DRYS DryShips Inc

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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-190951

 

This preliminary prospectus supplement relates to an effective registration statement under the Securities Act of 1933, as amended, but is not complete and may be changed. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell these securities in any jurisdiction where the offer or sale is not permitted and they are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 6, 2014

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus dated August 30, 2013)

 

DryShips Inc.

$700,000,000

    % Senior Secured Notes due 2017

 

 

DryShips Inc., a corporation organized under the laws of the Republic of the Marshall Islands, or the Company, is offering $700.0 million aggregate principal amount of its     % Senior Secured Notes due 2017, to which we will refer as the Notes. The Notes will bear interest at an annual rate of     % and will mature on October     , 2017. Interest on outstanding Notes will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on January 15, 2015. The net proceeds of the offering will be used to refinance our outstanding $700 million aggregate principal amount of 5% Convertible Senior Notes due December 1, 2014, to which we will refer as the Convertible Senior Notes.

We have granted the underwriters the right to purchase up to an additional 15% aggregate principal amount of the Notes.

The Notes will be our senior secured obligations; will rank senior in right of payment to all of our existing and future subordinated indebtedness; will rank equally in right of payment with all of our other existing and future senior indebtedness; will be effectively senior to our existing and future senior unsecured debt, to the extent of the value of the assets securing the Notes; and will be effectively subordinated to our future indebtedness, if any, that is secured by assets that do not secure the Notes, to the extent of the value of such assets.

Payment and performance of our obligations under the Notes and the Indenture will be secured by first priority liens on certain shares of Ocean Rig UDW Inc., or Ocean Rig, beneficially owned by the Company, plus additional or replacement collateral. See “Description of Notes—Security.”

 

Investing in the Notes involves substantial risks. See “Risk Factors” beginning on page S-15 for a discussion of certain risks that you should consider in connection with an investment in the Notes.

 

		Per Note				Total
Public offering price of the Notes (1)		$				$
Underwriting discount (2)		$				$		(3)
Proceeds, before expenses, to us (2)		$				$		(3)

 

(1)	Plus accrued interest from                     , 2014 if settlement occurs after such date.

(2)

We have granted the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to an additional $105.0 million aggregate principal amount of Notes. If the underwriters exercise the opinion in full, and assuming the sale of all over-allotment Notes to certain institutions for which the underwriters would receive an underwriting discount of $             per Note, the total underwriting discounts payable by us will be $             and total proceeds to us before other expenses will be $            .

(3)

Total amount may not equate due to rounding of the per Note amount. For sales to retail investors, the underwriting discount will be $             per note, resulting in proceeds, before expenses, to us of $             per note. For sales to institutional investors, the underwriting discount will be $             per note, resulting in proceeds, before expenses, to us of $             per note. Please read “Underwriting.”

Currently, there is no public market for the Notes. The Notes will not be listed on any securities exchange.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

 

Sole Bookrunning Manager

Sterne Agee

Co-Managers

 

DNB Markets		Cowen and Company

We expect that delivery of the Notes will be made to investors in book-entry form through the facilities of The Depository Trust Company, or DTC, on or about October     , 2014.

The date of this prospectus supplement is October     , 2014.

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TABLE OF CONTENTS

 

		Page
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS SUPPLEMENT			S-ii
ENFORCEABILITY OF CIVIL LIABILITIES			S-ii
PRESENTATION OF FINANCIAL AND OTHER INFORMATION			S-iii
NON-GAAP FINANCIAL MEASURES			S-iii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			S-iv
PROSPECTUS SUMMARY			S-1
THE OFFERING			S-7
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA OF DRYSHIPS INC.			S-12
RISK FACTORS			S-15
USE OF PROCEEDS			S-30
RATIO OF EARNINGS TO FIXED CHARGES			S-31
CAPITALIZATION			S-32
MANAGEMENT			S-34
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT			S-42
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			S-43
DESCRIPTION OF NOTES			S-49
DESCRIPTION OF OTHER INDEBTEDNESS			S-88
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS			S-98
MARSHALL ISLANDS TAX CONSIDERATIONS			S-101
UNDERWRITING			S-102
EXPENSES			S-104
LEGAL MATTERS			S-104
EXPERTS			S-104
WHERE YOU CAN FIND ADDITIONAL INFORMATION			S-104

 

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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS SUPPLEMENT

This prospectus supplement is based on information provided by us and other sources that we believe to be reliable. The underwriters are not responsible for, and is not making any representation or warranty to you concerning, our future performance or the accuracy or completeness of this prospectus supplement. This prospectus supplement summarizes certain documents and other information, and we refer you to such materials for a more complete understanding of what we discuss in this prospectus supplement. To the extent information contained in this prospectus supplement is inconsistent with information contained in the accompanying prospectus, you should rely on the information contained in this prospectus supplement.

You should rely only on the information contained and incorporated by reference in this prospectus supplement, the accompanying prospectus and any free writing prospectus that we authorize to be delivered to you. We have not, and the underwriters have not, authorized any person to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it.

You should not assume that the information contained in this prospectus supplement is accurate as of any date other than the date appearing on the front cover of this prospectus supplement. You should assume that the information contained in the documents incorporated by reference in this prospectus supplement is accurate only as of the respective dates of those documents.

In making an investment decision regarding the Notes we are offering, you must rely on your own examination of our company and the terms of this offering, including the potential merits and risks involved. We are offering the Notes on the basis of this prospectus supplement only. Accordingly, you must base any decision to purchase Notes in this offering only on the information contained and incorporated by reference in this prospectus supplement.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Republic of the Marshall Islands our principal executive offices are located outside the United States. The majority of our directors, officers and our independent registered public accounting firm reside outside the United States. In addition, substantially all of our assets and the assets of the directors, officers and our independent registered public accounting firm are located outside the United States. As a result, it may not be possible for you to serve legal process within the United States upon us or any of these persons. It may also not be possible for you to enforce, both in and outside the United States, judgments you may obtain in United States courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.

Furthermore, there is substantial doubt that courts in the countries in which we or our subsidiaries are incorporated or where our assets or the assets of our subsidiaries, directors or officers and such experts are located (i) would enforce judgments of U.S. courts obtained in actions against us, our subsidiaries, or our directors or officers and our independent registered public accounting firm based upon the civil liability provisions of applicable U.S. federal and state securities laws or (ii) would enforce, in original actions, liabilities against us or our subsidiaries, our directors or officers and our independent registered public accounting firm based on those laws.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Unless otherwise indicated, the financial information included or incorporated by reference in this prospectus supplement with respect to historical consolidated financial information of DryShips Inc. and its subsidiaries as of December 31, 2013 and 2012 and for the fiscal years ended December 31, 2013, 2012 and 2011 is derived from the audited consolidated financial statements of DryShips Inc. and its subsidiaries, incorporated by reference in this prospectus supplement. The summary historical consolidated financial and other data as of December 31, 2011, 2010 and 2009 and for our fiscal years ended December 31, 2010 and 2009 are derived from our audited consolidated financial statements that are not included in this prospectus supplement.

Our historical consolidated financial statements incorporated by reference in this prospectus supplement each have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP, and have been audited by Ernst & Young (Hellas) Certified Auditors Accountants S.A., independent registered public accounting firm.

The audit opinion of Ernst & Young (Hellas) with respect to our financial statements as at and for the year ended December 31, 2013, contained a paragraph that expresses substantial doubt about our ability to continue as a going concern. The audit opinion is included together with our financial statements as at and for the year ended December 31, 2013 in our 2013 annual report on Form 20-F filed on February 21 , 2014 and incorporated by reference into this prospectus supplement. See also Note 3 to our audited financial statements for our fiscal year ended December 31, 2013, and see “Risk Factors—Company Specific Risk Factors” in general and in specific see “Risk Factors—Company Specific Risk Factors—Our inability to comply with certain financial and other covenants under our loan agreements relating to our shipping segments and our working capital deficit raise substantial doubt about our ability to continue as a going concern”.

NON-GAAP FINANCIAL MEASURES

In this prospectus supplement, we disclose EBITDA and time charter equivalent (TCE), which are non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measures. We have presented EBITDA because we believe it provides useful information to investors because it is a basis upon which we measure our operations. EBITDA is also used by various of our lenders as a measure of our compliance with certain loan covenants, and we believe that it presents useful information to investors regarding our company’s ability to service and/or incur indebtedness. EBITDA is not a measure of our financial performance under U.S. GAAP and should not be construed as an alternative to net income (loss) or other financial measures presented in accordance with U.S. GAAP. It should be noted that companies calculate EBITDA differently; as a result, EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. Please see the section of this prospectus supplement entitled “Summary Consolidated Financial and Other Data of DryShips Inc.” for a reconciliation of EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure. TCE is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing voyage revenues (net of voyage expenses) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage and are paid by the charterer under a time charter contract, as well as commissions. TCE revenues, a non-U.S. GAAP measure, provides additional meaningful information in conjunction with revenues from our vessels, the most directly comparable U.S. GAAP measure, because it assists our management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance. TCE is also a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are including this cautionary statement in connection with this safe harbor legislation. This document, the documents incorporated by reference herein, and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. The words “anticipate,” “believe,” “expect,” “intend,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” and similar expressions identify forward-looking statements. We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material.

All statements in this document that are not statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to, such matters as:

 

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our future operating or financial results;

 

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our failure to comply with restrictions in our debt instruments or to waive or cure covenant breaches under our credit agreements;

 

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our ability to obtain additional financing;

 

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our ability to obtain financing to fund our capital expenditure obligations for our newbuilding program;

 

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our ability to retain and attract senior management and other key employees;

 

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our ability to manage growth;

 

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our ability to maintain our business in light of our proposed business and location expansion;

 

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the dry bulk charter markets and tanker charter markets;

 

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our ability to obtain double hull bunkering tankers given the scarcity of such vessels in general;

 

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the outcome of legal, tax or regulatory proceedings to which we may become a party;

 

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global economic conditions generally, and adverse conditions in the shipping or the marine fuel supply industries specifically;

 

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our ability to retain our key suppliers and key customers;

 

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our contracts and licenses with governmental entities remaining in full force and effect;

 

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changes in the market price of petroleum, including the volatility of spot pricing;

 

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increased levels of competition;

 

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compliance or lack of compliance with various environmental and other applicable laws and regulations;

 

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our ability to collect our accounts receivable;

 

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changes in the political, economic or regulatory conditions in the markets in which we operate, and the world in general;

 

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possibilities of war, other armed conflicts or terrorist attacks and/or piracy;

 

 

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our future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending or operating expenses;

 

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our failure to hedge certain financial risks associated with our business;

 

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uninsured losses;

 

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our ability to maintain our current tax treatment;

 

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increases in interest rates; and

 

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other important factors described from time to time in our respective filings with the SEC.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that it will achieve or accomplish these expectations, beliefs or projections described in the forward-looking statements contained in this prospectus supplement and the accompanying prospectus.

Important factors that, in our view, could cause actual results to differ materially from those discussed in any forward-looking statement include (i) our inability to refinance existing debt, obtain additional financing on favorable terms or any financing which may result in our failure to take delivery of new vessels and default on our obligations; (ii) the strength of world economies and currencies, (iii) general market conditions, including changes in charter rates and vessel values, (iv) failure of a seller to deliver one or more vessels, (v) failure of a buyer to accept delivery of a vessel, (vi) inability to procure acquisition financing, (vii) default by one or more charterers of our ships, (viii) changes in demand for drybulk commodities or oil and gas commodities, (ix) changes in demand that may affect attitudes of time charterers, (x) scheduled and unscheduled drydocking, (xi) changes in our voyage and operating expenses, including bunker prices, dry-docking and insurance costs, (xii) factors relating to the offshore drilling market, including supply and demand, utilization, day rates and customer drilling programs, hazards inherent in the drilling industry and marine operations causing personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage or claims by third parties that we have caused or may be responsible for the same, claims by third parties or customers and suspension of operations, (xiii) changes in governmental rules and regulations, (xiv) potential liability from pending or future litigation, (xv) domestic and international political conditions, and (xvi) potential disruption of shipping routes due to accidents, international hostilities and political events or acts by terrorists.

We refer you to the section entitled “Risk Factors,” beginning on page S-15, for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this prospectus supplement, the accompanying prospectus and in documents incorporated herein and therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Forward-looking statements reflect only as of the date on which they are made. We will not update any forward-looking statements to reflect future events, developments, or other information. If we do update one or more forward-looking statements, no inference should be drawn that additional updates will be made regarding that statement or any other forward-looking statements.

 

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RISK FACTORS

An investment in the Notes involves significant risks. You should carefully consider the risk factors and risk disclosure set forth below, in our Annual Report on Form 20-F filed with the SEC on February 21, 2014 under the headings “Risk Factors” and “Operating and Financial Review and Prospects,” on page 10 of the accompanying base prospectus and other filings we may make from time to time with the SEC, as well as the other information included in this prospectus supplement in evaluating us or our business before deciding to purchase any Notes. The occurrence of any of the events described in this section or any other risks may have a material adverse effect on our business, financial condition, results of operations and cash flows. In that case, you may lose all or part of your investment in the Notes.

Company Specific Risk Factors

We are not in compliance with certain financial and other covenants contained in our credit facilities relating to our shipping segments, which could result in an acceleration of a substantial portion of our secured indebtedness, which would constitute an event of default under the Notes.

As of June 30, 2014, we were in compliance with the financial covenants contained in our debt agreements relating to our offshore drilling segment, but we were in breach of certain financial covenants contained in certain of our secured loan agreements relating to our shipping segments, principally our loan-to-value of secured assets ratio. These covenant violations related to borrowings of $82.7 million aggregate principal amount under our secured credit facilities. We are also in breach of certain other, non-financial, covenants and representations and warranties in certain of our loan agreements relating to our shipping segment. Because of these violations and the cross-acceleration and cross-default provisions contained in our debt agreements relating to our shipping segment, we classified all of our outstanding indebtedness relating to our drybulk and tanker fleet, amounting to approximately $896.6 million aggregate principal amount as of June 30, 2014, as a current liability. Our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our audited financial statements included in our Annual Report on Form 20-F for the year ended December 31, 2013, which is incorporated by reference herein, that expresses substantial doubt about our ability to continue as a going concern.

As of the date of this prospectus supplement, none of our lenders have declared an event of default under the relevant loan agreements. However, our breaches under certain of those loan agreements constitute potential events of default that may result in acceleration of such indebtedness and potential cross-acceleration or cross-default events under our other credit facilities relating to our drybulk and tanker fleet.

We currently expect that, so long as we continue to pay scheduled loan installments and accumulated or accrued interest as they fall due under our existing secured credit facilities, our lenders under such facilities will not declare event of defaults or accelerate our debts based on breaches of our financial and loan-to-value ratio covenants. While we are currently in negotiations with certain of our lenders (but not all lenders for facilities under which we are currently in default) to obtain waivers of certain covenant breaches and to extend our existing waivers of covenant breaches, or to restructure the affected debt, there can be no assurance that such negotiations will result in waivers or extension of waivers of covenant breaches, or restructuring of effective debt, on favorable terms or at all. In the event that our lenders declare an event of default under the relevant loan agreements, cash on hand and cash generated from operations would not be sufficient to repay all amounts due if our lenders accelerated our debt as a result of our breaches of financial and loan-to-value ratio covenants.

If our banks were to accelerate such indebtedness, an event of default would exist under the Notes offered hereby. Holders of the Notes might then elect to accelerate the Notes and demand their repayment. If all of such debt, including the Notes, were accelerated we may not be able to repay all such debt in full, and would likely be subject to bankruptcy proceedings in an appropriate jurisdiction. See “Risk Factors —Risks Relating to the Notes—In the event of a bankruptcy filed in the United States, the Noteholders’ and Collateral Agent’s ability to

 

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realize upon the Collateral may be limited by federal bankruptcy law”, “—Risks Relating to the Notes—In a forced restructuring the Notes could be restructured over your objections”, “—Risks Relating to the Notes—It may be difficult to realize the value of the Collateral pledged to secure the Notes in a timely manner or at all”, “—Risks Relating to the Notes—We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of bankruptcy law”, “—Risks Relating to the Notes—The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict”, “—Risks Relating to the Notes—In the event of our bankruptcy, the Noteholders may be deemed to have unsecured claims”, “—Risks Relating to the Notes—The value of the Collateral may not sufficiently secure full amounts of claims and post-petition interest” and “—Risks Relating to the Notes—Any future pledge of Collateral may be voidable in bankruptcy”.

Our inability to comply with certain financial and other covenants under our loan agreements relating to our shipping segments and our working capital deficit raise substantial doubt about our ability to continue as a going concern.

As of June 30, 2014, we were in breach of certain financial and other covenants and representations and warranties contained in certain of our loan agreements relating to our shipping segments and our lenders may choose to accelerate our indebtedness relating to such segments. As a result, we reported a working capital deficit of $1,004.3 million at June 30, 2014. Therefore, our ability to continue as a going concern is dependent on management’s ability to successfully generate revenue and enter into firm financing agreements to meet our scheduled obligations as they become due and the continued support of our lenders, of which there can be no assurance. These conditions raise significant doubt about our ability to continue as a going concern and, therefore, we may be unable to realize our assets and discharge our liabilities in the normal course of business. Our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our financial statements included in our annual report on Form 20-F for the year ended December 31, 2013 that expresses substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of our inability to continue as a going concern.

If we are unable to repay all the outstanding obligations under our $700 million principal amount outstanding of Convertible Senior Notes at their maturity on December 1, 2014, we will be in default on such debt and under our other then outstanding debt.

Our $700.0 million principal amount of outstanding of Convertible Senior Notes mature on December 1, 2014. If all of the Notes offered hereby are sold, the net proceeds of this offering will be applied to repay in full the indebtedness under the Convertible Senior Notes. If less than all of the Notes offered hereby are sold, we expect to fund the repayment of any remaining principal amount outstanding of the Convertible Senior Notes through incremental borrowings under the Proposed Secured Credit Facility in excess of the amount required to refinance the outstanding balance under the existing Senior Credit Facility, borrowings under the Proposed Bridge Loan Facility, cash on hand or expected to be on hand and possible additional sources such as issuances of equity securities or the incurrence of debt (which debt securities may not be secured by Unpledged Shares (as defined below)) on or prior to December 1, 2014. If following this offering we continue to need additional funds to refinance a portion of the indebtedness under the Convertible Senior Notes, and if in such case we are unable to negotiate and execute definitive loan agreements for the Proposed Bridge Loan Facility or the Proposed Secured Credit Facility or if the amounts available from these sources are unavailable or insufficient, we will need to find other sources of capital to repay the entire amount outstanding under the Convertible Senior Notes. However, no assurance can be given that such sources will be available, or if they are available, in the amounts required to repay the Convertible Senior Notes in full.

 

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If we are unable to repay in full the outstanding balance under the Convertible Senior Notes at their maturity on or before December 1, 2014, we will be in payment default under the indenture governing the Convertible Senior Notes and, by operation of cross-acceleration and cross-default provisions of our other indebtedness or that of our subsidiaries, including the Notes offered hereby. If all of such debt, including the Notes offered hereby, were accelerated we may not be able to repay all such debt in full, and would likely be subject to bankruptcy proceedings in an appropriate jurisdiction. See “Risk Factors—Risks Relating to the Notes—In the event of a bankruptcy filed in the United States, the Noteholders’ and Collateral Agent’s ability to realize upon the Collateral may be limited by federal bankruptcy law”, “—Risks Relating to the Notes—In a forced restructuring the Notes could be restructured over your objections”, “—Risks Relating to the Notes—It may be difficult to realize the value of the Collateral pledged to secure the Notes in a timely manner or at all”, “—Risks Relating to the Notes—We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of bankruptcy law”, “—Risks Relating to the Notes—The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict”, “—Risks Relating to the Notes—In the event of our bankruptcy, the Noteholders may be deemed to have unsecured claims”, “—Risks Relating to the Notes—The value of the Collateral may not sufficiently secure full amounts of claims and post-petition interest” and “—Risks Relating to the Notes—Any future pledge of Collateral may be voidable in bankruptcy”.

A substantial portion of such debt is secured or incurred on the subsidiary level and, as a result, effectively or structurally senior to the Notes.

Investment in our Notes involves a high degree of risk, including due to the recent weakness in the drybulk and tanker sectors of the shipping industry and their impact on our ability to comply with our financial covenants.

The abrupt and dramatic downturn in the drybulk charter market, from which we derive a significant portion of our revenues, has severely affected the drybulk shipping industry and has harmed our business. The Baltic Dry Index, or the BDI, fell 94% from May 2008 through December 2008 to 663. The BDI recorded a 25-year low of 647 in 2012. While the BDI has since increased above its historical low and was 1,088 as of August 22, 2014, it remains significantly below its level in the first half of 2008, and there can be no assurance that the drybulk charter market will increase further, and the market could decline.

Historically, the tanker industry has been highly cyclical, with volatility in profitability, charter rates and asset values resulting from changes in the supply of, and demand for, tanker capacity. After reaching highs during the summer of 2008, charter rates for crude oil carriers fell dramatically from the highs of approximately $170,000 and $80,000 per day for Suezmaxes and Aframaxes, on July 7, 2008 and May 22, 2008, respectively, prior to the commencement of the global financial crisis and current rates continue to remain at relatively low levels of approximately $12,000 and $20,000 per day for Suezmaxes and Aframaxes, respectively, as of August 22, 2014.

The shipping markets remain cyclical and volatile. The economic dislocation worldwide and the disruption of the credit markets, have had a number of adverse consequences for shipping, including, among other things:

 

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limited availability of financing for vessels;

 

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no active second-hand market for the sale of vessels;

 

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extremely low charter rates, particularly for vessels employed in the spot market;

 

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charterers seeking to renegotiate the rates for existing time charters; and

 

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widespread loan covenant defaults in the shipping industry.

We may be unable to negotiate or extend waivers of covenant breaches under our credit facilities.

We are currently in negotiations with certain of our lenders to obtain waivers of certain covenant breaches and extend existing waivers of covenant breaches, or to restructure the affected debt. We cannot assure you that we will be able to obtain our lenders’ waiver or consent, or extend existing waivers, with respect to

 

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noncompliance under our credit facilities relating to our drybulk and tanker fleet, or any non-compliance with specified financial ratios or financial covenants under future financial obligations we may enter into, or that we will be able to refinance or restructure any such indebtedness. In addition, certain waivers we are negotiating provide for waiver periods that expire on December 31, 2014, and even if we are able to negotiate definitive documentation with respect to such waivers, we cannot assure you that we will be in compliance with the original covenants following such date. In addition, we are in breach of other, non-financial, covenants and representations and warranties for certain of our loan agreements in our shipping segments, for which we may be required to obtain waivers in the future. If we fail to remedy, or obtain a waiver of, the breaches of the covenants or representations and warranties, as the case may be, our lenders may accelerate our indebtedness under the relevant credit facilities, which could trigger cross-acceleration or cross-default provisions contained in our other credit facilities relating to our drybulk and tanker fleet and the Notes.

If our indebtedness is accelerated, it will be very difficult for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens, which would impair our ability to conduct our business and continue as a going concern. Further, as discussed below, our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our audited financial statements incorporated by reference in this prospectus supplement that expresses substantial doubt about our ability to continue as a going concern. In addition, if the value of our vessels deteriorates significantly from their currently depressed levels, we may have to record an impairment adjustment to our financial statements, which would adversely affect our financial results and further hinder our ability to raise capital.

Moreover, in connection with any additional amendments to our credit facilities, or waivers or extensions of waivers of covenant breaches, that we obtain, or if we enter into any future credit agreements or debt instruments, our lenders may impose additional operating and financial restrictions on us. These restrictions may further restrict our ability to, among other things, fund our operations or capital needs, make acquisitions or pursue available business opportunities, which in turn may adversely affect our financial condition. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the margin and lending rates they charge us on our outstanding indebtedness.

We currently expect that, so long as we continue to pay scheduled loan installments and accumulated or accrued interest as they fall due under our existing credit facilities, lenders under such facilities will not declare event of defaults or accelerate our debts based on breaches of our financial and loan-to-value ratio covenants. If such events of default or acceleration were declared, however, cash on hand and cash generated from operations would not be sufficient to repay all amounts due if our lenders accelerated our debt as a result of our breaches of financial and loan-to-value ratio covenants.

We have substantial indebtedness, and expect to incur substantial additional indebtedness, which could adversely affect our financial health.

As of June 30, 2014, on a consolidated basis, we had $6.1 billion in aggregate principal amount of indebtedness outstanding and $0 million in additional credit available to us under our credit facilities. In addition, we expect to incur substantial additional indebtedness to fund existing contractual obligations, amounting to approximately $2.1 billion in the aggregate as of August 24, 2014 for four newbuilding drillships, and for any further growth of our fleet.

This substantial level of debt and other obligations could have significant adverse consequences on our business and future prospects, including the following:

 

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we may not be able to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments, which may result in possible defaults on and acceleration of such indebtedness;

 

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we may not be able to obtain financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;

 

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•

we may not be able to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service the debt;

 

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we could become more vulnerable to general adverse economic and industry conditions, including increases in interest rates, particularly given our substantial indebtedness, some of which bears interest at variable rates;

 

•

our ability to refinance indebtedness may be limited or the associated costs may increase;

 

•

less leveraged competitors could have a competitive advantage because they have lower debt service requirements and, as a result, we may not be better positioned to withstand economic downturns; and

 

•

we may be less able to take advantage of significant business opportunities and to react to changes in market or industry conditions than our competitors and our management’s discretion in operating our business may be limited.

Each of these factors may have a material and adverse effect on our financial condition and viability. 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 income is not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. Any or all of these actions may be insufficient to allow us to service our debt obligations. Further, we may not be able to effect any of these remedies on satisfactory terms, or at all. In addition, a lack of liquidity in the debt and equity markets could hinder our ability to refinance our debt or obtain additional financing on favorable terms in the future.

We cannot assure you that we will be able to raise equity and debt financing sufficient to meet our future capital and operating needs.

From time to time we look to the capital markets in order to fund our capital and operating needs. We may sell additional shares or other securities in the future to satisfy our capital and operating needs. However, we cannot be certain that we will be able to do so on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance or expand our existing business, complete additional drilling unit acquisitions or otherwise take advantage of business opportunities as they arise.

Risks Relating to the Notes

The value of the Collateral securing the Notes may not be sufficient to satisfy all our obligations under the Notes and we may not have a sufficient amount of Ocean Rig Shares to meet our obligations to provide additional collateral under the Notes in the future.

The proceeds from the sale of the Collateral may not be sufficient to satisfy all our obligations under the Notes. The value of the Pledged Shares (as defined below) will depend on numerous factors affecting the price of the Pledged Shares, including, but not limited to, the market value of the shares at such time and the timing and manner of the sale or liquidation, as well as changing economic conditions, competition or other future trends. In addition, some or all of the Pledged Shares may be illiquid, and may have to be sold at a substantial discount in an insolvency situation or otherwise. See “Risk Factors—Risks Relating to the Notes—It may be difficult to realize the value of the Collateral pledged to secure the Notes in a timely manner or at all”. We cannot assure Noteholders that the Pledged Shares will be saleable or, if saleable, that there will not be substantial delays in its liquidation, especially in the event of default under the Notes or our bankruptcy or insolvency. During any such delays, the value of Collateral could decline. Accordingly, we cannot assure Noteholders that the proceeds of any sale or liquidation of the Pledged Shares plus any Collateral in the form of Cash Equivalents, if any, will be sufficient to satisfy, or will not be substantially less than, our obligations under the Notes.

 

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In addition, if the Collateral Agent were to foreclose upon the Pledged Shares, such foreclosure could constitute a change of control under instruments governing outstanding indebtedness of Ocean Rig. Holders of such outstanding debt could then require Ocean Rig to make an offer to repurchase such indebtedness. There can be no assurance that the cash on hand or other assets of Ocean Rig would be sufficient to effect such a repurchase in whole or in part, and any such repurchase, or failure to make any such repurchase, could negatively impact the value of the Pledged Shares. As a result, if the Collateral Agent were to foreclose upon the Pledged Shares, there is a substantial risk that the value of the Pledged Shares would not be sufficient to satisfy all our obligations under the Notes in the event that a change of control occurs under Ocean Rig’s outstanding debt.

Any claim for the difference between the amount, if any, realized by holders of the Notes from the sale of the Pledged Shares plus any Collateral in the form of Cash Equivalents, if any, securing the Notes and the obligations under the Notes rank equally in right of payment with all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables. As a result, if the value of the Pledged Shares plus any Collateral in the form of Cash Equivalents, if any, for the Notes is less than the amount outstanding under the Notes at the time the Collateral is liquidated, it is possible that any claims by Holders of the Notes for the difference between the amount realized from the sale of Collateral and the obligations under the Notes may not be satisfied in full before the claims of such creditors are paid.

In addition, we will be required by terms of the Notes and the Indenture, as well as the terms of the Proposed Bridge Loan Facility (if and to the extent we draw upon such Facility), to pledge Ocean Rig Shares upon issuance of the Notes and such drawdown under the Proposed Bridge Loan Facility, as well as to pledge additional Ocean Rig Shares as collateral when the value of the collateral under each such facility falls below certain thresholds. We have a limited number of Ocean Rig Shares available to pledge to secure the Notes and any of our other debt. After we issue the Notes offered hereby and following any drawdown under the Proposed Bridge Loan Facility then, based on recent closing prices of Ocean Rig Shares (i) we may not have a sufficient number of Ocean Rig Shares to allow us to borrow the full amount proposed in the Proposed Bridge Loan Facility, and (ii) we do not believe that we would have a material number of Ocean Rig Shares, if any, that then remain unpledged.

While the covenants under the Notes discussed under “Description of Notes—Certain Covenants—Restrictions on Issuing Bonds Secured by Unpledged Shares” prohibit us from pledging unpledged Ocean Rig Shares in respect of any future bond issuance, no such restriction exists with respect to any current or future credit facility, including the Proposed Bridge Loan Facility. As a result, the number of Ocean Rig Shares that remain unpledged may be further reduced in the future in connection with the incurrence of such debt or otherwise.

The restrictive covenants contained in the Supplemental Indenture (as defined below) and the Notes are not as extensive as our covenants under certain of our other current debt obligations nor the restrictive covenants often applicable to other issuers in a similar financial position.

The restrictive covenants contained in the Supplemental Indenture and the Notes are not as extensive as our covenants under certain of our other current debt obligations nor the restrictive covenants often applicable to other issuers and their subsidiaries whose financial position is similar to ours. The limited restrictive covenants contained in the Supplemental Indenture and the Notes will not restrict the Company or its subsidiaries (including Ocean Rig, whose shares of common stock are pledged to secure the Notes) from engaging in many transactions which may adversely affect our results of operations, financial condition or ability to repay the Notes, or which may adversely affect the value of the Pledged Shares. For example, the limitation on borrowings applicable to the Notes does not restrict our issuance of Disqualified Capital Stock (as defined below under “Description of Notes”) or preferred stock nor our incurrence of certain hedging obligations. Further, the restriction on certain restricted payments applicable to the Notes does not limit our ability to make investments in third parties, whether by way of investment in the equity interests of such party or by lending to or guaranteeing the debt of such third party. The limitation on affiliate transactions applicable to the Notes does not require, regardless of the size of the transaction, any independent third party evaluation of the fairness of the terms of the

 

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transaction. In addition, the Supplemental Indenture and the Notes do not contain, for example, any limitation on our ability to grant or allow liens on our assets (other than in the limited circumstances described under “Description of Notes—Certain Covenants—Limitation on Liens” and other than liens on any assets pledged to secure the Notes), any limitation on permitting or incurring restrictions on the Company’s subsidiaries’ ability to pay dividends or make other distributions to the Company (directly or indirectly), nor any provisions that would require that we apply any proceeds from an asset sale either to the purchase of replacement assets for our business or to the repayment of senior debt or to make an offer to repurchase the Notes.

In addition, the limited covenants contained in the Supplemental Indenture and the Notes (x) do not significantly limit the ability of Ocean Rig, as a subsidiary of the Company, to sell all or part of its assets or businesses to other of our subsidiaries or other parties (provided that it receives Fair Market Value and, if the sale is to an Affiliate, certain other conditions described below under “Description of Notes—Certain Covenants—Related party transactions” are met), and (y) permit Ocean Rig to “spin-off”, or distribute as a dividend or other payment to the holders of its outstanding Equity Interests (as defined below), all or part of its assets or businesses (including the shares or other Equity Interests of any of its subsidiaries or any other assets or business units) for no value. In such cases, the value of the Pledged Shares may decline and, although the Company may be required to deliver to the Collateral Agent further Pledged Shares or Cash Equivalents (as defined below) within two business days of any trading day following the issue date, to which we will refer as the Daily Valuation Date, on which the value of the Collateral is less than 120% of the aggregate principal amount of Notes outstanding on such Daily Valuation Date in order to ensure that the aggregate Collateral Value at such Daily Valuation Date meets such 120% Collateral Value requirement, we cannot assure you that we would be able to deliver sufficient additional Pledged Shares or Cash Equivalents to meet such 120% Collateral Value requirement or that, if such events occurred between Daily Valuation Dates, we could provide additional collateral prior to our default or insolvency. See also “Risk Factors—Risks Relating to the Notes—Fraudulent transfer statutes may limit your rights as a holder of the Notes” and “—We may be unable to repurchase the Notes as required upon a Change of Control”. Further, investors should be aware that the Thirty-Day VWAP used in measuring the Collateral Value on each Daily Valuation Date and each Quarterly Valuation Date, as a volume-weighted average trading price over 30 trading days, will not immediately reflect any decrease in value of the Pledged Shares; rather it may take a period of time before a decline is adequately reflected in the Collateral Value calculation. As a result, we may not be required to deliver sufficient additional Collateral on an immediate basis to reflect the decrease in the then-current trading prices of any Pledged Shares.

While the Company and its subsidiaries are subject to more extensive restrictions under certain of our other existing debt facilities, those debt facilities may not remain outstanding or unamended throughout the life of the Notes. Further, as noted above, we are in default under certain covenants of several of our outstanding debt facilities as of the date of this prospectus supplement and may breach other such covenants. See “Risk Factors—Company Specific Risk Factors—We are not in compliance with certain financial and other covenants contained in our credit facilities relating to our shipping segments, which could result in an acceleration of a substantial portion of our secured indebtedness, which would constitute an event of default under the Notes”. Holders of Notes will not be entitled to accelerate the maturity of the Notes as a result of any of our defaults under any such other facilities, other than, with respect to our consolidated indebtedness of at least $100 million, certain payment defaults or upon any exercise by the creditors under those other facilities of their rights to accelerate the maturity of such debt immediately.

We may cease to control Ocean Rig in the future.

Ocean Rig represents approximately 76.9% of our total consolidated assets and approximately 81.4 % of our consolidated total revenues as of and for the six-month period ended June 30, 2014, and made the only positive contribution to our net operating income among our other business segments for that period, as well as for our fiscal year ended December 31, 2013. The covenants contained in the Supplemental Indenture and the Notes will permit us to distribute, or “spin-off”, to our shareholders certain unpledged shares of Ocean Rig which we own if prior thereto and after giving pro forma effect to such spin-off, we would not be in Default under any covenant applicable to the Notes (including the restrictions on total borrowings described under “Description of Notes—

 

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Certain Covenants—Limitations of borrowings”) and provided that we comply with the 120% Collateral Value requirement as set forth in “Description of Notes—Certain Covenants—Limitation on Restricted Payments” and “Description of Notes—Security”. In such a transaction, we would not receive any consideration for the spun-off Ocean Rig shares, and as a result, our financial condition and results of operations would be materially adversely affected.

In addition, if as a result of any transaction Ocean Rig ceased to be one of the Company’s subsidiaries, it would no longer be subject to any of the restrictive covenants of contained in the Supplemental Indenture and the Notes, though it would remain subject to any restrictive covenants under any of its credit facilities. In such case, to the extent that the Notes continued to then be secured by Pledged Shares (and Cash Equivalent Collateral, if any) following any such spin-off, Note holders would have no recourse in the event that Ocean Rig thereafter engaged in transactions which were previously restricted under the Notes (including related party transactions) and which adversely affected its financial condition or results of operations, and thus, the value of the Pledged Shares. If, as a result, the value of the Pledged Shares declined following any such transaction by Ocean Rig, we cannot assure you that we would be able to deliver to the Collateral Agent sufficient additional Pledged Shares or Cash Equivalents so that the aggregate Collateral Value is no less than 120% of the outstanding aggregate principal amount of the Notes or that, if such events occurred between Daily Valuation Dates, we could provide additional collateral prior to our default or insolvency. See “Description of Notes—Security—Maintenance of Collateral”. See also “Risk Factors—Risks Relating to the Notes—Fraudulent transfer statutes may limit your rights as a holder of the Notes”.

In the event of a bankruptcy filed in the United States, the Noteholders’ and Collateral Agent’s ability to realize upon the Collateral may be limited by federal bankruptcy law.

The Noteholders’ and Collateral Agent’s ability to realize upon the Collateral will be subject to certain bankruptcy law limitations in the event of our bankruptcy filing in the United States. Under federal bankruptcy law, secured creditors are generally prohibited from repossessing their security from a debtor in a bankruptcy case or from disposing of security repossessed from such a debtor without bankruptcy court approval, which may not be given or may take a substantial period of time before it is obtained. Moreover, applicable federal bankruptcy laws generally permit the debtor to continue to use and expend collateral, including cash collateral, and to provide liens senior to the liens of the Collateral Agent for the Notes to secure indebtedness incurred after the commencement of a bankruptcy case, provided that the secured creditor either consents or is given “adequate protection.” “Adequate protection” could include cash payments or the granting of additional security, if and at such times as the presiding court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition of the collateral during the pendency of the bankruptcy case, the use of collateral (including cash collateral), and/or the incurrence of such senior indebtedness. Due to the imposition of the automatic stay, the lack of a precise definition of the term “adequate protection,” and the broad discretionary powers of a bankruptcy court, it is impossible to predict (1) how long payments under the Notes could be delayed following commencement of a bankruptcy case, (2) whether or when the Collateral Agent could repossess or dispose of the pledged assets, or (3) whether or to what extent Noteholders would be compensated for any delay in payment or loss of value of the pledged assets through the requirement of “adequate protection.” During the pendency of any bankruptcy proceeding, you would be exposed to the potential decline in the value of the Pledged Shares and any other Collateral securing the Notes, and we would not be required to continue to post additional Collateral in the event of any such decline. As a result, any Collateral that is ultimately available to the Collateral Agent and the Noteholders may not be sufficient to repay all amounts due in respect of the Notes.

Furthermore, if a bankruptcy court determines that the value of the Collateral is not sufficient to repay all amounts due on the Notes, Noteholders would hold “under-secured claims.” Applicable federal bankruptcy laws do not permit the payment or accrual of interest, costs, and attorney’s fees for “under-secured claims” during a debtor’s bankruptcy case.

None of our subsidiaries will guarantee the Notes. If any of our subsidiaries becomes insolvent, liquidates, reorganizes, dissolves, or otherwise winds up, holders of its indebtedness and its trade creditors generally will be

 

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entitled to payment on their claims from the assets of such subsidiary before any of those assets would be made available to us. Consequently, your claims in respect of the Notes effectively would be subordinated to all of the existing and future liabilities of our subsidiaries.

In a forced restructuring the Notes could be restructured over your objections.

A forced restructuring of the Notes could occur through the “cram down” provisions of the United States Bankruptcy Code or similar provisions under any other applicable bankruptcy law. Under such provision, the Notes could be restructured over your objections as to their general terms, primarily interest rate and maturity.

It may be difficult to realize the value of the Collateral pledged to secure the Notes in a timely manner or at all.

Our obligations under the Notes will be secured by a pledge of certain shares of common stock of Ocean Rig, and, at least initially, such Pledged Shares will represent approximately             % of the total number of outstanding shares of Ocean Rig common stock. As described below under “Description of Notes”, we may replace the Pledged Shares with Cash Equivalents in certain circumstances. The security agreements governing the Collateral provide the Collateral Agent with significant remedies, including foreclosures sand sale of all or parts of the Collateral, but the rights of the Collateral Agent to exercise such remedies are, subject to certain exceptions, generally limited to any Event of Default under the Notes. Further, the Collateral Agent will only take such action as instructed by the holders of a majority of the outstanding principal amount of the Notes. The realization of value from the Collateral Agent’s security interest, however, may be limited by other factors that may impede selling the Collateral in a timely manner and at a suitable price. Any delay in the realization of value of Collateral could result in a significant decline in the amount realized.

While the Notes are secured by such a substantial block of Ocean Rig shares, those shares will likely be deemed “control securities” for purposes of Rule 144 under the Securities Act and may only be resold by the Collateral Agent in limited numbers as permitted by Rule 144, in private secondary sales to one or more buyers or pursuant to an effective registration statement. Sales under Rule 144 would likely not be a practical means for any such liquidation and a private resale may require the sale of the shares at a discount to their public market price. We have assigned to the Collateral Agent our rights under a registration rights agreement with Ocean Rig, but any sales thereunder would be reduced by the costs of any underwriter commissions and other transaction costs. In addition, given the significant number of shares pledged and the proportion of the total number of shares of Ocean Rig outstanding common stock that the Pledged Shares represent, a complete disposition of such Collateral over a short period could have a negative impact on the share price and thus the realized value of the Collateral. Noteholders may seek to delay such dispositions over a longer period, which may significantly delay the realization of value from the Collateral Agent’s security interest over the shares. See also “Risk Factors—Risks Relating to the Notes—In the event of a bankruptcy filed in the United States, the Noteholders’ and Collateral Agent’s ability to realize upon the Collateral may be limited by federal bankruptcy law.” In addition, the Collateral Agent is not required to take any action with respect to the Collateral without adequate indemnification from the Noteholders.

We cannot assure you that, in the event of any attempt to liquidate the Pledged Shares, such sales will occur on a timely basis or at all, which may have a potentially significant adverse effect on the sale price of the Collateral when compared with amounts due under the Notes. Therefore, the practical value of realizing on the Collateral may be limited.

We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of bankruptcy law.

The Republic of the Marshall Islands does not have a legal provision for bankruptcy or a general statutory mechanism for insolvency proceedings. As such, in the event of a future insolvency or bankruptcy, our shareholders and creditors may experience delays in their ability to recover their claims after any such insolvency or bankruptcy.

 

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The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict.

We are incorporated under the laws of the Republic of the Marshall Islands, and we conduct operations in countries around the world. Consequently, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or insolvency or similar proceedings involving us or any of our subsidiaries, bankruptcy laws other than those of the United States could apply. The rights under the Notes may be subject to the laws of a number of jurisdictions, and it may be difficult to effectively enforce such rights in multiple bankruptcy, insolvency and other similar proceedings. Moreover, such multi-jurisdictional proceedings are typically complex and costly for creditors and often result in substantial uncertainty and delay in the enforcement of creditors’ rights. In addition, the bankruptcy, insolvency, administration and other laws of such jurisdictions may be materially different from, or in conflict with, one another, including creditors’ rights, priority of creditors, the ability to obtain post-petition interest and the duration of the insolvency proceeding. The application of these various laws in multiple jurisdictions could trigger disputes over which jurisdiction’s law should apply and could adversely affect the ability to realize any recovery under the Notes. If we become a debtor under the United States bankruptcy laws, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would become a debtor in the United States or that a United States bankruptcy court would be entitled to, or accept, jurisdiction over such bankruptcy case or that courts in other countries that have jurisdiction over us and our operations would recognize a United States bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction.

In the event of our bankruptcy, the Noteholders may be deemed to have unsecured claims.

In any U.S. bankruptcy proceeding with respect to us, it is possible that the bankruptcy trustee, the debtor-in-possession, or competing creditors will assert that the fair market value of the Collateral with respect to the Notes on the date of the bankruptcy filing was less than the then-current principal amount of the Notes. Upon a finding by the bankruptcy court that the Notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the Notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the Collateral.

Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the Notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the Notes to receive other “adequate protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Notes.

The value of the Collateral may not sufficiently secure full amounts of claims and post-petition interest.

In the event of a U.S. bankruptcy proceeding against us, the Noteholders will only be entitled to post-petition interest under the U.S. bankruptcy code to the extent that the value of their security interest in the Collateral is greater than their pre-bankruptcy claim. Noteholders that have a security interest in Collateral with a value equal or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the bankruptcy code. No appraisal of the fair market value of the Collateral has been prepared in connection with this offering, and we therefore cannot assure you that the value of the Noteholders’ interest in the Collateral equals or exceeds the principal amount of the Notes.

The Notes will be our senior secured obligations and will be guaranteed by us. Our operations are conducted through, and substantially all of our consolidated assets are held by, our subsidiaries.

The Notes will be our senior secured obligations. A substantial portion of our consolidated assets is held by our subsidiaries. Accordingly, our ability to service our debt, depends on the results of operations of our subsidiaries and upon the ability of such subsidiaries to provide us with cash, whether in the form of dividends,

 

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loans or otherwise, to pay amounts due on our obligations, including the Notes. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the Notes or to make any funds available for that purpose. In addition, dividends, loans or other distributions to us from such subsidiaries may be subject to contractual and other restrictions and are subject to other business considerations.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

It may be difficult to serve process on or enforce a U.S. judgment against us and our officers and directors because we are a foreign corporation.

We are a corporation formed in the Republic of the Marshall Islands, and some of our directors and officers and our independent registered public accounting firm are located outside of the United States. In addition, a substantial portion of our assets are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or any of these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of the Marshall Islands or of the non-U.S. jurisdictions in which our offices are located would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a Marshall Islands court in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise because the Marshall Islands courts may not have subject matter jurisdiction to entertain such a suit.

The Notes currently have no established trading market, and an active trading market may not develop for the Notes, which could affect the liquidity and value of the Notes and you may not be able to sell the Notes readily, or at all, or at or above the price that you paid.

The Notes will constitute a new issue of securities that have no established trading market. We cannot assure you that an active trading market will develop for the Notes, or if one does develop, that it will be liquid. If the Notes are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, our credit ratings, our operating performance and financial condition and other factors, many of which are beyond our control. If an active trading market does not develop, the market price and liquidity of the Notes may be adversely affected. As a result, we cannot ensure you that you will be able to sell any of the Notes at a particular time, at attractive prices, or at all. Thus, you may be required to bear the financial risk of your investment in the Notes indefinitely.

If a trading market were to develop, future trading prices of the Notes may be volatile and will depend on many factors, including:

 

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our operating performance and financial condition or prospects;

 

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the prospects for companies in our industry generally;

 

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the number of holders of the Notes;

 

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prevailing interest rates;

 

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the interest of securities dealers in making a market for them; and

 

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the market for similar securities and the overall securities market.

Fraudulent transfer statutes may limit your rights as a holder of the Notes.

Under U.S. Federal and state fraudulent transfer laws (and under similar laws in certain other jurisdictions) as previously interpreted by various courts, a court, if it determines that the issuance of the Notes or the granting of the pledge of our Pledged Shares constituted or was the result of a fraudulent conveyance, could:

 

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avoid all or a portion of our obligations to holders of the Notes and/or our pledge of Pledged Shares and other Collateral as described below under “Description of Notes”;

 

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subordinate our obligations to holders of the Notes to our other existing and future creditors, entitling such creditors to be paid in full before any payment is made on the Notes; and

 

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take other action detrimental to holders of the Notes, including invalidating the Notes and/or our pledge of Pledged Shares and other Collateral.

In that event, we cannot assure you that you would ever be repaid or that our pledge of Collateral under the Security Documents would be enforceable. There is also no assurance that amounts previously paid to you pursuant to the Notes would not be subject to return.

Under U.S. Federal and state fraudulent transfer laws (and potentially under similar laws in certain other jurisdictions), in order to take any of those actions, courts will typically need to find that (i) we received less than fair consideration or reasonably equivalent value for incurring the indebtedness represented by the Notes and/or pledge of Pledged Shares and other Collateral under the Security Documents, and (ii) we were insolvent at the time the Notes were issued and the pledge was granted, or we were rendered insolvent by reason of the issuance of the Notes and/or our pledge of Pledged Shares or other Collateral under the Security Documents.

Insolvency with respect to a company is generally defined as the following:

 

•

the sum of its indebtedness (including contingent liabilities) is greater than its assets, at fair valuation;

 

•

the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing indebtedness and liabilities (including contingent liabilities) as they become absolute and matured;

 

•

it was engaged, or was about to engage, in a business or transaction for which its capital was unreasonably small;

 

•

it intended to incur, or believed or should have believed it would incur, indebtedness beyond its ability to pay as such indebtedness matures; or

 

•

it was a defendant in an action for money damages, or had a judgment for money damages docketed against it if, in either case, after final judgment, the judgment was unsatisfied.

A court may also void the issuance of the Notes or the pledge of Pledged Shares or other Collateral under the Security Documents, without regard to the above factors, if the court found that we issued the Notes or granted such security with actual intent to hinder, delay or defraud current or future creditors.

Many of the foregoing terms are defined in or interpreted under the applicable fraudulent transfer statutes (and equivalent laws under certain other jurisdictions). As judicially interpreted, a court could find that we did not receive fair consideration or reasonably equivalent value for the incurrence of the indebtedness represented by the Notes or our pledge of Pledged Shares or other Collateral under the Security Documents.

 

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We cannot assure you what standard a court would apply in determining our solvency and whether it would conclude that we were solvent when we incurred our obligations under the Notes or granted under security interest. Although we believe that we are currently solvent under each of the solvency tests utilized by courts in the applicable jurisdictions, and that we will not be rendered insolvent by the issuance of the Notes and the grant of the Collateral contemplated under the Security Documents, any determination of “solvency” is ultimately within the discretion of any court having jurisdiction over us and the transactions contemplated hereby. No assurance can be given that such court will share our view with respect to its current and future solvency.

A court would likely find that we did not receive reasonably equivalent value or fair consideration for the Notes if we did not substantially benefit directly from the issuance of the Notes or the grant of the security interest thereunder. If a court were to void an issuance of the Notes or the grant of the security interest thereunder, you would no longer have a claim against us and/or against the Pledged Shares or other Collateral. Sufficient funds to repay the Notes may not be available from other sources. In addition, the court might direct you to repay any amounts that you already received from us. In addition, any payment by us pursuant to the Notes or any grant of security interest thereunder made at a time we were found to be insolvent could be voided and required to be returned to us or to a fund for the benefit of our creditors if (in the case of any bankruptcy proceeding for us brought in the U.S.) such payment is made to an insider within a one year period prior to a bankruptcy filing or within 90 days for any outside party and such payment would give the creditors more than such creditors would have received in a distribution under Chapter 7 of the United States Bankruptcy Code.

Any future pledge of Collateral may be voidable in bankruptcy.

In addition, any future pledge by the Company of Collateral in favor of the Collateral Agent pursuant to the Security Documents, delivered after the date of the Supplemental Indenture in the circumstances described below under “Description of Notes—Security”, may be voidable by the Company (or a debtor in possession or trustee in a bankruptcy proceeding) in a U.S. bankruptcy proceeding if certain events or circumstances exist or occur, including, among others, if (1) the Company is insolvent at the time of the pledge, (2) the pledge permits the holders of the Notes to receive a greater recovery than if the pledge had not been given and the Company had commenced a liquidation proceeding pursuant to chapter 7 of the U.S. Bankruptcy Code , and (3) a U.S. bankruptcy proceeding in respect of the Company is commenced within 90 days of the pledge. In the event of an insolvency proceeding commenced in a jurisdiction other than the United States, any future pledge by the Company of Collateral in favor of the Collateral Agent may be voidable if certain conditions and circumstances set forth in the laws of the applicable jurisdiction are satisfied. See “—Risks Relating to the Notes—The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict”.

Further, any future pledge by the Company of Collateral in favor of the Collateral Agent pursuant to the Security Documents, delivered after the date of the Supplemental Indenture in the circumstances described below under “Description of Notes—Security”, may be voidable as a constructive fraudulent conveyance in certain circumstances. Under state fraudulent transfer laws, in order to avoid a pledge of collateral, courts will typically need to find that we received less than fair consideration or reasonably equivalent value for the pledge of collateral, and at the time of the pledge we were insolvent or were rendered insolvent by reason of the pledge. Generally, a company would be considered insolvent if, at the time of the pledge:

 

•

the sum of its indebtedness (including contingent liabilities) is greater than its assets, at fair valuation;

 

•

the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing indebtedness and liabilities (including contingent liabilities) as they become absolute and matured;

 

•

it was engaged, or was about to engage, in a business or transaction for which its capital was unreasonably small;

 

•

it intended to incur, or believed or should have believed it would incur, indebtedness beyond its ability to pay as such indebtedness matures; or

 

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•

it was a defendant in an action for money damages, or had a judgment for money damages docketed against it if, in either case, after final judgment, the judgment was unsatisfied.

While, under U.S. bankruptcy laws, a pledge of collateral in respect of an antecedent debt generally constitutes “reasonably equivalent value” for purposes of a fraudulent conveyance analysis, no assurance can be given that a court interpreting state law or applicable foreign law will reach the same conclusion.

We may be unable to repurchase the Notes as required upon a Change of Control.

If we experience a Change of Control (as defined under “Description of Notes”), we would be required to make an offer to repurchase all outstanding Notes at 101% of their principal amount plus accrued and unpaid interest, if any to the date of repurchase. However, we may be unable to do so because we might not have enough available funds at the time of such event to make the required purchase of the Notes. See “Description of Notes—Change of Control Permits Holders to Require the Company to Purchase Notes”.

The ability of holders of Notes to require us to repurchase Notes as a result of a disposition of “substantially all” of our assets is uncertain.

The definition of change of control in the Supplemental Indenture governing the Notes offered hereby includes a phrase relating to the direct or indirect sale, transfer, conveyance or other disposition of “all or substantially all” of our consolidated assets. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase. Accordingly, the ability of a holder of Notes to require us to repurchase such Notes as a result of a sale, transfer, conveyance or other disposition of less than all of our and our subsidiaries’ assets taken as a whole of another person or group is uncertain.

In addition, a Delaware Chancery Court decision has raised questions about the enforceability of provisions related to the triggering of a change of control as a result of a change in the composition of a board of directors. As the Marshall Islands Business Corporations Act, or the BCA, specifically incorporates the judicial case law of the State of Delaware and other states with substantially similar legislative provisions, the ability of a holder of Notes to require us to repurchase Notes as a result of a change in composition of directors on our board is uncertain.

We have agreed to seek to have our Notes rated, and if a rating that is lower than market expectations is obtained or if a lowering or withdrawal of such rating occurs in the future, the trading price of our Notes may be affected.

We have agreed to use commercially reasonable efforts to obtain a rating for our Notes. In addition, we may elect to issue other securities for which we may seek to obtain a rating or to which one or more credit rating agencies might independently determine to assign a rating. If any ratings are assigned to our Notes in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, or if ratings for such other securities would imply a lower relative value for our Notes, could adversely affect the market for, or the market value of, our Notes. Ratings only reflect the views of the issuing rating agency or agencies and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendation to purchase, sell or hold any particular security, including our Notes. Ratings do not reflect market prices or suitability of a security for a particular investor and any future rating of our Notes may not reflect all risks related to us and our business, or the structure or market value of our Notes.

A significant period of time may lapse before the proceeds are to be applied to repay the Convertible Notes.

A significant period of time may lapse before the proceeds are to be applied to repay the Convertible Notes. Our Senior Convertible Notes do not come due until December 1, 2014, and in the interim the proceeds of the Notes offered hereby will not be held in escrow or delivered to the trustee for such Senior Convertible Notes or otherwise irrevocably restricted in use. In addition, during such time period we will be subject to negative carry, incurring interest expense on both the Notes offered hereby and the Senior Convertible Notes, which will reduce our operating results during such period that both instruments are simultaneously outstanding.

 

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The Notes will not be listed and there is no established market for the Notes.

The Notes are new securities and there is currently no established market for the Notes. We do not intend to apply for a listing of the Notes on any securities exchange or any automated dealer quotation system. The underwriters have advised us that they currently intend to make a market in the Notes. However, they are not obligated to do so, and they may discontinue any market making with respect to the Notes without notice. Accordingly, we cannot assure you as to the development or liquidity of any market for the Notes.

Because the Notes will be issued with original issue discount for U.S. federal income tax purposes, U.S. Holders may recognize taxable income in respect of the Notes in advance of the receipt of cash attributable to such income.

The Notes will be treated as issued with original issue discount for U.S. federal income tax purposes. As a result, U.S. holders (as defined in “Material United States Federal Income Tax Considerations”) will generally be required to include the original issue discount in gross income over the term of the notes on a constant yield basis, regardless of their method of accounting for tax purposes. Consequently, in addition to recognizing income attributable to stated interest, U.S. holders generally would recognize taxable income in respect of a Note in advance of receipt of any payment on the Notes to which such income is attributable. See “Material United States Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Original Issue Discount.”

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of the Notes, after deducting discounts and commissions payable to the underwriters and other expenses related to the offering, will be approximately $         million.

Assuming that all of the Notes offered hereby are sold, we will use the net proceeds of the offering to refinance the outstanding $700 million aggregate principal amount of the Convertible Senior Notes, which bear interest at 5% per annum and which mature on December 1, 2014. To the extent that less than all of the Notes offered hereby are sold, we intend to use borrowings from additional sources to fund such refinancing. While we have received committed term sheets from two lenders to provide additional funding for the repayment of the aggregate of $         principal amount of our Convertible Notes which will remain unpaid after the application of the net proceeds from the sale of the Notes, we have not, as of the date hereof, entered into definitive agreements for such credit. We cannot assure you that we will enter into definitive credit agreements for such funding. See “Risk Factors—Company Specific Risk Factors—If we are unable to repay all the outstanding obligations under our $700 million principal amount outstanding of Convertible Senior Notes at their maturity on December 1, 2014, we will be in default on such debt and under our other then outstanding debt”.

 

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RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth our ratio of earnings to fixed charges (or the dollar amount of the coverage deficiency in periods that earnings are inadequate to cover fixed charges) for the six months ended June 30, 2014 and each of the years ended December 31, 2013, 2012, 2011, 2010 and 2009.

 

		Year ended December 31, 2009				Year ended December 31, 2010				Year ended December 31, 2011				Year ended December 31, 2012				Year ended December 31, 2013				Six month period ended June 30, 2014
		In thousands of U.S. dollars
Earnings/(loss)
Income/(loss) from continuing operations before income taxes and non-controlling interest		$	766			$	210,886			$	(19,858	)		$	(244,636	)		$	(153,437	)		$	11,501
Add: Depreciation of capitalized interest			46				63				2,871				5,137				5,979				5,035
Add: Fixed charges			115,813				145,276				222,241				269,095				401,843				200,387
Less: Capitalized interest			(31,383	)			(78,451	)			(76,068	)			(58,967	)			(69,714	)			(19,400	)
Total Earnings/(loss)		$	85,242			$	277,774			$	129,186			$	(29,371	)		$	184,671			$	197,523
Fixed charges:
Interest expensed and capitalized		$	101,104			$	107,894			$	163,171			$	209,692			$	309,094			$	156,803
Amortization and write off of debt issue cost and discount relating to convertible notes			14,709				37,382				59,070				59,403				92,749				43,584
Total Fixed Charges		$	115,813			$	145,276			$	222,241			$	269,095			$	401,843			$	200,387
Ratio of Earnings to Fixed Charges			n/a				1.9x				n/a				n/a				n/a				n/a
Dollar amount of the coverage deficiency			30,571				n/a				93,055				298,466				217,172				2,864

 

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CAPITALIZATION

The following table sets forth our cash position and consolidated capitalization as of June 30, 2014:

 

•

on an actual basis;

 

•

on an as adjusted basis to give effect to (i) scheduled loan repayments of $38.1 million under our credit facilities and long-term debt which we made subsequent to June 30, 2014, and (ii) the repayment of the Old DOV Senior Secured Credit Facility out of the proceeds of the New DOV Senior Secured Term Loan Facility; and

 

•

on a further adjusted basis giving effect to this offering and the application of the net proceeds thereof as described in “Use of Proceeds”.

 

		As of June 30, 2014
		Actual				As Adjusted (1)(2)(3)				As Further Adjusted
		(in thousands of U.S. dollars)
Cash and cash equivalents		$	458,715				480,949				480,949
Restricted cash (3)(5)		$	168,050				93,050				93,050
Total Cash			626,765				573,999				573,999
Long-term debt, net of financing fees
5.00% Convertible Senior Notes		$	700,000				700,000				—	(4)
% Senior Secured Notes due 2017 offered hereby (4)			—				—				700,000
6.50% Drill Rigs Senior Secured Notes			800,000				800,000				800,000
7.25% Ocean Rig Senior Unsecured Notes			500,000				500,000				500,000
Secured Credit Facilities—Drybulk Segment			605,618				580,921				580,921
Secured Credit Facilities—Tanker Segment			290,945				282,327				282,327
DFHI Term Loan B Facility—Drilling Segment			1,885,750				1,881,000				1,881,000
Secured Credit Facilities—Drilling Segment			1,288,421				—				—
New DOV Senior Secured Term Loan Facility—Drilling Segment			—				1,300,000				1,300,000
Deferred Financing Costs and equity components of notes			(116,090	)			(142,370	)			(118,571	)
Total debt, including current portion (6)		$	5,954,644				5,901,878				5,925,677
Preferred stock, $0.01 par value; 500,000,000 shares authorized; 100,000,000 shares designated as Series A Convertible Preferred Stock; 0 shares of Series A Convertible Preferred Stock issued and outstanding at June 30, 2014			—				—				—
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 454,864,321 shares issued and outstanding at June 30, 2014 (7)(8)			4,548				4,548				4,548
Treasury stock; $0.01 par value; 21,000,000 shares at June 30, 2014			(210	)			(210	)			(360	)
Additional paid-in capital			2,916,044				2,916,044				2,916,194
Accumulated other comprehensive loss			(5,599	)			(5,599	)			(5,599	)
Accumulated deficit			(249,305	)			(249,305	)			(273,104	)
Total DryShips Inc. stockholders’ equity			2,665,478				2,665,478				2,641,679
Total capitalization		$	8,620,122				8,567,356				8,567,356

 

(1)	There have been no significant changes to our capitalization since June 30, 2014, as so adjusted.

(2)	Excludes a dividend paid by Ocean Rig to shareholders other than the Company on August 8, 2014 amounting to $10.1 million.

(3)	The cash position gives effect to $75.0 million of previously restricted cash becoming unrestricted cash as a result of the Drillships Ocean Ventures Inc. refinancing.

 

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(4)

Assuming that all of the Notes offered hereby are sold, we will use all of the net proceeds of the Notes to repay our $700 million outstanding Convertible Senior Notes due December 2014. To the extent that less than all of the Notes offered hereby are sold, we intend to apply the proceeds from borrowings under the Proposed Secured Credit Facility or borrowings under the Proposed Bridge Loan Facility (in each case if and to the extent only that we enter definitive agreements for such Facilities prior to the maturity date of such Convertible Notes), and any cash on hand and any cash from possible additional sources such as issuances of equity securities or the incurrence of debt (which may include additional secured borrowings against unpledged collateral), or any combination of these borrowing, proceeds, cash or additional sources, to fund the repayment of the remaining outstanding balance of the Convertible Senior Notes on or prior to maturity. See “Risk Factors—Company Specific Risk Factors—If we are unable to repay all the outstanding obligations under our $700 million principal amount outstanding of Convertible Senior Notes at their maturity on December 1, 2014, we will be in default on such debt and under our other outstanding debt”.

(5)	Restricted cash represents bank deposits to be used to fund loan installments coming due and minimum cash deposits required to be maintained with certain banks under our borrowing arrangements.

(6)	Includes $4.9 billion aggregate principal amount of secured debt, net of financing fees, which is guaranteed and $1.2 billion aggregate principal amount of unsecured debt, net of financing fees, which is not guaranteed.

(7)

Includes 15,100,000 of our common shares lent in connection with the sale of our outstanding Convertible Senior Notes which must be returned to us at the end of the loan availability period under the share lending agreement or earlier in certain circumstances. The end of the loan availability period under the share lending agreement is expected to occur on or before December 1, 2014. We believe that under U.S. GAAP, as presently in effect, the borrowed shares are not considered outstanding for the purpose of computing and reporting our earnings per share, although the borrowed shares are outstanding for corporate law purposes.

(8)	Excludes the issuance of 1,200,000 shares, granted to Fabiana Services S.A. on August 19, 2014, and the relevant amortization expense.

 

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MANAGEMENT

Set forth below are the names, ages and positions of our directors, executive officers and key employees. Our board of directors is elected annually on a staggered basis. Each director elected holds office until his successor shall have been duly elected and qualified, except in the event of his death, resignation, removal, or the earlier termination of his term of office. Officers are appointed from time to time by vote of our board of directors and hold office until a successor is elected.

 

Name*		Age		Position
George Economou		61		Chairman, President, Chief Executive Officer and Class A Director
Harry Kerames		59		Class A Director
Vassilis Karamitsanis		38		Class A Director
George Xiradakis		50		Class B Director
Chryssoula Kandylidis		60		Class C Director
George Demathas		61		Class C Director
Ziad Nakhleh		42		Chief Financial Officer
Niki Fotiou		45		Senior Vice President Head of Accounting and Reporting
Anastasia Pavli		32		Secretary

The business address of each person listed above is the address of our principal executive offices, which are located at 109 Kifisias Avenue and Sina Street, 151 24 Marousi, Athens, Greece.

Biographical information with respect to each of our directors, executives and key personnel is set forth below:

George Economou has over 30 years of experience in the maritime industry and has served as Chairman, President and Chief Executive Officer of DryShips Inc. since its incorporation in 2004. He successfully took the Company public in February 2005, on NASDAQ under the trading symbol: DRYS. Mr. Economou has overseen the Company’s growth into one of the largest US listed drybulk company in fleet size and revenue and the third largest Panamax owner in the world. The Company subsequently invested in and developed Ocean Rig UDW Inc., an owner of drilling rigs and drillships involved in ultra deepwater drilling. Mr. Economou is the Chairman, President and Chief Executive Officer of Ocean Rig UDW Inc. Mr. Economou is a member of ABS Council, Intertanko Hellenic Shipping Forum and Lloyds Register Hellenic Advisory Committees. Since 2000, Mr. Economou has been a director and the President of AllShips Ltd. and, since 2010, he has been a member of the board of directors of Danaos Corporation. Apart from his shipping interests, Mr. Economou has also invested in real estate. Mr. Economou is a graduate of the Massachusetts Institute of Technology and holds both a Bachelor of Science and a Master of Science degree in Naval Architecture and Marine Engineering and a Master of Science in Shipping and Shipbuilding Management.

Harry Kerames was appointed to our board of directors on July 29, 2009. Harry Kerames has over 22 years of experience in the transportation industry. Mr. Kerames has been the Managing Director of Global Capital Finance, where he was responsible for the firm’s shipping practice. Prior to joining Global Capital Finance in 2006, he was the Chief Marketing Officer at Charles R. Weber Company Inc., where he brokered the freight derivative business, and co-founded a freight derivatives hedge fund. Mr. Kerames has also held various directorships, senior level marketing positions, and consultative roles with Illinois Central Railroad, Genstar Corporation, Motive Power Industries, Hub Group Distribution Services, and Ship and Transportation Equipment Finance and OceanFreight Inc. Mr. Kerames is a member of the Baltic Exchange, the Hellenic American Chamber of Commerce, and the Connecticut Maritime Association. Mr. Kerames graduated with a Bachelor of Science from the University of Connecticut. Mr Kerames is the chairman of our Audit Committee.

Vassilis Karamitsanis was appointed to our board of directors on July 29, 2009. Vassilis Karamitsanis is an attorney and a founding partner of Sigma Kappa Sigma Law Offices. From 2007 to 2009, Mr. Karamitsanis was the head of the legal department at Karouzos Construction & Development Group. Mr. Karamitsanis has also

 

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previously served as a legal advisor to Dimand Real Estate Development and LPSA Consultants S.A. and has served as a special advisor to the Hellenic Ministry of Health & Welfare. He is a member of the Athens Bar Association and practices real estate, corporate, domestic and international contracting, telecommunications, and energy law. Mr. Karamitsanis graduated from Athens College Lyceum and received his law degree from Aristotle University of Thessaloniki. He also holds a postgraduate degree in Economic Analysis of Law from Erasmus University of Rotterdam and a postgraduate degree in Economic Analysis of Institutions from University Aix-Marseille III, Aix-en-Provence.

George Demathas was appointed to our board of directors on July 18, 2006. Mr. Demathas was also a director of Ocean Rig ASA from 2008 to 2010. Since 2001, Mr. Demathas has been the Chief Executive Officer and a director of Stroigasitera Inc., a privately held company that finances and develops natural gas infrastructure projects in Central Asia, and since 1996, Mr. Demathas has invested in natural gas trunk pipelines in Central Asia. Since 1991, Mr. Demathas has been involved in Malden Investment Trust Inc. in association with Lukoil, working in the Russian petrochemical industry. Mr. Demathas was a principal in Marketing Systems Ltd., where Mr. Demathas supplied turnkey manufacturing equipment to industries in the Former Soviet Union. Mr. Demathas has a Bachelor of Arts in Mathematics and Physics from Hamilton College in New York and an Master of Science in Electrical Engineering and Computer Science from Columbia University. He is based in Moscow and travels widely in Europe and the United States.

George Xiradakis was appointed to our board of directors in May 2006. Mr. Xiradakis has been the Managing Director of XRTC Business Consultants Ltd., a consulting firm providing financial advice to the maritime industry, including financial and state institutions. XRTC acted as the commercial representative of international banks including the French banking groups Credit Lyonnais and NATIXIS in Greece. Mr. Xiradakis is also the advisor of various shipping companies, as well as international and state organizations. He also serves as the General Secretary of the Association of Banking and Shipping Executives of Hellenic Shipping. In addition, Mr. Xiradakis has served on the board of directors of Paragon Shipping Inc., a company listed on the New York Stock Exchange, since 2008, and is also a member of the audit committee of Paragon Shipping Inc. From July 2010 to August 2010, Mr. Xiradakis served on the board of directors of Ocean Rig UDW Inc., the Company’s majority-owned subsidiary, and from 2008 to 2009, Mr. Xiradakis was a member of the board of directors of Aries Maritime Transport. Mr. Xiradakis has also served as President and Chairman of the board of directors of the Hellenic Real Estate Corporation and the Hellenic National Center of Port Development. Mr. Xiradakis has a certificate as a Deck Officer from the Hellenic Merchant Marine and he is a graduate of the Nautical Marine Academy of Aspropyrgos, Greece. He also holds a postgraduate Diploma in Commercial Operation of Shipping from London Guildhall University formerly known as City of London Polytechnic in London. Mr. Xiradakis holds an MSc. in Maritime Studies from the University of Wales.

Chryssoula Kandylidis was appointed to our board of directors on March 5, 2008. Mrs. Kandylidis has also served as an advisor to the Minister of Transport and Communications in Greece for matters concerning people with special abilities for the past three years on a voluntary basis. Mrs. Kandylidis graduated from Pierce College in Athens, Greece and from the Institut Francais d’ Athenes. She also holds a degree in Economics from the University of Geneva. Mrs. Kandylidis is the sister of George Economou, our Chief Executive Officer.

Ziad Nakhleh was appointed as our Chief Financial Officer in November 2009. Mr. Nakhleh has over 13 years of finance experience. From January, 2005 to September, 2008, he served as Treasurer and Chief Financial Officer of Aegean Marine Petroleum Network Inc., or Aegean, a publicly traded marine fuels logistics company listed on the New York Stock Exchange. From September 2008 to October 2009, Mr. Nakhleh was engaged in a consulting capacity to various companies in the shipping and marine fuels industries. Prior to his time with Aegean, Mr. Nakhleh was employed at Ernst & Young and Arthur Andersen in Athens. Mr. Nakhleh is a graduate of the University of Richmond in Virginia and is a member of the American Institute of Certified Public Accountants.

Niki Fotiou was appointed as the Company’s Senior Vice President Head of Accounting and Reporting in January 2010. From July 2006 to December 2009, Ms. Fotiou served as the Group Controller of Cardiff Marine

 

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Inc. For the period from 1993 to 2006, Ms. Fotiou worked for Deloitte and for Hyatt International Trade and Tourism Hellas. Ms Fotiou is a graduate of the University of Cape Town and is a member of the Association of Chartered Certified Accountants. Ms Fotiou serves as Chief Financial Officer and corporate secretary of Allships Ltd. since 2009.

Anastasia Pavli was appointed as our corporate secretary with effect from January 1, 2012. Ms Pavli is an attorney-at-law and an associate at Deverakis Law Office in Athens, Greece. Ms. Pavli graduated from the Athens Law Faculty with an L.L.B in 2006 and completed part of her undergraduate studies at the University of Heidelberg, Germany. Ms. Pavli received an L.L.M. from University College, London, United Kingdom in 2007 and has been a member of the Piraeus Bar Association since 2008. Ms. Pavli is also the legal counsel of a company affiliated with Mr. George Economou.

Consultancy Agreements

Agreement for the Services of our Chief Executive Officer

On October 22, 2008, we entered into a consultancy agreement with Fabiana Services S.A., or Fabiana, a Marshall Islands entity beneficially owned by our Chief Executive Officer, Mr. George Economou, with an effective date of February 3, 2008, as amended. Under the agreement, Fabiana provides the services of our Chief Executive Officer. The agreement has a term of five years unless terminated earlier in accordance with the agreement. Pursuant to the agreement, we are obligated to pay (i) annual remuneration to Fabiana in the amount of Euro 2.7 million (or $3.6 million, based on the Euro/U.S. dollar exchange rate as of December 31, 2012); and (ii) potential bonus compensation for the services provided at the end of each year, with any such bonus to be determined by the compensation committee of our board of directors. In addition, under the terms of the agreement, Fabiana also received in 2013 1,000,000 common shares that were awarded under our 2008 Equity Incentive Plan, as discussed below under “—Equity Incentive Plan.”

The agreement may be terminated (i) at the end of the term unless extended by mutual agreement in writing; (ii) at any time by mutual agreement of the parties; (iii) by the company without cause; or (iv) by either party for any material breach of their respective obligations under the agreement.

On January 25, 2010, the compensation committee of our board of directors approved a bonus award to Fabiana in the form of 4,500,000 common shares for Fabiana’s contribution of the services of our Chief Executive Officer during 2009, as well as for the anticipated contribution of such services during 2010, 2011 and 2012.

In addition, on January 12, 2011, the compensation committee of our board of directors approved a bonus award to Fabiana of $4 million in cash and 9,000,000 common shares for Fabiana’s contribution of the services of our Chief Executive Officer during 2010. The shares shall vest over a period of eight years with 1,000,000 shares to vest on the grant date and 1,000,000 shares to vest annually on December 31, 2011 through 2018, respectively.

Fabiana did not receive any bonus payments in 2011, 2012 or 2013.

On August 20, 2013, the compensation committee of our board of directors approved that a bonus in the form of 1,000,000 shares of the Company’s common stock, be granted to Fabiana for the contribution of our Chief Executive Officer 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 respectively.

On August 19, 2014, the compensation committee of our board of directors approved a bonus in the form of 1,200,000 shares of the Company’s common stock granted to Fabiana for the contribution of services rendered by our Chief Executive Officer in 2013. The shares vest over a period of three years with 400,000 shares each vesting on December 31, 2014, 2015 and 2016, respectively.

 

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Agreement for the Services of our Chief Financial Officer

On October 1, 2009, we entered into a consultancy agreement with an entity beneficially owned by our Chief Financial Officer, Mr. Ziad Nakhleh, as amended on February 4, 2011, for the provision of the services of our Chief Financial Officer. The agreement expires on December 31, 2013, unless extended by mutual agreement of the parties. Under the terms of the agreement, we are obligated to pay (i) an annual base salary (ii) a cash retention bonus for the contribution of the services of the Chief Financial Officer during the years 2010 and 2011; (iii) a cash retention bonus for the anticipated contribution of services of the Chief Financial Officer during the years 2011, 2012 and 2013; and (iv) additional bonus compensation as determined by the compensation committee of our board of directors.

The agreement may be terminated (i) at the end of the term unless extended by mutual agreement in writing; (ii) at any time by mutual agreement of the parties; (iii) at any time by us without cause; or (iv) at any time by either party in the event of a material breach of obligations by the other party. In addition, upon termination within three months following a change in control, as defined in the agreement, that occurs within two years of the date of the agreement, we will be obligated to pay the consultancy fee under the balance of the agreement, which shall not be less than six months’ base salary or greater than twelve months’ base salary.

Agreement for the Services of our Senior Vice President, Head of Accounting and Reporting

On March 5, 2010, we entered into a consultancy agreement with an entity beneficially owned by our Senior Vice President, Head of Accounting and Reporting, Ms. Niki Fotiou, for the provision of the services of our Senior Vice President, Head of Accounting and Reporting. We have extended the term of this agreement, which will be deemed to have expired as of December 31, 2015. Under the terms of the agreement, we are obligated to pay (i) an annual base salary; (ii) a cash bonus; (iii) equity compensation; (iv) additional bonus compensation as determined by our Chief Financial Officer; and (v) a signing bonus.

The agreement may be terminated (i) at the end of the term, unless extended by mutual agreement in writing; (ii) at any time by mutual agreement of the parties; (iii) at any time by us without cause; or (iv) at any time by either party in the event of a material breach of obligations by the other party. In addition, upon termination within three months following a change in control, as defined in the agreement, that occurs within two years of the date of the agreement, we will be obligated to pay the consultancy fee under the balance of the agreement, which shall not be less than six months’ base salary or greater than twelve months’ base salary.

Equity Incentive Plan

On January 16, 2008, the Company’s board of directors approved the 2008 Equity Incentive Plan, as amended, or the Plan. Under the Plan, officers, directors, and key employees of the Company and its subsidiaries and affiliates and consultants and service providers to the Company and its subsidiaries and affiliates are eligible to receive, with respect to the Company’s common shares, awards of stock options, stock appreciation rights, restricted stock, restricted stock units, phantom stock units and unrestricted stock. A total of 21,834,055 common shares have been reserved for issuance under the Plan, subject to adjustment for changes in our capitalization as provided in the Plan. The Plan is administered by our board of directors. Unless terminated earlier by our board of directors, the Plan will expire after January 16, 2018, the tenth anniversary of the date the Plan was adopted. Our awards under the Plan are set forth as follows:

On March 5, 2008, we awarded 1,000,000 non-vested common shares to Fabiana. The shares vested quarterly in eight equal installments, with the first installment of 125,000 shares of common stock vesting on May 28, 2008. The fair value of the 1,000,000 common shares on the grant date amounted to $75.09 per share.

On October 2, 2008, we approved grants in the amount of 9,000 vested common shares to three of our non-executive directors. Also on October 2, 2008, we approved grants of 2,700 non-vested common shares each, or 9,000 non-vested common shares in the aggregate, to two of our non-executive directors, to be issued and to vest

 

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in the amount of 75 shares per director, or 150 shares in the aggregate, per month over a three-year period beginning on February 1, 2009 and continuing until January 1, 2012 or such other time as we may instruct. From the 9,000 non-vested common shares, 3,600 shares were forfeited during 2010. All of the non-vested common shares described above have vested. The fair value of the vested shares on the grant date was $33.59 per share.

On March 12, 2009, 70,621 non-vested common shares were granted to an executive officer of the Company. The shares vested in annual installments of 42,373 and 28,248 shares on March 1, 2010 and March 1, 2011, respectively. The fair value of each share on the grant date was $3.54.

Also on January 25, 2010, we awarded 4,500,000 non-vested common shares to Fabiana for the contribution of the services of our Chief Executive Officer during the fiscal year ended 2009 as well as for the anticipated contribution of the services of our Chief Executive Officer during the fiscal years ended 2010, 2011 and 2012. The shares vest over a period of three years, with 1,000,000 shares vesting on the award date, 1,000,000 shares vesting on each of December 31, 2010 and 2011 and 1,500,000 shares vesting on December 31, 2012. The fair value of the shares on the award date was $6.05 per share.

On March 5, 2010, 2,000 non-vested common shares and 1,000 vested common shares were granted to an executive officer of the Company under the Plan. All of the shares awarded under this grant have vested. The shares were issued during July 2010 and the fair value of each share, on the grant date, was $5.66.

On January 12, 2011, we awarded 9,000,000 non-vested common shares to Fabiana for the contribution of the services of our Chief Executive Officer during the fiscal year ended 2010. The shares awarded to Fabiana vest over a period of eight years, with 1,000,000 shares vesting on February 10, 2011 and 1,000,000 shares vesting annually on December 31 of 2011 through 2018. The fair value of the shares on the award date was $5.50 per share.

On February 4, 2011, we awarded 15,000 non-vested common shares to one of our executive officers, which vest on a pro rata basis over the course of three years beginning in June 2012. The fair value of the shares on the award date was $5.01 per share.

On August 20, 2013, we awarded 1,000,000 non-vested common shares to Fabiana for the contribution of 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 respectively. The fair value of the shares on the award date was $2.01 per share.

On August 19, 2014, the compensation committee of our board of directors approved a bonus in the form of 1,200,000 shares of the Company’s common stock granted to Fabiana for the contribution of services rendered by our Chief Executive Officer in 2013. The shares vest over a period of three years with 400,000 shares each vesting on December 31, 2014, 2015 and 2016, respectively.

As of the date of this prospectus supplement, we had 5,031,034 common shares remaining for issuance under the Plan.

Stock options and stock appreciation rights may be granted under the Plan with a per share exercise price equal to the per share fair market value of our common shares on the date of grant, unless otherwise determined by the Plan’s administrator, but in no event will the exercise price be less than the fair market value of a common share on the date of grant. Options and stock appreciation rights may be exercisable at times and under conditions as determined by the Plan’s administrator, but in no event will they be exercisable later than ten years from the date of grant. Awards of restricted stock, restricted stock units and phantom stock units may be granted under the Plan subject to vesting and forfeiture provisions and other terms and conditions as determined by the Plan’s administrator. The Plan’s administrator may grant dividend equivalents with respect to grants of restricted stock units and phantom stock units.

 

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Adjustments may be made to outstanding awards in the event of a corporate transaction or change in capitalization or other extraordinary event. In the event of a “change in control” (as defined in the Plan), unless otherwise provided by the Plan’s administrator in an award agreement, awards then outstanding will become fully vested and exercisable in full.

Compensation of Directors and Senior Management

We paid an aggregate amount of $4.3 million, $5.2 million and $6.4 million, as cash compensation to our officers and executive directors for the fiscal years ended December 31, 2013, 2012 and 2011, respectively, and $2.2 million and $2.5 million for the six-month periods ended June 30, 2013 and 2014, respectively. Non-executive directors received annual cash compensation in the aggregate amount of $0.5 million, plus reimbursement of out-of-pocket expenses for the fiscal years ended December 31, 2013, 2012 and 2011, respectively, and $0.2 million for the six-month periods ended June 30, 2014 and 2013, respectively. We do not have a retirement plan for our officers or directors.

Board Practices

Our board of directors is elected annually, and each director elected holds office for a three-year term or until his successor shall have been duly elected and qualified, except in the event of his death, resignation, removal or the earlier termination of his term of office. The term of our Class A directors, Messrs. George Economou, Harry Kerames and Vassilis Karamitsanis, expires at the annual general meeting of shareholders in 2014. The term of our Class B director George Xiridakis, expires at the annual general meeting of shareholders in 2015. The term of our Class C directors, Ms. Chryssoula Kandylidis and Mr. George Demathas, expires at the annual general meeting of shareholders in 2016.

There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.

Our board of directors has determined five of our directors to be independent under the rules of the NASDAQ Stock Market LLC: Messrs. Harry Kerames, Vassilis Karamitsanis, George Xiradakis and George Demathas. Under the NASDAQ corporate governance rules, a director is not considered independent unless our board of directors affirmatively determines that the director has no direct or indirect material relationship with us or our affiliates that could reasonably be expected to interfere with the exercise of such director’s independent judgment. In making this determination, our board of directors broadly considers all facts and circumstances it deems relevant from the standpoint of the director and from that of persons or organizations with which the director has an affiliation.

Committees of the Board of Directors

Our board of directors has established an audit committee comprised of three independent directors: Harry Kerames, Vassilis Karamitsanis and George Xiradakis. Mr. Harry Kerames has been appointed to serve as Chairman of the audit committee. The audit committee is governed by a written charter, which has been approved by the board of directors. The board of directors has determined that all of the members of the audit committee meet the applicable independence requirements under Rule 10A-3 of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act and the NASDAQ Stock Market LLC and fulfill the requirement of being financially literate and that George Xiradakis qualifies as an “audit committee financial expert” as defined under current SEC regulations. The audit committee is appointed by the board of directors and is responsible for, among other matters:

 

•

engaging our external and internal auditors;

 

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approving in advance all audit and non-audit services provided by the auditors;

 

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•

approving all fees paid to the auditors;

 

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reviewing the qualification and independence of our external auditors;

 

•

reviewing our relationship with external auditors, including considering audit fees which should be paid as well as any other fees which are payable to auditors in respect of non-audit activities, discussing with the external auditors such issues as compliance with accounting principles and any proposals which the external auditors have made vis-a-vis our accounting principles and standards and auditing standards;

 

•

overseeing our financial reporting and internal control functions;

 

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overseeing our whistleblower’s process and protection; and

 

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overseeing general compliance with related regulatory requirements.

Our board of directors has established a compensation committee comprised of two independent directors, Harry Kerames and Vassilis Karamitsanis. The compensation committee is responsible for determining the compensation of our executive officers.

Our board of directors has also established a nominating committee consisting of two independent directors, Messrs. George Demathas and George Xiradakis. Mr. George Demathas has been appointed to serve as Chairman of the nominating committee. The nominating committee is responsible for identifying, evaluating and recommending to the board of directors individuals for membership on the board of directors, as well as considering nominees proposed by shareholders in accordance with our Amended and Restated Bylaws.

Employees

Drybulk and Tanker Segment

As of December 31, 2013, 2012 and 2011, DryShips Inc. employed 17, 19 and 17 persons at its offices in Athens, Greece, respectively. As of December 31, 2013, 2012 and 2011, TMS Bulkers and TMS Tankers employed approximately 246, 176 and 150 people in the aggregate, respectively. TMS Bulkers and TMS Tankers are responsible for recruiting, either directly or through a crewing agent, the senior officers and all other crew members for our drybulk and tanker vessels. We believe the streamlining of crewing arrangements will ensure that all our vessels will be crewed with experienced seamen that have the qualifications and licenses required by international regulations and shipping conventions. We did not experience any material work stoppages with respect to our drybulk and tanker segments due to labor disagreements during 2013, 2012 or 2011.

Offshore Drilling Segment

As of December 31, 2013, 2012 and 2011, our majority-owned subsidiary, Ocean Rig UDW Inc., employed 145, 10 and one persons, respectively. As of December 31, 2013, 2012 and 2011, the total number of employees employed by wholly-owned management subsidiaries of Ocean Rig UDW was approximately 1,742 , 1,374 and 1,305, respectively, of which approximately 265, 244 and 337 were full-time crew engaged through third party crewing agencies, respectively. Of the total number of employees as of December 31, 2013, 2012 and 2011, approximately 161, 144 and 162 were assigned to the Eirik Raude, approximately 218, 154 and 139 were assigned to the Leiv Eiriksson, approximately 191, 186 and 202 were assigned to the Ocean Rig Corcovado, and approximately 212, 205 and 200 were assigned to the Ocean Rig Olympia, respectively. In addition, of the total number of employees as of December 31, 2013, 2012 and 2011, approximately 200, 202 and 214 were assigned to the Ocean Rig Poseidon and approximately 185, 182 and 191 were assigned to the Ocean Rig Mykonos, respectively. Furthermore, of the total number of employees as of December 31, 2013, approximately 86 were assigned to the Ocean Rig Mylos, approximately 104 were assigned to the Ocean Rig Skyros, and approximately 93 were assigned to the Ocean Rig Athena respectively. As of December 31, 2013, 2012 and 2011, the newbuild drillship project team, located in South Korea and Norway, employed 47, 44 and 70 employees, respectively,

 

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while the management and staff positions at the Stavanger office consisted of 47, 139 and 110 employees, respectively. As of December 31, 2013, there were also 90 employees based at our Aberdeen, Rio de Janeiro, Angola and Jersey offices and 19 employees based in other locations. As of December 31, 2012, there were also 67 employees based at our Aberdeen, Rio de Janeiro and Jersey offices and five employees based in other locations. As of December 31, 2011, there were 12 employees based at our Aberdeen office and five employees based in other locations.

The increase of employees from December 31, 2011 to December 31, 2012 and 2013 is primarily due to the general growth of our offshore drilling business.

We did not experience any material work stoppages with respect to our offshore drilling segment due to labor disagreements during 2013, 2012 or 2011.

 

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SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of our common shares, as of August 11, 2014, held by:

 

•

each person or entity that we know beneficially owns 5% or more of our common shares;

 

•

each of our executive officers, directors and key employees; and

 

•

all our executive officers, directors and key employees as a group.

Beneficial ownership is determined in accordance with the SEC’s rules. In computing percentage ownership of each person, common shares subject to options held by that person that are currently exercisable or convertible, or exercisable or convertible within 60 days of August     , 2014, are deemed to be beneficially owned by that person. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. All of our shareholders, including the shareholders listed in the table below, are entitled to one vote for each common share held.

 

Name and Address of Beneficial Owner (1)		Number of Shares Owned				Percent of Class (2)
George Economou (3)			57,625,177				13.3	%
Executive Officers, Key Employees and Directors as a Group			57,625,177				13.3	%

 

*	Less than one percent.

(1)	Unless otherwise indicated, the business address of each beneficial owner identified is c/o DryShips Inc., Athens Shipping Office, 109 Kifisias Avenue and Sina Street, 151 24 Marousi, Athens, Greece.

(2)	Based on 433,864,321 common shares outstanding as of August 11, 2014.

(3)

Mr. Economou may be deemed to beneficially own 10,944,910 of these shares through Elios Investments Inc., which is a wholly-owned subsidiary of the Entrepreneurial Spirit Foundation, a Lichtenstein foundation, or the Foundation, the beneficiaries of which are Mr. Economou and members of his family. Mr. Economou may be deemed to beneficially own 15,500,000 of these shares through Fabiana, a Marshall Islands corporation, of which Mr. Economou is the controlling person. Mr. Economou may be deemed to beneficially own 963,667 of these shares through Sphinx Investment Corp., a Marshall Islands corporation, of which Mr. Economou is the controlling person. Mr. Economou may be deemed to beneficially own 254,512 of these shares through Goodwill Shipping Company Limited, a Malta corporation, of which Mr. Economou is the controlling person. Mr. Economou may be deemed to beneficially own 29,962,088 of these shares through Entrepreneurial Spirit Holdings Inc., a Liberian corporation that is wholly-owned by the Foundation.

As of August 11, 2014, we had 49 shareholders of record, 39 of which were located in the United States and held an aggregate of 362,423,846 of our common shares, representing 79.7% of our outstanding common shares. However, one of the U.S. shareholders of record is CEDE & CO., a nominee of DTC, which held 362,140,758 of our common shares as of August 11, 2014. Accordingly, we believe that the shares held by CEDE & CO. include common shares beneficially owned by both holders in the United States and non-U.S. beneficial owners. We are not aware of any arrangements the operation of which may at a subsequent date result in our change of control.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Agreements with Cardiff, TMS Bulkers and TMS Tankers

Mr. George Economou, our Chairman, President and Chief Executive Officer, controls the Foundation, a Liechtenstein foundation that owns 100.0% of the issued and outstanding capital stock of Cardiff, TMS Bulkers and TMS Tankers.

Management Agreements—Drybulk Vessels

Since January 1, 2011, we have outsourced all of our technical and commercial functions relating to the operation and employment of our drybulk carrier vessels to TMS Bulkers, a related party, pursuant to management agreements entered into for each of our operating drybulk carriers and vessels under construction. Prior to January 1, 2011, Cardiff, a company affiliated with our Chairman, President and Chief Executive Officer, Mr. George Economou, served as our technical and commercial manager pursuant to separate management agreements with each of our drybulk vessel-owning subsidiaries. Effective January 1, 2011, we entered into new management agreements with TMS Bulkers that replaced our management agreements with Cardiff, on the same terms as our management agreements with Cardiff, as a result of an internal restructuring of Cardiff for the purpose of enhancing Cardiff’s efficiency and the quality of Cardiff’s ship-management services.

Mr. Economou, under the guidance of our board of directors, manages our business, including our administrative functions, and we monitor TMS Bulkers’ performance under the management agreements.

Management Agreements with TMS Bulkers

Under our management agreements with TMS Bulkers, TMS Bulkers is entitled to a fixed management fee of Euro 1,500 (or $ 2,047 based on the Euro/U.S. Dollar exchange rate at June 30, 2014) per vessel, per day, payable in equal monthly installments in advance and automatically adjusted each year to the Greek Consumer Price Index for the previous year by not less than 3% and not more than 5%. If we request that TMS Bulkers supervise the construction of a newbuilding vessel, we are obligated to pay TMS Bulkers an upfront fee equal to 10% of the supervision cost budget for such vessel as approved by us in lieu of the fixed management fee. For any additional attendance above the budgeted superintendent expenses, we are charged extra at a standard rate of Euro 500 (or $682 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per day. Effective January 1, 2012, the fixed management fee was adjusted by 3% to Euro 1,545 (or $2,108 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per vessel, per day.

In addition, TMS Bulkers is entitled to a chartering commission of 1.25% of all monies earned by the vessel, which survives the termination of the management agreement until the termination of the charter agreement then in effect or the termination of any other employment arranged prior to such termination. TMS Bulkers also receives a sale and purchase commission of 1.0%. Furthermore, under the management agreements, we may award TMS Bulkers an annual performance incentive fee.

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 we provide notice of termination in the fourth quarter of the year immediately preceding the end of the respective term. The management agreements may be terminated as follows:

(i) TMS Bulkers may terminate the agreement with immediate effect by notice in writing (a) if any amounts payable by the vessel owner are not received by TMS Bulkers within ten running days; (b) the vessel owner does not meet certain obligations related to the technical management of the vessels for any reason within its control; or (c) the vessel owner employs the vessel in a hazardous or improper manner, and the vessel owner fails to remedy such default;

 

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(ii) the vessel owner may terminate the agreement with immediate effect by notice in writing if TMS Bulkers does not meet its obligations for any reason within its control under the agreement and fails to remedy such default within a reasonable time;

(iii) the agreement shall be deemed terminated in the case of the sale of the vessel, if the vessel becomes a total loss or is declared as a constructive total loss or in the event of an order or resolution passed for the winding up, dissolution, liquidation or bankruptcy of either party; and

(iv) upon a change of control of us and/or the vessel owners.

In the event that the management agreement is terminated for any reason other than a default by TMS Bulkers, we 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 us, as defined in the agreements, we will be required to pay TMS Bulkers a termination payment, representing an amount equal to the estimated remaining fees payable to TMS Bulkers 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.

The management agreements provide that TMS Bulkers shall not be liable to us for any losses or damages arising in the course of its performance under the agreement unless such loss or damage is proved to have resulted from the negligence, gross negligence or willful default by TMS Bulkers, its employees or agents and in such case the liability of TMS Bulkers per incident or series of incidents is limited to a total of ten times the annual management fee payable under the relevant agreement. The management agreements further provide that TMS Bulkers shall not be liable for any of the actions of the crew, even if such actions are negligent, grossly negligent or willful, except to the extent that they are shown to have resulted from a failure by TMS Bulkers to perform its obligations with respect to management of the crew. Except to the extent of the liability cap described above, we have agreed to indemnify TMS Bulkers and its employees and agents against any losses incurred in the course of the performance of the agreement. Under the management agreements, TMS Bulkers has the right to sub-contract any of its obligations thereunder, including those relating to management of the crew. In the event of such a sub-contract, TMS Bulkers shall remain fully liable for the due performance of its obligations under the management agreements.

During the six-month periods ended June 30, 2014 and 2013, total charges under the management agreements amounted to $16.7 million and $19.9 million, respectively.

Management Agreements with Cardiff

From September 1, 2010 to January 1, 2011, Cardiff served as our technical and commercial manager pursuant to management agreements with the terms described under “—Management Agreements with TMS Bulkers” above. From July 1, 2008 to September 1, 2010, we paid management fees to Cardiff that varied according to type of management service provided, including chartering, technical management, accounting and financial reporting services, as described below.

Until August 31, 2010, the Company paid a management fee of Euro 607 (or $ 828 at the Euro/U.S. Dollar exchange rate as of June 30, 2014) per day, per vessel to Cardiff. In addition, the management agreements provided for payment by the Company to Cardiff of: (i) a fee of Euro 106 (or $145 at the Euro/U.S. Dollar exchange rate as of June 30, 2014) per day, per vessel for services in connection with compliance with Section 404 of the Sarbanes-Oxley Act of 2002; (ii) Euro 527 (or $719 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) for superintendent visits on board vessels in excess of five days per annum, per vessel, for each additional day, per superintendent; (iii) chartering commission of 1.25% on all freight, hire and demurrage revenues; (iv) a commission of 1.0% on all gross sale proceeds or purchase price paid for vessels; (v) a quarterly fee of $250,000 for services in relation to the financial reporting requirements of the Company under SEC rules and the establishment and monitoring of internal controls over financial reporting; and (vi) a commission of 0.2% on derivative agreements and loan financing or refinancing.

 

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Cardiff also provided commercial operations and freight collection services in exchange for a fee of Euro 91 (or $124 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per day, per vessel. Cardiff provided insurance services and obtained insurance policies for the vessels for a fee of 5% on the total insurance premiums per vessel. Furthermore, if required, Cardiff also handled and settled all claims arising out of its duties under the management agreements (other than insurance and salvage claims) in exchange for a fee of Euro 158 (or $215 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per person, per day of eight hours.

Cardiff provided the Company with financial accounting services in exchange for a fee of Euro 121 (or $164 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per day, per vessel. The Company also paid Cardiff a quarterly fee of Euro 263,626 (or $ 359,586 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) for financial accounting services rendered by Cardiff.

Pursuant to the terms of the management agreements, all fees payable to Cardiff were adjusted based on the Greek consumer price index.

During the six-month periods ended June 30, 2014 and 2013, there were no charges from Cardiff under the management agreements.

Management Agreements with TMS Dry

In connection with the OceanFreight acquisition, we acquired four Capesize vessels, the Robusto, Cohiba, Montecristo and Partagas, two Panamax vessels, the Topeka and the Helena, and the contracts for the construction of five newbuilding VLOCs, for which OceanFreight had contracted the technical and commercial management to TMS Dry, a related party entity majority owned by our Chairman, President and Chief Executive Officer, Mr. George Economou, pursuant to separate vessel management agreements between the wholly-owned, vessel-owning subsidiaries of OceanFreight and TMS Dry.

TMS Dry was engaged under separate vessel management agreements with OceanFreight’s wholly-owned, vessel-owning subsidiaries. Under the vessel management agreements, OceanFreight paid a daily management fee per vessel, covering also superintendent’s fee per vessel plus expenses for any services performed relating to evaluation of the vessel’s physical condition, supervision of shipboard activities or attendance upon repairs and drydockings. At the beginning of each calendar year, these fees were adjusted upwards according to the Greek consumer price index. Such increase cannot be less than 3% and more than 5%. In the event that the management agreements were terminated for any reason other than TMS Dry’s default, OceanFreight was required (i) to pay management fees for a further period of three calendar months as from the date of termination; and (ii) to pay an equitable proportion of any severance crew costs in accordance with applicable collective bargaining agreements.

TMS Dry was entitled to a daily management fee per vessel of Euro 1,500 ($ 2,047 based on the Euro/U.S. Dollar exchange rate at June 30, 2014). TMS Dry was also entitled to (i) a discretionary incentive fee; (ii) extra superintendents’ fees of Euro 500 ($ 682 based on the Euro/U.S. Dollar exchange rate at June 30, 2014) per day; (iii) a commission of 1.25% on charterhire agreements; and (iv) a commission of 1.0% of the purchase price on sale or purchases of vessels in OceanFreight’s fleet. Furthermore, TMS Dry was entitled to a supervision fee payable upfront for vessels under construction equal to 10.0% of the approved annual budget for supervision costs in lieu of the daily management fee.

On July 25, 2011, OceanFreight, TMS Dry and TMS Bulkers entered into an agreement providing for the termination of the management agreements with TMS Dry upon completion of the OceanFreight acquisition. Under this agreement, TMS Dry received (i) $6.6 million due to the change of control and waiver TMS Dry’s contractual entitlement to seek payment of management fees for three years; and (ii) a $2.4 million commission as a result of the OceanFreight acquisition. Effective January 1, 2012, we entered into novation agreements with TMS Dry and TMS Bulkers for each of the 11 vessels we acquired in the OceanFreight acquisition, pursuant to which the management agreements were novated to TMS Bulkers on the same terms as the agreements with TMS Dry and TMS Bulkers discussed above.

 

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Management Agreements—Drilling Units

Services Agreements

On December 1, 2010, DryShips Inc. entered into the Global Services Agreement with Cardiff, effective December 21, 2010, pursuant to which we engaged Cardiff to act as consultant on matters of chartering and sale and purchase transactions for our offshore drilling units. Under the Global Services Agreement, Cardiff, or its subcontractor, (i) provided consulting services related to the identification, sourcing, negotiation and arrangement of new employment for our offshore assets, including our drilling units; and (ii) identified, sourced, negotiated and arranged the sale and purchase of our offshore assets, including our drilling units. In consideration of such services, Cardiff was entitled to a fee of 1.0% in connection with employment arrangements and 0.75% in connection with sale and purchase activities.

Except as provided below, the Global Services Agreement applied to all offshore drilling contracts we entered into after December 21, 2010, as well as the drilling contract with Cairn Energy plc, or Cairn, for the Ocean Rig Corcovado, which commenced in January 2011 and was completed in November 2011, and the drilling contracts with Vanco Cote d’Ivoire Ltd. and Vanco Ghana Ltd for the Ocean Rig Olympia, which commenced in March 2011, were novated to Tullow Ghana in December 2011 and were completed in the second quarter of 2012. The Global Services Agreement did not apply to the agreement with Petrobras Oil & Gas regarding the early termination of the drilling contract with Petrobras Oil & Gas for the Leiv Eiriksson and the replacement of the Leiv Eiriksson under the drilling contract with Petrobras Oil & Gas with the Ocean Rig Poseidon, which occurred in April 2011, the drilling contract with Cairn for the Leiv Eiriksson, which commenced in April 2011 and was completed in November 2011 and the drilling contract with Borders & Southern plc for the Leiv Eiriksson, which commenced in November 2011 and was completed in the fourth quarter of 2012.

Effective January 1, 2013, the Global Services Agreement was terminated by mutual agreement of the parties. Also effective January 1, 2013, Ocean Rig Management, our majority-owned subsidiary and a wholly-owned subsidiary of Ocean Rig UDW, entered into a new services agreement, or the Ocean Rig Services Agreement, with Cardiff Drilling , a company controlled by our Chairman, President and Chief Executive Officer, on the same terms and conditions as the Global Services Agreement, except that under the Ocean Rig Services Agreement, Ocean Rig Management is obligated to pay directly the fees of 1.0% in consideration of employment arrangements under the agreement and $0.75% in consideration of purchase and sale activities under the agreement, whereas under the Global Services Agreement, those fees were paid by DryShips Inc.

During the six-month period ended June 30, 2014 and 2013 total charges from Cardiff Drilling under the Ocean Rig Services Agreement amounted to $12.2 million and $4.2 million, respectively.

Management Agreements—Tankers

Since January 1, 2011, TMS Tankers has provided the commercial and technical management functions of our tankers, including while our tankers were under construction, pursuant to separate management agreements entered into with TMS Tankers for each of our tankers. Each management agreement provides for a management fee of Euro 1,700 (or $ 2,320 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per vessel, per day, payable in equal monthly installments in advance and automatically adjusted each year to 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 (or $ 2,389 based on the Euro/U.S. Dollar exchange rate as of June 30, 2014) per vessel, per day. In addition, TMS Tankers also received a construction supervisory fee of 10% of the budget for our tankers under construction, payable up front, in lieu of the fixed management fee while our tankers were under construction.

In addition, under the management agreements, TMS Tankers is entitled to a chartering commission of 1.25% of all monies earned by the vessel and a vessel sale and purchase commission of 1.0%. The management agreements further provide that in our discretion, we may pay TMS Tankers an annual performance incentive fee.

 

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Each management agreement has a term of five years and is automatically renewed for successive five year periods unless we provide notice of termination in the fourth quarter of the year immediately preceding the end of the respective term.

The management agreements may be terminated as follows:

(i) TMS Tankers may terminate the agreement with immediate effect by notice in writing (a) if any amounts payable by the vessel owner are not received by TMS Tankers within ten running days; (b) the vessel owner does not meet certain obligations related to the technical management of the vessels for any reason within its control; or (c) the vessel owner employs the vessel in a hazardous or improper manner, and the vessel owner fails to remedy such default;

(ii) the vessel owner may terminate the agreement with immediate effect by notice in writing if TMS Tankers does not meet its obligations for any reason within its control under the agreement and fails to remedy such default within a reasonable time;

(iii) the agreement shall be deemed terminated in the case of the sale of the vessel, if the vessel becomes a total loss or is declared as a constructive total loss or in the event of an order or resolution passed for the winding up, dissolution, liquidation or bankruptcy of either party; and

(iv) upon a change of control of us and/or the vessel owners.

In the event that the management agreements are terminated for any reason other than a default by TMS Tankers, we 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 us, as defined in the agreements, we will be required to pay TMS Tankers a termination payment, representing an amount equal to the estimated remaining fees payable to TMS Tankers 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.

The management agreements provide that TMS Tankers shall not be liable to us for any losses or damages arising in the course of its performance under the agreement unless such loss or damage is proved to have resulted from the negligence, gross negligence or willful default by TMS Tankers, its employees or agents and in such case the liability of TMS Tankers per incident or series of incidents is limited to a total of ten times the annual management fee payable under the relevant agreement. The management agreements further provide that TMS Tankers shall not be liable for any of the actions of the crew, even if such actions are negligent, grossly negligent or willful, except to the extent that they are shown to have resulted from a failure by TMS Tankers to perform its obligations with respect to management of the crew. Except to the extent of the liability cap described above, we have agreed to indemnify TMS Tankers and its employees and agents against any losses incurred in the course of the performance of the agreement. Under the new management agreements, TMS Tankers has the right to sub-contract any of its obligations thereunder, including those relating to management of the crew. In the event of such a sub-contract, TMS Tankers shall remain fully liable for the due performance of its obligations under the management agreements.

During the six-month period ended June 30, 2014 and 2013, total charges under the management agreements amounted to $5.3 million and $6.6 million, respectively.

Cardiff Tankers Inc.

Under certain charter agreements for our tankers, Cardiff Tankers Inc., or 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.

 

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Consultancy Agreements

Vivid Finance Limited

On September 1, 2010, we entered into a consultancy agreement, or the DryShips Consultancy Agreement, with Vivid Finance Limited, or Vivid Finance, a company controlled by our Chairman, President and Chief Executive Officer, Mr. George Economou, pursuant to which Vivid Finance provides consulting services relating to (i) the identification, sourcing, negotiation and arrangement of new loan and credit facilities, interest swap agreements, foreign currency contracts and forward exchange contracts; (ii) the raising of equity or debt in the public capital markets; and (iii) the renegotiation of existing loan facilities and other debt instruments. In consideration for these services, Vivid Finance is entitled to a fee of twenty basis points, or 0.20%, on the total transaction amount. The DryShips 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; (ii) at any time by the mutual agreement of the parties; and (iii) by us after providing written notice to Vivid Finance at least 30 days prior to the actual termination date.

Effective January 1, 2013, Ocean Rig Management, a wholly-owned subsidiary of our majority-owned subsidiary Ocean Rig UDW, entered into a separate consultancy agreement, or the Ocean Rig Consultancy Agreement, with Vivid Finance, on the same terms and conditions as the DryShips Consultancy Agreement, except that under the Ocean Rig Consultancy Agreement, Ocean Rig Management is obligated to pay directly the fee of 0.20% to Vivid Finance on the total transaction amount in consideration of the services provided, whereas under the DryShips Consultancy Agreement, this fee was paid by DryShips Inc. In connection with Ocean Rig Management’s entry into the Ocean Rig Consultancy Agreement, the DryShips Consultancy Agreement was amended, effective a of January 1, 2013, to limit the scope of the services provided under the agreement to DryShips Inc. and its subsidiaries or affiliates, except for Ocean Rig UDW and its subsidiaries. In essence, post-amendment, the DryShips Consultancy Agreement is in effect for our tanker and drybulk shipping segments only.

During the six-month periods ended June 30, 2014 and 2013, total charges from Vivid Finance under the consultancy agreements amounted to $5.9 million and $6.5 million, respectively.

 

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DESCRIPTION OF NOTES

The following description is only a summary of certain provisions of the Notes and the Indenture. You should read these documents in their entirety because they, and not this description, define your rights as holders of the Notes. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the “TIA”), and to all of the provisions of the Indenture and those terms made a part of the Indenture by reference to the TIA. Unless the context requires otherwise, in this Description of Notes, all references to “we,” “us,” “our” and the “Company” in this section refer solely to DryShips Inc., and not to any of its subsidiaries.

The Notes will be secured pursuant to a pledge and security agreement to be dated as of even date with the Indenture (the “Pledge Agreement”) by the Company in favor of Deutsche Bank Trust Company Americas, as collateral agent (the “Collateral Agent”).

The following description of the particular terms of the Notes offered hereby supplements, and should be read in conjunction with, the “Description of Debt Securities” set forth in the accompanying prospectus.

General

The Notes offered hereby constitute a separate series of our debt securities as described in the accompanying prospectus.

The Notes will be issued under a senior indenture, to be dated as of                     , 2014 (the “Base Indenture”), between the Company and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”), as supplemented by a supplemental indenture, between the Company and the Trustee (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”).

The Notes will initially be limited to $         million in aggregate principal amount (or $         million if the underwriters exercise their option to purchase additional Notes in full). The Indenture will not limit the amount of debt securities that we may issue under the Indenture and will provide that debt securities may be issued from time to time in one or more series. We may from time to time, without giving notice to or seeking the consent of the holders of the Notes, issue debt securities having the same interest rate, maturity and other terms (except for the issue date, the public offering price and the first interest payment date) as, and ranking equally and ratably with, the Notes. Any additional debt securities having such similar terms, together with the Notes, will constitute a single series of debt securities under the Indenture, including for purposes of voting and redemptions, and any additional debt securities issued as part of the same series as the Notes will be fungible with the Notes for United States federal income tax purposes. No such additional debt securities may be issued if an Event of Default has occurred and is continuing with respect to such Notes.

Other than as described under “—Certain Covenants,” the Indenture and the terms of the Notes will not contain any covenants restricting the operation of our business, our ability to pay dividends, our ability to incur debt or grant liens on our assets or that are designed to afford holders of the Notes protection in a highly leveraged or other transaction involving us that may adversely affect holders of the Notes.

Payments

The Notes will bear interest from the date of original issue until maturity on October         , 2017 at an annual rate of     %. We will make interest payments on the Notes quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on January 15, 2015, to holders of record at the close of business on the respective December 31, March 31, June 30 or September 30 (whether or not that date is a business day), as the case may be, immediately preceding such interest payment date, and on the maturity date. Interest on the Notes will be computed on the basis of a 360-day year composed of twelve 30-day months.

 

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If any interest payment date would otherwise be a day that is not a business day, that interest payment date will be postponed to the next date that is a business day. If the maturity date of the Notes falls on a day that is not a business day, the related payment of principal and interest will be made on the next business day as if it were made on the date such payment was due, and no interest will accrue on the amounts so payable for the period from and after such date to the next business day.

The Notes will not be entitled to the benefit of any sinking fund.

The Notes will be issued only in fully registered form without coupons and in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes will be represented by one or more global securities registered in the name of a nominee of DTC. Except as described under “—Book-entry System; Delivery and Form,” the Notes will not be issuable in certificated form.

Ranking

The Notes will:

 

(1)

be the Company’s senior secured obligations;

 

(2)

rank senior in right of payment to all of the Company’s existing and future subordinated indebtedness;

 

(3)

rank equally in right of payment with the Company’s existing senior credit agreements (the “Existing Credit Facilities”) and the Outstanding Convertible Notes, and all of the Company’s other existing and future senior indebtedness;

 

(4)

be effectively senior to the Company’s existing and future senior unsecured debt, to the extent of the value of the assets securing the Notes; and

 

(5)

be effectively subordinated to the Company’s existing and future secured indebtedness that is secured by assets that do not secure the Notes, to the extent of the value of such assets; and

 

(6)

be structurally subordinated to all existing and future liabilities (including trade payables) of each of the Company’s subsidiaries, including: (i) the $500 million principal amount of 7.25% Senior Unsecured Notes due 2019 of the Company’s subsidiary Ocean Rig UDW Inc. (“Ocean Rig”), (ii) the $800 million principal amount of 6.50% Senior Secured Notes due 2017 of the Company’s subsidiary Drill Rigs Holdings, Inc. (iii) the $1.3 billion syndicated term loan facility of the Company’s subsidiary Drillships Ocean Ventures Inc. and (iv) the $1.9 billion syndicated term loan facility of the Company’s subsidiary Drillships Financing Holding Inc.

Assuming we had completed the offering of the Notes on June 30, 2014, after giving effect to the issuance of such Notes and assuming we held all of the net proceeds of the offering as cash, we and our consolidated subsidiaries would have had an aggregate of approximately $6.8 billion of debt outstanding (or approximately $6.9 billion if the underwriters exercise their option to purchase additional Notes in each offering in full). Of such debt amount, approximately $5.6 billion would have been secured debt and approximately $5.2 billion would have been debt of our subsidiaries. Please see “Risk Factors—Company Specific Risk Factors—We have substantial indebtedness, and expect to incur substantial additional indebtedness, which could adversely affect our financial health” and “—Risks Relating to the Notes—The Notes will be our senior secured obligations and will be guaranteed by us. Our operations are conducted through, and substantially all of our consolidated assets are held by, our subsidiaries.”

The Notes will be obligations of the Company and will not be guaranteed by our subsidiaries. Accordingly, the Notes will effectively rank junior to all liabilities of our subsidiaries, excluding any amounts owed by such subsidiaries to us. We derive substantially all of our operating income and cash flow from our subsidiaries. Claims of creditors of our subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of our creditors, including holders of the Notes. As a result, the Notes will be effectively subordinated to creditors, including trade creditors, of our subsidiaries. Please read “Risk Factors—Risks Relating to the Notes.”

 

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Security

The Notes will be secured by a first priority pledge by the Company of certain shares of common stock, par value $0.01, of Ocean Rig (the “Ocean Rig Shares”) owned or from time to time acquired by the Company, plus additional or replacement collateral as discussed below under “—Maintenance of Collateral” (the “Collateral”). We refer to any such initially pledged Ocean Rig Shares, any additional Ocean Rig Shares pledged by the Company to secure the Notes as described under “—Maintenance of Collateral”, and any Qualified Acquiror Shares issued and pledged in exchange for such pledged Ocean Rig Shares in any transaction permitted pursuant to paragraph (1) of “—Release of Collateral”, as the “Pledged Shares”. Any Ocean Rig Shares that are owned by the Company but are not, at any relevant time, then pledged pursuant to the terms of the Security Documents (as defined below) nor at such time required to be pledged pursuant to the terms of the Indenture or the Security Documents, or subsequently released from the lien of the Indenture as described under “—Release of Collateral”, are referred to as the “Unpledged Shares”.

The Company will be entitled to receive and retain all distributions in respect of the Pledged Shares and will be entitled to vote all Pledged Shares, except if an Default, Event of Default, Collateral Default or Interest Payment Default (each as defined below) has occurred and is continuing with respect to the Notes, or if such vote, or failure to vote, would have a Material Adverse Effect on the value of the Pledged Shares or any part thereof.

The Pledge Agreement provides for limitations on the Company’s ability to grant, cause, or permit to exist any lien on any of the Collateral other than the liens securing the Notes (with customary exceptions). Upon final payment of all of the Notes, the pledge of, and liens on, the Collateral will be released.

Maintenance of Collateral

At the closing of the offering, the Company will deliver to the Collateral Agent and pledge to secure the Notes pursuant to the terms of the Security Documents (as defined below) a number of Ocean Rig Shares equal to 140% of the outstanding aggregate principal amount of the Notes divided by 15.50 (rounded up to the next whole share).

Following the closing of the offering, the Collateral Value will be measured by the Company each Trading Day following the issue date (each such date, a “Daily Valuation Date”) which will be set forth in a valuation notice (a “Valuation Notice”) delivered by the Company to Deutsche Bank Trust Company Americas, as verification agent (the “Verification Agent”). In the event of any dispute between the Company’s calculation set forth in its Valuation Notice and the calculation by the Verification Agent in respect to any Daily Valuation Date, the calculation which has yielded the lowest Collateral Value shall control. If the Collateral Value determined in the manner described in the preceding two sentences of this paragraph as calculated with respect to any Daily Valuation Date is less than 120% of the outstanding aggregate principal amount of the Notes on such Daily Valuation Date, the Company is required to pledge and deliver to the Collateral Agent, on or before the third business day following such Daily Valuation Date, a sufficient number of additional Pledged Shares or amount of Collateral consisting of Cash Equivalents, as elected by the Company (each valued in respect of the date of the pledge and delivery of such additional Collateral) (each such date, a “Top Up Date”)), so that the aggregate Collateral Value (determined as of such Top Up Date, and after giving pro forma effect to such pledge and delivery of additional Collateral) is, as a result, no less than 120% of the aggregate principal amount of the Notes outstanding as of such Top Up Date.

Release of Collateral

The Collateral Value will also be measured on the first Trading Day following the end of each calendar quarter (each such date, a “Quarterly Valuation Date”), beginning with the calendar quarter ending December 31, 2014, using the Collateral Value in respect of such Quarterly Valuation Date determined in the manner described above under “—Maintenance of Collateral”. If the Collateral Value (calculated in such manner) is more than 160% of the

 

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outstanding principal amount of the Notes on any two consecutive Quarterly Valuation Dates (the amount of such excess on such second consecutive Quarterly Valuation Date, the “Excess Collateral Amount”), the Company may, within two business days of such second consecutive Quarterly Valuation Date, request the Collateral Agent to release to the Company Pledged Shares or other Collateral consisting of Cash Equivalents from the lien of the Indenture and the Security Documents provided that (i) no Default, Event of Default, Collateral Default or Interest Payment Default (each as defined) has occurred and is continuing or would result from such release, (ii) an Officer’s Certificate is delivered to the Trustee and the Collateral Agent so stating and stating that such release is otherwise permitted under the relevant Indenture provision, (iii) the Company shall cause to be delivered to the Trustee a certificate or opinion required under Section 314(d) of the Trust Indenture Act certifying that any release of such Collateral permitted to be released under the Indenture will be deemed not to impair the lien of the Indenture and the Security Documents in contravention thereof, and (iv) the aggregate Collateral Value on such second consecutive Quarterly Valuation Date of such Pledged Shares and/or other Collateral consisting of Cash Equivalents which are proposed to be released does not exceed the Excess Collateral Amount on such second consecutive Quarterly Valuation Date. The Trustee will instruct the Collateral Agent to release or cause to be released to the Company such Pledged Shares and/or Collateral consisting of Cash Equivalents within three business days of receipt of such written request together with any documents referred to in the immediately preceding sentence; provided, that notwithstanding the foregoing, the Collateral Agent shall not release any Collateral in the event the Collateral Value on the proposed date of release (treating such date as a Daily Valuation Date) is less than 120% of the outstanding aggregate principal amount of the Notes on such date.

The Indenture will also permit the Company to obtain a release of Pledged Shares from the lien of the Indenture under the following circumstances:

 

(1)

in connection with a merger or consolidation of Ocean Rig (or successor thereto pursuant to this provision) into, or a sale or transfer of all or substantially all of the assets of Ocean Rig in any transaction or series of related transactions to, another person, or in connection with any other corporate reorganization of Ocean Rig; provided that, (i) no Default, Event of Default, Collateral Default or Interest Payment Default (each as defined below) has occurred and is continuing or would result from such release, (ii) an Officer’s Certificate is delivered to the Trustee so stating and stating that such release is otherwise permitted under the relevant Indenture provision, (iii) the Company shall cause to be delivered to the Trustee a certificate or opinion required under Section 314(d) of the Trust Indenture Act certifying that any release of such Collateral permitted to be released under the Indenture will be deemed not to impair the lien of the Indenture and the Security Documents in contravention thereof, and (iv) the Collateral Agent receives, as Collateral subject to the lien of the Indenture, in substitution for any Pledged Shares proposed to be released, upon consummation of the applicable transaction, Collateral consisting of Cash Equivalents and/or Qualified Acquiror Shares that are issued by the Qualified Acquiror in exchange for Ocean Rig Shares (including the Pledged Shares), which shall be deemed Pledged Shares for all purposes hereunder following the consummation of such transaction, which substitute collateral will have an aggregate Collateral Value that, together with the Collateral Value of any remaining Pledged Shares and Collateral consisting of Cash Equivalents, is no less than 120% of the aggregate principal amount of the Notes then outstanding on the date of such pledge and delivery of such substitute collateral;

 

(2)

if the Company chooses to substitute all or a portion of the Pledged Shares for Collateral consisting of Cash Equivalents, provided that, (i) no Default, Event of Default, Collateral Default or Interest Payment Default (each as defined below) has occurred and is continuing or would result from such release, (ii) an Officer’s Certificate is delivered to the Trustee so stating and stating that such release is otherwise permitted under the relevant Indenture provision, (iii) the Company shall cause to be delivered to the Trustee a certificate or opinion required under Section 314(d) of the Trust Indenture Act certifying that any release of such Collateral permitted to be released under the Indenture will be deemed not to impair the lien of the Indenture and the Security Documents in contravention thereof, and (iv) Collateral Agent receives, as Collateral

 

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subject to the lien of the Indenture in substitution for such Pledged Shares proposed to be released, Cash Equivalents and/or Qualified Acquiror Shares, which, when combined with any existing pledged Cash Equivalents and remaining Pledged Shares subject to the lien of the Indenture, have an aggregate Collateral Value of no less than 120% of the outstanding aggregate principal amount of the Notes on such date of such pledge and delivery of substitute Cash Equivalents; or

 

(3)

upon the legal defeasance of the Company’s obligations hereunder as described under “—Defeasance”, the Company may obtain the release of all pledged Collateral; provided that (i) no Default, Event of Default, or Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officer’s Certificate is delivered to the Trustee so stating and stating that such release is otherwise permitted under the relevant Indenture provision, and (iii) the Company shall cause to be delivered to the Trustee a certificate or opinion required under Section 314(d) of the Trust Indenture Act certifying that any release of such Collateral permitted to be released under the Indenture will be deemed not to impair the lien of the Indenture and the Security Documents in contravention thereof.

Trading Characteristics

The Notes are expected to trade at a price that takes into account the value of accrued but unpaid interest, if any; thus, purchasers will not pay and sellers will not receive accrued and unpaid interest with respect to such Notes that is not included in the trading price thereof.

Optional Redemption

The Notes will be redeemable by the Company prior to maturity only:

(1) after                     , 2015, once every 12 calendar months in an amount up to 20% of the principal amount of the Notes then outstanding at a redemption price of 102% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, to the date of redemption, upon not less than 30 nor more than 60 days’ notice to the holders (which notice will be irrevocable) by the Company (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); or

(2) as described under “—Optional Redemption for Changes in Withholding Taxes”.

At least five days prior to the date the Company publishes, mails or delivers notice of redemption of such Notes as described above, the Company will (i) notify the Trustee of such of such proposed redemption date and of the principal amount of the Notes to be redeemed (provided, however, that (1) such notification will be in writing and may be sent to the Trustee via electronic mail; (2) such notification shall not be irrevocable; and (3) the proposed redemption date and the principal amount of the Notes to be redeemed are subject to further amendment by the Company before notice of redemption is sent to the holders) and (ii) deliver to the Trustee and paying agent an Officer’s Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Company to so redeem have occurred. The Trustee and paying agent will accept and will be entitled to conclusively rely upon such Officer’s Certificate, as sufficient evidence of the satisfaction of the conditions precedent described above, in which case they will be conclusive and binding on the holders of such Notes.

We or our affiliates may purchase the Notes from investors who are willing to sell from time to time, either in the open market at prevailing prices or in private transactions at negotiated prices. Notes that we or they purchase may, at our discretion, be held, resold or canceled.

Additional Amounts

All payments made by or on behalf of the Company under or with respect to the Notes will be made free and clear of and without withholding or deduction for, or on account of, any present or future tax, duty, levy, impost, assessment or other governmental charge (including penalties, interest and other liabilities related thereto) (or

 

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“Taxes”) unless the withholding or deduction of such Taxes is then required by law. If any deduction or withholding for, or on account of, any Taxes imposed or levied by or on behalf of the government of the Republic of Marshall Islands or any political subdivision or any authority or agency therein or thereof having power to tax, or any other jurisdiction in which the Company (including any successor entities thereto) is organized or is otherwise resident for tax purposes, or any jurisdiction from or through which payment is made (including, without limitation, the jurisdiction of each paying agent) (each a “Specified Tax Jurisdiction”), will at any time be required to be made from any payments made under or with respect to any Notes, the Company will pay such additional amounts (or the “Additional Amounts”) as may be necessary so that the net amount received in respect of such payments by a holder (including Additional Amounts) after such withholding or deduction will not be less than the amount such holder would have received if such Taxes had not been withheld or deducted; provided, however, that the foregoing obligation to pay Additional Amounts with respect to any Notes does not apply to:

(1) any Taxes that would not have been so imposed but for the holder or beneficial owner of the Notes having any present or former connection with the Specified Tax Jurisdiction (other than the mere acquisition, ownership, holding, enforcement or receipt of payment in respect of such Notes);

(2) any estate, inheritance, gift, sales, excise, transfer, personal property tax or similar tax, assessment or governmental charge;

(3) any Taxes payable other than by deduction or withholding from payments under, or with respect to, such Notes;

(4) any Taxes imposed as a result of the failure of the holder or beneficial owner of such Notes, to the extent it is legally entitled to do so, to complete, execute and deliver to the Company any form or document to the extent applicable to such holder or beneficial owner that may be required by law or by reason of administration of such law and which is reasonably requested in writing to be delivered to the Company in order to enable the Company to make payments on such Notes without deduction or withholding for Taxes, or with deduction or withholding of a lesser amount, which form or document will be delivered within 60 days of a written request therefor by the Company;

(5) any Taxes that would not have been so imposed but for the beneficiary of the payment having presented a note for payment (in cases in which presentation is required) more than 30 days after the date on which such payment or such note became due and payable or the date on which payment thereof is duly provided for, whichever is later (except to the extent that the holder would have been entitled to Additional Amounts had the note been presented on the last day of such 30-day period);

(6) any Taxes imposed on or with respect to any payment by the Company to the holder if such holder is a fiduciary or partnership or person other than the sole beneficial owner of such payment, to the extent that a beneficiary or settlor with respect to such fiduciary, a member of such partnership or the beneficial owner of such payment would not have been entitled to Additional Amounts had such beneficiary, settlor, member or beneficial owner been the actual holder of such note;

(7) any Taxes that are required to be deducted or withheld on a payment or deemed payment pursuant to European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council meeting of November 26, 2000 and November 27, 2000 on the taxation of savings income or any law implementing, or introduced in order to conform to, such directive; or

(8) any combination of items (1) through (7) above.

If the Company becomes aware that it will be obligated to pay Additional Amounts with respect to any payment under or with respect to any Notes, the Company will deliver to the Trustee and paying agent at least 30 days prior to the date of that payment (unless the obligation to pay Additional Amounts arises after the 30th day prior to that payment date, in which case the Company will notify the Trustee and paying agent promptly thereafter but in no event later than two business days prior to the date of payment) an Officer’s Certificate

 

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stating the fact that Additional Amounts will be payable and the amount so payable. The Officer’s Certificate must also set forth any other information necessary to enable the paying agent to pay Additional Amounts to holders on the relevant payment date. The Trustee and paying agent will be entitled to rely solely on such Officer’s Certificate as conclusive proof that such payments are necessary. The Company will provide the Trustee and paying agent with documentation evidencing the payment of Additional Amounts.

The Company will make all withholdings and deductions required by law and will remit the full amount deducted or withheld to the relevant governmental authority on a timely basis in accordance with applicable law. As soon as practicable, the Company will provide the Trustee and paying agent with an official receipt or, if official receipts are not obtainable, other documentation evidencing the payment of the Taxes so withheld or deducted. Upon request, copies of those receipts or other documentation, as the case may be, will be made available by the Trustee and paying agent to the holders of the Notes.

Whenever in the Indenture there is referenced, in any context, the payment of amounts based upon the principal amount of the Notes or of principal, interest or any other amount payable under, or with respect to, such Notes, such reference will be deemed to include payment of Additional Amounts as described under this heading to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

The Company will indemnify a holder, within 10 business days after written demand therefor, for the full amount of any Taxes paid by such holder to a governmental authority of a Specified Tax Jurisdiction, on or with respect to any payment by on or account of any obligation of the Company to withhold or deduct an amount on account of Taxes for which the Company would have been obliged to pay Additional Amounts hereunder and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant governmental authority. A certificate as to the amount of such payment or liability delivered to the Company by a holder will be conclusive absent manifest error.

The Company will pay any present or future stamp, court, issue, registration, value added, court or documentary taxes or any other excise or property taxes, charges or similar levies that arise in any Specified Tax Jurisdiction from the execution, delivery, enforcement or registration of the Notes, the Indenture or any other document or instrument in relation thereof, or the receipt of any payments with respect to such Notes, other than, for the avoidance of doubt, any Transfer Taxes, as defined below in “—Transfer and Exchange” (each such tax, a “Note Issuance Tax”), and the Company will indemnify the holders for any such Note Issuance Taxes paid by such holders.

The obligations described under this heading will survive any termination, defeasance or discharge of the Indenture and will apply mutatis mutandis to any jurisdiction in which any successor person to the Company is organized or any political subdivision or authority or agency thereof or therein.

Optional Redemption for Changes in Withholding Taxes

The Company may redeem the Notes, at its option, at any time in whole but not in part, upon not less than 30 nor more than 60 days’ notice (which notice will be irrevocable) by the Company to the holders, at a redemption price equal to 100% of the outstanding principal amount of the Notes, plus accrued and unpaid interest (if any) to the applicable redemption date and all Additional Amounts (if any) then due and which will become due on the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date and Additional Amounts (if any) in respect thereof), in the event that the Company determines in good faith that it has become or would become obligated to pay, on the next date on which any amount would be payable with respect to the Notes, Additional Amounts and such obligation cannot be avoided by taking reasonable measures available to the Company (including making payment through a paying agent located in another jurisdiction), as a result of:

(1) a change in or an amendment to the laws (including any regulations or rulings promulgated thereunder) of any Specified Tax Jurisdiction affecting taxation, which change or amendment is announced or becomes effective on or after the date of the Indenture; or

 

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(2) any change in or amendment to any official position of a taxing authority in any Specified Tax Jurisdiction regarding the application, administration or interpretation of such laws, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction), which change or amendment is announced or becomes effective on or after the date of the Indenture.

Notwithstanding the foregoing, no such notice of redemption may be given earlier than 60 days prior to the earliest date on which the Company would be obligated to pay Additional Amounts if a payment in respect of the Notes were then due. Before the Company publishes, mails or delivers notice of redemption of the Notes as described above, the Company will deliver to the Trustee and paying agent (a) an Officer’s Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Company to so redeem have occurred and (b) an opinion of independent legal counsel reasonably satisfactory to the Trustee and paying agent that the Company has or will become obligated to pay Additional Amounts with respect to the Notes as a result of the circumstances referred to in clause (1) or (2) of the preceding paragraph.

The Trustee and paying agent will accept and will be entitled to conclusively rely upon such Officer’s Certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent described above, in which case they will be conclusive and binding on the holders of the Notes.

Certain Covenants

The Indenture includes the following restrictive covenants. Certain defined terms relevant to the covenants are set forth under “—Certain Definitions and Interpretations” below.

Ranking

The obligations of the Company under the Indenture and the Notes shall at all times rank at least pari passu with the claims of all their respective other unsecured and unsubordinated creditors save for those whose claims that are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application and for other obligations that are mandatorily preferred by law applying to companies generally.

Consolidation, Merger and Sale of Assets

The Company may not consolidate with or merge with or into any other Person or sell, assign, convey, transfer, lease all or substantially all of its properties and assets to any Person, unless:

 

(1)

either (x) the Company is the resulting or surviving entity or (y) the successor Person is a corporation, limited liability company, partnership, trust or other entity organized and validly existing under the laws of the Republic of the Marshall Islands, the United States of America, any State thereof, the District of Columbia, the Commonwealth of the Bahamas, the Republic of Liberia, the Republic of Panama, the Commonwealth of Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, Cyprus, Norway, Greece, Switzerland, Hong Kong, the United Kingdom, Malta, any Member State of the European Union and any other jurisdiction generally acceptable, as determined in good faith by the Board of Directors, to institutional lenders to borrowers in the shipping industries, and such successor Person shall expressly assume, by a supplemental indenture all of the obligations of the Company under the Notes and the Indenture;

 

(2)

immediately after giving effect to the transaction, the Company or the surviving Person (as the case may be) could Incur $1.00 of additional Indebtedness pursuant to the “—Limitations of borrowings” covenant described below, and no Default or Event of Default, shall have occurred and be continuing as a result of such transaction;

 

(3)	such transaction would not reasonably be expected to have a Material Adverse Effect;

 

(4)	the Company delivers to the Trustee an Officer’s Certificate (attaching the arithmetic computation to demonstrate compliance with clause (2) above) and an opinion of counsel, in each case stating that such

 

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transaction and such agreement (including any supplement to any Security Document if required in connection with such transaction) comply with this covenant and that all conditions precedent provided for in the Indenture relating to such transaction have been complied with;

 

(5)

the Company or the surviving Person (as the case may be) promptly causes such amendments, supplements or other instruments to be executed, delivered, filed and recorded, as applicable, in such jurisdictions as may be required by applicable law to preserve and protect the lien of the Security Documents on the Collateral; and

 

(6)	the Collateral shall (a) continue to constitute Collateral under the Indenture and the Security Documents, (b) be subject to the lien in favor of the Collateral Agent for the benefit of the Secured Parties, (c) and not be subject to any other Lien.

Upon any consolidation, merger, sale, assignment, conveyance, transfer or lease of the properties and assets of the Company into or to another Person in accordance with the foregoing provisions, any successor person formed by such consolidation or into which the Company is merged or to which such sale, assignment, conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture; and thereafter, except in the case of a lease, the Company shall be released from all obligations and covenants under this Indenture and the Notes.

The Company shall ensure that none of its Subsidiaries shall carry out any merger or other business combination or corporate reorganization involving consolidating the assets and obligations of any of its Subsidiaries with any other companies or entities that are not the Company or any of its Subsidiaries if such transaction would reasonably be expected to have a Material Adverse Effect.

The Company shall ensure that none of its Subsidiaries shall sell or otherwise dispose of all or a substantial part of their respective assets or operations as of the issue date in one or more transactions, whether or not related, unless such transaction or transactions are carried out at fair market value and such transaction or transactions would not reasonably be expected to have a Material Adverse Effect.

Although there is a limited body of case law interpreting the phrase “all or substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances, there may be a degree of uncertainty as to whether a particular transaction would involve “all or substantially all” of the property or assets of a Person. See “Risk Factors—Risks Relating to the Notes—The ability of holders of Notes to require us to repurchase Notes as a result of a disposition of “substantially all” of our assets is uncertain.”

Continuation of business

The Company shall, and shall ensure each of its Subsidiaries shall, not make or permit to be made any material change to the general nature or scope of their businesses from that carried on at the date of the Indenture and as described in this prospectus supplement; provided that, the Company and its Subsidiaries shall be permitted to engage in activities reasonably ancillary to their current business as carried on at the date of the Indenture and as described in the prospectus supplement, including the creation of one or more publicly-traded entities whose primary business is the operation of, ownership of, or investment in, marine/energy sector assets, provided further that in each such case such change would not reasonably be expected to have a Material Adverse Effect, and any such change otherwise complies with the provisions of the Indenture.

Related party transactions

The Company shall not engage in, or permit any member of its Subsidiaries to engage in, directly or indirectly, any transaction with any Affiliate of the Company (other than the Company or any of its Subsidiaries) (including, without limitation, the purchase, sale or exchange of assets or the rendering of any service), except (i) pursuant to agreements and arrangements with such Affiliates in existence prior to the issue date of the Notes and any amendments or other modifications thereto, provided that such arrangement or agreement as so amended or modified is not materially more disadvantageous to the Company or such Subsidiary than prior to such

 

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amendment or modification as determined in good faith by a majority of the disinterested members of the board of directors of the Company as set forth in a resolution attached to an Officer’s Certificate delivered to the Trustee and certifying as to compliance with this covenant; (ii) transactions that are on terms no less favorable to the Company or such Subsidiary, respectively, as those generally being provided to or available on an arm’s length basis from unrelated third parties, and are fair and reasonable to the Company or such Subsidiary, respectively, as determined in good faith by a majority of the disinterested members of the board of directors of the Company as set forth in a resolution attached to an Officer’s Certificate delivered to the Trustee and certifying as to compliance with this covenant, or (iii) transactions that are immaterial in amount or significance to the Company or such Subsidiary.

Corporate status

The Company shall not change, and shall ensure that none of its Subsidiaries changes, its type of organization or jurisdiction of organization unless (i) such change in type or jurisdiction of organization would not reasonably be expected to have a Material Adverse Effect and (ii) such change is made pursuant to and in accordance with the covenant set forth under “—Consolidation, Merger and Sale of Assets.”

Compliance with laws

The Company shall (and shall ensure that its Subsidiaries shall) comply in all material respects with all laws and regulations it or they may be subject to from time to time (including any environmental laws and regulations) if such failure to comply would reasonably be expected to have a Material Adverse Effect.

Limitations of borrowings

The Company shall not permit its Total Borrowings to equal or exceed 75% of Total Assets.

Ownership of Ocean Rig

Except in connection with or following any transaction permitted pursuant to paragraphs (1) or (2) of the provisions described above under “Security—Release of Collateral”, the Company shall not sell, transfer or otherwise dispose of any Pledged Shares.

The Company shall not sell, transfer or otherwise dispose of any Unpledged Shares if, immediately following such sale, transfer or other disposition, the Company would own, in the aggregate, less than 25% of the total outstanding Ocean Rig Shares or voting power of Ocean Rig except: (i) in connection with or following any transaction permitted pursuant to paragraphs (1) or (2) of the provisions described above under “Security—Release of Collateral”, (ii) in a Restricted Payment permitted under the covenant described under “—Certain Covenants—Limitation on Restricted Payments”, or (iii) in any other transaction if, following any such sale, transfer or other disposition, (A) George Economou shall remain the Chief Executive Officer and Chairman of the Board of Directors of the Company and Ocean Rig, or (B) the Continuing Directors shall constitute at least a majority of the Company’s and Ocean Rig’s respective boards of directors.

Registration Statement for Pledged Shares

The Company shall cause Ocean Rig to maintain an effective shelf registration statement permitting offerings and sales of the Pledged Shares by the Collateral Agent.

Limitation on Restricted Payments

(A) The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, take any of the following actions (each, a “Restricted Payment”):

(1) declare or pay any dividend or make any other payment or distribution with respect to any of the Company’s or any such Subsidiary’s Equity Interests (including, without limitation, any payment in

 

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connection with any merger or consolidation involving the Company or any such Subsidiary) or to the direct or indirect holders of the Company’s or any of its Subsidiaries’ Equity Interests in their capacity as such (other than dividends, payments or distributions (x) payable in Equity Interests (other than Disqualified Stock) of the Company, or (y) to the Company or one or more of its Subsidiaries);

(2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company or any such Subsidiary) any Equity Interests of the Company held by any Person (other than by a Subsidiary of the Company) or any Equity Interests of any of the Company’s Subsidiaries held by any Person (other than by the Company or another such Subsidiary); or

(3) call for redemption or make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value, prior to the Stated Maturity thereof, any Indebtedness that is subordinated in right of payment to the Notes except (a) in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such payment, purchase or other acquisition or (b) intercompany Indebtedness;

unless, at the time of and after giving pro forma effect to such Restricted Payment:

(i) no Default or Event of Default will have occurred and be continuing or would occur as a consequence thereof;

(ii) the Company could, at the time of the Restricted Payment and after giving pro forma effect thereto, Incur at least $1.00 of additional Indebtedness pursuant to the test set forth in the covenant described above under “—Limitations of borrowings”; and

(iii) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the issue date (excluding Restricted Payments permitted by clauses (2), (3), (4), (5) and (7) of the next succeeding paragraph (B)), is less than the sum, without duplication, of:

(a) 50% of the aggregate Consolidated Net Income accrued in the period beginning on the first day of the quarter beginning on October 1, 2014, and ending on the last day of the most recent quarter for which internal financial statements are available prior to the date of such proposed Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus

(b) 100% of the aggregate net cash proceeds, or the Fair Market Value of assets other than cash, received by the Company since the issue date as a contribution to its common equity capital or from the issue or sale of Equity Interests (other than Disqualified Stock) of the Company and the amount of reduction of Indebtedness of the Company or any of its Subsidiaries that has been converted into or exchanged for such Equity Interests (other than Equity Interests sold to, or Indebtedness held by, a Subsidiary of the Company); plus

(c) $25 million.

(B) The preceding provisions will not prohibit the following; provided that, in the case of clauses (7) and (8) below only, no Default has occurred and is continuing or would be caused thereby:

(1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture, and the redemption of any Indebtedness that is subordinated in right of payment to the Notes within 60 days after the date on which notice of such redemption was given, if at said date of the giving of such notice, such redemption would have complied with the provisions of the Indenture;

(2) the payment of any dividend by a Subsidiary of the Company to all the holders of any class of its Equity Interests of the same series on a pro rata basis;

 

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(3) any Restricted Payment in exchange for, or out of the net cash proceeds of a contribution to the common equity of the Company or a substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests (other than Disqualified Stock) of the Company; provided that the amount of any such net cash proceeds that are utilized for such Restricted Payment will be excluded from clause (3) (b) of the preceding paragraph (A);

(4) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes (no more than 90 days prior to the maturity thereof) in exchange for or with the net cash proceeds from a substantially concurrent Incurrence of Indebtedness (other than to a Subsidiary of the Company) of, Permitted Refinancing Indebtedness;

(5) so long as no Default or Event of Default has occurred and is continuing nor would occur as a consequence of such transaction, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any of its Subsidiaries held by any current or former officer, director or employee of the Company or any of its Subsidiaries pursuant to any equity subscription agreement, employee stock ownership plan or similar trust, shareholders’ agreement or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests may not exceed $30 million in any calendar year (with any portion of such $15 million amount that is unused in any calendar year to be carried forward to successive calendar years and added to such amount);

(6) the purchase, redemption or other acquisition or retirement for value of Equity Interests of the Company or any of its Subsidiaries deemed to occur upon the exercise of options or warrants to the extent that such Equity Interests represent all or a portion of the exercise or conversion price thereof or the purchase, redemption or other acquisition or retirement for value of Equity Interests of the Company or any of its Subsidiaries held by any current or former officers, directors or employees of the Company or any Subsidiary of the Company in connection with the exercise of vesting of any equity compensation (including, without limitation, stock options, restricted stock and phantom stock) in order to satisfy any tax withholding obligation with respect to such exercise or vesting;

(7) the payment of cash in lieu of fractional Equity Interests pursuant to the exchange or conversion of any exchangeable or convertible securities; provided, that such payment shall not be for the purpose of evading the limitations of this covenant (as determined by the board of directors of the Company in good faith);

(8) the declaration and payment of dividends to holders of any class or series of Disqualified Stock of the Company or any of its subsidiaries, in each case provided that immediately after giving pro forma effect thereto, the Company and its Subsidiaries will be in compliance with the covenant described above under “—Limitations of borrowings”;

(9) loans or advances to employees of the Company or any Subsidiary in the ordinary course of business and in accordance with any applicable law, regulation or stock exchange rule, not to exceed $20 million in the aggregate at any one time outstanding;

(10) other Restricted Payments in an aggregate amount not to exceed $150 million;

(11) any payment by the Company with respect to the redemption or retirement for value of the outstanding $700 million aggregate principal amount of Convertible Senior Notes, provided, that the Convertible Senior Notes are fully redeemed at or prior to maturity; and

(12) for so long as no Default or Event of Default has occurred and is continuing, nor as a result of such Restricted Payment would any Default or Event of Default occur, any other Restricted Payments so long as, after giving pro forma effect thereto, the Consolidated Total Leverage Ratio of the Company does not exceed 4.0 to 1.0.

The amount of all Restricted Payments (other than cash) will be the Fair Market Value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued to or by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment.

 

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Rating

The Company shall use commercially reasonable efforts:

(1) to obtain a rating for the Notes from Moody’s or S&P on or before April     , 2015; and

(2) to maintain a rating for the Notes from one of Moody’s or S&P on or after April     , 2015;

in each case, it being understood and agreed that “commercially reasonable efforts” shall in any event include the payment by the Company of customary rating agency fees and cooperation with information and data requests by Moody’s or S&P in connection with their ratings process.

Restrictions on Issuing Bonds Secured by Unpledged Shares

Other than as described in this prospectus supplement, after the initial issuance of the Notes offered hereby, neither the Company nor any other Person shall issue any bond, note, debenture or other similar security or instrument secured by Unpledged Shares.

Limitation on Liens

In addition to the other limitations contained in the Pledge Agreement on the Company’s ability to grant, cause, or permit to exist any lien on any of the Collateral other than the liens securing the Notes (with customary exceptions) and the restrictions described above under “Restrictions on Issuing Bonds Secured by Unpledged Shares”, the Company will not, and will not permit any of its Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien of any kind with a priority other than first upon any of their other property or assets, now owned or hereafter acquired, except for any Liens incurred in the ordinary course of business (which, for the avoidance of doubt, shall not include any Lien with a priority other than first in connection with any financing of property or assets of the Company or such Subsidiary).

Reports to Trustee

Within 60 days after the end of the first three fiscal quarters each fiscal year and within 120 days after the end of each fiscal year (in each case subject to any extensions or waivers), the Company is required to deliver to the Trustee an Officer’s Certificate confirming compliance with each of the covenants described above. Each such certificate will be made available to the holders of such Notes upon request to the Trustee. The Company shall mail, within 10 business days of the discovery thereof, to all holders of such Notes and Trustee, notice of any Default in compliance with the covenants described above.

Certain Definitions and Interpretations

For purposes of the foregoing provisions describing certain restrictive covenants in the Indenture applicable to the Notes, the following definitions shall apply:

“Affiliate” of any specified Person means (1) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or any (2) executive officer or director of such specified Person. For purposes of this definition, “control,” as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, that beneficial ownership of 10% or more of the Voting Stock of Person will be deemed to be control. The terms “controlling,” “controlled by” and “under common control with” will have correlative meanings.

“Attributable Debt” in respect of Sale and Leaseback Transaction means at the time of determination the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction including any period for which such lease has been extended or may at the option of the lessor be extended. Such present value will be calculated using discount rate equal to the rate of interest implicit in such transaction determined in accordance with GAAP.

 

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“Capital Lease Obligations” shall mean, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet prepared in accordance with GAAP, and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be prepaid by the lessee without payment of a penalty.

“Capital Stock” of any Person means any and all shares, interests (including general or limited partnership interests, limited liability company or membership interests or limited liability partnership interests), participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock.

“Cash Equivalents” means:

(1) United States dollars;

(2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof provided that the (provided that the full faith and credit of the United States is pledged in support thereof), maturing, unless such securities are deposited to defease any Indebtedness, not more than six months from the date of acquisition;

(3) U.S. dollar certificates of deposit and time deposits with maturities of six months or less from the date of acquisition, bankers’ acceptances with maturities not exceeding six months, and overnight bank deposits, in each case, with any commercial bank organized under the laws of the United States or any state, commonwealth or territory thereof, Switzerland or any Member State of the European Union that is a member of the Eurozone and the Euro group, in each case having capital and surplus in excess of $500.0 million and rating at the time of acquisition thereof of P-l or better from Moody’s Investors Service, Inc. or A-1 or better from Standard & Poor’s Rating Services;

(4) U.S. dollar denominated repurchase obligations with term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above;

(5) commercial paper denominated in U.S. dollars having the highest rating obtainable from Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services and in each case maturing within six months after the date of acquisition;

(6) securities issued and fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, rated at least “A” by Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services and having maturities of not more than six months from the date of acquisition; and

(7) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (6) of this definition.

“Collateral Default” means a Default consisting of the Company’s failure to comply with the material collateral provisions of the Indenture which (i) either (A) results in an impairment of the validity, perfection, or priority of the lien of the Indenture with respect to any portion of the Collateral having a fair market value in excess of $1 million in the aggregate or (B) would be materially adverse in any way to the holders of the Notes and (ii) would constitute an Event of Default unless cured within the applicable cure or grace period set forth in the Indenture.

 

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“Collateral Value” means, as of any date of determination, the sum of the following amounts with respect to the assets and other property subject to the lien of the Indenture:

(1) with respect to Pledged Shares, the product of (a) the number of Pledged Shares subject to the lien of the Indenture, multiplied by (b) the Thirty Trading-Day VWAP of the Pledged Shares as of the Trading Day immediately preceding such date of determination; and

(2) with respect to Cash Equivalents, 120% of the principal amount (or, if applicable, the accreted value) of such assets, or solely as described in paragraph (1) of “—Release of Collateral”, on any Quarterly Valuation Date, 160% of the principal amount (or, if applicable, the accreted value) of such assets.

“Consolidated Cash Flow” means, for any period, Consolidated Net Income of the Company and its Subsidiaries plus, without duplication:

(1) provision for taxes based on income or profits of the Company and its Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus

(2) the Consolidated Interest Expense of the Company and its Subsidiaries to the extent that such Consolidated Interest Expenses were deducted in computing such Consolidated Net Income; plus

(3) depreciation, amortization (including amortization of intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of the Company and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus

(4) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue in the ordinary course of business, in each case, on a consolidated basis and determined in accordance with GAAP.

“Consolidated Interest Expense” means, for any period, the sum, without duplication, of:

(1) the consolidated interest expense of the Company and its Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges Incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to Hedging Obligations, but excluding:

(a) amortization of debt issuance costs; and

(b) any nonrecurring charges relating to any premium or penalty paid, write-off of deferred finance costs or original issue discount or other charges in connection with redeeming or otherwise retiring any Indebtedness prior to its Stated Maturity, to the extent that any of such nonrecurring charges constitute interest expense;

(2) the consolidated interest expense of the Company and its Subsidiaries that was capitalized during such period; and

(3) dividends paid in cash or Disqualified Stock in respect of all Preferred Stock of the Company or its Subsidiaries and all Disqualified Stock of the Company or any of its Subsidiaries in each case held by persons other than the Company or any of its Subsidiaries.

 

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“Consolidated Net Income” means, for any period, the aggregate of the net income of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that:

(1) the net income (but not loss) of any Person that is not a Subsidiary of the Company or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or similar distributions paid in cash to the Company or a Subsidiary of the Company during such period;

(2) solely for the purpose of determining the amount available for Restricted Payments, the net income (but not loss) of any Subsidiary of the Company shall be excluded to the extent that the declaration of payment of dividends or similar distributions by that Subsidiary of that net income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charger or any agreement, instrument, judgment, decreed, order, statute, rule or governmental regulation applicable to the Subsidiary or its stockholders (in each case other than as a result of restrictions contained in the Indenture, any Pari Passu Debts or other Indebtedness existing at the issue date of the Notes, in each case as in effect on the date of determination); provided that Consolidated Net Income shall be increased by the amount of dividends or other distributions or other payments paid in cash to the Company or any of its Subsidiaries during such period, to the extent not already included therein;

(3) the cumulative effect of a change in accounting principles will be excluded;

(4) non-cash gains and losses due solely to fluctuations in currency values will be excluded;

(5) in the case of a successor to the Company by consolidation or merger or as a transferee of the Company’s assets, any earnings or (losses) of the successor corporation prior to such consolidation, merger or transfer of assets will be excluded;

(6) the effects resulting from the application of purchase accounting in relation to any acquisition that is consummated after the issue date will be excluded;

(7) any unrealized gain (or loss) in respect of Hedging Obligations will be excluded;

(8) non-cash charges or expenses with respect to the grant of stock options restricted stock or other equity compensation awards will be excluded;

(9) goodwill write-downs or other non-cash impairments of assets, or restructuring charges or severance costs associated with acquisitions or dispositions will be excluded;

(10) any restoration to income of any contingency or other reserve except to the extent that provision for such reserve was made out of Consolidated Net Income accrued at anytime following the issue date of the Notes will be excluded;

(11) drydock, shipyard stay and special survey expenses (other than Drydock, Shipyard Stay and Special Survey Amortization Expense for the applicable period) will be excluded;

(12) non-cash or non-recurring charges will be excluded; and

(13) any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with; (a) any sale of assets outside the ordinary course of business of the Company; or (b) the disposition of any securities by the Company or any of its Subsidiaries or the extinguishment of any Indebtedness of the Company or any of its Subsidiaries, will be excluded;

provided, however, that in the case of a successor to the Company or any of its Subsidiaries by consolidation or merger or as a transferee of the Company’s or any of its Subsidiaries’ assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets will be excluded.

 

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“Consolidated Total Indebtedness” means, as of any date of determination, the sum, without duplication, of:

(1) the total amount of Indebtedness of the Company and its Subsidiaries; plus

(2) the aggregate liquidation value of all Disqualified Stock of the Company and all Preferred Stock of the Company’s Subsidiaries, in each case, determined on a consolidated basis in accordance with GAAP.

For the avoidance of doubt, Consolidated Total Indebtedness shall be calculated on a pro forma basis to exclude any Indebtedness which is redeemable pursuant to its terms and which has been unconditionally called for redemption (or otherwise defeased or satisfied and discharged pursuant to its terms) with a scheduled redemption date within 180 days of the date of determination.

“Consolidated Total Leverage Ratio” means, as of any date of determination, the ratio of (1) Consolidated Total Indebtedness of the Company as of the date of determination to (2) Consolidated Cash Flow of the Company for the most recently ended four full fiscal quarters, provided that:

(1) if the Company or any of its Subsidiaries has Incurred any Indebtedness since the beginning of such period that remains outstanding on the date a determination of the Consolidated Total Leverage Ratio is to be made, Consolidated Cash Flow and Consolidated Total Indebtedness for such period and as at the date of such determination (as applicable) shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period;

(2) if the Company or any of its Subsidiaries has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period, or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Total Leverage Ratio, Consolidated Cash Flow for such period and Consolidated Total Indebtedness as at the date of such determination as applicable, shall be calculated on a pro forma basis as if such repayment, repurchase, defeasance or discharge had occurred on the first day of such period;

(3) if, since the beginning of such period, the Company or any of its Subsidiaries shall have made any asset sale, Consolidated Cash Flow for such period shall be reduced by an amount equal to the Consolidated Cash Flow (if positive) directly attributable to the assets which are the subject of such disposition for such period, or increased by an amount equal to the Consolidated Cash Flow (if negative) directly attributable thereto for such period, and Consolidated Total Indebtedness, as at the date of such determination, repaid, repurchased, defeased or otherwise discharged with respect to the Company and the continuing Subsidiaries in connection with such disposition (or, if the Capital Stock of any Subsidiary is sold, the consolidated Indebtedness of such Subsidiary to the extent the Company and the continuing Subsidiaries are no longer liable for such Indebtedness after such sale);

(4) if, since the beginning of such period, any Person that subsequently became a Subsidiary or was merged with or into the Company or any Subsidiary since the beginning of such period shall have sold or acquired assets or made any Investment that would have required an adjustment pursuant to clause (3) above or (7) below if made by the Company or any of its Subsidiaries during such period, Consolidated Cash Flow for such period and Consolidated Total Indebtedness as at the date of determination, shall be calculated after giving pro forma effect thereof as if such asset sale or acquisition, or Investment, had occurred on the first day of such period;

(5) if, since the beginning of such period, any Person ceased to be a Subsidiary of the Company or became a Subsidiary of the Company, Consolidated Cash Flow and Consolidated Indebtedness shall be calculated as if such event had occurred on the first day of such period;

(6) Consolidated Cash Flow and Consolidated Indebtedness of discontinued operations recorded on or after the date such operations are classified as discontinued in accordance with GAAP shall be excluded but, with respect to Consolidated Total Indebtedness, only to the extent that such Indebtedness shall not be obligations of the Company or any of its Subsidiaries following such classification; and

 

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(7) if, since the beginning of such period, the Company or any of its Subsidiaries shall have (i) by merger or otherwise, made an Investment in any Subsidiary (or any Person which becomes a Subsidiary), (ii) acquired any assets constituting all or substantially all of an operating unit of a business, or (iii) acquired any assets constituting less than all or substantially all of an operating unit of a business, Consolidated Cash Flow for such period and Consolidated Total Indebtedness as at such date of determination, shall be calculated after giving pro forma effect thereto (including, without limitation, the Incurrence of any Indebtedness) as if such Investment or acquisition had occurred on the first day of such period; provided, however, that with respect to subclause (7)(iii) of this definition, such calculation shall be approved by a majority of disinterested members of the board of directors of the Company as set forth in a resolution attached to an Officer’s Certificate delivered to the Trustee certifying as to such calculation.

“Continuing Director” means a director who either was a member of the Company’s or Ocean Rig’s respective board of directors on the issue date of the Notes or who becomes a member of the Company’s or Ocean Rig’s respective board of directors subsequent to that date and whose election, appointment or nomination for election by the Company’s or Ocean Rig’s respective stockholders is duly approved by a majority of the Continuing Directors on the Company’s or Ocean Rig’s respective board of directors at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Company on behalf of the Company’s entire board of directors, or by Ocean Rig on behalf of the Ocean Rig’s entire board of directors, respectively, in which such individual is named as nominee for director.

“Daily VWAP” means, (A) with respect to a share of Ocean Rig common stock, the price per share as displayed on Bloomberg (or any successor service) page ORIG<equity>AQR in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on such Trading Day; or, if such price per share is not available, the “Daily VWAP” with respect to a share of Ocean Rig common stock means the market value per share of Ocean Rig common stock on such day as determined, using a volume-weighted average method, by a nationally recognized independent investment banking firm retained for this purpose by the Company and, (B) with respect to a Qualified Acquiror Share, the price per share as displayed on Bloomberg (or any successor service) at a location or page applicable to such Qualified Acquiror Share, and equivalent to the shares of Ocean Rig common stock, in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on such Trading Day; or, if such price per share is not available, the “Daily VWAP” with respect to a Qualified Acquiror Share means the market value per Qualified Acquiror Share on such day as determined, using a volume-weighted average method, by a nationally recognized independent investment banking firm retained for this purpose by the Company. “Daily VWAP” will be determined without regard to early hours or after hours trading or any other trading outside of the regular trading session trading hours.

“Default” means an Event of Default or any event or circumstance specified under “—Events of Default” which would (with the giving of notice, lapse of time, determination of materiality or the fulfillment of any other applicable condition or any combination of the foregoing) be an Event of Default under the Indenture.

“Disqualified Stock” means any Capital Stock that (i) by its terms, (ii) by the terms of any security into which it is convertible or for which it is exchangeable, or (iii) by contract or otherwise, is, or upon the happening of any event or passage of time would be, required to be redeemed on or prior to the date that is 180 days after the date on which the Notes mature, or is redeemable at the option of the holder thereof, in any such case on or prior to such date. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale will not constitute Disqualified Stock if (i) the “change of control” provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the covenants described above under “—Change of Control Permits Holders to Require the Company to Purchase Notes” and (ii) such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company’s repurchase of such Notes as are required to be repurchased pursuant to the covenants described above under “—Change of Control Permits Holders to Require the Company to

 

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Purchase Notes.” The term “Disqualified Stock” will also include any options, warrants or other rights that are convertible into Disqualified Stock or that are redeemable at the option of the holder, or are required to be redeemed, prior to the date that is one year after the date on which the Notes mature.

“Drydock, Shipyard Stay and Special Survey Amortization Expense” shall mean, for any period, the amortized amount of all drydock, shipyard stay and special survey expenses in respect of Vessels of the Company and its Subsidiaries for such period. Drydock, Shipyard Stay and Special Survey Amortization Expense with respect to any Vessel of the Company or any of its Subsidiary will be amortized over a period commencing with the fiscal quarter in which any such expense is incurred and ending with the fiscal quarter in which the next drydock, shipyard stay or special survey, as applicable, with respect to such Vessel is scheduled to occur.

“Encumbrance” means any encumbrance, mortgage, pledge, lien, charge (whether fixed or floating), assignment by way of security, finance lease, sale and repurchase or sale and leaseback arrangement, sale of receivables on a recourse basis or security interest or any other agreement or arrangement having the effect of conferring security (provided that the foregoing shall not include a pledge of deposit accounts to the extent such pledge does not restrict withdrawal from such accounts).

“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

“Event of Default” means the occurrence of an event or circumstance specified under “—Events of Default.”

“Exchange” means securities exchange or other reputable marketplace for securities, on which the Notes are listed, or where the Company has applied for listing of the Notes.

“Fair Market Value” means the price that would be paid in an arms-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy as determined in good faith by a majority of the disinterested members of the board of directors of the Company whose determination will be conclusive if evidenced by a board resolution copy of which is delivered to the Trustee.

“Fitch” means Fitch Inc., a Subsidiary of Fimalac, S.A., and its successors.

“GAAP” means the generally accepted accounting principles in the United States of America, in force from time to time.

“Guarantee” means, as to any Person, a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner, including, without limitation, by way of pledge of assets or through letters of credit or reimbursement agreements in respect thereof; of all or any part of any Indebtedness of another Person, but excluding endorsements for collection or deposit in the normal course of business.

“Hedging Obligations” means with respect to any specified Person, the obligations of such Person under:

(1) any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement;

(2) any commodity forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement; or

(3) any foreign exchange contract, currency swap agreement or other similar agreement or arrangement.

 

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“Incur” means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become directly or indirectly liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness (the terms “Incurrence” and “Incurred” have correlative meanings); provided that neither the accrual of interest nor the accretion of original issue discount nor the payment of interest in the form of additional Indebtedness with the same terms or the payment of dividends on Disqualified Stock or Preferred Stock in the form of additional shares of the same class of Disqualified Stock or Preferred Stock (to the extent provided for when the Indebtedness or Disqualified Stock or Preferred Stock on which such interest or dividend is paid was originally issued) will be considered an Incurrence of Indebtedness.

“Indebtedness” means, with respect to any specified Person, whether or not contingent:

(1) all indebtedness of such Person in respect of borrowed money;

(2) all obligations of such Person evidenced by bonds, notes, debentures or similar instruments;

(3) all obligations of such Person in respect of banker’s acceptances, letters of credit or similar instruments (or reimbursement obligations in respect thereof);

(4) all Capital Lease Obligations (as defined in the Indenture consistent with GAAP) of such Person;

(5) all obligations of such Person in respect of the deferred and unpaid balance of the purchase price of any property or services except any such balance that constitutes an accrued expense or trade payable;

(6) all Disqualified Stock issued by such Person, valued at the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price plus accrued dividends;

(7) all Preferred Stock issued by Subsidiary of such Person, valued at the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price plus accrued dividends;

(8) all Indebtedness of others secured by Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person); provided that the amount of such Indebtedness will be the lesser of (A) the Fair Market Value of such asset at such date of determination and (B) the amount of such Indebtedness; and

(9) to the extent not otherwise included, the guarantee by the specified Person of any Indebtedness of any other Person.

For purposes hereof, the “maximum fixed repurchase price” of any Disqualified Stock or Preferred Stock which does not have fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock or Preferred Stock, as applicable, as if such Disqualified Stock or Preferred Stock were repurchased on any date on which Indebtedness will be required to be determined pursuant to the Indenture.

The amount of any Indebtedness outstanding as of any date will be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation. The amount of any Indebtedness described in clauses (1) and (2) above will be:

(1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and

(2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness.

For purposes of determining any particular amount of Indebtedness, (x) guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included, and (y) any Liens granted pursuant equally and ratably in accordance with the terms of the Indenture shall not be treated as Indebtedness.

 

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“Interest Payment Default” means a default in the payment of interest when due and payable on any of the Notes which would constitute an Event of Default if such payment were not made within the applicable cure or grace period.

“Investments” in any Person means all direct or indirect investments in such Person in the form of loans or other extensions of credit (including guarantees), advances, capital contributions (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities issued by such Person, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP.

If the Company or any of its Subsidiaries sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company will be deemed to have made an Investment on the date of any such sale or disposition equal to the Fair Market Value of the Investment in such Subsidiary not sold or disposed of. The acquisition by the Company or any of its Subsidiaries of a Person that holds an Investment in a third Person will be deemed to be an Investment by the Company or such Subsidiary in such third Person in an amount equal to the Fair Market Value of the Investment held by the acquired Person in such third Person unless such Investment in such third party was not made in anticipation or contemplation of the Investment by the Company or such Subsidiary and such third-party Investment is incidental to the primary business of such Person in whom the Company or such Subsidiary is making such Investment.

“Investment Grade” means, if rated by any one of the following:

(1) with respect to Moody’s (or any successor company acquiring all or substantially all of its assets), a rating of Baa3 (or its equivalent under any successor rating category of Moody’s) or better;

(2) with respect to S&P (or any successor company acquiring all or substantially all of its assets), a rating of BBB- (or its equivalent under any successor rating category of S&P) or better;

(3) with respect to Fitch (or any successor company acquiring all or substantially all of its assets), a rating of BBB- (or its equivalent under any successor rating category of Fitch) or better; and

(4) if any Rating Agency ceases to exist or ceases to rate the long-term debt of the Qualified Acquiror, the equivalent investment grade credit rating for the long-term debt of the Qualified Acquiror from any other “nationally recognized statistical rating organization” within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act.

“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.

“Market Disruption Event” means:

(1) failure by the securities exchange or market referenced in the definition of “Trading Day” to open for trading during its regular trading session; or

(2) the occurrence or existence prior to 1:00 p.m. on any Trading Day for Pledged Shares of an aggregate one-half hour of suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by a stock exchange or otherwise) in Pledged Shares or in any option contracts or futures contracts relating to Pledged Shares.

 

 

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“Material Adverse Effect” means a material adverse effect on: (a) the business, financial condition or operations of the Company, or the Company and its Subsidiaries taken as a whole, (b) the Company’s ability to perform and comply with its obligations under the Security Documents, the Indenture or the Notes; or (c) the validity or enforceability of the Security Documents, the Indenture or the Notes.

“Material Subsidiary” means:

(1) any Subsidiary whose total consolidated assets represent at least 10% of the total consolidated assets of the Company and its Subsidiaries, considered as a whole, or

(2) any Subsidiary whose total consolidated revenues represent at least 10% of the total consolidated net revenue of the Company and its Subsidiaries, considered as a whole.

“Moody’s” means Moody’s Investors Service, Inc., and its successors.

“Officer” means with respect to any person, the chairman of the board, the chief executive officer, the president, the chief operating officer, the chief financial officer, the treasurer, any assistant treasurer, the controller, the secretary or any vice president of such person.

“Officer’s Certificate” means certificate signed on behalf of the Company by an Officer of the Company, which Officer must be the any of the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company that meets the requirements of the Indenture.

“Pari Passu Debt” means any Indebtedness of the Company that ranks equally in right of payment with the Notes.

“Permitted Business” means any business conducted or proposed to be conducted as described in this prospectus supplement by the Company and its Subsidiaries on the issue date and other businesses reasonably related or ancillary thereto.

“Permitted Holder” means Mr. George Economou, Mr. Anthony Kandylidis, or any member of their respective immediate families, or any wholly-owned corporation, partnership, joint-venture association, joint-stock company, trust, unincorporated organization, limited liability company, or other entity of any such Permitted Holder.

“Permitted Refinancing Indebtedness” means any Indebtedness of the Company or any of its Subsidiaries issued in exchange for, or the net cash proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Subsidiaries (other than Indebtedness owed to the Company or to any Subsidiary of the Company); provided that:

(1) the amount of such Permitted Refinancing Indebtedness does not exceed the amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued and unpaid interest thereon and the amount of any reasonably determined premium necessary to accomplish such refinancing and such reasonable expenses incurred in connection therewith);

(2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to the Notes, as applicable, on terms at least as favorable, taken as a whole, to the holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

 

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(4) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is not subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness ranks equally in right of payment with, or is subordinated in right of payment to, the Notes; and

(5) such Indebtedness is Incurred by either (a) the Subsidiary of the Company that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded or (b) the Company.

“Person” means any individual, corporation, partnership, joint-venture association, joint-stock company, trust, unincorporated organization, limited liability company, or government or other entity.

“Preferred Stock” means, with respect to any Person, any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions upon liquidation.

“Qualified Acquiror” means any corporation, limited liability company, partnership, trust or other entity that is organized and validly existing under the laws of the Republic of the Marshall Islands, the United States of America, any State thereof, the District of Columbia, the Commonwealth of the Bahamas, the Republic of Liberia, the Republic of Panama, the Commonwealth of Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, Cyprus, Norway, Greece, Switzerland, Hong Kong, the United Kingdom, Malta, any Member State of the European Union and any other jurisdiction generally acceptable, whose long-term debt is rated Investment Grade.

“Qualified Acquiror Shares” means any shares of common stock or ordinary shares of a Qualified Acquiror that are listed on the New York Stock Exchange or on the NASDAQ Global Market.

“Rating Agency” means each of Moody’s, S&P, Fitch and, if any of Moody’s, S&P or Fitch ceases to exist or ceases to rate the long-term debt of a Qualified Acquiror, any other “nationally recognized statistical rating organization” within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act that continues to rate the long-term debt of the Qualified Acquiror.

“S&P” means Standard & Poor’s Rating Services, a business of Standard & Poor’s Financial Services LLC.

“Sale and Leaseback Transaction” means with respect to any Person any transaction involving any of the assets or properties of such Person whether now owned or hereafter acquired, whereby such Person sells or otherwise transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which such Person intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred.

“Secured Obligations” has the meaning set forth in the Pledge Agreement, which includes all obligations and liabilities of every nature of the Company now or hereafter existing under or arising out of or in connection with the Indenture and any of the Security Documents relating to the Notes.

“Secured Parties” means, collectively, Trustee, the Collateral Agent, the securities intermediary and each Noteholder.

“Security Documents” means the Pledge Agreement, securities account control agreement, issuer control agreements, and such other agreements and documents as are necessary to create and perfect the pledge of Collateral in favor of the Collateral Agent for the benefit of the Secured Parties, and protect the Collateral Agent’s rights and remedies with respect thereto.

“Stated Maturity” means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such installment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.

 

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“Subsidiary” means an entity over which another entity or person has a determining influence due to (i) direct and indirect ownership of shares or other ownership interests, (ii) control of the general partner of any such other entity that is a limited partnership and/or (iii) agreement, understanding or other arrangement. An entity shall always be considered to be the subsidiary of another entity or person if such entity or person has such number of shares or ownership interests so as to represent the majority of the votes in the entity, or has the right to elect or dismiss a majority of the directors in the entity.

“Thirty Trading-Day VWAP” means, as of a determination date, the average of the Daily VWAP for each day in the 30 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the determination date.

“Total Assets” shall mean, in respect of the Company on a consolidated basis and as of a given date, all of the assets of the Company of the types presented on its consolidated balance sheet less assets under any Vessel construction or ship purchase agreement (including novation and assignment and assumption agreements) that the Company is required to record on its books under GAAP even though the Company is no longer the legal owner of the vessel or legally obligated to take delivery of the vessel.

“Total Borrowings” shall mean, in respect of the Company on a consolidated basis and as of a given date, the aggregate of the following without duplication (and for purposes of the definition of “Total Borrowings”, without giving effect to any fair value accounting under GAAP): (a) the outstanding principal amount of any moneys borrowed; (b) the outstanding principal amount of any acceptance under any acceptance credit; (c) the outstanding principal amount of any bond, note, debenture or other similar instrument; (d) the book values of indebtedness under a lease, charter, hire purchase agreement or other similar arrangement which would, in accordance with GAAP, be treated as a finance or capital lease; (e) the outstanding principal amount of all money owing in connection with the sale or discounting of receivables (otherwise than on a non-recourse basis or which otherwise meet any requirements for de-recognition under GAAP); (f) the outstanding principal amount of any indebtedness arising from any deferred payment agreements arranged primarily as a method of raising finance or financing the acquisition of an asset (except trade payables); (g) the outstanding principal amount of any indebtedness of any person of a type referred to in the above clauses of this definition which is the subject of a guarantee given by the Company to the extent that such guaranteed indebtedness is determined and given a value in respect of the Company on a consolidated basis in accordance with GAAP and (h) the amount of Attributable Debt for any remaining leasehold term relating to a Sale and Leaseback transaction. Notwithstanding the foregoing, “Total Borrowings” shall not include: (a) indebtedness or obligations arising from derivative transactions, such as protecting against interest rate or currency fluctuations; and (b) indebtedness under any vessel construction or ship purchase agreement (including novation and assignment and assumption agreements) that the Company is required to record on its books under GAAP even though the Company is no longer the legal owner of the vessel or legally obligated to take delivery of the vessel.

“Trading Day” means a day on which:

(1) trading in Pledged Shares generally occurs;

(2) there is no Market Disruption Event with respect to the Pledged Shares; and

(3) a closing sale price for the Pledged Shares is provided on the principal U.S. national or regional securities exchange on which the Pledged Shares is then listed or, if the Pledged Shares are not listed, on a U.S. national or regional securities exchange, on the principal other market on which the Pledged Shares are then traded;

provided, that if the Pledged Shares are not so listed or traded, “Trading Day” means a business day.

“Vessel” shall mean one or more shipping or drilling vessels or drilling rigs, whose primary purpose is the maritime transportation of cargo or the exploration and production drilling for crude oil or hydrocarbons, or which are otherwise engaged, used or useful in a Permitted Business, in each case together with all related spares,

 

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equipment and any additions or improvements; provided that for the purposes of any provision related to the acquisition or disposition of a Vessel, such acquisition or disposition may be conducted through the transfer of all of the Capital Stock of any special purpose entity that owns a Vessel as described above.

“Voting Stock” of any Person as of any date means the Capital Stock of such Person that is ordinarily entitled to vote in the election of the board of directors of such Person.

“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date the number of years obtained by dividing:

(1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by

(2) by the then outstanding principal amount of such Indebtedness.

Change of Control Permits Holders to Require the Company to Purchase Notes

If a Change of Control (as defined below) occurs at any time, you will have the right, at your option, to require the Company to purchase for cash any or all of your Notes, or any portion of the principal amount thereof, that is equal to $1,000 or multiple of $1,000. The price the Company is required to pay (or the “Change of Control Purchase Price”) is equal to 101% of the principal amount of the Notes to be purchased plus accrued and unpaid interest to, but excluding, the Change of Control Purchase Date (unless the Change of Control Purchase Date is after a record date and on or prior to the interest payment date to which such record date relates, in which case the Company will instead pay the full amount of accrued and unpaid interest to the holder of record on such record date and the Change of Control Purchase Price will be equal to 101% of the principal amount of the Notes to be purchased). The “Change of Control Purchase Date” will be a date specified by us that is not less than 20 or more than 35 calendar days following the date of our Change of Control notice as described below. Any Notes purchased by the Company will be paid for in cash. For purposes of the Indenture, a “Change of Control” will be deemed to have occurred at the time after the Notes are originally issued that:

(1) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a Permitted Holder is or becomes the “Beneficial Owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (1) such Person shall be deemed to have “Beneficial Ownership” of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company;

(2) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company (determined on a consolidated basis) to another Person other than a transaction following which, in the case of a merger or consolidation transaction, holders of securities that represented 100% of the voting stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the voting stock of the surviving Person in such merger or consolidation transaction immediately after such transaction and in substantially the same proportion as before the transaction; or

(3) “Continuing Directors” (as defined below) cease to constitute at least a majority of our board of directors.

“Continuing Director” means a director who either was a member of our board of directors on the issue date of the Notes or who becomes a member of our board of directors subsequent to that date and whose election, appointment or nomination for election by our stockholders is duly approved by a majority of the Continuing

 

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Directors on our board of directors at the time of such approval, either by a specific vote or by approval of the proxy statement issued by us on behalf of our entire board of directors in which such individual is named as nominee for director.

On or before the 20th day after the occurrence of a Change of Control, we will provide to all holders of the Notes and the Trustee and paying agent a notice of the occurrence of the Change of Control and of the resulting purchase right. Such notice shall state, among other things:

 

(1)

the events causing the Change of Control;

 

(2)

the date of the Change of Control;

 

(3)

the last date on which a holder may exercise the repurchase right;

 

(4)

the Change of Control Purchase Price;

 

(5)

the Change of Control Purchase Date;

 

(6)

the name and address of the paying agent; and

 

(7)

the procedures that holders must follow to require the Company to purchase their Notes.

Simultaneously with providing such notice, we will publish a notice containing this information in a newspaper of general circulation in The City of New York or publish the information on our website or through such other public medium as we may use at that time.

To exercise the Change of Control purchase right, you must deliver, on or before the business day immediately preceding the Change of Control Purchase Date, the Notes to be purchased, duly endorsed for transfer, together with a written purchase notice and the form entitled “Form of Change of Control Purchase Notice” on the reverse side of the Notes duly completed, to the paying agent. Your purchase notice must state:

 

(1)

if certificated, the certificate numbers of your Notes to be delivered for purchase or if not certificated, your notice must comply with appropriate DTC procedures;

 

(2)

the portion of the principal amount of Notes to be purchased, which must be $1,000 or a multiple thereof; and

 

(3)

that the Notes are to be purchased by the Company pursuant to the applicable provisions of the Notes and Indenture.

You may withdraw any purchase notice (in whole or in part) by a written notice of withdrawal delivered to the paying agent prior to the close of business on the business day immediately preceding the Change of Control Purchase Date. The notice of withdrawal shall state:

 

(1)

the principal amount of the withdrawn Notes;

 

(2)

if certificated Notes have been issued, the certificate numbers of the withdrawn Notes, or if not certificated, your notice must comply with appropriate DTC procedures; and

 

(3)

the principal amount, if any, which remains subject to the purchase notice.

The Company will be required to purchase the Notes on the Change of Control Purchase Date. You will receive payment of the Change of Control Purchase Price on the later of the Change of Control Purchase Date or the time of book-entry transfer or the delivery of the Notes. If the paying agent holds money or securities sufficient to pay the Change of Control Purchase Price of the Notes on the Change of Control Purchase Date, then:

 

(1)

the Notes will cease to be outstanding and interest, including any additional interest, if any, will cease to accrue (whether or not book-entry transfer of the Notes is made or whether or not the Notes are delivered to the paying agent); and

 

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(2)

all other rights of the holder will terminate (other than the right to receive the Change of Control Purchase Price).

In connection with any purchase offer pursuant to a Change of Control purchase notice, the Company will, if required, comply with the provisions of the tender offer rules under the Exchange Act that may then be applicable, and file a Schedule TO or any other required schedule under the Exchange Act. To the extent the provisions of any such securities laws or regulations conflict with the Change of Control provisions of the Notes, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control provisions of the Notes by virtue of such conflicts.

No Notes may be purchased at the option of holders upon a Change of Control if the principal amount of the Notes has been accelerated, and such acceleration has not been rescinded, on or prior to such date.

The term Change of Control is limited to specified transactions and may not include other events that might adversely affect our financial condition. In addition, the requirement that the Company offer to purchase the Notes upon a Change of Control may not protect holders in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

If a Change of Control were to occur, we may not have enough funds to pay the Change of Control Purchase Price. Our ability to repurchase the Notes for cash may be limited by restrictions on our ability to obtain funds for such repurchase through dividends from our subsidiaries, the terms of our then existing borrowing arrangements or otherwise. Please read “Risk Factors—Risks Related to the Notes—We may be unable to repurchase the Notes as required upon a Change of Control.” If we fail to purchase the Notes when required following a Change of Control, we will be in Default under the Indenture. In addition, we have indebtedness, and may in the future incur other indebtedness, with similar change in control provisions permitting holders to accelerate or to require us to purchase their indebtedness upon the occurrence of similar events or on some specific dates.

Events of Default

The Indenture provides for the following Events of Default:

(1) failure by the Company to pay principal of or any premium when due;

(2) failure by the Company to pay any interest when due, continued for five business days;

(3) failure by the Company to perform or comply with the provisions of the Indenture relating to mergers and similar events;

(4) failure by the Company to pledge and deliver to the Collateral Agent on any Top Up Date the full amount of additional Collateral required pursuant to the Company’s obligation to maintain Collateral described under “—Security—Maintenance of Collateral.”

(5) failure by the Company to provide notice of a Change of Control or to repurchase Notes tendered for repurchase following the occurrence of a Change of Control in conformity with the covenant set forth under the caption “—Change of Control Permits Holders to Require the Company to Purchase Notes;”

(6) failure by the Company to perform any of the other covenants and agreements in the Indenture, the Pledge Agreement or any of the other Security Documents, continued for 60 days after written notice has been given by the Trustee, or the holders of at least 25% in principal amount of the outstanding Notes, as provided in the Indenture;

(7) default by the Company or any of its Subsidiaries with respect to any Indebtedness in excess of $100,000,000 (or its foreign currency equivalent), whether such Indebtedness now exists or shall hereafter be created (i) resulting in the acceleration of such Indebtedness prior to its stated maturity, or (ii) constituting a failure to pay any amounts when due and payable at its stated maturity, upon required repurchase, upon declaration of acceleration, or otherwise.

 

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(8) if any judgment or decree for the payment of money in excess of $100 million (or the equivalent thereof in other currencies) is entered against any of the Company or its Subsidiaries (net of any amounts (i) that a reputable insurance company has acknowledged liability for in writing and (ii) for which any joint venture partner or any other owners (other than the Company or any of its Subsidiaries) of any of the Company or its Subsidiaries are liable) and remains outstanding for a period of 90 consecutive days following entry of such judgment and is not discharged, waived or stayed;

(9) any of the Security Documents shall cease, for any reason, to be in full force and effect, or the Company, directly or through an Affiliate or agent, shall so assert in writing, or any lien created by any such Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby (other than as expressly permitted by the Security Documents), and in each case such condition shall continue unremedied for 10 days; or

(10) the occurrence of certain events of bankruptcy, insolvency or reorganization affecting the Company or any Material Subsidiary.

If an Event of Default, other than an Event of Default described in clause (10) above, occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare (i) the principal amount of the Notes and (ii) interest on any overdue principal and overdue interest at the rate of     % per annum (in each case to the extent that payment of such interest shall be legally enforceable) to be due and payable immediately. If an Event of Default described in clause (10) above occurs, the (a) principal amount of the Notes, (b) accrued and unpaid interest, if any, and (c) interest on any overdue principal and overdue interest at the rate of     % per annum (in each case to the extent that payment of such interest shall be legally enforceable), will automatically become immediately due and payable. In addition to the amounts described in the preceding two sentences, such further amounts sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, will also be due and payable by the Company.

After any such acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate principal amount of the Notes then outstanding may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal and any premium, interest or Additional Amounts which have become due as a result of such acceleration, have been cured or waived.

Notwithstanding the foregoing, if we so elect, the sole remedy under the Indenture for an Event of Default relating to (i) our failure to file with the Trustee pursuant to Section 314(a)(1) of the Trust Indenture Act any documents or reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act or (ii) the failure to comply with our reporting obligations to the Trustee and the SEC, as described under “—Reports” below, will, after the occurrence of such an Event of Default, consist exclusively of the right to receive additional interest on the Notes at an annual rate equal to (i) 0.25% per annum of the outstanding principal amount of the Notes for each day during the 90-day period beginning on, and including, the date on which such Event of Default first occurs and on which such Event of Default is continuing; and (ii) 0.50% per annum of the outstanding principal amount of the Notes for each day during the 90-day period beginning on, and including, the 91^st day following, and including the date on which such Event of Default first occurs and on which such Event of Default is continuing. In the event we do not elect to pay the additional interest upon an Event of Default in accordance with this paragraph, the Notes will be subject to acceleration as provided above. This additional interest will be payable in arrears on the same dates and in the same manner as regular interest on the Notes. On the 181^st day after such Event of Default first occurs (if not waived or cured prior to such 181^st day), such additional interest will cease to accrue and the Notes will be subject to acceleration as provided above. The provisions of the Indenture described in this paragraph will not affect the rights of holders of Notes in the event of the occurrence of any other Events of Default.

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immediately preceding paragraph, we must notify all holders of record of Notes and the Trustee and paying agent of such election on or before the close of business on the fifth business day prior to the date on which such Event of Default would otherwise occur. Upon our failure to timely give such notice or pay additional interest, the Notes will be immediately subject to acceleration as provided above.

In the case of an Event of Default under the Indenture, the Collateral Agent may, and upon the written direction of the Trustee acting in accordance with the terms of the Indenture or, in the absence of such Trustee instruction upon the written direction and indemnity of the Holders of a majority in principal amount of the outstanding Notes under the Indenture shall, subject to applicable law and the Pledge Agreement, exercise remedies under the Pledge Agreement and sell the Collateral. If such remedies are exercised by the Collateral Agent, any proceeds from the sale of the Collateral will be applied first, to pay all amounts owing to the Collateral Agent and the Trustee (in their respective capacities as such), including all reasonable costs and expenses incurred in connection with such collection or sale or otherwise in connection with any Security Document or the Indenture and the performance of their respective duties thereunder, and second, to the extent proceeds remain after such application, to the Trustee for payment to Holders of Notes for amounts due and unpaid on the Notes for principal, premium (if any) and interest ratably without preference or priority of any kind according to the amounts due and payable on the Notes, and third, any remaining balance to the Company, its successors or assigns. The proceeds may not be sufficient to satisfy the Company’s obligations under the Notes. See “Risk Factors—Risks Relating to the Notes—In the event of a bankruptcy filed in the United States, the Noteholders’ and Collateral Agent’s ability to realize upon the collateral may be limited by federal bankruptcy law”, “—In a forced restructuring the Notes could be restructured over your objections”, “—It may be difficult to realize the value of the collateral pledged to secure the Notes in a timely manner or at all”, “—We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of bankruptcy law”, “—The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict”, “—In the event of our bankruptcy, the Noteholders may be deemed to have unsecured claims”, and “—The collateral value may not sufficiently secure full amounts of claims and post-petition interest”.

To the extent permitted by law, the Collateral Agent may be the purchaser of any or all of the Pledged Collateral at any such sale, and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by the Collateral Agent at such sale, including, but not limited to, any sale commenced in a bankruptcy proceeding of the Company.

The Trustee will not be obligated to exercise any of its rights or powers at the request of the holders unless the holders have offered and provided to the Trustee indemnity and/or security reasonably satisfactory to it against any loss, liability or expense. Subject to the Indenture and the Pledge Agreement, applicable law and the indemnification of the Trustee and Collateral Agent the holders of a majority in aggregate principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or the Collateral Agent or exercising any trust or power conferred on the Trustee with respect to the Notes or any power conferred on the Collateral Agent. The Trustee and/or the Collateral Agent, however, may refuse to follow any direction (i) that conflicts with law or the Indenture or the Pledge Agreement or, (ii) that the Trustee or the Collateral Agent determines is unduly prejudicial to the rights of any other holder, (iii) that the Trustee or the Collateral Agent determined in good faith would involve the Trustee in personal liability or (iv) in the case the Trustee or the Collateral Agent does not receive indemnity and/or security satisfactory to it against any costs, liabilities or expenses to be incurred by the Trustee or the Collateral Agent in compliance with such direction.

Subject to the terms of the Security Documents, the holders of a majority in principal amount of the then-outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or the Collateral Agent. The Trustee and the Collateral Agent may refuse to follow any direction that conflicts with law, the Pledge Agreement, any other Security Document or the

 

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Indenture, that may involve the Trustee’s or the Collateral Agent’s personal liability, or that the Trustee or the Collateral Agent determines in good faith may be unduly prejudicial to the rights of holders of Notes not joining in the giving of such direction.

No holder of the Notes will have any right to institute any proceeding under the Indenture, or for the appointment of a receiver or a Trustee, or for any other remedy under the Indenture unless:

 

(1)

such holder has previously given the Trustee written notice of a continuing Event of Default;

 

(2)

the holders of not less than 25% in aggregate principal amount of the Notes then outstanding have made a written request and have offered indemnity reasonably satisfactory to the Trustee to institute such proceeding as Trustee; and

 

(3)

the Trustee has failed to institute such proceeding within 60 days after such notice, request and offer and has not received from the holders of a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request within 60 days after such notice, request and offer.

However, the above limitations do not apply to a suit instituted by a holder for the enforcement of payment of the principal of or interest on any Note on or after the applicable due date in accordance with the Indenture.

Generally, the holders of not less than a majority of the aggregate principal amount of the outstanding Notes may waive any Default or Event of Default with respect to such Notes unless:

 

(1)

the Company fails to pay the principal of or any interest on any such Notes when due;

 

(2)

the Company fails to comply with any of the provisions of the Indenture that would require the consent of such holder of each outstanding Note affected.

The Indenture provides that within 90 days after the Trustee receives written notice of a Default, the Trustee shall transmit by mail to all such holders, notice of such Default, unless such Default shall have been cured or waived. Except in the case of a Default in the payment of principal of or interest on any Note, the Trustee may withhold notice if and so long as the Trustee in good faith determines that withholding notice is in the best interest of such holders. In addition, we are required to deliver to the Trustee (i) within 120 days after the end of each fiscal year, a certificate indicating whether the officers of the Company delivering such certificate know of any Default that occurred during the previous year and whether the Company, to the best of such officer’s knowledge, is in Default in the performance or observance of any of the terms, provisions and conditions of the Indenture and (ii) within 30 days after the occurrence thereof, written notice of any event that would constitute a Default, their status and what action the we are taking or propose to take in respect thereof.

Each such holder shall have the right to receive payment or delivery, as the case may be, of:

 

(1)

the principal (including the Change of Control Purchase Price, if applicable) of;

 

(2)

accrued and unpaid interest, if any, on; and

 

(3)

Additional Amounts, if any, on

such Notes, on or after the respective due dates expressed or provided for in Indenture, or to institute suit for the enforcement of any such payment or delivery, as the case may be, and such right to receive such payment or delivery, as the case may be, on or after such respective dates shall not be impaired or affected without the consent of such holder.

 

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Modification and Waiver

The Company and the Trustee may amend or supplement the Indenture with respect to the Notes with the consent (including consents obtained in connection with any tender offer or exchange offer) of the applicable holders of a majority in aggregate principal amount of the outstanding Notes. In addition, the holders of a majority in aggregate principal amount of the outstanding Notes may waive the Company’s compliance in any instance with any provision of the Indenture without notice to the other holders of such Notes. However, no amendment, supplement or waiver may be made with respect to the Notes without the consent of each holder affected thereby if such amendment, supplement or waiver would:

 

(1)

change the stated maturity of the principal of or any interest on such Notes;

 

(2)

reduce the principal amount of or interest on such Notes;

 

(3)

change the currency of payment of principal of or interest on such Notes or change any such Note’s place of payment;

impair the right of any such holder to receive payment of principal of and interest on such holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on, or with respect to, the Notes;

 

(1)

modify the provisions with respect to the purchase rights of such holders as described above under “—Change of Control Permits Holders to Require the Company to Purchase Notes” in a manner adverse to holders of Notes;

 

(2)

change the ranking of such Notes;

 

(3)

change the Company’s obligation to pay Additional Amounts on any such Note; or

 

(4)

modify provisions with respect to modification, amendment or waiver (including waiver of Events of Default), except to increase the percentage required for modification, amendment or waiver or to provide for consent of each affected holder of such Notes.

The Company and the Trustee may amend or supplement the Indenture or the Notes without notice to, or the consent of, the holders of such Notes to:

 

(1)

cure any ambiguity, omission, defect or inconsistency that does not adversely affect the rights of any holder of such Notes in any material respect;

 

(2)

provide for the assumption by a successor of the Company’s obligations under the Indenture;

 

(3)

secure such Notes;

 

(4)

add to our covenants for the benefit of such holders or surrender any right or power conferred upon the Company;

 

(5)

add to, or provide for, the Collateral securing such Notes; or

 

(6)

make any change that does not adversely affect the rights of such holder.

The consent of such holders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, we are required to mail to the holders a notice briefly describing such amendment. However, the failure to give such notice to all such holders, or any defect in the notice, will not impair or affect the validity of the amendment.

Satisfaction and Discharge

The Company may satisfy and discharge its obligations under the Indenture with respect to the Notes by delivering to the registrar for cancellation all outstanding Notes or depositing with the Trustee or delivering to

 

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the holders, as applicable, after all outstanding Notes have become due and payable, or will become due and payable at their stated maturity within one year, cash sufficient to pay and discharge the entire indebtedness all of the outstanding Notes and all other sums payable under the Indenture by the Company. Such discharge is subject to terms contained in the Indenture.

If the Company satisfies and discharges its obligations under the Indenture with respect to the Notes, the Company will be released from its obligations described under “Change of Control Permits Holders to Require the Company to Purchase Notes”.

Defeasance

The Company may terminate at any time all of its obligations with respect to the Notes and the Indenture, which we refer to as “legal defeasance,” except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of Notes.

In the event the Company exercises its legal defeasance option with respect to the Notes, any Collateral securing the Notes will be released by the Collateral Agent to the Company, and the Company will be released from all obligations described under “Security—Maintenance of Collateral”.

The Company also may terminate at any time its obligations with respect to the Notes under the covenants described under “—Change of Control Permits Holders to Require the Company to Purchase Notes,” “—Certain Covenants” and “— Reports,” and the operation of certain Events of Default, which we refer to as “covenant defeasance.” The Company may exercise the legal defeasance option notwithstanding its prior exercise of the covenant defeasance option.

If the Company exercises its legal defeasance option with respect to the Notes, payment of such Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises the covenant defeasance option with respect to the Notes, payment of such Notes may not be accelerated because of an Event of Default specified in clause (4), clause (5), clause (6) (with respect to the covenants described under “—Certain Covenants” or “—Reports”), clause (7) or clause (8) described in the section “Events of Default.”

The legal defeasance option or the covenant defeasance option with respect to the Notes may only be exercised if:

(1) the Company irrevocably deposits in trust with the Trustee United States dollars or United States Government obligations or a combination thereof for the payment of principal of and interest and Additional Amounts, if any, on such Notes to maturity,

(2) such defeasance or covenant defeasance does not constitute a Default or Event of Default under the Indenture or any other applicable material agreement or instrument binding on the Company,

(3) no Event of Default with respect to the Notes has occurred and is continuing on the date of such deposit and, with respect to defeasance only, at any time during the period ending on the 123rd day after the date of such deposit (other than, if applicable, an Event of Default with respect to such Notes resulting from the borrowing of funds to be applied to such deposits),

(4) in the case of the legal defeasance option, the Company delivers to the Trustee an opinion of counsel stating that:

(a) the Company has received from the IRS a letter ruling, or there has been published by the Internal Revenue Service a revenue ruling, or

(b) since the date of the Indenture, there has been a change in the applicable U.S. Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the holders of such Notes

 

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will not recognize income, gain or loss for U.S. Federal income tax purposes as a result of such defeasance and will be subject to U.S. Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred,

(5) in the case of the covenant defeasance option, the Company delivers to the Trustee an opinion of counsel to the effect that the holders of such Notes will not recognize income, gain or loss for U.S. Federal income tax purposes as a result of such covenant defeasance and will be subject to U.S. Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred,

(6) the Company delivers to the Trustee an opinion of counsel to the effect that, after the 123rd day after the date of deposit, all money and U.S. Government obligations (or other property as may be provided pursuant to the terms of the Indenture) (including the proceeds thereof) deposited or caused to be deposited with the Trustee (or other qualifying trustee) to be held in trust will not be subject to any case or proceeding (whether voluntary or involuntary) in respect of the Company under any U.S. Federal or State bankruptcy, insolvency, reorganization or other similar law, or any decree or order for relief in respect of the Company issued in connection therewith,

(7) the Company delivers to the Trustee an Officer’s Certificate and an opinion of counsel, each stating that all conditions precedent to the defeasance and discharge of such Notes have been complied with as required by the Indenture, and

(8) the Company shall have delivered to the Trustee a certificate of an internationally-recognized firm of independent accountants to the effect that the amount deposited by the Company is sufficient to provide payment for the principal of, premium, if any, and accrued interest on, the Notes on the date such payments are due and payable in accordance with the terms of this Indenture and of the Notes.

If the Company defeases its obligations under the Indenture, it will be released from its obligations in the provisions described under “—Change of Control Permits Holders to Require the Company to Purchase Notes.”

Transfer and Exchange

We will maintain an office in New York City where the Notes may be presented for registration of transfer or exchange. This office will initially be an office or agency of the Trustee. No service charge will be imposed by us, the Trustee or the registrar for any registration of transfer or exchange of Notes, but any tax or similar governmental charge required by law or permitted by the Indenture because a holder requests any Notes to be issued in a name other than such holder’s name will be the obligation of such holder (each such tax or similar governmental charge, a “Transfer Tax”). We are not required to transfer or exchange any Note surrendered for purchase except for such portion of that Note not being purchased.

With respect to the Notes, we reserve the right to:

 

(1)

vary or terminate the appointment of the security registrar or paying agent;

 

(2)

appoint additional paying agents; or

 

(3)

approve any change in the office through which any such security registrar or any paying agent acts.

Payment and Paying Agents

With respect to the Notes, payments in respect of the principal and interest on global notes registered in the name of DTC or its nominee will be payable to DTC or its nominee, as the case may be, in its capacity as the registered holder under the Indenture. In the case of certificated Notes, payments will be made in U.S. dollars at the office of the Trustee or, at our option, by check mailed to such holder’s registered address (or, if requested by a holder of more than $1,000,000 principal amount of Notes, by wire transfer to the account designated by such

 

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holder). The Company will make any required interest payments on the Notes to the person in whose name each such Note is registered at the close of business on the record date for the interest payment with respect to such Note.

The Trustee will be designated as the Company’s paying agent for payments on the Notes. We may at any time designate additional paying agents or rescind the designation of any paying agent or approve a change in the office through which any paying agent acts.

Subject to the requirements of any applicable abandoned property laws, the Trustee and paying agent shall pay to us upon written request any money held by them for payments on the Notes that remain unclaimed for two years after the date upon which that payment has become due. After payment to us, holders of such Notes entitled to the money must look to the Company for payment. In that case, all liability of the Trustee or paying agent with respect to such money will cease.

Purchase and Cancellation

With respect to the Notes, the registrar and paying agent (if other than the Trustee) will forward to the Trustee any Notes surrendered to them by holders for transfer, exchange or payment. All such Notes delivered to the Trustee shall be cancelled promptly by the Trustee in the manner provided in the Indenture and may not be reissued or resold. No Notes shall be authenticated in exchange for any Notes cancelled, except as provided in the Indenture.

We may, to the extent permitted by law, and directly or indirectly (regardless of whether such Notes are surrendered to us), purchase Notes in the open market or by tender offer at any price or by private agreement.

Reports

So long as any Notes are outstanding, we will (i) file with the SEC within the time periods prescribed by its rules and regulations and applicable to us and (ii) furnish to the Trustee and the holders of such Notes within 15 days after the date on which we would be required to file the same with the SEC pursuant to its rules and regulations (giving effect to any grace period provided by Rule 12b-25 under the Exchange Act):

(1) all quarterly and annual financial information to the extent required of us to be contained in Forms 20-F and 6-K if we were subject to Sections 13(a) and 15(d) of the Exchange Act and, with respect to the annual consolidated financial statements only, a report thereon by our independent auditors; and

(2) at or prior to such times as would be required to be filed or furnished to the SEC if we were subject to Sections 13(a) and 15(d) of the Exchange Act, all such other reports and information that the Company would have been required to file or furnish pursuant thereto.

We shall not be required to file any report or other information with the SEC if the SEC does not permit such filing, although such reports will be required to be furnished to the Trustee and posted on the website of the Company within the time periods that would apply if the Company were required to file those reports with the SEC. Documents filed by us with the SEC via the EDGAR system will be deemed to have been furnished to the Trustee and the holders of such Notes as of the time such documents are filed via EDGAR.

Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer’s Certificates).

Replacement of Notes

We will replace mutilated, destroyed, stolen or lost Notes at the expense of the holder upon delivery to the Trustee of the mutilated Notes, or evidence of the loss, theft or destruction of such Notes satisfactory to us and the Trustee. In the case of a lost, stolen or destroyed Note, indemnity satisfactory to the Trustee and us may be required at the expense of such holder of such Note before a replacement Note will be issued.

 

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Notices

Except as otherwise described herein, notice to registered holders of Notes will be given to the addresses as they appear in the applicable security register. Notices will be deemed to have been given on the date of such mailing or electronic delivery. Whenever a notice is required to be given by us, such notice may be given by the Trustee on our behalf (and we will make any notice we are required to give to holders available on our website).

Governing Law

The Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws.

Concerning the Trustee

The Trustee, in its individual and any other capacity, may make loans to, accept deposits from and perform services for the Company as if it were not the Trustee; however, if it acquires any conflicting interest, it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign.

The Indenture will provide that in case an Event of Default shall occur and be continuing (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in the conduct of such person’s own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes, unless such holder shall have offered and provided to the Trustee security and/or indemnity satisfactory to it against any potential loss, liability or expense.

Deutsche Bank Trust Company Americas will be the Trustee under the Indenture. Initially, the Trustee will also act as the paying agent, registrar and custodian for the Notes.

Book-entry System; Delivery and Form

Global Notes

The Company will issue the Notes in the form of one or more global notes in definitive, fully registered, book-entry form. The global notes will be deposited with or on behalf of DTC and registered in the name of Cede & Co., as nominee of DTC.

DTC, Clearstream and Euroclear

Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may hold interests in the global notes through either DTC (in the United States), Clearstream Banking, société anonyme, Luxembourg, which we refer to as Clearstream, or Euroclear Bank S.A./N.V., as operator of the Euroclear System, which we refer to as Euroclear, in Europe, either directly if they are participants in such systems or indirectly through organizations that are participants in such systems. Clearstream and Euroclear will hold interests on behalf of their participants through customers’ securities accounts in Clearstream’s and Euroclear’s names on the books of their U.S. depositaries, which in turn will hold such interests in customers’ securities accounts in the U.S. depositaries’ names on the books of DTC.

We have obtained the information in this section concerning DTC, Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but we take no responsibility for the accuracy of this information.

We understand that:

 

•

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve

 

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System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered under Section 17A of the Exchange Act.

 

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DTC holds securities that its participants deposit with DTC and facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants’ accounts, thereby eliminating the need for physical movement of securities certificates.

 

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Direct participants include securities brokers and dealers, banks, trust companies, clearing corporations and other organizations.

 

•

DTC is owned by a number of its direct participants and by The New York Stock Exchange, Inc., the NYSE MKT LLC and the Financial Industry Regulatory Authority, Inc. (successor to the National Association of Securities Dealers, Inc.).

Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly.

The rules applicable to DTC and its direct and indirect participants are on file with the SEC.

We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its customers and facilitates the clearance and settlement of securities transactions between its customers through electronic book-changes in accounts of its customers, thereby eliminating the need for physical movement of certificates. Clearstream provides to its customers, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Section. Clearstream customers are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream customer either directly or indirectly.

We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./N.V., which we refer to as the Euroclear Operator, under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the Cooperative. All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.

We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.

We have provided the descriptions of the operations and procedures of DTC, Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any

 

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kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of the Company, the underwriters or the Trustee takes any responsibility for these operations or procedures, and you are urged to contact DTC, Clearstream and Euroclear or their participants directly to discuss these matters.

We expect that under procedures established by DTC:

 

•

upon deposit of the global notes with DTC or its custodian, DTC will credit on its internal system the accounts of direct participants designated by the underwriters with portions of the principal amounts of the global notes; and

 

•

ownership of the Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC or its nominee, with respect to interests of direct participants, and the records of direct and indirect participants, with respect to interests of persons other than participants.

The laws of some jurisdictions may require that purchasers of securities take physical delivery of those securities in definitive form. Accordingly, the ability to transfer interests in the Notes represented by a global note to those persons may be limited. In addition, because DTC can act only on behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the ability of a person having an interest in Notes represented by a global note to pledge or transfer those interests to persons or entities that do not participate in DTC’s system, or otherwise to take actions in respect of such interest, may be affected by the lack of a physical definitive security in respect of such interest.

So long as DTC or its nominee is the registered owner of a global note, DTC or that nominee will be considered the sole owner or holder of the Notes represented by that global note for all purposes under the Indenture and under the Notes. Except as provided below, owners of beneficial interests in any such global note will not be entitled to have Notes represented by that global note registered in their names, will not receive or be entitled to receive physical delivery of certificated Notes and will not be considered the owners or holders thereof under the Indenture or under the applicable Notes for any purpose, including with respect to the giving of any direction, instruction or approval to the Trustee. Accordingly, each such holder owning a beneficial interest in such global note must rely on the procedures of DTC and, if such holder is not a direct or indirect participant, on the procedures of the participant through which such holder owns its interest, to exercise any rights of a holder of Notes under the Indenture or such global note.

Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of one or more Notes by DTC, Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to such Notes.

None of the Trustee, the registrar, transfer agent or paying agent shall have any responsibility or obligation to any beneficial owner of an interest in a global note, any agent member or other member of, or a participant in, DTC or other person with respect to the accuracy of the records of DTC or any nominee or participant or member thereof, with respect to any ownership interest in the notes or with respect to the delivery to any agent member or other participant, member, beneficial owner or other person (other than DTC) of any notice or the payment of any amount or delivery of any notes (or other security or property) under or with respect to such notes. All notices and communications to be given to the holders and all payments to be made to holders in respect of the notes shall be given or made only to or upon the order of the registered holders (which shall be DTC or its nominee in the case of a global note). The rights of beneficial owners in any global note shall be exercised only through DTC, subject to its applicable rules and procedures. The Trustee, the registrar, transfer agent and paying agents may rely and shall be fully protected in relying upon information furnished by DTC with respect to its agent members and other members, participants and any beneficial owners.

Payments by the Company with respect the Notes represented by one or more global notes will be made to DTC or its nominee, as the case may be, as the registered owner thereof. We expect that DTC or its nominee,

 

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upon receipt of any payment on such Notes represented by a global note, will credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in such global note as shown in the records of DTC or its nominee. We also expect that payments by participants to owners of beneficial interests in such global note held through such participants will be governed by standing instructions and customary practice as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. The participants will be solely responsible for such payments.

Distributions on the Notes held beneficially through Clearstream will be credited to cash accounts of its customers in accordance with its rules and procedures, to the extent received by the U.S. depositary for Clearstream.

Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively referred to herein as the Terms and Conditions). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.

Distributions with respect to the Notes held beneficially through Euroclear will be credited to the cash accounts of its participants in accordance with the Terms and Conditions, to the extent received by the U.S. depositary for Euroclear.

Clearance and Settlement Procedures

Initial settlement for the Notes will be made in immediately available funds. Secondary market trading of the Notes between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled in immediately available funds. Secondary market trading of the Notes between Clearstream customers and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.

Cross-market transfers of the Notes between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream customers or Euroclear participants, on the other, will be effected through DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the U.S. depositary. Such cross-market transactions, however, will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the U.S. depositary to take action to effect final settlement on its behalf by delivering or receiving the Notes in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream customers and Euroclear participants may not deliver instructions directly to their U.S. depositaries.

Because of time-zone differences, credits of the Notes received in Clearstream or Euroclear as a result of a transaction with a DTC participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in the Notes settled during such processing will be reported to the relevant Clearstream customers or Euroclear participants on such business day. Cash received in Clearstream or Euroclear as a result of sales of such Notes by or through a Clearstream customer or a Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.

 

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Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures to facilitate transfers of the Notes among participants of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be changed or discontinued at any time.

Certificated Notes

The Company will issue the Notes in certificated form to each person that DTC identifies as the beneficial owner of such Notes represented by a global note upon surrender by DTC of the global note if:

 

•

DTC notifies the Company that it is no longer willing or able to act as a depositary for such global note or ceases to be a clearing agency registered under the Exchange Act, and we have not appointed a successor depositary within 90 days of that notice or becoming aware that DTC is no longer so registered;

 

•

an Event of Default under the Indenture has occurred and is continuing, and DTC requests the issuance of the Notes in certificated form; or

 

•

we have determined not to have such Notes represented by a global note.

Neither the Company nor the Trustee will be liable for any delay by DTC, its nominee or any direct or indirect participant in identifying the beneficial owners of the Notes. We and the Trustee may conclusively rely on, and will be protected in relying on, instructions from DTC or its nominee for all purposes, including with respect to the registration and delivery, and the respective principal amounts, of the certificated Notes to be issued.

Timing and delivery

It is expected that delivery of the Notes will be made upon the instructions of the underwriters against payment on or about the date specified in this prospectus supplement, which is later than the third business day following the date of pricing of the Notes. Under Rule 15c6-1 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, if any purchaser wishes to trade Notes on the date of pricing of the Notes or the succeeding business days up to three days prior to the date of delivery of the Notes, it may be required, by virtue of the fact that the Notes may initially settle later than on the third business day following the date of pricing of the Notes, to specify an alternative settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of the Notes who wish to trade the Notes on any day for which settlement within three business days would not be possible should consult their own advisors.

 

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DESCRIPTION OF OTHER INDEBTEDNESS

The following is a summary of the material terms of our credit facilities and other indebtedness that will be outstanding following the consummation of this offering. You should read this section together with “Compliance Status” elsewhere in this prospectus supplement.

Credit Facility Indebtedness

Proposed Secured Credit Facility

On July 17, 2014, we entered into a commitment letter from Nordea Bank for a the Proposed Secured Credit Facility in an amount up to $170.0 million to refinance existing indebtedness under our $325.0 million Senior Credit Facility, under which $63.3 million was outstanding at June 30, 2014, and for general corporate purposes. We estimate that the Proposed Secured Credit Facility will provide us approximately $100.0 million of incremental borrowing availability in excess of the amount required to refinance the outstanding balance under the existing $325.0 million Senior Credit Facility. We intend to apply such incremental borrowing availability under the Proposed Secured Credit Facility to repay a portion of the indebtedness under the Convertible Senior Notes.

The Proposed Secured Credit Facility would be secured by the six vessels that currently secure the existing Senior Credit Facility (the Capesize vessels Montechristo, Cohiba, Robusto and Partagas and the Panamax vessels Topeka and Helena as well as, three other unencumbered vessels (the Capesize vessel Raiatea (ex Conches) and the Panamax vessels Woolloomolloo and Saldanha).

This facility will have a five year term and bear interest at LIBOR plus a margin.

The initial drawing under this facility is subject, among other things, to the facility agent deeming that we have refinanced or with the proceeds of the Proposed Secured Credit Facility will refinance, the $700 million of Convertible Senior Notes. The entry into this facility also is subject to definitive documentation which we expect to complete in the fourth quarter of 2014.

Proposed Secured Bridge Loan Facility

On July 9, 2014, we received a commitment letter from ABN AMRO, pursuant to which ABN AMRO is prepared to make available to us a secured bridge loan facility in an amount up to $350.0 million. We intend to execute the commitment letter after this offering, as necessary. The term sheet provides that ABN AMRO is prepared to make available the minimum facility amount of $200.0 million of loans to refinance a portion of the Convertible Senior Notes subject to the lender’s satisfaction about the overall refinancing of our Convertible Senior Notes. The term sheet contemplates that an additional bank or banks yet to be identified by us, following consultation with ABN AMRO, may make available the remaining balance of up to $150.0 million for a maximum facility amount of $350.0 million. Such additional bank or banks currently have not been identified, and no assurance can be given that it or they will be identified.

The facility will be secured by certain shares of Ocean Rig common stock owned by us. The facility will be drawn and repaid in one lump sum amount, matures 12 months from drawdown and may be extended at the option of the lenders only by two further consecutive periods of six months each. The facility bears interest at LIBOR plus a margin, which margin steps up each quarter in accordance with a predetermined schedule. If we draw down this facility, the failure to timely repay indebtedness thereunder would result in substantial debt service obligations that may have a material adverse effect on our financial condition.

The entry into this facility is subject to, among other things, the facility agent deeming that we have refinanced, or with the proceeds of the Proposed Bridge Loan Facility will refinance, the $700 million of Convertible Senior Notes, and to the execution of definitive documentation.

 

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Credit Facilities relating to Our Drybulk and Tanker Segments

$325.0 million revolving credit facility and term, loan dated September 18, 2007, as amended

Upon our acquisition of OceanFreight Inc., or OceanFreight, on November 3, 2011, we issued a guarantee in connection with OceanFreight’s $325.0 million senior secured credit facility entered into on September 18, 2007. This facility is secured by six vessels: the Capesize vessels Montechristo, Cohiba, Robusto and Partagas and the Panamax vessels Topeka and Helena. The loan bears interest at LIBOR plus a margin and is comprised of the following two tranches: Tranche A is a reducing revolving credit facility in a maximum amount of $200.0 million, $199.0 million of which OceanFreight utilized prior to its acquisition by us and the outstanding balance at June 30, 2014 of $45.8 million will be reduced or repaid in three semi-annual equal installments of $8.13 million each, plus a balloon installment, in the amount of $21.4 million. Tranche B is a term loan facility in a maximum amount of $125.0 million, which was fully utilized by OceanFreight prior to its acquisition by us and the outstanding balance at June 30, 2014 of $17.5 million is repayable in three equal semi-annual installments in the amount of $5.13 million each, plus a balloon installment in the amount of $2.1 million. The maturity of the final installment payments under each of the two tranches is October 1, 2015 for Tranche A and July 1, 2015 for Tranche B. As of June 30, 2014, a total of $63.3 million was outstanding under this facility. We intend to refinance the amounts outstanding under this facility out of borrowings under the Proposed Secured Credit Facility.

$126.4 million secured term loan facility, dated July 23, 2008, as amended

We entered into a $126.4 million term loan facility to partially finance the acquisition of the drybulk vessel Flecha. In January 2012, we entered into a supplemental agreement with respect to this facility, according to which the vessel Woolloomooloo was pledged as collateral to secure the loan.

This loan bears interest at LIBOR plus a margin, and is repayable in 40 quarterly installments, plus a balloon payment payable together with the last installment in July 2018.

In August 2012, we entered into a fourth supplemental agreement to this facility to amend the minimum security cover covenant to decrease the loan-to-value ratio required under the facility until December 31, 2016 and made a prepayment of $9.1 million.

As of June 30, 2014, we had outstanding borrowings in the amount of $47.9 million under this term loan facility.

On July 11, 2014, we entered into a supplemental agreement with the lender to, among other things, release the vessel Woolloomoloo from the collateral package under this loan.

$103.2 million secured term loan facility, dated June 20, 2008, as amended

We entered into this facility to partially finance the acquisition costs of the drybulk vessels Sorrento and Iguana. This loan bears interest at LIBOR plus a margin. The portion of the loan facility relating to the drybulk vessel Sorrento is repayable in 32 quarterly installments, plus a balloon payment payable together with the last installment in July 2016. The portion of the loan facility relating to the drybulk vessel Iguana was repaid following the sale of that vessel during 2010.

As of June 30, 2014, we had outstanding borrowings in the amount of $22.8 million under this term loan facility. On April 14, 2014, we obtained a waiver letter relating to this facility to amend certain financial covenants until December 31, 2014. The waiver is subject to definitive documentation which we expect to complete in the fourth quarter of 2014.

$125.0 million secured term loan facility, dated May 13, 2008, as amended

We entered into this facility to partially finance the acquisition cost of the drybulk vessels Capri and Positano. The Positano has since been sold. The loan bears interest at LIBOR plus a margin and is repayable in

 

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thirty-two quarterly installments, plus a balloon payment payable together with the last installment in June 2016. As of June 30, 2014, we had outstanding borrowings in the amount of $18.7 million under this term loan facility.

$90.0 million secured term loan facility, dated May 5, 2008, as amended

We entered into this facility to partially finance the acquisition cost of the drybulk vessel Mystic.

The loan bears interest at LIBOR plus a margin, and is repayable in 15 semi-annual installments, with a balloon payment, payable together with the last installment in December 2015. As of June 30, 2014, we had outstanding borrowings in the amount of $33.0 million under this term loan.

$130.0 million secured term loan facility, dated March 13, 2008, as amended

We entered into this facility for working capital and general corporate purposes. The drybulk vessels Toro and Delray were initially mortgaged as collateral under this loan facility.

On August 25, 2010, we entered into a supplemental agreement, which among other things, extended the waiver period to March 31, 2012 with respect to the loan-to-value ratio required to be maintained under the facility, which requirement was reduced during the waiver period, and increased the applicable margin of the facility during the waiver period, with a scheduled reduction to the margin thereafter.

On November 29, 2010, we signed an amended and restated agreement for the substitution of the drybulk vessels Delray and Toro for the drybulk vessel Amalfi. The vessel Delray was sold in February 2010, whereas the vessel Toro was released as security for the loan facility and was replaced by the vessel Amalfi.

On August 1, 2013, we entered into a supplemental agreement to amend certain terms and cure a shortfall in the security cover ratio, and pledged an aggregate of 1,800,000 of its shares of Ocean Rig as additional security under the loans. The share pledge expired on December 31, 2013.

The remaining loan bears interest at LIBOR plus a margin and is repayable in two quarterly installments plus a balloon payment, payable together with the last installment in March 2015. As of June 30, 2014, we had outstanding borrowings in the amount of $30.2 million under this term loan facility.

On April 30, 2014, we reached an agreement with the lender under this term loan facility. Under the terms of the agreement, among other things, the lender has agreed to waive certain financial covenants until December 31, 2014 and relax other financial covenants until maturity, and we have agreed to provide a pledge over certain Ocean Rig shares owned by us until December 31, 2014. The agreement is subject to definitive documentation which we expect to complete in the fourth quarter of 2014.

$47.0 million secured term loan facility, dated November 16, 2007, as amended

We entered into this facility to partially finance the acquisition cost of the secondhand drybulk vessel Oregon. The loan bears interest at LIBOR plus a margin, and is repayable in 32 quarterly installments, with a balloon payment, payable together with the last installment in December 2015. As of June 30, 2014, we had outstanding borrowings in the amount of $15.0 million under this term loan facility.

$90.0 million secured term loan facility, dated October 5, 2007, as amended

We entered into this facility to partially finance the acquisition cost of the secondhand drybulk vessels Samatan and Galveston (ex VOC Galaxy). The loan bears interest at LIBOR plus a margin depending on corporate leverage, and is repayable in 32 quarterly installments beginning in the first quarter of 2008, with a balloon payment, payable together with the last installment in November, 2015. On August 25, 2010, we entered

 

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into a supplemental agreement, which among other things, extended the waiver period to March 31, 2012, with respect to the loan-to-value ratio required to be maintained under the facility, which requirement was reduced during the waiver period, and increased the applicable margin of the facility during the waiver period, with a scheduled reduction to the margin thereafter.

On August 1, 2013, we entered into a supplemental agreement to amend certain terms and cure a shortfall in the security cover ratio, and pledged an aggregate of 3,650,000 of its shares of Ocean Rig as additional security under the loans. The share pledge expired on December 31, 2013.

As of June 30, 2014, we had outstanding borrowings in the amount of $55.3 million under this term loan facility.

On April 30, 2014, we reached an agreement with the lender under this term loan facility. Under the terms of the agreement, among other things, the lender has agreed to waive certain financial covenants until December 31, 2014 and relax other financial covenants until maturity, and we have agreed to provide a pledge over certain Ocean Rig shares owned by us until December 31, 2014. The agreement is subject to definitive documentation, which we expect to complete in the fourth quarter of 2014.

$35.0 million secured term loan facility, dated October 2, 2007, as amended

We entered into this facility to partially finance the acquisition cost of the secondhand drybulk vessel Byron (ex Clipper Gemini). The loan bears interest at LIBOR plus a margin, and is repayable in 36 quarterly installments beginning in the first quarter of 2008, with a balloon payment, payable together with the last installment in October 2016. As of June 30, 2014, we had outstanding borrowings in the amount of $16.0 million under this term loan facility.

$518.8 million senior loan facilities and $110.0 junior loan facilities, each dated March 31, 2006, as amended

We entered into these facilities to provide us with working capital, and to partially finance the acquisition cost of certain vessels. These facilities are comprised of (i) term loan and short-term credit facilities (senior loan facility) and (ii) term loan and short-term credit facilities (junior loan facility).

The senior loan facility bears interest at LIBOR plus a margin. The term loan facility is repayable in 37 quarterly installments, with a balloon payment, payable together with the last installment on May 31, 2016. Each advance from the short term credit facility is repayable in quarterly installments with the next term loan facility installment. As of June 30, 2014, we had outstanding borrowings in the amount of $145.1 million under this term loan facility.

The junior loan facility bears interest at LIBOR plus a margin. The term loan facility is repayable in 37 quarterly installments, with a balloon payment, payable together with the last installment on May 31, 2016. Each advance from the short term credit facility is repayable in quarterly installments with the next term loan facility installment. As of June 30, 2014, we had outstanding borrowings in the amount of $29.3 million under this term loan facility.

On September 29, 2010, we executed two supplemental agreements under its senior and junior facilities. As a result of the amendments in these new supplemental agreements, we regained full compliance with the financial and non-financial covenants under the original facilities, as amended. The Xanadu was sold in September 2010 and its outstanding balance at that date was repaid. The Primera was sold in April 2011 and its outstanding balance at that date was repaid.

On February 9, 2012, we entered into two supplemental agreements under our senior and junior facilities to provide additional security in connection with a shortfall in the security cover ratio required to be maintained under the facilities and pledged 10,000,000 of our shares of Ocean Rig UDW as additional security under the facilities. The share pledge expired on March 31, 2012.

 

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On September 27, 2012, we entered into two additional supplemental agreements under our senior and junior facilities to provide additional security in connection with a shortfall in the security cover ratio required to be maintained under the facilities and pledged 7,800,000 of our shares of Ocean Rig UDW as additional security under the facilities. On November 22, 2013, the 7,800,000 shares of Ocean Rig were released back to us.

On November 18, 2013, we signed a Supplemental Agreement with HSH Nordbank, as Agent, for an amendment of certain terms under our senior and junior loan facilities. Under the terms of this agreement on November 21, 2013, the lending syndicate led by HSH applied our previously pledged restricted cash of $55.0 million against the next five quarterly installments. In addition, the lending syndicate has agreed to relax various financial covenants through the end of 2014.

$70.0 million secured term loan facility, dated February 7, 2011

We entered into this facility to partially finance the construction and acquisition costs of our newbuilding Aframax and Suezmax tankers, Saga and Vilamoura, which were delivered on January 18, 2011 and March 23, 2011, respectively, and for financing general corporate and working capital purposes. The loan bears interest at LIBOR plus a margin and is repayable in 20 quarterly installments, with a balloon payment payable together with the last installment on February 15, 2016. As of June 30, 2014, we had outstanding borrowings in the amount of $54.8 million under this term loan facility.

$32.3 million secured term loan facility, dated April 20, 2011

We entered into this facility to partially finance the construction cost of our newbuilding Aframax tanker Daytona, which was delivered to us on April 29, 2011. The loan bears interest at LIBOR plus a margin and is repayable in 24 quarterly installments of $538,500, plus a balloon payment of $19.4 million payable concurrently with the last installment. As of June 30, 2014, we had outstanding borrowings in the amount of $25.9 million under this term loan facility.

$141.4 million secured term loan facility, dated October 26, 2011

We entered into this facility to partially finance the construction costs of the newbuilding tankers Belmar, Calida, Lipari and Petalidi. The loan bears interest at LIBOR plus a margin and is repayable (i) in 28 installments ranging from $32,500 to $37,500, plus a balloon payment ranging from $7.9 million to $9.5 million, payable together with the last installment, with respect to advances by all of the commercial lenders except one and (ii) in 40 installments ranging from $587,500 to $697,500 with respect to advances by one of the lenders. As of December 31, 2012, we had drawn the full amount under this facility. As of June 30, 2014, we had outstanding borrowings in the amount of $117.8 million under this term loan facility and were not in compliance with a certain financial covenant under this term loan facility.

On July 17, 2014, we signed a supplemental agreement under the $141.4 million secured term loan facility for a waiver of a certain financial covenant until December 31, 2014.

$122.6 million secured credit facility, dated February 14, 2012

We entered into this facility to partially finance the construction costs relating to the vessel Fakarava, our newbuilding VLOC delivered to us in September, 2012, and the vessels Negonego and Rangiroa delivered to us in May 2013 and June 2013, respectively. The facility bears interest at LIBOR plus a margin and is repayable in 48 installments. The facility is secured with guarantees from Cardiff and us. We have drawn down an amount of $38.0 million related to the vessel Fakarava and an aggregate of $81.7 million related for the vessels Negonego and Rangiroa. As of June 30, 2014, we had outstanding borrowings in the amount of $112.7 million under this term loan facility.

 

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$87.7 million secured term loan facility, dated March 19, 2012

In March 2012, we entered into an $87.7 million secured term loan facility to partially finance the construction costs of our Panamax drybulk vessel under construction, Raraka, delivered in March, 2012, and two Capesize drybulk vessels under construction, which were sold in March 2013 prior to delivery and were delivered to their buyers in the second quarter of 2013. The relevant available portion of the loan was then terminated. The facility bears interest at LIBOR plus a margin and is repayable in 32 quarterly installments plus a balloon payment payable together with the last installment. As of June 30, 2014, we had outstanding borrowings in the amount of $16.4 million under this term loan facility.

$107.7 million secured loan agreement, dated October 24, 2012

In October 2012, we entered into a $107.7 million secured loan agreement to partially finance the construction costs of our two newbuilding Aframax tankers Alicante and Mareta, delivered in January 2013, and our Suezmax tanker Bordeira, delivered in January 2013. This loan agreement, which is available in three tranches, bears interest at LIBOR plus a margin and is repayable in 24 equal, semi-annual installments. As of June 30, 2014, we had outstanding borrowings in the amount of $92.5 million under this term loan facility.

On July 31, 2014, we signed a supplemental agreement under the $107.7 million secured term loan facility for a waiver of a certain financial covenant until December 31, 2014.

The credit facilities discussed above are secured by, among other things, mortgages over our vessels, assignments of shipbuilding contracts and refund guarantees, corporate guarantees and assignments of all freights, earnings, insurances and requisition compensation. The credit facilities contain covenants relating to our vessel-owning subsidiaries as borrowers under the loans, including restrictions on changes in management and ownership of the vessels, incurring additional financial indebtedness, creating or permitting to exist on their assets and changes in the general nature of our business; each of which may only be waived without the relevant lenders’ prior consent. In addition, under some of the credit facilities, the vessel-owning companies are not permitted to pay any dividends to us without the requisite lenders’ prior consent. The credit facilities also contain certain financial covenants relating to our financial position, operating performance and liquidity.

$12.5 million Sellers Credit dated March 15, 2013

On March 15, 2013, we reached an agreement with a far eastern shipyard for a $12.5 million sellers credit to us. This credit is repayable to the yard in one bullet repayment two years after date of drawdown and it bears interest at LIBOR plus 300 basis points per annum. We have agreed to provide a pledge of 1,602,500 shares in Ocean Rig that we own, which pledge will be automatically released upon repayment of credit. As of June 30, 2014, we had an outstanding credit in the amount of $12.5 million under this sellers credit.

Credit Facilities Relating to Our Offshore Drilling Segment

$1.3 billion Drillships Ocean Ventures New Senior Secured Term Loan Facility

On July 25, 2014, DOV and Drillships Ventures Projects Inc., a wholly owned subsidiary of DOV formed to serve as a co-borrower with DOV, entered into a Credit Agreement, to which we will refer as the New DOV Credit Agreement, among them, Ocean Rig, the lenders party thereto from time to time, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent, providing for the $1.3 billion New DOV Senior Secured Term Loan Facility. The New DOV Credit Agreement provides that, at the discretion of the lenders and subject to certain conditions, including the entering of definitive agreements, DOV may (i) add one or more incremental term loan facilities in an aggregate principal amount of up to $150.0 million and (ii) seeks commitments for up to $50.0 million for a revolving credit facility having payment priority with respect to the proceeds of collateral over the term loan.

 

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The New DOV Senior Secured Credit Facility has, subject to its extension by the mutual agreement of the parties thereto, a maturity date in the third quarter of 2021. Borrowings under the New DOV Senior Secured Credit Facility will bear interest at the applicable margin to either the base rate or the Eurodollar rate, as applicable and as provided in accordance with the New DOV Credit Agreement. The New DOV Credit Agreement also provides, if an event of default thereunder occurs and is continuing, for the payment of interest at a rate equal to 2% per annum above the rate otherwise required.

The New DOV Credit Agreement provides that DOV will not permit its Consolidated Net Leverage Ratio as of the last day of any period of four consecutive fiscal quarters (each, a “Test Period”) to exceed the ratio of (i) 5.50:1.00 for each such Test Period ending with the fiscal quarter ending December 31, 2015, and (ii) 5.00:1.00 for each such Test Period thereafter. The New DOV Credit Agreement also contains non-financial restrictive covenants, including with respect to the payment of dividends or distributions. The New DOV Credit Agreement provides events of default that are customary for similar credit facilities.

The New DOV Senior Secured Term Loan Facility is fully and unconditionally guaranteed by Ocean Rig and certain subsidiaries of DOV, to which we will refer as the DOV Subsidiary Guarantors. The guarantee by Ocean Rig will be automatically released in the event a Qualified DOV MLP IPO occurs. The New DOV Senior Secured Term Loan Facility is secured, on a first priority basis, by, among other things, a security interest in the Ocean Rig Mylos, the Ocean Rig Skyros and the Ocean Rig Athena and a pledge of certain other assets of DOV and the DOV Subsidiary Guarantors, subject to certain exceptions.

DOV used the proceeds from the New DOV Senior Secured Term Loan Facility to refinance the outstanding amounts under its Old DOV Senior Secured Term Loan Facility and to pay related fees and expenses.

$1.9 billion syndicated term loan facility, dated July 12, 2013

On July 12, 2013, Ocean Rig, through its wholly-owned subsidiaries, Drillships Financing Holding Inc., or DFHI, and Drillships Projects Inc., entered into a $1.8 billion senior secured term loan facility, comprised of tranche B-1 term loans in an aggregate principal amount equal to $975.0 million, to which we will refer as Tranche B-1 Term Loans, and tranche B-2 term loans in an aggregate principal amount equal to $825.0 million, to which we will refer as Tranche B-2 Term Loans and, together with the Tranche B-1 Term Loans, the Term Loans, with respective maturity dates in the first quarter of 2021, subject to adjustment to the third quarter of 2020 in certain circumstances and the third quarter of 2016. The Term Loans are initially guaranteed by Ocean Rig and certain existing and future subsidiaries of DFHI and are secured by certain assets of, and by a pledge of the stock of, DFHI and the subsidiary guarantors. The net proceeds of the Term Loans were used by Ocean Rig to repay in full amounts outstanding under Ocean Rig’s $800.0 million secured term loan agreement and the two $495.0 million senior secured credit facilities, amounting to $1,519.2 million in aggregate. The unamortized balance of deferred finance fees associated with the repaid loans, amounting to approximately $23.3 million was written off upon the extinguishment of the related debt in July 2013. In addition, restricted cash of $131.6 million associated with the respective loans has been released upon the repayment. On July 26, 2013, Ocean Rig through its wholly-owned subsidiaries DFHI and Drillships Projects Inc. entered into an incremental amendment to the $1.8 billion senior term loan for additional tranche B-1 term loans in a principal amount of $100.0 million.

On February 7, 2014, Ocean Rig and its wholly-owned subsidiaries, DFHI and Drillships Projects Inc., refinanced its 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.

As of June 30, 2014, we had outstanding borrowings amounting to $1,885.8 million under this facility.

 

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Securities Indebtedness

5.00% Convertible Senior Notes due 2014 of DryShips Inc.

In November 2009 and April 2010, we issued $460.0 million and $240.0 million, respectively, aggregate principal amount of the Convertible Senior Notes. The Convertible Senior Notes bear interest at 5% per annum payable semi-annually in arrears, commencing June 1, 2010. The $700.0 million aggregate outstanding principal amount of the Convertible Senior Notes is due on December 1, 2014.

The Convertible Senior Notes are unsecured. The holders may convert their Convertible Senior Notes at any time on or after June 1, 2014 prior to maturity. Effective September 19, 2011, the applicable conversion price of the Convertible Senior Notes changed to $6.90 per share. The applicable conversion price is substantially above the current trading price of DryShips common stock, and we believe it is highly unlikely that holders of the Convertible Senior Notes would elect to convert their Convertible Senior Notes into shares of DryShips common stock.

As the Convertible Senior Notes contain a cash settlement option upon conversion at the option of the issuer, we have applied the guidance for “Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”, and, therefore, on the day of the Convertible Senior Notes issuance, bifurcated the $460.0 million principal amount of the Convertible Senior Notes into liability and the equity components of $341.2 million and $118.8 million respectively, by first determining the carrying amount of the liability component of the Convertible Senior Notes by measuring the fair value of a similar liability that does not have an associated equity component. The equity component was calculated by deducting the fair value of the liability component from the total proceeds received at issuance. Additionally, the guidance requires us to accrete the discount of $118.8 million to the principal amount of the Convertible Senior Notes over the term of the Convertible Senior Notes.

A portion of the Convertible Senior Notes will be repaid in part out of the proceeds of this offering. We expect to repay the remaining outstanding balance of the Convertible Senior Notes through borrowings under the Proposed Bridge Loan Facility and incremental borrowings under the Proposed Secured Credit Facility in excess of the amount required to refinance the existing Senior Credit Facility, cash on hand or expected to be on hand and other possible sources such as issuances of equity securities or the incurrence of debt (which may include additional secured borrowings against unpledged collateral).

6.50% Senior Secured Notes due 2017 of Drill Rigs Holdings Inc.

On September 20, 2012, Drill Rigs Holdings Inc., a subsidiary of Ocean Rig to which we will refer as DRH, issued $800.0 million aggregate principal amount of 6.50% Senior Secured Notes due 2017, to which we will refer as the DRH Notes, in a private placement to eligible purchasers in order to fully repay outstanding indebtedness under a certain senior secured credit facility, to finance offshore drilling rigs and to pay all fees and expenses associated therewith. The DRH Notes bear interest at 6.5% per annum payable semi-annually in arrears, commencing on April 1, 2013. The $800.0 million aggregate principal amount of the DRH Notes is due on October 1, 2017.

The DRH Notes are fully and unconditionally guaranteed, on a senior secured basis, by Ocean Rig and certain existing and future subsidiaries of DRH, to which we will refer as the Subsidiary Guarantors. DRH may redeem some or all of the DRH Notes as follows: (i) at any time on or after October 1, 2015, at specified redemption prices, plus accrued and unpaid interest to the date of redemption; (ii) prior to October 1, 2015, for up to 35% of the aggregate original principal amount of the DRH Notes with the net proceeds of one or more equity offering at a price equal to 106.5% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of redemption; (iii) prior to October 1, 2015, at a redemption price equal to 100% of the outstanding principal amount thereof, plus any accrued and unpaid interest thereon to the date of redemption, plus a “make whole” premium; and (iv) prior to October 1, 2015, not more than once in any 12-month period up to $80.0 million in principal amount of the DRH Notes at a redemption price equal to 103% of the principal amount thereof, plus any accrued and unpaid interest thereon to the date of redemption.

 

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Upon the occurrence of a change of control, the noteholders will have the right to require the repurchase of all or any part of its DRH Notes at a price equal to 101% of their original principal amount, plus accrued and unpaid interest to the date of repurchase. In addition, DRH may be required to offer to use all or a portion of the net proceeds of certain asset sales to purchase some or all of the DRH Notes at 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase.

Under the governing the DRH Notes, Ocean Rig, as parent of DRH, may not, and may not permit its restricted subsidiaries to: (i) incur or guarantee additional indebtedness or issue preferred stock or disqualified capital stock; (iii) pay dividends, redeem equity interests or subordinated indebtedness or make other restricted payments; (iv) transfer or sell assets; (v) incur dividend or other payment restrictions affecting restricted subsidiaries; (vii) enter into transactions with affiliates; (ix) engage in businesses other than a business that is the same as Ocean Rig’s current business and any reasonably related businesses; and (viii) designate subsidiaries as unrestricted subsidiaries. In addition, the indenture also restricts the ability of Ocean Rig and certain guarantors of the DRH Notes to, among other things, (i) create or incur liens; (ii) consummate a merger, consolidation or sale of all or substantially all of the assets of DRH, Ocean Rig or the guarantors; and (iii) take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the DRH Notes. Subject to certain exceptions, future subsidiaries of Ocean Rig will become restricted subsidiaries under the indenture governing the DRH Notes and, under limited circumstances, may also become guarantors of the DRH Notes.

The DRH Notes are listed on the Official List of the Irish Stock Exchange and trade on the Global Exchange Market of that exchange.

7.25% Senior Notes due 2019 of Ocean Rig

On March 26, 2014, Ocean Rig issued $500.0 million aggregate principal amount of its 7.25% Senior Notes due 2019, to which we will refer as the Ocean Rig Unsecured Notes. Ocean Rig received net proceeds of approximately $493.6 million in the offering of the Ocean Rig Unsecured Notes, which were used to repurchase or redeem its 9.50% Senior Unsecured Callable Notes due 2016.

Under the terms of the governing indenture, dated March 26, 2014, Ocean Rig is required to pay interest on the Ocean Rig Unsecured Notes at a rate of 7.25% per annum. Ocean Rig is also required to make interest payments on the Ocean Rig Unsecured Notes semi-annually in arrears on April 1 and October 1 of each year, until the final maturity on April 1, 2019. The unsecured notes are not guaranteed by any of Ocean Rig’s subsidiaries. The Ocean Rig Unsecured Notes are Ocean Rig’s general unsecured senior obligations and rank equally in right of payment to all of Ocean Rig’s existing and future debt that is not expressly subordinated in right of payment to the unsecured notes. Ocean Rig may redeem some or all of the unsecured notes as follows: (i) at any time and from time to time from April 1, 2017 to March 31, 2018, at a redemption price equal to 105.438% of the aggregate principal amount, plus accrued and unpaid interest to the date of redemption; (ii) at any time and from time to time from April 1, 2018 to September 30, 2018, at a redemption price equal to 102.719% of the aggregate principal amount, plus accrued and unpaid interest to the date of redemption; and (iii) at any time and from time to time from October 1, 2018 and thereafter, at a redemption price equal to 100% of the aggregate principal amount, plus accrued and unpaid interest to the date of redemption.

If a change of control, as defined in the indenture, occurs, each holder of Ocean Rig Unsecured Notes will have the right to require the repurchase of all or any part of the Ocean Rig Unsecured Notes at a price equal to 101% of their original principal amount, plus accrued and unpaid interest to the date of repurchase. In addition, Ocean Rig may be required to offer to use all or a portion of the net proceeds of certain asset sales to purchase some or all of the unsecured notes at 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase.

The indenture governing the Ocean Rig Unsecured Notes, among other things, limits the ability Ocean Rig and its restricted subsidiaries thereunder, to: (i) incur or guarantee additional indebtedness or issue preferred

 

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stock or disqualified capital stock; (ii) pay dividends, redeem equity interests or subordinated indebtedness or make other restricted payments; (iii) transfer or sell assets; (iv) incur dividend or other payment restrictions affecting restricted subsidiaries; (v) enter into transactions with affiliates; (vi) engage in businesses other than a business that is the same as our current business and any reasonably related businesses; and (vii) designate subsidiaries as unrestricted subsidiaries. In particular, Ocean Rig may not, and may not permit any restricted subsidiaries to, declare or pay any dividend or make any other payment or distribution on account of equity interests of Ocean Rig or any restricted subsidiary or to the direct or indirect holders of Ocean Rig’s or any restricted subsidiaries’ equity interests in their capacity as such, except for certain exceptions, other than subject to certain conditions and limitations on dividend availability. In addition, the indenture also restricts Ocean Rig’s ability and the ability of any other guarantors to, among other things, (a) create or incur liens or (b) consummate a merger, consolidation or sale of all or substantially all of their respective assets. Subject to certain exceptions, Ocean Rig’s future subsidiaries will become restricted subsidiaries under the indenture governing the Ocean Rig Unsecured Notes and, under limited circumstances, may also become guarantors of the unsecured notes.

Compliance Status

As of June 30, 2014, we were in compliance with the financial covenants contained in our debt agreements relating to our offshore drilling fleet but remained in breach of certain financial covenants contained in certain of our loan agreements relating to our drybulk and tanker fleets, referred to collectively as our shipping segment, under which a total of $82.7 million aggregate principal amount was outstanding as of June 30, 2014. We are also in breach of other, non-financial, covenants and representations and warranties in certain of our loan agreements relating to our shipping segment. Even though to date none of the lenders has 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. We are currently in negotiations with certain of our lenders (but not all lenders for facilities under which we are currently in default) to obtain waivers of certain covenant breaches and extend our existing waivers of covenant breaches, or to restructure the affected debt. If we fail to remedy, or obtain a waiver of our current breaches of the covenants under our credit facilities, our lenders may accelerate our indebtedness under the relevant credit facilities, which could trigger the cross-acceleration or cross-default provisions contained in our other credit facilities relating to our shipping segment, under which a total of $896.6 million aggregate principal amount was outstanding as of June 30, 2014, as well as the Notes offered hereby. While we expect that the lenders will not demand payment of the loans relating to our shipping segment under which we were in breach as of June 30, 2014, before their maturity, provided that we pay scheduled loan installments and accumulated or accrued interest as they fall due under the existing credit facilities, we can give you no assurance that this will be the case. We plan to settle the loan interest and scheduled loan repayments with cash expected to be generated from operations and from financing activities. See “Risk Factors—Company Specific Risk Factors for DryShips Inc.—We are not in compliance with certain financial and other covenants contained in our credit facilities relating to our shipping segments, which could result in an acceleration of a substantial portion of our secured indebtedness, which would be an event of default under the Notes,” “—We may be unable to negotiate or extend waivers of covenant breaches under our credit facilities” and “—Our inability to comply with certain financial and other covenants under our loan agreements relating to our shipping segments and our working capital deficit raise substantial doubt about our ability to continue as a going concern.” See also “Financing activities—Long-term debt” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the six-month period ended June 30, 2014 included in our Report on Form 6-K filed with the SEC on August 6, 2014, that is incorporated by reference herein.

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of material United States federal income tax considerations that may be relevant to prospective holders of our Notes. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury Regulations promulgated thereunder, legislative history, judicial authority and administrative interpretations, as of the date of this prospectus supplement, all of which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the U.S. federal income tax considerations to vary substantially from those described below.

This discussion applies only to holders of our Notes that purchase our Notes at their issue price as part of the initial offering and hold our Notes as “capital assets” within the meaning of Section 1221 of the Code (generally, for investment purposes) and does not comment on all aspects of U.S. federal income taxation that may be important to certain holders in light of their particular circumstances, such as holders subject to special tax rules (e.g., financial institutions, regulated investment companies, real estate investment trusts, insurance companies, traders in securities that have elected the mark-to-market method of accounting for their securities, persons liable for alternative minimum tax, broker-dealers, tax-exempt organizations, or former citizens or long-term residents of the United States) or holders that will hold our Notes as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, all of whom may be subject to U.S. federal income tax rules that differ significantly from those summarized below. If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our Notes, the tax treatment of its partners generally will depend upon the status of the partner and the activities of the partnership. Partners in partnerships holding our Notes should consult their own tax advisors to determine the appropriate tax treatment of the partnership’s ownership of our Notes.

No ruling has been requested from the Internal Revenue Service, or the IRS, regarding any matter affecting us, holders of our Notes, or our shareholders.

This discussion does not address any U.S. estate, gift or alternative minimum tax considerations or tax considerations arising under the laws of any state, local or non-U.S. jurisdiction. Holders are urged to consult their own tax advisors regarding the U.S. federal, state, local and other tax consequences of owning and disposing of our Notes.

U.S. Federal Income Taxation of U.S. Holders

As used herein, the term “U.S. Holder” means a beneficial owner of our Notes that is, for U.S. federal income tax purposes: (a) a U.S. citizen or U.S. resident alien; (b) a corporation, or other entity taxable as a corporation, that was created or organized under the laws of the United States, any state thereof, or the District of Columbia; (c) an estate whose income is subject to U.S. federal income taxation regardless of its source; or (d) a trust that either is subject to the supervision of a court within the United States and has one or more U.S. persons with authority to control all of its substantial decisions or has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Certain Additional Payments

There are circumstances in which we might be required to make payments on a Note that would increase the yield of the Note, as described under “Description of Notes—Change of Control Permits Holders to Require the Company to Purchase Notes.” We intend to take the position that the possibility of such payments does not result in the Notes being treated as contingent payment debt instruments under the applicable Treasury Regulations. This determination will be binding on a U.S. Holder unless such U.S. Holder explicitly discloses on a statement attached to the U.S. Holder’s timely filed United States federal income tax return for the taxable year that includes the acquisition date of the Note that such holder’s determination is different. Our position is not binding

 

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on the IRS. If the IRS takes a contrary position, you may be required to accrue interest income based upon a “comparable yield” (as defined in the Treasury Regulations) determined at the time of issuance of the Notes (which is not expected to differ significantly from the actual yield on the Notes), with adjustments to such accruals when any contingent payments are made that differ from the payments based on the comparable yield. In addition, any income on the sale, exchange, retirement or other taxable disposition of the Notes would be treated as interest income rather than as capital gain. You should consult your tax adviser regarding the tax consequences if the Notes were treated as contingent payment debt instruments. The remainder of this discussion assumes that the Notes are not treated as contingent payment debt instruments.

Stated Interest on our Notes

Absent an election to treat all interest as original issue discount, as stated below, stated interest on a Note (including Additional Amounts, if any) generally will be taxable to a U.S. Holder as ordinary income at the time it is received or accrued in accordance with the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes.

Original Issue Discount

The notes will be issued at a substantial discount from their principal amount at maturity. For U.S. federal income tax purposes, the difference between the issue price and the stated principal amount at maturity of each note constitutes original issue discount (“OID”). A U.S. Holder will be required to include OID in its gross income periodically over the term of the notes before receipt of the cash or other payment attributable to such income, regardless of such holder’s regular method of accounting for U.S. federal income tax purposes.

The amount of OID a U.S. Holder must include in gross income as it accrues is the sum of the daily portions of OID with respect to the note for each day during the taxable year or portion of a taxable year on which the U.S. Holder holds the note. The daily portion is determined by allocating to each day of an accrual period a pro rata portion of an amount equal to the excess of (1) the adjusted issue price of the note at the beginning of the accrual period multiplied by the yield to maturity of the note per period over (2) the amount of any qualified stated interest allocable to the accrual period. The accrual period of a note may be of any length the U.S. Holder chooses and may vary in length over the term of the note, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the final day of an accrual period or on the first day of an accrual period.

The issue price of a note for OID purposes is the first price at which a substantial amount of notes are sold to investors (excluding sales to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers), which price is expected to be the issue price shown on the cover of this prospectus supplement. The adjusted issue price of the note at the start of any accrual period is the issue price of the note increased by the accrued original issue discount for each prior accrual period.

A U.S. Holder may elect to treat all interest on any note as OID and calculate the amount includible in gross income under the constant yield method described above. The election is to be made for the taxable year in which the holder acquired the note, and may not be revoked without the consent of the IRS. U.S. Holders should consult with their own tax advisors about this election.

Under these rules, a U.S. Holder will be required to include in gross income increasingly greater amounts of OID in each successive accrual period. Any amount included in income as OID will increase a U.S. Holder’s basis in the note.

Interest paid on our Notes and OID included in gross income will be foreign source income and, depending on your circumstances, treated as either “passive” or “general” category income for purposes of computing allowable foreign tax credits for U.S. federal income tax purposes.

 

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Sale, Exchange and Retirement of the Notes

In general, a U.S. Holder of the notes will have a tax basis in such notes equal to (x) the cost of such notes (y) increased by the amount of OID accrued on the notes and included in the U.S. Holder’s income (z) reduced by payments of principal on such notes. Upon a sale, exchange, or retirement of the notes, a U.S. Holder will generally recognize gain or loss equal to the difference between the amount realized on the sale, exchange or retirement (less any accrued and unpaid interest, which will be taxable as ordinary income) and the U.S. Holder’s tax basis in such notes. Such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the notes is greater than one year at the time of disposition. Certain U.S. Holders, including individuals, may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitation.

Gain or loss recognized by a U.S. Holder on the sale, exchange or retirement of the Notes generally will be treated as U.S.-source gain or loss for foreign tax credit purposes.

Information Reporting and Backup Withholding

In general, information reporting will apply to all payments of interest on, and the proceeds of the sale or other disposition (including a retirement or redemption) of, Notes held by a U.S. Holder unless the U.S. Holder is an exempt recipient and appropriately establishes that exemption. Backup withholding may apply to these payments unless the U.S. Holder provides the appropriate intermediary with a taxpayer identification number, certified under penalties of perjury, as well as certain other information, or otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules is allowable as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely provided to the IRS.

U.S. Return Disclosure Requirements for Individual U.S. Holders

U.S. Holders who are individuals and who hold certain specified foreign financial assets, including financial instruments issued by a foreign corporation not held in an account maintained by a financial institution, with an aggregate value in excess of $50,000 on the last day of a taxable year, or $75,000 at any time during that taxable year, may be required to report such assets on IRS Form 8938 with their tax return for that taxable year. Penalties apply for failure to properly complete and file Form 8938. Prospective investors are encouraged to consult with their own tax advisors regarding the possible application of this disclosure requirement to their investment in our Notes.

U.S. Federal Income Taxation of Non-U.S. Holders

A beneficial owner of our Notes (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is referred to herein as a non-U.S. Holder.

Interest on our Notes

In general, a non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax on interest (including Additional Amounts, if any) on the Notes unless the interest is effectively connected with the non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that the non-U.S. Holder maintains in the United States). If a non-U.S. Holder is engaged in a U.S. trade or business and the interest is deemed to be effectively connected with that trade or business, the non-U.S. Holder generally will be subject to U.S. federal income tax on the interest in the same manner as if it were a U.S. Holder and, in the case of a non-U.S. Holder that is a corporation, may also be subject to the branch profits tax (currently imposed at a rate of 30% or a lower applicable treaty rate).

 

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Sale, Exchange, and Retirement of the Notes

In general, a non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax on any gain resulting from the sale, redemption, exchange, retirement or other taxable disposition of a Note unless (i) the gain is effectively connected with the non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that the non-U.S. Holder maintains in the United States), in which case the non-U.S. Holder will generally be subject to U.S. federal income tax on such gain in the same manner as if such non-U.S. Holder were a U.S. person and, in addition, if the non-U.S. Holder is a foreign corporation, may also be subject to the branch profits tax described above, or (ii) the non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and certain other conditions are met, in which case the non-U.S. Holder may be subject to tax at a 30% rate on gain resulting from the disposition of our Notes which may be offset by U.S.-source capital losses.

Information Reporting and Backup Withholding

Information reporting and backup withholding generally will not apply to payments of interest on Notes held by a non-U.S. Holder if such interest is paid outside the United States by a non-U.S. payor or a non-U.S. middleman (within the meaning of U.S. Treasury Regulations) or the non-U.S. Holder properly certifies under penalties of perjury as to its non-U.S. status and certain other conditions are met or otherwise establishes an exemption.

Any payment received by a non-U.S. Holder from the sale, redemption or other taxable disposition of a Note to or through the U.S. office of a broker will be subject to information reporting and backup withholding unless the non-U.S. Holder properly certifies under penalties of perjury as to its non-U.S. status and certain other conditions are met, or otherwise establishes an exemption. Information reporting and backup withholding generally will not apply to any payment of the proceeds of the sale, redemption or other taxable disposition of a note effected outside the United States by a non-U.S. office of a broker. However, if the broker is considered a U.S. payor or U.S. middleman (within the meaning of U.S. Treasury Regulations), information reporting will apply to the payment of the proceeds of a sale, redemption or other taxable disposition of a note effected outside the United States unless the broker has documentary evidence in its records that the non-U.S. Holder is a non-U.S. Holder and certain other conditions are met. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against the non-U.S. Holder U.S. federal income tax liability, if any, and may entitle the non-U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

MARSHALL ISLANDS TAX CONSIDERATIONS

The following is a discussion of the laws of the Republic of the Marshall Islands, and the current laws of the Republic of the Marshall Islands applicable to persons who do not reside in, maintain offices in or engage in business in the Republic of the Marshall Islands.

Because we do not, and we do not expect that we will, conduct business or operations in the Republic of the Marshall Islands, and because all documentation related to this offering will be executed outside of the Republic of the Marshall Islands, under current Marshall Islands law you will not be subject to Marshall Islands taxation or withholding on distributions, including upon a return of capital, we make to you as a noteholder or shareholder. In addition, you will not be subject to Marshall Islands stamp, capital gains or other taxes on the purchase, ownership or disposition of our Notes, and you will not be required by the Republic of the Marshall Islands to file a tax return relating to the Notes.

Each prospective shareholder is urged to consult its tax counsel or other advisor with regard to the legal and tax consequences, under the laws of pertinent jurisdictions, including the Marshall Islands, of its investment in us. Further, it is the responsibility of each shareholder to file all state, local and non-U.S., as well as U.S. federal tax returns that may be required of it.

 

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UNDERWRITING

Sterne, Agee & Leach, Inc. is acting as the representative of the underwriters named below. Subject to the terms and conditions set forth in the underwriting agreement dated                     , 2014, the underwriters named below have agreed, severally and jointly, to purchase, and we have agreed to sell to the underwriters, the principal amount of each series of Notes set forth opposite each underwriter’s name below.

 

Underwriter		Principal Amount of Notes
Sterne, Agee & Leach, Inc.		$				$
Cowen and Company, LLC
DNB Markets, Inc.
Total		$				$

The underwriting agreement provides that the obligations of the underwriters to purchase the Notes included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the Notes (other than those covered by the underwriters’ option to purchase additional Notes described below) if they purchase any of the Notes.

Notes sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus supplement. Any Notes sold by the underwriters to securities dealers may be sold at a discount from the initial public offering price not to exceed $         per note in the case of sales to retail investors, and $         per note in the case of sales to institutional investors. If all the Notes are not sold at the initial offering price, the underwriter may change the offering price and the other selling terms.

Subject to certain exceptions, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to $         million additional principal amount of Notes at the public offering price less the underwriting discount. To the extent the option is exercised, the underwriters must purchase a principal amount of additional Notes approximately proportionate to the underwriters’ initial purchase commitment. Any Notes issued or sold under the option will be issued and sold on the same terms and conditions as the other Notes that are the subject of this offering.

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering.

 

		Paid by Us
		No Exercise				Full Exercise
Per Note		$		(1)		$		(2)
Total		$				$

 

(1)

For sales to retail investors, the underwriting discount will be $         per note, resulting in proceeds, before expenses, to us of $         per note. For sales to institutional investors, the underwriting discount will be $         per note, resulting in proceeds, before expenses, to us of $         per note.

(2)	Reflects full exercise of the underwriters’ option to purchase $         million additional principal amount of the Notes and assumes the sale of all over-allotment Notes to certain institutions for which the underwriters would receive an underwriting discount of $         per Note.

We estimate that our total expenses for this offering will be approximately $        .

We have agreed to reimburse the underwriters for certain expenses in an amount up to $20,000.

The Notes are a new issue of securities with no established trading market.

 

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In connection with the offering, the underwriters may purchase and sell the Notes in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the underwriters’ option to purchase additional Notes, and stabilizing purchases.

 

•

Short sales involve secondary market sales by the underwriters of a greater principal amount of Notes than they are required to purchase in the offering.

 

•

“Covered” short sales are sales of Notes in an amount up to the principal amount of Notes represented by the underwriters’ option to purchase additional Notes.

 

•

“Naked” short sales are sales of Notes in an amount in excess of the principal amount of Notes represented by the underwriters’ option to purchase additional Notes.

 

•

Covering transactions involve purchases of Notes either pursuant to the underwriters’ option to purchase additional Notes or in the open market in order to cover short positions.

 

•

To close a naked short position, the underwriters must purchase Notes in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Notes in the open market after pricing that could adversely affect investors who purchase in the offering.

 

•

To close a covered short position, the underwriters must purchase Notes in the open market or must exercise the option to purchase additional Notes. In determining the source of Notes to close the covered short position, the underwriters will consider, among other things, the price of Notes available for purchase in the open market as compared to the price at which they may purchase Notes through the underwriters’ option to purchase additional Notes.

 

•

Stabilizing transactions involve bids to purchase Notes so long as the stabilizing bids do not exceed a specified maximum.

Purchases to cover short positions and stabilizing purchases, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the Notes. They may also cause the price of the Notes to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions in the over-the-counter market or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

Conflicts of Interest

The underwriters are a full service financial institution engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The underwriters and their affiliates have in the past performed commercial banking, investment banking and advisory services for us from time to time for which they have received customary fees and reimbursement of expenses and may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In the ordinary course of their various business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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EXPENSES

The following are the estimated offering expenses of the issuance and distribution of the securities being registered under the registration statement of which this prospectus supplement forms a part, all of which will be paid by us.

 

Commission Registration Fee		$
Printing and Engraving Expenses		$
Legal Fees and Expenses		$
Accountants’ Fees and Expenses		$
Trustee Fees and Expenses		$
FINRA Fees		$
Blue Sky Fees (including legal fees related thereto)		$
Miscellaneous Costs		$
Total		$

LEGAL MATTERS

Certain legal matters in connection with the sale of the Notes relating to United States law are being passed upon for us by Seward & Kissel LLP, New York, New York and certain matters relating to Marshall Islands law are being passed upon for us by Seward & Kissel LLP, New York, New York. The underwriters are being represented by Gibson, Dunn & Crutcher LLP, New York, New York.

EXPERTS

The consolidated financial statements of DryShips Inc., appearing in DryShips Inc.’s Annual Report on Form 20-F for the year ended December 31, 2013 (including the schedules appearing therein) and the effectiveness of DryShips Inc.’s internal control over financial reporting as of December 31, 2013, have been audited by Ernst &Young (Hellas) Certified Auditors Accountants S.A., independent registered public accounting firm, as set forth in its reports thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about DryShips Inc.’s ability to continue as a going concern as described in Note 3 to the consolidated financial statements), included therein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Ocean Rig UDW Inc., appearing in Ocean Rig UDW Inc.’s Annual Report on Form 20-F for the year ended December 31, 2013 (including the schedules appearing therein) and the effectiveness of Ocean Rig UDW Inc.’s internal control over financial reporting as of December 31, 2013, have been audited by Ernst &Young (Hellas) Certified Auditors Accountants S.A., independent registered public accounting firm, as set forth in its reports thereon, included therein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The address of Ernst & Young (Hellas) Certified Auditors Accountants S.A. is 11th km National Road Athens-Lamia, 14451, Metamorphosi Athens, Greece and is registered as a corporate body with the public register for company auditors-accountants kept with the Body of Certified-Auditors-Accountants, or SOEL, Greece with registration number 107.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

As required by the Securities Act of 1933, we filed a registration statement relating to the securities offered by this prospectus supplement and its accompanying prospectus with the Commission. This prospectus supplement and prospectus are a part of that registration statement, which includes additional information that may be important to your investment decision.

 

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Government Filings

We file annual and special reports within the SEC. You may read and copy any document that we file at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. 20549. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.

Information Incorporated by Reference

We incorporate by reference in this prospectus the following documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended:

 

•

Our Annual Report on Form 20-F for the year ended December 31, 2013, filed by us with the SEC on February 21, 2014, which contains audited consolidated financial statements for the most recent fiscal year for which those statements have been filed;

 

•

Our report on Form 6-K filed with the SEC on August 6, 2014, which contains management’s discussion and analysis of financial condition and results of operations and unaudited interim condensed consolidated financial statements as of and for the six-month period ended June 30, 2014;

 

•

Item 18 only of the Annual Report on Form 20-F for the year ended December 31, 2013 filed by Ocean Rig UDW Inc. with the SEC on February 20, 2014, which contains audited consolidated financial statements for the most recent fiscal year for which those statements have been filed; and

 

•

The report on Form 6-K filed by Ocean Rig UDW Inc. with the SEC on August 6, 2014, which contains management’s discussion and analysis of financial condition and results of operations and unaudited interim condensed consolidated financial statements as of and for the six-month period ended June 30, 2014.

We are also incorporating by reference all subsequent annual reports on Form 20-F that we file with the Commission and certain current reports on Form 6-K that we furnish to the Commission after the date of this prospectus supplement (if they that they are incorporated by reference into this prospectus supplement) until the completion of this offering. In all cases, you should rely on the later information over different information included in this prospectus supplement of the accompanying prospectus.

You should assume that the information appearing in this prospectus supplement and the accompanying prospectus as well as the information incorporated by reference is accurate as of the dates on the front cover of those documents only. Our business, financial condition and results of operations and prospects may have changed since those dates. Any information that we file later with the SEC and incorporate by reference into this prospectus supplement will automatically update and supersede any applicable information in this prospectus supplement.

You may read and copy any document we file with the SEC at the SEC public reference room located at:

100 F Street, N.E.

Room 1580

Washington, D.C. 20549

Please call the SEC at 1-800-SEC-0330 for further information on the public reference room and its copy charges. Our SEC filings are also available to the public on the SEC’s website at http://www.sec.gov and through the NASDAQ Global Select Market, 1 Liberty Plaza, New York, New York 10006, on which our common shares are traded. The information contained in or accessible from the SEC’s website is not part of this prospectus supplement.

 

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You may obtain a copy of above mentioned filing or any subsequent filing we incorporated by reference to this prospectus supplement by writing or telephoning us at the following address:

DryShips Inc.

Athens Shipping Office

109 Kifisias Avenue and Sina Street, 151 24 Marousi

Athens, Greece

Attention: Chief Executive Officer

Telephone: (011) (30) (210) 809 0570

 

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Prospectus

DRYSHIPS INC.

 

Common Shares, Preferred Share Purchase

Rights, Preferred Shares, Debt Securities, Guarantees,

Warrants, Purchase Contracts, Rights and Units

Through this prospectus, we may periodically offer:

 

(1)

shares of our common stock, including related preferred stock purchase rights;

 

(2)

shares of our preferred stock;

 

(3)

our debt securities, which may be guaranteed by one or more of our subsidiaries;

 

(4)

our warrants;

 

(5)

our purchase contracts;

 

(6)

our rights; and

 

(7)

our units.

The prices and terms of the securities that we or any shareholder will offer will be determined at the time of their offering and will be described in a supplement to this prospectus. We will not receive any of the proceeds from the sale of securities by any selling shareholder.

Our common shares are currently listed on the NASDAQ Global Select Market under the symbol “DRYS.”

The securities issued under this prospectus may be offered directly or through underwriters, agents or dealers. The names of any underwriters, agents or dealers will be included in a supplement to this prospectus.

An investment in these securities involves risks. See the section entitled “Risk Factors” beginning on page 10 of this prospectus, and other risk factors contained in the applicable prospectus supplement and in the documents incorporated by reference herein and therein.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is August 30, 2013

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TABLE OF CONTENTS

 

		Page
PROSPECTUS SUMMARY			2
RISK FACTORS			10
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS			59
PER SHARE MARKET PRICE INFORMATION			61
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS			62
CAPITALIZATION			63
USE OF PROCEEDS			64
PLAN OF DISTRIBUTION			65
ENFORCEMENT OF CIVIL LIABILITIES			67
DESCRIPTION OF CAPITAL STOCK			68
DESCRIPTION OF PREFERRED SHARES			77
DESCRIPTION OF WARRANTS			78
DESCRIPTION OF DEBT SECURITIES			79
DESCRIPTION OF PURCHASE CONTRACTS			89
DESCRIPTION OF RIGHTS			90
DESCRIPTION OF UNITS			91
LEGAL MATTERS			92
WHERE YOU CAN FIND ADDITIONAL INFORMATION			92

 

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Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts presented in, United States dollars and financial information presented in this prospectus that is derived from financial statements incorporated by reference is prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. We have a fiscal year end of December 31.

This prospectus is part of a registration statement that we filed with the U.S. Securities and Exchange Commission, or the SEC, using a shelf registration process. Under the shelf registration process, we or any selling shareholder may sell our common shares (including related preferred stock purchase rights), preferred shares, debt securities, warrants, purchase contracts, units and rights described in this prospectus from time to time in one or more offerings. This prospectus only provides you with a general description of the securities we or any selling shareholder may offer. Each time we or any selling shareholder offer securities, we will provide you with a supplement to this prospectus that will describe the specific information about the securities being offered and the specific terms of that offering. The supplement may also add, update or change the information contained in this prospectus. If there is any inconsistency between the information in this prospectus and any prospectus supplement, you should rely on the prospectus supplement. Before purchasing any securities, you should read carefully both this prospectus and any supplement, together with the additional information described below.

This prospectus and any prospectus supplement are part of a registration statement we filed with the SEC and do not contain all the information in the registration statement. Forms of the indenture and other documents establishing the terms of the offered securities are filed as exhibits to the registration statement. Statements in this prospectus or any prospectus supplement about these documents are summaries and each statement is qualified in all respects by reference to the document to which it refers. You should refer to the actual documents for a more complete description of the relevant matters. For further information about us or the securities offered hereby, you should refer to the registration statement, which you can obtain from the SEC as described below under the section entitled “Where You Can Find Additional Information.”

You should rely only on the information contained or incorporated by reference in this prospectus and in any prospectus supplement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We will not make an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and the applicable supplement to this prospectus is accurate as of the date on its respective cover, and that any information incorporated by reference is accurate only as of the date of the document incorporated by reference, unless we indicate otherwise. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

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This section summarizes some of the information that is contained later in this prospectus or in other documents incorporated by reference into this prospectus. As an investor or prospective investor, you should review carefully the risk factors and the more detailed information that appears later in this prospectus or is contained in the documents that we incorporate by reference into this prospectus.

Unless the context otherwise requires, as used in this prospectus, the terms “we,” “our,” “us,” and the “Company” refer to DryShips Inc. and all of its subsidiaries.

We use the term deadweight, or “dwt,” in describing the size of vessels. Dwt, expressed in metric tons each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel can carry.

PROSPECTUS SUMMARY

Our Company

We are a Marshall Islands corporation with our principal executive offices in Athens, Greece and were incorporated in September 2004. We are an international provider of ocean transportation services for drybulk and petroleum cargoes through our ownership and operation of drybulk carrier vessels and oil tankers and offshore drilling services through the ownership and operation by our majority-owned subsidiary, Ocean Rig UDW, of ultra-deepwater drilling units. Our common stock is listed on the NASDAQ Global Select Market where it trades under they symbol “DRYS.”

As of August 19, 2013, we owned a fleet of (i) 42 drybulk carriers (including newbuildings), comprised of 12 Capesize, 28 Panamax and 2 Supramax vessels, which have a combined deadweight tonnage of approximately 4.4 million dwt and an average age of approximately 8.9 years; (ii) 10 drilling units (including newbuildings), comprised of two modern, fifth generation, advanced capability ultra-deepwater semisubmersible offshore drilling rigs, four sixth generation, advanced capability ultra-deepwater drillships and four seventh generation, advanced capability ultra-deepwater drillships; and (iii) ten oil tankers, comprised of six Aframax and four Suezmax tankers with a combined deadweight tonnage of over 1.3 million.

Our drybulk carriers, drilling units and oil tankers operate worldwide within the trading limits imposed by our insurance terms and do not operate in areas where United States, European Union or United Nations sanctions have been imposed.

Ocean Rig UDW comprises our entire offshore drilling segment, which represented approximately 70.6% of our total assets and approximately 77.2% of our total revenues for the six-month period ended June 30, 2013. As we have done in the past, we may, in the future, sell a minority voting and economic interest in Ocean Rig UDW in a public offering or distribute, or spin off, a minority voting and economic interest in Ocean Rig UDW to holders of our voting stock. There can be no assurance, however, that we will complete any such transaction, which, among other things, will be subject to market conditions.

In addition, we may sell a minority voting and economic interest in our wholly-owned subsidiary, Olympian Heracles Holding, the indirect owner and operator of our oil tankers, in a public offering sometime in the future. Alternatively, we may distribute, or spin off, a minority voting and economic interest in Olympian Heracles Holding to holders of our voting stock (including holders of our preferred shares), or complete some combination of a public offering and distribution to holders of our voting stock. Olympian Heracles Holding owns our operating tankers. There can be no assurance, however, that we will complete any such transaction, which, among other things, will be subject to market conditions.

 

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Our Drybulk Operations

Management of our Drybulk Vessels

We do not employ personnel to run our vessel operating and chartering business on a day-to-day basis. Prior to January 1, 2011, Cardiff Marine Inc., or Cardiff, a company affiliated with our Chairman, President and Chief Executive Officer, Mr. George Economou, served as our technical and commercial manager pursuant to separate management agreements with each of our drybulk vessel-owning subsidiaries. Effective January 1, 2011, we entered into new management agreements with TMS Bulkers, a related party entity, that replaced our management agreements with Cardiff, on the same terms as our management agreements with Cardiff, as a result of an internal restructuring of Cardiff for the purpose of enhancing Cardiff’s efficiency and the quality of its ship-management services. For a description of the terms of our management agreements with TMS Bulkers.

We believe that TMS Bulkers, as a successor to Cardiff, which was in the business of providing commercial and technical management for over 22 years, has established a reputation in the international shipping industry for operating and maintaining a fleet with high standards of performance, reliability and safety.

TMS Bulkers utilizes the same experienced personnel utilized by Cardiff in providing us with comprehensive 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.

TMS Bulkers’ completed implementation of the ISM Code, in 2010. TMS Bulkers has obtained documents of compliance for its office and safety management certificates for its vessels as required by the ISM Code and is ISO 14001 certified in recognition of its commitment to overall quality.

TMS Bulkers is beneficially owned by our Chairman, President and Chief Executive Officer, Mr. George Economou. Mr. Economou under the guidance of our board of directors, manages our business as a holding company, including our own administrative functions, and we monitor TMS Bulkers’ performance under the management agreements.

Chartering of our Drybulk Vessels

We actively manage the deployment of our drybulk fleet between long-term time charters and short-term time charters or spot charters, which generally last from several weeks to several days, and long-term time charters and bareboat charters, which can last up to several years.

As of August 19, 2013, 19 of our drybulk vessels were employed under time charters and 19 of our drybulk vessels were employed in the spot market.

Our Tanker Operations

Management of our Tankers

Since January 1, 2011, TMS Tankers, a company controlled by our Chairman, President and Chief Executive Officer, Mr. George Economou, has provided the commercial and technical management functions of our tankers, including while our tankers were under construction, pursuant to separate management agreements entered into with TMS Tankers for each of our tankers.

TMS Tankers is beneficially owned by our Chairman, President and Chief Executive Officer, Mr. George Economou. Mr. Economou, under the guidance of our board of directors, manages our business as a holding company, including our own administrative functions, and we monitor TMS Tankers’ performance under the management agreements. We believe that TMS Tankers, as a successor to Cardiff, which was in the business of

 

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providing commercial and technical management for over 22 years, has established a reputation in the international shipping industry for operating and maintaining a fleet with high standards of performance, reliability and safety.

Employment of our Tankers

We operate our tankers in the spot market. As of August 19, 2013, one Aframax tanker operates in the Sigma tanker pool. In the past, three of our other Aframax tankers operated in the Sigma tanker pool and three of our Suezmax tankers operated in the Blue Fin tanker pool.

TMS Tankers may seek to hedge our spot exposure through the use of freight forward agreements or other financial instruments. In addition, we may employ our tankers on fixed-rate time charters in the future. Accordingly, we actively monitor macroeconomic trends and governmental rules and regulations that may affect tanker rates in an attempt to optimize the deployment of our fleet.

Our Offshore Drilling Operations

Management of Our Offshore Drilling Operations

Management Agreements

Ocean Rig’s wholly-owned subsidiary, Ocean Rig AS, provides supervisory management services including onshore management, to our operating drilling rigs and drillships pursuant to separate management agreements entered into with each of the drilling unit-owning subsidiaries. In addition, Ocean Rig AS provides supervisory management services for our seventh generation drillships under construction.

Under the terms of these management agreements, Ocean Rig AS, through its affiliates, is responsible for, among other things, (i) assisting in construction contract technical negotiations, (ii) securing contracts for the future employment of the drilling units, and (iii) providing commercial, technical and operational management for the drillships.

Effective December 21, 2010, we terminated our management agreements with Cardiff, pursuant to which Cardiff provided supervisory services in connection with the construction of the Ocean Rig Corcovado and the Ocean Rig Olympia These agreements were replaced with the Global Services Agreement described below under “Services Agreements.”

Services Agreements

On December 1, 2010, DryShips Inc. entered into the Global Services Agreement with Cardiff, effective December 21, 2010, pursuant to which we engaged Cardiff to act as consultant on matters of chartering and sale and purchase transactions for our offshore drilling units. Effective January 1, 2013, the Global Services Agreement was terminated by mutual agreement of the parties. Also effective January 1, 2013, Ocean Rig Management Inc., or Ocean Rig Management, our majority-owned subsidiary and a wholly-owned subsidiary of Ocean Rig UDW, entered into a new services agreement with an affiliate of Cardiff.

On September 1, 2010, DryShips Inc. entered into a consultancy agreement, or the DryShips Consultancy Agreement, with Vivid Finance Ltd., or Vivid Finance, a company controlled by our Chairman, President and Chief Executive Officer, Mr. George Economou, pursuant to which Vivid Finance provides consulting services relating to (i) the identification, sourcing, negotiation and arrangement of new loan and credit facilities, interest swap agreements, foreign currency contracts and forward exchange contracts; (ii) the raising of equity or debt in the public capital markets; and (iii) the renegotiation of existing loan facilities and other debt instruments. Effective January 1, 2013, Ocean Rig Management entered into a separate consultancy agreement, or the Ocean Rig Consultancy Agreement, with Vivid Finance, on the same terms and conditions as the DryShips Consultancy Agreement.

 

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Our Fleet

The table below describes our fleet profile as of August 19, 2013:

 

Year Built

DWT

Type

Gross rate Per day

Redelivery

Earliest

Latest

Drybulk vessels

Capesize:

Rangiroa

2013

206,000

Capesize

$23,000

Apr-18

Nov-23

Negonego

2013

206,000

Capesize

$21,500

Mar-20

Feb-28

Fakarava

2012

206,000

Capesize

$25,000

Sept-15

Sept-20

Mystic

2008

170,040

Capesize

$52,310

Aug-18

Dec-18

Robusto

2006

173,949

Capesize

$26,000

Aug-14

Apr-18

Cohiba

2006

174,234

Capesize

$26,250

Oct-14

Jun-19

Montecristo

2005

180,263

Capesize

$23,500

May-14

Feb-19

Flecha

2004

170,012

Capesize

$55,000

Jul-18

Nov-18

Manasota

2004

171,061

Capesize

$30,000

Jan-18

Aug-18

Partagas

2004

173,880

Capesize

$11,500

Jun-14

Oct-14

Alameda

2001

170,662

Capesize

$27,500

Nov-15

Jan-16

Capri

2001

172,579

Capesize

$10,000

Nov-13

Mar-14

Panamax:

Raraka

2012

76,037

Panamax

$7,500

Jan-15

Mar-15

Woolloomooloo

2012

76,064

Panamax

$7,500

Dec-14

Feb-15

Amalfi

2009

75,206

Panamax

Spot

N/A

N/A

Rapallo

2009

75,123

Panamax

Spot

N/A

N/A

Catalina

2005

74,432

Panamax

Spot

N/A

N/A

Majorca

2005

74,477

Panamax

Spot

N/A

N/A

Ligari

2004

75,583

Panamax

$9,250

Sep-13

Nov-13

Saldanha

2004

75,707

Panamax

Spot

N/A

N/A

Sorrento

2004

76,633

Panamax

$24,500

Aug-21

Dec-21

Mendocino

2002

76,623

Panamax

Spot

N/A

N/A

Bargara

2002

74,832

Panamax

Spot

N/A

N/A

Oregon

2002

74,204

Panamax

$9,650

Sept-13

Nov-13

Ecola

2001

73,931

Panamax

Spot

N/A

N/A

Samatan

2001

74,823

Panamax

Spot

N/A

N/A

Sonoma

2001

74,786

Panamax

Spot

N/A

N/A

Capitola

2001

74,816

Panamax

Spot

N/A

N/A

Levanto

2001

73,925

Panamax

Spot

N/A

N/A

Maganari

2001

75,941

Panamax

Spot

N/A

N/A

Coronado

2000

75,706

Panamax

Spot

N/A

N/A

Marbella

2000

72,561

Panamax

Spot

N/A

N/A

Redondo

2000

74,716

Panamax

$9,250

Sept-13

Nov-13

Topeka

2000

74,716

Panamax

$8,450

Oct-13

Dec-13

Ocean Crystal

1999

73,688

Panamax

Spot

N/A

N/A

Helena

1999

73,744

Panamax

Spot

N/A

N/A

Supramax:

Byron

2003

51,118

Supramax

Spot

N/A

N/A

Galveston

2002

51,201

Supramax

Spot

N/A

N/A

 

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Year Built

DWT

Type

Gross rate Per day

Redelivery

Earliest

Latest

Newbuildings

Panamax:

Newbuilding Ice –class Panamax 1

2014

75,900

Panamax

Spot

N/A

N/A

Newbuilding Ice –class Panamax 2

2014

75,900

Panamax

Spot

N/A

N/A

Newbuilding Ice –class Panamax 3

2014

75,900

Panamax

Spot

N/A

N/A

Newbuilding Ice –class Panamax 4

2014

75,900

Panamax

Spot

N/A

N/A

Tanker Vessels

Suezmax:

Bordeira

2013

158,300

Suezmax

Spot

N/A

N/A

Petalidi

2012

158,300

Suezmax

Spot

N/A

N/A

Lipari

2012

158,300

Suezmax

Spot

N/A

N/A

Vilamoura

2011

158,300

Suezmax

Spot

N/A

N/A

Aframax:

Alicante

2013

115,200

Aframax

Spot

N/A

N/A

Mareta

2013

115,200

Aframax

Spot

N/A

N/A

Calida

2012

115,200

Aframax

Spot

N/A

N/A

Saga

2011

115,200

Aframax

Spot

N/A

N/A

Daytona

2011

115,200

Aframax

Spot

N/A

N/A

Belmar

2011

115,200

Aframax

Spot

N/A

N/A

 

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Drilling Units

 

Drilling Unit		Year Built or Scheduled Delivery/ Generation		Water Depth to Welhead (ft)				Drilling Depth to Oil Field (ft)				Customer		Expected Contract Term(1)				Maximum Dayrate				Drilling Location
Operating Drilling Rigs
Leiv Eiriksson		2001/5th			7,500				30,000			Rig Management Norway AS(2)			Q2 2013– Q1 2016			$	545,000			Norwegian Continental Shelf
Eirik Raude		2002/5th			10,000				30,000			Lukoil Overseas Sierra-Leone B.V.			Q3 2013 – Q3 2014			$	575,000			Sierra Leone, Ivory Coast
Operating Drillships
Ocean Rig Corcovado		2011/6th			10,000				40,000			Petroléo Brasileiro S.A.			Q2 2012– Q2 2015			$	444,000	(3)		Brazil
Ocean Rig Olympia		2011/6th			10,000				40,000			Total E&P Angola			Q3 2012– Q3 2015	(4)		$	593,246			West Africa
Ocean Rig Poseidon		2011/6th			10,000				40,000			ENI Angola S.p.A.			Q2 2013– Q2 2016			$	690,300	(5)		Angola
Ocean Rig Mykonos		2011/6th			10,000				40,000			Petroléo Brasileiro S.A.			Q1 2012– Q1 2015			$	443,000	(3)		Brazil
Ocean Rig Mylos		2013/7th			12,000				40,000			Repsol Sinopec Brasil S.A.			Q3 2013– Q3 2016			$	602,304	(6)		Brazil
Ocean Rig Skyros		Q4 2013/7th			12,000				40,000			Total E&P Angola Major Oil Company(7)			Q4 2013– Q4 2014 Q1 2015			$	575,000			Angola   West Africa
Ocean Rig Athena		Q4 2013/7th			12,000				40,000			ConocoPhillips Angola 36 & ConocoPhillips Angola 37 Ltd			Q4 2013– Q1 2017			$	654,487	(8)		Angola
Ocean Rig Apollo		Q1 2015/7th			12,000				40,000			Total E&P Angola			Q1 2015– Q1 2018				586,000	(9)		Congo

 

(1)	Not including the exercise of any applicable options to extend the term of the contract.

 

(2)	Rig Management Norway is the coordinator for the consortium under the contract. The contract has a minimum duration of 1,070 days and includes three options of up to six wells each that must be exercised prior to the expiration of the firm contract period in the first quarter of 2016.

 

(3)	Approximately 20% of the maximum dayrates are service fees paid to us in Brazilian Real (R$). The maximum dayrate disclosed in this table is based on the August 19, 2013 exchange rate of R$2.41:$1.00.

 

(4)

Total E&P Angola has the option to extend the term of the contract for two additional one-year periods at the dayrate of $584,450, adjusted annually for inflation, with the first option exercisable within one year from the commencement date under the drilling contract, and the second option exercisable within one year after the date of exercise of the first option.

 

(5)

The maximum dayrate of $690,300 is the average maximum dayrate applicable during the initial three-year term of the contract. Under the contract, the initial maximum dayrate of $670,000 will increase annually at a rate of 3%, beginning twelve months after the commencement date, during the term of the contract. ENI has the option to extend the term of the contract by two optional periods of one-year each. In the event ENI exercises the option for both optional years on or before the date the contract is commenced, the maximum dayrate will decrease by $15,000 per day and, in the event ENI exercises the option for both optional years within the first year of the date the contract is commenced, the maximum dayrate will decrease by $10,000 per day.

 

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(6)

To commence upon delivery of the drillship from the shipyard or to the drilling location and the provisional acceptance of the drillship by Repsol at an average maximum dayrate of approximately $602,304 over the term of the contract. A portion of the maximum dayrate is service fees paid to us in Brazilian Real (R$). The average maximum dayrate disclosed in this table is based on the August 19, 2013 exchange rate of R$2.41:$1.00. Under the contract, Repsol has options to extend the contract for up to two years beyond the initial three-year contract period.

 

(7)	We have received a letter of award from a major oil company for drilling offshore West Africa for a period of six years. The contract will commence in direct continuation of the previous contract and is subject to final documentation and receipt of regulatory approvals.

 

(8)

The maximum dayrate of $654,487 is the average maximum dayrate applicable during the initial three-year term of the contract. Under the contract, the initial maximum dayrate of $633,500 is subject to a fixed annual escalation of approximately 6% during the contract period. Under the contract, ConocoPhillips has the option to extend the initial contract period by up to two years.

 

(9)

The maximum dayrate of approximately $586,000 is the average maximum dayrate applicable during the initial three-year term of the contract. Under the contract, the initial maximum dayrate of $580,000 is subject to a fixed escalation of 2% during the contract period. Under the contract, the counterparty has the option to extend the initial contract period by up to two years.

Corporate Structure

DryShips Inc. is a holding company existing under the laws of the Republic of the Marshall Islands. We maintain our principal executive offices at 74-76 V. Ipeirou Street, 151 25, Marousi, Athens, Greece. Our telephone number at that address is (011) (30) (210) 809 0570. Our website address is www.dryships.com. The information on our website is not a part of this prospectus.

Recent Developments

Vessel Acquisitions and Sales

In March 2013 and April 2013, the Company sold its newbuilding Capesize bulk carriers Hull 1241 and 1242, to an unaffiliated third party and novated the contracts for the construction of its newbuilding Very Large Ore Carriers Hulls 1239 and 1240, in favor of an entity related to Mr. George Economou. These four vessels had remaining yard installments of approximately $178 million against which the Company had no committed debt. Under the terms of the sale agreements, the Company made payments of only $29 million, thus eliminating approximately $149 million in capital expenditures.

On July 10, 2013, Ocean Rig entered into a drilling contract with Total E&P Angola for a five-well program or a minimum of 275 days for its ultra deepwater drillship Ocean Rig Skyros for drilling offshore West Africa. The Ocean Rig Skyros is expected to commence this contract upon delivery from the shipyard, in November 2013.

On July 19, 2013, Ocean Rig received a Letter of Award for its ultra deepwater drillship Ocean Rig Skyros, from a major oil company. The Letter of Award is for a six-year contract for drilling offshore West Africa. The contract is expected to commence in direct continuation of the previous contract of the Ocean Rig Skyros with Total E&P Angola before the first quarter of 2015.

On July 30, 2013, Ocean Rig signed definitive documentation with Total E&P Congo, following the previously announced Letter of Award, for its ultra deepwater drillship Ocean Rig Apollo. The contract is for a three-year drilling campaign offshore West Africa and is expected to commence in the first quarter of 2015.

On August 19, 2013, Ocean Rig took delivery of the Ocean Rig Mylos and on August 20, 2013 drew down an amount of $450.0 million under its $1.35 billion credit facility dated February 28, 2013.

 

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Credit Agreements and Term Loans

On July 12, 2013, Ocean Rig, through its wholly-owned subsidiaries, Drillships Financing Holding Inc. (“DFHI”), and Drillships Projects Inc., entered into a $1.8 billion senior secured term loan facility, comprised of tranche B-1 term loans in an aggregate principal amount equal to $975.0 million and tranche B-2 term loans in an aggregate principal amount equal to $825.0 million, with respective maturity dates in the first quarter of 2021, subject to adjustment to the third quarter of 2020 in certain circumstances, and the third quarter of 2016.

On July 26, 2013, Ocean Rig, through its wholly-owned subsidiaries, DFHI, and Drillships Projects Inc. entered into an incremental amendment to the $1.8 billion senior term loan facility dated July 12, 2013, for additional tranche B-1 term loans in a principal amount of $100.0 million.

On August 1, 2013, the Company entered into two supplemental agreements related to two term bank loans dated October 5, 2007 and March 13, 2008, respectively, to amend certain terms and cure a shortfall in the security cover ratio, and pledged an aggregate of 5,450,000 of its shares of Ocean Rig as additional security under the loans. The share pledge expires on December 31, 2013.

The Securities We May Offer

We may use this prospectus to offer our:

 

•

common shares, including related preferred stock purchase rights;

 

•

preferred shares;

 

•

debt securities, which may be guaranteed by one or more of our subsidiaries;

 

•

warrants;

 

•

purchase contracts; and

 

•

units.

We or any selling shareholder may also offer securities of the types listed above that are convertible or exchangeable into one or more of the securities listed above.

A prospectus supplement will describe the specific types, amounts, prices, and detailed terms of any of these offered securities and may describe certain risks in addition to those set forth below associated with an investment in the securities. Terms used in the prospectus supplement will have the meanings described in this prospectus, unless otherwise specified.

 

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RISK FACTORS

An investment in our securities involves a high degree of risk. You should consider carefully the risks set forth below and in any documents we have incorporated by reference, as well as those under the heading “Risk Factors” in any prospectus supplement, before investing in the securities offered by this prospectus. You should also carefully consider the risks described in any future reports that summarize the risks that may materially affect our business, before making an investment in our securities. Please see the section of this prospectus entitled “Where You Can Find Additional Information—Information Incorporated by Reference.”

Some of the following risks relate principally to the industries 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, cash flows or our ability to pay dividends, if any, in the future, or the trading price of our common stock.

Risk Factors Relating to the Drybulk Shipping Industry

Charterhire rates for drybulk carriers are volatile and remain significantly below their high in 2008, which has had and may continue to have an adverse effect on our revenues, earnings and profitability and our ability to comply with our loan covenants.

The degree of charterhire rate volatility among different types of drybulk vessels has varied widely; however, the prolonged downturn in the drybulk charter market has severely affected the entire drybulk shipping industry and charterhire rates for drybulk vessels have declined significantly from historically high levels. The Baltic Dry Index, or the BDI, an index published daily by the Baltic Exchange Limited, a London-based membership organization that provides daily shipping market information to the global investing community, is a daily average of charter rates for key drybulk routes, which has long been viewed as the main benchmark to monitor the movements of the drybulk vessel charter market and the performance of the overall drybulk shipping market. The BDI declined 94% in 2008 from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and has remained volatile since then. The BDI recorded a 25-year record low of 647 in 2012. While the BDI increased to 1,115 as of August 19 2013, there can be no assurance that the drybulk charter market will increase further, and the market could decline.

The decline and volatility in charter rates has been due to various factors, including the over-supply of drybulk vessels, the lack of trade financing for purchases of commodities carried by sea, which resulted in a significant decline in cargo shipments. The decline and volatility in charter rates in the drybulk market also affects the value of our drybulk vessels, which follows the trends of drybulk charter rates, and earnings on our charters, and similarly, affects our cash flows, liquidity and compliance with the covenants contained in our loan agreements. If low charter rates in the drybulk market continue or decline further for any significant period, this could have an adverse effect on our vessel values and our ability to continue as a going concern and comply with the financial covenants in our loan agreements. In such a situation, unless our lenders were willing to provide waivers of covenant compliance or modifications to our covenants, our lenders could accelerate our debt and we could face the loss of our vessels. In addition, the decline in the drybulk carrier charter market has had and may continue to have additional adverse consequences for the drybulk shipping industry, including an absence of financing for vessels, no active secondhand market for the sale of vessels, charterers seeking to renegotiate the rates for existing time charters, and widespread loan covenant defaults in the drybulk shipping industry. Accordingly, the value of our common shares could be substantially reduced or eliminated.

Because we currently employ 19 of our vessels in the spot market and pursuant to short-term time charters, we are exposed to changes in spot market and short-term charter rates for drybulk carriers and such changes may affect our earnings and the value of our drybulk carriers at any given time. In addition, we have five vessels scheduled to come off of their current charters in 2013 for which we will be seeking new employment. We may

 

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not be able to successfully charter our vessels in the future or renew existing charters at rates sufficient to allow us to meet our obligations. Fluctuations in charter rates result from changes in the supply of and demand for vessel capacity and changes in the supply and demand for the major commodities carried by water internationally. Because the factors affecting the supply of 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:

 

•

supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;

 

•

changes in the exploration or production of energy resources, commodities, semi-finished and finished consumer and industrial products;

 

•

the location of regional and global exploration, production and manufacturing facilities;

 

•

the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;

 

•

the globalization of production and manufacturing;

 

•

global and regional economic and political conditions, including armed conflicts, terrorist activities, embargoes and strikes;

 

•

natural disasters and other disruptions in international trade;

 

•

developments in international trade;

 

•

changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;

 

•

environmental and other regulatory developments;

 

•

currency exchange rates; and

 

•

weather.

The factors that influence the supply of vessel capacity include:

 

•

the number of newbuilding deliveries;

 

•

port and canal congestion;

 

•

the scrapping rate of older vessels;

 

•

vessel casualties; and

 

•

the number of vessels that are out of service.

In addition to the prevailing and anticipated freight rates, factors that affect the rate of newbuilding, scrapping and laying-up include newbuilding prices, secondhand vessel values in relation to scrap prices, costs of bunkers and other operating costs, costs associated with classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile of the existing drybulk fleet in the market and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations. These factors influencing the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.

We anticipate that the future demand for our drybulk carriers will be dependent upon continued economic growth in the world’s economies, including China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargoes to be transported

 

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by sea. Given the large number of new drybulk carriers currently on order with shipyards, the capacity of the global drybulk carrier fleet seems likely to increase and economic growth may not continue. Adverse economic, political, social or other developments could have a material adverse effect on our business and operating results.

An over-supply of drybulk carrier capacity may prolong or further depress the current low charter rates and, in turn, adversely affect our profitability.

The market supply of drybulk carriers has been increasing as a result of the delivery of numerous newbuilding orders over the last few years. Newbuildings have been delivered in significant numbers since the beginning of 2006 and, as of August 1, 2013, newbuilding orders had been placed for an aggregate of more than 17.8% of the existing global drybulk fleet, with deliveries expected during the next three years. Due to lack of financing many analysts expect significant cancellations and/or slippage of newbuilding orders. While vessel supply will continue to be affected by the delivery of new vessels and the removal of vessels from the global fleet, either through scrapping or accidental losses, an over-supply of dry bulk carrier capacity could exacerbate the recent decrease in charter rates or prolong the period during which low charter rates prevail. Currently, some of our spot market-related time charterers are at times unprofitable due the volatility associated with dry cargo freight rates. If market conditions persist or worsen, upon the expiration or termination of our vessels’ current non-spot charters, we may only be able to re-charter our vessels at reduced or unprofitable rates, or we may not be able to charter these vessels at all. The occurrence of these events could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends. Currently, five of the charters for our drybulk vessels are scheduled to expire 2013.

The market values of our vessels may decrease, which could limit the amount of funds that we can borrow or cause us to breach certain covenants in our credit facilities and we may incur a loss if we sell vessels following a decline in their market value.

The fair market values of our vessels are related to prevailing freight charter rates. However, while the fair market values of vessels and the freight charter market have a very close relationship as the charter market moves from trough to peak, the time lag between the effect of charter rates on market values of ships can vary.

The fair market values of our vessels have generally experienced high volatility, and you should expect the market values of our vessels to fluctuate depending on a number of factors including:

 

•

prevailing level of charter rates;

 

•

general economic and market conditions affecting the shipping industry;

 

•

types and sizes of vessels;

 

•

supply of and demand for vessels;

 

•

other modes of transportation;

 

•

cost of newbuildings;

 

•

governmental and other regulations; and

 

•

technological advances.

In addition, as vessels grow older, they generally decline in value. If the market values of our vessels, which are at relatively low levels, decrease further, we may not be in compliance with certain covenants in our credit facilities secured by mortgages on our drybulk vessels, and our lenders could accelerate our indebtedness or require us to pay down our indebtedness to a level where we are again in compliance with our loan covenants. If our indebtedness is accelerated, we may not be able to refinance our debt or obtain additional financing.

 

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In addition, if we sell one or more of our vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our consolidated financial statements, the sale proceeds may be less than the vessel’s carrying value on our consolidated financial statements, resulting in a loss and a reduction in earnings. Furthermore, if vessel values persist at their current levels or decline further, we may have to record an impairment adjustment in our financial statements which could adversely affect our financial results. Due to our decision to sell certain vessels subsequent to the balance sheet dates and based on the agreed-upon sales price, an impairment charge of $3.6 million, $144.7 million and $0 million, for each of the years ended December 31, 2010, 2011 and 2012, respectively, was recognized. In addition, for the six-month period ended June 30, 2013, we incurred an impairment loss of $43.5 million due to our decision to sell four of our newbuildings.

A further economic slowdown or changes in the economic and political environment in the Asia Pacific region could exacerbate the effect of recent slowdowns in the economies of the European Union and may have a material adverse effect on our business, financial condition and results of operations.

We anticipate a significant number of the port calls made by our vessels will continue to involve the loading or discharging of drybulk commodities in ports in the Asia Pacific region. As a result, any negative changes in economic conditions in any Asia Pacific country, particularly in China, may exacerbate the effect of recent slowdowns in the economies of the European Union and may have a material adverse effect on our business, financial condition and results of operations, as well as our future prospects. Before the global economic financial crisis that began in 2008, China had one of the world’s fastest growing economies in terms of gross domestic product, or GDP, which had a significant impact on shipping demand. The quarterly year-over-year growth rate of China’s GDP decreased to approximately 7.5% for the quarter ended June 30, 2013, as compared to approximately 7.6% for the year ended June 30, 2012, and continues to remain below pre-2008 levels. .

We cannot assure you that the Chinese economy will not experience a significant contraction in the future. Although state-owned enterprises still account for a substantial portion of the Chinese industrial output, in general, the Chinese government is reducing the level of direct control that it exercises over the economy through state plans and other measures. There is an increasing level of freedom and autonomy in areas such as allocation of resources, production, pricing and management and a gradual shift in emphasis to a “market economy” and enterprise reform. Limited price reforms were undertaken with the result that prices for certain commodities are principally determined by market forces. Many of the reforms are unprecedented or experimental and may be subject to revision, change or abolition based upon the outcome of such experiments. If the Chinese government does not continue to pursue a policy of economic reform, the level of imports to and exports from China could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions. Notwithstanding economic reform, the Chinese government may adopt policies that favor domestic drybulk shipping companies and may hinder our ability to compete with them effectively. Moreover, the current economic slowdown in the economies of the European Union and other Asian countries may further adversely affect economic growth in China and elsewhere. In addition, concerns regarding the possibility of sovereign debt defaults by European Union member countries, including Greece, have disrupted financial markets throughout the world, may lead to weaker consumer demand in the European Union, the United States, and other parts of the world. The possibility of sovereign debt defaults by European Union member countries, including Greece, and the possibility of market reforms to float the Chinese renminbi, either of which development could weaken the Euro against the Chinese renminbi, could adversely affect consumer demand in the European Union. Moreover, the revaluation of the renminbi may negatively impact the United States’ demand for imported goods, many of which are shipped from China. Such weak economic conditions could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. Our business, financial condition, results of operations, ability to pay dividends as well as our future prospects, will likely be materially and adversely affected by a further economic downturn in any of these countries.

 

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If economic conditions throughout the world do not improve, this will impede our results of operations, financial condition and cash flows.

Negative trends in the global economy that emerged in 2008 continue to adversely affect global economic conditions. In addition, the world economy is currently facing a number of new challenges, including uncertainty related to the continuing discussions in the United States regarding the federal debt ceiling and recent turmoil and hostilities in the Middle East, North Africa and other geographic areas and countries. The deterioration in the global economy has caused, and may continue to cause, a decrease in worldwide demand for certain goods and, thus, shipping.

The United States, the European Union and other parts of the world have recently been or are currently in a recession and continue to exhibit weak economic trends. The current sovereign debt crisis in certain Eurozone countries, and concerns over debt levels of certain other European Union member states and in other countries around the world, as well as concerns about international banks, have led to increased volatility in global credit and equity markets. The credit markets in the United States and Europe have experienced significant contraction, deleveraging and reduced liquidity, and the United States federal and state governments and European authorities have implemented a broad variety of governmental action and/or new regulation of the financial markets and may implement additional regulations in the future. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The United States Securities and Exchange Commission, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws. Global financial markets and economic conditions have been, and continue to be, severely disrupted and volatile. Credit markets and the debt and equity capital markets have been exceedingly distressed and the uncertainty surrounding the future of the credit markets in the United States and the rest of the world has resulted in reduced access to credit worldwide.

We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. Major market disruptions and the current adverse changes in market conditions and regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow amounts under our credit facilities or any future financial arrangements. We cannot predict how long the current market conditions will last. However, these recent and developing economic and governmental factors, together with the concurrent decline in charter rates and vessel values, may have a material adverse effect on our results of operations, financial condition or cash flows, and the trading price of our common shares. In the absence of available financing, we also may be unable to take advantage of business opportunities or respond to competitive pressures.

In addition, as a result of the ongoing economic turmoil in Greece resulting from the sovereign debt crisis and the related austerity measures implemented by the Greek government, our operations in Greece may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Greek government new taxes or other fees. We also face the risk that strikes, work stoppages, civil unrest and violence within Greece may disrupt our shoreside operations and those of our managers located in Greece.

The current state of global financial markets and current economic conditions may adversely impact our ability to obtain additional financing on acceptable terms which may hinder or prevent us from expanding our business.

Global financial markets and economic conditions have been, and continue to be, volatile. Recently, the debt and equity capital markets have been severely distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions, have made, and will likely continue to make, it difficult to obtain additional financing. The current state of global financial markets and current economic conditions might adversely impact our ability to issue additional equity at prices which will not be dilutive to our existing shareholders or preclude us from issuing equity at all.

 

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Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders have increased margins or interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased, to provide funding to borrowers. Furthermore, certain banks that have historically been significant lenders to the shipping industry have reduced or ceased lending to the shipping industry. Due to these factors, we cannot be certain that additional financing will be available if needed and to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance our existing business, complete additional drilling unit acquisitions or otherwise take advantage of business opportunities as they arise.

The instability of the euro or the inability of Eurozone countries to refinance their debts could have a material adverse effect on our revenue, profitability and financial position.

As a result of the credit crisis in Europe, in particular in Greece, Italy, Ireland, Portugal and Spain, the European Commission created the European Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support. In March 2011, the European Council agreed on the need for Eurozone countries to establish a permanent stability mechanism, the European Stability Mechanism, or the ESM, which will be activated by mutual agreement, to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries after June 2013. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations and the overall stability of the euro. An extended period of adverse development in the outlook for European countries could reduce the overall demand for drybulk cargoes and oil and gas and for our services. These potential developments, or market perceptions concerning these and related issues, could affect our financial position, results of operations and cash flow.

Charterers have been placed under significant financial pressure, thereby increasing our charter counterparty risk.

The continuing weakness in demand for drybulk shipping services and any future declines in such demand could result in financial challenges faced by our charterers and may increase the likelihood of one or more of our charterers being unable or unwilling to pay us contracted charter rates. We expect to generate most of our revenues from these charters and if our charterers fail to meet their obligations to us, we will sustain significant losses which could have a material adverse effect on our financial condition and results of operations.

Acts of piracy on ocean-going vessels have had and may continue to have an adverse effect on our business.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean, off the coast of West Africa and in the Gulf of Aden off the coast of Somalia. In February 2009, the drybulk vessel Saldanha, which is owned by our subsidiary, Team-Up Owning Company Limited, was seized by pirates while transporting coal through the Gulf of Aden. Although the frequency of sea piracy worldwide decreased during 2012 to its lowest level since 2009, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea, with drybulk vessels and tankers particularly vulnerable to such attacks. If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, or Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, due to employing onboard security guards, could increase in such circumstances. Furthermore, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charterhire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. We may not

 

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be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking, involving the hostile detention of a vessel, as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition, results of operations.

The U.S. government recently imposed legislation concerning the deteriorating situation in Somalia, including acts of piracy offshore Somalia. On April 13, 2010, the President of the United States issued an Executive Order, which we refer to as the Order, prohibiting, among other things, the payment of monies to or for the benefit of individuals and entities on the list of Specially Designated Nationals, or SDNs, published by U.S. Department of the Treasury’s Office of Foreign Assets Control. Certain individuals associated with piracy offshore Somalia are currently designated persons under the SDN list. The Order is applicable only to payments by U.S. persons and not by foreign entities, such as us. Notwithstanding this fact, it is possible that the Order, and the regulations promulgated thereunder, may affect foreign private issuers to the extent that such foreign private issuers provide monies, such as ransom payments to secure the release of crews and ships in the event of detention hijackings, to any SDN for which they seek reimbursement from a U.S. insurance carrier. While additional regulations relating to the Order may be promulgated by the U.S. government in the future, we cannot predict what effect these regulations may have on our operations.

Political instability, terrorist attacks and international hostilities can affect the seaborne transportation industry, which could adversely affect our business.

We conduct most of our operations outside of the United States, and our business, results of operations, cash flows, financial condition and ability to pay dividends, if any, in the future may be adversely affected by changing economic, political and government conditions in the countries and regions where our vessels are employed or registered. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of political conflicts, including the current political instability in the Middle East, North Africa and other geographic countries and areas, terrorist or other attacks, war or international hostilities. Terrorist attacks such as those in New York on September 11, 2001, in London on July 7, 2005, and in Mumbai on November 26, 2008, and the continuing response of the United States and others to these attacks, as well as the threat of future terrorist attacks around the world, continues to cause uncertainty in the world’s financial markets and may affect our business, operating results and financial condition. Continuing conflicts and recent developments in the Middle East and North Africa, and the presence of U.S. or other armed forces in Iraq, Afghanistan and various other regions, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, such as the attack on the MT Limburg, a vessel unaffiliated with us, in October 2002, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. Any of these occurrences could have a material adverse impact on our operating results, revenues and costs.

Our revenues are subject to seasonal fluctuations, which could affect our operating results and our ability to pay dividends, if any, in the future.

We operate our drybulk vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charterhire rates. This seasonality may result in quarter-to-quarter volatility in our operating results, which could affect our ability to pay dividends, if any, in the future from quarter to quarter. The drybulk 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. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, our revenues have historically been weaker during the fiscal quarters ended June 30 and September 30, and, conversely, our revenues have historically been stronger in fiscal quarters ended December 31 and March 31. This seasonality may adversely affect our operating results and our ability to pay dividends, if any, in the future.

 

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Rising fuel prices may adversely affect our profits.

While we do not directly bear the cost of fuel or bunkers under our time charters, fuel is a significant factor in negotiating charter rates. Fuel is also a significant, if not the largest, expense in our shipping operations when vessels are under spot or voyage charter. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability at the time of charter negotiation. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce the profitability and competitiveness of our business versus other forms of transportation, such as truck or rail.

We are subject to international safety regulations and the failure to comply with these regulations may subject us to increased liability, may adversely affect our insurance coverage and may result in our vessels being denied access to, or detained in, certain ports.

Our business and the operation of our drybulk vessels and tankers are materially affected by government regulation in the form of international conventions, national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration. Because such conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions, laws and regulations or the impact thereof on the resale prices or useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may materially adversely affect our operations. We are required by various governmental and quasi governmental agencies to obtain certain permits, licenses, certificates, and financial assurances with respect to our operations.

In addition, vessel classification societies also impose significant safety and other requirements on our vessels. In complying with current and future environmental requirements, vessel-owners and operators may also incur significant additional costs in meeting new maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future and require us to incur significant capital expenditures on our vessels to keep them in compliance.

The operation of our vessels is affected by the requirements set forth in the United Nations’ International Maritime Organization’s International Management Code for the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires ship owners, ship managers and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. Currently, all of our vessels are ISM Code-certified and we expect that any vessels that we acquire in the future will be ISM Code-certified when delivered to us. The failure of a shipowner or bareboat charterer to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. If we are subject to increased liability for non-compliance or if our insurance coverage is adversely impacted as a result of non-compliance, it may negatively affect our ability to pay dividends, if any, in the future. If any of our vessels are denied access to, or are detained in, certain ports, this may decrease our revenues.

We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business.

Our operations are subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in

 

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which our drybulk and tanker vessels operate or are registered, which can significantly affect the ownership and operation of those vessels. These requirements include, but are not limited to, the International Convention for the Prevention of Pollution from Ships, or MARPOL, the International Convention on Load Lines of 1966, the International Convention on Civil Liability for Oil Pollution Damage of 1969, generally referred to as CLC, the International Convention on Civil Liability for Bunker Oil Pollution Damage, or Bunker Convention, the ISM Code, the International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, the U.S. Oil Pollution Act of 1990, or OPA, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the U.S. Clean Water Act, the U.S. Clean Air Act, the U.S. Outer Continental Shelf Lands Act, the U.S. Maritime Transportation Security Act of 2002, or the MTSA, and European Union regulations. Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions, the management of ballast waters, maintenance and inspection, elimination of tin-based paint, development and implementation of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the United States. An oil spill could result in significant liability, including fines, penalties and criminal liability and remediation costs for natural resource damages under other federal, state and local laws, as well as third-party damages. The April 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional laws or regulatory initiatives, including the raising of liability caps under OPA, that may affect our operations or require us to incur additional expenses to comply with such regulatory initiatives. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents.

TMS Bulkers Ltd., or TMS Bulkers, managers of the vessel Oliva, one of our Panamax drybulk carriers, reported that on March 16, 2011, the vessel ran aground at Nightingale Island, which is part of the “Tristan Da Cunha” group of islands in the South Atlantic Ocean. At the time of the incident the vessel was on its way from Santos, Brazil to China, loaded with 65,266 metric tons of soya beans. The following day the vessel broke in two. Both the vessel and the cargo are lost and are considered to be actual total losses for insurance purposes. In addition, bunkers leaked from the damaged hull, which has affected the local birdlife and marine environment. There were no injuries to the 22 crew members on board.

TMS Bulkers activated its Emergency Response Plan and has deployed all appropriate resources in close cooperation with the local authorities to mitigate the damage arising from this accident. That response has included the attendance of a large local vessel, which was joined a few days later by a salvage tug with appropriate equipment for bird rehabilitation and oil clean-up operations, as well as salvage operations. A second tug and a small general cargo vessel also have been chartered to deliver additional equipment and a team of specialists from The Southern African Foundation for the Conservation of Coastal Birds, or the SANCCOB. Oil pollution experts International Tanker Operators Pollution Federation, or ITOPF, have been coordinating the response to the casualty, in conjunction with TMS Bulkers and the vessel’s Protection & Indemnity liability insurers (Gard). The vessel’s hull was fully insured and the Hull & Machinery insurers were notified of the loss. The hull and machinery claims, cargo claims as a result of pollution and any liability claims as a result of the grounding have been settled.

 

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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, destination and trans-shipment points. Inspection procedures may result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery of our vessels and the levying of customs duties, fines or other penalties against us.

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

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

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek to obtain security for its claim by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could attempt to assert “sister ship” liability against a 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 her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our vessels may negatively impact our revenues and reduce the amount of dividends, if any, in the future.

In the highly competitive international shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources and, as a result, we may be unable to employ our vessels profitably.

We employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than we do. Competition for the transportation of drybulk 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 drybulk shipping industry and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter rates and higher quality vessels than we are able to offer. If we are unable to successfully compete with other drybulk shipping companies, this would have an adverse impact on our results of operations.

 

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Risks associated with operating ocean-going vessels could affect our business and reputation, which could adversely affect our revenues and stock price.

The operation of ocean-going vessels carries inherent risks. These risks include the possibility of:

 

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marine disaster;

 

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environmental accidents;

 

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cargo and property losses or damage;

 

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

 

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piracy.

The involvement of our vessels in an environmental disaster may harm our reputation as a safe and reliable vessel owner and operator. Any of these circumstances or events could increase our costs or lower our revenues.

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 includes hull and machinery insurance, war risks insurance and protection and indemnity insurance (which includes environmental damage and pollution insurance). We may not be adequately insured against all risks or our insurers may not 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, in the future, we may not be able to 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, although we believe are standard in the shipping industry, may nevertheless increase our costs.

The operation of drybulk carriers has certain unique operational risks.

The operation of certain ship types, such as drybulk carriers, has certain unique risks. With a drybulk carrier, the cargo itself and its interaction with the ship can be a risk factor. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk 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. Furthermore, any defects or flaws in the design of a drybulk carrier may contribute to vessel damage. Hull breaches in drybulk carriers may lead to the flooding of the vessels holds. If a drybulk carrier 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 our ability to pay dividends, if any, in the future. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.

Risk Factors Relating to the Offshore Drilling Industry

Our business in the offshore drilling sector depends on the level of activity in the offshore oil and gas industry, which is significantly affected by, among other things, volatile oil and gas prices and may be materially and adversely affected by a decline in the offshore oil and gas industry.

The offshore contract drilling industry is cyclical and volatile. Our business in the offshore drilling sector depends on the level of activity in oil and gas exploration, development and production in offshore areas

 

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worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments affect customers’ drilling programs. Oil and gas prices and market expectations of potential changes in these prices also significantly affect this level of activity and demand for drilling units.

Oil and gas prices are extremely volatile and are affected by numerous factors beyond our control, including the following:

 

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worldwide production and demand for oil and gas and any geographical dislocations in supply and demand;

 

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the cost of exploring for, developing, producing and delivering oil and gas;

 

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expectations regarding future energy prices;

 

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advances in exploration, development and production technology;

 

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the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain levels and pricing;

 

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the level of production in non-OPEC countries;

 

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government regulations;

 

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local and international political, economic and weather conditions;

 

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domestic and foreign tax policies;

 

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development and exploitation of alternative fuels;

 

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the policies of various governments regarding exploration and development of their oil and gas reserves; and

 

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the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities, insurrection or other crises in the Middle East or other geographic areas or further acts of terrorism in the United States, or elsewhere.

Declines in oil and gas prices for an extended period of time, or market expectations of potential decreases in these prices, could negatively affect our business in the offshore drilling sector. Crude oil inventories remain at high levels compared to historical levels, which may place downward pressure on the price of crude oil and demand for offshore drilling units. Sustained periods of low oil prices typically result in reduced exploration and drilling because oil and gas companies’ capital expenditure budgets are subject to cash flow from such activities and are therefore sensitive to changes in energy prices. These changes in commodity prices can have a dramatic effect on rig demand, and periods of low demand can cause excess rig supply and intensify the competition in the industry which often results in drilling units, particularly lower specification drilling units, being idle for long periods of time. We cannot predict the future level of demand for our services or future conditions of the oil and gas industry. Any decrease in exploration, development or production expenditures by oil and gas companies could reduce our revenues and materially harm our business and results of operations.

In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, including:

 

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the availability of competing offshore drilling vessels and the level of newbuilding activity for drilling vessels;

 

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the level of costs for associated offshore oilfield and construction services;

 

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oil and gas transportation costs;

 

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the discovery of new oil and gas reserves;

 

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the cost of non-conventional hydrocarbons, such as the exploitation of oil sands; and

 

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regulatory restrictions on offshore drilling.

Any of these factors could reduce demand for our services and adversely affect our business and results of operations.

The offshore drilling industry is highly competitive with intense price competition and, as a result, we may be unable to compete successfully with other providers of contract drilling services that have greater resources than we have.

The offshore contract drilling industry is highly competitive with several industry participants, none of which has a dominant market share, and is characterized by high capital and maintenance requirements. Drilling contracts are traditionally awarded on a competitive bid basis. Price competition is often the primary factor in determining which qualified contractor is awarded the drilling contract, although drilling unit availability, location and suitability, the quality and technical capability of service and equipment, reputation and industry standing are key factors which are considered. Mergers among oil and natural gas exploration and production companies have reduced, and may from time to time further reduce, the number of available customers, which would increase the ability of potential customers to achieve pricing terms favorable to them.

Many of our competitors in the offshore drilling industry are significantly larger than we are and have more diverse drilling assets and significantly greater financial and other resources than we have. In addition, because of our relatively small offshore drilling fleet, we may be unable to take advantage of economies of scale to the same extent as some of our larger competitors. Given the high capital requirements that are inherent in the offshore drilling industry, we may also be unable to invest in new technologies or expand in the future as may be necessary for us to succeed in this industry, while our larger competitors with superior financial resources, and in many cases less leverage than we have, may be able to respond more rapidly to changing market demands and compete more efficiently on price for drillship and drilling rig employment. We may not be able to maintain our competitive position, and we believe that competition for contracts will continue to be intense in the future. Our inability to compete successfully in the offshore drilling industry may reduce our revenues and profitability.

An over-supply of drilling units may lead to a reduction in dayrates and therefore may materially impact our profitability.

During the recent period of high utilization and high dayrates, industry participants have increased the supply of drilling units by ordering the construction of new drilling units. Historically, this has resulted in an over-supply of drilling units and has caused a subsequent decline in utilization and dayrates when the drilling units enter the market, sometimes for extended periods of time until the units have been absorbed into the active fleet. According to industry sources, the worldwide fleet of ultra-deepwater drilling units as of August 2013 consisted of 129 units, comprised of 60 semi-submersible rigs and 69 drillships. An additional 16 semi-submersible rigs and 71 drillships were under construction or on order as of August 2013, which would bring the total fleet to 216 drilling units by the end of 2020. A relatively large number of the drilling units currently under construction have been contracted for future work, which may intensify price competition as scheduled delivery dates occur. The entry into service of these new, upgraded or reactivated drilling units will increase supply and has already led to a reduction in dayrates as drilling units are absorbed into the active fleet. In addition, the new construction of high-specification drilling units, as well as changes in our competitors’ drilling unit fleets, could require us to make material additional capital investments to keep our fleet competitive. Lower utilization and dayrates could adversely affect our revenues and profitability. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on our drilling units if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these drilling units may not be recoverable.

 

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Consolidation of suppliers may increase the cost of obtaining supplies, which may have a material adverse effect on our results of operations and financial condition.

We rely on certain third parties to provide supplies and services necessary for our offshore drilling operations, including, but not limited to, drilling equipment suppliers and catering and machinery suppliers. Recent mergers have reduced the number of available suppliers, resulting in fewer alternatives for sourcing key supplies. Such consolidation, combined with a high volume of drilling units under construction, may result in a shortage of supplies and services thereby increasing the cost of supplies and/or potentially inhibiting the ability of suppliers to deliver on time, or at all. These cost increases, delays or unavailability could have a material adverse effect on our results of operations and result in drilling unit downtime, and delays in the repair and maintenance of our drilling units.

Our international operations in the offshore drilling sector involve additional risks, including piracy, which could adversely affect our business.

Our drilling rigs and drillships, which we refer to collectively as our drilling units, operate in various regions throughout the world. Our drilling rig, the Leiv Eiriksson commenced drilling operations on the Norwegian Continental Shelf, our drilling rig, the Eirik Raude, is mobilizing from offshore Ireland to offshore West Africa, where it is expected to commence drilling operations, our drillships, the Ocean Rig Corcovado and the Ocean Rig Mykonos, are operating offshore Brazil and our drillships, the Ocean Rig Olympia and the Ocean Rig Poseidon, are operating offshore West Africa and Angola, respectively.

In the past, the Eirik Raude has operated in the Gulf of Mexico and offshore Canada, Norway, the United Kingdom, Ghana and the Ivory Coast, while the Leiv Eiriksson has operated offshore Greenland, West Africa, Turkey, Ireland, west of the Shetland Islands, the Falkland Islands and in the North Sea, and the Ocean Rig Corcovado and the Ocean Rig Olympia have operated offshore Greenland and West Africa, respectively. As a result of our international operations, we may be exposed to political and other uncertainties, including risks of:

 

•

terrorist and environmental activist acts, armed hostilities, war and civil disturbances;

 

•

acts of piracy, which have historically affected ocean-going vessels trading in regions of the world such as the South China Sea and in the Gulf of Aden off the coast of Somalia and which have generally increased significantly in frequency since 2008, particularly in the Gulf of Aden and off the west coast of Africa;

 

•

significant governmental influence over many aspects of local economies;

 

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seizure, nationalization or expropriation of property or equipment;

 

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limitations on insurance coverage, such as war risk coverage, in certain areas;

 

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political unrest;

 

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foreign and U.S. monetary policy, government debt downgrades and potential defaults and foreign currency fluctuations and devaluations;

 

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the inability to repatriate income or capital;

 

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complications associated with repairing and replacing equipment in remote locations;

 

•

import-export quotas, wage and price controls, imposition of trade barriers;

 

•

regulatory or financial requirements to comply with foreign bureaucratic actions;

 

•

changing taxation policies, including confiscatory taxation;

 

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other forms of government regulation and economic conditions that are beyond our control; and

 

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governmental corruption.

 

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repudiation, nullification, modification or renegotiation of contracts;

 

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In addition, international contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to:

 

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the equipping and operation of drilling units;

 

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repatriation of foreign earnings;

 

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oil and gas exploration and development;

 

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taxation of offshore earnings and earnings of expatriate personnel; and

 

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prevailing level of charter rates;

Some foreign governments favor or effectively require (i) the awarding of drilling contracts to local contractors or to drilling rigs owned by their own citizens, (ii) the use of a local agent or (iii) foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect our ability to compete in those regions. It is difficult to predict what governmental regulations may be enacted in the future that could adversely affect the international drilling industry. The actions of foreign governments, including initiatives by OPEC, may adversely affect our ability to compete. Failure to comply with applicable laws and regulations, including those relating to sanctions and export restrictions, may subject us to criminal sanctions or civil remedies, including fines, denial of export privileges, injunctions or seizures of assets.

Our business and operations involve numerous operating hazards.

Our offshore drilling operations are subject to hazards inherent in the drilling industry, such as blowouts, reservoir damage, loss of production, loss of well control, lost or stuck drill strings, equipment defects, punch throughs, craterings, fires, explosions and pollution, including spills similar to the events on April 20, 2010 related to the Deepwater Horizon, in which we were not involved. Contract drilling and well servicing require the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and third parties. These hazards can cause personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage, claims by third parties or customers and suspension of operations. Our offshore fleet is also subject to hazards inherent in marine operations, either while on-site or during mobilization, such as capsizing, sinking, grounding, collision, damage from severe weather and marine life infestations. Operations may also be suspended because of machinery breakdowns, abnormal drilling conditions, personnel shortages or failure of subcontractors to perform or supply goods or services.

Damage to the environment could also result from our operations, particularly through spillage of fuel, lubricants or other chemicals and substances used in drilling operations, leaks and blowouts or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil and gas companies. Our insurance policies and contractual indemnity rights with our customers may not adequately cover losses, and we do not have insurance coverage or rights to indemnity for all the risks to which we are exposed. Consistent with standard industry practice, our customers generally assume, and indemnify us against, well control and subsurface risks under dayrate drilling contracts, including pollution damage in connection with reservoir fluids stemming from operations under the contract, damage to the well or reservoir, loss of subsurface oil and gas and the cost of bringing the well under control. We generally indemnify our customers against pollution from substances in our control that originate from the drilling unit (e.g., diesel used onboard the unit or other fluids stored onboard the unit and above the water surface). However, our drilling contracts are individually negotiated, and the degree of indemnification we receive from the customer against the liabilities discussed above can vary from contract to contract, based on market conditions and customer requirements existing when the contract was negotiated. Notwithstanding a contractual indemnity from a customer, there can be no assurance that our customers will be financially able to indemnify us or will otherwise honor their contractual indemnity obligations. We maintain insurance coverage for property damage, occupational injury and illness, and general and marine third-party liabilities. However, pollution and environmental risks generally are not totally insurable. Furthermore, we have no insurance coverage for named storms in the Gulf of Mexico and while trading within war risks excluded areas.

 

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Our insurance coverage relating to our offshore drilling operations may not adequately protect us from certain operational risks inherent in the drilling industry.

Our insurance relating to our offshore drilling operations is intended to cover normal risks in our current operations, including insurance against property damage, occupational injury and illness, loss of hire, certain war risks and third-party liability, including pollution liability. For example, the amount of risk we are subject to might increase regarding occupational injuries because on January 12, 2012, the U.S. Supreme Court ruled that the U.S. Outer Continental Shelf Lands Act could cover occupational injuries.

Insurance coverage may not, under certain circumstances, be available, and if available, may not provide sufficient funds to protect us from all losses and liabilities that could result from our operations. We have also obtained loss of hire insurance which becomes effective after 45 days of downtime with coverage that extends for approximately one year. This loss of hire insurance is recoverable only if there is physical damage to the rig or equipment which is caused by a peril against which we are insured. The principal risks which may not be insurable are various environmental liabilities and liabilities resulting from reservoir damage caused by our gross negligence. Moreover, our insurance provides for premium adjustments based on claims and is subject to deductibles and aggregate recovery limits. In the case of pollution liabilities, our deductible is $10,000 per event and $250,000 for protection and indemnity claims brought before any U.S. jurisdiction. The deductible for collision liability claims is $10,000. Our aggregate recovery limit is $500.0 million for all claims arising out of any event covered by our protection and indemnity insurance. Our deductible is $1.5 million per hull and machinery insurance claim. In addition, insurance policies covering physical damage claims due to a named windstorm in the Gulf of Mexico generally impose strict recovery limits. Our insurance coverage may not protect fully against losses resulting from a required cessation of drilling unit operations for environmental or other reasons. Insurance may not be available to us at all or on terms acceptable to us, we may not maintain insurance or, if we are so insured, our policy may not be adequate to cover our loss or liability in all cases. The occurrence of a casualty, loss or liability against, which we may not be fully insured against, could significantly reduce our revenues, make it financially impossible for us to obtain a replacement drilling unit or to repair a damaged drilling unit, cause us to pay fines or damages which are generally not insurable and that may have priority over the payment obligations under our indebtedness or otherwise impair our ability to meet our obligations under our indebtedness and to operate profitably.

Governmental laws and regulations, including environmental laws and regulations, may add to our costs or limit our drilling activity.

Our business in the offshore drilling industry is affected by laws and regulations relating to the energy industry and the environment in the geographic areas where we operate. The offshore drilling industry is dependent on demand for services from the oil and gas exploration and production industry, and, accordingly, we are directly affected by the adoption of laws and regulations that, for economic, environmental or other policy reasons, curtail exploration and development drilling for oil and gas. We may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may, in the future, add significantly to our operating costs or significantly limit drilling activity. Our ability to compete in international contract drilling markets may be limited by foreign governmental regulations that favor or require the awarding of contracts to local contractors or by regulations requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Governments in some countries are increasingly active in regulating and controlling the ownership of concessions, the exploration for oil and gas, and other aspects of the oil and gas industries. Offshore drilling in certain areas has been curtailed and, in certain cases, prohibited because of concerns over protection of the environment. Operations in less developed countries can be subject to legal systems that are not as mature or predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings.

To the extent new laws are enacted or other governmental actions are taken that prohibit or restrict offshore drilling or impose additional environmental protection requirements that result in increased costs to the oil and gas industry, in general, or the offshore drilling industry, in particular, our business or prospects could be

 

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materially adversely affected. The operation of our drilling units will require certain governmental approvals, the number and prerequisites of which cannot be determined until we identify the jurisdictions in which we will operate on securing contracts for the drilling units. Depending on the jurisdiction, these governmental approvals may involve public hearings and conditions that result in costly undertakings on our part. We may not obtain such approvals or such approvals may not be obtained in a timely manner. If we fail to timely secure the necessary approvals or permits, our customers may have the right to terminate or seek to renegotiate their drilling contracts to our detriment. The amendment or modification of existing laws and regulations or the adoption of new laws and regulations curtailing or further regulating exploratory or development drilling and production of oil and gas could have a material adverse effect on our business, operating results or financial condition. Future earnings may be negatively affected by compliance with any such new legislation or regulations.

We are subject to complex laws and regulations, including environmental laws and regulations that can adversely affect the cost, manner or feasibility of doing business.

Our offshore drilling operations are subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which our vessels operate or are registered, which can significantly affect the ownership and operation of our drilling units. These requirements include, but are not limited to, the International Convention for the Prevention of Pollution from Ships, or MARPOL, the International Convention on Civil Liability for Oil Pollution Damage of 1969, generally referred to as CLC, the International Convention on Civil Liability for Bunker Oil Pollution Damage, or Bunker Convention, the International Convention for the Safety of Life at Sea of 1974, or SOLAS, the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention, or ISM Code, the International Convention for the Control and Management of Ships’ Ballast Water and Sediments in February 2004, or the BWM Convention, the U.S. Oil Pollution Act of 1990, or OPA, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the U.S. Clean Water Act, the U.S. Clean Air Act, the U.S. Outer Continental Shelf Lands Act, the U.S. Maritime Transportation Security Act of 2002, or the MTSA, European Union Regulations, and Brazil’s National Environmental Policy Law (6938/81), Environmental Crimes Law (9605/98) and Law (9966/2000) relating to pollution in Brazilian waters.

Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lives of our vessels. Moreover, the manner in which these laws are enforced and interpreted is constantly evolving. We may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions, including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations.

Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil in U.S. waters, including the 200-nautical mile exclusive economic zone around the United States. An oil spill could result in significant liability, including fines, penalties and criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents and our insurance may not be sufficient to cover all such risks. As a result, claims against us could result in a material adverse effect on our business, results of operations, cash flows and financial condition.

 

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Although our drilling units are separately owned by our subsidiaries, under certain circumstances a parent company and all of the ship-owning affiliates in a group under common control engaged in a joint venture could be held liable for damages or debts owed by one of the affiliates, including liabilities for oil spills under OPA or other environmental laws. Therefore, it is possible that we could be subject to liability upon a judgment against us or any one of our subsidiaries.

Our drilling units could cause the release of oil or hazardous substances, especially as our drilling units age. Any releases may be large in quantity, above our permitted limits or occur in protected or sensitive areas where public interest groups or governmental authorities have special interests. Any releases of oil or hazardous substances could result in fines and other costs to us, such as costs to upgrade our drilling rigs, clean up the releases, and comply with more stringent requirements in our discharge permits. Moreover, these releases may result in our customers or governmental authorities suspending or terminating our operations in the affected area, which could have a material adverse effect on our business, results of operation and financial condition.

If we are able to obtain from our customers some degree of contractual indemnification against pollution and environmental damages in our contracts, such indemnification may not be enforceable in all instances or the customer may not be financially able to comply with its indemnity obligations in all cases. In addition, we may not be able to obtain such indemnification agreements in the future.

Our insurance coverage may not be available in the future or we may not obtain certain insurance coverage. If it is available and we have the coverage, it may not be adequate to cover our liabilities. Any of these scenarios could have a material adverse effect on our business, operating results and financial condition.

Regulation of greenhouse gases and climate change could have a negative impact on our business.

Currently, emissions of greenhouse gases from ships involved in international transport are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions. As of January 1, 2013, all ships (including rigs and drillships) must comply with mandatory requirements adopted by the MEPC in July 2011 relating to greenhouse gas emissions. All ships are required to follow the Ship Energy Efficiency Management Plans. Now the minimum energy efficiency levels per capacity mile, outlined in the Energy Efficiency Design Index, applies to all new ships. These requirements could cause us to incur additional compliance costs. The IMO is planning to implement market-based mechanisms to reduce greenhouse gas emissions from ships at an upcoming MEPC session. The European Union has indicated that it intends to propose an expansion of the existing European Union emissions trading scheme to include emissions of greenhouse gases from marine vessels, and in January 2012 the European Commission launched a public consultation on possible measures to reduce greenhouse gas emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of vessels is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental groups seeking such regulation. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this time.

Because our offshore drilling business depends on the level of activity in the offshore oil and gas industry, existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws, regulations, treaties or international agreements reduce the worldwide demand for oil and gas. In addition, such laws, regulations, treaties or international agreements could result in increased compliance costs or additional operating restrictions, which may have a negative impact on our business.

 

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The Deepwater Horizon oil spill in the Gulf of Mexico may result in more stringent laws and regulations governing deepwater drilling, which could have a material adverse effect on our business, operating results or financial condition.

On April 20, 2010, there was an explosion and a related fire on the Deepwater Horizon, an ultra-deepwater semi-submersible drilling unit that is not connected to us, while it was servicing the Macondo well in the Gulf of Mexico. This catastrophic event resulted in the death of 11 workers and the total loss of that drilling unit, as well as the release of large amounts of oil into the Gulf of Mexico, severely impacting the environment and the region’s key industries. This event is being investigated by several federal agencies, including the U.S. Department of Justice, and by the U.S. Congress, and is also the subject of numerous lawsuits. On January 11, 2011, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling released its final report, with recommendations for new regulations.

We do not currently operate our drilling units in these regions, but we may do so in the future. In any event, changes to leasing and drilling activity requirements as a result of the Deepwater Horizon incident could have a substantial impact on the offshore oil and gas industry worldwide. All drilling activity in the U.S. Gulf of Mexico must be in compliance with enhanced safety requirements contained in Notices to Lessees 2010-N05 and 2010 N-06. Effective October 22, 2012, all drilling in the U.S. Gulf of Mexico must also comply with the Final Drilling Safety Rule as adopted on August 15, 2012, which enhances safety measures for energy development on the outer continental shelf. All drilling must also comply with the Workplace Safety Rule on Safety and Environmental Management Systems. We continue to evaluate these requirements to ensure that our rigs and equipment are in full compliance, where applicable. Additional requirements could be forthcoming based on further recommendations by regulatory agencies investigating the Macondo well incident.

We are not able to predict the extent of future leasing plans or the likelihood, nature or extent of additional rulemaking. Nor are we able to predict when the Bureau of Ocean Energy Management (BOEM) will enter into leases with our customers or when the Bureau of Safety and Environmental Enforcement (BSEE) will issue drilling permits to our customers. We are not able to predict the future impact of these events on our operations. The current and future regulatory environment in the Gulf of Mexico could impact the demand for drilling units in the Gulf of Mexico in terms of overall number of rigs in operations and the technical specification required for offshore rigs to operate in the Gulf of Mexico. It is possible that short-term potential migration of rigs from the Gulf of Mexico could adversely impact dayrates levels and fleet utilization in other regions. In addition, insurance costs across the industry have increased as a result of the Macondo well incident and certain insurance coverage has become more costly, less available, and not available at all from certain insurance companies.

Hurricanes may impact our ability to operate our drilling units in the Gulf of Mexico or other U.S. coastal waters, which could reduce our revenues and profitability.

Hurricanes Ivan, Katrina, Rita, Gustav and Ike caused damage to a number of drilling units unaffiliated with us in the U.S. Gulf of Mexico. Drilling units that moved off their locations during the hurricanes damaged platforms, pipelines, wellheads and other drilling units. BOEM and the BSEE, the U.S. organizations that issue a significant number of relevant guidelines for the drilling units’ activities, have in place until November 1, 2014 guidelines for tie-downs on drilling units and permanent equipment and facilities attached to outer continental shelf production platforms, and moored drilling unit fitness. These guidelines effectively impose requirements on the offshore oil and natural gas industry in an attempt to increase the likelihood of survival of offshore drilling units during a hurricane. The guidelines also provide for enhanced information and data requirements from oil and natural gas companies that operate properties in the Gulf of Mexico region of the Outer Continental Shelf. BOEM and BSEE may issue similar guidelines for future hurricane seasons and may take other steps that could increase the cost of operations or reduce the area of operations for our ultra-deepwater drilling units, thereby reducing their marketability. Implementation of new guidelines or regulations that may apply to ultra-deepwater drilling units may subject us to increased costs and limit the operational capabilities of our drilling units. Our drilling units do not currently operate in the Gulf of Mexico or other U.S. coastal waters but may do so in the future.

 

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Risk Factors Relating to the Tanker Industry

If the tanker industry, which historically has been cyclical and volatile, continues to be depressed or declines further in the future, our revenues, earnings and available cash flow may be adversely affected

Historically, the tanker industry has been highly cyclical, with volatility in profitability, charter rates and asset values resulting from changes in the supply of, and demand for, tanker capacity. After reaching highs during the summer of 2008, charter rates for crude oil carriers fell dramatically in connection with the commencement of the global financial crisis and current rates continue to remain at relatively low levels compared to the rates achieved in the years preceding the global financial crisis. Fluctuations in charter rates and tanker values result from changes in the supply of and demand for tanker capacity and changes in the supply of and demand for oil and oil products.

The factors that influence demand for tanker capacity include:

 

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supply of and demand for oil and oil products;

 

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global and regional economic and political conditions, including developments in international trade, national oil reserves policies, fluctuations in industrial and agricultural production and armed conflicts, which, among other things, could impact the supply of oil as well as trading patterns and the demand for various types of vessels;

 

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regional availability of refining capacity;

 

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environmental and other legal and regulatory developments;

 

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the distance oil and oil products are to be moved by sea;

 

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changes in seaborne and other transportation patterns, including changes in the distances over which tanker cargoes are transported by sea;

 

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increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;

 

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currency exchange rates;

 

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weather and acts of God and natural disasters;

 

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competition from alternative sources of energy and from other shipping companies and other modes of transport;

 

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international sanctions, embargoes, import and export restrictions, nationalizations, piracy and wars; and

 

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regulatory changes including regulations adopted by supranational authorities and/or industry bodies, such as safety and environmental regulations and requirements by major oil companies.

The factors that influence the supply of tanker capacity include:

 

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current and expected purchase orders for tankers;

 

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the number of tanker newbuilding deliveries;

 

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any potential delays in the delivery of newbuilding vessels and/or cancellations of newbuilding orders;

 

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the scrapping rate of older tankers;

 

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the successful implementation of the phase-out of single-hull tankers;

 

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technological advances in tanker design and capacity;

 

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•

tanker freight rates, which are affected by factors that may effect the rate of newbuilding, swapping and laying up of tankers;

 

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port and canal congestion;

 

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price of steel and vessel equipment;

 

•

conversion of tankers to other uses or conversion of other vessels to tankers;

 

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the number of tankers that are out of service; and

 

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changes in environmental and other regulations that may limit the useful lives of tankers.

The factors affecting the supply of and demand for tankers have been volatile and are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable, including those discussed above. The current global economic downturn may reduce demand for transportation of oil over longer distances and increase supply of tankers to carry that oil, which may have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If the number of new ships delivered exceeds the number of tankers being scrapped and lost, tanker capacity will increase. In addition the total newbuilding order books for Suezmax and Aframax vessels scheduled to enter the fleet through 2013 currently stand at 5.0% and 1.6% respectively, and there can be no assurance that the order books will not increase further in proportion to the existing fleets. If the supply of tanker capacity increases and the demand for tanker capacity does not increase correspondingly, charter rates could materially decline and the value of our vessels could be adversely affected.

The market value of our vessels may fluctuate significantly, and we may incur losses when we sell vessels following a decline in their market value.

The fair market value of our tanker vessels may have declined recently, and may decrease further depending on a number of factors including:

 

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general economic and market conditions affecting the shipping industry;

 

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competition from other shipping companies;

 

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supply of and demand for tankers and the types and sizes of tankers we own;

 

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alternative modes of transportation;

 

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ages of vessels;

 

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cost of newbuildings;

 

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governmental or other regulations;

 

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prevailing level of charter rates; and

 

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technological advances.

Declines in charter rates and other market deterioration could cause the market value of our vessels to decrease significantly. We evaluate the carrying amounts of our vessels to determine if events have occurred that would require an impairment of their carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and projection of future cash flows related to the vessels is complex and requires us to make various estimates including future freight rates, earnings from the vessels and discount rates. All of these items have been historically volatile.

We evaluate the recoverable amount as the higher of fair value less costs to sell and value in use. If the recoverable amount is less than the carrying amount of the vessel, the vessel is deemed impaired. The carrying values of our vessels may not represent their fair market value at any point in time because the new market prices

 

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of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Any impairment charges incurred as a result of further declines in charter rates could negatively affect our business, financial condition or operating results.

Due to the cyclical nature of the tanker market, the market value of one or more of our vessels may at various times be lower than their book value, and sales of those vessels during those times would result in losses. If we determine at any time that a vessel’s future limited useful life and earnings require us to impair its value on our financial statements, that could result in a charge against our earnings and the reduction of our shareholders’ equity. If for any reason we sell vessels at a time when vessel prices have fallen, the sale proceeds may be at less than the vessel’s carrying amount on our financial statements, with the result that we would also incur a loss and a reduction in earnings.

Declining tanker values could affect our ability to raise cash by limiting our ability to refinance vessels and thereby adversely impact our liquidity. In addition, declining vessel values could result in the reduction in lending commitments, the pledging of unencumbered vessels as additional collateral, the requirement to repay outstanding amounts or a breach of loan covenants, which could give rise to an event of default under our credit facilities.

Changes in the crude oil and petroleum products markets could result in decreased demand for our vessels and services.

Demand for our vessels and services in transporting crude oil and petroleum products will depend upon world and regional crude oil and petroleum products markets. Any decrease in shipments of crude oil or petroleum products in those markets could have a material adverse effect on our business, financial condition and results of operations. Historically, those markets have been volatile as a result of the many conditions and events that affect the price, production and transport of crude oil and petroleum products, including competition from alternative energy sources. In the long-term it is possible that crude oil and petroleum products demand may be reduced by an increased reliance on alternative energy sources, by a drive for increased efficiency in the use of crude oil and petroleum products as a result of environmental concerns, or by high oil prices. The recent recession affecting the U.S. and world economies may result in protracted reduced consumption of crude oil and petroleum products and a decreased demand for our vessels and lower charter rates, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

An over-supply of tanker capacity may prolong currently low charter rates and vessel values or lead to further reductions in charter rates, vessel values, and profitability.

The market supply of tankers is affected by a number of factors such as demand for energy resources, oil, and petroleum products, as well as strong overall economic growth in parts of the world economy including Asia. If the capacity of new ships delivered exceeds the capacity of tankers being scrapped and lost, tanker capacity will increase. In addition, the tanker newbuilding order book, which extends to 2016, equaled approximately 9.8% of the existing world oil tanker fleet as of August 1, 2013, according to industry sources and the order book may increase further in proportion to the existing fleet. If the supply of tanker capacity increases and if the demand for tanker capacity does not increase correspondingly, charter rates could materially decline. A reduction in charter rates and the value of our vessels may have a material adverse effect on our results of operations and available cash once we take delivery of our newbuilding tankers.

The tanker sector is highly competitive, and we may not be able to compete successfully for charters with new entrants or established companies with greater resources.

The tanker industry is highly competitive, 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 petroleum products and oil can be intense and depends on price, location, size, age,

 

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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 than we have could operate larger fleets than our tanker fleet and, thus, may be able to offer lower charter rates and higher quality vessels than we are able to offer. If this were to occur, we may be unable to attract new customers, which could adversely affect our business and operations.

Our operating results may be adversely affected by seasonal fluctuations in the tanker industry.

The tanker sector has historically exhibited seasonal variations in demand and, as a result, in charter rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The tanker sector is typically stronger in the fall and winter months in anticipation of increased consumption of oil and petroleum products in the northern hemisphere during the winter months. As a result, our revenues from our tankers may be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, revenues may be stronger in fiscal quarters ended December 31 and March 31. This seasonality could materially affect our operating results and cash available for dividends in the future.

Company Specific Risk Factors

We are not in compliance with certain financial and other covenants contained in our credit facilities relating to our shipping segments, which could adversely affect our business.

Our credit facilities require us to satisfy certain financial covenants. In general, these financial covenants require us, as Dryships, on a consolidated level, to maintain (i) minimum liquidity; (ii) a minimum market adjusted equity ratio; (iii) a minimum interest coverage ratio; (iv) a minimum market adjusted net worth; (v) a minimum debt service coverage ratio and (vi) a minimum working capital level. In addition, certain of our facilities require us to satisfy certain financial covenants at a certain subsidiary level. In addition, our credit facilities, which are secured by mortgages on our vessels and drillships, require us to maintain specified financial ratios, mainly to ensure that the market value of the mortgaged vessels and drillships under the applicable credit facility, determined in accordance with the terms of that facility, does not fall below a certain percentage of the outstanding amount of the loan, which we refer to as a value maintenance clause or a loan-to-value ratio. Events beyond our control, including changes in the economic and business conditions in the international drybulk, tanker or offshore drilling markets in which we operate, may affect our ability to comply with the financial covenants and loan-to-value ratios required by our credit facilities. Our ability to maintain compliance also depends substantially on the value of our assets, our charterhire and dayrates, our ability to obtain charters and drilling contracts, our success at keeping our costs low and our ability to successfully implement our overall business strategy.

A violation of any of the financial covenants in our credit facilities, absent a waiver of the breach from our lenders, or a violation of the loan-to-value ratios in our credit facilities, if not waived by our lenders or cured by providing additional collateral or prepaying the amount of outstanding indebtedness required to eliminate the shortfall, could result in an event of default under our credit facilities that would allow all amounts outstanding thereunder to be declared immediately due and payable. In addition, all of our credit facilities relating to our drybulk and tanker fleet contain cross-acceleration or cross-default provisions that may be triggered by a default under one of our other credit facilities relating to our drybulk and tanker fleet. Furthermore, our debt agreements relating to our offshore drilling fleet also contain cross-default or cross-acceleration provisions that may be triggered by a default under one of our other debt agreements relating to our offshore drilling fleet. If the amounts outstanding under our indebtedness relating to our drybulk and tanker fleet or our offshore drilling fleet were to be become accelerated or were to become the subject of foreclosure actions, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.

As of June 30, 2013, we were in compliance with the financial covenants contained our debt agreements relating to our offshore drilling segment, but we were in breach of certain financial covenants, mainly the interest

 

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coverage ratio, contained in our loan agreements relating to our shipping segments, under which a total of $804.8 million was outstanding as of June 30, 2013. Even though as of the date of registration statement, none of the lenders had declared an event of default under the relevant loan agreements for which we were not in compliance as of June 30, 2013, these breaches constitute potential events of default that may result in the lenders requiring immediate repayment of the loans. As a result of the aforementioned non-compliance and due to the cross-acceleration and cross-default provisions contained in our credit facilities relating to our drybulk and tanker fleet, all of our outstanding indebtedness relating to our drybulk and tanker fleet, amounting to approximately $1,058.1 million as of June 30, 2013, has been classified as current. As a result, we reported a working capital deficit of $679.2 million at June 30, 2013.

In addition, as of June 30, 2013, we were not in compliance with the loan-to-value ratios contained in certain of our credit facilities relating to our drybulk fleet, under which a total of $59.0 million was outstanding as of that date, out of our total consolidated outstanding indebtedness relating to our drybulk and tanker fleet of approximately $1,058.1 million. As discussed above, these violations of the loan-to-value covenants do not constitute events of default that would automatically trigger the full repayment of the loans. Under the terms of the credit facilities, loan-to-value shortfalls may be remedied by us by providing additional collateral or repaying the amount of the shortfall. On August 1, 2013, we have agreed with our lenders under two of our credit facilities, under which a total of $87.2 million was outstanding as of June 30, 2013, to waive the breach of the loan-to-value ratios under the facilities to December 31, 2013, in exchange for, among other things, the pledge of 5,450,000 shares of Ocean Rig UDW Inc., or Ocean Rig UDW, our majority-owned subsidiary, as additional collateral securing the loans. As a result of our breaches of the loan-to-value ratios in certain of our credit facilities, we may be required to prepay indebtedness or provide additional collateral to our lenders in the form of cash or other property in the total amount of $19.7 million in order to comply with the relevant loan-to-value ratios. In addition, on September 27, 2012, we entered into supplemental agreements under two of our credit facilities, under which a total of $245.7 million was outstanding as of June 30, 2013, to provide additional security to cure shortfalls in the loan-to-value ratio required to be maintained under the facilities and pledged 7,800,000 common shares of Ocean Rig UDW, our majority-owned subsidiary, that we own as additional collateral under the facilities. The term of the share pledge expires on September 16, 2013. Furthermore, we have entered into an amendment to one of our credit facilities to reduce the loan-to-value ratio required to be maintained under the facility until 2016. There can be no assurance that we will be in compliance with the loan-to-value ratios contained in these credit facilities when the share pledge expires or the original covenant comes back into effect or that the relevant lenders would permit further amendments to the collateral arrangements with respect to future breaches of the loan-to-value ratios.

We are currently in negotiations with our lenders to obtain waivers of our covenant breaches and extend existing waivers of covenant breaches, or to restructure the affected debt. We cannot guarantee that we will be able to obtain our lenders’ waiver or consent, or extensions of existing waivers, with respect to the aforementioned noncompliance under our credit facilities relating to our drybulk and tanker fleet, or any non-compliance with specified financial ratios or financial covenants under future financial obligations we may enter into, or that we will be able to refinance or restructure any such indebtedness. If we fail to remedy, or obtain a waiver of, the breaches of the covenants discussed above, our lenders may accelerate our indebtedness under the relevant credit facilities, which could trigger the cross-acceleration or cross-default provisions contained in our other credit facilities relating to our drybulk and tanker fleet, under which a total of $1,058.1 million was outstanding as of June 30, 2013. If our indebtedness is accelerated, it will be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens, which would impair our ability to conduct our business and continue as a going concern. Further, as discussed below, our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our audited financial statements included in this report that expresses substantial doubt about our ability to continue as a going concern. In addition, if the value of our vessels deteriorates significantly from their currently depressed levels, we may have to record an impairment adjustment to our financial statements, which would adversely affect our financial results and further hinder our ability to raise capital.

 

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Moreover, in connection with any additional amendments to our credit facilities, or waivers or extensions of waivers of covenant breaches, that we obtain, or if we enter into any future credit agreements or debt instruments, our lenders may impose additional operating and financial restrictions on us. These restrictions may further restrict our ability to, among other things, fund our operations or capital needs, make acquisitions or pursue available business opportunities, which in turn may adversely affect our financial condition. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the margin and lending rates they charge us on our outstanding indebtedness.

We expect that our lenders will not demand payment of the loans relating to our drybulk and tanker fleet under which we are in breach of certain financial and loan-to-value ratio covenants before their maturity, provided that we pay scheduled loan installments and accumulated or accrued interest as they fall due under the existing credit facilities. We plan to settle the loan interest and scheduled loan repayments with cash expected to be generated from operations and firm financing agreements that are currently in place. We do not expect that cash on hand and cash expected to be generated from operations will be sufficient to repay our loans relating to our drybulk and tanker fleet with cross-default provisions which amounted to approximately $1,058.1 million in the aggregate as of June 30, 2013, if such debt is accelerated by our lenders, as discussed above. In such a scenario, we would have to seek to access the capital markets to fund the mandatory payments.

Our inability to comply with certain financial and other covenants under our loan agreements relating to our shipping segments and our working capital deficit raise substantial doubt about our ability to continue as a going concern.

As of June 30, 2013, we were in breach of certain financial and other covenants contained in our loan agreements relating to our shipping segments and our lenders may choose to accelerate our indebtedness relating to such segments. As a result, we reported a working capital deficit of $679.2 million at June 30, 2013. Therefore, our ability to continue as a going concern is dependent on management’s ability to successfully generate revenue and enter into firm financing agreements to meet our scheduled obligations as they become due and the continued support of our lenders. Our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our financial statements included in our Annual Report for the year ended December 31, 2012, which was filed with the Commission on March 22, 2013 that expresses substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of our inability to continue as a going concern except for the shipping segments’ bank debt and the restricted cash classification under current liabilities and current assets, respectively. These conditions raise significant doubt about our ability to continue as a going concern and, therefore, we may be unable to realize our assets and discharge our liabilities in the normal course of business.

Our credit facilities impose operating and financial restrictions on us, and if we receive additional waivers of covenant breaches and/or further amend our loan agreements in the future, our lenders may impose additional operating and financial restrictions on us and/or modify the terms of our existing credit facilities.

In addition to the loan-to-value ratio requirements and financial covenants relating to our financial position, operating performance and liquidity contained in our credit facilities, our credit facilities also contain restrictions on our ability to, among other things:

 

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enter into other financing arrangements;

 

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incur or guarantee additional indebtedness;

 

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create or permit liens on our assets;

 

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consummate a merger, consolidation or sale of our all or substantially all of our assets or the shares of our subsidiaries;

 

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•

make investments;

 

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change the general nature of our business;

 

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pay dividends, redeem capital stock or subordinated indebtedness or make other restricted payments;

 

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incur dividend or other payment restrictions affecting the restricted subsidiaries under the indenture governing our Senior Secured Notes (as defined below);

 

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change the management and/or ownership of our vessels and drilling units;

 

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enter into transactions with affiliates;

 

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transfer or sell assets;

 

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amend, modify or change our organizational documents;

 

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make capital expenditures;

 

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change the flag, class or management of our vessels or drilling units;

 

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drop below certain minimum cash deposits, as defined in our credit facilities; and

 

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compete effectively to the extent our competitors are subject to less onerous restrictions.

Therefore, we will need to seek permission from our lenders in order to engage in certain corporate and commercial actions that we believe would be in the best interest of our business, and a denial of permission may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. Our lenders’ interests may be different from our interests, and we cannot guarantee that we will be able to obtain our lenders’ permission when needed. In addition to the above restrictions, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness. These potential restrictions and requirements may limit our ability to pay dividends, if any, in the future to you, finance our future operations, make acquisitions or pursue business opportunities.

Our ability to comply with the covenants and restrictions contained in our credit facilities may be affected by economic, financial and industry conditions and other factors beyond our control. Any default under the agreements governing our indebtedness, including a default under our credit facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying dividends in the future. If we are unable to repay indebtedness, the lenders under our credit facilities could proceed against the collateral securing that indebtedness. In any such case, we may be unable to repay the amounts due under our credit facilities. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent. Our ability to comply with these covenants in future periods will also depend substantially on the value of our assets, our charter rates and dayrates, our ability to obtain charters and drilling contracts, our success at keeping our costs low and our ability to successfully implement our overall business strategy. Any future credit agreement or amendment or debt instrument may contain similar or more restrictive covenants.

We have substantial indebtedness, and expect to incur substantial additional indebtedness, which could adversely affect our financial health.

As of June 30, 2013, on a consolidated basis, we had $4.6 billion in aggregate principal amount of indebtedness outstanding and $1.35 billion in additional credit available to us under our credit facilities. In July 2013, we entered into a $1.9 billion senior secured term loan facility and repaid in full amounts outstanding under Ocean Rig’s $800.0 million secured term loan agreement and the two $495.0 million senior secured credit facilities. In addition, we expect to incur substantial additional indebtedness in order to fund the estimated remaining unfinanced contractual obligations, excluding financing costs, amounting to $511.5 million in the aggregate for one of our newbuilding drillships and 4 newbuilding drybulk vessels as of August 19, 2013 and any further growth of our fleet.

 

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This substantial level of debt and other obligations could have significant adverse consequences on our business and future prospects, including the following:

 

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we may not be able to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments, which may result in possible defaults on and acceleration of such indebtedness;

 

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we may not be able to obtain financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;

 

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we may not be able to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service the debt;

 

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we could become more vulnerable to general adverse economic and industry conditions, including increases in interest rates, particularly given our substantial indebtedness, some of which bears interest at variable rates;

 

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our ability to refinance indebtedness may be limited or the associated costs may increase;

 

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less leveraged competitors could have a competitive advantage because they have lower debt service requirements and, as a result, we may not be better positioned to withstand economic downturns; and

 

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we may be less able to take advantage of significant business opportunities and to react to changes in market or industry conditions than our competitors and our management’s discretion in operating our business may be limited.

Each of these factors may have a material and adverse effect on our financial condition and viability. 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 income is not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. Any or all of these actions may be insufficient to allow us to service our debt obligations. Further, we may not be able to effect any of these remedies on satisfactory terms, or at all. In addition, a lack of liquidity in the debt and equity markets could hinder our ability to refinance our debt or obtain additional financing on favorable terms in the future.

We may not be able to generate sufficient cash flow to meet our debt service and other obligations due to events beyond our control.

Our ability to make scheduled payments on our outstanding indebtedness will depend on our ability to generate cash from operations in the future. Our future financial and operating performance will be affected by a range of economic, financial, competitive, regulatory, business and other factors that we cannot control, such as general economic and financial conditions in the drybulk and tanker shipping and offshore drilling industries or the economy generally. In particular, our ability to generate steady cash flow will depend on our ability to secure time charters and drilling contracts at acceptable rates. Our ability to renew our existing time charters and drilling contracts or obtain new time charters and drilling contracts at acceptable charterhire and dayrates or at all will depend on the prevailing economic and competitive conditions.

Furthermore, our financial and operating performance, and our ability to service our indebtedness, is also dependent on our subsidiaries’ ability to make distributions to us, whether in the form of dividends, loans or otherwise. The timing and amount of such distributions will depend on our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in our various debt agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors.

 

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If our operating cash flows are insufficient to service our debt and to fund our other liquidity needs, we may be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, seeking additional capital, or any combination of the foregoing. We cannot assure you that any of these actions could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on our outstanding indebtedness and to fund our other liquidity needs. Also, the terms of existing or future debt agreements may restrict us from pursuing any of these actions. Furthermore, reducing or delaying capital expenditures or selling assets could impair future cash flows and our ability to service our debt in the future.

If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing such indebtedness, which would allow creditors at that time to declare all such indebtedness then outstanding to be due and payable. This would likely in turn trigger cross-acceleration or cross-default rights among certain of our other debt agreements. Under these circumstances, lenders could compel us to apply all of our available cash to repay borrowings or they could prevent us from making payments on the notes. If the amounts outstanding under our existing and future debt agreements were to be accelerated, or were the subject of foreclosure actions, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.

The failure of our counterparties to meet their obligations under our time charter agreements could cause us to suffer losses or otherwise adversely affect our business.

As of August 19, 2013, 19 of our drybulk vessels were employed under time charters and 19 vessels were operating in the spot market. The ability and willingness of each of our counterparties to perform its obligations under a time charter agreement with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the drybulk shipping industry and the overall financial condition of the counterparties. In addition, in challenging market conditions, there have been reports of charterers, including some of our charterers, renegotiating their charters or defaulting on their obligations under charters and our customers may fail to pay charterhire or attempt to renegotiate charter rates.

Three of our drybulk vessels, the Capri, Samatan and Capitola are currently on short term (spot) charters to Korea Line Corp., or KLC, a South Korean shipping company that announced on January 25, 2011 it had filed a petition for the rehabilitation proceeding for court receivership in the Seoul Central District Court, and the court had issued a preservation order. We were entitled to a rate of $61,000, $39,500 and $39,500 per day under our charters with KLC for the vessels Capri, Samatan and Capitola, respectively, which were scheduled to expire between May 2013 and June 2018. On February 15, 2011, KLC’s application was approved by the Seoul Court, and Joint Receivers of KLC were appointed. Upon and with effect from March 14, 2011, the shipowning companies’ original charter agreements with KLC were terminated by the Joint Receivers, and the shipowning companies entered into new short term charter agreements with the Joint Receivers at reduced rates of hire and others terms, with the approval of the Seoul Court. On April 1, 2011, the shipowning companies filed claims in the corporate rehabilitation of KLC for (i) outstanding hire due under the original charter agreements, and (ii) damages and loss caused by the early termination of the original charter agreements. During 2012, the new charterparties, were terminated on agreed terms.

Eleven of the vessels in our fleet provide for charter rates that are significantly above current market rates. Should any of our counterparties under these charters fail to honor its obligations under our charter agreements, it may be difficult to secure substitute employment for such vessels, and any new charter arrangements we secure in the spot market or on time charters could be at lower rates given currently decreased charter rate levels, particularly in the drybulk carrier market. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and comply with covenants in our credit facilities.

 

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Some of our offshore drilling contracts may be terminated early due to certain events.

Some of our customers under our drilling contracts have the right to terminate our drilling contracts upon the payment of an early termination or cancellation fee. However, such payments may not fully compensate us for the loss of the contract. In addition, our contracts permit our customers to terminate the contracts early without the payment of any termination fees under certain circumstances, including as a result of major non-performance, longer periods of downtime or impaired performance caused by equipment or operational issues, or sustained periods of downtime due to piracy or force majeure events beyond our control.

In addition, during periods of challenging market conditions, our customers may no longer need a drilling unit that is currently under contract or may be able to obtain a comparable drilling unit at a lower dayrate. As a result, we may be subject to an increased risk of our clients seeking to renegotiate the terms of their existing contracts or repudiate their contracts, including through claims of nonperformance. Our customers’ ability to perform their obligations under their drilling contracts with us may also be negatively impacted by the prevailing uncertainty surrounding the development of the world economy and the credit markets. If our customers cancel some of our contracts, and we are unable to secure new contracts on a timely basis and on substantially similar terms, or if contracts are suspended for an extended period of time or if a number of our contracts are renegotiated, it could adversely affect our consolidated statement of financial position, results of operations or cash flows.

Our future contracted revenue for our fleet of drilling units may not be ultimately realized.

As of August 19, 2013, the future contracted revenue for our fleet of drilling units, or our drilling contract backlog, was approximately $4.7 billion under firm commitments. We may not be able to perform under our drilling contracts due to events beyond our control, and our customers may seek to cancel or renegotiate our drilling contracts for various reasons, including adverse conditions, resulting in lower daily rates. For example, effective March 3, 2013, one of our customers, European Hydrocarbons Limited, or European Hydrocarbons, unilaterally cancelled our drilling contract for the Eirik Raude for drilling offshore West Africa prior to the scheduled termination date. Our inability, or the inability of our customers, to perform under the respective contractual obligations may have a material adverse effect on our financial position, results of operations and cash flows.

Most of our offshore drilling contracts may be terminated early due to certain events.

Under most of our current drilling contracts, our customers have the right to terminate the drilling contract upon the payment of an early termination or cancellation fee. However, such payments may not fully compensate us for the loss of the contract. For example, European Hydrocarbons, our customer under our drilling contract for the Eirik Raude for drilling operations offshore West Africa, unilaterally cancelled the contract effective March 3, 2013, approximately 23 days prior to the contract’s scheduled termination date. In connection with the cancellation of the contract, we are entitled to an early termination fee of $13.7 million. As a result of the cancellation, we will not receive approximately $14.1 million in estimated contract revenues, after giving effect to the early termination payment.

In addition, our drilling contracts permit our customers to terminate the contracts early without the payment of any termination fees under certain circumstances, including as a result of major non-performance, longer periods of downtime or impaired performance caused by equipment or operational issues, or sustained periods of downtime due to piracy or force majeure events beyond our control.

In addition, during periods of challenging market conditions, our customers may no longer need a drilling unit that is currently under contract or may be able to obtain a comparable drilling unit at a lower dayrate. As a result, we may be subject to an increased risk of our clients seeking to renegotiate the terms of their existing contracts or repudiate their contracts, including through claims of nonperformance. Our customers’ ability to

 

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perform their obligations under their drilling contracts with us may also be negatively impacted by the prevailing uncertainty surrounding the development of the world economy and the credit markets. If our customers cancel some of our contracts, and we are unable to secure new contracts on a timely basis and on substantially similar terms, or if contracts are suspended for an extended period of time or if a number of our contracts are renegotiated, it could adversely affect our consolidated statement of financial position, results of operations or cash flows.

We are dependent on spot charters and any decrease in spot charter rates in the future may adversely affect our earnings.

We currently operate a fleet of 38 drybulk vessels, of which 19 vessels are employed in the spot market, exposing us to fluctuations in spot market charter rates. In addition, we currently employ nine of our tankers in the spot market and one in the pool market. We have also agreed to acquire 4 newbuilding drybulk vessels, which are expected to be delivered to us between April 2014 and August 2014, some of which may be employed in the spot market upon their delivery to us. In addition, we may employ in the spot market any additional vessels that we may acquire in the future or existing vessels upon the expiration of related time charters.

Although the number of vessels in our fleet that participate in the spot market will vary from time to time, we anticipate that a significant portion of our fleet will participate in this market. As a result, our financial performance will be significantly affected by conditions in the drybulk and oil tanker spot market and only our vessels that operate under fixed-rate time charters may, during the period such vessels operate under such time charters, provide a fixed source of revenue to us.

Historically, the drybulk and tanker markets have been volatile as a result of the many conditions and factors that can affect the price, supply of and demand for drybulk and tanker capacity. The recent global economic crisis may further reduce demand for transportation of drybulk cargoes and oil over longer distances and supply of drybulk vessels and tankers to carry such drybulk cargoes and oil, respectively, which may materially affect our revenues, profitability and cash flows. The spot charter market may fluctuate significantly based upon supply of and demand of vessels and cargoes. The successful operation of our vessels in the competitive spot charter market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. The spot market is very volatile, and, in the past, there have been periods when spot rates have declined below the operating cost of vessels. If future spot charter rates decline, then we may be unable to operate our vessels trading in the spot market profitably, meet our obligations, including payments on indebtedness, or to pay dividends in the future. Furthermore, as charter rates for spot charters are fixed for a single voyage, which may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.

Our ability to renew the charters on our vessels upon the expiration or termination of our current charters, seven of which are scheduled to expire in 2013, or on vessels that we may acquire in the future, the charter rates payable under any replacement charters and vessel values will depend upon, among other things, economic conditions in the sectors in which our vessels operate at that time, changes in the supply and demand for vessel capacity and changes in the supply and demand for the seaborne transportation of energy resources.

A drop in spot charter rates may provide an incentive for some charterers to default on their charters.

When we enter into a time charter, charter rates under that charter are fixed for the term of the charter. If the spot charter rates or short-term time charter rates in the drybulk shipping industry remain significantly lower than the time charter equivalent rates that some of our charterers are obligated to pay us under our existing charters, the charterers may have incentive to default under that charter or attempt to renegotiate the charter. If our charterers fail to pay their obligations, we would have to attempt to re-charter our vessels at lower charter rates, which would affect our ability to operate our vessels profitably and may affect our ability to comply with covenants contained in any loan agreements we may enter into in the future.

 

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We depend upon the spot market in our tanker segment and any decrease in spot charter rates may adversely affect our financial condition and results of operations.

We currently employ all of our tankers in the spot market, including one Aframax tanker which operates in Sigma tankers pools. As a result, our results of operations in our tanker segment will be significantly affected by conditions in the oil tanker spot market. The spot market is highly volatile and fluctuates based on tanker and oil supply and demand. The successful operation of our tankers in the spot market depends on, among other things, our commercial and technical manager’s ability to obtain profitable charters and minimizing, to the extent possible, time spent waiting for charters and traveling unladen to pick up cargo. In the past, there have been periods when spot rates have declined below operating costs of vessels. Future spot rates may decline significantly and may not be sufficient for us to operate our tankers profitably, which would have an adverse impact on our financial condition and results of operations.

The tanker sector is currently at depressed levels and conditions in the tanker market could have an adverse effect on our business, results of operation and financial condition.

In November 2010, we expanded into the oil tanker sector with our entry into construction contracts for six Aframax and six Suezmax high specification tankers. We have taken delivery of all six of the newbuilding Aframax tankers and four of the newbuilding Suezmax tankers and have novated the construction contracts for the remaining two Suezmax tankers to an unaffiliated third party in order to release ourselves from our obligations under the construction contracts for these two tankers and reduce the amount of our outstanding capital expenditures. The charter markets for crude oil carriers and product tankers have deteriorated significantly since summer 2008 and are currently at depressed levels. These markets may be further depressed through 2014 given the significant number of newbuilding vessels scheduled to be delivered. Attractive investment opportunities in these sectors may reflect these depressed conditions, however, the return on any such investment is highly uncertain in this extremely challenging operating environment.

The tanker sector, which is intensely competitive, has unique operational risks and is highly dependent on the availability of and demand for crude oil and petroleum products as well as being significantly impacted by the availability of modern tanker capacity and the scrapping, conversion or loss of older vessels. An inability to successfully execute an expansion into the tanker sector could be costly, distract us from our drybulk and offshore drilling business and divert management resources, each of which could have an adverse effect on our business, results of operation and financial condition.

Our ability to establish oil tanker industry relationships and a reputation for customer service and safety, as well as to acquire and renew charters, will depend on a number of factors, including our ability to man our vessels with experienced oil tanker crews and the ability to manage such risks. There is no assurance that we will be able to address the variety of vessel management risks in the oil tanker sector or to develop and maintain commercial relationships with leading charter companies, which could adversely affect our expansion into the oil tanker sector.

Declines in charter rates and other market deterioration could cause us to incur impairment charges.

The Company reviews for impairment long-lived assets and intangible long-lived assets held and used 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 impairment loss. The impairment loss is determined by the difference between the carrying amount of the asset and the fair value of the asset. In developing estimates of future undiscounted cash flows, the Company makes assumptions and estimates about the vessels’, rigs’ and drillships’ future performance, with the significant assumptions being related to charter and drilling rates, fleet utilization, operating expenses, capital expenditures, residual value and the estimated remaining useful life of each vessel, rig and drillship. The assumptions used to develop estimates of

 

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future undiscounted cash flows are based on historical trends as well as future expectations. The projected net operating cash flows are determined by considering the charter revenues and drilling revenues from existing time charters and drilling contracts for the fixed fleet days and an estimated daily time charter equivalent for the unfixed days. In making estimates concerning the daily time charter equivalent for the unfixed days, the Company utilizes the most recent ten year historical average for similar vessels and other available market data over the remaining estimated life of the vessel, assumed to be 25 years from the delivery of the vessel from the shipyard.

As a result of the impairment review, the Company determined that the carrying amounts of its assets held for use were recoverable, and therefore, concluded that no impairment loss was necessary for 2010, 2011 and 2012. However, due to the Company’s decision to sell certain vessels during the years and or subsequent to the balance sheet dates and based on the agreed-upon sales price, an impairment charge of $3.6 million, $144.7 million and $0 million, for each of the years ended December 31, 2010, 2011 and 2012, respectively, was recognized. In addition, during the six-month period ended June 30, 2013, the Company incurred impairment losses of $43.5 million due to the decision to sell certain newbuildings.

Although the Company believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. Set forth below is an analysis that shows the impact on the Company’s impairment analysis of its shipping segment, if the Company were to utilize the most recent five year, three year or one year historical average rates for similar vessels for purposes of estimating future cash flows for unfixed days over the remaining life of the vessel.

 

Amounts in thousand of US dollars		2012
Level of impairment		5 year				3 year				1 year
Drybulk carriers		$	2,902			$	753,809			$	952,181
Drybulk carriers under construction			—				46,700				135,327
Tankers			—				105,489				105,489
Tankers under construction			—				39,750				39,750
Total			42,902			$	945,748			$	1,232,747

Any impairment charges incurred as a result of declines in charter rates and other market deterioration could negatively affect our business, financial condition or operating results or the trading price of our common shares.

We will need to procure significant additional financing, which may be difficult to obtain on acceptable terms, in order to complete the construction of our drillships, tankers and drybulk carriers under construction.

We, through our majority-owned subsidiary, Ocean Rig UDW, have entered into contracts with Samsung Heavy Industries Co. Ltd., or Samsung, for the construction of four seventh generation drillships that are scheduled to be delivered to us in August 2013, November 2013, December 2013 and January 2015, respectively. The estimated total project cost for our four seventh generation drillships, excluding financing costs, is approximately $2.7 billion, of which an aggregate of approximately $1.6 billion was outstanding as of June 30, 2013. In order to complete the construction of our seventh generation drillships, we will need to procure additional financing. On February 28, 2013, we entered into a $1.35 billion syndicated secured term loan facility to partially finance the construction costs of our seventh generation drillships, the Ocean Rig Mylos, delivered in August 2013, and the Ocean Rig Skyros and the Ocean Rig Athena, scheduled for delivery in November 2013 and December 2013, respectively. On July 15, 2013, we paid an installment amounting to $83.0 million for the Ocean Rig Apollo, our seventh generation drillship scheduled for delivery in January 2015. On August 19, 2013, we took delivery of the Ocean Rig Mylos and on August 20, 2013 drew down an amount of $450.0 million under the above facility. We expect to finance the remaining delivery payments for our seventh generation drillships with cash on hand, operating cash flow, equity financing and additional bank debt.

 

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Furthermore, we have entered into contracts for the construction of four Panamax Ice Class 1A drybulk vessels, scheduled for delivery in 2014. As of August 19, 2013, we had remaining construction costs of $124.4 million in the aggregate with respect to our four newbuilding Panamax Ice Class 1A drybulk vessels. We have not secured financing for the remaining construction costs for these vessels.

We cannot be certain that additional financing to complete the construction of our newbuilding drillships and drybulk carriers will be available on acceptable terms or at all. If additional bank financing is not available when needed, or is available only on unfavorable terms, we may be unable to take delivery of one or more of our newbuilding drillships or drybulk vessels, in which case we would be prevented from realizing potential revenues from the applicable drillship or drybulk vessel and we could lose our deposit money, which amounted to $890.9 million in the aggregate, as of June 30, 2013. We may also incur additional costs and liability to the shipyards, which may pursue claims against us under our newbuilding construction contracts and retain and sell our newbuilding drillships and drybulk vessels to third parties to the extent completed.

Construction of vessels and drilling units is subject to risks, including delays and cost overruns, which could have an adverse impact on our available cash resources and results of operations.

As August 19, 2013, we had entered into contracts for the construction of (i) four Panamax Ice Class 1A drybulk vessels, scheduled for delivery in 2014; and (ii) three seventh generation drillships, scheduled for delivery in November 2013, December 2013 and January 2015, respectively. Currently, each of our newbuilding vessels is expected to be delivered to us on time.

From time to time in the future, we may also undertake new construction projects and conversion projects. In addition, we may make significant upgrade, refurbishment, conversion and repair expenditures for our fleet from time to time, particularly as our vessels and drilling units become older. Some of these expenditures are unplanned. These projects together with our existing construction projects and other efforts of this type are subject to risks of cost overruns or delays inherent in any large construction project as a result of numerous factors, including the following:

 

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shipyard unavailability;

 

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shortages of equipment, materials or skilled labor for completion of repairs or upgrades to our equipment;

 

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unscheduled delays in the delivery of ordered materials and equipment or shipyard construction;

 

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financial or operating difficulties experienced by equipment vendors or the shipyard;

 

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unanticipated actual or purported change orders;

 

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local customs strikes or related work slowdowns that could delay importation of equipment or materials;

 

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engineering problems, including those relating to the commissioning of newly designed equipment;

 

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design or engineering changes;

 

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latent damages or deterioration to the hull, equipment and machinery in excess of engineering estimates and assumptions;

 

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work stoppages;

 

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client acceptance delays;

 

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weather interference, storm damage or other events of force majeure;

 

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disputes with shipyards and suppliers;

 

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shipyard failures and difficulties;

 

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•

failure or delay of third-party equipment vendors or service providers;

 

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unanticipated cost increases; and

 

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difficulty in obtaining necessary permits or approvals or in meeting permit or approval conditions.

These factors may contribute to cost variations and delays in the delivery of our newbuilding vessels and drillships. Delays in the delivery of these newbuilding vessels or drillships or the inability to complete construction in accordance with their design specifications may, in some circumstances, result in a delay in contract commencement, resulting in a loss of revenue to us, and may also cause customers to renegotiate, terminate or shorten the term of a charter agreement or drilling contract, pursuant to applicable late delivery clauses. In the event of termination of one of these contracts, we may not be able to secure a replacement contract on as favorable terms. Additionally, capital expenditures for vessel or drilling unit upgrades, refurbishment and construction projects could materially exceed our planned capital expenditures. Moreover, our vessels and drilling units that may undergo upgrade, refurbishment and repair may not earn a dayrate or charterhire, respectively, during the periods they are out of service. In addition, in the event of a shipyard failure or other difficulty, we may be unable to enforce certain provisions under our newbuilding contracts such as our refund guarantee, to recover amounts paid as installments under such contracts. The occurrence of any of these events may have a material adverse effect on our results of operations, financial condition or cash flows.

In the event our counterparties do not perform under their agreements with us for the construction of our newbuilding vessels and drillships and we are unable to enforce certain refund guarantees, we may lose all or part of our investment, which would have a material adverse effect on our results of operations, financial condition and cash flows.

As of August 19 , 2013, we had paid an aggregate of $720.0 million to Samsung in connection with our seventh generation drillships currently scheduled for delivery in November 2013, December 2013 and January 2015.

In addition, as of August 19, 2013, we had entered into contracts for the construction of four Panamax Ice Class 1A drybulk vessels, scheduled for delivery in 2014. As of August 19, 2013, we had made total yard payments in the amount of approximately $11.6 million for these vessels in the aggregate.

In the event our counterparties under the construction contracts discussed above do not perform under their agreements with us and we are unable to enforce certain refund guarantees with third party banks due to an outbreak of war, bankruptcy or otherwise, we may lose all or part of our investment, which would have a material adverse effect on our results of operations, financial condition and cash flows.

Currently, our revenues in the offshore drilling segment depend on two ultra-deepwater drilling rigs and five drillships, which are designed to operate in harsh environments. The damage or loss of any of our drilling units could have a material adverse effect on our results of operations and financial condition.

Our revenues are dependent on the drilling rig Leiv Eiriksson, which commences drilling operations on the Norwegian Continental Shelf, the drilling rig Eirik Raude, which is currently mobilizing from offshore Ireland to offshore West Africa, where the rig is expected to commence drilling operations, and the drillships Ocean Rig Corcovado and Ocean Rig Mykonos, which are currently operating offshore Brazil, Ocean Rig Olympia, which is currently operating offshore West Africa, Ocean Rig Poseidon, which is currently operating offshore Angola and the Ocean Rig Mylos which was delivered on August 19, 2013. Our drilling units may be exposed to risks inherent in deepwater drilling and operating in harsh environments that may cause damage or loss. The drilling of oil and gas wells, particularly exploratory wells where little is known of the subsurface formations involves risks, such as extreme pressure and temperature, blowouts, reservoir damage, loss of production, loss of well control, lost or stuck drill strings, equipment defects, punch throughs, craterings, fires, explosions, pollution and natural disasters such as hurricanes and tropical storms.

 

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In addition, offshore drilling operations are subject to perils peculiar to marine operations, either while on-site or during mobilization, including capsizing, sinking, grounding, collision, marine life infestations, and loss or damage from severe weather. The replacement or repair of a rig or drillship could take a significant amount of time, and we may not have any right to compensation for lost revenues during that time. As long as we have only seven drilling units in operation, loss of or serious damage to one of the drilling units could materially reduce our revenues for the time that drilling unit is out of operation. In view of the sophisticated design of the drilling units, we may be unable to obtain a replacement unit that could perform under the conditions that our drilling units are expected to operate, which could have a material adverse effect on our results of operations and financial condition.

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

While we have the right to inspect previously owned vessels prior to our purchase of them and we intend to inspect all secondhand vessels that we acquire in the future, 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. A secondhand vessel may have conditions or defects that we were not aware of when we bought the vessel and which may require us to incur costly repairs to the vessel. These repairs may require us to put a vessel into drydock which would reduce our fleet utilization. Furthermore, we usually do not receive the benefit of warranties on secondhand vessels.

We may have difficulty managing our planned growth properly.

We intend to continue to grow our fleet. Our future growth will primarily depend on our ability to:

 

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locate and acquire suitable vessels and drilling units;

 

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identify and consummate acquisitions or joint ventures;

 

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enhance our customer base;

 

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manage our expansion; and

 

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obtain required financing on acceptable terms.

Growing any business by acquisition presents numerous risks, such as undisclosed liabilities and obligations, the possibility that indemnification agreements will be unenforceable or insufficient to cover potential losses and difficulties associated with imposing common standards, controls, procedures and policies, obtaining additional qualified personnel, managing relationships with customers and integrating newly acquired assets and operations into existing infrastructure. We may be unable to successfully execute our growth plans or we may incur significant expenses and losses in connection with our future growth which would have an adverse impact on our financial condition and results of operations.

If any of our vessels or drilling units fail to maintain their class certification and/or fail any annual survey, intermediate survey, drydocking or special survey, that vessel or unit would be unable to carry cargo or operate, thereby reducing our revenues and profitability and violating certain covenants under our credit facilities.

The hull and machinery of every commercial drybulk vessel, tanker and drilling unit 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 SOLAS. All of our drybulk vessels are certified as being “in class” by all the major Classification Societies (e.g., American Bureau of Shipping, Lloyd’s Register of Shipping). Each of our operating drillships is certified as being “in class” by American Bureau of Shipping. The Leiv Eiriksson was credited with completing its last

 

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Special Periodical Survey in April 2011 and the Eirik Raude completed the same in 2012. Our five operating drillships are due for their first Special Periodical Surveys in 2016 and 2018. Our seventh generation drillships under construction are due for their first Special Periodical Surveys in 2018 and 2020.

A vessel must undergo annual surveys, intermediate surveys, drydockings and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked every two to three years for inspection of the underwater parts of such vessel.

If any vessel or drilling unit does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports, or operate, and will be unemployable and uninsurable which could cause us to be in violation of certain covenants in our credit facilities. Any such inability to carry cargo or be employed, or operate, or any such violation of covenants, could have a material adverse impact on our financial condition and results of operations.

The aging of our drybulk carrier fleet may result in increased operating costs or loss of hire 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. As of August 2013, the 42 vessels in our drybulk carrier fleet had an average age of 8.9 years. 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 increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations and safety or other equipment standards related to the age of vessels may also 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. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

In addition, charterers actively discriminate against hiring older vessels. For example, Rightship, the ship vetting service founded by Rio Tinto and BHP-Billiton which has become the major vetting service in the drybulk shipping industry, ranks the suitability of vessels based on a scale of one to five stars. Most major carriers will not charter a vessel that Rightship has vetted with fewer than three stars. Rightship automatically downgrades any vessel over 18 years of age to two stars, which significantly decreases its chances of entering into a charter. Therefore, as our vessels approach and exceed 18 years of age, we may not be able to operate these vessels profitably during the remainder of their useful lives.

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

If our drybulk vessels or tankers suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock 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 dividends, if any, in the future. We may not have insurance that is sufficient to cover all or any of these costs or losses and may have to pay drydocking costs not covered by our insurance.

If our drilling units suffer damage, they may need to be repaired at a yard facility. The costs of discontinued operations due to repairs are unpredictable and can be substantial. The loss of earnings while our drilling units are being repaired and repositioned, as well as the actual cost of these repairs, would decrease our earnings and reduce the amount of dividends, if any, in the future. We may not have insurance that is sufficient to cover all or any of these costs or losses and may have to pay repair costs not covered by our insurance.

 

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We may not be able to maintain or replace our drilling units as they age.

The capital associated with the repair and maintenance of our fleet increases with age. We may not be able to maintain our existing drilling units to compete effectively in the market, and our financial resources may not be sufficient to enable us to make expenditures necessary for these purposes or to acquire or build replacement drilling units.

Our board of directors has determined to suspend the payment of cash dividends as a result of market conditions in the international shipping industry, and until such market conditions improve, it is unlikely that we will reinstate the payment of dividends.

In light of a lower freight rate environment and a highly challenged financing environment, our board of directors, beginning with the fourth quarter of 2008, has suspended our common share dividend. Our dividend policy will be assessed by the board of directors from time to time. The suspension allows us to preserve capital and use the preserved capital to capitalize on market opportunities as they may arise. Until market conditions improve, it is unlikely that we will reinstate the payment of dividends. In addition, other external factors, such as our lenders imposing restrictions on our ability to pay dividends under the terms of our loan agreements, may limit our ability to pay dividends. Further, we may not be permitted to pay dividends if we are in breach of the covenants contained in our loan agreements and any waivers of non-compliance with the covenants in our loan agreements that we have received or may receive in the future from our lenders may prohibit us from paying dividends.

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 or pay dividends, if any, in the future.

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, if any, in the future depends on our subsidiaries and their ability to distribute funds to us. Furthermore, certain of our subsidiaries are obligated to use their surplus cash to prepay the balance on their long-term loans. If we are unable to obtain funds from our subsidiaries, our board of directors may not exercise its discretion to pay dividends in the future. We do not intend to obtain funds from other sources to pay dividends, if any, in the future. In addition, the declaration and payment of dividends, if any, in the future will depend on the provisions of Marshall Islands law affecting the payment of dividends. Marshall Islands law generally prohibits the payment of dividends if the company is insolvent or would be rendered insolvent upon payment of such dividend and dividends may be declared and paid out of our operating surplus; but in this case, there is no such surplus. Dividends may be declared or paid out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. Our ability to pay dividends, if any, in the future will also be subject to our satisfaction of certain financial covenants contained in our credit facilities and certain waivers related thereto.

Investment in derivative instruments such as freight forward agreements could result in losses.

From time to time, we may take positions in derivative instruments including freight forward agreements, or FFAs. FFAs and other derivative instruments may be used to hedge a vessel owner’s exposure to the charter market by providing for the sale of a contracted charter rate along a specified route and period of time. Upon settlement, if the contracted charter rate is less than the average of the rates, as reported by an identified index, for the specified route and period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. If we take positions in FFAs or other derivative instruments and do not correctly anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling or termination of the FFA. This could adversely affect our results of operations and cash flows.

 

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The derivative contracts we have entered into to hedge our exposure to fluctuations in interest rates could result in higher than market interest rates and charges against our income.

As of June 30, 2013, we had entered into 37 interest rate swaps for purposes of managing our exposure to fluctuations in interest rates applicable to indebtedness under our credit facilities, which were advanced at a floating rate based on LIBOR. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially differently from our expectations. Our existing interest rate swaps as of June 30, 2013 did not, and our future derivative contracts may not, qualify for treatment as hedges for accounting purposes. We recognized fluctuations in the fair value of these contracts in our statement of operations. At June 30, 2013, the fair value of our interest rate swaps was a liability of $ 77.1 million.

Our financial condition could be materially adversely affected to the extent we do not hedge our exposure to interest rate fluctuations under our financing arrangements, under which loans have been advanced at a floating rate based on LIBOR and for which we have not entered into an interest rate swap or other hedging arrangement. Any hedging activities we engage in may not effectively manage our interest rate exposure or have the desired impact on our financial conditions or results of operations.

Because we generate most of our revenues in U.S. Dollars, but incur a significant portion of our employee salary and administrative and other expenses in other currencies, exchange rate fluctuations could have an adverse impact on our results of operations.

Our principal currency for our operations and financing is the U.S. Dollar. A substantial portion of the operating dayrates for the drilling units, our principal source of revenues, are quoted and received in U.S. Dollars; however, a portion of our revenue under our contracts with Petryleo Brasileiro S.A., or Petrobras Brazil, for the Ocean Rig Corcovado and the Ocean Rig Mykonos is, and a portion of our revenue under our contract with Repsol Sinopec Brasil S.A., or Repsol, for the Ocean Rig Mylos, our seventh generation drillship which was delivered in August 2013, will be receivable in Brazilian Real. The principal currency for operating expenses is also the U.S. Dollar; however, a significant portion of employee salaries and administration expenses, as well as parts of the consumables and repair and maintenance expenses for the drilling rigs, may be paid in Norwegian Kroner, Great British Pounds, Canadian dollars, Euros or other currencies depending in part on the location of our drilling operations. For the six months ended June 30, 2013, approximately 70% of our expenses were incurred in currencies other than the U.S. Dollars. This exposure to foreign currency could lead to fluctuations in net income and net revenue due to changes in the value of the U.S. Dollar relative to the other currencies. Revenues paid in foreign currencies against which the U.S. Dollar rises in value can decrease, resulting in lower U.S. Dollar denominated revenues. Expenses incurred in foreign currencies against which the U.S. Dollar falls in value can increase, resulting in higher U.S. Dollar denominated expenses. We have employed derivative instruments in order to economically hedge our currency exposure; however, we may not be successful in hedging our future currency exposure and our U.S. Dollar denominated results of operations could be materially and adversely affected upon exchange rate fluctuations determined by events outside of our control.

If the recent volatility in LIBOR continues, it could affect our profitability, earnings and cash flow.

LIBOR has recently been volatile, with the spread between LIBOR and the prime lending rate widening significantly at times. These conditions are the result of the recent disruptions in the international credit markets. Because the interest rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, if this volatility were to continue, it would affect the amount of interest payable on our debt, which in turn, could have an adverse effect on our profitability, earnings and cash flow.

Furthermore, interest in most loan agreements in our industry has been based on published LIBOR rates. Recently, however, lenders have insisted on provisions that entitle the lenders, in their discretion, to replace published LIBOR as the base for the interest calculation with their cost-of-funds rate. If we are required to agree to such a provision in future loan agreements, our lending costs could increase significantly, which would have an adverse effect on our profitability, earnings and cash flow.

 

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An increase in interest rates would increase the cost of servicing our indebtedness and could reduce our profitability.

Our debt under certain of our credit facilities bears interest at variable rates. We may also incur indebtedness in the future with variable interest rates. As a result, an increase in market interest rates would increase the cost of servicing our indebtedness and could materially reduce our profitability and cash flows. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial indebtedness.

We depend entirely on TMS Bulkers and TMS Tankers to manage and charter our drybulk fleet and our tankers under construction, respectively.

With respect to our operations in the drybulk and tanker shipping sectors, we currently have 19 employees, including our President and Chief Executive Officer, our Chief Financial Officer and our Senior Vice President Head of Accounting and Reporting. Since January 1, 2011, we have subcontracted the commercial and technical management of our drybulk and tanker vessels, including crewing, maintenance and repair, to TMS Bulkers Ltd., or TMS Bulkers, and TMS Tankers Ltd., or TMS Tankers, respectively. TMS Bulkers and TMS Tankers are beneficially wholly-owned by our Chairman, President and Chief Executive Officer, Mr. George Economou. The loss of the services or TMS Bulkers or TMS Tankers or their failure to perform their obligations to us could materially and adversely affect the results of our operations. Although we may have rights against TMS Bulkers and TMS Tankers if they default on their obligations to us, you will have no recourse against either of them. Further, we are required to seek approval from our lenders to change our manager.

Under our management agreements with TMS Bulkers and TMS Tankers, TMS Bulkers and TMS Tankers shall not be liable to us for any losses or damages arising in the course of its performance under the agreement unless such loss or damage is proved to have resulted from the negligence, gross negligence or willful default by TMS Bulkers and TMS Tankers, its employees or agents and in such case TMS Bulkers’ and TMS Tankers’ liability per incident or series of incidents is limited to a total of ten times the annual management fee payable under the relevant agreement. The management agreements further provide that TMS Bulkers and TMS Tankers shall not be liable for any of the actions of the crew, even if such actions are negligent, grossly negligent or willful, except to the extent that they are shown to have resulted from a failure by TMS Bulkers and TMS Tankers to perform their obligations with respect to management of the crew. Except to the extent of the liability cap described above, we have agreed to indemnify TMS Bulkers and TMS Tankers and their employees and agents against any losses incurred in the course of the performance of the agreement.

TMS Bulkers and TMS Tankers are privately held company and there is little or no publicly available information about them.

The ability of TMS Bulkers and TMS Tankers to continue providing services for our benefit will depend in part on their own financial strength. Circumstances beyond our control could impair TMS Bulkers’ and TMS Tankers’ financial strength, and because it is privately held it is unlikely that information about its financial strength would become public unless TMS Bulkers or TMS Tankers began to default on their obligations. As a result, an investor in our shares might have little advance warning of problems affecting TMS Bulkers and TMS Tankers, even though these problems could have a material adverse effect on us.

We may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business.

Our success will depend in large part on our ability and the ability of TMS Bulkers and TMS Tankers to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. Competition to attract and retain qualified crew members is intense. If we are not able to increase our rates to compensate for any crew cost increases, it could have a material adverse effect on our business, results of operations, cash flows and financial

 

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condition. Any inability we, or TMS Bulkers or TMS Tankers, experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We are dependent upon key management personnel, particularly our Chairman, President and Chief Executive Officer Mr. George Economou.

Our continued operations depend to a significant extent upon the abilities and efforts of our Chairman, President and Chief Executive Officer, Mr. George Economou. The loss of Mr. Economou’s services to our Company could adversely affect our discussions with our lenders and management of our fleet during this difficult economic period and, therefore, could adversely affect our business prospects, financial condition and results of operations. We do not currently, nor do we intend to, maintain “key man” life insurance on any of our personnel, including Mr. Economou.

Our Chairman, Chief Executive Officer has affiliations with TMS Bulkers and TMS Tankers which could create conflicts of interest.

Our major shareholder is controlled by Mr. George Economou, who controls four entities that, in the aggregate, were deemed to beneficially own, directly or indirectly, approximately 14.8% of our outstanding common shares as of August 19, 2013. Mr. Economou controls TMS Bulkers and TMS Tankers. Mr. Economou is also our Chairman, Chief Executive Officer and a director of our Company. These responsibilities and relationships could create conflicts of interest between us, on the one hand, and TMS Bulkers and TMS Tankers, on the other hand. These conflicts may arise in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus drybulk carriers and tankers managed by TMS Bunkers and TMS Tankers, respectively, and/ or other companies affiliated with TMS Bulkers or TMS Tankers and Mr. Economou.

In particular, TMS Bulkers or TMS Tankers may give preferential treatment to vessels that are beneficially owned by related parties because Mr. Economou and members of his family may receive greater economic benefits.

Failure to attract or retain key personnel, labor disruptions or an increase in labor costs could adversely affect our operations in the offshore drilling sector.

We require highly skilled personnel to operate and provide technical services and support for our business in the offshore drilling sector worldwide. As of December 31, 2012, through the subsidiaries of Ocean Rig UDW, we employed 1,374 employees, the majority of whom are full-time crew employed on our drilling units. Under certain of our employment contracts, we are required to have a minimum number of local crew members of our drillships. We will need to recruit additional qualified personnel as we take delivery of our newbuilding drillships. Competition for the labor required for drilling operations has intensified as the number of drilling units activated, added to worldwide fleets or under construction has increased, leading to shortages of qualified personnel in the industry and creating upward pressure on wages and higher turnover. If turnover increases, we could see a reduction in the experience level of our personnel, which could lead to higher downtime, more operating incidents and personal injury and other claims, which in turn could decrease revenues and increase costs. In response to these labor market conditions, we are increasing efforts in our recruitment, training, development and retention programs as required to meet our anticipated personnel needs. If these labor trends continue, we may experience further increases in costs or limits on our offshore drilling operations.

Currently, none of our employees are covered by collective bargaining agreements. In the future, some of our employees or contracted labor may be covered by collective bargaining agreements in certain jurisdictions such as Brazil, Nigeria, Norway and the United Kingdom. As part of the legal obligations in some of these agreements, we may be required to contribute certain amounts to retirement funds and pension plans and have restricted ability to dismiss employees. In addition, many of these represented individuals could be working

 

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under agreements that are subject to salary negotiation. These negotiations could result in higher personnel costs, other increased costs or increased operating restrictions that could adversely affect our financial performance. Labor disruptions could hinder our operations from being carried out normally and if not resolved in a timely cost-effective manner, could have a material impact on our business. If we choose to cease operations in one of those countries or if the market conditions reduce the demand for our drilling services in such a country, we would incur costs, which may be material, associated with workforce reductions.

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

Our current operating and financial systems may not be adequate as we expand the size of our fleet and our attempts to improve those systems may be ineffective. In addition, as we expand our fleet, we will need to recruit suitable additional seafarers and shoreside administrative and management personnel. We may be unable to hire suitable employees as we expand our fleet. If we or our crewing agent encounters 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 and our ability to pay dividends, if any, in the future may be adversely affected.

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. shareholders.

A foreign corporation will be treated as a “passive foreign investment company,” or a 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 which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC 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 method of operation, we do not believe that we are, have been or will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time and voyage chartering activities as services income, rather than rental income. Accordingly, we believe that our income from our time and voyage chartering activities does not constitute passive income, and the assets that we own and operate in connection with the production of that income do not constitute assets that produce or are held for production of passive income.

There is substantial legal authority supporting this position consisting of case law and U.S. Internal Revenue Service, or the IRS, pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, it should be noted that there is also authority which characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, in the absence of any authorkity directly under the PFIC rules, no assurance can be given that the IRS or a court of law will accept this position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if the nature and extent of our operations changed.

If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. federal income tax consequences and information reporting obligations. Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse tax consequences for such shareholders), such shareholders would be subject to U.S. federal income tax at the then

 

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prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the U.S. shareholder’s holding period of our common shares. See “Item 10. Additional Information—E. Taxation – U.S. Federal Income Taxation of U.S. Holders” in our Annual Report on Form 20-F for the year ended December 31, 2012, incorporated herein by reference, “ for a more comprehensive discussion of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.

We may have to pay tax on United States source shipping income, which would reduce our earnings.

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

We expect that we and each of our vessel-owning subsidiaries qualify for this statutory tax exemption and we have taken and intend to continue to take this position for U.S. federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S. source shipping income. For example, we would no longer qualify for exemption under Section 883 of the Code for a particular taxable year if shareholders with a five percent or greater interest in our common shares owned, in the aggregate, 50% or more of our outstanding common shares for more than half of the days during the taxable year. Due to the factual nature of the issues involved, it is possible that our tax-exempt status or that of any of our subsidiaries may change.

If we or our vessel-owning subsidiaries are not entitled to this exemption under Section 883 of the Code for any taxable year, we or our subsidiaries could be subject for those years to an effective 2% (i.e., 50% of 4%) U.S. federal income tax on our gross shipping income attributable to transportation that begins or ends in the United States. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.

A change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate our drilling units could result in a high tax rate on our worldwide earnings, which could result in a significant negative impact on our earnings and cash flows from operations.

We conduct our worldwide drilling operations through various subsidiaries. Tax laws and regulations are highly complex and subject to interpretation. Consequently, we are subject to changing tax laws, treaties and regulations in and between countries in which we operate. Our income tax expense is based upon our interpretation of tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, or in the valuation of our deferred tax assets, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings in our offshore drilling segment, and such change could be significant to our financial results. If any tax authority successfully challenges our operational structure, intercompany pricing policies or the taxable presence of our key subsidiaries in certain countries; or if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure; or if we lose a material tax dispute in any country, particularly in the United States, Canada, the United Kingdom, or Norway, our effective tax rate on our worldwide earnings from our offshore drilling operations could increase substantially and our earnings and cash flows from these operations could be materially adversely affected.

Our subsidiaries that provide services relating to drilling may be subject to taxation in the jurisdictions in which such activities are conducted. Such taxation would result in decreased earnings available to our shareholders.

 

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Investors are encouraged to consult their own tax advisors concerning the overall tax consequences of the ownership of our common shares arising in an investor’s particular situation under U.S. federal, state, local and foreign law.

A spin off of our offshore drilling or tanker segment may have adverse tax consequences to shareholders.

We may again distribute, or spin off, a voting and economic interest in our majority-owned subsidiary, Ocean Rig UDW, formerly known as Primelead Shareholders Inc., which owns and operates our drilling units. We may spin off our wholly-owned subsidiary, Olympian Heracles Holding Inc., or Olympian Heracles Holding, which owns our oil tankers. A spin off of Ocean Rig UDW or Olympian Heracles Holding may be a taxable transaction to our shareholders depending upon their country of residence. A shareholder may recognize taxable gain and be subject to tax as a result of receiving shares of Ocean Rig UDW or Olympian Heracles Holding in the spin off, notwithstanding that cash will not have been received. In addition, after the spin off, Ocean Rig UDW or Olympian Heracles Holding may be treated as a PFIC, which would have adverse U.S. federal income tax consequences to a U.S. shareholder of Ocean Rig UDW or Olympian Heracles Holding. Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse consequences for such shareholders), such U.S. shareholders would be subject to U.S. federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of shares of Ocean Rig UDW or Olympian Heracles Holding, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period in such shares. In the alternative, Ocean Rig UDW or Olympian Heracles Holding may issue common shares in a public offering. If as a result of such issuance, our ownership of Ocean Rig UDW or Olympian Heracles Holding was reduced to less than 25% (but more than 0%) of the outstanding capital stock of such entity, our ownership of Ocean Rig UDW or Olympian Heracles Holding common shares could be treated as a passive asset for purposes of determining whether we are a PFIC for U.S. federal income tax purposes.

Our vessels may call on ports located in, and our drilling units may operate in, countries that are subject to restrictions imposed by the U.S. or other governments, which could adversely affect our reputation and the market for our common shares.

As of the date of this registration statement, none of our vessels has called on ports located in, and none of our drilling units has operated in, countries subject to sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism, such as Cuba, Iran, Sudan and Syria; however our vessels and drilling units may call on ports or operate in these countries from time to time in the future on our charterers’ instructions. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which amended the Iran Sanctions Act. Among other things, CISADA introduced limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. In 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions for or on behalf of any person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting business in U.S. dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran’s petroleum or petrochemical sector. The Iran Threat Reduction Act also includes a provision requiring the President of the United States to impose five or more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise owns, operates, or controls or insures a vessel that was used to

 

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transport crude oil from Iran to another country and (1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions subject to U.S. jurisdiction, and exclusion of that person’s vessels from U.S. ports for up to two years.

Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common shares may adversely affect the price at which our common shares trade. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Alternatively, in connection with the nature of chartering arrangements generally and despite our objections, there is the possibility that from time to time in the future, our charterers may direct our vessels or drilling units to call in ports or operate in locations violative of sanctions. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments. Investor perception of the value of our common shares may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

We may be subject to premium payment calls because we obtain some of our insurance through protection and indemnity associations.

For our drybulk vessels, we may be subject to increased premium payments, or calls, in amounts based on our claim records as well as the claim records of other members of the protection and indemnity associations in the International Group, which is comprised of 13 mutual protection and indemnity associations and insures approximately 90% of the world’s commercial tonnage and through which we receive insurance coverage for tort liability, including pollution-related liability, as well as actual claims. Although there is no cap to the amount of such supplemental calls, historically, supplemental calls for our fleet have ranged from 0% to 40% of the annual insurance premiums, and in no year were such amounts material to the results of our operations. For the drilling units, we may be subject to increased premium payments, or calls, in amounts based on our claim records.

Our customers may be involved in the handling of environmentally hazardous substances and if discharged into the ocean may subject us to pollution liability which could have a negative impact on our cash flows, results of operations and ability to pay dividends, if any, in the future.

Our operations may involve the use or handling of materials that may be classified as environmentally hazardous substances. Environmental laws and regulations applicable in the countries in which we conduct operations have generally become more stringent. Such laws and regulations may expose us to liability for the conduct of or for conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such actions were taken.

During drilling operations in the past, the predecessor of Ocean Rig UDW, Ocean Rig ASA, caused the release of oil, waste and other pollutants into the sea and into protected areas, such as the Barents Sea where on

 

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April 12, 2005, Ocean Rig ASA discharged less than one cubic meter of hydraulic oil. While we conduct maintenance on our drilling units in an effort to prevent such releases, future releases could occur, especially as our rigs age. Such releases may be large in quantity, above our permitted limits or in protected or other areas in which public interest groups or governmental authorities have an interest. These releases could result in fines and other costs to us, such as costs to upgrade our drilling units, costs to clean up the pollution, and costs to comply with more stringent requirements in our discharge permits. Moreover, these releases may result in our customers or governmental authorities suspending or terminating our operations in the affected area, which could have a material adverse effect on our business, results of operation and financial condition.

We expect that we will be able to obtain some degree of contractual indemnification from our customers in most of our drilling contracts against pollution and environmental damages. But such indemnification may not be enforceable in all instances, the customer may not be financially capable in all cases of complying with its indemnity obligations or we may not be able to obtain such indemnification agreements in the future.

Our operating and maintenance costs with respect to our offshore drilling units will not necessarily fluctuate in proportion to changes in operating revenues, which may have a material adverse effect on our results of operations, financial condition and cash flows.

Operating revenues may fluctuate as a function of changes in dayrates. However, costs for operating a drilling unit are generally fixed regardless of the dayrate being earned. Therefore, our operating and maintenance costs with respect to our offshore drilling units will not necessarily fluctuate in proportion to changes in operating revenues. In addition, should our drilling units incur idle time between contracts, we typically will not de-man those drilling units but rather use the crew to prepare the rig for its next contract. During times of reduced activity, reductions in costs may not be immediate, as portions of the crew may be required to prepare rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. In addition, as our drilling units are mobilized from one geographic location to another, labor and other operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity the unit is performing and the age and condition of the equipment. Contract preparation expenses vary based on the scope and length of contract preparation required and the duration of the firm contractual period over which such expenditures are incurred. If we experience increased operating costs without a corresponding increase in earnings, this may have a material adverse effect on our results of operations, financial condition and cash flows.

We may be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse effect on us.

We have been and may be, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential costs to resolve them may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases and/or insurers may not remain solvent which may have a material adverse effect on our financial condition.

Failure to comply with the U.S. Foreign Corrupt Practices Act could result in fines, criminal penalties, drilling contract terminations and an adverse effect on our business.

We may operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent and in full compliance with the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA. We are subject, however, to the risk that we, our affiliated

 

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entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption laws, including the FCPA. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.

Risks Relating to Our Common Shares

We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law, and as a result, shareholders may have fewer rights and protections under Marshall Islands law than under a typical jurisdiction in the United States.

Our corporate affairs are governed by our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws and by the Marshall Islands Business Corporations Act, or the BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public shareholders may have more difficulty in protecting their interests in the face of actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.

Because the Public Company Accounting Oversight Board is not currently permitted to inspect our independent accounting firm, you may not benefit from such inspections.

Auditors of U.S. public companies are required by law to undergo periodic Public Company Accounting Oversight Board, or PCAOB, inspections that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. Certain European Union countries, including Greece, do not currently permit the PCAOB to conduct inspections of accounting firms established and operating in such European Union countries, even if they are part of major international firms. Accordingly, unlike for most U.S. public companies, the PCAOB is prevented from evaluating our auditor’s performance of audits and its quality control procedures, and, unlike shareholders of most U.S. public companies, we and our shareholders are deprived of the possible benefits of such inspections.

We may be adversely affected by the introduction of new accounting rules for leasing.

International and U.S. accounting standard-setting boards (the International Accounting Standards Board, or IASB, and the Financial Accounting Standards Board, or FASB) have proposed changes to the accounting for leases. If the proposals are adopted, they would be expected generally to have the effect of bringing most off-balance sheet leases onto a lessee’s balance sheet which would also change the income and expense recognition patterns of those items. Lessor accounting would also be affected. Financial statement metrics such as leverage and capital ratios, as well as EBITDA, may also be affected, even when cash flow and business activity have not changed. This may in turn affect covenant calculations under various contracts (e.g., loan agreements) unless the affected contracts are modified. On May 16, 2013, the IASB and the FASB issued, for public comment, exposure drafts on the proposed lease accounting. The Boards will set the effective date for the proposed requirements when they consider interested parties’ feedback on this exposure draft. Accordingly, the timing and ultimate effect of theose proposals on the Company are uncertain.

 

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Our Chairman, President and Chief Executive Officer, who may be deemed to beneficially own, directly or indirectly, approximately 14.8% of our outstanding common shares, may have the power to exert control over us, which may limit your ability to influence our actions.

As of August 19, 2013, our Chairman, President and Chief Executive Officer, Mr. George Economou, may be deemed to have beneficially owned, directly or indirectly, approximately 14.8% of our outstanding common shares and therefore may have the power to exert considerable influence over our actions. The interests of our Chairman, President and Chief Executive Officer may be different from your interests.

Future sales of our common shares could cause the market price of our common shares to decline.

The market price of our common shares could decline due to sales, or the announcements of proposed sales, of a large number of common shares in the market, including sales of common shares by our large shareholders, or the perception that these sales could occur. These sales, or the perception that these sales could occur, could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common shares.

Our Amended and Restated Articles of Incorporation authorize our board of directors to, among other things, issue additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, without shareholder approval. We may issue such additional equity or convertible securities to raise additional capital. The issuance of any additional shares of common or preferred stock or convertible securities could be substantially dilutive to our shareholders. Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options or warrants to purchase our common shares in the future and those stock appreciation rights, options or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution. Holders of shares of our common shares have no preemptive rights that entitle such holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders.

There is no guarantee of a continuing public market for you to resell our common shares.

Our common shares commenced trading on the NASDAQ National Market, now the NASDAQ Global Market, in February 2005. Our common shares now trade on the NASDAQ Global Select Market. We cannot assure you that an active and liquid public market for our common shares will continue. The price of our common shares may be volatile and may fluctuate due to factors such as:

 

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actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;

 

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mergers and strategic alliances in the drybulk shipping industry;

 

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market conditions in the drybulk shipping industry and the general state of the securities markets;

 

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changes in government regulation;

 

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shortfalls in our operating results from levels forecast by securities analysts; and

 

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announcements concerning us or our competitors.

The trading price of our common shares is below $5.00 and if it remains below that level, under stock exchange rules, our stockholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability to use our common shares as collateral may depress demand as certain institutional investors are restricted from investing in shares priced below $5.00 and lead to sales of such shares creating downward pressure on and increased volatility in the market price of our common shares.

You may not be able to sell your shares of our common shares in the future at the price that you paid for them or at all.

 

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Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to replace or remove our current board of directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common shares.

Several provisions of our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws could make it difficult for our stockholders to change the composition of our board of directors in any one year, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable.

These provisions include:

 

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authorizing our board of directors to issue “blank check” preferred stock without stockholder approval;

 

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providing for a classified board of directors with staggered, three-year terms;

 

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prohibiting cumulative voting in the election of directors;

 

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authorizing the removal of directors only for cause and only upon the affirmative vote of the holders of a majority of the outstanding shares of our common shares entitled to vote for the directors;

 

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prohibiting stockholder action by written consent unless the written consent is signed by all shareholders entitled to vote on the action;

 

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limiting the persons who may call special meetings of stockholders;

 

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establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

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restricting business combinations with interested shareholders.

In addition, we have entered into a stockholders rights agreement that will make it more difficult for a third party to acquire us without the support of our board of directors.

The above anti-takeover provisions, including the provisions of our stockholders rights plan, could substantially impede the ability of public stockholders to benefit from a change in control and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium.

The price of our shares of common stock after an offering may be volatile.

The price of our shares of common stock may fluctuate due to factors such as:

 

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actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry

 

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mergers and strategic alliances in the drybulk and tanker industries;

 

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market conditions in the drybulk and tanker industries;

 

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changes in government regulation;

 

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the failure of securities analysts to publish research about us after this offering, or shortfalls in our operating results from levels forecast by securities analysts;

 

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the general state of the securities market;

The seaborne transportation industry has been highly unpredictable and volatile. The market for our shares of common stock in this industry may be equally volatile. Consequently, you may not be able to sell the securities at prices equal to or greater than those paid by you in an offering.

 

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Investors may experience significant dilution as a result of future offerings.

We may have to attempt to sell shares in the future in order to satisfy our capital needs; however there can be no assurance that we will be able to do so. If we are able to sell shares in the future, the prices at which we sell these future shares will vary, and these variations may be significant and our existing shareholders may experience significant dilution if we sell these future shares to other than existing shareholders pro rata at prices significantly below the price at which such existing shareholders invested.

We may issue additional shares of our common stock or other equity securities without your approval, which would dilute your ownership interests and may depress the market price of shares of our common stock.

We may issue additional shares of our common stock or other equity securities of equal or senior rank in the future in connection with, among other things, future vessel acquisitions, repayment of outstanding indebtedness, or our equity incentive plan, without shareholder approval, in a number of circumstances.

Our issuance of additional shares of our common stock or other equity securities of equal or senior rank would have the following effects:

 

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our existing shareholders’ proportionate ownership interest in us will decrease;

 

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the amount of cash available for dividends payable on our common shares may decrease;

 

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the relative voting strength of each previously outstanding common share may be diminished; and

 

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the market price of shares of our common stock may decline.

 

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Matters discussed in this prospectus may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts or present facts or conditions.

We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are including this cautionary statement in connection with this safe harbor legislation. This prospectus and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. When used in this prospectus, the words “anticipate,” “believe,” “expect,” “intend,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” and similar expressions identify forward-looking statements.

The forward-looking statements in this prospectus are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Important assumptions relating to the forward-looking statements include, among other things, assumptions regarding demand for our products, the cost and availability of refined marine fuel from suppliers, pricing levels, the timing and cost of capital expenditures, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.

In addition to these assumptions and matters discussed elsewhere herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include:

 

•

our future operating or financial results;

 

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our future payment of dividends and the availability of cash for payment of dividends;

 

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our ability to obtain financing to fund our capital expenditure obligations for our newbuilding drillships;

 

•

our ability to retain and attract senior management and other key employees;

 

•

our ability to manage growth;

 

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our ability to maintain our business in light of our proposed business and location expansion;

 

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our ability to obtain double hull bunkering tankers given the scarcity of such vessels in general;

 

•

the outcome of legal, tax or regulatory proceedings to which we may become a party;

 

•

adverse conditions in the shipping or the marine fuel supply industries;

 

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our ability to retain our key suppliers and key customers;

 

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our contracts and licenses with governmental entities remaining in full force and effect;

 

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material disruptions in the availability or supply of crude oil or refined petroleum products;

 

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changes in the market price of petroleum, including the volatility of spot pricing;

 

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increased levels of competition;

 

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•

compliance or lack of compliance with various environmental and other applicable laws and regulations;

 

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our ability to collect accounts receivable;

 

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changes in the political, economic or regulatory conditions in the markets in which we operate, and the world in general;

 

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our future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending or operating expenses;

 

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our failure to hedge certain financial risks associated with our business;

 

•

uninsured losses;

 

•

our ability to maintain our current tax treatment;

 

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our failure to comply with restrictions in our credit agreements;

 

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increases in interest rates; and

 

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other important factors described from time to time in our filings with the SEC.

 

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PER SHARE MARKET PRICE INFORMATION

The trading market for our common stock is the NASDAQ Global Select Market, on which the shares are listed under the symbol “DRYS.” You should carefully review the high and low prices of DRYS common shares in the tables for the months, quarters and years indicated under the heading “Item 9. The Offer and Listing” in our Annual Report on Form 20-F for the year ended December 31, 2012, which is incorporated by reference herein.

The table below sets forth the high and low market closing prices for each of the periods indicated for our common shares as reported by NASDAQ.

 

		High				Low
For the Year Ended
For the Fiscal Year Ended December 31, 2012		$	3.74			$	1.58
For the Quarter Ended
June 30, 2013		$	2.25			$	1.68
March 31, 2013		$	2.30			$	1.64
For the Month:
August 1 through August 19, 2013		$	2.12			$	1.92
July 2013		$	2.09			$	1.78
June 2013		$	1.87			$	1.68
May 2013		$	2.25			$	1.82
April 2013		$	1.94			$	1.72
March 2013		$	2.13			$	1.80

 

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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

The following table sets forth our unaudited ratio of earnings to fixed charges and preferred stock dividends (or the dollar amount of the coverage deficiency in periods that earnings are inadequate to cover fixed charges) for each of the preceding five fiscal years and the six months ended June 30, 2013.

 

		Year Ended December				Year Ended December 31, 2009				Year Ended December 31, 2010				Year Ended December 31, 2011				Year Ended December 31, 2012				Six months Ended June 30, 2013
		(in thousands of US dollars)
Earnings/ (loss)
Income/(loss) from continuing operations before income taxes and non controlling interests		$	(341,613	)		$	766			$	210,886			$	(19,858	)		$	(244,636	)		$	(92,532	)
Add: Depreciation of capitalized interest			12				46				63				2,871				5,137				2,720
Add: Fixed charges			126,252				115,813				145,276				222,241				269,095				152,639
Less: Capitalized interest			(13,058	)			(31,383	)			(78,451	)			(76,068	)			(58,967	)			(34,466	)
Add: Equity in loss of investee			6,893				—				—				—				—				—
Total Earnings/ (loss)		$	(221,514	)		$	85,242			$	277,774			$	129,186			$	(29,371	)		$	28,361
Fixed Charges
Interest expensed and capitalized		$	110,404			$	101,104			$	107,894			$	163,171			$	209,692			$	120,425
Amortization and write-off of debt issue cost and discount relating to convertible notes			15,848				14,709				37,382				59,070				59,403				32,214
Total Fixed Charges		$	126,252			$	115,813			$	145,276			$	222,241			$	269,095			$	152,639
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends			n/a				n/a				1.9x				n/a				n/a				n/a
Dollar amount of the coverage deficiency			347,766				30,571				n/a				93,055				298,466				124,278

For purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, “preferred stock dividends,” refers to the amount of pre-tax earnings that is required to pay the cash dividends on outstanding preferred stock and is computed as the amount of (a) the dividend divided by (b) the result of 1 minus the effective income tax rate applicable to continuing operations. We did not have any preferred stock outstanding as of August 19, 2013 or during any of the periods covered by the above table.

 

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CAPITALIZATION

Each prospectus supplement will include information on the Company’s consolidated capitalization.

 

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USE OF PROCEEDS

We intend to use net proceeds from the sale of the securities as set forth in the applicable prospectus supplement. We will not receive any proceeds from sales of our securities by any selling shareholder.

 

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PLAN OF DISTRIBUTION

We or any selling shareholder may sell or distribute the securities included in this prospectus and any selling shareholder may sell shares of our common stock through underwriters, through agents, to dealers, in private transactions, at market prices prevailing at the time of sale, at prices related to the prevailing market prices, or at negotiated prices.

In addition, we or any selling shareholder may sell some or all of our securities included in this prospectus, through:

 

•

a block trade in which a broker-dealer may resell a portion of the block, as principal, in order to facilitate the transaction;

 

•

purchases by a broker-dealer, as principal, and resale by the broker-dealer for its account;

 

•

ordinary brokerage transactions and transactions in which a broker solicits purchasers; or

 

•

trading plans entered into by the selling shareholder pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are in place at the time of an offering pursuant to this prospectus and any prospectus supplement hereto that provide for periodic sales of their Common Shares on the basis of parameters described in such trading plans.

In addition, we or any selling shareholder may enter into option or other types of transactions that require us or them to deliver our securities to a broker-dealer, who will then resell or transfer the securities under this prospectus. We or any selling shareholder may enter into hedging transactions with respect to our securities. For example, we or any selling shareholder may:

 

•

enter into transactions involving short sales of our shares of common stock by broker-dealers;

 

•

sell common shares short themselves and deliver the shares to close out short positions;

 

•

enter into option or other types of transactions that require us or the selling shareholder to deliver shares of common stock to a broker-dealer, who will then resell or transfer the shares of common stock under this prospectus; or

 

•

loan or pledge the common shares to a broker-dealer, who may sell the loaned shares or, in the event of default, sell the pledged shares.

We or any selling shareholder may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or any selling shareholder or borrowed from us, any selling shareholder or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us or any selling shareholder in settlement of those derivatives to close out any related open borrowings of stock. The third party in such sale transactions will be an underwriter and, if not identified in this prospectus, will be identified in the applicable prospectus supplement (or a post-effective amendment). In addition, we or any selling shareholder may otherwise loan or pledge securities to a financial institution or other third party that in turn may sell the securities short using this prospectus. Such financial institution or other third party may transfer its economic short position to investors in our securities or in connection with a concurrent offering of other securities.

The selling shareholders and any broker-dealers or other persons acting on our behalf or the behalf of any selling shareholder that participates with us or any selling shareholder in the distribution of the securities, may be deemed to be underwriters, and any commissions received or profit realized by them on the resale of the

 

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securities, may be deemed to be underwriting discounts and commissions under the Securities Act of 1933, as amended, or the Securities Act. As a result, we have or will inform the selling shareholders that Regulation M, promulgated under the Exchange Act, may apply to sales by the selling shareholders in the market. The selling shareholders may agree to indemnify any broker, dealer or agent that participates in transactions involving the sale of our common shares against certain liabilities, including liabilities arising under the Securities Act.

As of the date of this prospectus, we are not a party to any agreement, arrangement or understanding between any broker or dealer and us with respect to the offer or sale of the securities pursuant to this prospectus.

At the time that any particular offering of securities is made, to the extent required by the Securities Act, a prospectus supplement will be distributed, setting forth the terms of the offering, including the aggregate number of securities being offered, the purchase price of the securities, the initial offering price of the securities, the names of any underwriters, dealers or agents, any discounts, commissions and other items constituting compensation from us, and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Furthermore, we, our executive officers, our directors and any selling shareholder may agree, subject to certain exemptions, that for a certain period from the date of the prospectus supplement under which the securities are offered, we and they will not, without the prior written consent of an underwriter, offer, sell, contract to sell, pledge or otherwise dispose of any of our common shares or any securities convertible into or exchangeable for our common shares. However, an underwriter, in its sole discretion, may release any of the securities subject to these lock-up agreements at any time without notice. We expect an underwriter to exclude from these lock-up agreements, securities exercised and/or sold pursuant to trading plans entered into by any selling shareholder pursuant to Rule 10b5-1 under the Exchange Act, that are in place at the time of an offering pursuant to this prospectus and any prospectus supplement hereto that provide for periodic sales of their Common Shares on the basis of parameters described in such trading plans.

Underwriters or agents could make sales in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an at-the-market offering as defined in Rule 415 promulgated under the Securities Act, which includes sales made directly on or through the NASDAQ Global Select Market, the existing trading market for our shares of common stock, or sales made to or through a market maker other than on an exchange.

We will bear costs relating to all of the securities being registered under this registration statement.

As a result of requirements of the Financial Industry Regulatory Authority, or FINRA, formerly the National Association of Securities Dealers, Inc., the maximum commission or discount to be received by any FINRA member or independent broker/dealer may not be greater than 8% of the gross proceeds received by us or any selling shareholder for the sale of any securities being registered pursuant to Rule 415 promulgated by the SEC under the Securities Act.

 

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ENFORCEMENT OF CIVIL LIABILITIES

DryShips Inc. is a Marshall Islands company and our executive offices are located outside of the United States in Athens, Greece. A majority of our directors, officers and the experts named in the prospectus reside outside the United States. In addition, a substantial portion of our assets and the assets of our directors, officers and experts are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.

Furthermore, there is substantial doubt that the courts of the Marshall Islands or Greece would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws.

 

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DESCRIPTION OF CAPITAL STOCK

For purposes of the description of the Company’s capital stock below, references to “us,” “we” and “our” refer only to DryShips Inc. and not any of our subsidiaries. Please see our amended and restated articles of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus forms a part.

Authorized and Outstanding Capital Stock

Under our Amended and Restated Articles of Incorporation, our authorized capital stock consists of 1,000,000,000 shares of common stock, par value $0.01 per share, of which 424,762,244 shares (including treasury stock) are issued and outstanding as of August 19, 2013 and 500,000,000 shares of preferred stock, par value $0.01 per share, of which 100,000,000 shares have been designated as Series A Convertible Preferred Stock and no shares are issued and outstanding as of August 19, 2013. All of our shares of stock are in registered form.

Share History

In October 2004, we issued 15,400,000 shares of our common stock to the Entrepreneurial Spirit Foundation, or the Foundation, as consideration for the contribution to us of all of the issued and outstanding capital stock of six of our subsidiaries. The Foundation is a foundation organized under the laws of Lichtenstein and is controlled by our Chairman and Chief Executive Officer Mr. George Economou. Subsequent to the issuance of the 15,400,000 shares discussed above, 2,772,000 shares of common stock were transferred from the Foundation to Advice Investments S.A., a corporation organized under the Republic of Liberia, all the issued and outstanding capital stock of which is owned by Ms. Elisavet Manola of Athens, Greece, the ex-wife of Mr. Economou. The Foundation transferred 1,848,000 shares of common stock to Magic Management Inc., all of the issued and outstanding capital stock of which is owned by Ms. Rika Vosniadou of Athens, Greece, the ex-wife of Mr. Economou. In February 2005, we issued 14,950,000 shares of common stock in connection with our initial public offering. The net proceeds of the initial public offering were $251.3 million. On February 14, 2006, the Foundation transferred all of its shares to its wholly-owned subsidiary, Elios Investments.

On May 10, 2006, the Company filed its universal shelf registration statement and related prospectus for the issuance of 5,000,000 shares of common stock. From May 2006 through August 2006, 4,650,000 shares of common stock with a par value $0.01 were issued. The net proceeds after underwriting commissions of 2.5% and other issuance fees were $56.5 million.

Our shareholders voted to adopt a resolution at our annual general shareholders’ meeting on July 11, 2006, which increased the aggregate number of shares of common stock that the Company is authorized to issue from 45,000,000 registered shares with par value of $0.01 to 75,000,000 registered shares with par value $0.01.

On October 24, 2006, the Company’s Board of Directors agreed to the request of the Company’s major shareholders (Elios Investments Inc., Advice Investments S.A. and Magic Management Inc.) following the declaration of our $0.20 quarterly dividend per share in September 2006, to receive their dividend payment in the form of our common stock in lieu of cash. One of these shareholders, Elios Investments Inc., is controlled by our Chairman and Chief Executive Officer, Mr. George Economou. In addition, the Board of Directors also agreed on that date to the request of a company related to Mr. Economou to accept repayment of the outstanding balance of a seller’s credit in respect of a vessel purchased by us (as discussed in Note 3(e) of our consolidated financial statements included in our annual report on Form 20-F for the fiscal year ended December 31, 2006) in shares of our common stock. As a result of the agreement, an aggregate of $3,080,000 in dividends and the seller’s credit together with interest amounting to $3,327,000 were settled with 235,585 and 254,512 shares of our common stock, respectively. The price used as consideration for issuance of the above common stock was equal to the average closing price of our common stock on the NASDAQ Global Select Market over the 8 trading days ended October 24, 2006, which was $13.07 per share.

 

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In December 2006, we filed a registration statement on Form F-3 on behalf of the Company’s major shareholders registering for resale an aggregate of 15,890,097 shares of our common stock. This registration statement is no longer effective.

On October 5, 2007, we filed an automatic shelf registration statement on Form F-3ASR (Registration No. 333-146540) for an undetermined amount of securities, including common shares, preferred shares, debt securities, guarantees, warrants, purchase contracts and units. The above registration statement expired on October 5, 2010. As a result, on September 3, 2010, we filed a new automatic shelf registration statement, for an undetermined amount of securities, including common shares, preferred shares, debt securities, guarantees, warrants, purchase contracts and units. The registration of securities pursuant to the Form F-3ASR (Registration No. 333-146540) was deemed terminated as of September 7, 2010, the effective date of the new automatic shelf registration statement.

In January 2008, following a special shareholders meeting, we increased the aggregate number of authorized shares of our common stock from 75,000,000 registered shares with par value of $0.01 to 1,000,000,000 registered shares with a par value of $0.01 and increased the aggregate number of authorized shares of preferred stock from 30,000,000 registered shares; par value $0.01 per share to 500,000,000 registered preferred shares with a par value of $0.01 per share.

In January 2008, we entered into a stockholders rights agreement and declared a dividend of one preferred share purchase right, or a right, to purchase one one-thousandth of our Series A Participating Preferred Stock for each outstanding common share. Each right entitles the registered holder, upon the occurrence of certain events, to purchase from us one one-thousandth of a share of Series A Participating Preferred Stock at a purchase price of $250, subject to adjustment.

In March 2008, we filed a prospectus supplement relating to the offer and sale of up to 6,000,000 shares of common stock, par value $0.01 per share, pursuant to our controlled equity offering. In May 2008, we issued 1,109,903 shares of common stock pursuant to that prospectus supplement. The net proceeds, after underwriting commissions of 1.75% and other issuance fees, amounted to $101.6 million.

On March 5, 2008, we issued to Fabiana Services S.A., or Fabiana, 1,000,000 shares of common stock out of the 1,834,055 shares reserved in our 2008 Equity Incentive Plan. Fabiana, a related party entity incorporated in the Marshall Islands, provides the services of the individual who serves in the position of Chief Executive Officer of the Company. The shares vest quarterly in eight equal installments with the first installment of 125,000 shares vested on May 28, 2008, in accordance with the consultancy agreement with Fabiana.

On October 2, 2008, our board of directors and compensation committee approved grants in the amount of 9,000 vested shares and 9,000 unvested shares to the non-executive directors of the Company. The unvested shares vested ratably in 12 equal installments over a three year period with the first vesting date being January 1, 2009.

On October 21, 2008, we filed a prospectus supplement pursuant to our controlled equity offering for the sale of up to 4,940,097 common shares, pursuant to which we sold 2,069,700 shares. The net proceeds of this offering amounted to $41.9 million.

On November 6, 2008, we filed a prospectus supplement pursuant to our controlled equity offering for the sale of up to 25,000,000 common shares, pursuant to which we sold 24,980,300 shares. The net proceeds of this offering amounted to $167.1 million.

On January 28, 2009, we entered into an ATM Equity Sales Agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, or Merrill Lynch, and we filed a related prospectus supplement relating to the offer and sale of up to $500 million of our common shares, pursuant to which we sold 71,265,000 shares through March 26, 2009. The net proceeds of this offering were $370.5 million after commissions.

 

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On March 12, 2009, we granted to one of our executive officers 70,621 shares of non-vested common stock out of the 1,834,055 shares reserved in our 2008 Equity Incentive Plan. The shares vested in annual instalments of 42,373 and 28,248 shares on March 1, 2010 and 2011, respectively.

On March 19, 2009, we issued a total of 11,990,405 common shares to the nominees of Central Mare Inc. in connection with the disposal of three newbuilding Capesize vessels.

On April 2, 2009, we filed a prospectus supplement pursuant to our controlled equity for the sale of the remaining amount of $119,966,000 of common shares. We issued 24,404,595 shares of common stock with par value $0.01 per share. The net proceeds of this offering amounted to $117.0 million after commissions.

On May 7, 2009, we filed a prospectus supplement pursuant to our ATM Equity Offering Sales Agreement with Merrill Lynch for up to $475 million of common shares, pursuant to which we sold 69,385,000 shares. The net proceeds of this offering amounted to $464.9 million after commissions.

On July 9, 2009, we entered into an agreement with entities affiliated with our Chairman and Chief Executive Officer to acquire the remaining 25% of the total issued and outstanding capital stock of Ocean Rig UDW. The consideration paid for the 25% interest in Ocean Rig UDW consisted of a one-time $50 million cash payment upon the closing of the transaction, and the issuance of 52,238,806 shares of Series A Convertible Preferred Stock with an aggregate face value of $280 million. The holders of our Series A Convertible Preferred Stock have demand Registration Rights exercisable at any time.

In November 25, 2009, we issued $460 million aggregate principal amount of our 5.00% Convertible Senior Notes due December 1, 2014 resulting in net proceeds of $447.8 million. Concurrently with that offering, we offered up to 26,100,000 common shares to loan Deutsche Bank AG, London Branch pursuant to a share lending agreement.

On January 25, 2010 our board of directors and compensation committee approved a bonus in the form of 4,500,000 shares of our common stock with par value $0.01 to be granted to Fabiana for the contribution of our Chief Executive Officer during 2009 as well as for the years 2010, 2011 and 2012. The shares vest over a period of four years, with 1,000,000 shares vesting on the grant date; 1,000,000 shares vested on each of December 31, 2010 and 2011; and 1,500,000 shares vested on December 31, 2012.

On January 25, 2010, we amended our 2008 Equity Incentive Plan to provide that a total of 21,834,055 common shares be reserved for issuance under the 2008 Equity Incentive Plan, as Amended and Restated.

On March 5, 2010, we issued to one of our executive officers 2,000 shares of non-vested common stock and 1,000 shares of vested common stock out of the 21,834,055 common shares reserved under our 2008 Equity Incentive Plan, as Amended and Restated. The shares vested in annual instalments of 1,000 shares on July 20, 2010, December 31, 2010 and December 31, 2011, respectively.

On April 27, 2010, we issued $240 million aggregate principal amount of our 5.00% Convertible Senior Notes due December 1, 2014 resulting in net proceeds of $242.3 million, including $5.06 million in accrued interest from November 25, 2009. Concurrently with that offering, we offered up to 10,000,000 common shares to loan to Deutsche Bank AG, London Branch pursuant to a share lending agreement.

In December 2010, Ocean Rig UDW completed the sale of an aggregate of 28,571,428 of its common shares (representing approximately 22% of Ocean Rig UDW’s then outstanding common shares) in a private offering to eligible purchasers at a price of $17.50 per share, or the Ocean Rig UDW Private Placement. A company controlled by our Chairman, President and Chief Executive Officer, Mr. George Economou, purchased 2,869,428 common shares, or 2.38% of Ocean Rig UDW’s then outstanding common shares, in the Ocean Rig UDW

 

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Private Placement at the offering price of $17.50 per share. We received approximately $488.3 million of net proceeds from the Ocean Rig UDW Private Placement. Following the completion of the Ocean Rig UDW Private Placement, we owned approximately 78% of the outstanding common shares of Ocean Rig UDW.

On January 12, 2011, we awarded 9,000,000 non-vested common shares to Fabiana for the contribution of the services of our Chief Executive Officer during the fiscal year ended 2010. The shares awarded to Fabiana vest over a period of eight years, with 1,000,000 shares vested on February 10, 2011 and 1,000,000 shares vesting annually on December 31 of 2011 through 2018. The fair value of the shares on the award date was $5.50 per share.

On February 4, 2011, we awarded 15,000 non-vested common shares to one of our executive officers, which vest on a pro rata basis over the course of three years beginning in June 2012. The fair value of the shares on the award date was $5.01 per share.

On April 27, 2011, Ocean Rig UDW completed the issuance and sale of $500.0 million aggregate principal amount of its 9.5% senior unsecured notes due 2016, or Senior Unsecured Notes, in a private offering to eligible purchasers. The net proceeds from the offering of the Senior Unsecured Notes amounted to approximately $487.5 million.

On August 26, 2011, Ocean Rig UDW commenced an offer to exchange up to 28,571,428 of its common shares that were registered under the U.S. Securities Act of 1933, as amended, or the Securities Act, pursuant to a registration statement on Form F-4 (Registration No. 333-175940), for an equivalent number of its common shares previously sold in the Ocean Rig UDW Private Placement, or the Ocean Rig UDW Exchange Offer. On September 29, 2011, an aggregate of 28,505,786 common shares were exchanged in the Ocean Rig UDW Exchange Offer.

On October 5, 2011, we completed the partial spin off of Ocean Rig UDW by distributing an aggregate of 2,967,291 common shares of Ocean Rig UDW, representing approximately a 2.25% stake in Ocean Rig UDW, after giving effect to the treatment of fractional shares, on a pro rata basis to our shareholders of record as of September 21, 2011. In lieu of fractional shares, our transfer agent aggregated all fractional shares that would otherwise be distributable to our shareholders and sold a total of 105 common shares on behalf of those shareholders who would otherwise be entitled to receive a fractional share of Ocean Rig UDW. Following the distribution, each such shareholder received a cash payment in an amount equal to its pro rata share of the total net proceeds of the sale of fractional shares. On September 19, 2011, Ocean Rig UDW’s common shares commenced “when issued” trading on the NASDAQ Global Select Market under the ticker “ORIGV.” Ocean Rig UDW’s common shares commenced “regular way” trading on the NASDAQ Global Select Market under the ticker symbol “ORIG” on October 6, 2011.

The conditions for the mandatory conversion of 25% of our 52,238,806 outstanding shares of Series A Convertible Preferred Stock into 10,242,903 of our common shares, at the conversion price set forth in the Certificate of Designations, were met on each of December 31, 2010, March 31, 2011, July 31, 2011 and September 30, 2011, the contractual delivery dates of the Ocean Rig Corcovado, the Ocean Rig Olympia, the Ocean Rig Poseidon and the Ocean Rig Mykonos, respectively. Accordingly, we issued a total of 46,095,517 common shares in connection with the conversion of our shares of Series A Convertible Preferred Stock, including 5,123,905 common shares issued in October 2011 upon the conversion, at the conversion price set forth in the Certificate of Designations, of an aggregate of 6,532,979 dividend shares of Series A Convertible Preferred Stock accrued quarterly from July 9, 2009 through September 30, 2011 and held by each shareholder.

On November 3, 2011, the merger of Pelican Stockholdings Inc., or Pelican Stockholdings, our wholly-owned subsidiary, and OceanFreight Inc., or OceanFreight, was completed, following approval by shareholders of OceanFreight at a special meeting of shareholders held on November 3, 2011. Following the completion of the merger, OceanFreight is our wholly-owned subsidiary. We refer to this transaction as the OceanFreight

 

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acquisition. Under the terms of the merger agreement, OceanFreight shareholders received $11.25 cash and 0.52326 of a common share of Ocean Rig UDW per common share of OceanFreight previously owned. Following the closing of the OceanFreight acquisition, we transferred $33.1 million in cash and 1,541,159 common shares of Ocean Rig UDW to shareholders of OceanFreight, other than the entities controlled by Mr. Anthony Kandylidis, the Chief Executive Officer of OceanFreight, as discussed below. The common shares of Ocean Rig UDW that comprised the stock portion of the merger consideration were currently outstanding shares that were owned by us. Prior to the completion of the merger, we acquired from the entities controlled by Mr. Kandylidis all of their shares of OceanFreight, representing a majority of the outstanding shares of OceanFreight, for the same consideration per share that the OceanFreight shareholders received in the OceanFreight acquisition, which amounted to approximately $33.8 million in cash and 1,570,226 common shares of Ocean Rig UDW. Mr. Kandylidis is the Executive Vice President of Ocean Rig UDW as well as the son of one of our directors and the nephew of our Chairman, President and Chief Executive Officer and the Chairman, President and Chief Executive Officer of Ocean Rig UDW, Mr. George Economou.

On December 6, 2011, we announced that the board of directors of Ocean Rig UDW had approved a repurchase program through December 31, 2013 for up to a total of $500.0 million of Ocean Rig UDW’s common shares and Senior Unsecured Notes. As of August 19, 2013, no repurchases had been made under the repurchase program.

On April 17, 2012, DryShips Inc. completed the sale of an aggregate of 11,500,000 common shares of Ocean Rig UDW owned by DryShips Inc. in a public offering amounting to net proceeds to us of $180.5 million. Companies affiliated with our Chairman, President and Chief Executive Officer purchased a total of 2,185,000 common shares of Ocean Rig UDW from DryShips at the public offering price of $16.25 per share.

On September 20, 2012, Drill Rigs Holdings, our majority-owned subsidiary and a wholly-owned subsidiary of Ocean Rig UDW, completed the issuance of $800 million of aggregate principal amount of Senior Secured Notes, in a private offering to eligible purchasers, or the Drill Rigs Holdings Secured Bond Offering.

On February 14, 2013, DryShips Inc. completed the sale of an aggregate of 7,500,000 common shares of Ocean Rig UDW owned by DryShips Inc. in a public offering amounting to net proceeds to us of $123.2 million.

As of August 19, 2013, we had 424,762,244 common shares (including treasury stock) outstanding and we owned 78,301,755 shares, or 59.4%, of Ocean Rig UDW’s outstanding common shares.

Description of Common Stock

Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. 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. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities. All outstanding shares of common stock are, and the shares to be sold pursuant to this registration statement when issued and paid for will be, fully paid and non-assessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of our Series A Convertible Preferred Stock and any shares of preferred stock which we may issue in the future. Our common stock is listed on the NASDAQ Global Select Market under the symbol “DRYS.”

Our Articles of Incorporation and Bylaws

Our purpose, as stated in Section B of our Amended and Restated Articles of Incorporation, is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Marshall Islands Business Corporations Act. Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws do not impose any limitations on the ownership rights of our shareholders.

 

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Directors

Our directors are elected by a plurality of the votes cast by shareholders entitled to vote in an election. Our Amended and Restated Articles of Incorporation provide that cumulative voting shall not be used to elect directors. Our board of directors must consist of at least three members. The exact number of directors is fixed by a vote of at least 66 2/3% of the entire board. Our Amended and Restated Bylaws provide for a staggered board of directors whereby directors shall be divided into three classes: Class A, Class B and Class C which shall be as nearly equal in number as possible. Shareholders, acting as at a duly constituted meeting, or by unanimous written consent of all shareholders, initially designated directors as Class A, Class B or Class C. The term of our directors designated Class A directors expires at our 2014 annual meeting of shareholders. Class B directors serve for a term expiring at our 2015 annual meeting of shareholders. Directors designated as Class C directors serve for a term expiring at our 2013 annual meeting of shareholders. At annual meetings for each initial term, directors to replace those whose terms expire at such annual meetings will be elected to hold office until the third succeeding annual meeting. Each director serves his respective term of office until his successor has been elected and qualified, except in the event of his death, resignation, removal or the earlier termination of his term of office. Our board of directors has the authority to fix the amounts which shall be payable to the members of the board of directors for attendance at any meeting or for services rendered to us.

Under our Amended and Restated Bylaws, no contract or transaction between the Company and one or more of our directors or officers, or between the Company and any other corporation, partnership, association or other organization of which one or more of our directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of our board of directors or a committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (i) the material facts as to his or her or their relationship or interest as to the contract or transaction are disclosed or are known to our board or directors or the applicable committee thereof and the board or directors or such committee, as applicable, in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, or, if the votes of the disinterested directors are insufficient to constitute an act of the board of directors as defined under the BCA, then by unanimous vote of the disinterested directors; (ii) the material facts as to his or her or their relationship or interest as to the contract or transaction are disclosed or are known to the Company’s shareholders, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (iii) the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified by our board of directors, a committee thereof or our shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee thereof that authorizes the contract or transaction.

Shareholder Meetings

Under our Amended and Restated Bylaws, annual shareholders meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Our board of directors may set a record date between 15 and 60 days before the date of any meeting to determine the shareholders that will be eligible to receive notice and vote at the meeting.

Dissenters’ Rights of Appraisal and Payment

Under the BCA, our shareholders have the right to dissent from various corporate actions, including any merger or consolidation or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting shareholder to receive payment of the appraised fair value of his shares is not available under the BCA for the shares of any class or series of stock, which shares or depository receipts in respect thereof, at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting of the shareholders to act upon the agreement of merger or consolidation, were either (i) listed on a securities exchange or admitted for trading on an interdealer quotation system or (ii) held of record by more than 2,000 holders. In the event of any further

 

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amendment of our Amended and Restated Articles of Incorporation, a shareholder also has the right to dissent and receive payment for the shareholder’s shares if the amendment alters certain rights in respect of those shares. The dissenting shareholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting shareholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in any appropriate court in any jurisdiction in which our shares are primarily traded on a local or national securities exchange.

Shareholders’ Derivative Actions

Under the BCA, any of our shareholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the shareholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.

Indemnification of Officers and Directors

Our Amended and Restated Bylaws include a provision that entitles any director or officer of the Company to be indemnified by the Company upon the same terms, under the same conditions and to the same extent as authorized by the BCA if he acted in good faith and in a manner reasonably believed to be in and not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

We are also authorized to carry directors’ and officers’ insurance as a protection against any liability asserted against our directors and officers acting in their capacity as directors and officers regardless of whether the Company would have the power to indemnify such director or officer against such liability by law or under the provisions of our by laws. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and executive officers.

The indemnification provisions in our Amended and Restated Bylaws may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.

Anti-takeover Provisions of our Charter Documents

Several provisions of our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws may have antitakeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, that a shareholder may consider in its best interest and (2) the removal of incumbent officers and directors.

Blank Check Preferred Stock

Under the terms of our Amended and Restated Articles of Incorporation, our board of directors has authority, without any further vote or action by our shareholders, to issue up to 500,000,000 shares of blank check preferred stock, of which 100,000,000 of these shares have been designated as Series A Convertible Preferred Stock and 10,000,000 of these shares have been designated as Series A Participating Preferred Stock as of August 19, 2013. As of August 19, 2013, we had no shares of preferred stock outstanding. Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

 

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Classified Board of Directors

Our Amended and Restated Articles of Incorporation provide for a board of directors serving staggered, three-year terms. Approximately one-third of our board of directors will be elected each year. The classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of our Company. It could also delay shareholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for two years.

Election and Removal of Directors

Our Amended and Restated Articles of Incorporation prohibit cumulative voting in the election of directors. Our Amended and Restated Bylaws require shareholders to give advance written notice of nominations for the election of directors. Our Amended and Restated Bylaws also provide that our directors may be removed only for cause and only upon affirmative vote of the holders of at least 66 2/3% of the outstanding voting shares of the Company. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

Limited Actions by Shareholders

Under the BCA and our Amended and Restated Bylaws, any action required or permitted to be taken by our shareholders must be effected at an annual or special meeting of shareholders or by the unanimous written consent of our shareholders. Our Amended and Restated Bylaws provide that, unless otherwise prescribed by law, only a majority of our board of directors, the chairman of our board of directors or the President may call special meetings of our shareholders, and the business transacted at the special meeting is limited to the purposes stated in the notice. Accordingly, a shareholder may be prevented from calling a special meeting of shareholders for shareholder consideration of a proposal over the opposition of our board of directors and shareholder consideration of a proposal may be delayed until the next annual meeting of shareholders.

Advance Notice Requirements for Shareholder Proposals and Director Nominations

Our Amended and Restated Bylaws provide that shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must provide timely notice of their proposal in writing to the corporate secretary. Generally, to be timely, a shareholder’s notice must be received at our principal executive offices not less than 150 days nor more than 180 days prior to the one year anniversary of the preceding year’s annual meeting of shareholders. Our Amended and Restated Bylaws also specify requirements as to the form and content of a shareholder’s notice. These provisions may impede shareholders’ ability to bring matters before an annual meeting of shareholders or make nominations for directors at an annual meeting of shareholders.

Stockholders Rights Agreement

We entered into a Stockholders Rights Agreement with American Stock Transfer & Trust Company, as Rights Agent, as of January 18, 2008. Under this Agreement, we declared a dividend payable of one preferred share purchase right, or Right, to purchase one one-thousandth of a share of our Series A Participating Preferred Stock for each outstanding common share. The Right will separate from the common shares and become exercisable after (1) the 10th business day after a person or group acquires ownership of 15% or more of our common shares or (2) the 10th business day (or such later date as determined by the company’s board of directors) after a person or group announces a tender or exchange offer which would result in that person or group holding 15% or more of our common shares, or collectively, the Distribution Date. On the Distribution Date, each holder of a Right will be entitled to purchase for $250.00, or the Exercise Price, a fraction (1/1000th) of one share of our Series A Participating Preferred Stock, which has similar economic terms as one of our common shares. Subject to certain exceptions, if a person acquires more than 15% of our common shares, referred to as an Acquiring Person, each holder of a Right (except that Acquiring Person) will be entitled to buy at the exercise price the number of our common shares stock having a market value of twice the exercise price. In

 

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addition, any time after the date an Acquiring Person obtains more than 15% of our common shares and before that Acquiring Person acquires more than 50% of our outstanding common shares, we may exchange each right owned by all other Rights holders, in whole or in part, for one of our common shares. We may also redeem the Rights at any time prior to a public announcement that a person has acquired ownership of 15% or more of the Company’s common stock.

On July 9, 2009, the Stockholders Rights Agreement was amended for the sole purpose of amending and restating the definition of Acquiring Person to exempt persons acquiring our Series A Convertible Preferred Stock and any of our common shares resulting from the conversion of any such preferred stock from the definition of Acquiring Person, subject to certain exceptions. On April 21, 2010, the Stockholders Rights Agreement was further amended for the sole purpose of further amending and restating the definition of Acquiring Person to exempt from the definition of Acquiring Persons any persons acting (i) as a broker, dealer, distributor or initial purchaser or underwriter of our securities or as a market-maker with respect to such securities or (ii) in connection with share lending agreements or similar agreements between us or any of our affiliates and such person or any of such person’s affiliates or associates, subject to certain exceptions.

The Rights expire on the earliest of (1) February 4, 2018 or (2) the exchange or redemption of the Rights as described above. The terms of the rights and the Stockholders Rights Agreement may be amended without the consent of the Rights holders at any time on or prior to the Distribution Date. After the Distribution Date, the terms of the Rights and the Stockholders Rights Agreement may be amended to make changes, which do not adversely affect the rights of the Rights holders (other than the Acquiring Person). The Rights do not have any voting rights. The Rights have the benefit of certain customary anti-dilution protections. As of August 19, 2013, no exercise of any Right had occurred.

Dividends

In light of a lower freight rate environment and a highly challenged financing environment, our board of directors, beginning with the fourth quarter of 2008, has suspended our common share dividend. Our dividend policy will be assessed by the board of directors from time to time. The suspension allows us to preserve capital and use the preserved capital to capitalize on market opportunities as they may arise. Until market conditions improve, it is unlikely we will reinstate the payment of dividends. In addition, other external factors, such as our lenders imposing restrictions on our ability to pay dividends under the terms of our loan agreements, may limit our ability to pay dividends. Further, we may not be permitted to pay dividends if we are in breach of the covenants contained in our loan agreements. In addition, the waivers of our non-compliance with covenants in our loan agreements that we received from our lenders may prohibit us from paying our dividends.

Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends, if any, in the future, will also depend on the earnings and cash flow of our subsidiaries and their ability to pay dividends to us. If there is a substantial decline in the drybulk, tanker or offshore drilling charter markets, our earnings would be negatively affected thus limiting our ability to pay dividends, if any, in the future. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividend.

We believe that, under current U.S. law, any future dividend payments from our then current and accumulated earnings and profits, as determined under U.S. federal income tax principles, would constitute “qualified dividend income” and, as a consequence, non-corporate U.S. shareholders would generally be subject to the same preferential U.S. federal income tax rates applicable to long-term capital gains with respect to such dividend payments. Distributions in excess of our earnings and profits, as so calculated, will be treated first as a non-taxable return of capital to the extent of a U.S. stockholder’s tax basis in its common shares on a dollar-for-dollar basis and thereafter as capital gain.

 

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DESCRIPTION OF PREFERRED SHARES

Under the terms of our articles of incorporation, our board of directors has authority, without any further vote or action by our shareholders, to issue up to 500,000,000 shares of blank check preferred stock. As of the date of this prospectus, we do not have any shares of Series A Convertible Preferred Stock.

Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our Company or the removal of our management. The material terms of any series of preferred shares that we offer through a prospectus supplement will be described in that prospectus supplement. Our board of directors is authorized to provide for the issuance of preferred shares in one or more series with designations as may be stated in the resolution or resolutions providing for the issue of such preferred shares. At the time that any series of our preferred shares are authorized, our board of directors will fix the dividend rights, any conversion rights, any voting rights, redemption provisions, liquidation preferences and any other rights, preferences, privileges and restrictions of that series, as well as the number of shares constituting that series and their designation. Our board of directors could, without shareholder approval, cause us to issue preferred stock which has voting, conversion and other rights that could adversely affect the holders of our ordinary shares or make it more difficult to effect a change in control. Our preferred shares could be used to dilute the share ownership of persons seeking to obtain control of us and thereby hinder a possible takeover attempt which, if our shareholders were offered a premium over the market value of their shares, might be viewed as being beneficial to our shareholders. In addition, our preferred shares could be issued with voting, conversion and other rights and preferences which would adversely affect the voting power and other rights of holders of our ordinary shares. The material terms of any series of preferred shares that we offer through a prospectus supplement will be described in that prospectus supplement.

Our Series A Convertible Preferred Stock that was outstanding until October 2011 accrued cumulative dividends on a quarterly basis at an annual rate of 6.75% of the aggregate face value. Dividends were payable in preferred stock or cash, if cash dividends have been declared on our common shares. Such accrued dividends were payable in additional shares of preferred stock immediately prior to any conversion.

Each share of our Series A Convertible Preferred Stock was mandatorily convertible into our common shares proportionally, upon the contractual delivery of our drillships Ocean Rig Corcovado, Ocean Rig Olympia, Ocean Rig Poseidon and Ocean Rig Mykonos, at a premium of 127.5% of the original purchase price. Furthermore, each share of the Series A Convertible Preferred Stock could have been converted into our common shares at any time at the option of the holder at a conversion rate of 1.0:0.7.

Each share of Series A Convertible Preferred Stock entitled the holder to one vote on all matters submitted to a vote of our shareholders. Except as otherwise provided in the Certificate of Designations of Rights, Preferences and Privileges of Series A Convertible Preferred Stock, or the Certificate of Designations, or by law, the holders of shares of Series A Convertible Preferred Stock and the holders of our common shares voted together as one class on all matters submitted to a vote of the Company’s shareholders. Except as required by law, holders of Series A Convertible Preferred Stock had no special voting rights and their consent was not be required (except to the extent they are entitled to vote with holders of our common shares as described above) for taking any corporate action.

The Series A Convertible Preferred Stock ranked senior to all other series of our preferred stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provided otherwise. The Series A Convertible Preferred Stock was not redeemable unless upon any liquidation, dissolution or winding up of the Company, or sale of all or substantially all of the Company’s assets, in which case a one-to-one redemption takes place plus any accrued and unpaid dividends.

In connection with the delivery of our newbuilding drillships the Ocean Rig Corcovado, Ocean Rig Olympia, Ocean Rig Poseidon and Ocean Rig Mykonos¸ all of our outstanding shares of Series A Convertible Preferred Stock were converted into common shares in accordance with the terms of the Certificate of Designations.

 

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DESCRIPTION OF WARRANTS

We may issue warrants to purchase any of our debt or equity securities. Each series of warrants will be issued under a separate warrant agreement to be entered into between us and a warrant agent. The terms of any warrants to be issued and a description of the material provisions of the applicable warrant agreement will be set forth in the applicable prospectus supplement.

The applicable prospectus supplement will describe the following terms of any warrants in respect of which this prospectus is being delivered:

 

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the title of such warrants;

 

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the aggregate number of such warrants;

 

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the price or prices at which such warrants will be issued;

 

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the number and type of our securities purchasable upon exercise of such warrants;

 

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the price at which our securities purchasable upon exercise of such warrants may be purchased;

 

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the date on which the right to exercise such warrants shall commence and the date on which such right shall expire;

 

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if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time;

 

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if applicable, the designation and terms of the securities with which such warrants are issued and the number of such warrants issued with each such security;

 

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if applicable, the date on and after which such warrants and the related securities will be separately transferable;

 

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information with respect to book-entry procedures, if any;

 

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if applicable, a discussion of any material United States federal income tax considerations; and

 

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any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants.

 

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DESCRIPTION OF DEBT SECURITIES

We may issue debt securities from time to time in one or more series, under one or more indentures, each dated as of a date on or prior to the issuance of the debt securities to which it relates. We may issue senior debt securities and subordinated debt securities pursuant to separate indentures, a senior indenture and a subordinated indenture, respectively, in each case between us and the trustee named in the indenture. We have filed forms of these documents as exhibits to the registration statement, of which this prospectus forms a part. The senior indenture and the subordinated indenture, as amended or supplemented from time to time, are sometimes referred to individually as an “indenture” and collectively as the “indentures.” Each indenture will be subject to and governed by the Trust Indenture Act and will be construed in accordance with and governed by the laws of the State of New York, without giving effect to any principles thereof relating to conflicts of law that would result in the application of the laws of any other jurisdiction. The aggregate principal amount of debt securities which may be issued under each indenture will be unlimited and each indenture will contain the specific terms of any series of debt securities or provide that those terms must be set forth in or determined pursuant to, an authorizing resolution, as defined in the applicable prospectus supplement, and/or a supplemental indenture, if any, relating to such series. Our debt securities may be convertible or exchangeable into any of our equity or other debt securities.

Certain of our subsidiaries may guarantee the debt securities we offer. Those guarantees may or may not be secured by liens, mortgages, and security interests in the assets of those subsidiaries. The terms and conditions of any such subsidiary guarantees, and a description of any such liens, mortgages or security interests, will be set forth in the prospectus supplement that will accompany this prospectus.

Our statements below relating to the debt securities and the indentures are summaries of their anticipated provisions, are not complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the applicable indenture and any applicable United States federal income tax considerations as well as any applicable modifications of or additions to the general terms described below in the applicable prospectus supplement or supplemental indenture. For a description of the terms of a particular issue of debt securities, reference must be made to both the related prospectus supplement and to the following description.

General

Neither indenture limits the amount of debt securities which may be issued. The debt securities may be issued in one or more series. The senior debt securities will be unsecured and will rank on a parity with all of our other unsecured and unsubordinated indebtedness. Each series of subordinated debt securities will be unsecured and subordinated to all present and future senior indebtedness. Any such debt securities will be described in an accompanying prospectus supplement.

You should read the applicable indenture and subsequent filings relating to the particular series of debt securities for the following terms of the offered debt securities:

 

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the designation, aggregate principal amount and authorized denominations;

 

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the issue price, expressed as a percentage of the aggregate principal amount;

 

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the maturity date;

 

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the interest rate per annum, if any;

 

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if the offered debt securities provide for interest payments, the date from which interest will accrue, the dates on which interest will be payable, the date on which payment of interest will commence and the regular record dates for interest payment dates;

 

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any optional or mandatory sinking fund provisions or exchangeability provisions;

 

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•

the terms and conditions upon which conversion of any convertible debt securities may be effected, including the conversion price, the conversion period and other conversion provisions;

 

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the date, if any, after which and the price or prices at which the offered debt securities may be optionally redeemed or must be mandatorily redeemed and any other terms and provisions of optional or mandatory redemptions;

 

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if other than denominations of $1,000 and any integral multiple thereof, the denominations in which offered debt securities of the series will be issuable;

 

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if other than the full principal amount, the portion of the principal amount of offered debt securities of the series which will be payable upon acceleration or provable in bankruptcy;

 

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any events of default not set forth in this prospectus;

 

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the currency or currencies, including composite currencies, in which principal, premium and interest will be payable, if other than the currency of the United States of America;

 

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if principal, premium or interest is payable, at our election or at the election of any holder, in a currency other than that in which the offered debt securities of the series are stated to be payable, the period or periods within which, and the terms and conditions upon which, the election may be made;

 

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whether interest will be payable in cash or additional securities at our or the holder’s option and the terms and conditions upon which the election may be made;

 

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if denominated in a currency or currencies other than the currency of the United States of America, the equivalent price in the currency of the United States of America for purposes of determining the voting rights of holders of those debt securities under the applicable indenture;

 

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if the amount of payments of principal, premium or interest may be determined with reference to an index, formula or other method based on a coin or currency other than that in which the offered debt securities of the series are stated to be payable, the manner in which the amounts will be determined;

 

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any restrictive covenants or other material terms relating to the offered debt securities;

 

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whether the offered debt securities will be issued in the form of global securities or certificates in registered or bearer form;

 

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any listing on any securities exchange or quotation system;

 

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additional provisions, if any, related to defeasance and discharge of the offered debt securities; and

 

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the applicability of any guarantees.

Subsequent filings may include additional terms not listed above. Unless otherwise indicated in subsequent filings with the SEC relating to the indenture, principal, premium and interest will be payable and the debt securities will be transferable at the corporate trust office of the applicable trustee. Unless other arrangements are made or set forth in subsequent filings or a supplemental indenture, principal, premium and interest will be paid by checks mailed to the holders at their registered addresses.

Unless otherwise indicated in subsequent filings with the SEC, the debt securities will be issued only in fully registered form without coupons, in denominations of $1,000 or any integral multiple thereof. No service charge will be made for any transfer or exchange of the debt securities, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection with these debt securities.

Some or all of the debt securities may be issued as discounted debt securities to be sold at a substantial discount below the stated principal amount. United States federal income tax consequences and other special considerations applicable to any discounted securities will be described in subsequent filings with the SEC relating to those securities.

 

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We refer you to applicable subsequent filings with respect to any deletions or additions or modifications from the description contained in this prospectus.

Senior Debt

We may issue senior debt securities under the senior debt indenture. These senior debt securities will rank on an equal basis with all our other unsecured debt except subordinated debt.

Subordinated Debt

We may issue subordinated debt securities under the subordinated debt indenture. Subordinated debt will rank subordinate and junior in right of payment, to the extent set forth in the subordinated debt indenture, to all our senior debt (both secured and unsecured).

In general, the holders of all senior debt are first entitled to receive payment of the full amount unpaid on senior debt before the holders of any of the subordinated debt securities are entitled to receive a payment on account of the principal or interest on the indebtedness evidenced by the subordinated debt securities in certain events.

If we default in the payment of any principal of, or premium, if any, or interest on any senior debt when it becomes due and payable after any applicable grace period, then, unless and until the default is cured or waived or ceases to exist, we cannot make a payment on account of or redeem or otherwise acquire the subordinated debt securities.

If there is any insolvency, bankruptcy, liquidation or other similar proceeding relating to us or our property, then all senior debt must be paid in full before any payment may be made to any holders of subordinated debt securities.

Furthermore, if we default in the payment of the principal of and accrued interest on any subordinated debt securities that is declared due and payable upon an event of default under the subordinated debt indenture, holders of all our senior debt will first be entitled to receive payment in full in cash before holders of such subordinated debt can receive any payments.

Senior debt means:

 

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the principal, premium, if any, interest and any other amounts owing in respect of our indebtedness for money borrowed and indebtedness evidenced by securities, notes, debentures, bonds or other similar instruments issued by us, including the senior debt securities or letters of credit;

 

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all capitalized lease obligations;

 

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all hedging obligations;

 

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all obligations representing the deferred purchase price of property; and

 

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all deferrals, renewals, extensions and refundings of obligations of the type referred to above;

but senior debt does not include:

 

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subordinated debt securities; and

 

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any indebtedness that by its terms is subordinated to, or ranks on an equal basis with, our subordinated debt securities.

 

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Covenants

Under the terms of the indenture, we covenant, among other things:

 

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that we will duly and punctually pay the principal of and interest, if any, on the offered debt securities in accordance with the terms of such debt securities and the applicable indenture;

 

•

that so long as any offered debt securities are outstanding, we will (i) file with the SEC within the time periods prescribed by its rules and regulations and (ii) furnish to the trustee and holders of the offered debt securities all quarterly and annual financial information required to be furnished or filed with the SEC pursuant to Section 13 and 15(d) of the Exchange Act, and with respect to the annual consolidated financial statements only, a report thereon by our independent auditors;

 

•

that we will deliver to the trustee after the end of each fiscal year a compliance certificate as to whether we have kept, observed, performed and fulfilled our obligations and each and every covenant contained under the applicable indenture;

 

•

that we will deliver to the trustee written notice of any event of default, with the exception of any payment default that has not given rise to a right of acceleration under the indenture;

 

•

that we will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, which may affect the covenants or the performance of the indenture or the offered debt securities;

 

•

that we will do or cause to be done everything necessary to preserve and keep in full force and effect our corporate existence and the corporate, partnership or other existence of certain of our subsidiaries whose preservation is determined to be desirable by our board of directors and material to the holders;

 

•

that we will, and we will cause each of our subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except as contested in good faith and by appropriate proceedings;

 

•

that in the event we are required to pay additional interest to holders of our debt securities, we will provide notice to the trustee, and where applicable, the paying agent, of our obligation to pay such additional interest prior to the date on which any such additional interest is scheduled to be paid; and

 

•

that we will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of the indenture.

Any series of offered debt securities may have covenants in addition to or differing from those included in any applicable indenture which will be described in subsequent filings prepared in connection with the offering of such securities, limiting or restricting, among other things:

 

•

the ability of us or our subsidiaries to incur either secured or unsecured debt, or both;

 

•

the ability to make certain payments, dividends, redemptions or repurchases;

 

•

our ability to create dividend and other payment restrictions affecting our subsidiaries;

 

•

our ability to make investments;

 

•

mergers and consolidations by us or our subsidiaries;

 

•

sales of assets by us;

 

•

our ability to enter into transactions with affiliates;

 

•

our ability to incur liens; and

 

•

sale and leaseback transactions.

 

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Modification of the Indentures

Each indenture and the rights of the respective holders may be modified by us only with the consent of holders of not less than a majority in aggregate principal amount of the outstanding debt securities of all series under the respective indenture affected by the modification, taken together as a class. But no modification that:

 

•

changes the amount of securities whose holders must consent to an amendment, supplement or waiver;

 

•

reduces the rate of or changes the interest payment time on any security or alters its redemption provisions (other than any alteration to any such section which would not materially adversely affect the legal rights of any holder under the indenture) or the price at which we are required to offer to purchase the securities;

 

•

reduces the principal or changes the maturity of any security or reduces the amount of, or postpones the date fixed for, the payment of any sinking fund or analogous obligation;

 

•

waives a default or event of default in the payment of the principal of or interest, if any, on any security (except a rescission of acceleration of the securities of any series by the holders of at least a majority in principal amount of the outstanding securities of that series and a waiver of the payment default that resulted from such acceleration);

 

•

makes the principal of or interest, if any, on any security payable in any currency other than that stated in the security;

 

•

makes any change with respect to holders’ rights to receive principal and interest, certain modifications affecting shareholders or certain currency-related issues; or

 

•

waives a redemption payment with respect to any security or changes any of the provisions with respect to the redemption of any securities will be effective against any holder without his consent. In addition, other terms as specified in subsequent filings may be modified without the consent of the holders.

Events of Default

Each indenture defines an event of default for the debt securities of any series as being any one of the following events:

 

•

default in any payment of interest when due which continues for 30 days;

 

•

default in any payment of principal or premium at maturity;

 

•

default in the deposit of any sinking fund payment when due;

 

•

default in the performance of any covenant in the debt securities or the applicable indenture which continues for 60 days after we receive notice of the default;

 

•

default under a bond, debenture, note or other evidence of indebtedness for borrowed money by us or our subsidiaries (to the extent we are directly responsible or liable therefor) having a principal amount in excess of a minimum amount set forth in the applicable subsequent filing, whether such indebtedness now exists or is hereafter created, which default shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such acceleration having been rescinded or annulled or cured within 30 days after we receive notice of the default; and

 

•

events of bankruptcy, insolvency or reorganization.

An event of default of one series of debt securities does not necessarily constitute an event of default with respect to any other series of debt securities.

 

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There may be such other or different events of default as described in an applicable subsequent filing with respect to any class or series of offered debt securities.

In case an event of default occurs and continues for the debt securities of any series, the applicable trustee or the holders of not less than 25% in aggregate principal amount of the debt securities then outstanding of that series may declare the principal and accrued but unpaid interest of the debt securities of that series to be due and payable. Any event of default for the debt securities of any series which has been cured may be waived by the holders of a majority in aggregate principal amount of the debt securities of that series then outstanding.

Each indenture requires us to file annually after debt securities are issued under that indenture with the applicable trustee a written statement signed by two of our officers as to the absence of material defaults under the terms of that indenture. Each indenture provides that the applicable trustee may withhold notice to the holders of any default if it considers it in the interest of the holders to do so, except notice of a default in payment of principal, premium or interest.

Subject to the duties of the trustee in case an event of default occurs and continues, each indenture provides that the trustee is under no obligation to exercise any of its rights or powers under that indenture at the request, order or direction of holders unless the holders have offered to the trustee reasonable indemnity. Subject to these provisions for indemnification and the rights of the trustee, each indenture provides that the holders of a majority in principal amount of the debt securities of any series then outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee as long as the exercise of that right does not conflict with any law or the indenture.

Defeasance and Discharge

The terms of each indenture provide us with the option to be discharged from any and all obligations in respect of the debt securities issued thereunder upon the deposit with the trustee, in trust, of money or United States government obligations, or both, which through the payment of interest and principal in accordance with their terms will provide money in an amount sufficient to pay any installment of principal, premium and interest on, and any mandatory sinking fund payments in respect of, the debt securities on the stated maturity of the payments in accordance with the terms of the debt securities and the indenture governing the debt securities. This right may only be exercised if, among other things, we have received from, or there has been published by, the United States Internal Revenue Service a ruling to the effect that such a discharge will not be deemed, or result in, a taxable event with respect to holders. This discharge would not apply to our obligations to register the transfer or exchange of debt securities, to replace stolen, lost or mutilated debt securities, to maintain paying agencies and hold moneys for payment in trust.

Defeasance of Certain Covenants

The terms of the debt securities provide us with the right not to comply with specified covenants and that specified events of default described in a subsequent filing will not apply. In order to exercise this right, we will be required to deposit with the trustee money or U.S. government obligations, or both, which through the payment of interest and principal will provide money in an amount sufficient to pay principal, premium, if any, and interest on, and any mandatory sinking fund payments in respect of, the debt securities on the stated maturity of such payments in accordance with the terms of the debt securities and the indenture governing such debt securities. We will also be required to deliver to the trustee an opinion of counsel to the effect that the deposit and related covenant defeasance should not cause the holders of such series to recognize income, gain or loss for United States federal income tax purposes.

A subsequent filing may further describe the provisions, if any, of any particular series of offered debt securities permitting a discharge defeasance.

 

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Subsidiary Guarantees

Certain of our subsidiaries may guarantee the debt securities we offer. In that case, the terms and conditions of the subsidiary guarantees will be set forth in the applicable prospectus supplement. Unless we indicate differently in the applicable prospectus supplement, if any of our subsidiaries guarantee any of our debt securities that are subordinated to any of our senior indebtedness, then the subsidiary guarantees will be subordinated to the senior indebtedness of such subsidiary to the same extent as our debt securities are subordinated to our senior indebtedness.

Global Securities

The debt securities of a series may be issued in whole or in part in the form of one or more global securities that will be deposited with, or on behalf of, a depository identified in an applicable subsequent filing and registered in the name of the depository or a nominee for the depository. In such a case, one or more global securities will be issued in a denomination or aggregate denominations equal to the portion of the aggregate principal amount of outstanding debt securities of the series to be represented by the global security or securities. Unless and until it is exchanged in whole or in part for debt securities in definitive certificated form, a global security may not be transferred except as a whole by the depository for the global security to a nominee of the depository or by a nominee of the depository to the depository or another nominee of the depository or by the depository or any nominee to a successor depository for that series or a nominee of the successor depository and except in the circumstances described in an applicable subsequent filing.

We expect that the following provisions will apply to depository arrangements for any portion of a series of debt securities to be represented by a global security. Any additional or different terms of the depository arrangement will be described in an applicable subsequent filing.

Upon the issuance of any global security, and the deposit of that global security with or on behalf of the depository for the global security, the depository will credit, on its book-entry registration and transfer system, the principal amounts of the debt securities represented by that global security to the accounts of institutions that have accounts with the depository or its nominee. The accounts to be credited will be designated by the underwriters or agents engaging in the distribution of the debt securities or by us, if the debt securities are offered and sold directly by us. Ownership of beneficial interests in a global security will be limited to participating institutions or persons that may hold interests through such participating institutions. Ownership of beneficial interests by participating institutions in the global security will be shown on, and the transfer of the beneficial interests will be effected only through, records maintained by the depository for the global security or by its nominee. Ownership of beneficial interests in the global security by persons that hold through participating institutions will be shown on, and the transfer of the beneficial interests within the participating institutions will be effected only through, records maintained by those participating institutions. The laws of some jurisdictions may require that purchasers of securities take physical delivery of the securities in certificated form. The foregoing limitations and such laws may impair the ability to transfer beneficial interests in the global securities.

So long as the depository for a global security, or its nominee, is the registered owner of that global security, the depository or its nominee, as the case may be, will be considered the sole owner or holder of the debt securities represented by the global security for all purposes under the applicable indenture. Unless otherwise specified in an applicable subsequent filing and except as specified below, owners of beneficial interests in the global security will not be entitled to have debt securities of the series represented by the global security registered in their names, will not receive or be entitled to receive physical delivery of debt securities of the series in certificated form and will not be considered the holders thereof for any purposes under the indenture. Accordingly, each person owning a beneficial interest in the global security must rely on the procedures of the depository and, if such person is not a participating institution, on the procedures of the participating institution through which the person owns its interest, to exercise any rights of a holder under the indenture.

 

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The depository may grant proxies and otherwise authorize participating institutions to give or take any request, demand, authorization, direction, notice, consent, waiver or other action which a holder is entitled to give or take under the applicable indenture. We understand that, under existing industry practices, if we request any action of holders or any owner of a beneficial interest in the global security desires to give any notice or take any action a holder is entitled to give or take under the applicable indenture, the depository would authorize the participating institutions to give the notice or take the action, and participating institutions would authorize beneficial owners owning through such participating institutions to give the notice or take the action or would otherwise act upon the instructions of beneficial owners owning through them.

Unless otherwise specified in applicable subsequent filings, payments of principal, premium and interest on debt securities represented by a global security registered in the name of a depository or its nominee will be made by us to the depository or its nominee, as the case may be, as the registered owner of the global security.

We expect that the depository for any debt securities represented by a global security, upon receipt of any payment of principal, premium or interest, will credit participating institutions’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the global security as shown on the records of the depository. We also expect that payments by participating institutions to owners of beneficial interests in the global security held through those participating institutions will be governed by standing instructions and customary practices, as is now the case with the securities held for the accounts of customers registered in street name, and will be the responsibility of those participating institutions. None of us, the trustees or any agent of ours or the trustees will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial interests in a global security, or for maintaining, supervising or reviewing any records relating to those beneficial interests.

Unless otherwise specified in the applicable subsequent filings, a global security of any series will be exchangeable for certificated debt securities of the same series only if:

 

•

the depository for such global securities notifies us that it is unwilling or unable to continue as depository or such depository ceases to be a clearing agency registered under the Exchange Act and, in either case, a successor depository is not appointed by us within 90 days after we receive the notice or become aware of the ineligibility;

 

•

we in our sole discretion determine that the global securities shall be exchangeable for certificated debt securities; or

 

•

there shall have occurred and be continuing an event of default under the applicable indenture with respect to the debt securities of that series.

Upon any exchange, owners of beneficial interests in the global security or securities will be entitled to physical delivery of individual debt securities in certificated form of like tenor and terms equal in principal amount to their beneficial interests, and to have the debt securities in certificated form registered in the names of the beneficial owners, which names are expected to be provided by the depository’s relevant participating institutions to the applicable trustee.

In the event that the Depository Trust Company, or DTC, acts as depository for the global securities of any series, the global securities will be issued as fully registered securities registered in the name of Cede & Co., DTC’s partnership nominee.

The Depository Trust Company, or DTC, is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the SEC. Established in 1973, DTC was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making “book-entry” changes to ownership of the securities. DTC provides securities movements for the net settlements of the National Securities Clearing Corporation’s or NSCC, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker/dealers), as well as money market instruments.

 

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DTC is a subsidiary of The Depository Trust & Clearing Company, or DTCC. DTCC is a holding company established in 1999 to combine DTC and NSCC. DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage backed securities, money market instruments and over the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s customer base extends to thousands of companies within the global financial services industry. DTCC serves brokers, dealers, institutional investors, banks, trust companies, mutual fund companies, insurance carriers, hedge funds and other financial intermediaries – either directly or through correspondent relationships.

DTCC is industry-owned by its customers who are members of the financial community, such as banks, broker/dealers, mutual funds and other financial institutions. DTCC operates on an at-cost basis, returning excess revenue from transaction fees to its member firms. All services provided by DTC are regulated by the Commission.

The 2012 DTCC Board of Directors is composed of 19 directors serving one-year terms. Thirteen directors are representatives of clearing agency participants, including international broker/dealers, custodian and clearing banks, and investment institutions; of these, two directors are designated by DTCC’s preferred shareholders, which are NYSE Euronext and FINRA. Three directors are from nonparticipants. The remaining three are the chairman and chief executive officer, president, and chief operating officer of DTCC. All of the Board members except those designated by the preferred shareholders are elected annually

To facilitate subsequent transfers, the debt securities may be registered in the name of DTC’s nominee, Cede & Co. The deposit of the debt securities with DTC and their registration in the name of Cede & Co. will effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the debt securities. DTC’s records reflect only the identity of the direct participating institutions to whose accounts debt securities are credited, which may or may not be the beneficial owners. The participating institutions remain responsible for keeping account of their holdings on behalf of their customers.

Delivery of notices and other communications by DTC to direct participating institutions, by direct participating institutions to indirect participating institutions, and by direct participating institutions and indirect participating institutions to beneficial owners of debt securities are governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect.

Neither DTC nor Cede & Co. consents or votes with respect to the debt securities. Under its usual procedures, DTC mails a proxy to the issuer as soon as possible after the record date. The proxy assigns Cede & Co.‘s consenting or voting rights to those direct participating institution to whose accounts the debt securities are credited on the record date.

If applicable, redemption notices shall be sent to Cede & Co. If less than all of the debt securities of a series represented by global securities are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each direct participating institution in that issue to be redeemed.

To the extent that any debt securities provide for repayment or repurchase at the option of the holders thereof, a beneficial owner shall give notice of any option to elect to have its interest in the global security repaid by us, through its participating institution, to the applicable trustee, and shall effect delivery of the interest in a global security by causing the direct participating institution to transfer the direct participating institution’s interest in the global security or securities representing the interest, on DTC’s records, to the applicable trustee. The requirement for physical delivery of debt securities in connection with a demand for repayment or repurchase will be deemed satisfied when the ownership rights in the global security or securities representing the debt securities are transferred by direct participating institutions on DTC’s records.

 

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DTC may discontinue providing its services as securities depository for the debt securities at any time. Under such circumstances, in the event that a successor securities depository is not appointed, debt security certificates are required to be printed and delivered as described above.

We may decide to discontinue use of the system of book-entry transfers through the securities depository. In that event, debt security certificates will be printed and delivered as described above.

The information in this section concerning DTC, DTCC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for its accuracy.

 

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DESCRIPTION OF PURCHASE CONTRACTS

We may issue purchase contracts for the purchase or sale of any of our debt or equity securities issued by us.

Each purchase contract will entitle the holder thereof to purchase or sell, and obligate us to sell or purchase, on specified dates, such securities at a specified purchase price, which may be based on a formula, all as set forth in the applicable prospectus supplement. We may, however, satisfy our obligations, if any, with respect to any purchase contract by delivering the cash value of such purchase contract or the cash value of the securities otherwise deliverable as set forth in the applicable prospectus supplement. The applicable prospectus supplement will also specify the methods by which the holders may purchase or sell such securities and any acceleration, cancellation or termination provisions or other provisions relating to the settlement of a purchase contract.

The purchase contracts may require us to make periodic payments to the holders thereof or vice versa, which payments may be deferred to the extent set forth in the applicable prospectus supplement, and those payments may be unsecured or prefunded on some basis. The purchase contracts may require the holders thereof to secure their obligations in a specified manner to be described in the applicable prospectus supplement. Alternatively, purchase contracts may require holders to satisfy their obligations thereunder when the purchase contracts are issued. Our obligation to settle such pre-paid purchase contracts on the relevant settlement date may constitute indebtedness. Accordingly, pre-paid purchase contracts will be issued under the indenture.

The purchase contracts will be construed in accordance with and governed by the laws of the State of New York, without giving effect to any principles thereof relating to conflicts of law that would result in the application of the laws of any other jurisdiction.

 

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DESCRIPTION OF RIGHTS

We may issue rights to purchase our equity securities. These rights may be issued independently or together with any other security offered by this prospectus and may or may not be transferable by the shareholder receiving the rights in the rights offering. In connection with any rights offering, we may enter into a standby underwriting agreement with one or more underwriters pursuant to which the underwriter will purchase any securities that remain unsubscribed for upon completion of the rights offering.

The applicable prospectus supplement relating to any rights will describe the terms of the offered rights, including, where applicable, the following:

 

•

the exercise price for the rights;

 

•

the number of rights issued to each shareholder;

 

•

the extent to which the rights are transferable;

 

•

any other terms of the rights, including terms, procedures and limitations relating to the exchange and exercise of the rights;

 

•

the date on which the right to exercise the rights will commence and the date on which the right will expire;

 

•

the amount of rights outstanding;

 

•

the extent to which the rights include an over-subscription privilege with respect to unsubscribed securities; and

 

•

the material terms of any standby underwriting arrangement entered into by us in connection with the rights offering.

The description in the applicable prospectus supplement of any rights we offer will not necessarily be complete and will be qualified in its entirety by reference to the applicable rights certificate or rights agreement, which will be filed with the Commission if we offer rights. For more information on how you can obtain copies of any rights certificate or rights agreement if we offer rights, see “Where You Can Find Additional Information” of this prospectus. We urge you to read the applicable rights certificate, the applicable rights agreement and any applicable prospectus supplement in their entirety.

 

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DESCRIPTION OF UNITS

As specified in the applicable prospectus supplement, we may issue units consisting of one or more of our purchase contracts, warrants, debt securities, shares of preferred stock, shares of common stock or any combination of such securities. The applicable prospectus supplement will describe:

 

•

the terms of the units and of the purchase contracts, warrants, debt securities, preferred stock and common stock comprising the units, including whether and under what circumstances the securities comprising the units may be traded separately;

 

•

a description of the terms of any unit agreement governing the units;

 

•

if applicable, a discussion of any material U.S. federal tax considerations; and

 

•

a description of the provisions for the payment, settlement, transfer or exchange or the units.

 

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EXPENSES

The following are the estimated expenses of the issuance and distribution of the securities being registered under the registration statement of which this prospectus forms a part, all of which will be paid by us.

 

SEC registration fee		$	*
FINRA filing fee		$	*
Legal fees and expenses		$	*
Accounting fees and expenses		$	*
Printing and engraving expenses		$	*
Transfer agent and registrar fees		$	*
Indenture trustee fees and expenses		$	*
Blue sky fees and expenses		$	*
Miscellaneous		$	*
Total		$	*

 

*	To be provided by a prospectus supplement or as an exhibit to Report on Form 6-K that is incorporated by reference into this registration statement.

LEGAL MATTERS

The validity of the securities offered by this prospectus will be passed upon for us by Seward & Kissel LLP, New York, New York with respect to matters of United States and Marshall Islands law.

EXPERTS

The consolidated financial statements of DryShips Inc., appearing in DryShips Inc.‘s Annual Report on Form 20-F for the year ended December 31, 2012 (including schedule appearing therein) and the effectiveness of DryShips Inc.‘s internal control over financial reporting as of December 31, 2012, have been audited by Ernst Young (Hellas) Certified Auditors Accountants S.A., independent registered public accounting firm, as set forth in its reports thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about DryShips Inc’s. ability to continue as a going concern as described in Note 3 to the consolidated financial statements), included therein, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The address of Ernst & Young (Hellas) Certified Auditors Accountants S.A. is 11th km National Road Athens-Lamia, 14451, Metamorphosi Athens, Greece.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

As required by the Securities Act of 1933, we filed a registration statement relating to the securities offered by this prospectus with the SEC. This prospectus is a part of that registration statement, which includes additional information.

Government Filings

We file annual and special reports within the SEC. You may read and copy any document that we file and obtain copies at the prescribed rates from the SEC’s Public Reference Room at 100 F Street, N.E., Washington

 

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D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling 1 (800) SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and other information regarding issuers that file electronically with the SEC. Our filings are also available on our website at http://www.dryships.com. The information on our website, however, is not, and should not be deemed to be, a part of this prospectus.

This prospectus and any prospectus supplement are part of a registration statement that we filed with the SEC and do not contain all of the information in the registration statement. The full registration statement may be obtained from the SEC or us, as indicated below. Forms of the indenture and other documents establishing the terms of the offered securities are filed as exhibits to the registration statement. Statements in this prospectus or any prospectus supplement about these documents are summaries and each statement is qualified in all respects by reference to the document to which it refers. You should refer to the actual documents for a more complete description of the relevant matters. You may inspect a copy of the registration statement at the SEC’s Public Reference Room in Washington, D.C., as well as through the SEC’s website.

Information Incorporated by Reference

The SEC allows us to “incorporate by reference” information that we file with it. This means that we can disclose important information to you by referring you to those filed documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC prior to the termination of this offering will also be considered to be part of this prospectus and will automatically update and supersede previously filed information, including information contained in this document.

We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act:

 

•

Annual Report on Form 20-F for the year ended December 31, 2012, filed with the SEC on March 22, 2013, which contains audited consolidated financial statements for the most recent fiscal year for which those statements have been filed;

 

•

Our Report on Form 6-K, filed with the Commission on August 8, 2013, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operation and our unaudited interim condensed consolidated financial statements and related information and data as of and for the six month period ended June 30, 2013;

 

•

Our Report on Form 6-K, filed with the Commission on July 16, 2013,

 

•

Our Report on Form 6-K, filed with the Commission on July 23, 2013

 

•

The description of our securities contained in our Registration Statement on Form F-1, (File No. 333-122008) as amended, filed with the SEC on January 13, 2005 and any amendment or report filed for the purpose of updating that description; and

 

•

Registration Statement on Form 8-A12B, filed with the Commission on January 8, 2008, and any amendment thereto.

We are also incorporating by reference all subsequent annual reports on Form 20-F that we file with the Commission and certain Reports on Form 6-K that we furnish to the Commission after the date of this prospectus (if they state that they are incorporated by reference into this prospectus) until we file a post-effective amendment indicating that the offering of the securities made by this prospectus has been terminated. In all cases, you should rely on the later information over different information included in this prospectus or the prospectus supplement.

You should rely only on the information contained or incorporated by reference in this prospectus and any accompanying prospectus supplement. We have not, and any underwriters have not, authorized any other person

 

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to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any accompanying prospectus supplement as well as the information we previously filed with the Commission and incorporated by reference, is accurate as of the dates on the front cover of those documents only. Our business, financial condition and results of operations and prospects may have changed since those dates.

You may request a free copy of the above mentioned filings or any subsequent filing we incorporated by reference to this prospectus by writing or telephoning us at the following address:

DryShips Inc.

Attn: George Economou

74-76 V. Ipeirou Street

151 25, Marousi

Athens, Greece

(011) (30) 210 80 90 570

Information provided by the Company

We will furnish holders of shares of our common stock with annual reports containing audited financial statements and a report by our independent registered public accounting firm. The audited financial statements will be prepared in accordance with U.S. generally accepted accounting principles. As a “foreign private issuer,” we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. While we furnish proxy statements to shareholders in accordance with the rules of the NASDAQ Global Select Market, those proxy statements do not conform to Schedule 14A of the proxy rules promulgated under the Exchange Act. In addition, as a “foreign private issuer,” our officers and directors are exempt from the rules under the Exchange Act relating to short swing profit reporting and liability.

Commission Position on Indemnification for Securities Act Liabilities

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

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