

     14,497       2,777  
                

Total current liabilities

     110,257       57,922  

Long-term debt

     612,600       564,960  

Unrealized interest-rate swap loss

     30,093       9,840  
                

Total liabilities

     752,950       632,722  
                

Commitments and contingencies

    

Minority interests in equity of consolidated joint ventures

     9,053       —    

Shareholders’ equity:

    

Common stock at $0.01 par value—100,000,000 shares authorized, 56,515,218 and 50,026,533 shares outstanding

     566       501  

Preferred stock at $0.01 par value—100,000 shares authorized, none issued

     —         —    

Additional paid-in capital

     495,053       442,776  

Common stock to be issued for warrants exercised

     —         1,438  

Accumulated deficit

     (28,392 )     (19,997 )
                

Total shareholders’ equity

     467,227       424,718  
                

Total liabilities and shareholders’ equity

   $ 1,229,230     $ 1,057,440  
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUINTANA MARITIME LIMITED

CONSOLIDATED INCOME STATEMENTS

(All amounts expressed in thousands of U.S. Dollars except per share data)

 

     Year Ended
December 31, 2007
    Year Ended
December 31, 2006
    Period From January 13,
2005 (inception) to
December 31, 2005
 

Revenues:

      

Time charter revenue

   $ 244,688     $ 103,667     $ 42,062  

Voyage revenue

     3,096       4,474       —    

Commissions

     (11,381 )     (4,824 )     (1,787 )
                        

Net revenue

     236,403       103,317       40,275  

Expenses:

      

Vessel operating expenses

     36,721       17,489       7,411  

Voyage expenses

     104       4,083       —    

Charter hire expense

     14,592       —         —    

General and administrative expenses

     17,063       10,790       5,301  

Costs related to sale process

     1,380       —         —    

Depreciation and amortization

     52,124       30,486       11,648  
                        

Total expenses

     121,984       62,848       24,360  
                        

Operating income

     114,419       40,469       15,915  

Other (expenses) / income:

      

Interest expense

     (44,379 )     (16,615 )     (5,367 )

Interest income

     3,200       1,199       228  

Finance costs

     (1,085 )     (2,169 )     (5,190 )

Interest-rate swap loss, net

     (19,367 )     (9,840 )     —    

Foreign exchange gains / (losses) and other, net

     800       (300 )     (58 )
                        

Total other expenses

     (60,831 )     (27,725 )     (10,387 )

Minority interest in net loss of consolidated joint ventures

     180       —         —    

Net income

   $ 53,768     $ 12,744     $ 5,528  
                        

Weighted average shares outstanding:

      

Basic

     54,675,962       33,568,793       14,134,268  
                        

Diluted

     56,630,332       34,680,371       14,239,907  
                        

Per share amounts:

      

Basic earnings per share

   $ 0.98     $ 0.38     $ 0.39  
                        

Diluted earnings per share

   $ 0.95     $ 0.37     $ 0.39  
                        

Cash dividends declared per ordinary share

   $ 1.10     $ 0.84     $ 0.25  
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUINTANA MARITIME LIMITED

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(All amounts expressed in thousands of U.S. Dollars except share data)

 

     Number
of Shares
   Common
Stock,
$0.01
Par
Value
   Additional
Paid-in
Capital
   Common
Stock To
Be Issued
For
Warrants
Exercised
    Accumulated
Deficit
    Total  

Balance at January 13, 2005

   —        —        —        —         —         —    

Issuance of common stock and capital contributions

   6,319,492      63      68,342      —         —         68,405  

Initial public offering, net of issuance costs

   16,968,500      170      180,592      —         —         180,762  

Stock-based compensation

   —        —        616      —         —         616  

Dividends paid

   —        —        —        —         (5,888 )     (5,888 )

Net income

   —        —        —        —         5,528       5,528  
                                           

Balance, December 31, 2005

   23,287,992    $ 233    $ 249,550      —       $ (360 )   $ 249,423  
                                           

Preferred stock conversion, net of issuance costs

   25,569,462      256      182,443      —         —         182,699  

Warrants exercised, net

   1,062,079      11      8,486      —         —         8,497  

Common stock to be issued for warrants exercised

   —        —        —        1,438       —         1,438  

Stock-based compensation

   107,000      1      2,297      —         —         2,298  

Dividends paid

   —        —        —        —         (32,381 )     (32,381 )

Net income

   —        —        —        —         12,744       12,744  
                                           

Balance, December 31, 2006

   50,026,533    $ 501    $ 442,776    $ 1,438     $ (19,997 )   $ 424,718  
                                           

Warrants exercised, net

   6,096,085      61      46,762      —         —         46,823  

Common stock to be issued for warrants exercised

   188,400      2      1,436      (1,438 )     —         —    

Stock-based compensation

   204,200      2      4,079      —         —         4,081  

Dividends paid

   —        —        —        —         (62,163 )     (62,163 )

Net income

   —        —        —        —         53,768       53,768  
                                           

Balance, December 31, 2007

   56,515,218    $ 566    $ 495,053      —       $ (28,392 )   $ 467,227  
                                           

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUINTANA MARITIME LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(All amounts expressed in thousands of U.S. Dollars)

 

      Year Ended
December 31, 2007
    Year Ended
December 31, 2006
    Period from
January 13, 2005
(inception) to
December 31, 2005
 

Cash flows from operating activities:

      

Net income

   $ 53,768     $ 12,744     $ 5,528  

Adjustments to reconcile net income to net cash from operating activities:

      

Depreciation and amortization

     52,124       30,486       11,648  

Amortization of deferred finance costs

     1,085       2,169       5,190  

Amortization of time charter fair value

     2,111       2,111       440  

Amortization of loss on sale-leaseback

     188       —         —    

Stock-based compensation

     4,081       2,298       616  

Minority interest share in net loss of consolidated joint ventures

     (180 )     —         —    

Unrealized interest rate swap loss

     20,253       9,840       —    

Changes in assets and liabilities:

      

Increase in inventories

     (753 )     (1,271 )     (378 )

Decrease / (Increase) in due from charterers, net

     788       85       (1,244 )

Increase in other receivables

     (586 )     (716 )     (480 )

Increase in prepaid expenses and other current assets

     (1,706 )     (119 )     (867 )

(Decrease) / Increase in accounts payable

     (1,060 )     3,895       1,474  

Increase / (Decrease) in sundry liabilities and accruals

     11,265       (637 )     3,413  

Increase in deferred income

     11,720       1,061       1,716  

Deferred dry-dock costs paid

     (5,202 )     (4,986 )     (1,200 )
                        

Net cash from operating activities

   $ 147,896     $ 56,960     $ 25,856  
                        

Cash flows from investing activities:

      

Vessel acquisitions

     (309,360 )     (570,738 )     (457,784 )

Advances for vessel acquisitions / newbuildings

     (63,137 )     (26,310 )     —    

Vessel disposal, net of commissions

     249,354       —         —    

Purchases of other fixed assets

     (725 )     (251 )     (443 )

Time charter premium

     —         —         (9,500 )
                        

Net cash used in investing activities

   $ (123,868 )   $ (597,299 )   $ (467,727 )
                        

Cash flows from financing activities:

      

Proceeds from long-term debt

     282,857       611,960       628,621  

Repayment of long-term debt

     (205,000 )     (210,000 )     (418,621 )

Payment of financing costs

     (1,154 )     (4,798 )     (7,149 )

Proceeds from preferred stock issuance, net

     —         182,699       —    

Proceeds from exercise of warrants, net

     46,823       8,497       —    

Common stock to be issued for warrants exercised

     —         1,438       —    

Paid-in capital and common stock

     —         —         68,405  

Proceeds from initial public offering

     —         —         182,942  

Issuance costs of initial public offering

     —         —         (2,180 )

Contributions from minority interest holders of consolidated joint ventures

     9,233       —         —    

Dividends paid

     (62,163 )     (32,381 )     (5,888 )
                        

Net cash from financing activities

   $ 70,596     $ 557,415     $ 446,130  
                        

Net increase in cash and cash equivalents

     94,624       17,076       4,259  

Cash and cash equivalents at beginning of period

     21,335       4,259       —    
                        

Cash and cash equivalents at end of the period

   $ 115,959     $ 21,335     $ 4,259  
                        

Supplemental disclosure of cash flow information:

      

Cash paid during the period for interest

   $ 36,352     $ 18,994     $ 3,064  

Capitalized interest on newbuildings

     2,232       —         —    

Non-cash investing and financing activities:

      

Conversion of 12% Mandatorily Convertible Preference Stock

     —         190,938       —    
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUINTANA MARITIME LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts expressed in U.S. dollars except as otherwise noted)

1. Basis of Presentation and General Information

The Company

The accompanying consolidated financial statements include the accounts of Quintana Maritime Limited and its wholly owned subsidiaries (collectively, the “Company”).

Quintana Maritime Limited is a holding company incorporated on January 13, 2005, under the Laws of the Republic of the Marshall Islands. Through its subsidiaries, the Company is engaged in the marine transportation of dry bulk cargoes through the ownership and operation of dry bulk vessels.

The Company was formed by companies controlled by each of Corbin J. Robertson Jr., First Reserve Corporation (“FRC”) and American Metals & Coal International, Inc. (“AMCI”). On July 20, 2005, the Company completed its initial public offering.

Except as otherwise noted, the Company is the sole owner of all of the outstanding shares of the following subsidiaries as of December 31, 2007, each of which was formed in the Marshall Islands for the purpose of owning a vessel in the Company’s fleet:

 

Company

  

Vessel Type

  

Deadweight
Tonnage (in
tonnes)

  

Built

  

Vessel Delivery Date

Fearless Shipco LLC (1)

   Panamax    73,427    1997    April 11, 2005

King Coal Shipco LLC (1)

   Panamax    72,873    1997    April 12, 2005

Coal Glory Shipco LLC (1)

   Panamax    73,670    1995    April 13, 2005

Coal Age Shipco LLC (1)

   Panamax    72,861    1997    May 4, 2005

Iron Man Shipco LLC (1)

   Panamax    72,861    1997    May 6, 2005

Barbara Shipco LLC (1)

   Panamax    73,390    1997    July 20, 2005

Coal Pride Shipco LLC

   Panamax    72,600    1999    August 16, 2005

Linda Leah Shipco LLC (1)

   Panamax    73,390    1997    August 22, 2005

Iron Beauty Shipco LLC

   Capesize    165,500    2001    October 18, 2005

Kirmar Shipco LLC

   Capesize    165,500    2001    November 11, 2005

Iron Vassilis Shipco LLC

   Kamsarmax    82,000    2006    July 27, 2006

Iron Fuzeyya Shipco LLC

   Kamsarmax    82,229    2006    August 14, 2006

Iron Bradyn Shipco LLC

   Kamsarmax    82,769    2006    August 21, 2006

Grain Harvester Shipco LLC

   Panamax    76,417    2004    September 5, 2006

Santa Barbara Shipco LLC

   Kamsarmax    82,266    2006    September 5, 2006

Iron Bill Shipco LLC(2)

   Kamsarmax    82,000    2006    September 7, 2006

Ore Hansa Shipco LLC

   Kamsarmax    82,229    2006    September 15, 2006

Iron Anne Shipco LLC

   Kamsarmax    82,000    2006    September 25, 2006

Iron Kalypso Shipco LLC

   Kamsarmax    82,204    2006    September 25, 2006

Grain Express Shipco LLC

   Panamax    76,466    2004    October 9, 2006

 

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Iron Knight Shipco LLC

   Panamax    76,429    2004    January 24, 2007

Coal Gypsy Shipco LLC

   Kamsarmax    82,300    2006    November 24, 2006

Pascha Shipco LLC

   Kamsarmax    82,300    2006    December 15, 2006

Coal Hunter Shipco LLC

   Kamsarmax    82,300    2006    December 20, 2006

Iron Lindrew Shipco LLC

   Kamsarmax    82,300    2007    February 16, 2007

Iron Miner Shipco LLC

   Capesize    177,000    2007    March 13, 2007

Iron Brooke Shipco LLC

   Kamsarmax    82,300    2007    March 20, 2007

Iron Manolis Shipco LLC

   Kamsarmax    82,300    2007    April 3, 2007

Lowlands Beilun Shipco LLC(3)

   Capesize    170,162    1999    April 10, 2007

Iron Endurance Shipco LLC

   Capesize    180,000    TBD 2008    Expected Q4, 2008

Christine Shipco LLC(4)

   Capesize    180,000    TBD 2010    Expected Q1, 2010

Hope Shipco LLC(5)

   Capesize    181,000    TBD 2010    Expected Q4, 2010

Lillie Shipco LLC(5)

   Capesize    181,000    TBD 2010    Expected Q4, 2010

Fritz Shipco LLC(5)

   Capesize    180,000    TBD 2010    Expected Q2, 2010

Benthe Shipco LLC(5)

   Capesize    180,000    TBD 2010    Expected Q2, 2010

Gayle Frances Shipco LLC(5)

   Capesize    180,000    TBD 2010    Expected Q3, 2010

Iron Lena Shipco LLC(5)

   Capesize    180,000    TBD 2010    Expected Q4, 2010

 

(1) Indicates a vessel sold to a third party in July 2007 and subsequently leased back to Company
(2) Formerly Iron Elisabeth Shipco LLC
(3) Formerly Coal Heat Shipco LLC
(4) Christine Shipco is owned 42.8% by the Company
(5) Consolidated joint venture 50% owned by the Company

The operations of all the Company’s vessels are managed by a wholly owned subsidiary, Quintana Management LLC.

In December 2005, the Company formed a wholly owned subsidiary, Quintana Logistics LLC, to engage in chartering operations, including entry into contracts of affreightment. Under a contract of affreightment, the Company would agree to transport a specified amount of cargo at a specified rate per ton between designated ports over a particular period of time. The contracts of affreightment generally do not specify particular vessels, so the Company would be permitted either to use its own vessel or to charter in a third-party vessel.

2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Quintana Maritime Limited and its subsidiaries referred to in Note 1. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

 

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liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation

The functional currency of the Company is the U.S. Dollar, since the Company’s vessels operate in international shipping markets, which use the U.S. Dollar as their functional currency. As such, the Company’s accounting records are maintained in U.S. Dollars. Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the balance sheet dates, monetary assets and liabilities, which are denominated in other currencies, are translated to reflect the year-end exchange rates. Resulting gains or losses are reflected separately in the accompanying consolidated statements of operations.

Cash and Cash Equivalents

The Company considers highly liquid investments, such as time deposits and certificates of deposit with an original maturity of three months or less, to be cash equivalents.

Due from Charterers, net

Due from charterers, net includes accounts receivable from charters net of the provision for doubtful accounts. At each balance sheet date, the Company provides for the provision based on a review of all outstanding charter receivables. As of December 31, 2007 and 2006, the allowance for bad debt was $187 thousand.

Revenue is based on contracted charterparties and, although the Company’s business is with customers whom the Company believes to be of the highest standard, there is always the possibility of dispute over terms and payment of hires and freights. In particular, disagreements may arise as to the responsibility of lost time and revenue due to the Company as a result. As such, the Company periodically assesses the recoverability of amounts outstanding and estimates a provision if there is a possibility of non-recoverability. Although the Company believes its provisions to be reasonable at the time they are made, it is possible that an amount under dispute is not ultimately recovered and the estimated provision for doubtful accounts is inadequate.

Inventories

Inventories consist of lubricants, which are stated at the lower of cost or market value. Cost is determined by the weighted average method.

Other Fixed Assets

Other fixed assets, net, are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the specific asset placed in service. We use the following useful lives to calculate depreciation:

 

Description of Asset

   Useful
Life

Leasehold improvement (1)

   2 years

Furniture, fixtures, and other equipment

   4 years

Computer equipment

   4 years

 

(1) Leasehold improvements are depreciated over the shorter of 2 years or the remaining term of the lease.

Impairment of Long-lived Assets

Long-lived assets and certain identifiable intangibles held and used or disposed of by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company evaluates the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset as provided by third parties. In this respect, management regularly reviews the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Company’s vessels. No impairment was recognized during the years ended December 31, 2007 or 2006.

Vessel Cost

Vessels are stated at cost, which consists of the contract price and any material expenses directly attributable to acquisition, including initial repairs, pre-delivery improvements and delivery expenses. Expenditures for conversions and

 

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major improvements are capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels; otherwise these amounts are expensed as incurred.

Vessel Depreciation

Depreciation is computed using the straight-line method over the estimated useful lives 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 of $220 per lightweight ton. Management estimates the useful lives 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 lives. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted to end at the date such regulations become effective.

Time Charter Premium

When vessels are acquired with time charters attached and the hire rates on such charters are above the prevailing market rate at the time of acquisition, the Company allocates the total purchase price of the vessel between the vessel charter-free value and a deferred asset equal in amount to the present value of the attached charter. This present value is computed as the difference between the contractual amount to be received over the term of the time charter and management’s estimates of the fair value of the time charter at the time of acquisition. The discount rate reflects the risks associated with the acquired time charter. The deferred time charter premium is amortized over the remaining period of the time charter as a reduction to time charter revenue.

Deferred Drydocking Costs

The Company follows the deferral method of accounting for drydocking costs, whereby actual costs incurred are deferred and are amortized on a straight-line basis over the period through the date of the next drydocking, which is typically 30 to 60 months. Unamortized drydocking costs of vessels that are sold are written off, unless the vessel is subject to a sale-leaseback transaction.

Deferred Financing Costs

Fees incurred for obtaining new loans or refinancing existing ones are deferred and amortized to interest expense over the life of the related debt. Unamortized fees relating to loans repaid or refinanced are expensed in the period the repayment or refinancing is made.

Sale-Leaseback Transaction

The Company may from time to time enter into sale-leaseback transactions with third parties in which the Company is the lessee. Leases are classified as capital leases when substantially all the risk and rewards of ownership remain with the Company. All other leases are classified as operating leases.

All the Company’s sale-leaseback transactions have been classified as operating leases. Any profit or loss on the sale of these vessels is deferred and amortized over the lease term to charterhire expense.

Dry-docking costs for vessels sold and leased back remain on the balance sheet and are amortized on a straight-line basis over the period through the next dry docking date. Future dry docking costs for the vessels will be deferred and amortized through the next dry-docking date or through the termination of the lease, whichever comes first. Operating lease payments are charged to expense on a straight-line basis over the lease term. Refer to Note 11 for further information.

Pension and Retirement Benefit Obligations—Crew

The shipowning companies included in the consolidation employ the crew on board under short-term contracts (usually up to eight months) and, accordingly, are not liable for any pension or post-retirement benefits.

 

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Deferred Income

Deferred income primarily relates to cash received from charterers prior to it being earned. These amounts are recognized as income when earned.

Revenues and Expenses

Revenues are generated from voyage and time-charter agreements. Time-charter revenues are recorded over the term of the charter as service is provided. Under a voyage charter, the revenues and associated voyage costs are recognized on a pro-rata basis over the duration of the voyage. Losses on voyages are provided for in full at the time such losses can be estimated. A voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo. Vessel operating expenses and general and administrative expenses are accounted for on the accrual basis. Prepaid expenses represent cash paid in the current period that relates to subsequent periods.

As of December 31, 2007, all vessels in the Company’s fleet were employed on fixed-rate time charters under which the charterer, and not the Company, was responsible for voyage expenses. As of December 31, 2006, 22 of the 23 vessels in the Company’s fleet were employed under such charters. As of December 31, 2005, 9 of the 10 vessels in the Company’s fleet were employed under such charters. The Company believes that, for the relevant periods covered by these financial statements, voyage costs such as port and canal charges are not material, and the impact of recognizing voyage costs on a pro-rata basis are not materially different from recognizing them as incurred. The Company also believes that recognizing other voyage costs such as bunkers (fuel) expense and commission expense on a pro-rata basis would approximate the amount of expense recognized as incurred.

Quintana Logistics may charter in vessels on a bareboat basis in order to conduct its operations. The charter hire paid to the ship owner is expensed as a voyage expense. In 2006, Quintana Logistics paid $2.5 million in charter-in cost. The Company had no corresponding expense in 2007 or 2005, when Quintana Logistics did not conduct any operations.

Repairs and Maintenance

All repair and maintenance expenses including major overhauling and underwater inspection expenses are expensed as incurred.

United States Federal Income Taxation of our Company

We have made special tax elections in respect of each of our ship-owning and operating subsidiaries, the effect of which is to disregard each of those subsidiaries as a taxable entity separate from us for United States federal income tax purposes. Therefore, for purposes of the discussion below, the income earned and assets held by those subsidiaries will be treated as earned and owned directly by us for United States federal income tax purposes.

Unless exempt from U.S. federal income taxation under the rules discussed below, a non-U.S. corporation is subject to U.S. federal income taxation in respect of any income it earns that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or bareboat charter basis, from the participation in a pool, partnership, strategic alliance, joint operating agreement or other joint venture it directly or indirectly owns or participates in that generates such income, or from the performance of services directly related to those uses, which we refer to as “shipping income,” to the extent that the shipping income is derived from sources within the United States. For these purposes, 50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States constitutes income from sources within the United States, which we refer to as “U.S.-source shipping income.”

Shipping income attributable to transportation that both begins and ends in the United States is considered to be 100% from sources within the United States. Shipping income attributable to transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States. During the year ended December 31, 2007 we did not engage in transportation that produced income considered to be 100% from sources within the United States. Shipping income derived from sources outside the United States is not subject to U.S. federal income tax.

In the absence of exemption from tax under Section 883 of the Code (the “883 Exemption”), our U.S.-source shipping income would generally be subject to a 4% gross basis tax (i.e., a tax imposed without allowance for deductions). We believe that we qualified for the 883 Exemption for our year ended December 31, 2007 and we will take this position for U.S. federal income tax return reporting purposes. However, there are circumstances, including some that are beyond our control, which could cause us to lose the benefit of the 883 Exemption and thereby become subject to U.S. federal income tax on our U.S.-source shipping income. For example, shareholders who own 5% or more of our common stock (collectively, “5%

 

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shareholders”) could acquire and own 50% or more of our outstanding common stock. This would preclude us from being eligible for the 883 Exemption unless we can establish that among those 5% shareholders there are a sufficient number of 5% shareholders that are qualified shareholders for purposes of Section 883 to preclude non-qualified 5% shareholders from owning 50% or more of such shares for more than half the number of days during the taxable year. Therefore, we can give no assurances regarding our qualification for this tax exemption.

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 is imposed on payments of dividends by us to our shareholders.

Financial Instruments

The principal financial assets of the Company consist of cash and cash equivalents, accounts receivable due from charterers (net of allowance), other receivables, and prepaid expenses and other current assets. The principal financial liabilities of the Company consist of accounts payable due to suppliers, sundry liabilities and accruals, deferred income, debt, and the interest-rate swap. The carrying amounts reflected in the accompanying consolidated balance sheet of financial assets and liabilities approximate their respective fair values.

Variable Interest Entities

The Company evaluates its relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements. As of December 31, 2007, there were seven entities for the periods presented that were required to be included in the accompanying consolidated financial statements. Four of those entities had insignificant assets and liabilities as of that date.

Joint Ventures

In accordance with the Company’s accounting policy on variable interest entities, the Company evaluates its relationships with other entities to identify whether they are variable interest entities. The Company does not hold a majority voting interest in any of the joint ventures but has determined that each joint venture is a variable interest entity and that the Company is, in each case, the primary beneficiary. As such, the Company consolidates the joint ventures. The joint venture partners’ share of the net income or loss of the joint ventures is presented separately in the accompanying consolidated income statements as minority interests. The partners’ share of net assets is presented separately in the accompanying consolidated balance sheets as minority interests.

Segment Reporting

The Company reports financial information and evaluates its operations by charter revenues and not by the length of ship employment for its customers, i.e. spot or time charters. The Company does not use discrete financial information to evaluate the operating results for each such type of charter. Although revenue can be identified for these types of charters, management cannot and does not identify expenses, profitability or other financial information for these charters. As a result, management, including the chief operating decision maker, reviews operating results solely by revenue per day and operating results of the fleet and thus, the Company has determined that it operates under one reportable segment. Furthermore, when the Company charters a vessel to a charterer, the charterer is free to trade the vessel worldwide and, as a result, the disclosure of geographic information is impracticable.

Derivatives

The Company designates its derivatives based upon the criteria established by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended by Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities—An amendment of SFAS 133”, (SFAS 138) and Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, (SFAS 149), requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Fair value for non-exchange traded contracts is based on dealer quotes, pricing models, or discounted cash flow analysis. The accounting for the changes in the fair value of the derivative depends on the intended use

 

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of the derivative and the resulting designation. For a derivative that does not qualify as a hedge, the change in fair value is recognized at the end of each accounting period on the income statement.

Earnings per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the year. The computation of diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. Such securities include nonvested stock awards, for which the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury method, to the extent that they are dilutive, and common shares issuable upon exercise of the Company’s outstanding warrants.

Share-based Compensation

Management has selected the straight-line method with respect to the restricted stock because it considers each restricted stock award to be a single award and not multiple awards, regardless of the vesting schedule. Additionally, the “front-loaded” recognition of compensation cost that results from the accelerated method implies that the related employee services become less valuable as time passes, which management does not believe to be the case. The fair market value of the restricted stock is fixed as of the grant date as the average of the high and low trading prices of the Company’s common stock on the grant date.

The Company does not currently record an estimate of forfeitures of restricted stock, as it believes that any such amount would be immaterial. The Company will, however, re-evaluate the reasonableness of its decision at each reporting period.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective beginning in fiscal year 2007. Based on our expectation that the Company will continue not to be liable for income taxes in either the Marshall Islands or in the United States, the adoption of FIN 48 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities.” FSP AUG AIR-1 addresses the accounting for planned major maintenance activities. Specifically, the FSP prohibits the practice of the accrue-in-advance method of accounting for planned major maintenance activities. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. Because the Company does not use the accrue-in-advance method, the adoption of FSP AUG AIR-1 did not have a material impact on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which enhances existing guidance for measuring assets and liabilities at fair value. Previously, guidance for applying fair value was incorporated in several accounting pronouncements. The new statement provides a single definition of fair value, together with a framework for measuring it and requires additional disclosure about the use of fair value to measure assets and liabilities. While the statement does not require any new fair value measurements, it does change certain current practices. The Company has adopted SFAS 157 for the fiscal year starting January 1, 2008 and does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). Under this statement, entities may voluntarily and irrevocably choose to measure certain financial assets and liabilities, on an instrument-by-instrument basis, at fair value. Subsequent changes for the elected instruments must be reported in earnings. The Company has adopted SFAS 159 for the fiscal year starting January 1, 2008 and does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.

 

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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). The statement is an amendment to ARB No. 51 and establishes accounting and reporting standards for minority interests, including disclosures relating to presentation of minority interests on the face of the balance sheet and income statement as well as reporting requirements relating to changes in a parent’s ownership interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of this standard but believes that its implementation is unlikely to have a material impact on the financial position of the Company.

In December, 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). The Statement is a revision of SFAS No. 141, Business Combinations, issued in June 2001, designed to improve the relevance, representational fairness and comparability and information that a reporting entity provides about a business combination and its effects. The Statement establishes principals and requirements for how the acquirer recognizes assets, liabilities and non-controlling interests, how to recognize and measure goodwill and the disclosures to be made. The statement applies to all transactions in which an entity obtains control of a business and is effective for the Company for acquisitions on or after January 1, 2009. The Company is currently evaluating the impact of the adoption of this standard, if any.

3. Vessel Acquisitions

In 2006, the Company entered into agreements with affiliates of Metrobulk to acquire 17 vessels for an aggregate of $735 million and a separate agreement with another party to acquire one vessel for $92.5 million. The Company took delivery of 13 vessels in the year ended December 31, 2006 and awaited delivery of an additional 5 vessels as of that date.

The Company took delivery of the four remaining Metrobulk vessels and an additional Capesize vessel during 2007 (Iron Knight, Iron Lindrew, Iron Miner, Iron Brooke and Iron Manolis ), paying an aggregate of approximately $236.8 million upon delivery.

On January 22, 2007, the Company agreed to purchase a 1999-built, 170,162 dwt Capesize bulk carrier named Lowlands Beilun. The Company initially advanced $7.3 million on that date and paid the remaining balance of $65.7 million upon the delivery of the vessel on April 10, 2007.

The movement in vessels, net in the accompanying consolidated balance sheets is analyzed as follows:

 

     Vessels, net  
     (in thousands)  

January 1, 2006

   $ 446,475  

Additions

     570,738  

Depreciation charge for the year

     (29,590 )
        

December 31, 2006

   $ 987,623  

Advances for vessel acquisitions paid in 2006 for vessels delivered in 2007

     26,310  

Additions

     309,360  

Vessel disposals (1)

     (252,722 )

Depreciation charge for the year

     (49,836 )
        

December 31, 2007

   $ 1,020,735  
        

 

(1) Please refer to Note 11 for a discussion of the vessels sold.

The depreciation charge for the period from January 13, 2005 (inception) to December 31, 2005 was $11.3 million.

4. Advances for Acquisition of Vessels / Newbuildings

Advances for acquisition of vessels / newbuildings (in thousands) in the accompanying consolidated balance sheets is analyzed as follows:

 

January 1, 2006

     $     —  

 

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Vessel acquisition advances

     26,310  
        

December 31, 2006

   $ 26,310  

Advances paid in 2006 for vessels delivered in 2007

     (26,310 )

Newbuilding advances

     63,137  
        

December 31, 2007

   $ 63,137  
        

In April 2007, the Company entered into an agreement with Cosmos World Maritime S.A., an affiliate of Itochu Corporation, for the purchase of a 180,000 dwt Capesize carrier to be constructed at Imabari Shipbuilding Co., Ltd. and scheduled to be delivered at the end of 2008, for a purchase price of approximately $92 million. The vessel will be named Iron Endurance. On May 4, 2007, the Company paid the sellers $9.2 million under the contract and on October 31, 2007, the Company paid a further $9.2 million to the sellers as payment for the second installment under the contract. Both installments were financed through existing cash reserves. The remaining 2 installments are due under the memorandum of agreement between March 2008 and delivery of the vessel, expected in the fourth quarter of 2008. The Company may fund the balance of the purchase price with a combination of cash on hand and borrowings under the revolving credit facility.

Additionally, in April and May 2007, the Company and its joint venture partners paid the first installments due under the newbuilding contracts of Christine Shipco LLC, Hope Shipco LLC, and Lillie Shipco LLC. In total, $42.6 million was advanced, out of which $15.7 million was paid by the Company. Refer to Note 9 for details of the financing of these installments.

5. Other Receivables

Other receivables shown in the accompanying consolidated balance sheets are analyzed as follows:

 

      December 31,
     2007    2006
     (in thousands)

Value added tax

   $ 466    $ 420

Advances to crew

     465      221

Other

     851      555
             

Total

   $ 1,782    $ 1,196
             

6. Deferred Charges

The deferred charges shown in the accompanying consolidated balance sheets are analyzed as follows:

 

     Finance Costs     Drydocking     Time Charter
Premium
    Loss on Sale-
Leaseback
 
     (in thousands)  

January 1, 2006

   $ 1,959     $ 920     $ 9,060       —    

Additions

     4,798       4,986       —         —    

Amortizations

     (336 )     (690 )     (2,111 )     —    

Write-offs

     (1,833 )     —         —         —    
                                

December 31, 2006

   $ 4,588     $ 5,216     $ 6,949       —    

Additions

     1,154       5,394       —         3,368  

Amortization

     (1,085 )     (1,951 )     (2,111 )     (188 )
                                

December 31, 2007

   $ 4,657     $ 8,659     $ 4,838     $ 3,180  
                                

Iron Beauty was acquired in October 2005 with a time charter attached of $36,500 per day less commissions. It was determined that this was an above-market rate. As described in Note 2 above, the Company, in these circumstances, allocates a portion of the amount paid for the vessel to the fair value of the above-market charter and shows this as a deferred asset. When Iron Beauty was purchased, the present value of the time charter was determined to be $9.5 million and this amount was allocated as a deferred asset. This is then amortized to revenue on a straight-line basis over the term of the time charter, resulting in a daily time charter rate of approximately $30,600 as recognized revenue. For cash flow purposes, the company will continue to receive $36,500 per day less commissions. The amortization schedule of the balance of the deferred time charter premium is as follows:

 

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Year

   Amortization
(in thousands)

2008

   $ 2,111

2009

     2,111

2010

     616
      

Total

   $ 4,838
      

7. Prepaid Expenses and Other Current Assets

The prepaid expenses shown in the accompanying consolidated balance sheets are analyzed as follows:

 

     December 31,

Prepaid Expenses and Other Current Assets

   2007    2006
     (in thousands)

Prepaid insurance

   $ 531    $ 595

Prepaid bareboat hire (1)

     1,183      —  

Other prepaid expenses and other current assets

     978      391
             

Total

   $ 2,692    $ 986
             

 

(1) Relates to prepaid bareboat hire to owners of vessels that are operated by the Company under operating leases.

8. Sundry Liabilities and Accruals

The sundry liabilities and accruals shown in the accompanying consolidated balance sheets are analyzed as follows:

 

      December 31,

Sundry Liabilities and Accruals

   2007    2006
     (in thousands)

Accrued interest expense

   $ 10,618    $ 211

Accrued office expenses

     1,459      1,255

Other sundry liabilities and accruals

     2,156      1,310
             

Total

   $ 14,233    $ 2,776
             

9. Long-Term Debt

The following table summarizes the Company’s long-term debt (in thousands):

 

      December 31,  

Long-Term Debt

   2007     2006  
     (in thousands)  

Revolving credit facility

   $ 660,000     $ 611,960  

Credit facilities of consolidated joint ventures (1)

     29,818       —    
                
     689,818       611,960  

Less: Current portion of long-term debt

     (77,218 )     (47,000 )
                

Long-term debt, net of current portion

   $ 612,600     $ 564,960  
                

 

(1) The Company is responsible for repaying 50% of the outstanding credit facilities of Hope Shipco LLC and Lillie Shipco LLC. Christine Shipco LLC has a credit facility for pre-delivery financing, but the Company has no repayment obligations with respect to that facility.

 

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Revolving Credit Facility

On July 19, 2006, the Company entered into an 8.25 year, $735 million senior secured revolving credit facility. The Company has amended the facility, most recently on July 5, 2007. Following these amendments, which are described below and were made as a result of the changing capital requirements of the Company, the maximum available amount under the facility is $735.2 million. Under the amended facility, the Company can borrow a further $55.2 million, which is equal to 60% of the purchase price of Iron Endurance, a newbuilding Capesize vessel to be purchased by the Company from an affiliate of Itochu Corporation, and is expected to be delivered in the fourth quarter of 2008.

Amendments to the Revolving Credit Facility

First Amendment

On March 14, 2007, the Company executed an amendment (the “Amendment”) to the facility. The material terms of the Amendment were:

 

   

To increase the maximum available amount for borrowing to $865 million;

 

   

To reschedule the quarterly commitment reductions as follows:

 

   

Two reductions of $14.5 million each, beginning on July 1, 2007, followed by

 

   

Four reductions of $18 million each, followed by

 

   

23 reductions of $15 million each, with the final reduction occurring on the maturity date together with a balloon reduction equal to the lesser of $419 million or remaining amounts outstanding under the facility.

 

   

To waive compliance with the minimum-liquidity covenant through December 31, 2007.

On March 28, 2007, the Company received a waiver under the facility permitting it to form the shipowning company to purchase a Capesize vessel through a joint venture and to exclude that shipowning company from coverage under the facility until its delivery.

On April 27, 2007, the Company received an additional waiver under the facility with respect to the formation of six additional shipowning companies and to clarify that only the Company’s interest in the relevant shipowning companies will be used in calculating compliance with the financial covenants under the facility.

Second Amendment

On July 5, 2007, the Company further amended the credit facility (the “Second Amendment”). The Second Amendment contemplated the completion of the Company’s transaction relating to the sale-leaseback of seven vessels in its existing fleet (the “sale-leaseback” as described below in Note 11), and the effectiveness of the terms of the Second Amendment was contingent upon the completion of that transaction and the mandatory prepayment of $185 million of the amount outstanding under the Facility from the funds received in the sale-leaseback. As of July 25, 2007, the Company had completed the sale-leaseback and prepaid $185.0 million. The material terms of the Amendment are:

 

   

approval of the release of the security interests on the ships sold in the sale-leaseback and other related collateral contemporaneously with consummation of the sale-leaseback;

 

   

approval of the Company’s guarantee of the obligations under the sale-leaseback;

 

   

permission to borrow up to $55.2 million, which is equal to 60% of the purchase price of a newbuilding Capesize vessel to be purchased by the Company from an affiliate of Itochu Corporation, and is expected to be delivered in the fourth quarter of 2008, thereby adjusting the maximum available amount under the facility to $735.2 million after the borrowings for this vessel; and

 

   

a revised schedule of quarterly commitment reductions as follows:

 

  ¡  

Two reductions of $10,000,000 each, beginning on July 1, 2007, followed by

 

  ¡  

Four reductions of $13,750,000 each, followed by

 

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  ¡  

23 reductions of $12,125,000 each, with the final reduction occurring on the maturity date together with a balloon reduction equal to the lesser of $381,325,000 or remaining amounts outstanding under the Facility.

In addition, the Second Amendment contains customary representations and warranties made by the Company to its lenders. Except as specified in the Second Amendment, the Facility remains in full force and effect.

Under the facility in effect as December 31, 2007 the following repayments of principal are required over the next five years:

 

Period

   Principal
Repayment
     (in thousands)

January 1, 2008 to December 31, 2008 (1)

   $ 55,000

January 1, 2009 to December 31, 2009

     48,500

January 1, 2010 to December 31, 2010

     48,500

January 1, 2011 to December 31, 2011

     48,500

January 1, 2012 to December 31, 2012

     48,500

 

(1) The Company paid an installment of $13.75 million on January 2, 2008.

As of December 31, 2007, the undrawn portion of the credit facility amounted to $55.2 million. The full amount borrowed under the facility will mature on September 30, 2014.

The Company’s obligations under the credit facility are secured by: (i) first priority cross-collateralized mortgages over the vessels securing the facility, which include the entire fleet other than those purchased in connection with joint ventures; (ii) first priority assignment of all insurances, operational accounts and earnings of the vessels financed with borrowings under the facility; (iii) first priority pledges over the operating accounts of the shipowning subsidiaries held with the agent, (iv) assignments of existing and future charters for the vessels, and (v) assignments of interest rate swaps. Borrowings under the revolving credit facility bear interest at the rate of LIBOR plus 0.85% per annum (until December 31, 2010) and LIBOR plus 1.10% per annum thereafter.

Effective July 1, 2006, the Company entered into an interest-rate swap with Fortis Bank (Nederland) N.V. (“Fortis”) that effectively fixes the interest payable on the borrowings under the facility at 5.985%, inclusive of margin due to the Company’s lenders. For further details, refer to Note 14 of these consolidated financial statements.

As of December 31, 2007, the Company was in compliance with relevant covenants under the facility. Consummation of the proposed merger would result in an event of default under the facility. Consequently, it is currently proposed that the facility be refinanced immediately prior to the consummation of the merger.

Consolidated Joint Venture Credit Facilities

Christine Shipco LLC

On April 11, 2007, Christine Shipco LLC entered into a secured loan agreement with Royal Bank of Scotland for an amount equal to 70% of the pre-delivery installments, or $25.3 million, for the Capesize newbuilding, to be named Christine. Pre-delivery installments payable to the yard are expected to total approximately $36.2 million. As of December 31, 2007, $7.6 million had been drawn down under the facility.

The loan is to be repaid in one installment on the earlier of the delivery date and August 31, 2010, but the loan may be prepaid in full or in part at any time. The delivery date is expected to be during the first quarter of 2010. Under the terms of the joint venture agreement and the loan agreement, Quintana Maritime Limited is not responsible for repayment of the pre-delivery financing. Christine Shipco LLC expects to refinance the loan upon delivery by borrowing an amount equal to the sum of the pre-delivery financing outstanding at delivery and 70% of the delivery installment. The Company will be obliged to make capital contributions to Christine Shipco LLC to cover 50% of the principal and interest due upon refinancing of the facility.

The interest rate payable on the loan is the aggregate of (1) LIBOR, (2) the margin of 1.125% and (3) the mandatory cost, if any. The mandatory cost is an addition to the interest rate to compensate the lender for the costs of compliance with the Bank of England and European Central Bank requirements.

 

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Under the loan facility, Christine Shipco LLC must ensure that the fair market value of the vessel, less the unpaid portion of the purchase price, is equal to at least 130% of the loan amount outstanding. In addition, the facility contains customary restrictive covenants and events of default, including nonpayment of principal or interest, breach of covenants or material misrepresentations, default under other material indebtedness, bankruptcy, and change of control. Christine Shipco LLC is not permitted to pay dividends without the prior written consent of the lender.

Lillie Shipco LLC and Hope Shipco LLC

On May 11, 2007, Lillie Shipco LLC and Hope Shipco LLC entered into separate secured loan agreements with Royal Bank of Scotland to finance amounts equal to 70% of the first pre-delivery installments due to the shipyard, or $11.3 million and $10.9 million, respectively. The loan facilities were drawn down in full upon payment of the first pre-delivery installments in May 2007.

Each of the loans is to be repaid in one installment on April 18, 2008, but each loan may be prepaid in full or in part at any time. Under the terms of the joint venture agreements governing Lillie Shipco LLC and Hope Shipco LLC, Quintana Maritime Limited will be responsible for repaying 50% of the outstanding balance of each loan at the repayment date.

The interest rate payable on each of the loans is the aggregate of (1) LIBOR, (2) the margin of 1.125% and (3) the mandatory cost, if any. The mandatory cost is an addition to the interest rate to compensate the lender for the costs of compliance with the Bank of England and European Central Bank requirements.

Under the loan facilities, each of Hope Shipco LLC and Lillie Shipco LLC must ensure that the fair market value of the vessel, less the unpaid portion of the purchase price, is equal to at least 115% of the loan amount outstanding. In addition, the facilities contain customary restrictive covenants and events of default, including nonpayment of principal or interest, breach of covenants or material misrepresentations, default under other material indebtedness, bankruptcy, and change of control. Neither Lillie Shipco LLC nor Hope Shipco LLC is permitted to pay dividends without the prior written consent of the lender.

Both Lillie Shipco LLC and Hope Shipco LLC expect to refinance the loans to cover the remaining pre-delivery installments.

Under the three joint-venture credit facilities as at December 31, 2007, the following repayments of principal payable by the joint ventures will be required over the next five years:

 

Period

   Principal
Repayment
     (in thousands)

January 1, 2008 to December 31, 2008

   $ 22,218

January 1, 2009 to December 31, 2009

     —  

January 1, 2010 to December 31, 2010

     7,600

January 1, 2011 to December 31, 2011

     —  

January 1, 2012 to December 31, 2012

     —  

As of December 31, 2007, the Company was in compliance with all covenants under all the above facilities. The weighted average interest rate, as of December 31, 2007 and 2006, was 6.1% and 6.0%, respectively.

KSC Vessels

The Company has recently nominated four joint ventures to purchase the KSC vessels. While the joint ventures expect to obtain financing with respect to these vessels once they receive refund guarantees in their favor, those guarantees have not been received yet and, therefore, no financing has been arranged.

10. Related Party Transactions

On October 31, 2005, the Company and Quintana Minerals Corporation entered into a service agreement, whereby Quintana Minerals agreed to provide certain administrative services to the Company at cost, and the Company agreed to reimburse Quintana Minerals for the expenses incurred by Quintana Minerals in providing those services. Quintana Minerals Corporation is an affiliate of Corbin J. Robertson, the Chairman of the Board of Directors of the Company and significant shareholder in the Company. Total amounts reimbursed to Quintana Minerals Corporation were $2.1 million, $1.3 million,

 

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and $1.3 million for the years ended December 31, 2007 and 2006 and for the period from January 13, 2005 to December 31, 2005, respectively. Trade payables as of December 31, 2007 and 2006 shown in the accompanying consolidated financial statements include $0.3 million and $ 0.1 million respectively, related to expenses, including salaries of Company management, office rent, and related expenses, paid for by Quintana Minerals Corporation, on behalf of the Company.

In 2005, the Company’s Chief Executive Officer, Stamatis Molaris, signed a consulting agreement with Quintana Minerals Corporation dated as of January 1, 2005 with duration of one year. This agreement was terminated as of March 31, 2005. Quintana Minerals Corporation is an affiliate of Corbin J. Robertson, Jr., who beneficially owned 38.6% of the member interests in Quintana Maritime Investors LLC, the Company’s parent prior to the initial public offering, which in turn owned 100% of the common equity of the Company prior to the initial public offering. Quintana Maritime Investors LLC paid $25 thousand to Mr. Molaris in payment of all amounts due under the agreement.

An affiliate of Mr. Robertson, the Chairman of the Board of the Company has the right in certain circumstances to require us to register their shares of common stock in connection with a public offering and sale. In addition, in connection with other registered offerings by us, affiliates of Mr. Robertson and certain other shareholders will have the ability to exercise certain piggyback registration rights with respect to their shares.

In addition, affiliates of Mr. Robertson and Hans J. Mende, directors of the Company, as well as certain members of our board of directors and management, who together owned approximately 15.3% of our outstanding common stock as of December 31, 2007, purchased an aggregate of approximately $26.2 million of units consisting of preferred stock and warrants in our May 2006 private placement.

In 2006, Quintana Logistics carried cargoes shipped by affiliates of AMCI International, Inc., which generated revenues of approximately $2.5 million during the year. In addition, Quintana Logistics paid a brokerage fee of 2.5%, or approximately $63 thousand, to AMCI International, Inc. The Company believes that the freight charged to and the brokerage commissions paid to the AMCI affiliates were representative of market rates. Hans J. Mende is the President and controlling stockholder of AMCI International, Inc. Quintana Logistics did not operate during the the year ended December 31, 2007 or the period ended December 31, 2005.

Vessel Acquisitions by Joint Ventures

Imabari Vessel. On April 3, 2007, the Company entered into a limited liability company agreement, effective March 30, 2007, with Robertson Maritime Investors LLC (“RMI”), an affiliate of Corbin J. Robertson, Jr. and AMCIC Cape Holdings LLC (“AMCIC”), an affiliate of Hans J. Mende, a member of our Board, for the formation of Christine Shipco LLC, a joint venture to purchase a newbuilding capesize drybulk carrier. Messrs. Robertson, Mende and Molaris, our Chief Executive Officer, will, in addition to serving as members of our Board, serve as members of the board of directors of Christine Shipco LLC. Members of Mr. Robertson’s family, including Corbin J. Robertson, III (who is also a member of the Board), will also participate in the joint venture through RMI. Christine Shipco LLC executed an agreement with an affiliate of Itochu Corporation for the purchase of Christine , a 180,000 dwt Capesize carrier to be constructed at Imabari Shipbuilding Co., Ltd. and scheduled to be delivered in 2010 for a purchase price of $72.4 million. Christine Shipco LLC entered into a term loan agreement relating to the pre-delivery financing of Christine and utilized approximately $7.6 million of the loan facility, together with cash of $3.3 million to pay the first installment of $10.9 million. Under the terms of the agreement governing Christine Shipco LLC, the Company has no obligations to make capital contributions to the joint venture until the delivery of the vessel in 2010, when the Company must fund the equity portion of the delivery installment, which is equal to 50% of the acquisition price of the vessel, or approximately $36.2 million. The Company expects to fund the equity portion of that installment with cash on hand. Christine Shipco LLC expects to refinance the existing loan agreement to cover the portion of the delivery installment not funded by the Company’s capital contribution. Subsequent to the delivery of the vessel, the Company will be obliged to pay its pro rata portion of the capital obligations of the joint venture (other than amounts due under the management agreement with the Company) under most circumstances. As a result, the Company owns a 42.8% interest in the joint venture, and RMI and AMCIC each own a 28.6% interest in the joint venture.

The Conflicts Committee of the Company’s Board, which is made up of three of the Company’s independent non-executive directors, has approved this agreement with the advice of independent outside counsel.

STX Vessels. On April 16, 2007, the Company entered into agreements with STX Shipbuilding Co., Ltd. for the construction of two 181,000 dwt newbuilding Capesize carriers for expected delivery in the fourth quarter of 2010 for an aggregate purchase price of approximately $159 million. The Company has nominated Hope Shipco LLC and Lillie Shipco LLC to purchase the respective vessels. The Company owns 50% of each of Hope Shipco LLC and Lillie Shipco LLC, and AMCIC, as described above, owns the other 50%. The sole purpose of each of Hope Shipco LLC and Lillie Shipco LLC is to

 

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purchase, own and operate the relevant Capesize vessel. Hope Shipco LLC and Lillie Shipco LLC entered into credit facilities to finance 70% of the first pre-delivery installment, and each of Hope Shipco LLC and Lillie Shipco LLC expects to refinance the facilities to cover up to 70% of the total purchase price of its respective Capesize vessel.

Each of Hope Shipco LLC and Lillie Shipco LLC is managed by a two-member board of directors consisting of Hans J. Mende and Stamatis Molaris, appointed by AMCIC and the Company, respectively. Mr. Mende serves as member of the Company’s Board, and Mr. Molaris serves as a director and the Company’s Chief Executive Officer and President. All decisions of the boards of directors will require unanimous approval.

Pursuant to each joint venture agreement for the STX vessels, the Company will be responsible for 50% of all vessel construction costs. Hope Shipco LLC and Lillie Shipco LLC funded the initial delivery installments with capital contributions by the Company and AMCIC and borrowings at the joint-venture level. Each joint venture will fund the remaining balance of the vessel construction costs with cash contributions from the partners and borrowings at the joint-venture level.

The Conflicts Committee of the Company’s Board, which is made up of three of the Company’s independent non-executive directors, approved the agreements governing the joint ventures in the fourth quarter of 2007 with the advice of independent outside counsel.

KSC Vessels. On April 27, 2007, the Company executed agreements with Korea Shipyard Co., Ltd., a new Korean shipyard, for the construction of four 180,000 dwt newbuilding Capesize carriers for delivery in mid-2010 at a purchase price of approximately $77.7 million per vessel, or an aggregate purchase price of approximately $310.8 million. The Company has nominated Fritz Shipco LLC, Benthe Shipco LLC, Gayle Frances Shipco LLC, and Iron Lena Shipco LLC to purchase the respective vessels. The Company will own 50% of each of those companies, and AMCIC will own the other 50%.

Each of the joint ventures is managed by a two-member board of directors consisting of Hans J. Mende and Stamatis Molaris, each appointed by AMCIC and the Company, respectively. Mr. Mende serves as member of the Company’s Board, and Mr. Molaris serves as a director and the Company’s Chief Executive Officer and President. All decisions of the boards of directors require unanimous approval.

None of the KSC joint ventures will be required to pay any purchase installments with respect to the relevant vessel until it receives a refund guarantee. As of February 25, 2008, none of the joint ventures had received refund guarantees with respect to these vessels. Pursuant to each joint venture agreement with respect to the KSC vessels, the Company will be responsible for 50% of all vessel costs. The Company expects to fund these amounts with cash from operations. Each joint venture will fund the balance of the vessel construction costs with cash contributions from AMCIC and borrowings at the joint-venture level.

The Conflicts Committee of the Company’s Board, which is made up of three of the Company’s independent non-executive directors, approved the limited liability company agreements governing these four joint ventures in the fourth quarter of 2007 with the advice of independent outside counsel. Any future agreements relating to these vessels, including financing arrangements made prior to the payment of the initial installments, will be reviewed separately by the Conflicts Committee.

Management Agreements

Quintana Management LLC expects to enter into a management agreement (each a “Management Agreement”) with each of the seven existing joint ventures pursuant to which the Company will be responsible for the supervision of construction prior to delivery of the vessels and technical management of the vessels subsequent to delivery. Pursuant to each Management Agreement, the Company expects to collect from its joint venture partners $60,000 per annum per vessel for supervising the construction of each of the vessels, starting from the effective date of the joint venture agreements until their respective delivery. The Company will not make any payments with respect to these services. Upon delivery, the Company will manage the vessels on behalf of each joint venture, and the joint ventures will pay the Company a management fee based on the Company’s budgeted management costs, subject to adjustment in certain circumstances.

Charters

Of the seven capesize vessels to be acquired by the joint ventures as described above, Christine, Hope, Lillie, and two of the KSC vessels will be chartered to EDF Trading, a wholly owned subsidiary of EDF, a major European utility, upon their delivery in 2010. The five-year charters will provide for charterhire to be paid at a floor rate, which averages $27,000,

 

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net, per vessel per day for each of the five vessels, with 50% profit sharing based on the monthly AV4 BCI time-charter rate as published by the Baltic Exchange. As of December 31, 2007, the remaining two vessels have not yet been chartered.

11. Commitments and Contingent Liabilities

Operating Leases

In 2007, the Company entered into 2 new operating leases for the Athens office for the period from July 1, 2007 to December 31, 2009 and extended the existing leases until June 30, 2008 and December 31, 2008. In November 2006, the Company entered into a two-year, non-cancellable operating sub-lease for its office in Switzerland. Rental expense for both offices for the years ended December 31, 2007 and 2006 and for the period from January 13, 2005 to December 31, 2005 were $590 thousand, $222 thousand and $91 thousand, respectively. Future rental commitments under the operating leases are as follows:

 

     December 31,
2007
     (in thousands)

January 1, 2008 to December 31, 2008

   $ 818

January 1, 2009 to December 31, 2009

     580
      

Total

   $ 1,398
      

Newbuilding installments

As of December 31, 2007, the Company and its joint venture partners expect to have the following newbuilding installment commitments. These commitments reflect all eight of the capesize newbuildings, including one vessel to be wholly owned by the Company and seven vessels to be partially owned through joint ventures. All newbuildings are expected to be delivered by the end of 2010, but the installment schedule may vary depending on when the shipyards start construction and on the final delivery date of the vessels.

 

      Company Commitments    Joint Venture Partner
Commitments
   Total
Commitments
     (in millions)

January 1, 2008 to December 31, 2008

   $ 108.4    $ 46.0    $ 154.4

January 1, 2009 to December 31, 2009

     46.6      61.1      107.7

January 1, 2010 to December 31, 2010

     173.4      137.3      310.7
                    
   $ 328.4    $ 244.4    $ 572.8
                    

Performance Guarantees

The Company has issued performance guarantees on behalf of Lillie Shipco LLC and Hope Shipco LLC, which guarantee the performance of each joint venture’s obligations and responsibilities under the newbuilding contracts. In particular, the Company has guaranteed the payment of the contract price of the relevant vessels if the joint ventures are in default under the terms of the contract. The contract prices for the newbuildings are $80.6 million and $78.1 million respectively. The guarantees expire on delivery of the vessels to each joint venture. If the sellers of the vessels were to make demand under the guarantees, the Company would have recourse against AMCIC for breach of the agreement governing the rights and obligations of the joint venture partners.

The Company has pledged no assets as collateral for the joint ventures’ obligations.

Sale-Leaseback Transaction

In July 2007, the Company sold 7 Panamax vessels to 2 unaffiliated third parties. Coal Glory, Iron Man, and Linda Leah were sold to three Norwegian partnerships managed by Glitnir Marine Finance AS, and Coal Age, Fearless I, Barbara, and King Coal were sold to two German partnerships managed by KG Allgemeine Leasing GmbH & Co. The total sales price of the vessels, net of sales costs, was approximately $249.4 million, and all vessels were delivered to the buyers in July 2007. Simultaneous with the sale of the vessels, the Company entered into bareboat charter agreements to

 

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lease the vessels back for 8 years. The Company will continue to generate revenues from the time charters relating to the vessels, and these revenues will continue to be reported in time charter revenues.

The bareboat charter agreements are accounted for as operating leases and the aggregate loss on the transaction of approximately $3.3 million was deferred and is being amortized over the eight-year lease period. During the year ended December 31, 2007, approximately $0.2 million of amortization charges has been included in charter hire expense on the accompanying consolidated income statement.

The Company’s future minimum lease payment expense under the bareboat charters is as follows:

 

Period

   Amount
     (in thousands)

January 1, 2008 to December 31, 2008

   $ 32,649

January 1, 2009 to December 31, 2009

     32,560

January 1, 2010 to December 31, 2010

     32,560

January 1, 2011 to December 31, 2011

     32,560

January 1, 2012 to December 31, 2012

     32,560

Thereafter

     83,367
      

Total future minimum lease payments

   $ 246,256
      

The total lease payment expense for the year ended December 31, 2007 was approximately $ 14.6 million and is included in Charter hire expense in the accompanying consolidated income statement.

Legal Proceedings

The Company has not been involved in any legal proceedings that may have, or have had a significant effect on its business, financial position, results of operations or liquidity, nor is the Company aware of any proceedings that are pending or threatened which may have a significant effect on its business, financial position, results of operations or liquidity. From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business, principally disputes with charterers, personal injury and property casualty claims. The Company expects that these claims would be covered by insurance, subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.

Legal Proceedings Related to Mr. Molaris

A private individual filed a complaint with the public prosecutor of the Athens Magistrates Court against Mr. Molaris and four others relating to allegations that, while Mr. Molaris was employed by Stelmar Shipping Ltd., they conspired to defraud the individual of a brokerage fee of €1.2 million purportedly owed by a shipyard in connection with the repair of a Stelmar vessel. During the year ended December 31, 2007, the competent Magistrates Judiciary Board acquitted Mr. Molaris and the four other defendants of the relevant charges and consequently ruled that they should not face full trial. The plaintiff filed an appeal, and the public prosecutor issued a pleading on December 28, 2007, stating that the appeal should be dismissed. Mr. Molaris expects the final dismissal of the appeal to be forthcoming.

12. Capital Structure

As of December 31, 2007, the Company had common stock (with attached preferred share purchase rights) and Class A Warrants outstanding.

Common Stock

As of December 31, 2007, the Company had 56,515,218 shares of fully paid common stock outstanding, not including 1,407,650 shares of unvested restricted stock that have been issued but are subject to forfeiture.

Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of shareholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by our board of directors out of funds legally available for dividends. Upon our dissolution or liquidation or the sale of all or substantially all of the Company assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation

 

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preferences, if any, the holders or the Company’s common stock will be entitled to receive pro rata the Company’s remaining assets available for distribution. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of the Company’s securities. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any shares of preferred stock which the Company may issue in the future.

Preferred Share Purchase Rights

In November 2007, the Company declared a dividend distribution of one preferred share purchase right (a “Right”) on each outstanding share of Quintana common stock. The dividend distribution was made on November 22, 2007 to shareholders of record on that date. The Rights will expire on November 12, 2017.

The rights will become exercisable and trade separately from the common stock upon the earlier of (i) ten days following the public announcement or disclosure that a person or group has acquired beneficial ownership of 15 percent or more of the outstanding Quintana common stock (thereby becoming an Acquiring Person) or (ii) ten business days following the commencement of, or the announcement of an intention to make, a tender offer or exchange offer, that would result in ownership of 15 percent or more of common stock. In such circumstances, each right entitles shareholders to buy one one-thousandth of a share of a new series of junior participating preferred stock at a purchase price of $75.00.

In the event that the rights are triggered, shareholders of record will be able to exercise each right to receive, upon payment of the exercise price, shares of common stock having a market value equal to twice the exercise price. An Acquiring Person will not be entitled to exercise any rights. In connection with the issuance of the rights, the Board of Directors of the Company authorized the issuance of 100,000 shares of preferred stock.

Warrants

Each outstanding warrant entitles the holder to purchase one share of the Company’s common stock and will expire on May 11, 2009, the Warrant Expiration Date. The holders of the warrants are entitled to exercise all or a portion of their warrants at any time on or prior to the Warrant Expiration Date at which time all unexercised warrants will expire. Holders of warrants may exercise in one of two ways: First, they may surrender their warrants, together with the relevant cash exercise price, in order to receive the number of shares paid for. Second, they have a cashless exercise option, in which they may surrender warrants to receive common stock with an aggregate market value equal to the difference between the then-current market price per share of the common stock and the exercise price of the warrants multiplied by the number of such shares.

Holders of the warrants have no right to vote on matters submitted to the Company’s shareholders and have no right to receive dividends. Holders of the warrants are not entitled to share in the Company’s assets in the event of liquidation, dissolution or winding up. In the event a bankruptcy or reorganization is commenced by or against the Company, a bankruptcy court may hold that unexercised warrants are executory contracts which may be subject to rejection by us with approval of the bankruptcy court, and the holders of the warrants may, even if sufficient funds are available, receive nothing or a lesser amount than that to which they would otherwise be entitled to receive as a result of any such bankruptcy case if they had exercised their warrants prior to the commencement of such date.

Issuance of Units, Preferred Stock, and Warrants

On May 11, 2006, the Company sold, in a private placement, 2,045,558 units consisting of 2,045,558 shares of 12% Mandatorily Convertible Preferred Stock with a liquidation preference of $93.75 per share and 8,182,232 Class A Warrants with an exercise price of $8.00 per share. Each Unit sold in the private placement consists of one share of preferred stock and four warrants. Affiliates of the Company’s Chairman, First Reserve Corporation, and Hans J. Mende, as well as certain members of our board of directors and management, who together owned approximately 29.6% of our outstanding common stock as of December 31, 2006, purchased an aggregate of approximately $41.2 million of units consisting of preferred stock and warrants in this offering.

The preferred stock was cumulative and had no voting rights, except as provided in the statement of designations of the preferred stock or by the laws of the Republic of the Marshall Islands. Holders of the preferred stock were generally entitled to receive cash dividends at the per annum rate of 12% of the liquidation preference of $93.75 per share. Dividends on the preferred stock were cumulative and were payable in cash quarterly on February 28, May 30, August 31 and November 30 of each year, commencing on August 31, 2006 for the initial period beginning on the date of issuance, at an annual rate of 12.0% of the liquidation preference of $93.75 per share of the preferred stock, when, as and if declared by the Company’s board of directors out of legally available funds.

 

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The conversion of the preferred stock and the exercisability of the warrants were subject to approval by the common shareholders. The sale of the units resulted in gross proceeds of approximately $191 million to the Company, $41.2 million of which was attributable to investments by the Company’s founders and management. The preferred stock was converted into common stock and the warrants became exercisable as described below.

Conversion of Preferred Stock into Common Stock; Exercisability of Warrants

Under the terms governing the equity issuance described above, we were required to hold a special meeting to approve the conversion of the preferred stock as well as the issuance of common stock upon the conversion of the preferred stock and the exercise of the warrants.

On August 11, 2006, the Company held a special meeting of shareholders in Calgary, Alberta, Canada. At the meeting, the following unified proposal was approved by a majority of the shareholders, voting in person or by proxy:

 

   

The conversion of the Company’s 12% Mandatorily Convertible Preferred Stock into shares of common stock;

 

   

The exercisability of the 8,182,232 Class A Warrants to purchase shares of the Company’s common stock; and

 

   

The issuance of shares of the Company’s common stock upon conversion of the shares of Preferred Stock and the exercise of the Warrants.

On that date, all of the Company’s outstanding preferred stock was converted into common stock at a ratio of 12.5 shares of common stock per share of preferred stock. As a result, 25,569,462 additional shares of common stock were issued on that date, and no units or preferred stock remained outstanding. This issuance is shown as a non-cash transaction in the statements of cash flows. In May 2006, the Company received proceeds of $190.9 million, net of issuance costs, from the issuance of the preferred stock that was converted into the common stock. The Company did not receive any additional proceeds as a result of the conversion of the preferred stock into common stock, but it continues to receive proceeds from the exercise of warrants, as described below.

Exercise of Warrants

In connection with the Company’s private placement in May 2006 described above, the Company issued 8,182,232 Class A Warrants, exercisable at a price of $8.00 per share and expiring on May 11, 2009.

For the years ended December 31, 2007 and 2006, the Company received $46.8 and $9.6 million, respectively, in net proceeds from the exercise of 6,096,085 and 1,250,479 warrants respectively. As of December 31, 2007, 835,668 warrants remained outstanding (including 91,408 warrants held by the Company in connection with cashless exercises).

The balance sheet line item “common stock to be issued for warrants exercised” reflects funds received for 188,400 warrants that were exercised prior to the end of the period but prior to the issuance of the related shares, which were issued on January 5, 2007.

As of February 25, 2008, an additional 20,148 warrants had been exercised, leaving 815,520 warrants outstanding, including 92,554 treasury warrants. Of the 20,148 additional warrants exercised, 17,822 warrants were exercised for cash, resulting in proceeds to the Company of approximately $0.1 million, and 2,326 warrants were exercised in a cashless exercise. Affiliates of the Company’s founders had, as of that date, exercised an aggregate of 1,756,804 warrants for an aggregate purchase price of approximately $14.1 million, leaving no warrants held by sponsors outstanding.

13. Earnings per Share

Earnings per share has been calculated by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. The following dilutive securities are included in shares outstanding for purposes of computing diluted earnings per share:

 

   

Restricted stock outstanding under the Company’s Stock Incentive Plan; and

 

   

Common shares issuable upon exercise of the Company’s outstanding warrants.

 

   

The Company had no other dilutive securities for the periods indicated.

The Company calculates the number of shares outstanding for the calculation of basic earnings per share and diluted earnings per share as follows:

 

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     Year Ended
December 31, 2007
   Year Ended
December 31, 2006
   Period from
January 13, 2005 to
December 31, 2005

Weighted average common shares outstanding, basic

   54,675,962    33,568,793    14,134,268

Weighted average restricted stock awards

   479,537    681,167    105,639

Weighted average warrants(1)

   1,474,833    430,411    —  
              

Weighted average common shares outstanding, diluted

   56,630,332    34,680,371    14,239,907
              

 

(1) On May 11, 2006, the Company sold Units consisting of 12% Mandatorily Convertible Preferred Stock and Class A Warrants in a private placement. 8,182,232 Warrants, with an exercise price of $8.00 and an expiration date of May 11, 2009, were issued. The conversion of the preferred stock and the exercisability of the warrants were approved by the shareholders on August 11, 2006. The warrants have been included in diluted earnings per share beginning on August 11, 2006. As of December 31, 2007, 835,668 warrants were outstanding, which includes 91,408 warrants held by the Company in connection with cashless exercise.

14. Interest-Rate Swap

Effective July 1, 2006, the Company entered into an interest-rate swap with Fortis Bank (Nederland) N.V. (“Fortis”) on variable notional amounts ranging from $295 million to approximately $702 million, based on expected principal outstanding under the Company’s revolving credit facility. Under the terms of the swap, the Company makes quarterly payments to Fortis based on the relevant notional amount at a fixed rate of 5.135%, and Fortis makes quarterly floating-rate payments at LIBOR to the Company based on the same notional amount. The swap transaction effectively converts the Company’s contractual floating-rate interest obligation under its new revolving credit facility to a fixed rate of 5.985%, inclusive of margin due to its lenders. The swap is effective from July 1, 2006 to December 31, 2010. In addition, Fortis has the option to enter into an additional swap with the Company effective December 31, 2010 to June 30, 2014. Under the terms of the optional swap, the Company will make quarterly fixed-rate payments of 5.00% to Fortis based on a decreasing notional amount of $504 million, and Fortis will make quarterly floating-rate payments at LIBOR to the Company based on the same notional amount.

During the years ended December 31, 2007 and 2006, Fortis paid the Company approximately $0.9 million and $0.6 million, respectively, net of amounts paid by the Company to Fortis. The Company marks to market the fair value of the interest-rate swap and related swaption (“the swap”) at the end of every period and reflects the resulting gain or loss in “interest-rate swap loss” on its consolidated income statement. During the years ended December 31, 2007 and 2006, the mark-to-market adjustment resulted in unrealized non-cash losses of $20.3 million and $9.8 million, respectively. The fair value of the swap is reflected on the consolidated balance sheet under unrealized interest-rate swap loss and at December 31, 2007, the fair value of the swap was a loss of $30.1 million.

The Company did not have any hedging transactions as of December 31, 2005.

15. Cash Dividends

During 2007, the Company paid aggregate dividends of $62.2 million to shareholders of common stock. In 2006, the Company paid aggregate dividends of $32.4 million, including a $1.2 aggregate dividend to holders of preferred stock in the second quarter. In 2005, the Company paid aggregate dividends of $5.9 million with respect to its common stock.

16. Stock Incentive Plan

Prior to the Company’s initial public offering, the Quintana Maritime Limited 2005 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted by the Company and approved by its shareholders. The purpose of the Stock Incentive Plan is

 

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to provide the directors, employees, advisors and consultants of the Company and its affiliates additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its affiliates. The Stock Incentive Plan provides for the granting of stock options, restricted stock awards, performance awards, and phantom stock awards. To date, the Company has only issued restricted stock and phantom stock under the Stock Incentive Plan. In December 2005, the Company cancelled all outstanding phantom stock awards and issued restricted stock awards in their place. Only restricted stock awards are outstanding as of December 31, 2006.

The Plan is administered by the Compensation, Nominating & Governance Committee (the “CNG Committee”) of the Board of Directors. In general, the CNG Committee is authorized to select the recipients of awards and to establish the terms and conditions of those awards. A total of 3 million common shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in our capital structure) may be awarded under the Stock Incentive Plan. In general, no more than 1.5 million shares may be granted to any one individual over the term of the Stock Incentive Plan, and no more than $2 million in performance awards under the Stock Incentive Plan.

Restricted stock is common stock subject to forfeiture restrictions until they are vested. The forfeiture restrictions will be determined by the CNG Committee in its sole discretion, and the CNG Committee may provide that the forfeiture restrictions will lapse upon a number of conditions, including the grantee’s attainment of performance targets, continued employment or service, the occurrence of any other event, or a combination of the foregoing. All existing award agreements provide that the restricted stock will vest in the event of a change of control, the definition of which would include the merger contemplated by the merger agreement that the Company entered into in January 2008.

Phantom stock is common stock (or the fair market value thereof) or rights to receive amounts equal to share appreciation over a specific period of time. Such awards vest over a period of time established by the CNG Committee, without satisfaction of any performance criteria or objectives. Payment of a phantom stock award may be made in cash, common stock, or a combination thereof.

The Stock Incentive Plan may not be amended, other than to increase the maximum aggregate number of shares that may be issued under it, to increase the maximum aggregate number of shares that may be issued under the plan through incentive stock options, to reprice any outstanding options or to change the class of individuals eligible to receive awards under the plan, by the Board of Directors without the consent of our shareholders. No change in any award previously granted under the plan may be made which would impair the rights of the holder of such award without the approval of the holder.

2008 Awards

In February 2008, the Company issued 292,250 shares of restricted stock to executive officers, with a fair market value of $22.54 per share. The vesting of the restricted stock is not conditioned on anything other than the passage of time and the grantee’s continued employment or services with the Company. Those shares vest as follows:

 

Vesting on February 15,

   Percentage
of Award
Vesting
 

2008

   15.0 %

2009

   17.5 %

2010

   20.0 %

2011

   22.5 %

2012

   25.0 %

As of the award date of these shares, there were 1,699,900 shares of restricted stock outstanding under the Stock Incentive Plan and 939,000 shares remaining available for issuance under the plan. In February 2008, 287,447 shares of restricted stock vested, leaving 1,412,453 shares of restricted stock outstanding under the Stock Incentive Plan.

2007 Awards

In December 2007, the Company issued 218,500 shares of restricted stock to employees and non-executive members of the Board of Directors, with a fair market value of $23.10 per share. The vesting of the restricted stock is not conditioned on anything other than the passage of time and the grantee’s continued employment or services with the Company. Those shares vest as follows:

 

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Vesting on February 15,

   Percentage
of Award
Vesting
 

2008

   15.0 %

2009

   17.5 %

2010

   20.0 %

2011

   22.5 %

2012

   25.0 %

As of December 31, 2007 there were 1,407,650 shares of restricted stock outstanding under the Stock Incentive Plan and 1,231,250 shares remaining available for issuance under the plan.

2006 Awards

In May 2006, the Company issued 301,500 shares of restricted stock at a fair market value of $8.06 per share. Of those shares, 9,000 shares awarded to a new director elected in May 2006 vest ratably between February 2007 and February 2009, and the remaining 292,500 shares vest in February 2010. The vesting of the restricted stock is not conditioned on anything other than the passage of time and the grantee’s continued employment or services with the Company.

In December 2006, the Company issued 690,000 shares of restricted stock at a fair market value of $11.24 per share. The vesting of the restricted stock is not conditioned on anything other than the passage of time and the grantee’s continued employment or services with the Company. Those shares vest as follows:

 

Vesting on February 15,

   Percentage
of Award
Vesting
 

2007

   15.0 %

2008

   17.5 %

2009

   20.0 %

2010

   22.5 %

2011

   25.0 %

As of December 31, 2006 there were 1,438,900 shares of restricted stock outstanding under the Stock Incentive Plan and 1,449,750 shares remaining available for issuance under the plan.

2005 Awards

On August 24, 2005, the Company granted to directors and key employees a total of 266,625 shares of phantom stock and 266,625 shares of restricted stock at a fair market value of $11.10 per share. The restricted stock awards made on August 24, 2005 were scheduled to vest annually between February 2006 and February 2009. Effective December 23, 2005, the Company cancelled outstanding shares of phantom stock and issued corresponding amounts of restricted stock with a fair market value of $9.74 per share. In addition, the Company awarded on December 23, 2005 a total of 25,500 shares of restricted stock with a fair market value of $9.74 per share to recent hires. Accordingly, as of December 31, 2005, there were 558,750 shares of restricted stock and no shares of phantom stock outstanding. The vesting of the restricted stock is not conditioned on anything other than the passage of time and the grantee’s continued employment with the Company. As of December 31, 2005, 2,441,250 shares remained available for issuance under the plan.

Outstanding Restricted Stock

Restricted stock outstanding as of December 31, 2007, 2006 and 2005 includes the following:

 

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     Number of
Shares
    Weighted
Average Fair
Value Per Share

Outstanding at December 31, 2005

   558,750     $ 10.39

Granted

   991,500       10.27

Vested

   (107,000 )     10.37

Canceled or expired

   (4,350 )     9.87
            

Outstanding at December 31, 2006

   1,438,900     $ 10.31

Granted

   218,500       23.10

Vested

   (204,200 )     10.79

Canceled or expired

   (45,550 )     10.10
            

Outstanding at December 31, 2007

   1,407,650     $ 12.24
            

Taking into effect the 292,250 shares awarded and 287,447 shares vested in February 2008, 1,412,453 shares of restricted stock remain outstanding with a weighted average fair value of $10.04 per share. The total expense related to the restricted-stock awards is calculated by multiplying the number of shares awarded by the average high and low sales price of the Company’s common stock on the grant date, which we consider to be its fair market value. The Company amortizes the expense over the total vesting period of the awards on a straight-line basis.

Total compensation cost charged against income was $4.1 million, $2.3 million and $0.6 million for the years ended December 31, 2007 and 2006 and the period from January 13, 2005 to December 31, 2005, respectively. For the period during which the phantom stock was outstanding, the Company debited its profit and losses account and credited its equity account on a straight-line basis for the period from August 24, 2005 to December 22, 2005. For the period from December 23, 2005 to December 31, 2005, the Company accounted for the additional restricted stock granted on December 23, 2005 on a straight-line basis, consistently with the treatment for previously outstanding restricted stock. Total unamortized compensation cost relating to the restricted stock at December 31, 2007 and December 31, 2006 was $13.9 million and $13.3 million, respectively. The total compensation cost related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of approximately 4 years and 4 years as of December 31, 2007 and 2006, respectively. The unamortized compensation cost as of December 31, 2007 will be expensed according to the following schedule, based on currently outstanding restricted stock awards:

 

Period in which compensation cost is expensed

   Amount to be
expensed in
relevant period
     (in thousands)

2008

   $ 5,353

2009

     3,840

2010

     3,111

2011

     1,401

2012

     153
      

Total

   $ 13,858
      

17. Forward Currency Exchange Contracts

The Company enters into foreign currency exchange contracts in order to mitigate foreign-exchange risk in connection with potential fluctuations in the value of the Euro. As of December 31, 2007, we had no open foreign currency exchange contracts. During 2007, we were party to the following foreign currency exchange contract:

 

Contract Date

   Notional Amount (€)    For Value    Rate ($/€)

August 14, 2007

   1,000,000    September 14, 2007    1.345

We were party to the following forward currency exchange contracts during 2006, all of which closed during 2006 and 2007:

 

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Contract Date

   Notional Amount (€)    For Value    Rate ($/€)

September 26, 2006

   1,000,000    March 26, 2007    1.2800

September 29, 2006

   1,000,000    December 29, 2006    1.2745

October 6, 2006

   1,000,000    June 29, 2007    1.2795

October 10, 2006

   1,000,000    September 28, 2007    1.2725

We were not party to any foreign currency exchange contracts during the period January 13, 2005 (inception) to December 31, 2005.

At each reporting period, the Company marks to market the fair value of the forward currency exchange contracts and includes that amount in its income statement in the item “foreign exchange gains / (losses) and other, net.”, which at December 31, 2006 was $0.1 million. The Company enters into foreign currency exchange contracts in order to mitigate foreign-exchange risk in connection with potential fluctuations in the value of the Euro. The Company had no forward currency exchange contracts during the 2005 period.

18. Significant Customers

For the years ended December 31, 2007 and December 31, 2006 and in the period from January 13, 2005 (inception) to December 31, 2005, the following charterers individually accounted for more than 10% of the Company’s gross revenues as follows::

 

      Percentage of Gross Revenues  

Charterer

   2007     2006     2005  

Bunge

   52.4 %   22.1 %   —    

Cargill

   —       10.7 %   14.9 %

STX Panocean

   —       11.9 %   —    

Energy Shipping

   —       —       16.2 %

Deiulemar

   —       —       15.7 %

Safety Management

   —       —       12.3 %

Sinochart

   —       —       11.8 %

19. Subsequent Events

Merger Announcement

On January 29, 2008 Excel Maritime Carriers Ltd (Excel) (NYSE: EXM) and Quintana jointly announced that Excel had agreed to acquire Quintana pursuant to a definitive merger agreement whereby Quintana would become a wholly owned subsidiary of Excel. The merger agreement was approved by the boards of directors of each company.

Under the agreement, Quintana shareholders will receive a combination of cash and stock. Each Quintana share will receive $13.00 in cash and 0.4084 Excel Class A common shares. If Excel’s average closing price during the 15 trading day period ending before the closing date of the merger is above $45.00 per share, the 0.4084 exchange ratio will be adjusted downward to equal the quotient of $18.38 divided by the average closing price of Excel Class A common shares for the fifteen trading days immediately preceding the closing date of the merger. In all cases, the value of the Excel Class A common stock to be delivered per Quintana share shall be reduced to reflect any cash dividends paid by Quintana in 2008 prior to the closing of the merger. The total transaction value will be approximately $2.5 billion (based on Excel’s closing price of $36.33 on February 25, 2008), including assumed net debt and other costs. In addition, Quintana will nominate three directors, Hans Mende, Corbin Robertson III, and Paul Cornell, who will serve on Excel’s Board of Directors.

The transaction is subject to customary closing conditions, including the receipt of financing, approval of Quintana’s shareholders and receipt of regulatory approvals.

Letter of Guarantee

On February 7, 2008, in connection with the merger agreement described above, Quintana entered into an irrevocable letter of credit in favor of Excel, whereby termination of the merger agreement by Quintana for specified reasons, may result in payment of a maximum aggregate amount by Quintana of $93 million to pay buyer termination expenses, the termination

 

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fee or the Company Breach Fee. The amounts payable under the letter of credit vary depending on the reason for termination of the agreement, such reasons including, but not limited to:

 

   

Failure of Quintana’s shareholders to approve the merger;

 

   

Representations, warrants or covenants under the merger agreement are breached by Quintana which result in Excel terminating the merger;

 

   

Quintana takes or fails to take action in breach of the merger agreement which is the principal cause of the merger not occurring prior to October 31, 2008.

Dividend

On February 14, 2008, the Company announced a dividend of $0.31 per common share, payable on March 7, 2008 to common shareholders of record on February 22, 2008.

Vesting

On February 15, 2008, 287,447 shares of restricted stock vested.

 

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SUPPLEMENTARY DATA

Selected Quarterly Financial Information (Unaudited)

 

     Three Months Ended
     March 31,
2007
   June 30,
2007
   September 30,
2007
   December 31,
2007
     (in thousands except share data)

Net revenues

   $ 47,757    $ 59,738    $ 63,991    $ 64,917

Operating income

   $ 24,298    $ 30,938    $ 31,666    $ 27,517

Net income *

   $ 12,493    $ 29,396    $ 7,635    $ 4,244

Net income per common share:

           

Basic

   $ 0.24    $ 0.54    $ 0.14    $ 0.08
                           

Diluted

   $ 0.23    $ 0.52    $ 0.13    $ 0.07
                           

Weighted average shares outstanding:

           

Basic

     52,794,611      54,832,491      55,002,903      56,034,646
                           

Diluted

     54,943,309      56,582,452      56,927,051      57,600,871
                           

 

* As our swap that was entered into in 2006 does not qualify for hedge accounting, the Company must mark to market the fair value of the hedge at the end of every reporting period and reflect the change in the fair value in the income statement. This can result in significant fluctuations in net income from peri