DRYS DryShips Inc

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

1. Basis of Presentation and General Information:

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of DryShips Inc. its subsidiaries and consolidated Variable Interest Entities ("VIEs") (collectively, the "Company" or "DryShips"). DryShips was formed on September 9, 2004, under the laws of the Republic of the Marshall Islands.  The Company is a provider of international seaborne drycargo and oil transportation services and deepwater drilling rig services.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") for interim financial information. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. These statements and the accompanying notes should be read in   conjunction with the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed with the SEC on February 21, 2014.

 

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented.   Operating results for the six-month period ended June 30, 2014, are not necessarily indicative of the results that might be expected for the fiscal year ending December 31, 2014.

The consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

2. Significant Accounting policies:

 

A discussion of the Company's significant accounting policies can be found in the Company's consolidated financial statements included in the Annual Report on Form 20-F for the year ended December 31, 2013, filed with the SEC on February 21, 2014 (the "Consolidated Financial Statements for the year ended December 31, 2013"). There have been no material changes to these policies in the six month period ended June 30, 2014.

New accounting pronouncements

Revenue from Contracts with Customers: The Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") (collectively, the "Boards") jointly issued a standard in May 2014 that will supersede virtually all of the existing revenue recognition guidance in US GAAP and International Financial Reporting Standards ("IFRS") and is effective for annual periods beginning on or after January 1, 2017. The standard establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard's requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity's ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgments and estimates. The guidance in Accounting Standard Update ("ASU") 2014-09 Revenue from Contracts with Customers (Topic 606) supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this ASU supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. Management is in the process of accessing the impact of the new standard on Company's financial position and performance.

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

  3. Going concern

As of June 30, 2014, the drilling segment was in compliance with its financial covenants while the shipping segment was in breach of   certain financial covenants, contained in the Company's loan agreements relating to $82,650 of the Company's debt, giving effect to the waivers subsequently signed. Even though as of   to date none of the lenders have declared an event of default under the loan agreements, these breaches constitute events of default and may result in the lenders requiring immediate repayment of the loans. As a result of this non-compliance and of the cross default provisions contained in all bank loan agreements of the shipping segment, the Company has classified the respective bank loans   amounting to $896,563 as current liabilities (Note 9). As a result, the Company reported a working capital deficit of $1,004,262 at June 30, 2014.

 

In addition and as further discussed in Note 13, the Company's expected short term capital commitments to fund the construction installments under the shipbuilding contracts in the twelve-month period ending June 30, 2015, amount to $627,140. Cash expected to be   generated from operations assuming that current market charter hire rates would prevail in the twelve-month period ending June 30, 2015, will not be sufficient to cover the Company's unfinanced capital commitments. The Company expects to finance its current   maturities of long-term debt and unfinanced capital commitments with cash on hand, operational cash flows and debt or equity   issuances.

On October 4, 2013, the Company filed a prospectus supplement to the universal shelf registration statement on Form F-3 filed on August 30, 2013, pursuant to an at-the-market offering for up to $200,000 of the Company's common shares. In connection with the offering, the Company entered into a Sales Agreement with Evercore Group L.L.C., ("Evercore"), the sales agent, dated October 4, 2013. During 2013, 6,892,233 common shares were issued and sold pursuant to the at-the-market offering, resulting in proceeds of $23,655, after deducting commissions, while in the six months ended June 30, 2014, 22,209,844 common shares were issued and sold pursuant to the at-the-market offering, resulting in proceeds of $90,016, after deducting commissions.

The Company is currently in negotiations with its lenders to obtain waivers, waiver extensions or to restructure the affected debt. Management expects that the lenders will not demand payment of the loans before their maturity, provided that the Company pays scheduled loan installments and accumulated or accrued interest as they fall due under the existing credit facilities. Management plans to settle the loan interest and scheduled loan repayments with cash expected to be generated from operations and from financing activities.

The unaudited interim condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Accordingly, the unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities, or any other adjustments that might result in the event the Company is unable to continue as a going concern.

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

4. Transactions with Related Parties:

 

The amounts included in the accompanying consolidated balance sheets and unaudited interim condensed consolidated statements of operations are as follows:

 

 

          (Per day and per quarter information in the note below is expressed in United States Dollars/Euros)

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

4. Transactions with Related Parties - continued:

TMS Bulkers Ltd. - TMS Tankers Ltd.:

 

Effective January 1, 2011, each of the Company's drybulk vessel-owning subsidiaries entered into new management agreements with TMS Bulkers Ltd. ("TMS Bulkers"), which replaced the Company's management agreements with Cardiff Marine Inc. ("Cardiff"), a related technical and commercial management company incorporated in Liberia, that were effective as of September 1, 2010 through December 31, 2010 and each of the Company's tanker ship-owning subsidiaries entered into new management agreements with TMS Tankers Ltd. ("TMS Tankers") together TMS Bulkers and TMS Tankers are hereinafter referred to as the "Managers". The Managers are beneficially owned by Mr.George Economou, the Company's Chairman, President and Chief Executive Officer.

TMS Bulkers provides comprehensive drybulk ship management services, including technical supervision, such as repairs, maintenance and inspections, safety and quality, crewing and training as well as supply provisioning. TMS Bulkers' commercial management services include operations, chartering, sale and purchase, post-fixture administration, accounting, freight invoicing and   insurance. Each new vessel management agreement provides for a fixed management fee, the same fee as was charged by Cardiff   under the Company's previous management agreements effective from September 1, 2010, of Euro 1,500   ($2,047   based on the   Euro/U.S. Dollar exchange rate at June 30, 2014) per vessel per day, which is payable in equal monthly installments in advance and can be adjusted each year by the Greek Consumer Price Index for the previous year but by not less than 3% and not more than 5%.   Effective January 1, 2012, the fixed management fee was adjusted by 3% to Euro 1,545 ($2,108   based on the Euro/U.S. Dollar exchange rate at June 30, 2014).

 

If TMS Bulkers is requested to supervise the construction of a newbuilding vessel, in lieu of the management fee, the Company will pay TMS Bulkers an upfront fee equal to 10% of the budgeted supervision cost. For any additional attendance above the budgeted   superintendent expenses, the Company will be charged extra at a standard rate of Euro 500 (or $682   based on the Euro/U.S. Dollar exchange rate at June 30, 2014) per day.

 

TMS Tankers provides comprehensive tanker ship management services, including technical supervision, such as repairs, maintenance and inspections, safety and quality, crewing and training as well as supply provisioning. TMS Tankers' commercial management   services include operations, chartering, sale and purchase, post-fixture administration, accounting, freight invoicing and insurance.   Under the management agreements, TMS Tankers is entitled to a daily management fee per vessel of Euro 1,700   ($2,320   based on   the Euro/U.S. Dollar exchange rate at June 30, 2014), payable in equal monthly installments in advance and automatically adjusted   each year by the Greek Consumer Price Index for the previous year by not less than 3% and not more than 5%. Effective January 1,   2012, the fixed management fee was adjusted by 3% to Euro 1,751   ($2,389   based on the Euro/U.S. Dollar exchange rate at June 30,   2014). TMS Tankers is entitled to a construction supervisory fee of 10% of the budgeted supervision cost for the vessels under construction, payable up front in lieu of the fixed management fee.

 

Under their respective agreements, the Managers are also entitled to (i) a discretionary incentive fee, (ii) a commission of 1.25% on charter hire agreements that are arranged by the Managers; and (iii) a commission of 1% of the purchase price on sales or purchases of vessels in the Company's fleet that are arranged by the Managers.

 

In the event that the management agreements are terminated for any reason other than a default by the Managers or change of control of the Company's ownership, the Company will be required to pay the management fee for a further period of three calendar months as from the date of termination.

 

In the event of a change of control of the Company's ownership, the Company will be required to pay the Managers a termination payment, representing an amount equal to the estimated remaining fees payable to the Managers under the then current term of the agreement which such payment shall not be less than the fees for a period of 36 months and not more than a period of 48 months.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

4. Transactions with Related Parties - continued:

TMS Bulkers Ltd. - TMS Tankers Ltd. - continued:

 

Each management agreement has an initial term of five years and will be automatically renewed for a five-year period and thereafter extended in five-year increments, unless the Company provides notice of termination in the fourth quarter of the year immediately preceding the end of the respective term.

 

Transactions with TMS Bulkers and TMS Tankers in Euros were settled on the basis of the average U.S. Dollar rate on the invoice date.

 

George Economou: As the Company's Chairman, President, Chief Executive Officer ("CEO") and principal shareholder, with a   13.3% shareholding as of June 30, 2014, Mr. George Economou has the ability to exert influence over the operations of the Company.   Mr. George Economou shareholding decreased to 13.3%, on April 7, 2014 due to the expiration of the previously issued 3,500,000 warrants pursuant to a Securities Purchase Agreement dated March 6, 2009.   In April 2012, companies affiliated with the Company's Chairman, President and Chief Executive Officer purchased a total of 2,185,000 common shares of Ocean Rig in the public offering by Ocean Rig of common shares of Ocean Rig owned by DryShips that was completed on April 17, 2012 (Note 11). During March 2013, the Company accepted an offer from a company affiliated with Mr. George Economou for the sale of two VLOC newbuildings (Note 6).

Cardiff Marine Inc : On January 2, 2014, the Company entered into an agreement with certain clients of Cardiff, a company controlled by Mr. George Economou, for the grant of seven rights of first refusal to acquire seven Newcastlemax newbuildings, should they wish to sell these vessels at some point in the future. The Company may exercise any one, several or all of the rights. Each right is valid until one day before the contractual date of delivery of each vessel. These newbuildings are scheduled for delivery between the fourth quarter of 2015 and the fourth quarter of 2016.

Global Services Agreement: Effective January 1, 2013, the Company terminated its Global Services Agreement with Cardiff  pursuant to which Cardiff (i) provided consulting services related to the identification, sourcing, negotiation and arrangement of new employment for offshore assets of the Company and its subsidiaries, including the Company's drilling units; and (ii) identified, sourced, negotiated and arranged the sale or purchase of the offshore assets of the Company and its subsidiaries,   including the Company's drilling units.  In consideration of such services, the Company had paid Cardiff a fee of 1.0% in   connection with employment arrangements and 0.75% in connection with sale and purchase activities. Effective January 1, 2013,   Ocean Rig Management Inc. ("Ocean Rig Management"), a wholly-owned subsidiary of Ocean Rig, the Company's majority owned subsidiary, entered into a Global Services Agreement with Cardiff Drilling Inc. ("Cardiff Drilling") a company controlled by Mr. George Economou, pursuant to which Ocean Rig Management engaged Cardiff Drilling to act as consultant on matters of chartering and sale and purchase transactions for the offshore drilling units operated by Ocean Rig. Under the Global Services Agreement, Cardiff   Drilling, or its subcontractor, (i) provides consulting services related to the identification, sourcing, negotiation and arrangement of new employment for offshore assets of Ocean Rig and its subsidiaries; and (ii) identifies, sources, negotiates and arranges the sale or purchase of the offshore assets of Ocean Rig and its subsidiaries. In consideration of such services, Ocean Rig will pay Cardiff   Drilling a fee of 1.0% in connection with employment arrangements and 0.75% in connection with sale and purchase activities. Costs from the Global Services Agreement are expensed in the unaudited interim condensed consolidated statements of operations or capitalized as a component of "Advances for drillships under construction and related costs" being a directly attributable cost to the construction, as applicable.

Transactions with Cardiff in Euros were settled on the basis of the average USD rate on the invoice date.

 

Fabiana Services S.A.: Under the consultancy agreements effective from February 3, 2005, between the Company and Fabiana Services S.A. ("Fabiana"), a related party entity incorporated in the Republic of the Marshall Islands, Fabiana provides consultancy services relating to the services of Mr. George Economou in his capacity as Chief Executive Officer of the Company (Note 12).

 

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

4. Transactions with Related Parties - continued:

 

Fabiana Services S.A. - continued:

 

On January 12, 2011, the Compensation Committee approved a $4 million bonus and 9,000,000 shares of the Company's common stock payable to Fabiana for the provision of the services of the Company's Chief Executive Officer during 2010. The shares were granted to Fabiana and vest over a period of eight years, with 1,000,000 shares vesting on the grant date and 1,000,000 shares to vest annually on December 31, 2011 through 2018, respectively.

On August 20, 2013, the Compensation Committee approved that a bonus in the form of 1,000,000 shares of the Company's common stock, with par value $0.01, be granted to Fabiana for the contribution of Mr. George Economou for Chief Executive Officer's services rendered during 2012. The shares vest over a period of two years  with 333,334 shares vesting on the grant date, 333,333 shares vesting on August 20, 2014 and, 333,333 vesting on August 20, 2015.

  Azara Services S.A.: Under the consultancy agreement entered on September 9, 2013 and effective from January 1, 2013, between one of the wholly owned subsidiaries of Ocean Rig, and Azara Services S.A. ("Azara"), a related party entity incorporated in the Republic of the Marshall Islands, Azara provides consultancy services relating to the services of Mr. George Economou in his capacity as Chief   Executive Officer of Ocean Rig. The annual remuneration to be awarded to Azara under the consultancy agreement is $2,500 in   cash. For the six month period ended June 30, 2014, the Company incurred costs of $1,250, related to this agreement which are   included in "General and Administrative expenses" in the unaudited interim condensed consolidated statement of operations.  In   addition, on August 20, 2013, Ocean Rig's Compensation Committee approved a sign-on bonus of 150,000 shares of Ocean Rig's common stock to Azara, relating to the services of Mr. George Economou as Chief Executive Officer of Ocean Rig. The shares vest over a period of two years with 50,000 shares vesting on the grant date, 50,000 shares vesting on August 20, 2014 and, 50,000 vesting on August 20, 2015. The stock-based compensation is being recognized to expenses over the vesting period and based on   the fair value of the Ocean Rig shares on the grant date of $17.56 per share.

Basset Holdings Inc.:   Under the Consultancy Agreement effective from June 1, 2012, between a wholly owned subsidiary of Ocean Rig and Basset Holdings Inc. ("Basset"), a related party entity incorporated in the Republic of the Marshall Islands, Basset provides consultancy services relating to the services of Mr. Anthony Kandylidis in his capacity as Executive Vice-President of Ocean Rig. The   annual remuneration to be awarded to Basset under the consultancy agreement is Euro 0.9 million   ($1.2   million based on the   Euro/U.S. Dollar exchange rate at June 30, 2014). On August 20, 2013, the Compensation Committee of Ocean Rig approved that a cash bonus of $3.0 million be paid to Basset for the contribution of Mr. Antony Kandylidis for Executive Vice President's services.

Cardiff Tankers Inc .:   Under certain charter agreements for the Company's tankers, Cardiff Tankers Inc. ("Cardiff Tankers"), a related party entity incorporated in the Republic of the Marshall Islands, is entitled to a 1.25% commission on the charter hire agreements.

 

Vivid Finance Limited: Under the consultancy agreement effective from September 1, 2010, between the Company and Vivid Finance Limited ("Vivid"), a company controlled by the Chairman, President and Chief Executive Officer of the Company, Mr. George Economou, Vivid provides the Company with financing-related services such as (i) negotiating and arranging new loan and   credit facilities, interest rate swap agreements, foreign currency contracts and forward exchange contracts, (ii) renegotiating existing loan facilities and other debt instruments, and (iii) the raising of equity or debt in the capital markets. In exchange for its services,   Vivid is entitled to a fee equal to 0.20% on the total transaction amount. The consultancy agreement has a term of five years and may be terminated (i) at the end of its term unless extended by mutual agreement of the parties; or (ii) at any time by the mutual agreement of the parties.

 

Effective January 1, 2013, the Company, amended its agreement with Vivid to limit the scope of the services provided under the agreement to DryShips Inc. and its subsidiaries or affiliates, except for Ocean Rig and its subsidiaries.  In essence, post-amendment,   the consultancy agreement between the DryShips Inc. and Vivid is in effect for the Company's tanker and drybulk shipping segments only.

 

Effective January 1, 2013, Ocean Rig Management, a wholly-owned subsidiary of Ocean Rig, entered into a new consultancy agreement with Vivid, on the same terms and conditions as in the consultancy agreement, dated as of September 1, 2010, between   DryShips Inc. and Vivid, except that under the new agreement, Ocean Rig is obligated to pay directly the fee of 0.20% to Vivid on the total transaction amount in consideration of the services provided by Vivid in respect of Ocean Rig's offshore drilling business, whereas under the consultancy agreement between DryShips Inc. and

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

4. Transactions with Related Parties - continued:

Vivid, this fee was paid by DryShips Inc.

Sigma Tankers Inc. pool and Blue Fin Tankers Inc. pool: Three of the Suezmax tankers, Vilamoura, Lipari and Petalidi , operated   in the Blue Fin Tankers pool ("Blue Fin") until the termination of the pooling agreements with Blue Fin relating to such vessels in October 2012, March 2013 and November 2012, respectively. The Aframax tankers Saga , Daytona , Belmar and Calida operated in Sigma tanker pool until the termination of the pooling agreements with Sigma relating to such vessels in April 2012, October 2012, January 2013 and October 2013, respectively. Sigma and Blue Fin are spot market pools managed by Heidmar Inc. Mr. George Economou is a member of the Board of Directors of Heidmar Inc.

  5. Other current assets

 

The amount of other current assets shown in the accompanying consolidated balance sheets is analyzed as follows:

 

 

6. Advances for Vessels and Drillships under Construction and related costs:

 

The amounts shown in the accompanying consolidated balance sheets include milestone payments relating to the shipbuilding contracts with the shipyards, supervision costs and any material related expenses incurred during the construction periods, all of which   are capitalized in accordance with the accounting policy discussed in Note 2 of the Consolidated Financial Statements for the year ended December 31, 2013.

 

The movement of the account during the six month period ended June 30, 2014 was as follows:

 

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

6. Advances for Vessels and Drillships under Construction and related costs-continued:

 

On April 12, 2011, the Company concluded an order with an established Chinese shipyard for two 176,000 dwt drybulk vessels, namely hull number H1241 and H1242, for an aggregated price of $54,164 per vessel. On March 26, 2013, the Company concluded   two Memoranda of Agreement, with an unrelated party for the sale of two Capesize newbuildings, Hull 1241 and Hull 1242, for a sale price of $71,000 in the aggregate. An impairment loss of $31,617 in the aggregate, was recognized, as a result of the reduction of the   vessels' carrying amount to their fair value. In addition, an amount of $10,245 related to this agreement was paid and included in "Contract termination fees and other" in the unaudited 2013 interim condensed consolidated financial statements. On May 23, 2013 and June 17, 2013, Hull 1241 and Hull 1242, were delivered to their new owners, respectively.

 

In connection with the acquisition of OceanFreight, the Company acquired the orders for five Very Large Ore Carriers, or VLOCs from an established Chinese shipyard. On September 10, 2012, the vessel Fakarava was delivered to the Company while on May 23, 2013 and June 18, 2013, the Company took delivery of its newbuilding VLOC's Negonego (ex. H1229) and Rangiroa (ex. H1228),   respectively. During March 2013, the Company accepted an offer from an entity affiliated with Mr. George Economou (Note 4) for the novation of the shipbuilding contracts of two VLOC under construction, Hull 1239 and Hull 1240, scheduled for delivery during the fourth quarter 2013 and the first quarter 2014, respectively. An impairment loss of $11,873, in the aggregate, was recognized, as a result of the reduction of the vessels' carrying amount to their fair value. In addition, due to the novation agreements which were   signed on April 17, 2013, an amount of $18,305 has been paid and included in "Contract termination fees and other" in the unaudited 2013 interim condensed consolidated financial statements.

On March 24, 2014 the drillship Ocean Rig Athena was delivered to the Company. The Ocean Rig Apollo and the Ocean Rig   Santorini , for which the Company has paid   $235,656 and   $127,000 to the yard, respectively, are scheduled to be delivered in January 2015 and June 2016, respectively.

On April 8, 2014, two contracts between Drillship Crete Owners Inc. and Drillship Amorgos Owners Inc., two wholly owned subsidiaries of Ocean Rig, the Company`s majority owned subsidiary and Samsung Heavy Industries Co., Ltd ("Samsung") became effective for the construction of two 7th generation new integrated design drillships at Samsung and paid $76,600 as first installment to the yard for each of the new drillships. The drillships are scheduled to be delivered to the Company in February 2017 and June 2017, respectively. The total project cost is approximately $685,000, per drillship.

  7. Vessels, Drilling Rigs, Drillships, Machinery and Equipment, net:

 

The amounts in the accompanying consolidated balance sheets are analyzed as follows:

 

On March 18, 2014, the Company concluded a Memorandum of Agreement with an unaffiliated third party for the acquisition of one second hand Capesize vessel with an attached time charter, Raiatea (ex. Conches) , for a purchase price of $53,000. The vessel was delivered on April 24, 2014.

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As of June 30, 2014, all of the Company's operating vessels, drilling rigs and drillships, except for the vessels Saldhana and Raiatea , have been pledged as collateral to secure the bank loans, Ocean Rig's 6.5% senior secured notes due 2017 and the term loan B facility. (Note 9). 

 

8. Other non-current assets:

 

The amounts included in the accompanying consolidated balance sheets are as follows:

 

 

9. Long-term Debt:

 

The amount of long-term debt shown in the accompanying consolidated balance sheets is analyzed as follows:

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

9. Long-term Debt - continued:

Convertible Senior Notes and Related Borrow Facility

 

In conjunction with the Company's public offering of an aggregate of $460,000 and $240,000 aggregate principal amount of 5% Convertible unsecured Senior Notes in November 2009 and April 2010, respectively (collectively, the "Convertible Senior Notes" or the "Notes"), the Company entered into share lending agreements with an affiliate of the underwriter of the offering, or the share borrower, pursuant to which the Company loaned the share borrower approximately 36,100,000 shares of the Company's common stock. Under the share lending agreements, the share borrower is required to return the borrowed shares when the Notes are no longer outstanding. The Company did not receive any proceeds from the sale of the borrowed shares by the share borrower, but the   Company did receive a nominal lending fee of $0.01 per share from the share borrower for the use of the borrowed shares. As of December 31, 2013 and June 30, 2014, the share borrower had returned an aggregate of 21,000,000 of the above-referenced loaned shares to the Company, which were not retired and are included as treasury stock in the accompanying balance sheets as of December 31, 2013 and June 30, 2014, respectively.

The fair value of the outstanding loaned shares as of December 31, 2013 and June 30, 2014, was $70,970 and   $48,622   respectively. On   the day of the Notes issuance the fair value of the share lending agreements was determined to be $14,476, based on a 5.5% interest   rate of the Notes without the share lending agreement and was recorded as debt issuance cost. Amortization of the issuance costs   associated with the share lending agreement during the six-month periods ended June 30, 2013 and 2014, was $1,475 and   $1,475, respectively, and is included in "Interest and finance costs." The unamortized balance as of December 31, 2013 and June 30,   2014, was $2,733 and $1,258, respectively.

Effective September 19, 2011, the applicable conversion price of the Notes changed to $6.9 per share. The previous conversion price of $7.19 per share was adjusted downward in connection with the Company's partial spin off of Ocean Rig common stock held by the Company. Since the Company's stock price was below the Notes conversion price of $6.9 as of June 30, 2014, the if-converted value did not exceed the principal amount of the Notes.

The total interest expense related to the Notes in the Company's unaudited interim condensed consolidated statement of operations for   the six-month periods ended June 30, 2013 and 2014, was $38,383 and $41,158, respectively, of which $20,883 and $23,658,   respectively, are non-cash amortization of the discount on the liability component and $17,500 and $17,500,   respectively, are the   contractual interest paid semi-annually at a coupon rate of 5% per year. At December 31, 2013 and June 30, 2014, the net carrying   amount of the liability component and unamortized discount were $654,738 and $678,397, respectively, and $45,262 and $21,603,   respectively.

 

The Company's interest expense associated with the $460,000 aggregate principal amount and $240,000 aggregate principal amount of   Notes is accretive based on an effective interest rate of 12% and 14%, respectively.

 

Ocean Rig's 6.5% senior secured notes due 2017

 

On September 20, 2012, Ocean Rig's wholly owned subsidiary Drill Rigs Holdings Inc. (the "Issuer") issued $800,000 aggregate principal amount of 6.50% Senior Secured Notes due 2017 (the "Drill Rigs Notes"), offered in a private offering, resulting in net proceeds of approximately $781,965. Ocean Rig used a portion of the net proceeds of the notes to repay the full   amount outstanding under its $1,040,000 senior secured credit facility as at September 20, 2012. The Drill Rigs Notes are secured obligations and rank senior in right of payment to any future subordinated indebtedness and equally in right of payment to all of its existing and future unsecured senior indebtedness.

 

The Drill Rigs Notes are fully and unconditionally guaranteed by Ocean Rig and certain of its existing and future subsidiaries   (collectively, the "Issuer Subsidiary Guarantors" and, together with Ocean Rig, the "Guarantors").

 

Upon a change of control, which occurs if 50% or more of Ocean Rig's shares are acquired by any person or group other than DryShips or its affiliates, the Issuer will be required to make an offer to repurchase the notes at a price equal to 101% of the   principal amount thereof, plus any accrued and unpaid interest thereon to the date of repurchase. On or after October 1, 2015, the Issuer may, at its option, redeem all or a portion of the notes, at one time or from time to time at 103.25% (from October 1, 2015 to September 30, 2016) or 100% (from October 1, 2016 and thereafter) of the principal amount thereof, plus any accrued and unpaid interest thereon to the date of redemption.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

9. Long-term Debt - continued:

The Drill Rigs Notes and the Drill Rigs Notes guarantees are secured, on a first priority basis, by a security interest in the Issuer's two semi-submersible offshore drilling rigs, the Leiv Eiriksson and the Eirik Raude , and certain other assets of the Issuer and the Issuer   Subsidiary Guarantors, and by a pledge of the stock of the Issuer and the Issuer Subsidiary Guarantors, subject to certain exceptions. The contractual semi-annual coupon interest rate is 6.5% on the Drill Rigs Notes.

  Ocean Rig's 7.25% senior unsecured notes due 2019

On March 26, 2014, Ocean Rig issued $500,000 aggregate principal amount of 7.25% senior unsecured notes due 2019 (the "7.25% Senior Unsecured Notes"), offered in a private placement, resulting in net proceeds of approximately $493,625. The 7.25% Senior Unsecured Notes are unsecured obligations and rank senior in right of payment to any future subordinated indebtedness and equally in right of payment to all of its existing and future unsecured senior indebtedness. Ocean Rig used the net proceeds from the offering of   the 7.25% Senior Unsecured Notes, together with cash on hand and repurchased $462,300 of its 9.5% Senior Unsecured Notes, of which $500,000 in aggregate principal amount was outstanding prior to closing of the 7.25% Senior Unsecured Notes Offering, at a   tender premium of 105.375%, while the remaining $37,700, was redeemed at a redemption price of 104.5% on May 13, 2014.

The 7.25% Senior Unsecured Notes are not guaranteed by any of the Company's subsidiaries. Upon a change of control, which occurs if 50% or more of the Company's shares are acquired by any person or group other than DryShips or its affiliates, the noteholders will have an option to require the Company to purchase all outstanding notes at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. The contractual semi-annual coupon interest rate is 7.25% per year.

Ocean Rig's 9.5% senior unsecured notes due 2016

 

On April 27, 2011, Ocean Rig issued $500,000 aggregate principal amount of its 9.5% senior unsecured notes due 2016 (the "9.5% Senior Unsecured Notes"), offered in a private placement, resulting in net proceeds of approximately $487.5 million. The 9.5% Senior Unsecured Notes were unsecured obligations and ranked senior in right of payment to any future subordinated indebtedness and equally in right of payment to all of Ocean Rig's existing and future unsecured senior indebtedness.

 

The 9.5% Senior Unsecured Notes were not guaranteed by any of the Company's subsidiaries. Upon a change of control, which occurs if 50% or more of Ocean Rig's shares were acquired by any person or group other than DryShips or its affiliates, the noteholders   had an option to require Ocean Rig to purchase all outstanding notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. The contractual semi-annual coupon interest rate was 9.5% per year.

The 9.5% Senior Unsecured Notes were repurchased or redeemed in connection with the 7.25% Senior Unsecured Notes offering discussed above.

Term bank loans and credit facilities

 

The bank loans are payable in U.S. Dollars in quarterly and semi-annual installments with balloon payments due at maturity between   March 2015   and June 2025. Interest rates on the outstanding loans as at June 30, 2014, are based on LIBOR plus a margin, except for an amount of $1,885,750 from the loan facilities which are based on a fixed rate.

 

On March 28, 2014, the Company entered into a supplemental agreement relating to the loan agreement dated March 19, 2012, to amend certain financial covenants.

On April 14, 2014, the Company obtained a waiver letter relating to the term loan facility dated June 20, 2008, to amend certain financial covenants. The waiver is subject to definitive documentation, which is expected to be completed by the end of the third quarter of 2014.

On April 30, 2014, the Company reached an agreement with the lender under its two Senior Secured Credit Facilities, dated October 5, 2007 and March 13, 2008. Under the terms of these agreements, among other things, the lender has agreed to waive certain financial covenants until December 31, 2014 and relax other financial covenants until maturity, and the   Company has agreed to provide a pledge over approximately 3,800,000 Ocean Rig shares owned by DryShips until December 31, 2014. These agreements are subject to definitive documentation which is expected to be completed by the end of the third quarter of 2014.

 

On May 29, 2014 the Company entered into a supplemental agreement to the loan agreement dated February 14, 2012 to amend certain definition.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

9. Long-term Debt - continued:

$1.35 billion Senior Secured Credit Facility

On March 24, 2014, Ocean Rig drew down the remaining undrawn amount of $450,000 under the $1.35 billion term loan facility signed on February 28, 2013, in connection with Ocean Rig Athena delivery.

On July 25, 2014, Ocean Rig's wholly owned subsidiary, Drillships Ocean Ventures Inc. entered into a $1.3 billion Senior Secured Term Loan B ("New Term Loan B") facility to refinance the $1.35 billion Senior Secured Credit Facility led by DNB, which had a loan balance of approximately $1.3 billion on that date. In line with ASC 470-10-45 "Short-Term Obligations Expected to Be Refinanced" the Company has classified the outstanding balance of its bank loans as at June 30, 2014, in accordance with the terms of the new Term Loan B. The unamortized balance of the deferred finance fees associated with the loan repaid, amounting to approximately $19.5 million, was written off in the statement of operations upon the extinguishment of the related debt in July 2014. In addition, restricted cash of $75.0 million associated with the respective loans has been released upon the repayment.  The New Term Loan B facility is secured primarily by first priority mortgages on the vessels, Ocean Rig Mylos, Skyros and Athena, bears interest at a fixed rate, and matures on July 25, 2021.

$1.9 billion Term Loan B Facility

On February 7, 2014, Ocean Rig refinanced its then existing short-term Tranche B-2 Term Loans with a fungible add-on to its existing long-term Tranche B-1 Term Loans.  As a result of this refinancing, the total $1.9 billion of Tranche B-1 Term Loans will mature no   earlier than the third quarter of 2020.

The aggregate available undrawn amounts under the Company's facilities at December 31, 2013 and June 30, 2014, were $450,000 and $0, respectively.

 

The weighted-average interest rates on the above outstanding debt were: 6.39% for the six-month period ended June 30, 2013 and 6.57% for the six-month period ended June 30, 2014.

The term loans, credit facilities and secured notes are secured by first priority mortgages over the Company's vessels, drilling rigs and drillships, corporate guarantees, first priority assignments of all freights, earnings, insurances and requisition compensation and pledges of the   shares of capital stock of certain of the Company's subsidiaries. The loans contain covenants that restrict, without the bank's prior consent changes in management and ownership of the vessels, the incurrence of additional indebtedness and mortgages of vessels and changes in the general nature of the Company's business. In addition, some of the vessels' owning companies are not permitted to pay any dividends to DryShips nor DryShips to its shareholders without the lender's prior consent. The loans also contain certain   financial covenants relating to the Company's financial position, operating performance and liquidity, including maintaining working capital above a certain level. The Company's secured credit facilities impose operating and negative covenants on the Company and its subsidiaries. These covenants may limit DryShips' subsidiaries' ability to, among other things, without the relevant lenders' prior   consent (i) incur additional indebtedness, (ii) change the flag, class or management of the vessel mortgaged under such facility, (iii) create or permit to exist liens on their assets, (iv) make loans, (v) make investments or capital expenditures, and (vi) undergo a change in ownership or control.

As of June 30, 2014, the Company was not in compliance with certain loan-to-value ratios contained in certain of its loan agreements relating to its shipping segment. These loan-to-value ratio shortfalls do not constitute events of default that would automatically trigger the full repayment of the loan. Based on the loan agreements, loan-to-value shortfalls may be remedied by the Company by providing additional collateral or repaying the amount of the shortfall. In addition, as of June 30, 2014, and giving effect to the waivers subsequently signed,  the Company was in breach of   certain financial covenants, contained in the Company's loan agreements relating to its shipping segment, under which a total of   $82,650 was outstanding as of June 30, 2014 (Note 3). As a result of this non-compliance and of the cross default provisions contained   in all of the Company's bank loan agreements relating to its shipping segment, and in accordance with guidance related to the classification of obligations that are callable by the creditor, the Company has classified all of the amounts outstanding under its bank   loans relating to its shipping segment that were in breach as of June 30, 2014, amounting to $896,563, as current at June 30, 2014.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

9. Long-term Debt - continued:

As of June 30, 2014, the Company was in compliance with all the financial covenants contained in its debt agreements relating to its drilling segment.

 

Total interest incurred on long-term debt and amortization and write off of debt issuance costs, including capitalized interest, for the six-month   periods ended June 30, 2013 and 2014, amounted to $119,366, and $172,178, respectively. These amounts net of capitalized interest are   included in "Interest and finance costs" in the accompanying unaudited interim condensed consolidated statements of operations.

The annual principal payments required to be made after June 30, 2014, including balloon payments and taking into consideration the repayment of Ocean Rig's $1.35 billion Senior Secured Credit Facility and the New Term Loan B discussed above, totaling $6,070,734 due through   July 2020, are as follows:

 

 

10. Financial Instruments and Fair Value Measurements:

ASC 815, "Derivatives and Hedging" requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. Effective January 1, 2011, the Company removed the designation of the cash flow hedges and discontinued hedge accounting for the associated interest rate swaps.

 

The Company recognizes all derivative instruments as either assets or liabilities at fair value on its consolidated balance sheets.

 

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income/ (loss) and reclassified into earnings in the same period or   periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the accompanying unaudited   interim condensed consolidated statement of operations. Changes in the fair value of derivative instruments that have not been designated as hedging instruments are reported in the accompanying unaudited interim condensed consolidated statement of operations.

 

The Company enters into interest rate swap transactions to manage interest costs and risk associated with changing interest rates with respect to its variable interest rate loans and credit facilities. The Company has entered in the past into forward freight agreements ("FFA") and foreign currency forward contracts in order to manage risks associated with fluctuations in charter rates and foreign currencies, respectively. All of the Company's derivative transactions are entered into for risk management purposes.

As of June 30, 2014, the Company had 26 interest rate swaps outstanding, of $2.7 billion notional amount, maturing   from September 2014 through November 2017.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

10. Financial Instruments and Fair Value Measurements - continued:

 

During the six-month periods ended June 30, 2013 and 2014, the losses transferred from accumulated other comprehensive loss to the unaudited interim condensed consolidated statements of operations were $276 and $277, respectively. The estimated net amount of existing losses at June 30, 2014, that will be reclassified into earnings within the next twelve months related with previously designated cash flow hedges is $554.

 

 

The carrying amounts of cash and cash equivalents, restricted cash current, trade accounts receivable, accounts payable and other current liabilities reported in the consolidated balance sheets approximate their respective fair values because of the short term nature   of these accounts. The fair value of credit facilities is estimated based on current rates offered to the Company for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of the credit facilities. The carrying value approximates the fair market value for the floating rate loans. The carrying value of non-current   restricted cash receiving floating interest rate approximates the fair value, the fair value of the interest rate swaps was determined using a discounted cash flow method based on market-based LIBOR swap yield curves, taking into account current interest rates and   the creditworthiness of both the financial instrument counterparty and the Company. The Convertible Senior Notes, the OCR UDW Notes and the Drill Rigs Notes, have a fixed rate and their estimated fair values were determined through Level 2 inputs of the fair value hierarchy (quoted price in the over-the counter-market). The fair value of the loan that has a fixed rate is estimated through   Level 2 inputs of the fair value hierarchy by discounting future cash flows using rates currently available for debt with similar terms, credit risk and remaining maturities. The estimated fair value of the above Convertible Senior Notes, 9.5% Senior Unsecured Notes, Drill Rigs Notes and loans at December 31, 2013, were approximately $700,000, $531,250, $863,504 and $1,951,790, respectively, compared to a carrying amount net of financing fees of $649,966, $493,915, $784,485 and $1,839,170, respectively. The estimated   fair value of the above   Convertible Senior Notes,   7.25% Senior Unsecured Notes, Drill Rigs Notes and   loans at June 30, 2014, is approximately $691,250, $501,250, $828,000, and $1,826,474, respectively compared to a carrying amount net of financing fees of   $676,201, $491,451, $786,306 and $1,831,254, respectively.

 

The guidance for fair value measurements applies to all assets and liabilities that are being measured and reported on a fair value basis. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

 

10. Financial Instruments and Fair Value Measurements - continued:

requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table summarizes the valuation of assets and liabilities measured at fair value on a recurring basis as of the valuation date.

 

 

The following table summarizes the valuation of assets measured at fair value on a non-recurring basis as of the valuation date.

 

 

In accordance with the provisions of relevant guidance, four newbuildings with a carrying amount of $43,490 were written down to their fair values as determined based on the agreed sale price, resulting in an impairment charge of $43,490, which was included in the accompanying unaudited interim condensed consolidated statement of operations for the six-month period ended June 30, 2013 (Note 6).

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

11. Common Stock and Additional Paid-in Capital:

Issuance of common shares

On October 4, 2013, the Company filed a prospectus supplement to the universal shelf registration statement on Form F-3 filed on August 30, 2013, pursuant to an at-the-market offering for up to $200,000 of the Company's common shares. In connection with the offering, the Company entered into a Sales Agreement with Evercore, the sales agent, dated October 4, 2013. During 2013, 6,892,233   common shares were issued and sold pursuant to the at-the-market offering, resulting in  proceeds of $23,655, after deducting   commissions, while in the   six months ended June 30, 2014,   22,209,844   common shares were issued and sold pursuant to the at-the-market offering, resulting in proceeds of $90,016,   after deducting commissions.

Sale of Ocean Rig shares

  

On February 14, 2013, the Company completed a public offering of an aggregate of 7,500,000 common shares of Ocean Rig owned by DryShips. The Company received approximately $122,960 of net proceeds from the public offering. The net assets of Ocean Rig as   of February 14, 2013, amounted to $2,950,992. At the date of the transaction, the carrying amounts of Ocean Rig's assets and   liabilities did not require fair value adjustments. The difference between the net consideration received and the amount attributed to   the non-controlling interests, which amounted to $45,418, was recognized in equity attributable to the controlling interest.

 

Treasury stock

 

During September 2011, April 2012 and January 2013, the share borrower described in Note 9 returned to the Company an aggregate of 21,000,000 loaned shares of the Company's common stock, which were not retired and are held as treasury stock.

Dividends

On May 8, 2014, Ocean Rig announced that its Board of Directors declared a quarterly cash dividend with respect to the quarter ended March 31, 2014 of $0.19 per common share, to shareholders on record as of May 20, 2014. The dividend was paid on May 29, 2014.   The Company received dividends amounting to $14,877, from its subsidiary, during the six month period ended June 30, 2014.

12. Equity incentive plan:

 

DryShips Inc.

 

On January 12, 2011, 9,000,000 shares of the non-vested common stock out of 21,834,055 shares reserved under the Plan were granted to Fabiana as a bonus for the contribution of Mr. George Economou for the provision of Chief Executive Officer services during 2010. The shares were granted to Fabiana and vest over a period of eight years, with 1,000,000 shares vesting on the grant date and 1,000,000 shares vesting annually on December 31, 2011 through 2018, respectively. The stock-based compensation is being recognized to expenses over the vesting period and based on the fair value of the shares on the grant date of $5.50 per share. As   of June 30, 2014, 4,000,000 of these shares have vested.

 

On August 20, 2013, the Compensation Committee approved that a bonus in the form of 1,000,000 shares of the Company's common stock, with par value $0.01, be granted to Fabiana for the contribution of Mr. George Economou for Chief Executive Officer's services   rendered during 2012. The shares vest over a period of two years  with 333,334 shares vesting on the grant date, 333,333 shares

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

12. Equity incentive plan – continued:

vesting on August 20, 2014 and 333,333 vesting on August 20, 2015. The stock based compensation is being recognized   to expenses over the vesting period and based on the fair value of the shares on the grant date of $2.01 per share. As of June 30, 2014,   333,334 of these shares have vested.

A summary of the status of the Company's non vested shares as of December 31, 2013 and the movement during the six-month period   ended June 30, 2014, is presented below. There were no shares granted or forfeited in the six month period ended June 30, 2014.

 

 

As of December 31, 2013 and June 30, 2014, there was $13,947 and $11,022, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a   weighted-average period of five years.

 

The amounts of $3,349 and $2,924, are recorded in "General and administrative expenses", in the accompanying unaudited interim   condensed consolidated statements of operations for the six-month periods ended June 30, 2013 and 2014, respectively. The total fair   value of shares vested during the six-month periods ended June 30, 2013 and 2014, was $0 and $0, respectively.

 

Ocean Rig UDW Inc.

On February 14, 2012, Ocean Rig's Compensation Committee approved the grant of 112,950 of Ocean Rig's shares of non-vested common stock to officers and key employees of Ocean Rig's subsidiary, Ocean Rig AS, as a bonus for their services rendered during   2011. The shares vest over a period of three years, one third on each December 31, 2012, 2013 and 2014.The stock-based compensation is being recognized to expenses over the vesting period and was based on the fair value of the shares on the grant date of $16.50 per share.

On March 21, 2012, Ocean Rig's board of directors approved the 2012 Equity Incentive Plan (the "Ocean Rig Plan") and reserved a total of 2,000,000 common shares. Under the Ocean Rig Plan, officers, key employees and directors are eligible to receive awards of stock options, stock appreciation rights, restricted stock, restricted stock units, phantom stock units and unrestricted stock.

On May 15, 2012, Ocean Rig's Compensation Committee approved the grant of: a) 4,500 shares of non-vested common stock to an officer as an additional bonus for his services rendered during 2011 and b) 28,200 shares to new recruited employees as a sign-up   stock bonus. The shares vest over a period of three years, one third on each of December 31, 2012, 2013 and 2014. The stock-based compensation is being recognized to expenses over the vesting period and based on the fair value of the Ocean Rig shares on the grant date of $15.92 per share.

On December 5, 2012, 7,500 shares were awarded to an officer of the Company. The fair value of the shares on the grant date was $15.75 and the shares vested in March 2013.

 

On May 16, 2013, Ocean Rig's Compensation Committee approved the grant of 192,400 shares of non-vested common stock to employees of Ocean Rig. The shares vest over a period of three years. The stock-based compensation is being recognized to expenses over the vesting period and based on the fair value of the Ocean Rig shares on the grant date of $16.90 per share.

On August 20, 2013, Ocean Rig's Compensation Committee approved a sign-on bonus of 150,000 shares of Ocean Rig's common stock to Azara, pursuant to a consultancy agreement with Azara effective January 1, 2013, relating to the services of Mr. George Economou as Chief Executive Officer of the Company. The shares vest over a period of two years  with 50,000 shares vesting on the grant date, 50,000 shares vesting on August 20, 2014 and 50,000 vesting on August 20, 2015, respectively. The stock based compensation is being recognized to expenses over the vesting period and based on the fair value of the Ocean Rig shares on the grant date of $17.56 per share.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

12. Equity incentive plan – continued:

On March 31, 2014, Ocean Rig's Compensation Committee approved the grant of 153,700 shares of non-vested common stock to employees of Ocean Rig. The shares vest over a period of three years. The stock-based compensation is being recognized to expenses over the vesting period and based on the fair value of the Ocean Rig shares on the grant date of $17.79 per share.

As of June 30, 2014, 123,683 shares have vested, while 119,900 shares were forfeited due to employees' resignations.

A summary of the status of Ocean Rig's non vested shares as of December 31, 2013 and movement during the six-month period ended June 30, 2014, is presented below.

 

 

As of December 31, 2013 and June 30, 2014, there was $2,724 and $3,717, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted by Ocean Rig. That cost is expected to be recognized over a period of two years. The amounts of $591 and $1,655 represent the stock based compensation expense for each period accordingly and are recorded in "General and administrative expenses", in the accompanying unaudited interim condensed consolidated statements   of operations for the six month periods ended June 30, 2013 and 2014, respectively.

 

13. Commitment and contingencies:

 

13.1 Legal proceedings

Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary course of the shipping and drilling business.

The Company has obtained hull and machinery insurance for the assessed market value of the Company's fleet and protection and indemnity insurance. However, such insurance coverage may not provide sufficient funds to protect the Company from all liabilities   that could result from its operations in all situations. Risks against which the Company may not be fully insured or insurable include   environmental liabilities, which may result from a blow-out or similar accident, or liabilities resulting from reservoir damage alleged to have been caused by the negligence of the Company.

The Company's loss of hire insurance coverage does not protect against loss of income from day one. It covers approximately one year for the loss of time but will be effective after 45 days' off-hire. During 2012, the Ocean Rig Corcovado , a drillship owned by Ocean Rig,  incurred off-hire due to a failure in one of its engines which was a covered event under the loss of hire policy that resulted in   $24.6 million being recognized as revenue during the year ended December 31, 2012. The amount of $24.6 million was reimbursed by the insurers to Ocean Rig in August 2012. During 2014, the Ocean Rig Corcovado incurred off-hire for the same event and, as a result,   an additional amount of $20.2 million for the above covered event was recognized as revenue during the six-month period ended June 30, 2014 and was reimbursed during the same period.

As part of the normal course of operations, the Company's customers may disagree on amounts due to the Company under the provision of the contracts which are normally settled though negotiations with the customer. Disputed amounts are normally reflected   in revenues at such time as the Company reaches agreement with the customer on the amounts due. During 2014, the Ocean Rig Mylos incurred off-hire due to damage to the blow-out-preventer stack during testing, which was a covered event under the loss of hire policy that resulted in $23.3 million being recognized as revenue during the year six-month period ended June 30, 2014.

 

On July 17, 2008, the Company entered into an agreement to sell the vessel Toro, a 1995-built 73,034 dwt Panamax drybulk carrier, to Samsun Logix Corporation ("Samsun") for the price of approximately $63.4 million. On January 29, 2009, the Company reached an

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

13. Commitment and contingencies-continued:

13.1 Legal proceedings   – continued:

agreement with the buyers whereby the price was reduced to $36.0 million. As part of the agreement, the buyers released the deposit   of $6.3 million to the Company immediately and were required to make a new deposit of $1.5 million towards the revised purchase

price. On February 13, 2009, the Company proceeded with the cancellation of the sale agreement due to the buyers' failure to pay the new deposit of $1.5 million and to perform their obligations under the agreement. In February 2009, Samsun was placed in corporate rehabilitation. In February 2010, Samsun's plan of reorganization was approved by its creditors. As part of this plan, the Company will recover a certain percentage of the agreed-upon purchase price.

   

As this is contingent on the successful implementation of the plan of reorganization, the Company is unable to estimate the impact on the Company's financial statements.

   

On May 10, 2013, Drillship Hydra Owners Inc., being the owning company of the drillship Ocean Rig Corcovado , filed a claim against Capricorn Greenland Exploration 1 Limited and Cairn Energy Plc with the High Court in London in connection with the loss of daily earnings and cost of repair for the Blow Out Preventer of Ocean Rig Corcovado in June and July 2011. In July 2013, Ocean Rig reached an out of court commercial agreement with Capricorn Greenland Exploration 1 Limited and Cairn Energy Plc to receive compensation amounting to $5.0 million, and a Settlement Agreement and Release dated September 12, 2013, was entered and the relevant claim filed in the High Court in London, U.K. was dropped. In this respect, Ocean Rig, having previously recognized a receivable of $11.0 million recorded a charge of $6.0 million in June 2013, which amount is included in the respective consolidated statement of operations.

 

13.2 Purchase obligations:

 

The following table sets forth the Company's contractual obligations and their maturity dates as of June 30, 2014:

 

13.3 Contractual charter revenue

 

Future minimum contractual charter revenue, based on vessels committed to non-cancelable, long-term time contracts as of June 30,   2014, amount to   $100,403   for the twelve months ending June 30, 2015, $71,671   for the twelve months ending June 30, 2016,   $62,553   for the twelve months ending June 30, 2017, $56,455 for the twelve months ending June 30, 2018, $10,819   for the twelve months   ending June 30, 2019 and $5,453 for the twelve months ending June 30, 2020 and thereafter. These amounts do not include any assumed off-hire.

14. Interest and Finance Costs:

 

The amounts in the accompanying unaudited interim condensed consolidated statements of operations are analyzed as follows:

 

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

15. Segment information:

 

The Company has three reportable segments from which it derives its revenues: Drybulk, Tanker and Drilling segments. The   reportable segments reflect the internal organization of the Company and are a strategic business that offers different products and services. The Drybulk business segment consists of transportation and handling of Drybulk cargoes through ownership and trading of   vessels. The Drilling business segment consists of trading of the drilling rigs and drillships through ownership and trading of such drilling rigs and drillships. The Tanker business segment consists of vessels for the transportation of crude and refined petroleum cargoes.

 

The tables below present information about the Company's reportable segments as of and for the six-month periods ended June 30, 2013 and 2014.

 

The accounting policies followed in the preparation of the reportable segments are the same as those followed in the preparation of the Company's consolidated financial statements.

 

The Company measures segment performance based on net income/ (loss). Summarized financial information concerning each of the Company's reportable segments is as follows:

16. Losses per share:

 

The Company calculates basic and diluted losses per share as follows:

 

 

For the six month periods ended June 30, 2013 and 2014 and given that the Company incurred losses, the effect of including any   potential common shares in the denominator of diluted per-share computations would have been anti-dilutive, and therefore, basic and diluted losses per share are the same. 

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18. Income Taxes:

Neither the Republic of the Marshall Islands nor Malta imposes a tax on international shipping income earned by a "non-resident" corporation. Under the laws of the Republic of the Marshall Islands and Malta, the countries in which the Company and the vessels owned by subsidiaries of the Company are registered and the Company's subsidiaries (and their vessels) are subject to registration fees and tonnage taxes, as applicable, which have been included in Vessels' operating expenses in the accompanying unaudited interim condensed consolidated statements of operations.

The Marshall Islands and Malta, the jurisdictions where the Company and its ship-owning subsidiaries are incorporated, each grants an "equivalent exemption" to United States corporations with respect to each type of shipping income earned by the Company's ship-owning subsidiaries. Therefore, the ship-owning subsidiaries will be exempt from United States federal income taxation with respect to U.S.-source shipping income if they satisfy the 50% Ownership Test. The Company believes that each of the Company's Marshall Islands and Malta ship-owning subsidiaries will be entitled to exemption from U.S. federal income tax in respect of their U.S. source shipping income.

Ocean Rig operates through its various subsidiaries in a number of countries throughout the world. Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The countries in which Ocean Rig operates have taxation regimes with varying nominal rates, deductions, credits and other tax attributes. Consequently, there is not an expected relationship between the provision for/or benefit from income taxes and income or loss before income taxes.

 

19. Subsequent Events:

19.1 On July 9, 2014, the Company received a firm commitment letter for an up to $350 million secured bridge loan facility, to partially refinance its 5.00% convertible bond maturing December 1, 2014. ABN Amro Bank N.V. is expected to be the Lead Arranger and commit $200 million in this facility. The facility is subject to definitive documentation. We expect it will be secured by Ocean Rig shares owned by the Company, will contain certain conditions precedent, will mature 12 months from the drawdown date as such period may be extended by the lenders for up to 12 months and will be subject to mandatory prepayment in certain events.

 

19.2 On July 11, 2014, the Company entered into a supplemental agreement under the secured term loan facility dated July 23, 2008 , to among other things, release the vessel Woolloomoloo from the collateral package under this loan.

 

19.3 On July 17, 2014, the Company signed a supplemental agreement under the secured term loan facility dated October 26, 2011 for a waiver of a certain financial covenant until December 31, 2014.

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DRYSHIPS INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in thousands of United States Dollars – except for daily fees, share and per share data, unless otherwise stated)

19. Subsequent Events – continued:

19.4 On July 18, the Company signed a firm commitment letter from Nordea Bank for an up to $170 million senior secured credit facility to finance nine drybulk vessels. Nordea Bank has committed to fully underwrite this facility which is expected to have a five year term and bears interest at LIBOR plus a margin. Six out of the nine vessels are currently mortgaged under the Company's $325 million Senior Credit Facility which has a balance of $58.1 million as of July 31, 2014. The remaining three vessels are currently debt free. The availability of this facility is subject to final documentation and certain conditions precedent.

19.5 On July 21, 2014, Ocean Rig announced that its Board of Directors declared a quarterly cash dividend with respect to the quarter ended June 30, 2014 of $0.19 per common share, to shareholders on record as of August 1, 2014 and payable on or about August 11, 2014.

19.6 On July 25, 2014, Ocean Rig entered into a $1.3 billion Senior Secured Term Loan B facility to refinance the $1.35 billion Senior Secured Credit Facility, which had a balance of approximately $1.3 billion on that date. Consequently, an amount of $75 million which was previously restricted under the $1.35 billion facility was released to Ocean Rig.  The new Term Loan B facility is secured primarily by first priority mortgages on the drillships, Ocean Rig Mylos , Ocean Rig Skyros and Ocean Rig Athena , bears interest at a fixed rate, and matures on July 25, 2021.

19.7 On July 31, 2014, the Company signed a supplemental agreement under the secured term loan facility dated October 24, 2012,

for the relaxation of a certain financial covenant until December 31, 2014.