UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


________________




FORM
10-K




[X]           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE


SECURITIES
EXCHANGE ACT OF 1934




For
the Fiscal Year Ended December 31, 2008




OR




[  ]           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE


SECURITIES
EXCHANGE ACT OF 1934




For
the transition period
from                   to


________________




Commission File Number001-33831




EAGLE
BULK SHIPPING INC.




(Exact
name of Registrant as specified in its charter)




Republic
      of the Marshall Islands
            
            98–0453513(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)477
      Madison Avenue
              New
      York, New York 10022
              (Address
      of principal executive offices and Zip
Code)





Registrant’s
telephone number, including area code: (212) 785–2500





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





Common
Stock, par value $.01 per share


(Title
of Class)





The
Common Stock is registered on the NASDAQ Stock Market LLC


(Name
of exchange on which registered)




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




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes oNo x




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




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




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




1






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




Large
accelerated filer x Accelerated filer
o Non-Accelerated filer
o Smaller reporting
company o




(Do not
check if a smaller reporting company)




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




The
aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 30, 2008, the last business day of the registrant’s most
recently completed second quarter, was 1,383,003,271 based on the closing price
of $29.57 per share on the NASDAQ Stock Exchange on that date. (For this
purpose, all outstanding shares of Common Stock have been considered held by
non-affiliates, other than the shares beneficially owned by directors, officers
and certain 5% shareholders of the registrant; without conceding that any of the
excluded parties are “affiliates” of the registrant for purposes of the federal
securities laws.)




As of
March 2, 2009, 47,031,300 shares of the registrant’s Common Stock were
outstanding.






DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant’s definitive proxy statement to be filed by the registrant
within 120 days of December 31, 2008 in connection with its 2009 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Form
10-K.




TABLE OF CONTENTSPagePART
      IItem
      1.
                      Business
                      3Item
      1A.
                      Risk
      Factors
                      31Item
      1B.
                      Unresolved
      Staff Comments
                      46Item
      2.
                      Properties
                      46Item
      3.
                      Legal
      Proceedings
                      46Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      46PART
      IIItem
      5.
                      Market
      for Registrant’s Common Equity, Related Stockholder
                        Matters
      and Issuer Purchases of Equity Securities
                      47Item
      6.
                      Selected
      Financial Data
                      49Item
      7.
                      Management’s
      Discussion and Analysis of Financial Condition
                        and
      Results of Operations
                      51Item
      7A.
                      Quantitative
      and Qualitative Disclosures about Market Risks
                      73Item
      8.
                      Financial
      Statements and Supplementary Data
                      75Item
      9.
                      Changes
      in and Disagreements with Accountants on
                        Accounting
      and Financial Disclosure
                      75Item
      9A.
                      Controls
      and Procedures
                      75Item
      9B.
                      Other
      Information
                      76PART
      IIIItem
      10.
                      Directors,
      Executive Officers, and Corporate Governance
                      77Item
      11.
                      Executive
      Compensation
                      77Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and
                        Management
      and Related Stockholder Matters
                      77Item
      13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      78Item
      14.
                      Principal
      Accounting Fees and Services
                      78PART
      IVItem
      15.
                      Exhibits,
      Financial Statement Schedules
                      79Signatures
                      80




2





PART
I





ITEM1.BUSINESS





Overview





Eagle
Bulk Shipping Inc. (the “Company”, “we”, “us”, or “our”), incorporated
under the laws of the Republic of the Marshall Islands (the “Marshall Islands”)
and headquartered in New York City, is engaged primarily in the ocean
transportation of a broad range of major and minor bulk cargoes, including iron
ore, coal, grain, cement and fertilizer, along worldwide shipping routes. We
operate in the Handymax sector of the dry bulk industry, with particular
emphasis on the Supramax class of vessels. As of December 31, 2008, we owned and
operated a modern fleet of 23 oceangoing vessels with a combined carrying
capacity of 1,184,939 deadweight tons and an average age of approximately
6 years. We also have a Supramax vessel newbuilding program in China and
Japan which commenced delivery of the constructed vessels in 2008 and is
expected to continue until 2011. At the end of 2008, we had contracts for the
construction of 24 Supramax vessels with a combined carrying capacity of
1,369,300 deadweight tons. During 2008, three vessels have been constructed and
delivered into our fleet. The program also provides us with options for the
construction of eight Supramax vessels with a combined carrying capacity of
464,000 deadweight tons. Upon delivery of the last contracted newbuilding vessel
in 2011, our total fleet will consist of 47 vessels with a combined carrying
capacity of 2.55 million dwt.





We
own one of the largest fleets of Supramax dry bulk vessels in the world.
Supramax dry bulk vessels range in size from 50,000 to 60,000 dwt. These vessels
have the cargo loading and unloading flexibility of on-board cranes while
offering cargo carrying capacities approaching that of Panamax dry bulk vessels,
which range in size from 60,000 to 100,000 dwt and must rely on port facilities
to load and offload their cargoes. We believe that the cargo handling
flexibility and cargo carrying capacity of the Supramax class vessels make them
attractive to charterers.





We
carry out the commercial and strategic management of our fleet through our
wholly-owned subsidiary, Eagle Shipping International (USA) LLC, a Marshall
Islands limited liability company that was formed in January 2005 and
maintains its principle executive offices in New York City. Each of our vessels
is owned by us through a separate wholly owned Marshall Islands limited
liability company.





We
maintain our principal executive offices at 477 Madison Avenue, New York, New
York 10022. Our telephone number at that address is (212) 785-2500. Our
website address is www.eagleships.com. Information contained on our website does
not constitute part of this annual report.





A
glossary of shipping terms (the “Glossary”) that should be used as a reference
when reading this Annual Report on Form 10-K begins on page 25. Capitalized
terms that are used in this Annual Report are either defined when they are first
used or in the Glossary.





Forward-Looking
Statements





This
Form 10-K contains forward-looking statements regarding the outlook for dry
cargo markets, and the Company’s prospects. There are a number of factors, risks
and uncertainties that could cause actual results to differ from the
expectations reflected in these forward-looking statements, including changes in
production of or demand for major and minor bulk commodities, either globally or
in particular regions; greater than anticipated levels of vessel newbuilding
orders or less than anticipated rates of scrapping of older vessels; changes in
trading patterns for particular commodities significantly impacting overall
tonnage requirements; changes in the rates of growth of the world and various
regional economies; risks incident to vessel operation, including discharge of
pollutants; unanticipated changes in laws and regulations; increases in costs of
operation; the availability to the Company of suitable vessels for acquisition
or chartering-in on terms it deems favorable; the ability to attract and retain
customers. This Form 10-K also includes statistical data regarding world dry
bulk fleet and orderbook and fleet age. We generated some of these data
internally, and some were obtained from independent industry publications and
reports that we believe to be reliable sources.  We have not
independently verified these data nor sought the consent of any organizations to
refer to their reports in this Annual Report. The Company assumes no obligation
to update or revise any forward-looking statements. Forward-looking statements
in this Form 10-K and written and oral forward-looking statements attributable
to the Company or its representatives after the date of this Form 10-K are
qualified in their entirety by the cautionary statement contained in this
paragraph and in other reports hereafter filed by the Company with the
Securities and Exchange Commission.


3
  Management
of Our Fleet


Our New York City based management team, with in excess of
20 years of experience in the shipping industry primarily focused on the
sub-Panamax dry bulk sectors, such as Supramax, Handymax and Handysize vessels,
undertakes all commercial and strategic management of our fleet and supervises
the technical management of our vessels. The technical management of our fleet
is provided by unaffiliated third party managers, V.Ships, Wilhelmsen Ship
Management (formerly Barber Ship Management), and Anglo Eastern International
Ltd., which are three of the world’s largest providers of independent ship
management and related services, and which we refer to as our technical
managers. The management of our fleet includes the following
functions:





·
            Strategic management.
      We locate, obtain financing and insurance for, purchase and sell,
      vessels.




·
            Commercial management.
      We obtain employment for our vessels and manage our relationships with
      charterers.




·
            Technical management.
      The technical manager performs day-to-day operations and maintenance of
      our vessels.




Our
Competitive Strengths and our Business Strategy





We
believe that we have a number of strengths that provide us with a competitive
advantage in the dry bulk shipping industry, including:





·
            A fleet of Supramax dry bulk
      vessels. We specialize in the Supramax class of the Handymax sector
      of the dry bulk industry. Our operating fleet of 23 vessels at December
      31, 2008 and contracts for the construction of 24 newbuilding vessels
      makes us one of the world’s largest fleets of vessels in the sector. We
      view Handymax vessels, especially the Supramax class of vessels, as a
      highly attractive sector of the dry bulk shipping industry relative to
      larger vessel sectors due to their:




-  reduced volatility in charter rates;-  increased
      operating flexibility;-  ability
      to access more ports;-  ability
      to carry a more diverse range of cargoes; and-  broader
      customer base.


·
            A modern, high quality
      fleet. The 23 Handymax vessels in our operating fleet at
      December 31, 2008 had an average age of approximately 6 years
      compared to an average age for the world Handymax dry bulk fleet of over
      15 years. As of December 31, 2008, we have taken delivery of three
      Supramax newbuilding vessels and we are also constructing another 24
      Supramax vessels. We also hold options for the construction of an
      additional 8 Supramax vessels which if exercised would deliver between
      2010 and 2012. We believe that owning a modern, high quality fleet reduces
      operating costs, improves safety and provides us with a competitive
      advantage in securing employment for our vessels. Our fleet was built to
      high standards and all of our vessels were built at leading Japanese and
      Chinese shipyards, including Mitsui Engineering and Shipbuilding
      Co., Ltd., and Oshima Shipbuilding Co., Ltd. The vessels under
      construction are being built at premier shipyards in Japan, IHI Marine
      United, and China, Yangzhou Dayang Shipbuilding Co.
  Ltd.






4




·
            A fleet of sister and similar
      ships allows us to maintain low cost, highly efficient operations.
      Our current operating fleet of 23 vessels includes 8 identical sister
      ships built at the Mitsui shipyard based upon the same design
      specifications, 2 identical sister ships built at Dayang shipyard, and 3
      similar ships built at the Oshima shipyard that use many of the same parts
      and equipment. Our newbuilding fleet of 24 vessels to be constructed
      includes three sets of sister vessels - four 56,000 dwt sister ships from
      IHI Marine United, three 53,100 dwt sister ships and seventeen 58,000 dwt
      sister ships from Yangzhou Dayang Shipbuilding Co. Ltd. Operating sister
      and similar ships provides us with operational and scheduling flexibility,
      efficiencies in employee training and lower inventory and maintenance
      expenses. We believe that this should allow us both to increase revenue
      and lower operating costs. We intend to actively monitor and control
      vessel operating expenses while maintaining the high quality of our fleet
      through regular inspection and maintenance programs. We also intend to
      take advantage of savings that result from the economies of scale that the
      third party technical managers provide us through access to bulk
      purchasing of supplies, quality crew members and a global service network
      of engineers, naval architects and port
  captains.




·
            A medium-to long-term
      fixed-rate time charter program. We have entered into time charter
      employment contracts for a substantial portion of our fleet and these
      charters provide for fixed semi-monthly payments in advance. A significant
      proportion of our charters on the vessels in our operating fleet range in
      length from one to three years, while 19 of the 24 newbuilding vessels
      will enter into charters averaging approximately 6 years duration upon
      their delivery. We believe that this structure provides significant
      visibility to our future financial results and allows us to take advantage
      of the stable cash flows and high utilization rates that are associated
      with medium- to long-term time charters. Our use of time charters also
      mitigates in part the seasonality of the spot market business. Generally,
      spot markets are strongest in the first and fourth quarters of the
      calendar year and weaker in the second and third quarters. Our time
      charters provide for fixed semi-monthly payments in advance. While we
      remain focused on securing charters with fixed base rates, we have also
      entered into contracts with fixed minimum rates and profit sharing
      arrangements, enabling us to benefit from an increasing rate environment
      while still minimizing downside risk. We regularly monitor the dry bulk
      shipping market and based on market conditions we may consider taking
      advantage of short-term charter
rates.




·
            Expand our fleet through
      selective acquisitions of dry bulk vessels. We intend to continue
      to grow our fleet through timely and selective acquisitions of additional
      vessels in a manner that is accretive to earnings. We expect to focus
      primarily in the Handymax sector of the dry bulk shipping industry, and in
      particular on Supramax class vessels. We may also consider acquisitions of
      other sizes of dry bulk vessels, including Handysize vessels, but not
      tankers.




Our
Fleet





Our
operating fleet consists of 23 vessels, which includes 3 newly constructed
vessels. We are also constructing an additional 24 vessels under our newbuilding
program. The following tables presents certain information concerning our fleet
as of December 31, 2008:





No. of Vessels
            Dwt
            Vessel
              Type
            Delivery
            EmploymentVessels in Operation23
      Vessels
            1,184,939
            20
      Supramax
            
            Time
      Charter3
      Handymax
            
            Time
      CharterVessels to be delivered3
      Vessels
            159,300
            53,100
      dwt series Supramax
            2009-2010
            2
      Vessels on Time Charter and 1 Vessel Charter Free4
      Vessels
            224,000
            56,000
      dwt series Supramax
            2009-2010
            1
      Vessel on Time Charter and  3 Vessels Charter
    Free17
      Vessels
            986,000
            58,000
      dwt series Supramax
            2009-2011
            17
      Vessels on Time Charter





All
vessels in our fleet are fitted with cargo cranes and cargo grabs. All of our
vessels are flagged in the Marshall Islands. We own each of our vessels through
a separate wholly owned Republic of Marshall Islands subsidiary.




5




Operating
Fleet:










Vessel
            Year Built
            Dwt
            Time
      Charter Employment (expiry range)(1)Cardinal
            2004
            55,362
            June
      2009 to September 2009Condor
            2001
            50,296
            May
      2010 to July 2010Falcon
            2001
            51,268
            April
      2010 to June 2010Griffon
            1995
            46,635
            March
      2009Harrier
            2001
            50,296
            June
      2009 to September 2009Hawk
      I
            2001
            50,296
            April
      2009 to June 2009Heron
            2001
            52,827
            January
      2011 to May 2011Jaeger
            2004
            52,248
            October
      2009 to January 2010Kestrel
      I
            2004
            50,326
            February
      2009 to April 2009Kite
            1997
            47,195
            September
      2009 to January 2010Merlin
            2001
            50,296
            December
      2010 to March 2011Osprey
      I
            2002
            50,206
            October
      2009 to December 2009Peregrine
            2001
            50,913
            Dec
      2009 to Mar 2010Sparrow
            2000
            48,225
            February
      2010 to May 2010Tern
            2003
            50,200
            December
      2009 to February 2010Shrike
            2003
            53,343
            May
      2010 to August 2010Skua
            2003
            53,350
            August
      2010 to September 2010Kittiwake
            2002
            53,146
            July
      2009 to September 2009Goldeneye
            2002
            52,421
            May
      2009 to July 2009Wren
            2008
            53,349
            December
      2018 to April 2019Redwing
            2007
            53,411
            August
      2009 to October 2009Woodstar
            2008
            53,390
            December
      2018 to April 2019Crowned
      Eagle
            2008
            55,940
            September
      2009 to December 2009





(1)
            The
      date range provided represents the earliest and latest date on which the
      charterer may redeliver the vessel to the Company upon the conclusion of
      the charter.





Newbuilding
Acquisitions





We
have has contracts for the construction of a fleet of Supramax vessels in Japan
and China which have begun delivering into our operating fleet. The newbuilding
program in Japan consists of a total of five vessels, of which one vessel has
been delivered in 2008. The newbuilding program in China calls for construction
of 22 vessels, of which two vessels have been delivered in 2008, and options for
the construction of 8 additional vessels.




6





Newbuilding
Vessels – Japan:





In
November 2006, we entered into two vessel newbuilding contracts with IHI Marine
United Inc., a Japanese shipyard, for the construction of two ‘Future-56’ class
Supramax vessels, GOLDEN
EAGLE and IMPERIAL
EAGLE. These 56,000 deadweight ton vessels are expected to be delivered
in January and February of 2010.





In
March 2007, we entered into two contracts with IHI Marine United Inc., a
Japanese shipyard, for the construction of the CROWNED EAGLE and CRESTED EAGLE, two
‘Future-56’class Supramax 56,000, deadweight ton vessels. The Crowned Eagle was
constructed and delivered into our fleet in November 2008. We took delivery of
the Crested Eagle in January 2009.





In
April 2007, we entered into a contract with the same shipyard for the
construction of the STELLAR
EAGLE, also a ‘Future-56’class Supramax 56,000 deadweight ton vessel,
which is expected to be delivered in March 2009.





Newbuilding
Vessels – China:





During
the third quarter of 2007, we acquired the rights to 26 Supramax newbuilding
vessels from Kyrini Shipping Inc., an unrelated privately held Greek shipping
company. Five of these Supramax vessels are of the 53,100 deadweight ton
category, while the remaining 21 are of the 58,000 deadweight ton category.
These vessels are being built at a shipyard in China and are expected to be
delivered by 2012. Of these 26 vessels, 21 vessels are secured by long-term
charters through 2018.  The Company also received options for 9
additional 58,000 dwt Supramax newbuilding vessels from the shipyard in China.
On December 27, 2007, the Company exercised four of the nine options, and the
options for the remaining five vessels expired on March 31, 2008. The Company
took delivery of the first of these 30 vessels, WREN, in June 2008. Subsequent
to the delivery of the second vessel, WOODSTAR, in October 2008, the Company
amended its newbuilding program with the shipyard and converted the firm
contracts on eight unchartered vessels into options. Furthermore, the delivery
of the ninth unchartered vessel was delayed from September 2009 to November
2010.





The
following table represents certain information about the Company’s newbuilding
fleet, at December 31, 2008:





Vessel
                                                Dwt
                                                Year Built - Expected Delivery(1)
                                                Time
      Charter Employment(2)Crested Eagle(3)
                                                56,000
                                                Jan
      2009
                                                Dec
      2009 to March 2010Stellar Eagle
                                                56,000
                                                Mar
      2009
                                                Charter
      FreeBittern
                                                58,000
                                                Aug
      2009
                                                Aug
      2009 to Dec 2018/Apr 2019Canary
                                                58,000
                                                Oct
      2009
                                                Oct
      2009 to Dec 2018/Apr 2019Thrasher
                                                53,100
                                                Dec
      2009
                                                Dec
      2009 to Dec 2018/Apr 2019Crane
                                                58,000
                                                Oct
      2009
                                                Oct
      2009 to Dec 2018/Apr 2019Avocet
                                                53,100
                                                Feb
      2010
                                                Feb
      2010 to Dec 2018/Apr 2019Egret (3)
                                                58,000
                                                Oct
      2009
                                                Oct
      2009 to Sep 2012/Jan 2013Golden Eagle
                                                56,000
                                                Jan
      2010
                                                Charter
      FreeGannet (3)
                                                58,000
                                                Jan
      2010
                                                Jan
      2010 to Oct 2012/ Feb 2013Imperial Eagle
                                                56,000
                                                Feb
      2010
                                                Charter
      FreeGrebe(3)
                                                58,000
                                                Feb
      2010
                                                Feb
      2010 to Nov 2012/Mar 2013Ibis(3)
                                                58,000
                                                Mar
      2010
                                                Mar
      2010 to Dec 2012/Apr 2013Jay
                                                58,000
                                                May
      2010
                                                May
      2010 to Dec 2018/Apr 2019Kingfisher
                                                58,000
                                                June
      2010
                                                June
      2010 to Dec 2018/Apr 2019Martin
                                                58,000
                                                Jul
      2010
                                                Jul
      2010 to Dec 2016/Dec 2017Thrush
                                                53,100
                                                Nov
      2010
                                                Charter
      FreeNighthawk
                                                58,000
                                                Mar
      2011
                                                Mar
      2011 to Sep 2017/Sep 2018Oriole
                                                58,000
                                                Jul
      2011
                                                Jul
      2011 to Jan 2018/Jan 2019Owl
                                                58,000
                                                Aug
      2011
                                                Aug
      2011 to Feb 2018/Feb 2019Petrel (3)
                                                58,000
                                                Sep
      2011
                                                Sep
      2011 to Jun 2014/Oct 2014Puffin (3)
                                                58,000
                                                Oct
      2011
                                                Oct
      2011 to Jul 2014/Nov 2014Roadrunner (3)
                                                58,000
                                                Nov
      2011
                                                Nov
      2011 to Aug 2014/Dec 2014Sandpiper (3)
                                                58,000
                                                Dec
      2011
                                                Dec
      2011 to Sep 2014/Jan
2015
  7
  CONVERTED INTO OPTIONSSnipe
                          58,000
                          Jan
      2012
                          Charter
      FreeSwift
                          58,000
                          Feb
      2012
                          Charter
      FreeRaptor
                          58,000
                          Mar
      2012
                          Charter
      FreeSaker
                          58,000
                          Apr
      2012
                          Charter
      FreeBesra
      (4)
                          58,000
                          Oct
      2011
                          Charter
      FreeCernicalo (4)
                          58,000
                          Jan
      2011
                          Charter
      FreeFulmar (4)
                          58,000
                          Jul
      2011
                          Charter
      FreeGoshawk (4)
                          58,000
                          Sep
      2011
                          Charter
      Free


(1)
              Vessel
      build and delivery dates are estimates based on guidance received from
      shipyard.(2)
              The
      date range represents the earliest and latest date on which the charterer
      may redeliver the vessel to the Company upon conclusion of the
      charter.(3)
              The
      charterer has an option to extend the charter by one or two periods of 11
      to 13 months each.








(4)
            Options
      for construction declared on December 27, 2007. Firm contracts converted
      back to options in December 2008.




Nature
of Business




Our
strategy is to charter our vessels primarily pursuant to one- to three-year time
charters to allow us to take advantage of the stable cash flow and high
utilization rates that are associated with medium- to long-term time charters. A
significant proportion of the time charters on our operating fleet range in
length from one to three years.  Similarly, 20 of the 24 newbuilding
vessels are scheduled to enter into time charters averaging approximately 6 years duration from their
delivery. We regularly monitor the dry bulk shipping market and based on market
conditions we may consider taking advantage of short-term charter
rates.




A
time charter involves the hiring of a vessel from its owner for a period of time
pursuant to a contract under which the vessel owner places its ship (including
its crew and equipment) at the service of the charterer. Under a typical time
charter, the charterer periodically pays us a fixed daily charter hire rate and
bears all voyage expenses, including the cost of fuel and port and canal
charges. Once we have time chartered a vessel, trading of the vessel and the
commercial risks shift to the customer. Subject to certain restrictions imposed
by us in the contract, the charterer determines the type and quantity of cargo
to be carried and the ports of loading and discharging. We have contracted the
technical operations of the vessel to third party vessel managers and we oversee
the technical operation and navigation of the vessel at all times, including
monitoring vessel operating expenses, such as the cost of crewing, insuring,
repairing and maintaining the vessel, costs of spare parts and supplies, tonnage
taxes and other miscellaneous expenses.




In
connection with the charter of each of our vessels, we pay commissions ranging
from 1.25% to 6.25% of the total daily charter hire rate of each charter to
unaffiliated ship brokers and to in-house ship brokers associated with the
charterers, depending on the number of brokers involved with arranging the
relevant charter.




Our
vessels operate worldwide within the trading limits imposed by our insurance
terms and do not operate in areas where United States or United Nations
sanctions have been imposed.




Our
Customers




Our
customers include international companies such as Norden A/S, Korea
Line, Ltd., Western Bulk ASA, Clipper Bulk, Pacific Basin, BHP, San Juan
Navigation, J. Lauritzen, Hanjin, HMM and Cosco. Our assessment of a charterer’s
financial condition and reliability is an important factor in negotiating
employment for our vessels. We expect to charter our vessels to major trading
houses (including commodities traders), publicly traded companies, reputable
vessel owners and operators, major producers and government-owned entities
rather than to more speculative or undercapitalized entities. In 2008, four
customers individually accounted for more than 10% of our time charter
revenue.




Operations




There
are two central aspects to the operation of our fleet:




·
            Commercial
      Operations, which involves chartering and operating a vessel;
      and




·
            Technical
      Operations, which involves maintaining, crewing and insuring a
      vessel.






8




We
carry out the commercial and strategic management of our fleet through our
wholly owned subsidiary, Eagle Shipping International (USA) LLC, a Marshall
Islands limited liability company that was formed in January 2005 and maintains
its principle executive offices in New York City. Our office staff, either
directly or through this subsidiary, provides the following
services:




·
            commercial
      operations and technical
supervision;




·
            safety
      monitoring;




·
            vessel
      acquisition; and




·
            financial,
      accounting and information technology
services.




We
currently have a total of 42 shore-based personnel, including our senior
management team.




Commercial
and Strategic Management




We
perform all of the commercial and strategic management of our fleet,
including:




·
            Obtaining employment for our
      vessels and maintaining our relationships with our charterers. We
      believe that because our management team has an average of 20 years
      experience in operating Handymax and Handysize dry bulk vessels, we have
      access to a broad range of charterers and can employ the fleet efficiently
      in any market and achieve high utilization
  rates.




In
accordance with our strategy, we have entered into time charters for all 23 of
our vessels currently in the operating fleet and 20 of the 24 vessels under
construction. In general, our time charters afford us greater assurance that we
will be able to cover a fixed portion of our costs, mitigate revenue volatility,
provide stable cash flow and achieve higher utilization rates than if our
vessels were employed on the shorter term voyage charters or on the spot
market.




We
regularly monitor the dry bulk shipping market and, based on market conditions,
when a time charter ends, we may consider taking advantage of short-term charter
rates. In such cases we will arrange voyage charters for those vessels that we
will operate in the spot market. Under a voyage charter, the owner of a vessel
provides the vessel for the transport of goods between specific ports in return
for the payment of an agreed-upon freight per ton of cargo or, alternatively, a
specified total amount. All operating costs are borne by the owner of the
vessel. A single voyage charter is often referred to as a “spot market” charter,
which generally lasts from two to ten weeks. Operating vessels in the spot
market may afford greater speculative opportunity to capitalize on fluctuations
in the spot market; when vessel demand is high we earn higher rates, but when
demand is low our rates are lower and potentially insufficient to cover costs.
Spot market rates are volatile and are affected by world economics,
international events, weather conditions, strikes, governmental policies, supply
and demand, and other factors beyond our control. If the markets are especially
weak for protracted periods, there is a risk that vessels in the spot market may
spend time idle waiting for business, or may have to be “laid up”.




·
            Identifying, purchasing, and
      selling vessels. We believe that our commercial management team has
      longstanding relationships in the dry bulk industry, which provides us
      access to an extensive network of ship brokers and vessel owners that we
      believe will provide us with an advantage in future
      transactions.




·
            Obtaining insurance coverage
      for our vessels. We have well-established relationships with
      reputable marine underwriters in all the major insurance markets around
      the world that helps insure our fleet with insurance at competitive
      rates.




·
            Supervising our third party
      technical managers. We regularly monitor the expenditures, crewing,
      and maintenance of our vessels by our technical managers, V Ships and
      Wilhemsen Ship Management, and Anglo Eastern International Ltd. Our
      management team has direct experience with vessel operations, repairs,
      drydockings and vessel
construction.




Technical
Management




The
technical management of our fleet is provided by our unaffiliated third party
technical managers, V.Ships, Wilhelmsen Ship Management, and Anglo Eastern
International Ltd., that we believe are three of the world’s largest providers
of independent ship management and related services. We review the performance
of our managers on an annual basis and may add or change technical
managers.




9




Technicalmanagement includes managing day-to-day vessel
operations, performing general vessel maintenance, ensuring regulatory and
classification society compliance, supervising the maintenance and general
efficiency of vessels, arranging our hire of qualified officers and crew,
arranging and supervising drydocking and repairs, purchasing supplies, spare
parts and new equipment for vessels, appointing supervisors and technical
consultants and providing technical support. Our technical managers also manage
and process all crew insurance claims. Our technical managers maintain records
of all costs and expenditures incurred in connection with their services that
are available for our review on a daily basis. Our technical managers are
members of marine contracting associations which arrange bulk purchasing thereby
enabling us to benefit from economies of scale.
  We currently crew our
vessels primarily with officers and seamen from Ukraine and Romania who are
supplied by our managers. As of December 31, 2008, we employed a total of 495
officers and seamen on the 23 vessels in our operating fleet. Each technical
manager handles each seaman’s training, travel, and payroll and ensures that all
our seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions. Additionally, our seafaring
employees perform most commissioning work and assist in supervising work at
shipyards and drydock facilities. We typically man our vessels with more crew
members than are required by the country of the vessel’s flag in order to allow
for the performance of routine maintenance duties. All of our crew members are
subject to and are paid commensurate with international collective bargaining
agreements and, therefore, we do not anticipate any labor disruptions. No
international collective bargaining agreements to which we are a party are set
to expire within two years.




Wepay our technical managers a monthly fee per vessel plus
actual costs incurred by our vessels. These monthly fees averaged $9,041 per
vessel in 2008, $8,906 per vessel in 2007, and $8,583 per vessel in
2006.




Permits
and Authorizations




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




Environmental
and Other Regulations




Government
regulation significantly affects the ownership and operation of our vessels. We
are subject to international conventions and treaties, national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered relating to safety and health and environmental protection
including the storage, handling, emission, transportation and discharge of
hazardous and non-hazardous materials, and the remediation of contamination and
liability for damage to natural resources. Compliance with such laws,
regulations and other requirements entails significant expense, including vessel
modifications and implementation of certain operating procedures.




A variety of government and private
entities subject our vessels to both scheduled and unscheduled inspections.
These entities include the local port authorities (United States Coast Guard,
harbor master or equivalent), classification societies; flag state
administrations (country of registry) and charterers, particularly terminal
operators. Certain of these entities require us to obtain permits, licenses and
certificates for the operation of our vessels. Failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend the operation of one or more of our vessels.




We believe that the heightened level of
environmental and quality concerns among insurance underwriters, regulators and
charterers is leading to greater inspection and safety requirements on all
vessels and may accelerate the scrapping of older vessels throughout the dry
bulk shipping industry. Increasing environmental concerns have created a demand
for vessels that conform to the stricter environmental standards. We are
required to maintain operating standards for all of our vessels that emphasize
operational safety, quality maintenance, continuous training of our officers and
crews and compliance with United States and international regulations.We
believe that the operation of our vessels is in substantial compliance with
applicable environmental laws and regulations and that our vessels have all
material permits, licenses, certificates or other authorizations necessary for
the conduct of our operations. However, because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, we cannot
predict the ultimate cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our
vessels.  In addition, a future serious marine incident that causes
significant adverse environmental impact could result in additional legislation
or regulation that could negatively affect our profitability.




10




International Maritime
Organization




The
International Maritime Organization, the United Nations agency for maritime
safety and the prevention of pollution by ships, or the IMO, has adopted the
International Convention for the Prevention of Marine Pollution, 1973, as
modified by the related Protocol of 1978 relating thereto, which has been
updated through various amendments, or the MARPOL Convention. The MARPOL
Convention establishes environmental standards relating to oil leakage or
spilling, garbage management, sewage, air emissions, handling and disposal of
noxious liquids and the handling of harmful substances in packaged forms. The
IMO adopted regulations that set forth pollution prevention requirements
applicable to dry bulk carriers. These regulations have been adopted by over 150
nations, including many of the jurisdictions in which our vessels
operate.




In
September 1997, the IMO adopted Annex VI to the MARPOL Convention,
Regulations for the Prevention of Pollution from Ships, to address air pollution
from ships. Effective May 2005, Annex VI sets limits on sulfur oxide and
nitrogen oxide emissions from all commercial vessel exhausts and prohibits
deliberate emissions of ozone depleting substances (such as halons and
chlorofluorocarbons), emissions of volatile compounds from cargo tanks, and the
shipboard incineration of specific substances. Annex VI also includes a global
cap on the sulfur content of fuel oil and allows for special areas to be
established with more stringent controls on sulfur emissions. We believe that
all our vessels are currently compliant in all material respects with these
regulations. In October 2008, the IMO adopted amendments to Annex VI regarding
nitrogen oxide and sulfur oxide emissions standards which are expected to enter
into force on July 1, 2010. The amended Annex VI would reduce air pollution from
vessels by, among other things, (i) implementing a progressive reduction of
sulfur oxide emissions from ships, with the global sulfur cap reduced initially
to 3.50% (from the current cap of 4.50%), effective from January 1, 2012, then
progressively to 0.50%, effective from January 1, 2020, subject to a feasibility
review to be completed no later than 2018; and (ii) establishing new tiers of
stringent nitrogen oxide emissions standards for new marine engines, depending
on their date of installation. Once these amendments become effective, we may
incur costs to comply with these revised standards. Also in October 2008, the
United States became a party to the MARPOL Convention by depositing an
instrument of ratification with the IMO for the amended Annex VI, thereby
rendering U.S. air emissions standards equivalent to IMO
requirements.




Safety
Management System Requirements





The
operation of our vessels is also affected by the requirements set forth in the
IMO’s International Convention for the Safety of Life at Sea, or SOLAS and the
International Convention on Load Lines, or the LL Convention, which impose a
variety of standards that regulate the design and operational features of ships.
The IMO periodically revises the SOLAS and LL Convention standards. We believe
that all our vessels are in material compliance with SOLAS and LL Convention
standards.




Under
Chapter IX of SOLAS, the International Safety Management Code for the Safe
Operation of Ships and for Pollution Prevention, or ISM Code, our operations are
also subject to environmental standards and requirements contained in the ISM
Code promulgated by the IMO. The ISM Code requires the party with operational
control of a vessel to develop an extensive safety management system that
includes, among other things, the adoption of a safety and environmental
protection policy setting forth instructions and procedures for operating its
vessels safely and describing procedures for responding to emergencies. We rely
upon the safety management system that we and our technical manager have
developed for compliance with the ISM Code. The failure of a ship owner or
bareboat charterer to comply with the ISM Code may subject such party to
increased liability, may decrease available insurance coverage for the affected
vessels and may result in a denial of access to, or detention in, certain ports.
As of the date of this filing, all of the vessels in our operating fleet are ISM
code-certified.




The ISM Code requires that vessel
operators obtain a safety management certificate for each vessel they operate.
This certificate evidences compliance by a vessel’s management with the ISM Code
requirements for a safety management system. No vessel can obtain a safety
management certificate unless its manager has been awarded a document of
compliance, issued by each flag state, under the ISM Code. Our appointed ship
managers have obtained documents of compliance for their offices and safety
management certificates for all of our vessels for which the certificates are
required by the IMO. The document of compliance, or the DOC,and ship management
certificate, or the SMC,are renewed every five
years buttheDOC is subject to audit verification
annually and the SMCat
leastevery 2.5
years.




11




Pollution
Control and Liability Requirements




IMO
has negotiated international conventions that impose liability for oil pollution
in international waters and the territorial waters of the signatory to such
conventions. For example, IMO adopted an International Convention for the
Control and Management of Ships’ Ballast Water and Sediments, or the BWM
Convention, in February 2004. The BWM Convention’s implementing regulations call
for a phased introduction of mandatory ballast water exchange requirements
(beginning in 2009), to be replaced in time with mandatory concentration limits.
The BWM Convention will not become effective until 12 months after it has been
adopted by 30 states, the combined merchant fleets of which represent not less
than 35% of the gross tonnage of the world’s merchant shipping. To date there
has not been sufficient adoption of this standard for it to take
force.




Although
the United States is not a party to these conventions, many countries have
ratified and follow the liability plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, as
amended in 2000, or the CLC. Under this convention and depending on whether the
country in which the damage results is a party to the 1992 Protocol to the CLC,
a vessel’s registered owner is strictly liable for pollution damage caused in
the territorial waters of a contracting state by discharge of persistent oil,
subject to certain defenses.  The limits on liability outlined in the
1992 Protocol use the International Monetary Fund currency unit of Special
Drawing Rights, or SDR. Under an amendment to the 1992 Protocol that became
effective on November 1, 2003, for vessels between 5,000 and 140,000 gross
tons (a unit of measurement for the total enclosed spaces within a vessel),
liability is limited to approximately $6.69 million (4.51 million SDR) plus $937
(631 SDR) for each additional gross ton over 5,000. For vessels of over 140,000
gross tons, liability is limited to $133.24 million (89.77 million
SDR).  As the convention calculates liability in terms of a basket of
currencies, these figures are based on currency exchange rates of 0.673737 SDR
per U.S. dollar on February 23, 2009. The right to limit liability is forfeited
under the CLC where the spill is caused by the ship owner’s actual fault and
under the 1992 Protocol where the spill is caused by the ship owner’s
intentional or reckless conduct. Vessels trading with states that are parties to
these conventions must provide evidence of insurance covering the liability of
the owner. In jurisdictions where the CLC has not been adopted, various
legislative schemes or common law govern, and liability is imposed either on the
basis of fault or in a manner similar to that of the convention. We believe that
our protection and indemnity insurance will cover the liability under the plan
adopted by the IMO.




In
March 2006, the IMO amended Annex I to MARPOL, including a new regulation
relating to oil fuel tank protection, which became effective August 1,
2007.  The new regulation will apply to various ships delivered on or
after August 1, 2010.  It includes requirements for the protected
location of the fuel tanks, performance standards for accidental oil fuel
outflow, a tank capacity limit and certain other maintenance, inspection and
engineering standards.




The
IMO adopted the International Convention on Civil Liability for Bunker Oil
Pollution Damage, or the Bunker Convention, to impose strict liability on ship
owners for pollution damage in jurisdictional waters of ratifying states caused
by discharges of bunker fuel. The Bunker Convention, which became effective on
November 21, 2008, requires registered owners of ships over 1,000 gross tons to
maintain insurance for pollution damage in an amount equal to the limits of
liability under the applicable national or international limitation regime (but
not exceeding the amount calculated in accordance with the Convention on
Limitation of Liability for Maritime Claims of 1976, as
amended).  With respect to non-ratifying states, liability for spills
or releases of oil carried as fuel in ship’s bunkers typically is determined by
the national or other domestic laws in the jurisdiction where the events or
damages occur.




IMO
regulations also require owners and operators of vessels to adopt Ship Oil
Pollution Emergency Plans. Periodic training and drills for response personnel
and for vessels and their crews are required.




Anti-Fouling
Requirements









12




Compliance
Enforcement




The
flag state, as defined by the United Nations Convention on Law of the Sea, has
overall responsibility for the implementation and enforcement of international
maritime regulations for all ships granted the right to fly its flag. The
“Shipping Industry Guidelines on Flag State Performance” evaluates flag states
based on factors such as sufficiency of infrastructure, ratification of
international maritime treaties, implementation and enforcement of international
maritime regulations, supervision of surveys, casualty investigations and
participation at IMO meetings. Our vessels are flagged in the Marshall Islands.
Marshall Islands-flagged vessels have historically received a good assessment in
the shipping industry.  We recognize the importance of a credible flag
state and do not intend to use flags of convenience or flag states with poor
performance indicators.




Noncompliance
with the ISM Code or other IMO regulations may subject the ship owner or
bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports. The U.S. Coast Guard and European Union
authorities have indicated that vessels not in compliance with the ISM Code by
the applicable deadlines will be prohibited from trading in U.S. and European
Union ports, respectively. As of the date of this report, each of our vessels is
ISM Code certified.  However, there can be no assurance that such
certificate will be maintained.




The
IMO continues to review and introduce new regulations. It is impossible to
predict what additional regulations, if any, may be passed by the IMO and what
effect, if any, such regulations might have on our operations.




The U.S. Oil Pollution Act of
1990 and Comprehensive
Environmental Response, Compensation and Liability Act




The
U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and
liability regime for the protection and cleanup of the environment from oil
spills. OPA affects all owners and operators whose vessels trade in the United
States, its territories and possessions or whose vessels operate in United
States waters, which includes the United States’ territorial sea and its two
hundred nautical mile exclusive economic zone.  The United States has
also enacted the Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, which applies to the discharge of hazardous substances
other than oil, whether on land or at sea.  Both OPA and CERCLA impact
our operations.




Under
OPA, vessel owners, operators and bareboat charterers are “responsible parties”
and are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war) for
all containment and clean-up costs and other damages arising from discharges or
threatened discharges of oil from their vessels. OPA defines these other damages
broadly to include:




·
            natural
      resources damage and the costs of assessment
  thereof;




·
            real
      and personal property damage;




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




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




·
            net
      cost of public services necessitated by a spill response, such as
      protection from fire, safety or health hazards;
  and




·
            loss
      of subsistence use of natural
resources.




Under
amendments to OPA that became effective on July 11, 2006, the liability of
responsible parties is limited to the greater of $950 per gross ton or
$0.8 million per non-tank (e.g. dry bulk) vessel that is over 300 gross
tons (subject to periodic adjustment for inflation). CERCLA, which applies to
owners and operators of vessels, contains a similar liability regime and
provides for cleanup, removal and natural resource damages.  Liability
under CERCLA is limited to the greater of $300 per gross ton or $5 million for
vessels carrying a hazardous substance as cargo and the greater of $300 per
gross ton or $0.5 million for any other vessel.  These limits of
liability do not apply if an incident was directly caused by violation of
applicable U.S. federal safety, construction or operating regulations or by a
responsible party’s gross negligence or willful misconduct, or if the
responsible party fails or refuses to report the incident or to cooperate and
assist in connection with oil removal activities.




13




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




OPA
also requires owners and operators of vessels to establish and maintain with the
U.S. Coast Guard evidence of financial responsibility sufficient to meet their
potential liabilities under OPA and CERCLA.  On October 17, 2008, the
U.S. Coast Guard regulatory requirements under OPA and CERCLA were amended to
require evidence of financial responsibility in amounts that reflect the higher
limits of liability imposed by the 2006 amendments to OPA, as described above.
The increased amounts became effective on January 15, 2009.  In
addition, on September 24, 2008, the U.S. Coast Guard proposed adjustments to
the limits of liability for non-tank vessels that would further increase the
limits to the greater of $1,000 per gross ton or $848,000 and establish a
procedure for adjusting the limits for inflation every three
years.  The Coast Guard is currently soliciting comments on the
proposal.  Under the regulations, vessel owners and operators may
evidence their financial responsibility by showing proof of insurance, surety
bond, self-insurance or guaranty. Under OPA, an owner or operator of a fleet of
vessels is required only to demonstrate evidence of financial responsibility in
an amount sufficient to cover the vessels in the fleet having the greatest
maximum liability under OPA.




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




The
U.S. Coast Guard’s financial responsibility regulations may also be satisfied by
evidence of surety bond, guaranty or by self-insurance. Under the self-insurance
provisions, the ship owner or operator must have a net worth and working
capital, measured in assets located in the United States against liabilities
located anywhere in the world, that exceeds the applicable amount of financial
responsibility. We have complied with the U.S. Coast Guard regulations by
providing a certificate of responsibility from third party entities that are
acceptable to the U.S. Coast Guard evidencing sufficient
self-insurance.




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




Other
Environmental Initiatives




The
U.S. Clean Water Act, or CWA, prohibits the discharge of oil or hazardous
substances in U.S. navigable waters unless authorized by a duly-issued permit or
exemption, and imposes strict liability in the form of penalties for any
unauthorized discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and complements the remedies available
under OPA and CERCLA. In addition, most U.S. states that border a navigable
waterway have enacted environmental pollution laws that impose strict liability
on a person for removal costs and damages resulting from a discharge of oil or a
release of a hazardous substance. These laws may be more stringent than U.S.
federal law.




The
U.S. Environmental Protection Agency, or EPA, historically exempted the
discharge of ballast water and other substances incidental to the normal
operation of vessels in U.S. waters from CWA permitting requirements. However,
on March 31, 2005, a U.S. District Court ruled that the EPA exceeded its
authority in creating an exemption for ballast water. On September 18, 2006, the
court issued an order invalidating the exemption in the EPA’s regulations for
all discharges incidental to the normal operation of a vessel as of September
30, 2008, and directed the EPA to develop a system for regulating all discharges
from vessels by that date. The District Court’s decision was affirmed by the
Ninth Circuit Court of Appeals on July 23, 2008. The Ninth Circuit’s ruling
meant that owners and operators of vessels traveling in U.S. waters would soon
be required to comply with the CWA permitting program to be developed by the EPA
or face penalties.




14




In
response to the invalidation and removal of the EPA’s vessel exemption by the
Ninth Circuit, the EPA has enacted rules governing the regulation of ballast
water discharges and other discharges incidental to the normal operation of
vessels within U.S. waters. Under the new rules, which took effect February 6,
2009, commercial vessels 79 feet in length or longer (other than commercial
fishing vessels), or Regulated Vessels, are required to obtain a CWA permit
regulating and authorizing such normal discharges. This permit, which the EPA
has designated as the Vessel General Permit for Discharges Incidental to the
Normal Operation of Vessels, or VGP, incorporates the current U.S. Coast Guard
requirements for ballast water management as well as supplemental ballast water
requirements, and includes limits applicable to 26 specific discharge streams,
such as deck runoff, bilge water and gray water.




For
each discharge type, among other things, the VGP establishes effluent limits
pertaining to the constituents found in the effluent, including best management
practices, or BMPs, designed to decrease the amount of constituents entering the
waste stream. Unlike land-based discharges, which are deemed acceptable by
meeting certain EPA-imposed numerical effluent limits, each of the 26 VGP
discharge limits is deemed to be met when a Regulated Vessel carries out the
BMPs pertinent to that specific discharge stream. The VGP imposes additional
requirements on certain Regulated Vessel types, that emit discharges unique to
those vessels. Administrative provisions, such as inspection, monitoring,
recordkeeping and reporting requirements are also included for all Regulated
Vessels.




In
addition, pursuant to §401 of the CWA which requires each state to certify
federal discharge permits such as the VGP, certain states have enacted
additional discharge standards as conditions to their certification of the VGP.
These local standards bring the VGP into compliance with more stringent state
requirements, such as those further restricting ballast water discharges and
preventing the introduction of non-indigenous species considered to be invasive.
The VGP and its state-specific regulations and any similar restrictions enacted
in the future will increase the costs of operating in the relevant
waters.




The
U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977
and 1990, or the CAA, requires the EPA to promulgate standards applicable to
emissions of volatile organic compounds and other air contaminants. Our vessels
are subject to vapor control and recovery requirements for certain cargoes when
loading, unloading, ballasting, cleaning and conducting other operations in
regulated port areas. Our vessels that operate in such port areas with
restricted cargoes are equipped with vapor recovery systems that satisfy these
requirements. The CAA also requires states to draft State Implementation Plans,
or SIPs, designed to attain national health-based air quality standards in
primarily major metropolitan and/or industrial areas. Several SIPs regulate
emissions resulting from vessel loading and unloading operations by requiring
the installation of vapor control equipment. As indicated above, our vessels
operating in covered port areas are already equipped with vapor recovery systems
that satisfy these existing requirements.




As
referenced above, the amended Annex VI to the IMO’s MARPOL Convention, which
addresses air pollution from ships, was ratified by the United States on October
9, 2008 and entered into force domestically on January 8, 2009. The EPA and the
state of California, however, have each proposed more stringent regulations of
air emissions from ocean-going vessels. On July 24, 2008, the California Air
Resources Board of the State of California, or CARB, approved clean-fuel
regulations applicable to all vessels sailing within 24 miles of the California
coastline whose itineraries call for them to enter any California ports,
terminal facilities, or internal or estuarine waters. The new CARB regulations
require such vessels to use low sulfur marine fuels rather than bunker fuel. By
July 1, 2009, such vessels are required to switch either to marine gas oil with
a sulfur content of no more than 1.5% or marine diesel oil with a sulfur content
of no more than 0.5%. By 2012, only marine gas oil and marine diesel oil fuels
with 0.1% sulfur will be allowed. CARB unilaterally approved the new regulations
in spite of legal defeats at both the district and appellate court levels, but
more legal challenges are expected to follow. If CARB prevails and the new
regulations go into effect as scheduled on July 1, 2009, in the event our
vessels were to travel within such waters, these new regulations would require
significant expenditures on low-sulfur fuel and would increase our operating
costs. Finally, although the more stringent CARB regime was technically
superseded when the United States ratified and implemented the amended Annex VI,
the possible declaration of various U.S. coastal waters as Emissions Control
Areas may in turn bring U.S. emissions standards into line with the new CARB
regulations, which would cause us to incur further costs.




15




The
U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. NISA established a ballast
water management program for ships entering U.S. waters. Under NISA, mid-ocean
ballast water exchange is voluntary, except for ships heading to the Great Lakes
or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope
crude oil. However, NISA’s reporting and record-keeping requirements are
mandatory for vessels bound for any port in the United States. Although ballast
water exchange is the primary means of compliance with the act’s guidelines,
compliance can also be achieved through the retention of ballast water on board
the ship, or the use of environmentally sound alternative ballast water
management methods approved by the U.S. Coast Guard. If the mid-ocean ballast
exchange is made mandatory throughout the United States, or if water treatment
requirements or options are instituted, the cost of compliance could increase
for ocean carriers. Although we do not believe that the costs of compliance with
a mandatory mid-ocean ballast exchange would be material, it is difficult to
predict the overall impact of such a requirement on the dry bulk shipping
industry. The U.S. House of Representatives has recently passed a bill that
amends NISA by prohibiting the discharge of ballast water unless it has been
treated with specified methods or acceptable alternatives. Similar bills have
been introduced in the U.S. Senate, but we cannot predict which bill, if any,
will be enacted into law. In the absence of federal standards, states have
enacted legislation or regulations to address invasive species through ballast
water and hull cleaning management and permitting requirements. For instance,
the state of California has recently enacted legislation extending its ballast
water management program to regulate the management of “hull fouling” organisms
attached to vessels and adopted regulations limiting the number of organisms in
ballast water discharges. In addition, in November 2008 the Sixth Circuit
affirmed a District Court’s dismissal of challenges to the state of Michigan’s
ballast water management legislation mandating the use of various techniques for
ballast water treatment. Other states may proceed with the enactment of similar
requirements that could increase the costs of operating in state
waters.




Our
operations occasionally generate and require the transportation, treatment and
disposal of both hazardous and non-hazardous solid wastes that are subject to
the requirements of the U.S. Resource Conservation and Recovery Act or
comparable state, local or foreign requirements. In addition, from time to time
we arrange for the disposal of hazardous waste or hazardous substances at
offsite disposal facilities. If such materials are improperly disposed of by
third parties, we may still be held liable for clean up costs under applicable
laws.




European Union
Regulations




In
2005, the European Union adopted a directive on ship-source pollution, imposing
criminal sanctions for intentional, reckless or negligent pollution discharges
by ships. The directive could result in criminal liability for pollution from
vessels in waters of European countries that adopt implementing
legislation.  Criminal liability for pollution may result in
substantial penalties or fines and increased civil liability
claims.




Greenhouse Gas
Regulation




In
February 2005, the Kyoto Protocol to the United Nations Framework Convention on
Climate Change, or the Kyoto Protocol, entered into force. Pursuant to the Kyoto
Protocol, adopting countries are required to implement national programs to
reduce emissions of certain gases, generally referred to as greenhouse gases,
which are suspected of contributing to global warming. Currently, the emissions
of greenhouse gases from international shipping are not subject to the Kyoto
Protocol. However, 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 vessels. In the United States, the Attorneys
General from 16 states and a coalition of environmental groups in April 2008
filed a petition for a writ of mandamus, or petition, with the DC Circuit Court
of Appeals, or the DC Circuit, to request an order requiring the EPA to regulate
greenhouse gas emissions from ocean-going vessels under the Clean Air Act.
Although the DC Circuit denied the petition in June 2008, any future passage of
climate control legislation or other regulatory initiatives by the IMO, European
Union or individual countries where we operate that restrict emissions of
greenhouse gases could entail financial impacts on our operations that we cannot
predict with certainty at this time.




16




Vessel
Security Regulations









·
            on-board
      installation of automatic identification systems to provide a means for
      the automatic transmission of safety-related information from among
      similarly equipped ships and shore stations, including information on a
      ship’s identity, position, course, speed and navigational
      status;




·
            on-board
      installation of ship security alert systems, which do not sound on the
      vessel but only alert the authorities on
shore;




·
            the
      development of vessel security
plans;




·
            ship
      identification number to be permanently marked on a vessel’s
      hull;




·
            a
      continuous synopsis record kept onboard showing a vessel’s history
      including the name of the ship and of the state whose flag the ship is
      entitled to fly, the date on which the ship was registered with that
      state, the ship’s identification number, the port at which the ship is
      registered and the name of the registered owner(s) and their registered
      address; and




·
            compliance
      with flag state security certification
  requirements.




The
U.S. Coast Guard regulations, intended to align with international maritime
security standards, exempt from MTSA vessel security measures non-U.S. vessels
that have on board, as of July 1, 2004, a valid International Ship Security
Certificate attesting to the vessel’s compliance with SOLAS security
requirements and the ISPS Code. Our managers intend to implement the various
security measures addressed by MTSA, SOLAS and the ISPS Code, and we intend that
our fleet will comply with applicable security requirements. We have implemented
the various security measures addressed by the MTSA, SOLAS and the ISPS
Code.




Inspection
by Classification Societies




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




The
classification society also undertakes on request other surveys and checks that
are required by regulations and requirements of the flag state. These surveys
are subject to agreements made in each individual case and/or to the regulations
of the country concerned.




For
maintenance of the class certification, regular and extraordinary surveys of
hull, machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:




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




17




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




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




All
areas subject to survey as defined by the classification society are required to
be surveyed at least once per class period, unless shorter intervals between
surveys are prescribed elsewhere. The period between two subsequent surveys of
each area must not exceed five years. Vessels under five years of age can
waive drydocking in order to increase available days and decrease capital
expenditures, provided that the vessel is inspected underwater.




Most
vessels are also drydocked every 30 to 36 months for inspection of the
underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a “recommendation” which must be
rectified by the ship owner within prescribed time limits.




Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as “in class” by a classification society which is a member of the
International Association of Classification Societies, or IACS. All our vessels
that we have purchased and may agree to purchase in the future must be certified
as being “in class” prior to their delivery under our standard purchase
contracts and memorandum of agreement. If the vessel is not certified on the
date of closing, we have no obligation to take delivery of the vessel. We have
all of our vessels, and intend to have all vessels that we acquire in the
future, classed by IACS members.




Risk
of Loss and Liability Insurance




General




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




While
we maintain hull and machinery insurance, war risks insurance, loss of hire,
protection and indemnity cover and freight, demurrage and defense cover for our
operating fleet in amounts that we believe to be prudent to cover normal risks
in our operations, we may not be able to achieve or maintain this level of
coverage throughout a vessel’s useful life. Furthermore, while we believe that
our present insurance coverage is adequate, not all risks can be insured, and
there can be no guarantee that any specific claim will be paid, or that we will
always be able to obtain adequate insurance coverage at reasonable
rates.




18




Hull & Machinery and
War Risks Insurance




We
maintain marine hull and machinery, war risks insurances, and loss of hire
insurance, which cover the risk of actual or constructive total loss for all of
our vessels. Our vessels are each covered up to at least their fair market value
with deductibles of $75,000 - $100,000 per vessel per incident.




Protection and Indemnity
Insurance




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




Our
current protection and indemnity insurance coverage for pollution is
$1 billion per vessel per incident. The 13 P&I Associations that
comprise the International Group insure approximately 90% of the world’s
commercial tonnage and have entered into a pooling agreement to reinsure each
association’s liabilities. As a member of a P&I Association, which is a
member of the International Group, we are subject to calls payable to the
associations based on the group’s claim records as well as the claim records of
all other members of the individual associations and members of the pool of
P&I Associations comprising the International Group.




Competition




We
compete with a large number of international fleets. The international shipping
industry is highly competitive and fragmented with many market participants.
There are approximately 7,000 drybulk carriers aggregating approximately 418
million dwt, and the ownership of these vessels is divided among approximately
1,400 mainly private independent dry bulk vessel owners with no one shipping
group owning or controlling more than 5.0% of the world dry bulk fleet. We
primarily compete with other owners of dry bulk vessels in the Handymax class
that are mainly privately owned fleets.





Competition
in the ocean shipping industry varies primarily according to the nature of the
contractual relationship as well as with respect to the kind of commodity being
shipped. Our business will fluctuate in line with the main patterns of trade of
dry bulk cargoes and varies according to changes in the supply and demand for
these items. Competition in virtually all bulk trades is intense and based
primarily on supply and demand. We compete for charters on the basis of price,
vessel location, size, age and condition of the vessel, as well as on our
reputation as an owner and operator. Increasingly, major customers are
demonstrating a preference for modern vessels based on concerns about the
environmental and operational risks associated with older vessels. Consequently,
owners of large modern fleets have gained a competitive advantage over owners of
older fleets.




As
in the spot market, the time charter market is price sensitive and also depends
on our ability to demonstrate the high quality of our vessels and operations to
chartering customers. However, because of the longer term commitment, customers
entering time charters are more concerned about their exposure and image from
chartering vessels that do not comply with environmental regulations or that
will be forced out of service for extensive maintenance and repairs.
Consequently, in the time charter market, factors such as the age and quality of
a vessel and the reputation of the owner and operator tend to be more
significant than in the spot market in competing for business.




19




Value
of Assets and Cash Requirements




The
replacement costs of comparable new vessels may be above or below the book value
of our fleet. The market value of our fleet may be below book value when market
conditions are weak and exceed book value when markets are strong. In common
with other shipowners, we may consider asset redeployment which at times may
include the sale of vessels at less than their book value.




The
Company’s results of operations and cash flow may be significantly affected by
future charter markets.




Exchange
Controls




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




Tax
Considerations




The
following is a discussion of the material Marshall Islands and United States
federal income tax considerations relevant to owning common stock by a United
States Holder or a non-United States Holder, each as defined below. This
discussion does not purport to deal with the tax consequences of owning the
common stock to all categories of investors, some of which (such as financial
institutions, regulated investment companies, real estate investment trusts,
tax-exempt organizations, insurance companies, persons holding our common stock
as part of a hedging, integrated, conversion or constructive sale transaction or
a straddle, traders in securities that have elected the mark-to-market method of
accounting for their securities, persons liable for alternative minimum tax,
persons who are investors in pass-through entities, dealers in securities or
currencies, persons who own 10% or more of our common stock and investors whose
functional currency is not the United States dollar) may be subject to special
rules. This discussion deals only with holders who own the common stock as a
capital asset. Shareholders are encouraged to consult their own tax advisors
concerning the overall tax consequences arising in their own particular
situation under United States federal, state, local or foreign law of the
ownership of our common stock.




Marshall
Islands Tax Considerations




In
the opinion of Seward & Kissel LLP, the following are the material Marshall
Islands tax consequences of our activities to us and shareholders of our common
stock. We are incorporated in the Marshall Islands. Under current Marshall
Islands law, we are not subject to tax on income or capital gains, and no
Marshall Islands withholding tax will be imposed upon payments of dividends by
us to our shareholders.




United
States Federal Income Tax Considerations




In
the opinion of Seward & Kissel LLP, our United States counsel, the following
are the material United States federal income tax consequences to us of our
activities and to United States Holders and to Non-United States Holders of our
common stock. The following discussion of United States federal income tax
matters is based on the Internal Revenue Code of 1986, as amended, or the Code,
judicial decisions, administrative pronouncements, and existing and proposed
regulations issued by the United States Department of the Treasury, all of which
are subject to change, possibly with retroactive effect. In addition, the
discussion below is based, in part, on the description of our business as
described in ‘‘Business’’ in this annual report and assumes that we conduct our
business as described in that section.




We
have made, or will make, special United States federal income tax elections in
respect of each of our ship owning or operating subsidiaries that is potentially
subject to tax as a result of deriving income attributable to the transportation
of cargoes to or from the United States. The effect of the special U.S. tax
elections is to ignore or disregard the subsidiaries for which elections have
been made as separate taxable entities and to treat them as part of their
parent, the ‘‘Company.’’ Therefore, for purposes of the following discussion,
the Company, and not the subsidiaries subject to this special election, will be
treated as the owner and operator of the vessels and as receiving the income
therefrom.




20




United
States Federal Income Taxation of Our Company




Taxation
of Operating Income: In General




The
Company currently earns, and we anticipate that the Company will continue to
earn, substantially all its income from the hiring or leasing of vessels for use
on a time or voyage charter basis or from the performance of services directly
related to those uses, all of which we refer to as ‘‘shipping
income.’’




Unless
exempt from United States federal income taxation under the rules of Section 883
of the Code, or Section 883, as discussed below, a foreign corporation such as
ourselves will be subject to United States federal income taxation on its
‘‘shipping income’’ that is treated as derived from sources within the United
States, to which we refer as ‘‘United States source shipping income.’’ For tax
purposes, ‘‘United States source shipping income’’ includes 50% of shipping
income that is attributable to transportation that begins or ends, but that does
not both begin and end, in the United States.




Shipping
income attributable to transportation exclusively between non-United States
ports will be considered to be 100% derived from sources outside the United
States. Shipping income derived from sources outside the United States will not
be subject to any United States federal income tax.




Shipping
income attributable to transportation exclusively between United States ports is
considered to be 100% derived from United States sources. However, the Company
is not permitted by United States law to engage in the transportation of cargoes
that produces 100% United States source income.




Unless
exempt from tax under Section 883, the Company’s gross United States source
shipping income would be subject to a 4% tax imposed without allowance for
deductions as described below.




Exemption
of Operating Income from United States Federal Income Taxation


Under
Section 883 and the regulations thereunder, a foreign corporation will be exempt
from United States federal income taxation on its United States source shipping
income if:




(1)
                      it
      is organized in a qualified foreign country, which is one that grants an
      ‘‘equivalent exemption’’ from tax to corporations organized in the United
      States in respect of each category of shipping income for which exemption
      is being claimed under Section 883 and to which we refer as the ‘‘Country
      of Organization Test;’’ and(2)
                      one
      of the following tests is met:  (A)
                        more
      than 50% of the value of its shares is beneficially owned, directly or
      indirectly, by qualified shareholders, which as defined includes
      individuals who are ‘‘residents’’ of a qualified foreign country, to which
      we refer as the ‘‘50% Ownership Test;’’(B)
                        its
      shares are ‘‘primarily and regularly traded on an established securities
      market’’ in a qualified foreign country or in the United States, to which
      we refer as the ‘‘Publicly-Traded Test;’’ or(C)
                        it
      is a ‘‘controlled foreign corporation’’ and satisfies an ownership test,
      to which, collectively, we refer as the ‘‘CFC
  Test.’’





The
Republic of the Marshall Islands, the jurisdiction where the Company is
incorporated, has been officially recognized by the IRS as a qualified foreign
country that grants the requisite ‘‘equivalent exemption’’ from tax in respect
of each category of shipping income the Company earns and currently expects to
earn in the future. Therefore, the Company will be exempt from United States
federal income taxation with respect to its United States source shipping income
if it satisfies any one of the 50% Ownership Test, the Publicly-Traded Test, or
the CFC Test.





We
believe that we currently satisfy the Publicly-Traded Test, as discussed below
and we intend to take this position on our United States federal income tax
returns for our 2008 taxable year. The Company does not currently anticipate a
circumstance under which it would be able to satisfy the 50% Ownership Test or
the CFC Test before or after the issuance of the common stock to which the
registration statement of which this prospectus forms a part
relates.




21




Publicly-Traded
Test


The
regulations under Section 883 provide, in pertinent part, that shares of a
foreign corporation will be considered to be ‘‘primarily traded’’ on an
established securities market in a country if the number of shares of each class
of shares that are traded during any taxable year on all established securities
markets in that country exceeds the number of shares in each such class that are
traded during that year on established securities markets in any other single
country. The Company’s common stock, which will be its sole class of issued and
outstanding shares, are ‘‘primarily traded’’ on the Nasdaq Global Select
Market.





Under
the regulations, the Company’s common stock will be considered to be ‘‘regularly
traded’’ on an established securities market if one or more classes of its
shares representing more than 50% of its outstanding shares, by both total
combined voting power of all classes of shares entitled to vote and total value,
are listed on such market, to which we refer as the ‘‘listing threshold.’’ Since
all our common stock are listed on the Nasdaq Global Select Market, we believe
that we satisfy the listing threshold.





It
is further required that with respect to each class of shares relied upon to
meet the listing threshold, (i) such class of shares is traded on the market,
other than in minimal quantities, on at least 60 days during the taxable year or
one-sixth of the days in a short taxable year; and (ii) the aggregate number of
shares of such class of shares traded on such market during the taxable year is
at least 10% of the average number of shares of such class of shares outstanding
during such year or as appropriately adjusted in the case of a short taxable
year. We believe the Company will satisfy the trading frequency and trading
volume tests. Even if this were not the case, the regulations provide that the
trading frequency and trading volume tests will be deemed satisfied if, as is
the case with the Company’s common stock, such class of shares is traded on an
established market in the United States and such shares are regularly quoted by
dealers making a market in such shares.





Notwithstanding
the foregoing, the regulations provide, in pertinent part, that a class of
shares will not be considered to be ‘‘regularly traded’’ on an established
securities market for any taxable year in which 50% or more of the vote and
value of the outstanding shares of such class are owned, actually or
constructively under specified share attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the vote and
value of such class of outstanding shares, to which we refer as the ‘‘5 Percent
Override Rule.’’





For
purposes of being able to determine the persons who actually or constructively
own 5% or more of the vote and value of the Company’s common stock, or ‘‘5%
Shareholders,’’ the regulations permit the Company to rely on those persons that
are identified on Schedule 13G and Schedule 13D filings with the Commission, as
owning 5% or more of the Company’s common stock. The regulations further provide
that an investment company which is registered under the Investment Company Act
of 1940, as amended, will not be treated as a 5% Shareholder for such
purposes.





In
the event the 5 Percent Override Rule is triggered, the regulations provide that
the 5 Percent Override Rule will nevertheless not apply if the Company can
establish that within the group of 5% Shareholders, there are sufficient
qualified shareholders for purposes of Section 883 to preclude non-qualified
shareholders in such group from owning 50% or more of the Company’s common stock
for more than half the number of days during the taxable year, which we refer to
as the ‘‘5 Percent Override Exception.’’





The
Company does not believe that it is currently subject to the 5 Percent Override
Rule. Therefore, the Company believes that it currently qualifies for the
Publicly-Traded Test. However, there is no assurance that the Company will
continue to satisfy the Publicly-Traded Test. For example, the Company’s
shareholders could change in the future, and thus the Company could become
subject to the 5 Percent Override Rule.




22




Taxation
in Absence of Section 883 Exemption


If
the benefits of Section 883 are unavailable, the Company’s United States source
shipping income would be subject to a 4% tax imposed by Section 887 of the Code
on a gross basis, without the benefit of deductions, to the extent that such
income is not considered to be ‘‘effectively connected’’ with the conduct of a
United States trade or business, as described below. Since under the sourcing
rules described above, no more than 50% of the Company’s shipping income would
be treated as being United States source shipping income, the maximum effective
rate of United States federal income tax on our shipping income would never
exceed 2% under the 4% gross basis tax regime. Based on the current operation of
our vessels, if we were subject to 4% gross basis tax, our United States federal
income tax liability would be approximately $1,400,000 per year. However, we can
give no assurance that the operation of our vessels, which are under the control
of third party charterers, will not change such that our United States federal
income tax liability would be substantially higher.





To
the extent the Company’s United States source shipping income is considered to
be ‘‘effectively connected’’ with the conduct of a United States trade or
business, as described below, any such ‘‘effectively connected’’ United States
source shipping income, net of applicable deductions, would be subject to United
States federal income tax, currently imposed at rates of up to 35%. In addition,
the Company may be subject to the 30% ‘‘branch profits’’ tax on earnings
effectively connected with the conduct of such trade or business, as determined
after allowance for certain adjustments, and on certain interest paid or deemed
paid attributable to the conduct of the Company’s United States trade or
business.





The
Company’s United States source shipping income would be considered ‘‘effectively
connected’’ with the conduct of a United States trade or business only
if:





·
            the
      Company has, or is considered to have, a fixed place of business in the
      United States involved in the earning of United States source shipping
      income; and




·
            substantially
      all of the Company’s United States source shipping income is attributable
      to regularly scheduled transportation, such as the operation of a vessel
      that follows a published schedule with repeated sailings at regular
      intervals between the same points for voyages that begin or end in the
      United States.




The
Company does not intend to have, or permit circumstances that would result in
having, any vessel sailing to or from the United States on a regularly scheduled
basis. Based on the foregoing and on the expected mode of the Company’s shipping
operations and other activities, we believe that none of the Company’s United
States source shipping income will be ‘‘effectively connected’’ with the conduct
of a United States trade or business.





United
States Taxation of Gain on Sale of Vessels


If
the Company qualifies for exemption from tax under Section 883 in respect of the
shipping income derived from the international operation of its vessels, then
gain from the sale of any such vessel should likewise be exempt from tax under
Section 883. If, however, the Company’s shipping income from such vessels does
not for whatever reason qualify for exemption under Section 883 and assuming
that any decision on a vessel sale is made from and attributable to the United
States office of the Company, as we believe likely to be the case as the Company
is currently structured, then any gain derived from the sale of any such vessel
will be treated as derived from United States sources and subject to United
States federal income tax as ‘‘effectively connected’’ income (determined under
rules different from those discussed above) under the above described net income
tax regime.




United
States Federal Income Taxation of United States Holders


As
used herein, the term ‘‘United States Holder’’ means a beneficial owner of
common stock that is an individual United States citizen or resident, a United
States corporation or other United States entity taxable as a corporation, an
estate the income of which is subject to United States federal income taxation
regardless of its source, or a trust if a court within the United States is able
to exercise primary jurisdiction over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust.




23




If
a partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.





Distributions


Subject
to the discussion of passive foreign investment companies below, any
distributions made by the Company with respect to its common stock to a United
States Holder will generally constitute dividends to the extent of the Company’s
current or accumulated earnings and profits, as determined under United States
federal income tax principles. Distributions in excess of such earnings and
profits will be treated first as a nontaxable return of capital to the extent of
the United States Holder’s tax basis in his common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because the Company is not a United States
corporation, United States Holders that are corporations will not be entitled to
claim a dividends received deduction with respect to any distributions they
receive from us. Dividends paid with respect to the Company’s common stock will
generally be treated as ‘‘passive category income’’ for purposes of computing
allowable foreign tax credits for United States foreign tax credit
purposes.





Dividends
paid on the Company’s common stock to a United States Holder who is an
individual, trust or estate (a ‘‘United States Non-Corporate Holder’’) will
generally be treated as ‘‘qualified dividend income’’ that is taxable to such
United States Non-Corporate Holder at preferential tax rates (through 2010)
provided that (1) the common stock is readily tradable on an established
securities market in the United States (such as the Nasdaq Global Select Market
on which the Company’s common stock is traded); (2) the Company is not a passive
foreign investment company for the taxable year during which the dividend is
paid or the immediately preceding taxable year (which we do not believe we have
been, are or will be); (3) the United States Non-Corporate Holder has owned the
common stock for more than 60 days in the 121-day period beginning 60 days
before the date on which the common stock becomes ex-dividend; and (4) the
United States Non-Corporate Holder is not under an obligation to make related
payments with respect to positions in substantially similar or related
property.





There
is no assurance that any dividends paid on the Company’s common stock will be
eligible for these preferential rates in the hands of a United States
Non-Corporate Holder, although we believe that they will be so eligible.
Legislation has been previously introduced in the U.S. Congress which, if
enacted in its present form, would preclude our dividends from qualifying for
such preferential rates prospectively from the date of enactment. Any dividends
out of earnings, and profits the Company pays, which are not eligible for these
preferential rates will be taxed as ordinary income to a United States
Non-Corporate Holder.





Special
rules may apply to any ‘‘extraordinary dividend’’—generally, a dividend in an
amount which is equal to or in excess of 10% of a shareholder’s adjusted basis
in a common share—paid by the Company. If the Company pays an ‘‘extraordinary
dividend’’ on its common stock that is treated as ‘‘qualified dividend income,’’
then any loss derived by a United States Non-Corporate Holder from the sale or
exchange of such common stock will be treated as long-term capital loss to the
extent of such dividend.





Sale,
Exchange or Other Disposition of Common Stock


Assuming
the Company does not constitute a passive foreign investment company for any
taxable year, a United States Holder generally will recognize taxable gain or
loss upon a sale, exchange or other disposition of the Company’s common stock in
an amount equal to the difference between the amount realized by the United
States Holder from such sale, exchange or other disposition and the United
States Holder’s tax basis in such stock. Such gain or loss will be treated as
long-term capital gain or loss if the United States Holder’s holding period is
greater than one year at the time of the sale, exchange or other disposition.
Such capital gain or loss will generally be treated as United States source
income or loss, as applicable, for United States foreign tax credit purposes.
Long-term capital gains of United States Non-Corporate Holders are currently
eligible for reduced rates of taxation. A United States Holder’s ability to
deduct capital losses is subject to certain limitations.




24




Passive
Foreign Investment Company Status and Significant Tax Consequences


Special
United States federal income tax rules apply to a United States Holder that
holds shares in a foreign corporation classified as a ‘‘passive foreign
investment company’’ for United States federal income tax purposes. In general,
the Company will be treated as a passive foreign investment company with respect
to a United States Holder if, for any taxable year in which such holder holds
the Company’s common stock, either





·
            at
      least 75% of our gross income for such taxable year consists of passive
      income (e.g., dividends, interest, capital gains and rents derived other
      than in the active conduct of a rental business);
  or




·
            at
      least 50% of the average value of our assets during such taxable year
      produce, or are held for the production of, passive
  income.




Income
earned, or deemed earned, by the Company in connection with the performance of
services would not constitute passive income. By contrast, rental income would
generally constitute ‘‘passive income’’ unless the Company was treated under
specific rules as deriving its rental income in the active conduct of a trade or
business.





Based
on the Company’s current operations and future projections, we do not believe
that the Company has been or is, nor do we expect the Company to become, a
passive foreign investment company with respect to any taxable year. Although
there is no legal authority directly on point, our belief is based principally
on the position that, for purposes of determining whether the Company is a
passive foreign investment company, the gross income it derives from its time
chartering and voyage chartering activities should constitute services income,
rather than rental income. Accordingly, such income should not constitute
passive income, and the assets that the Company owns and operates in connection
with the production of such income, in particular, the vessels, should not
constitute passive assets for purposes of determining whether the Company is a
passive foreign investment company. We believe there is substantial legal
authority supporting our position consisting of case law and IRS pronouncements
concerning the characterization of income derived from time charters and voyage
charters as services income for other tax purposes.  In addition, we
have obtained an opinion from our counsel, Seward & Kissel LLP, that, based
upon the Company’s operations as described herein, its income from time charters
and voyage charters should not be treated as passive income for purposes of
determining whether it is a passive foreign investment company. However, in the absence
of any legal authority specifically relating to the statutory provisions
governing passive foreign investment companies, the IRS or a court could
disagree with our position. In addition, although the Company intends to conduct
its affairs in a manner to avoid being classified as a passive foreign
investment company with respect to any taxable year, we cannot assure you that
the nature of its operations will not change in the future.





As
discussed more fully below, if the Company were to be treated as a passive
foreign investment company for any taxable year, a United States Holder would be
subject to different taxation rules depending on whether the United States
Holder makes an election to treat the Company as a ‘‘Qualified Electing Fund,’’
which election we refer to as a ‘‘QEF election.’’ As an alternative to making a
QEF election, a United States Holder should be able to make a ‘‘mark-to-market’’
election with respect to the Company’s common stock, as discussed
below.





Taxation
of United States Holders Making a Timely QEF Election


If
a United States Holder makes a timely QEF election, which United States Holder
we refer to as an ‘‘Electing Holder,’’ the Electing Holder must report for
United States federal income tax purposes its pro rata share of the Company’s
ordinary earnings and net capital gain, if any, for each taxable year of the
Company for which it is a passive foreign investment company that ends with or
within the taxable year of the Electing Holder, regardless of whether or not
distributions were received from the Company by the Electing Holder. No portion
of any such inclusions of ordinary earnings will be treated as ‘‘qualified
dividend income.’’ Net capital gain inclusions of United States Non-Corporate
Holders would be eligible for preferential capital gains tax rates. The Electing
Holder’s adjusted tax basis in the common stock will be increased to reflect
taxed but undistributed earnings and profits. Distributions of earnings and
profits that had been previously taxed will result in a corresponding reduction
in the adjusted tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would not, however, be entitled to a deduction
for its pro rata share of any losses that the Company incurs with respect to any
year. An Electing Holder would generally recognize capital gain or loss on the
sale, exchange or other disposition of the Company’s common stock. A United
States Holder would make a timely QEF election for shares of the Company by
filing one copy of IRS Form 8621 with his United States federal income tax
return for the first year in which he held such shares when the Company was a
passive foreign investment company. If the Company were to be treated as a
passive foreign investment company for any taxable year, the Company would
provide each United States Holder with all necessary information in order to
make the QEF election described above.




25




Taxation
of United States Holders Making a ‘‘Mark-to-Market’’ Election


Alternatively,
if the Company were to be treated as a passive foreign investment company for
any taxable year and, as we anticipate, its shares are treated as ‘‘marketable
stock,’’ a United States Holder would be allowed to make a ‘‘mark-to-market’’
election with respect to the Company’s common stock, provided the United States
Holder completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury regulations. If that election is made, the
United States Holder generally would include as ordinary income in each taxable
year the excess, if any, of the fair market value of the common stock at the end
of the taxable year over such holder’s adjusted tax basis in the common stock.
The United States Holder would also be permitted an ordinary loss in respect of
the excess, if any, of the United States Holder’s adjusted tax basis in the
common stock over its fair market value at the end of the taxable year, but only
to the extent of the net amount previously included in income as a result of the
mark-to-market election. A United States Holder’s tax basis in his common stock
would be adjusted to reflect any such income or loss amount. Gain realized on
the sale, exchange or other disposition of the Company’s common stock would be
treated as ordinary income, and any loss realized on the sale, exchange or other
disposition of the common would be treated as ordinary loss to the extent that
such loss does not exceed the net mark-to-market gains previously included by
the United States Holder. No income inclusions under this election will be
treated as ‘‘qualified dividend income.’’





Taxation
of United States Holders Not Making a Timely QEF or Mark-to-Market
Election


Finally,
if the Company were to be treated as a passive foreign investment company for
any taxable year, a United States Holder who does not make either a QEF election
or a ‘‘mark-to-market’’ election for that year, whom we refer to as a
‘‘Non-Electing Holder,’’ would be subject to special rules with respect to (1)
any excess distribution (i.e., the portion of any distributions received by the
Non-Electing Holder on the common stock in a taxable year in excess of 125% of
the average annual distributions received by the Non-Electing Holder in the
three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding
period for the common stock), and (2) any gain realized on the sale, exchange or
other disposition of the Company’s common stock. Under these special
rules:





·
            the
      excess distribution or gain would be allocated ratably over the
      Non-Electing Holder’s aggregate holding period for the common
      stock;




·
            the
      amount allocated to the current taxable year, and any taxable year prior
      to the first taxable year in which the Company was a passive foreign
      investment company, would be taxed as ordinary income and would not be
      ‘‘qualified dividend income;’’ and




·
            the
      amount allocated to each of the other taxable years would be subject to
      tax at the highest rate of tax in effect for the applicable class of
      taxpayer for that year, and an interest charge for the deemed deferral
      benefit would be imposed with respect to the resulting tax attributable to
      each such other taxable year.




These
special rules would not apply to a qualified pension, profit sharing or other
retirement trust or other tax-exempt organization that did not borrow money or
otherwise utilize leverage in connection with its acquisition of the Company’s
common stock. If the Company is a passive foreign investment company and a
Non-Electing Holder who is an individual dies while owning the Company’s common
stock, such holder’s successor generally would not receive a step-up in tax
basis with respect to such shares.




United
States Federal Income Taxation of ‘‘Non-United States Holders’’


A
beneficial owner of common stock (other than a partnership) that is not a United
States Holder is referred to herein as a ‘‘Non-United States
Holder.’’





If
a partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.




26




Dividends
on Common Stock


Non-United
States Holders generally will not be subject to United States federal income tax
or withholding tax on dividends received from the Company with respect to its
common stock, unless that income is effectively connected with the Non-United
States Holder’s conduct of a trade or business in the United States. If the
Non-United States Holder is entitled to the benefits of a United States income
tax treaty with respect to those dividends, that income is taxable only if it is
attributable to a permanent establishment maintained by the Non-United States
Holder in the United States.




Sale,
Exchange or Other Disposition of Common Stock


Non-United
States Holders generally will not be subject to United States federal income tax
or withholding tax on any gain realized upon the sale, exchange or other
disposition of the Company’s common stock, unless:





·
            the
      gain is effectively connected with the Non-United States Holder’s conduct
      of a trade or business in the United States (and, if the Non-United States
      Holder is entitled to the benefits of an income tax treaty with respect to
      that gain, that gain is attributable to a permanent establishment
      maintained by the Non-United States Holder in the United States);
      or




·
            the
      Non-United States Holder is an individual who is present in the United
      States for 183 days or more during the taxable year of disposition
      and other conditions are met.




If
the Non-United States Holder is engaged in a United States trade or business for
United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of
the shares, that is effectively connected with the conduct of that trade or
business will generally be subject to regular United States federal income tax
in the same manner as discussed in the previous section relating to the taxation
of United States Holders. In addition, if you are a corporate Non-United States
Holder, your earnings and profits that are attributable to the effectively
connected income, which are subject to certain adjustments, may be subject to an
additional branch profits tax at a rate of 30%, or at a lower rate as may be
specified by an applicable income tax treaty.




Backup
Withholding and Information Reporting


In
general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting requirements if
you are a non-corporate United States Holder. Such payments or distributions may
also be subject to backup withholding tax if you are a non-corporate United
States Holder and you:





·
            fail
      to provide an accurate taxpayer identification
  number;




·
            are
      notified by the IRS that you have failed to report all interest or
      dividends required to be shown on your federal income tax returns;
      or




·
            in
      certain circumstances, fail to comply with applicable certification
      requirements.




Non-United
States Holders may be required to establish their exemption from information
reporting and backup withholding by certifying their status on IRS Form W-8BEN,
W-8ECI or W-8IMY, as applicable.





If
you are a Non-United States Holder and you sell your common stock to or through
a United States office of a broker, the payment of the proceeds is subject to
both United States backup withholding and information reporting unless you
certify that you are a non-United States person, under penalties of perjury, or
you otherwise establish an exemption. If you sell your common stock through a
non-United States office of a non-United States broker and the sales proceeds
are paid to you outside the United States, then information reporting and backup
withholding generally will not apply to that payment. However, United States
information reporting requirements, but not backup withholding, will apply to a
payment of sales proceeds, even if that payment is made to you outside the
United States, if you sell your common stock through a non-United States office
of a broker that is a United States person or has some other contacts with the
United States. Such information reporting requirements will not apply, however,
if the broker has documentary evidence in its records that you are a non-United
States person and certain other conditions are met, or you otherwise establish
an exemption.





Backup
withholding tax is not an additional tax. Rather, you generally may obtain a
refund of any amounts withheld under backup withholding rules that exceed your
income tax liability by filing a refund claim with the IRS.


27





GLOSSARY
OF SHIPPING TERMS





Following
are definitions of shipping terms used in this Form 10-K.





Annual Survey—The inspection
of a vessel by a classification society, on behalf of a flag state, that takes
place every year.





Bareboat Charter—Also known as
“demise charter.” Contract or hire of a ship under which the shipowner is
usually paid a fixed amount of charter hire rate for a certain period of time
during which the charterer is responsible for the operating costs and voyage
costs of the vessel as well as arranging for crewing.





Bulk Vessels/Carriers—Vessels
which are specially designed and built to carry large volumes of cargo in bulk
cargo form.





Bunkers—Heavy fuel oil used to
power a vessel’s engines.





Capesize—A dry bulk carrier in
excess of 100,000 dwt.





Charter—The hire of a vessel
for a specified period of time or to carry a cargo for a fixed fee from a
loading port to a discharging port. The contract for a charter is called a
charterparty.





Charterer—The individual or
company hiring a vessel.





Charter Hire Rate—A sum of
money paid to the vessel owner by a charterer under a time charterparty for the
use of a vessel.





Classification Society—An
independent organization which certifies that a vessel has been built and
maintained in accordance with the rules of such organization and complies with
the applicable rules and regulations of the country of such vessel and the
international conventions of which that country is a member.





Deadweight Ton—”dwt”—A unit of
a vessel’s capacity for cargo, fuel oil, stores and crew, measured in metric
tons of 1,000 kilograms. A vessel’s DWT or total deadweight is the total weight
the vessel can carry when loaded to a particular load line.





Demise Charter—See bareboat
charter





Draft—Vertical distance
between the waterline and the bottom of the vessel’s keel.





Dry Bulk—Non-liquid cargoes of
commodities shipped in an unpackaged state.





Drydocking—The removal of a
vessel from the water for inspection and/or repair of submerged
parts.





Gross Ton—Unit of 100 cubic
feet or 2.831 cubic meters used in arriving at the calculation of gross
tonnage.





Handymax—A dry bulk carrier of
approximately 35,000 to 60,000 dwt.





Handysize—A dry bulk carrier
having a carrying capacity of up to approximately 35,000 dwt.





Hull—The shell or body of a
vessel.





International Maritime
Organization—”IMO”—A United Nations agency that issues international
trade standards for shipping.




28




Intermediate Survey—The
inspection of a vessel by a classification society surveyor which takes place
between two and three years before and after each Special Survey for such vessel
pursuant to the rules of international conventions and classification
societies.





ISM Code—The International
Management Code for the Safe Operation of Ships and for Pollution Prevention, as
adopted by the IMO.





Metric Ton—A unit of
measurement equal to 1,000 kilograms.





Newbuilding—A newly
constructed vessel.





OPA—The United States Oil
Pollution Act of 1990 (as amended).





Orderbook—A reference to
currently placed orders for the construction of vessels (e.g., the Panamax
orderbook).





Panamax—A dry bulk carrier of
approximately 60,000 to 100,000 dwt of maximum length, depth and draft capable
of passing fully loaded through the Panama Canal.





Protection & Indemnity
Insurance—Insurance obtained through a mutual association formed by
shipowners to provide liability insurance protection from large financial loss
to one member through contributions towards that loss by all
members.





Scrapping—The disposal of old
or damaged vessel tonnage by way of sale as scrap metal.





Short-Term Time Charter—A time
charter which lasts less than approximately 12 months.





Sister Ships—Vessels of the
same class and specification which were built by the same shipyard.





SOLAS—The International
Convention for the Safety of Life at Sea 1974, as amended, adopted under the
auspices of the IMO.





Special Survey—The inspection
of a vessel by a classification society surveyor which takes place a minimum of
every four years and a maximum of every five years.





Spot Market—The market for
immediate chartering of a vessel usually for single voyages.





Strict Liability—Liability
that is imposed without regard to fault.





Supramax—A new class of
Handymax dry bulk carrier of approximately 50,000 to 60,000 dwt.





Time Charter—Contract for hire
of a ship. A charter under which the ship-owner is paid charter hire rate on a
per day basis for a certain period of time, the shipowner being responsible for
providing the crew and paying operating costs while the charterer is responsible
for paying the voyage costs. Any delays at port or during the voyages are the
responsibility of the charterer, save for certain specific exceptions such as
loss of time arising from vessel breakdown and routine maintenance.





Ton—A metric ton.





Voyage Charter—Contract for
hire of a vessel under which a shipowner is paid freight on the basis of moving
cargo from a loading port to a discharge port. The shipowner is responsible for
paying both operating costs and voyage costs. The charterer is typically
responsible for any delay at the loading or discharging ports.




29




Available
Information


The
Company makes available free of charge through its internet website, www.eagleships.com
its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the Securities and Exchange Commission. You
may read and copy any document we file with the SEC at the SEC’s public
reference facilities maintained by the Securities and Exchange Commission 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 facilities. Our
SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov.
The information on our website is not incorporated by reference into this
report.


30


ITEM
1A. RISK
FACTORS





We
operate in an intensely competitive industry. Some of the following risks relate
principally to the industry in which we operate and our business in general.
Other risks relate principally to the securities market, national and global
economic conditions and the ownership of our common stock. The occurrence of any
of the events described in this section could cause our  results to
differ materially from those contained in the forward-looking statements made in
this report, and could significantly and negatively affect our business,
financial condition or operating results.





Industry
Specific Risk Factors





Charter
hire rates for dry bulk vessels have declined significantly and may decrease in
the future, which may adversely affect our earnings.





The
drybulk shipping industry is cyclical with attendant volatility in charterhire
rates and profitability. The degree of charter hire rate volatility among
different types of drybulk vessels has varied widely, and charterhire rates for
drybulk vessels have declined significantly from historically high levels.
Fluctuations in charter rates result from changes in the supply 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 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
      and terrorist activities; embargoes and
strikes;




·
            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.




Factors
that influence the supply of vessel capacity include:





·
            number
      of newbuilding deliveries;




·
            scrapping
      of older vessels;




·
            vessel
      casualties; and




·
            number
      of vessels that are out of service.




31




We
anticipate that the future demand for our drybulk vessels will be dependent upon
continued economic growth in the world’s economies, seasonal and regional
changes in demand, changes in the capacity of the global drybulk fleet and the
sources and supply of drybulk cargo to be transported by sea. 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.





Our
ability to recharter our drybulk vessels upon the expiration or termination of
their time charters and the charter rates payable under any renewal or
replacement charters will depend upon, among other things, the current state of
the drybulk shipping market. If the drybulk shipping market is in a period of
depression when our vessels’ charters expire, we may be forced to re-charter
them at reduced rates or even possibly a rate whereby we incur a loss, which may
reduce our earnings or make our earnings volatile.





In
addition, because the market value of our vessels may fluctuate significantly,
we may incur losses when we sell vessels, which may adversely affect our
earnings. If we sell vessels at a time when vessel prices have fallen and before
we have recorded an impairment adjustment to our financial statements, the sale
may be at less than the vessel’s carrying amount on our financial statements,
resulting in a loss and a reduction in earnings.





The dry bulk carrier charter market
has deteriorated significantly since October 2008, which has adversely affected
our revenues, earnings and profitability and our ability to comply with our loan
covenants.





The
Baltic Dry bulk Index, or BDI, declined from a high of 11,793 in May 2008 to a
low of 663 in December 2008, which represents a decline of 94%. The BDI fell
over 70% during the month of October alone.  Over the comparable
period of May through December 2008, the high and low of the Baltic Panamax
Index and the Baltic Capesize Index represent a decline of 96% and 99%,
respectively. The decline in charter rates is due to various factors, including
the lack of trade financing for purchases of commodities carried by sea, which
has resulted in a significant decline in cargo shipments, and the excess supply
of iron ore in China, which has resulted in falling iron ore prices and
increased stockpiles in Chinese ports.  The decline in charter rates
in the dry bulk market also affects the value of our dry bulk vessels, which
follows the trends of dry bulk charter rates, and earnings on our charters, and
similarly, affects our cash flows, liquidity and compliance with the covenants
contained in our loan agreements.





Although
our vessels are employed predominately on medium and long-term time charters, 15
of these are scheduled to expire in the next 12 months, at which time we will
have to negotiate new employment for these vessels.  If the very low
charter rates in the dry bulk market continue to exist when we are required to
renew these charters or in the future when our other charters must be renewed,
this will have an adverse effect on our revenues, profitability, cash flows and
our ability to comply with the financial covenants in our loan
agreements.





A further economic slowdown in the
Asia Pacific region could exacerbate the effect of recent slowdowns in the
economies of the United States and 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, 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 United States and 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. In recent years, China
has been one of the world’s fastest growing economies in terms of gross domestic
product, which has had a significant impact on shipping demand. This rate of
growth declined significantly in the second half of 2008 and it is likely that
China and other countries in the Asia Pacific region will continue to experience
slowed or even negative economic growth in the near future. Moreover, the
current economic slowdown in the economies of the United States, the European
Union and other Asian countries may further adversely affect economic growth in
China and elsewhere. China has recently announced a $586.0 billion stimulus
package aimed in part at increasing investment and consumer spending and
maintaining export growth in response to the recent slowdown in its economic
growth. Our business, financial condition and results of operations, as well as
our future prospects, will likely be materially and adversely affected by a
further economic downturn in any of these countries.




32




Changes in the economic and
political environment in China and policies adopted by the government to
regulate its economy may have a material adverse effect on our business,
financial condition and results of operations.





The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in such respects
as structure, government involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and balance of payments
position. Prior to 1978, the Chinese economy was a planned economy. Since 1978,
increasing emphasis has been placed on the utilization of market forces in the
development of the Chinese economy. Annual and five year State Plans are adopted
by the Chinese government in connection with the development of the economy.
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, all of which
could, adversely affect our business, operating results and financial
condition.





The
market values of our vessels have declined and may further decrease, which could
limit the amount of funds that we can borrow or trigger certain financial
covenants under our current or future credit facilities and/or we may incur a
loss if we sell vessels following a decline in their market value.





The
fair market values of our vessels have generally experienced high volatility and
have recently declined significantly.  The market prices for
secondhand Handymax and Supramax drybulk carriers have recently decreased
sharply from their historically high levels.The fair market value of our vessels
may continue to fluctuate (i.e., increase and decrease) 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
      and demand for vessels;


·
            other
      modes of transportation;


·
            cost
      of newbuildings;


·
            governmental
      or other regulations; and


·
            technological
      advances.




If
the fair market value of our vessels declines, we may not be in compliance with
certain provisions of our credit facility and we may not be able to refinance
our debt or obtain additional financing.  If we are not able to comply
with the covenants in our credit facility and unable to remedy the relevant
breach, our lenders could accelerate our debt and foreclose on our
fleet.  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 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 fall
significantly we may have to record an impairment adjustment in our financial
statements which could adversely affect our financial results.




33




An
over-supply of drybulk carrier capacity may lead to reductions in charter hire
rates and profitability.





The
market supply of drybulk carriers has been increasing, and the number of drybulk
carriers on order are near historic highs. These newbuildings were delivered in
significant numbers starting at the beginning of 2006 and continuing through
2008. As of December 2008, newbuilding orders had been placed for an aggregate
of more than 70% of the existing global drybulk fleet on a deadweight basis,
with deliveries expected during the next 36 months.  An
over-supply of drybulk carrier capacity may result in a reduction of charter
hire rates. If such a reduction occurs, upon the expiration or termination of
our vessels’ current 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.





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





Terrorist
attacks in such as the attacks on the United States 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 in the United States or elsewhere, continues to
cause uncertainty in the world’s financial markets and may affect our business,
operating results and financial condition. The continuing presence of United
States and other armed forces in Iraq and Afghanistan 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, 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.





Terrorist
attacks on vessels, such as the October 2002 attack on the M.V. Limburg, a very large crude
carrier not related to us, may in the future also negatively affect our
operations and financial condition and directly impact our vessels or our
customers. Future terrorist attacks could result in increased volatility and
turmoil of the financial markets in the United States and globally. Any of these
occurrences could have a material adverse impact on our revenues and
costs.





Acts of piracy on
ocean-going vessels have recently increased in frequency, which could adversely
affect our business.





Acts of piracy 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 ofSomalia.  Throughout 2008and early 2009, the frequency of piracy incidents has
increased significantly, particularly in the Gulf of Aden off the coast ofSomalia.  If these piracy attacks
result in regions in which our vessels are deployed being characterized by
insurers as“war risk”zones, as theGulf of Adentemporarily was in May 2008, or Joint
War Committee (JWC)“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, including due to
employing onboard security guards, could increase in such
circumstances.  We may not be adequately insured to cover losses from
these incidents, which could have a material adverse effect on us.  In
addition, detention hijacking 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 and
results of operations.





Disruptions in world financial
markets and the resulting governmental action in the United States and in other
parts of the world could have a material adverse impact on our results of
operations, financial condition and cash flows, and could cause the market price
of our common stock to further decline.





The
United States and other parts of the world are exhibiting deteriorating economic
trends and have been in a recession. For example, the credit markets in the
United States have experienced significant contraction, deleveraging and reduced
liquidity, and the United States federal government and state governments have
implemented and are considering a broad variety of governmental action and/or
new regulation of the financial markets. Securities and futures markets and the
credit markets are subject to comprehensive statutes, regulations and other
requirements. The 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.




34




Recently,
a number of financial institutions have experienced serious financial
difficulties and, in some cases, have entered bankruptcy proceedings or are in
regulatory enforcement actions. 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, have caused the
trading price of our common shares on the Nasdaq Global Market to decline and
could cause the price of our common shares to continue to decline.





Our
operating results will be subject to seasonal fluctuations, which could affect
our operating results and the amount of available cash with which we can pay
dividends.





We
operate our vessels in markets that have historically exhibited seasonal
variations in demand and, as a result, in charter hire rates. To the extent we
operate vessels in the spot market, this seasonality may result in
quarter-to-quarter volatility in our operating results, which could affect the
amount of dividends that we pay to our stockholders from quarter to quarter. The
drybulk sector is typically stronger in the fall and winter months in
anticipation of increased consumption of coal and other raw materials in the
northern hemisphere. In addition, unpredictable weather patterns in these months
tend to disrupt vessel scheduling and supplies of certain commodities. As a
result, our revenues from our drybulk carriers may be weaker during the fiscal
quarters ended June 30 and September 30, and, conversely, our revenues from our
drybulk carriers may be stronger in fiscal quarters ended December 31 and March
31. While this seasonality will not affect our operating results as long as our
fleet is employed on time charters, if our vessels are employed in the spot
market in the future, it could materially affect our operating
results.





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





The
operation of our vessels is affected by the requirements set forth in the United
Nation’s International Maritime Organization’s International Management Code for
the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM
Code requires shipowners, 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. 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.Each of the
vessels that has been delivered to us is ISM Code-certified and we expect that
each other vessel that we have agreed to purchase will be ISM Code-certified
when delivered to us.





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.




35




The
operation of our vessels is also affected by other 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.





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 inspection and related
procedures in countries of origin and destination and trans shipment points.
Inspection procedures may result in the seizure of contents of our vessels,
delays in the loading, offloading or delivery 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.





Our
business has inherent operational risks, which may not be adequately covered by
insurance.





Our
vessels and their cargoes are at risk of being damaged or lost because of events
such as marine disasters, bad weather, mechanical failures, human error,
environmental accidents, war, terrorism, piracy and other circumstances or
events.  In addition, transporting cargoes across a wide variety of
international jurisdictions creates a risk of business interruptions due to
political circumstances in foreign countries, hostilities, labor strikes and
boycotts, the potential for changes in tax rates or policies, and the potential
for government expropriation of our vessels. Any of these events may result in
loss of revenues, increased costs and decreased cash flows to our customers,
which could impair their ability to make payments to us under our
charters.





In
the event of a casualty to a vessel or other catastrophic event, we will rely on
our insurance to pay the insured value of the vessel or the damages incurred.
Through our management agreements with our technical managers, we procure
insurance for the vessels in our fleet employed under time charters against
those risks that we believe the shipping industry commonly insures against.
These insurances include marine hull and machinery insurance, protection and
indemnity insurance, which include pollution risks and crew insurances, and war
risk insurance. Currently, the amount of coverage for liability for pollution,
spillage and leakage available to us on commercially reasonable terms through
protection and indemnity associations and providers of excess coverage is $1
billion per vessel per occurrence.





We
cannot assure you that we will be adequately insured against all risks or that
we will be able to obtain adequate insurance coverage at reasonable rates for
our vessels in the future.  For example, in the past more stringent
environmental regulations have led to increased costs for, and in the future may
result in the lack of availability of, insurance against risks of environmental
damage or pollution. Additionally, our insurers may refuse to pay particular
claims. Any significant loss or liability for which we are not insured could
have a material adverse effect on our financial condition.





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 one vessel in our fleet
for claims relating to another of our vessels.




36




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 cash we have available for distribution as
dividends to our stockholders.





Company
Specific Risk Factors





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





Commencing
with the fourth quarter of 2008, our board of directors has determined to
suspend the payment of a dividend to our shareholders to increase cash flow,
optimize financial flexibility and enhance internal growth.  In the
future, the declaration and payment of dividends, if any, will always be subject
to the discretion of our board of directors, restrictions contained in our
amended credit facility and the requirements of Marshall Islands law. The timing
and amount of any dividends declared will depend on, among other things, our
earnings, financial condition and cash requirements and availability, our
ability to obtain debt and equity financing on acceptable terms as contemplated
by our growth strategy, the terms of our outstanding indebtedness and the
ability of our subsidiaries to distribute funds to us. The international drybulk
shipping industry is highly volatile, and we cannot predict with certainty the
amount of cash, if any, that will be available for distribution as dividends in
any period. Also, there may be a high degree of variability from period to
period in the amount of cash that is available for the payment of
dividends.





We
may incur expenses or liabilities or be subject to other circumstances in the
future that reduce or eliminate the amount of cash that we have available for
distribution as dividends, including as a result of the risks described in this
Annual Report. Our growth strategy contemplates that we will finance our
acquisitions of additional vessels through debt financings or the net proceeds
of future equity issuances on terms acceptable to us. If financing is not
available to us on acceptable terms, our board of directors may determine to
finance or refinance acquisitions with cash from operations, which would reduce
the amount of any cash available for the payment of dividends.





Under
the terms of our credit facility, we will not be permitted to pay dividends if
there is a default or a breach of a loan covenant. In addition, we are permitted
to pay dividends only in amounts up to our cumulative cash flows which is EBITDA
(as defined in our credit agreement) less the aggregate amount of interest
incurred and net amounts payable under interest rate hedging agreements during
the relevant period and an agreed upon reserve for drydockings. Please see the
section of this Annual Report entitled “Credit Facility” for more information
relating to restrictions on our ability to pay dividends under the terms of our
credit facility.





The
Republic of Marshall Islands law generally prohibits the payment of dividends
other than from surplus (retained earnings and the excess of consideration
received for the sale of shares above the par value of the shares) or while a
company is insolvent or would be rendered insolvent by the payment of such a
dividend. We may not have sufficient surplus in the future to pay dividends and
our subsidiaries may not have sufficient funds or surplus to make distributions
to us. We can give no assurance that dividends will be paid at all.




37




We
may have difficulty managing our planned growth properly.





The
acquisition and management of the 23 vessels in our operating fleet have
imposed, and additional drybulk vessels that we may acquire in the future will
impose, significant responsibilities on our management and staff. The addition
of vessels to our fleet may require us to increase the number of our personnel.
We will also have to manage our customer base so that we can provide continued
employment for our vessels upon the expiration of our existing time
charters.





We
intend to continue to grow our business. Our future growth will primarily depend
on:





·
            locating
      and acquiring suitable vessels;




·
            obtaining
      required financing on acceptable
terms;




·
            identifying
      and consummating acquisitions;




·
            enhancing
      our customer base; and




·
            managing
      our expansion.




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 cannot give any assurance that we will be successful in
executing our growth plans or that we will not incur significant expenses and
losses in connection with our future growth.





We
cannot assure you that we will be able to borrow amounts under our credit
facility and restrictive covenants in our credit facility may impose financial
and other restrictions on us





We
entered into a senior secured revolving credit facility in July 2005. We used
borrowings under the revolving credit facility to refinance a portion of our
outstanding indebtedness at the time of our initial public offering in June 2005
and to fund vessel acquisitions. Since then we have amended and enhanced our
credit facility periodically to accommodate our newbuilding program of 35
vessels, the first of which was delivered in June 2008 and eight of which we
have converted in options to purchase vessels in the future.  In July,
2008, we entered into an amendment to our revolving credit facility that, among
other things, provided for an additional incremental commitment of up to $200
million under the same terms and conditions as the previously existing facility,
subject to satisfaction of certain additional conditions, and amended the
applicable margin rate under the facility.  In December 2008, we
entered into a further amendment to our credit facility to, among other changes,
reduce the required minimum security value of our fleet from 130% to 100%,
reduce the requirement minimum net worth requirement from $300 million to $75
million for 2009, subject to annual review thereafter, and amend the applicable
interest margin to 1.75% over LIBOR.





Our
ability to borrow future amounts under our credit facility will be subject to
the satisfaction of certain customary conditions precedent and compliance with
terms and conditions included in the loan documents. In connection with vessel
acquisitions, amounts borrowed may not exceed 75% of the value of the vessels
securing our obligations under the credit facility. Our ability to borrow such
amounts, in each case, will be subject to our lender’s approval of the vessel
acquisition. Our lender’s approval will be based on the lender’s satisfaction of
our ability to raise additional capital through equity issuances in amounts
acceptable to our lender and the proposed employment of the vessel to be
acquired. To the extent that we are not able to satisfy these requirements,
including as a result of a decline in the value of our vessels, we may not be
able to draw down the credit facility in connection with a vessel acquisition
without obtaining a waiver or consent from the lender.




38




The
credit facility also imposes operating and financial restrictions on us. These
restrictions may limit our ability to, among other things:





·
            pay
      dividends in the future in amounts exceeding our EBITDA, less the
      aggregate amount of interest incurred and net amounts payable under
      interest rate hedging agreements during the relevant period and an agreed
      upon reserve for drydockings;




·
            change
      our Chief Executive Officer without the approval of our
      lender;




·
            incur
      additional indebtedness;




·
            change
      the flag, class or management of our
vessels;




·
            create
      liens on our assets;




·
            sell
      our vessels;




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




·
            enter
      into a new line of business; and




·
            enter
      into a time charter or consecutive voyage charters that has a term that
      exceeds, or which by virtue of any optional extensions may exceed,
      thirteen months.




In
addition, we may not pay dividends if there is a default or a breach of a loan
covenant under the credit facility or if the payment of the dividends would
result in a default or breach of a loan covenant. Our indebtedness may also be
accelerated if we experience a change of control. Therefore, we may need to seek
permission from our lender in order to engage in some corporate actions. Our
lender’s interests may be different from ours and we cannot guarantee you that
we will be able to obtain our lender’s permission when needed. This may limit
our ability to pay dividends to you, finance our future operations, make
acquisitions or pursue business opportunities.





We
cannot assure you that we will be able to refinance indebtedness incurred under
our credit facility.





Our
business strategy contemplates that we repay all or a portion of our acquisition
related debt from time to time with the net proceeds of equity issuances. We
cannot assure you that we will be able to refinance our indebtedness through
equity offerings or otherwise on terms that are acceptable to us or at all. If
we are not able to refinance our indebtedness, we will have to dedicate a
portion of our cash flow from operations to pay the principal and interest of
this indebtedness. We cannot assure you that we will be able to generate cash
flow in amounts that are sufficient for these purposes. If we are not able to
satisfy these obligations, we may have to undertake alternative financing plans
or sell our assets. The actual or perceived credit quality of our charterers,
any defaults by them, and the market value of our fleet, among other things, may
materially affect our ability to obtain alternative financing. In addition, debt
service payments under our credit facility or alternative financing may limit
funds otherwise available for working capital, capital expenditures, payment of
dividends and other purposes. If we are unable to meet our debt obligations, or
if we otherwise default under our credit facility or an alternative financing
arrangement, our lender could declare the debt, together with accrued interest
and fees, to be immediately due and payable and foreclose on our fleet, which
could result in the acceleration of other indebtedness that we may have at such
time and the commencement of similar foreclosure proceedings by other lenders. In
addition, if the recent financial difficulties experienced by financial
institutions worldwide leads to such institutions being unable to meet their
lending commitments, that inability could have a material adverse effect on our
ability to meet our own capital commitment obligations under our newbuilding
contracts and our ability to grow our fleet.  If we are not able to
borrow under our credit facility and are unable to find alternative sources of
financing on terms that are acceptable to us or at all, our business, financial
condition, results of operations and cash flows may be materially adversely
affected.




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





The
20 of the 23 Handymax drybulk vessels in our operating fleet at December 31,
2008, are all secondhand vessels. We have entered into contracts for the
construction of 27 newbuilding vessels, the first three of which were delivered
in 2008, and have options to acquire 8 additional vessels. We also may enter
into additional newbuilding contracts and purchase additional secondhand vessels
in the future. While we have the right to inspect previously owned vessels prior
to purchase, such an inspection does not provide us with the same knowledge
about their condition that we would have if these vessels had been built for and
operated exclusively by us. 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.




39




We
are subject to certain risks with respect to our counterparties on contracts,
and failure of such counterparties to meet their obligations could cause us to
suffer losses or otherwise adversely affect our business.





We
enter into, among other things, charter parties with our customers. Such
agreements subject us to counterparty risks. The ability of each of our
counterparties to perform its obligations under a contract 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 maritime and offshore
industries, the overall financial condition of the counterparty, charter rates
received for specific types of vessels, and various expenses. Consistent with
drybulk shipping industry practice, we have not independently analyzed the
creditworthiness of the charterers.  In addition, in depressed market
conditions, our charterers may no longer need a vessel that is currently under
charter or may be able to obtain a comparable vessel at lower
rates.  As a result, charterers may seek to renegotiate the terms of
their existing charter parties or avoid their obligations under those
contracts.  Should a counterparty fail to honor its obligations under
agreements with us, we could sustain significant losses which could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.





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





We
derive a significant part of our revenues from a small number of charterers. The
charterers’ payments to us under their charters are our sole source of revenue.
Some of our charterers are privately owned companies for which limited credit
and financial information was available to us in making our assessment of
counterparty risk when we entered into our charter. In addition, the ability of
each of our charterers to perform its obligations under a charter will depend on
a number of factors that are beyond our control. These factors may include
general economic conditions, the condition of the drybulk shipping industry, the
charter rates received for specific types of vessels and various operating
expenses. If one or more of these charterers terminates its charter or chooses
not to re-charter our vessel or is unable to perform under its charter with us
and we are not able to find a replacement charter, we could suffer a loss of
revenues that could adversely affect our financial condition, results of
operations and cash available for distribution as dividends to our stockholders.
In addition, we may be required to change the flagging or registration of the
related vessel and may incur additional costs, including maintenance and crew
costs if a charterer were to default on its obligations. Our stockholders do not
have any recourse against our charterers.





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.





Our
vessels are employed 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.





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





Our
success depends to a significant extent upon the abilities and efforts of our
management team. We have entered into an employment contract with our Chairman
and Chief Executive Officer, Sophocles Zoullas. Our success will depend upon our
ability to retain key members of our management team and to hire new members as
may be necessary. The loss of any of these individuals could adversely affect
our business prospects and financial condition. Difficulty in hiring and
retaining replacement personnel could have a similar effect. We do not maintain
“key man” life insurance on any of our officers.




40




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:





·
            marine
      disaster;




·
            environmental
      accidents;




·
            cargo
      and property losses or damage;




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




·
            piracy.




Any
of these circumstances or events could increase our costs or lower our revenues.
The involvement of our vessels in an environmental disaster may harm our
reputation as a safe and reliable vessel owner and operator.





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





In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. Although the weighted average age of the 23 Handymax
drybulk vessels in our operating fleet as of December 31, 2008 is approximately
6 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. We cannot assure you that, as our
vessels age, market conditions will justify those expenditures or enable us to
operate our vessels profitably during the remainder of their useful
lives.





We
may have to pay tax on United States source income, which would reduce our
earnings.





Under
the United States 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 our subsidiaries, that is attributable to transportation that
begins or ends, but that does not both begin and end, in the United States is
characterized as United States source shipping income and such income is subject
to a 4% United States 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
believe that we and each of our subsidiaries qualify for this statutory tax
exemption and we will take this position for United States 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 after the
offering and thereby cause us to become subject to United States federal income
tax on our United States source shipping income. For example, there is a risk
that we could no longer qualify for exemption under Section 883 of the Code for
a particular taxable year if other shareholders with a five percent or greater
interest in our stock were, in combination with to own 50% or more of our
outstanding shares of our stock on more than half the days during the taxable
year. Due to the factual nature of the issues involved, we can give no
assurances on our tax-exempt status or that of any of our
subsidiaries.




41




In
addition, changes in the Code, the Treasury regulations or the interpretation
thereof by the Internal Revenue Service or the courts could adversely affect our
ability to take advantage of the exemption under Section 883.





If
we are not entitled to this exemption under Section 883 for any taxable year, we
would be subject for such taxable year to a 4% United States federal income tax
on our United States source shipping income. The imposition of this taxation
could have a negative effect on our business and would result in decreased
earnings available for distribution to our stockholders.





Based
on the current operation of our vessels, if we were subject to this tax, our
United States federal income tax liability would be approximately
$1,400,000per
year. Because the operations of our vessels are under the control of third party
charterers, we can give no assurance that our United States federal income tax
liability would be substantially higher. However, since no more that 50% of our
shipping income would be treated as derived from U.S. sources, our maximum tax
liability under the 4% tax regime would never exceed 2% of our shipping
income.





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





A
foreign corporation will be treated as a “passive foreign investment company,”
or PFIC, for United States 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.” United States stockholders of a PFIC are
subject to a disadvantageous United States 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 current method of operation, we do not believe that we have been, are 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
chartering activities as services income, rather than rental income.
Accordingly, we believe that our income from our time 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 passive
assets.





There
is, however, no direct legal authority under the PFIC rules addressing our
method of operation. Accordingly, no assurance can be given that the United
States Internal Revenue Service, or IRS, or a court of law will accept our
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 there were to be changes in the
nature and extent of our operations.




If
the IRS were to find that we are or have been a PFIC for any taxable year, our
United States stockholders would face adverse United States tax consequences.
Under the PFIC rules, unless those stockholders made an election available under
the Code (which election could itself have adverse consequences for such
stockholders, as discussed below under “United States Federal Income Taxation of
United States Holders”), such stockholders would be liable to pay United States
federal income tax upon excess distributions and upon any gain from the
disposition of our common stock at the then prevailing income tax rates
applicable to ordinary income plus interest as if the excess distribution or
gain had been recognized ratably over the stockholder’s holding period of our
common stock. Please see the section of this Form 10-K entitled “Tax
Considerations—United States Federal Income Taxation of United States Holders”
for a more comprehensive discussion of the United States federal income tax
consequences to United States stockholders if we are treated as a
PFIC.




42




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





If
our vessels 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 cash that we have available for dividends. We may not have
insurance that is sufficient to cover these costs or losses and may have to pay
drydocking costs not covered by our insurance.





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





We
are a holding company and our subsidiaries conduct all of our operations and own
all of our operating assets. We have no significant assets other than the equity
interests in our subsidiaries. As a result, our ability to satisfy our financial
obligations and to make dividend payments in the future depends on our
subsidiaries and their ability to distribute funds to us. If we are unable to
obtain funds from our subsidiaries, our board of directors may exercise its
discretion not to declare or pay dividends. We do not intend to obtain funds
from other sources to pay dividends.





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 implement our
plan to 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 shore side administrative and management
personnel. We cannot guarantee that we will be able 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 may be adversely
affected and, among other things, the amount of cash available for distribution
as dividends to our stockholders may be reduced.





We may not have adequate insurance
to compensate us for the loss of a vessel, which may have a material adverse
effect on our financial condition and results of operations.





We
have procured hull and machinery insurance, protection and indemnity insurance,
which includes environmental damage and pollution insurance coverage and war
risk insurance for our fleet. We do not maintain, for our vessels, insurance
against loss of hire, which covers business interruptions that result from the
loss of use of a vessel. We may not be adequately insured against all risks. We
may not be able to obtain adequate insurance coverage for our fleet in the
future. The insurers may not pay particular claims. Our insurance policies may
contain deductibles for which we will be responsible and limitations and
exclusions which may increase our costs or lower our revenue. Moreover, insurers
may default on claims they are required to pay. If our insurance is not enough
to cover claims that may arise, the deficiency may have a material adverse
effect on our financial condition and results of operations.





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.




43




Risks
Relating to Our Common Stock





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





Our
corporate affairs are governed by our amended and restated articles of
incorporation and 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 Marshall Islands interpreting the BCA. The rights and
fiduciary responsibilities of directors under the laws 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 the United
States. The rights of stockholders of companies incorporated in the Marshall
Islands may differ from the rights of stockholders of companies incorporated in
the United States. While the BCA provides that it is to be interpreted according
to the laws of the State of Delaware and other states with substantially similar
legislative provisions, there have been few, if any, court cases interpreting
the BCA in the Marshall Islands and we can not predict whether Marshall Islands
courts would reach the same conclusions as United States courts. Thus, you may
have more difficulty in protecting your interests in the face of actions by the
management, directors or controlling stockholders than would stockholders of a
corporation incorporated in a United States jurisdiction which has developed a
relatively more substantial body of case law.





Future
sales of our common stock could cause the market price of our common stock to
decline.





Sales
of a substantial number of shares of our common stock in the public market, or
the perception that these sales could occur, may depress the market price for
our common stock. These sales could also impair our ability to raise additional
capital through the sale of our equity securities in the future. We intend to
issue additional shares of our common stock in the future. Our amended and
restated articles of incorporation authorize us to issue 100 million shares of
common stock of which 47,031,300 shares are outstanding as of December 31,
2008.





Anti-takeover
provisions in our organizational documents, as well as our shareholder rights
plan, could have the effect of discouraging, delaying or preventing a merger or
acquisition, or could make it difficult for our stockholders to replace or
remove our current board of directors, which could adversely affect the market
price of our common stock.





Several
provisions of our amended and restated articles of incorporation and 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, as well as our
shareholder rights plan, may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable. These provisions will
include:





·
            authorizing
      our board of directors to issue “blank check” preferred stock without
      stockholder approval;




·
            providing
      for a classified board of directors with staggered, three year
      terms;




·
            authorizing
      vacancies on our board of directors to be filled only by a vote of the
      majority of directors then in office and specifically denying our
      stockholders the right to fill vacancies on the
  board;




·
            establishing
      certain 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;




·
            prohibiting
      cumulative voting in the election of
directors;




·
            limiting
      the persons who may call special meetings of
  stockholders;




·
            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 stock
      entitled to vote for the directors;




44




·
            prohibiting
      stockholder action by written consent;
and




·
            establishing
      supermajority voting provisions with respect to amendments to certain
      provisions of our amended and restated articles of incorporation and
      bylaws.




In
addition to the provision described above, on November 9, 2007, our board of
directors adopted a shareholder rights plan and declared a dividend distribution
of one Right for each outstanding share of our common stock to shareholders of
record on the close of business on November 23, 2007. Each Right is nominally
exercisable, upon the occurrence of certain events, for one one-thousandth of a
share of Series A Junior Participating Preferred Stock, par value $.01 per
share, at a purchase price of $125.00 per unit, subject to adjustment. The
Rights may further discourage a third party from making an unsolicited proposal
to acquire us, as exercise of the Rights would cause substantial dilution to
such third party attempting to acquire us.





These
anti-takeover provisions 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 stock and your ability to realize any
potential change of control premium.


45


ITEM
1B.  UNRESOLVED STAFF
COMMENTS





None








ITEM
2.            PROPERTIES





We
do not own any real property. We lease office space at 477 Madison Avenue, New
York, New York 10022.








ITEM
3.            LEGAL
PROCEEDINGS





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








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





None




46


PART
II





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





Common
Stock





The
trading market for shares of our common stock is the Nasdaq Stock Market, on
which our shares are quoted under the symbol “EGLE.” As of February 27, 2009,
the number of stockholders of record of the Company’s common stock was
approximately 52,000. The following table sets forth the high and low closing
prices for shares of our common stock in 2008 and 2007, as reported by the
Nasdaq Stock Market:





For the period:
                  High
                  LowJanuary
      1, 2008 to March 31, 2008
                  $28.06
                  $19.79April
      1, 2008 to June 30, 2008
                  $36.24
                  $23.57July
      1, 2008 to September 30, 2008
                  $30.46
                  $12.48October
      1, 2008 to December 31, 2008
                  $14.20
                  $
      2.55January
      1, 2007 to March 31, 2007
                  $21.64
                  $17.36April
      1, 2007 to June 30, 2007
                  $22.98
                  $19.65July
      1, 2007 to September 30, 2007
                  $27.01
                  $22.92October
      1, 2007 to December 31, 2007
                  $35.29
                  $24.73





Recent
Sales of Unregistered Securities





On
June 28, 2006, we completed an offering of 2,750,000 shares of our common stock
to certain institutional investors, raising gross proceeds of $33,000,000 before
deduction of fees and expenses of $1,770,811. The shares were sold pursuant to
an exemption from registration addorded by section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.





Equity
Compensation Plan





Information
regarding our equity compensation plan as of December 31, 2008 is disclosed in
Note 9, “2005 Stock Incentive Plan” to our consolidated financial
statements.





Performance
Graph





The
following graph illustrates a comparison of the cumulative total shareholder
return (change in stock price plus reinvested dividends) of Eagle Bulk Shipping
Inc.’s common stock with the Standard and Poor’s 500 Index and a peer group “Dry
Index” consisting of DryShips, Inc., Diana Shipping Inc., Excel Maritime
Carriers Ltd., Navios Maritime Holdings, Inc. and Genco Shipping and Trading
Limited. The comparison graph assumes a $100 investment in each of the Company’s
common stock, the Standard & Poor’s 500 Index and the Dry Index peer group
on June 28, 2005, the date of the Company’s initial public
offering.




47



















Payment
of Dividends to Stockholders





In
2007, the Company declared four quarterly dividends in the aggregate amount of
$1.98 per share of its common stock in February, April, July and November.
Aggregate payments were $82,134,982 for dividends declared in 2007.


In
2008, the Company declared four quarterly dividends in the aggregate amount of
$2.00 per share of its common stock in March, May, August and November.
Aggregate payments were $93,592,906 for dividends declared in 2008.





In
December 2008, commencing with the fourth quarter of 2008, the Company’s board
of directors has determined to suspend the payment of a dividend to stockholders
in order to increase cash flow, optimize financial flexibility and enhance
internal growth.  In the future, the declaration and payment of
dividends, if any, will always be subject to the discretion of the board of
directors, restrictions contained in the credit facility and the requirements of
Marshall Islands law. The timing and amount of any dividends declared will
depend on, among other things, our earnings, financial condition and cash
requirements and availability, the ability to obtain debt and equity financing
on acceptable terms as contemplated by the Company’s growth strategy, the terms
of its outstanding indebtedness and the ability of the Company’s subsidiaries to
distribute funds to it. (See Notes to the Consolidated Financial Statements and
Management’s Discussion & Analysis.)


48


ITEM
6.            SELECTED
FINANCIAL DATA





We
were incorporated on March 23, 2005 and our predecessor, Eagle Holdings
LLC, was formed on January 26, 2005. The following selected consolidated
financial data are derived from the audited consolidated financial statements of
the Company included elsewhere in this report. The data presented herein should
be read in conjunction with the consolidated financial statements, related notes
and other financial information included herein. In accordance with standard
shipping industry practice, we did not obtain from the sellers historical
operating data for the vessels that we acquired, as that data was not material
to our decision to purchase the vessels. Accordingly, we have not included any
historical financial data relating to the results of operations of our vessels
from the period before our acquisition of them. Please see the section of this
annual report entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Lack of Historical Operating Data for
Vessels Before their Acquisition.”





(Dollar
      amounts in thousands except Per Share amounts and Fleet
    Data)
                
                2008
                
                
                2007
                
                
                2006Income
      Statement DataRevenues,
      net of commissions
                
                $
                185,425
                
                
                $
                124,815
                
                
                $
                104,648Vessel
      Expenses
                
                
                36,270
                
                
                
                27,144
                
                
                
                21,562Depreciation
      and Amortization
                
                
                33,949
                
                
                
                26,436
                
                
                
                21,813General
      and Administrative Expenses
                
                
                34,567
                
                
                
                11,776
                
                
                
                18,293Gain
      on Sale of Vessel
                
                
                —
                
                
                
                (873
                )
                
                
                —Write-off
      of advances for vessel construction
                
                
                3,883
                
                
                
                —
                
                
                
                —Total
      Operating Expenses
                
                
                108,669
                
                
                
                64,483
                
                
                
                61,668Interest
      Expense, Net
                
                
                13,033
                
                
                
                8,088
                
                
                
                9,179Write-off
      of deferred financing costs
                
                
                2,090
                
                
                
                —
                
                
                
                —Net
      Income
                
                $
                61,633
                
                
                $
                52,244
                
                
                $
                33,801Share
      and Per Share DataBasic Income
      per share
                
                $
                1.32
                
                
                $
                1.24
                
                
                $
                0.98Diluted
      Income per share
                
                
                1.31
                
                
                
                1.24
                
                
                
                0.98Weighted
      Average Shares Outstanding - Diluted
                
                
                46,888,788
                
                
                
                42,195,561
                
                
                
                34,543,862Cash
      Dividends Declared
      per share
                
                $
                2.00
                
                
                $
                1.98
                
                
                $
                2.08Consolidated
      Cash Flow DataNet
      cash from operating activities
                
                $
                109,536
                
                
                $
                82,889
                
                
                $
                70,535Net
      cash used in investing activities
                
                
                (336,658
                )
                
                
                (446,251
                )
                
                
                (130,759
                )Net
      cash from financing activities
                
                
                83,427
                
                
                
                493,989
                
                
                
                57,973





Consolidated
      Balance Sheet Data
                
                December 31, 2008
                
                
                December 31, 2007
                
                
                December 31, 2006Current
      Assets
                
                $
                16,864
                
                
                $
                157,454
                
                
                $
                27,652Total
      Assets
                
                
                1,362,176
                
                
                
                1,136,008
                
                
                
                568,791Total
      Liabilities
                
                
                890,749
                
                
                
                621,037
                
                
                
                247,215Long-term
      Debt
                
                
                789,601
                
                
                
                597,243
                
                
                
                239,975Stockholders’
      Equity
                
                
                471,427
                
                
                
                514,971
                
                
                
                321,576Other
      DataEBITDA
      (a)
                
                $
                127,683
                
                
                $
                99,418
                
                
                $
                82,695Capital
      Expenditures :Vessels
                
                $
                336,438
                
                
                $
                458,262
                
                
                $
                130,759Payments
      for Drydockings
                
                $
                2,389
                
                
                $
                3,625
                
                
                $
                2,325Ratio
      of Total Debt to Total Capitalization (b)
                
                
                62.6
                %
                
                
                53.7
                %
                
                
                42.7
                %Fleet
      DataNumber
      of Vessels in operating fleet
                
                
                23
                
                
                
                18
                
                
                
                16Average
      Age of Fleet (in dwt weighted years)
                
                
                6
                
                
                
                6
                
                
                
                6Fleet
      Ownership Days
                
                
                7,229
                
                
                
                6,166
                
                
                
                5,288Fleet
      Available Days
                
                
                7,172
                
                
                
                6,073
                
                
                
                5,224Fleet
      Operating Days
                
                
                7,139
                
                
                
                6,039
                
                
                
                5,203Fleet
      Utilization Days
                
                
                99.5
                %
                
                
                99.4
                %
                
                
                99.6
                %




49




(a)
            Our
      revolving credit facility permits us to pay dividends in amounts up to
      cumulative free cash flows which is our earnings before extraordinary or
      exceptional items, interest, taxes, depreciation and amortization (Credit
      Agreement EBITDA), less the aggregate amount of interest incurred and net
      amounts payable under interest rate hedging agreements during the relevant
      period and an agreed upon reserve for dry-docking. Therefore, we believe
      that this non-GAAP measure is important for our investors as it reflects
      our ability to pay dividends. The Company’s computation of EBITDA may not
      be comparable to similar titled measures of other companies. Following an
      amendment to the revolving credit facility in December 2008, payment of
      dividend has been suspended until certain covenants requirements have been
      met and our board of directors determines in its discretion to declare and
      pay future dividends. The following table is a reconciliation of net
      income, as reflected in the consolidated statements of operations, to the
      Credit Agreement EBITDA:





2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Net
      Income
                                    
                                    $
                                    61,632,809
                                    
                                    
                                    $
                                    52,243,981
                                    
                                    
                                    $
                                    33,801,540Interest
      Expense
                                    
                                    
                                    15,816,573
                                    
                                    
                                    
                                    12,741,106
                                    
                                    
                                    
                                    10,548,616Depreciation
      and Amortization
                                    
                                    
                                    33,948,840
                                    
                                    
                                    
                                    26,435,646
                                    
                                    
                                    
                                    21,812,486Amortization
      of fair value (below) above market of time charter
acquired
                                    
                                    
                                    (799,540
                                    )
                                    
                                    
                                    3,740,000
                                    
                                    
                                    
                                    3,462,000EBITDA
                                    
                                    
                                    110,598,682
                                    
                                    
                                    
                                    95,160,733
                                    
                                    
                                    
                                    69,624,642Adjustments
      for Exceptional Items:Write-off
      of Advances for Vessel Construction (1)
                                    
                                    
                                    3,882,888
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Write-off
      of Financing Fees (1)
                                    
                                    
                                    2,089,701
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Non-cash
      Compensation Expense (2)
                                    
                                    
                                    11,111,885
                                    
                                    
                                    
                                    4,256,777
                                    
                                    
                                    
                                    13,070,473Credit
      Agreement EBITDA
                                    
                                    $
                                    127,683,156
                                    
                                    
                                    $
                                    99,417,510
                                    
                                    
                                    $
                                    82,695,115


(1)One time charge (see Notes to the financial
      statements)(2) Stock-based
      compensation related to stock options, restricted stock units and
      management’s participation in profits interests in Eagle Ventures LLC (see
      Notes to the financial
statements)






(b)
              Ratio
      of Total Debt to Total Capitalization was calculated as debt divided by
      capitalization (debt plus stockholders’
equity).


50


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





The
following is a discussion of the Company’s financial condition and results of
operation for the years ended December 31, 2008, 2007 and 2006. This section
should be read in conjunction with the consolidated financial statements
included elsewhere in this report and the notes to those financial
statements.





This
discussion contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended and the Private Securities Litigation Reform
Act of 1995, and are intended to be covered by the safe harbor provided for
under these sections.  These statements may include words such as
“believe,” “estimate,” “project,” “intend,” “expect,” “plan,” “anticipate,” and
similar expressions in connection with any discussion of the timing or nature of
future operating or financial performance or other events. Forward looking
statements reflect management’s current expectations and observations with
respect to future events and financial performance. Where we express an
expectation or belief as to future events or results, such expectation or belief
is expressed in good faith and believed to have a reasonable
basis.  However, our forward-looking statements are subject to risks,
uncertainties, and other factors, which could cause actual results to differ
materially from future results expressed, projected, or implied by those
forward-looking statements. The principal factors that affect our financial
position, results of operations and cash flows include, charter market rates,
which have recently declined significantly from historic highs, and periods of
charter hire, vessel operating expenses and voyage costs, which are incurred
primarily in U.S. dollars, depreciation expenses, which are a function of the
cost of our vessels, significant vessel improvement costs and our vessels’
estimated useful lives, and financing costs related to our indebtedness. Our
actual results may differ materially from those anticipated in these forward
looking statements as a result of certain factors which could include the
following: (i) changes in demand in the dry bulk market, including, without
limitation, changes in production of, or demand for, commodities and bulk
cargoes, generally or in particular regions; (ii) greater than anticipated
levels of dry bulk vessel new building orders or lower than anticipated rates of
dry bulk vessel scrapping; (iii) changes in rules and regulations applicable to
the dry bulk industry, including, without limitation, legislation adopted by
international bodies or organizations such as the International Maritime
Organization and the European Union or by individual countries; (iv) actions
taken by regulatory authorities; (v) changes in trading patterns significantly
impacting overall dry bulk tonnage requirements; (vi) changes in the typical
seasonal variations in dry bulk charter rates; (vii) changes in the cost of
other modes of bulk commodity transportation; (viii) changes in general domestic
and international political conditions; (ix) changes in the condition of the
Company’s vessels or applicable maintenance or regulatory standards (which may
affect, among other things, our anticipated dry docking costs); (x) and other
factors listed from time to time in our filings with the Securities and Exchange
Commission. This discussion also includes statistical data regarding world dry
bulk fleet and orderbook and fleet age. We generated some of these data
internally, and some were obtained from independent industry publications and
reports that we believe to be reliable sources. We have not independently
verified these data nor sought the consent of any organizations to refer to
their reports in this annual report. We disclaim any intent or obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.





Overview





We
are Eagle Bulk Shipping Inc., a Republic of Marshall Islands corporation
headquartered in New York City. We own one of the largest fleets of Supramax dry
bulk vessels in the world. Supramax dry bulk vessels range in size from 50,000
to 60,000 dwt. We transport a broad range of major and minor bulk cargoes,
including iron ore, coal, grain, cement and fertilizer, along worldwide shipping
routes. As of December 31, 2008, we owned and operated a modern fleet of 23
Handymax dry bulk vessels, 20 of which are of the Supramax class. We also have
an on-going Supramax newbuilding program for the construction of 24 newbuilding
vessels in Japan and China. The first three of these vessels were delivered to
us in 2008. Upon delivery of all newbuilding vessels by end 2011, our total
fleet will consist of 47 vessels with a combined carrying capacity of
approximately 2.55 million dwt. We also hold options for the construction of an
additional eight Supramax vessels at the same shipyard in China.




51




We
are focused on maintaining a high quality fleet that is concentrated primarily
in one vessel type – Handymax dry bulk carriers and its sub-category of Supramax
vessels which are Handymax vessels ranging in size from 50,000 to 60,000 dwt.
These vessels have the cargo loading and unloading flexibility of on-board
cranes while offering cargo carrying capacities approaching that of Panamax dry
bulk vessels, which range in size from 60,000 to 100,000 dwt and must rely on
port facilities to load and offload their cargoes. We believe that the cargo
handling flexibility and cargo carrying capacity of the Supramax class vessels
make them attractive to potential charterers. The 23 vessels in our operating
fleet have a combined carrying capacity of 1,184,939 dwt and an average age of
approximately 6 years, as compared to an average age for the world Handymax dry
bulk fleet of over 15 years.





Our
financial performance is based on the following key elements of our business
strategy:





(1)
            concentration
      in one vessel category: Supramax class of Handymax dry bulk vessels, which
      we believe offer size, operational and geographical advantages (over
      Panamax and Capesize vessels),





(2)
            our
      strategy is to charter our vessels primarily pursuant to one- to
      three-year time charters to allow us to take advantage of the stable cash
      flow and high utilization rates that are associated with medium to
      long-term time charters. Reliance on the spot market contributes to
      fluctuations in revenue, cash flow, and net income. On the other hand,
      time charters provide a shipping company with a predictable level of
      revenues. We have entered into time charters for all of our vessels which
      range in length from approximately one to three years, and in the case of
      many of our newbuilding vessels for periods up to December 2018. Our time
      charters provide for fixed semi-monthly payments in advance. We believe
      this strategy is effective in strong and weak dry bulk markets, giving us
      security and predictability of cashflows when we look at the volatility of
      the shipping markets,





(3)
            maintain
      high quality vessels and improve standards of operation through improved
      environmental procedures, crew training and maintenance and repair
      procedures, and





(4)
            maintain
      a balance between purchasing vessels as market conditions and
      opportunities arise and maintaining prudent financial ratios (e.g.
      leverage ratio).





The
following are several significant events that occurred during 2008:





·
            In
      May 2008, we acquired two Supramax vessels, Goldeneye and Redwing, which
      delivered into our fleet in June 2008 and September 2008,
      respectively.




·
            We
      took delivery of the first of our newbuilding vessels, Wren in June 2008.
      This vessel is the first of the series of 22 vessels being built in China
      under construction contracts.




·
            We
      took delivery of our second newbuilding vessel from China, Woodstar, in
      October 2008.




·
            We
      took delivery of our third newbuilding vessel, Crowned Eagle, in November
      2008. This vessel is the first of the series of five vessels being built
      in Japan.




·
            In
      December 2008, we renegotiated our 30 vessel newbuilding program in China
      by converting firm construction contracts on eight charter free vessels
      into options. The contract deposits on these vessels were redirected as
      progress payments towards vessels being constructed for delivery in 2009.
      We also deferred delivery of a vessel, THRUSH, from September 2009 to
      November 2010. These changes in the newbuilding program resulted in a
      reduction of the Company’s capital expenditure program by a total of $363
      million.




·
            In
      December 2008, we amended and reduced our revolving credit facility to
      $1,350,000,000.






52


The
following are several significant events that occurred during 2007:


·
            In
      January 2007, we entered into two vessel newbuilding contracts with IHI
      Marine United Inc., a Japanese shipyard, for the construction of two
      56,000 deadweight ton ‘Future-56’ class Supramax vessels at a contract
      price in Japanese yen  equivalent to $33,500,000 each. We took
      delivery of one these vessels, CROWNED EAGLE, in November 2008, and the
      second vessel, CRESTED EAGLE, was delivered to us in January
      2009.




·
            In
      February 2007 we sold our oldest vessel, SHIKRA, and we expanded our fleet
      from 16 vessels to 18 vessels by acquiring the SHRIKE, SKUA and
      KITTIWAKE




·
            In
      March 2007, we completed a public offering of 5,813,819 shares of our
      common stock.




·
            In
      April 2007, we entered into a vessel newbuilding contract with IHI Marine
      United Inc., for the construction of a ‘Future-56’ class Supramax vessel
      at a contract price of equivalent $33,500,000. The 56,000 deadweight ton
      vessel, STELLAR EAGLE, is expected to be delivered in March
      2009.




·
            In
      August 2007, we completed the acquisition of the rights to 26 newbuilding
      vessels and options for the construction of an additional 9 vessels. These
      vessels will be constructed in China, at the Yangzhou Dayang Shipbuilding
      Co. Ltd., and delivered into our Company’s fleet between 2008 and 2012 for
      a total cost of approximately $1,100,000,000 and associated capitalized
      financing and technical supervision costs. On December 27, 2007, the
      Company exercised four of the nine options. The total contract price for
      the four additional vessels is $169,200,000. The remaining five options
      expired on March 31, 2008.




·
            On
      September 21, 2007, we completed a public offering of 5,000,000 shares of
      our common stock.




·
            In
      October 2007, we amended and increased our revolving credit facility to
      $1,600,000,000.




The
following are several significant events that occurred during 2006:





·
            We
      expanded our fleet from 13 vessels to 16 vessels by acquiring the KESTREL I, TERN
      andJAEGER in
      June and July 2006, respectively.




·
            On
      June 28, 2006, we completed an offering of 2,750,000 shares of our common
      stock at $12.00 per share.




·
            In
      July 2006, we increased our credit facility from $330,000,000 to
      $450,000,000.




·
            In
      November 2006, we entered into two vessel newbuilding contracts with IHI
      Marine United Inc., for the construction of two ‘Future-56’ class Supramax
      vessels, GOLDEN EAGLE and IMPERIAL EAGLE, at a contract price equivalent
      to $33,500,000 each. These 56,000 dwt vessels are expected to be delivered
      in January and February of 2010,
respectively.




·
            In
      November 2006, we increased our credit facility to
      $500,000,000.




We
have employed all of our vessels on time charters. The following table
represents certain information about the Company’s vessel revenue earning
charters:




53




The
following table represents certain information about the Company’s revenue
earning charters on its operating fleet as of December 31, 2008:


Vessel
            Year Built
            Dwt
            Time
      Charter Expiration(1)
            Daily
      Time
              Charter Hire RateCardinal
            2004
            55,362
            Jun
      to Sep 2009
            $62,000Condor
            2001
            50,296
            May
      to July 2010
            $22,000Falcon
      (2)
            2001
            51,268
            April
      to June 2010
            $39,500Griffon
            1995
            46,635
            March
      2009
            $20,075Harrier
      (3)
            2001
            50,296
            June
      2009 to September 2009
            $24,000Hawk
      I
            2001
            50,296
            April
      2009 to June 2009
            $22,000Heron
      (4)
            2001
            52,827
            January
      2011 to May 2011
            $26,375Jaeger
      (5)
            2004
            52,248
            October
      2009 to January 2010
            $10,100Kestrel
      I
            2004
            50,326
            January
      2009
            $20,000February
      2009
            $8,500April
      2009
            $18,000Kite
            1997
            47,195
            September
      2009 to January 2010
            $21,000Merlin
      (6)
            2001
            50,296
            December
      2010 to March 2011
            $25,000Osprey
      I (7)
            2002
            50,206
            October
      2009 to December 2009
            $25,000Peregrine
            2001
            50,913
            January
      2009
            $20,500December
      2009 to March 2010
            $8,500Sparrow
            2000
            48,225
            February
      2010 to May 2010
            $34,500Tern
            2003
            50,200
            February
      2009
            $20,500December
      2009 to March 2010
            $8,500Shrike
            2003
            53,343
            April
      2009 to July 2009
            $24,600May
      2010 to Aug 2010
            $25,600Skua
      (8)
            2003
            53,350
            May
      2009 to August 2009
            $24,200Kittiwake
            2002
            53,146
            July
      2009 to September 2009
            $56,250Goldeneye
            2002
            52,421
            May
      2009 to July 2009
            $61,000Wren
      (9)
            2008
            53,349
            Feb
      2012
              Feb
      2012 to Dec 2018/Apr 2019
            $24,750
              $18,000
      (with
              profit
      share)Redwing
            2007
            53,411
            August
      2009 to October 2009
            $50,000Woodstar
      (10)
            2008
            53,390
            Jan
      2014
              Jan
      2014 to Dec 2018/Apr 2019
            $18,300
              $18,000
      (with
              profit
      share)Crowned
      Eagle
            2008
            55,940
            September
      2009 – December 2009
            $16,000




54




(1)
            The
      date range provided represents the earliest and latest date on which the
      charterer may redeliver the vessel to the Company upon the termination of
      the charter. The time charter hire rates presented are gross daily charter
      rates before brokerage commissions, ranging from 1.25% to 6.25%, to third
      party ship brokers.


(2)
            The
      charterer of the FALCON has an option to extend the charter period by 11
      to 13 months at a daily time charter rate of
  $41,000.


(3)
              The
      daily rate for the HARRIER is $27,000 for the first year and $21,000 for
      the second year. Revenue recognition is based on an average daily rate of
      $24,000.


(4)
            The
      charterer of the HERON has an option to extend the charter period by 11 to
      13 months at a time charter rate of $27,375 per day. The charterer has a
      second option for a further 11 to 13 months at a time charter rate of
      $28,375 per day.


(5)
            In
      December 2008, the JAEGER commenced a charter for one year at an average
      daily rate of approximately $10,100 based on a charter rate of $5,000 per
      day for the first 50 days and $11,000 per day for the balance of the
      year.




(7)
            The
      charterer of the OSPREY has an option to extend the charter period by 11
      to 13 months at a time charter rate of $25,000 per
  day.


(8)
            The
      charterer of the SKUA has an option to extend the charter period by 11 to
      13 months at a daily time charter rate of
  $25,200.


(9)
            The
      WREN has entered into a long-term charter. The charter rate until February
      2012 is $24,750 per day. Subsequently, the charter until redelivery in
      December 2018 to April 2019 will be profit share based. The base charter
      rate will be $18,000 with a 50% profit share for earned rates over $22,000
      per day. Revenue recognition for the base rate from commencement of the
      charter is based on an average daily base rate of
  $20,306.


(10)
              The
      WOODSTAR has entered into a long-term charter. The charter rate until
      January 2014 is $18,300 per day. Subsequently, the charter until
      redelivery in December 2018 to April 2019 will be profit share based. The
      base charter rate will be $18,000 with a 50% profit share for earned rates
      over $22,000 per day. Revenue recognition for the base rate from
      commencement of the charter is based on an average daily base rate of
      $18,152.




55




The
following table, as of December 31, 2008, represents certain information about
the Company’s newbuilding vessels being constructed and their employment upon
delivery:





Vessel
                                Dwt
                                Year Built - Expected Delivery(1)
                                Time Charter Employment
      Expiration(2)
                                Daily Time Charter Hire
      Rate(3)
                                Profit ShareCrested
      Eagle
                                56,000
                                Jan
      2009
                                January
      2010 – March 2010
                                $10,500
                                —Stellar
      Eagle
                                56,000
                                Apr
      2009
                                Charter
      Free
                                —
                                —Golden
      Eagle
                                56,000
                                Jan
      2010
                                Charter
      Free
                                —
                                —Imperial
      Eagle
                                56,000
                                Feb
      2010
                                Charter
      Free
                                —
                                —Thrush
                                53,100
                                Nov
      2010
                                Charter
      Free
                                —
                                —Thrasher
                                53,100
                                Nov
      2009
                                Feb
      2016
                                $18,400
                                —Feb
      2016 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Avocet
                                53,100
                                Dec
      2009
                                Mar
      2016
                                $18,400
                                —Mar
      2016 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Bittern
                                58,000
                                Sep
      2009
                                Dec
      2014
                                $18,850
                                —Dec
      2014 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Canary
                                58,000
                                Oct
      2009
                                Jan
      2015
                                $18,850
                                —Jan
      2015 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Crane
                                58,000
                                Nov
      2009
                                Feb
      2015
                                $18,850
                                —Feb
      2015 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Egret
      (4)
                                58,000
                                Dec
      2009
                                Sep
      2012 to Jan 2013
                                $17,650
                                50%
      over $20,000Gannet
      (4)
                                58,000
                                Jan
      2010
                                Oct
      2012 to Feb 2013
                                $17,650
                                50%
      over $20,000Grebe(4)
                                58,000
                                Feb
      2010
                                Nov
      2012 to Mar 2013
                                $17,650
                                50%
      over $20,000Ibis(4)
                                58,000
                                Mar
      2010
                                Dec
      2012 to Apr 2013
                                $17,650
                                50%
      over $20,000Jay
                                58,000
                                Apr
      2010
                                Sep
      2015
                                $18,500
                                50%
      over $21,500Sep
      2015 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Kingfisher
                                58,000
                                May
      2010
                                Oct
      2015
                                $18,500
                                50%
      over $21,500Oct
      2015 to Dec 2018/Apr 2019
                                $18,000
                                50%
      over $22,000Martin
                                58,000
                                Jun
      2010
                                Dec
      2016 to Dec 2017
                                $18,400
                                —Nighthawk
                                58,000
                                Mar
      2011
                                Sep
      2017 to Sep 2018
                                $18,400
                                —Oriole
                                58,000
                                Jul
      2011
                                Jan
      2018 to Jan 2019
                                $18,400
                                —Owl
                                58,000
                                Aug
      2011
                                Feb
      2018 to Feb 2019
                                $18,400
                                —Petrel
      (4)
                                58,000
                                Sep
      2011
                                Jun
      2014 to Oct 2014
                                $17,650
                                50%
      over $20,000Puffin
      (4)
                                58,000
                                Oct
      2011
                                Jul
      2014 to Nov 2014
                                $17,650
                                50%
      over $20,000Roadrunner
      (4)
                                58,000
                                Nov
      2011
                                Aug
      2014 to Dec 2014
                                $17,650
                                50%
      over $20,000Sandpiper
      (4)
                                58,000
                                Dec
      2011
                                Sep
      2014 to Jan 2015
                                $17,650
                                50%
      over $20,000




CONVERTED INTO OPTIONSSnipe
      (6)
              58,000
              Jan
      2012
              Charter
      Free
              —
              —Swift
      (6
              58,000
              Feb
      2012
              Charter
      Free
              —
              —Raptor
      (6
              58,000
              Mar
      2012
              Charter
      Free
              —
              —Saker
      (6
              58,000
              Apr
      2012
              Charter
      Free
              —
              —Besra
      (5,6)
              58,000
              Oct
      2011
              Charter
      Free
              —
              —Cernicalo
      (5,6)
              58,000
              Jan
      2011
              Charter
      Free
              —
              —Fulmar
      (5,6)
              58,000
              Jul
      2011
              Charter
      Free
              —
              —Goshawk
      (5,6)
              58,000
              Sep
      2011
              Charter
      Free
              —
              —





(1)
              Vessel
      build and delivery dates are estimates based on guidance received from
      shipyard.(2)
              The
      date range represents the earliest and latest date on which the charterer
      may redeliver the vessel to the Company upon the termination of the
      charter.(3)
              The
      time charter hire rate presented are gross daily charter rates before
      brokerage commissions ranging from 1.25% to 6.25% to third party ship
      brokers.(4)
              The
      charterer has an option to extend the charter by 2 periods of 11 to 13
      months each.(5)
              Options
      for construction declared on December 27, 2007.(6)
              Firm
      contracts converted to options in December
2008.





















56


Market
Overview





The
international shipping industry is highly competitive and fragmented with many
market participants. There are approximately 7,000drybulk carriers of over
10,000 dwt aggregating approximately 418 million dwt, and the ownership of these
vessels is divided among approximately 1,400 mainly private independent dry bulk
vessel owners with no one shipping group owning or controlling more than 5% of
the world bulker fleet. We primarily compete with other owners of dry bulk
vessels in the Handymax and Handysize class and Panamax class sectors that are
mainly privately owned fleets.





Competition
in virtually all bulk trades is intense and based primarily on supply and
demand. Such demand is a function of world economic conditions and the
consequent requirement for commodities, production and consumption patterns, as
well as events which interrupt production, trade routes and consumption. We
compete for charters on the basis of price, vessel location, size, age and
condition of the vessel, as well as on our reputation as an owner and operator.
Increasingly, major customers are demonstrating a preference for modern vessels
based on concerns about the environmental and operational risks associated with
older vessels. Consequently, owners of large modern fleets have gained a
competitive advantage over owners of older fleets.





Our
strategy is to concentrate in one vessel category of the dry bulk segment of the
shipping industry – the Handymax sector. Handymax dry bulk vessels range in size
from 35,000 to 60,000 dwt. Within the Handymax sector, the industry has migrated
to a larger size of vessel class called the Supramax class of dry bulk vessels
which range in size from 50,000 to 60,000 dwt. These vessels have the cargo
loading and unloading flexibility of on-board cranes while offering cargo
carrying capacities approaching that of Panamax dry bulk vessels, which range in
size from 60,000 to 100,000 dwt and must rely on port facilities to load and
offload their cargoes. We believe that the cargo handling flexibility and cargo
carrying capacity of the Supramax class vessels make them attractive to
potential charterers. Twenty of the 23 vessels in our operating fleet as of
December 31, 2008 are classified as Supramax vessels. All of the 24 vessels
under construction are also Supramax class vessels.


















57





The
Handymax Market





The
primary driver for the dry bulk shipping industry continues to be commodities
demand in East Asia led by China and increasingly India. Demand for dry bulk
vessels is further boosted by port congestion and shifts in trade patterns which
increase distances or ton-miles, especially the port infrastructure bottlenecks,
and changes in weather patterns in commodity resource-rich areas such as
Australia. These port delays result in grain, ores and coal being shipped from
increasing distances as importers turn to other producers. The unprecedented
boom in commodity trades since 2004 saw commodity prices and dry bulk shipping
rates reach their peak in mid-2008 before the credit crisis abruptly curtailed
commodity demand. The collapse of trade credit in the Fall of 2008 brought about
a sudden and precipitous, 90% decline in vessel charter rates and shipping
indexes touched lows not seen since 2002. The decline in rates had a similar
effect on vessel values with sale and purchase activity drying up by the end of
2008, followed by an increase in cancellations of newbuilding orders, including
renegotiations and delays of shipbuilding contracts. This has resulted in
growing uncertainty in the ship supply position. Prior to the credit crisis, the
supply side of drybulk shipping had seen a surge in newbuilding orders with the
peak supply period being 2009-2010. Meanwhile, a lack of trading activity has
increased the rate at which older vessels get scrapped. Increased scrapping and
a reduction in the order-book may rebalance supply with a slow rebuilding of
demand.





Lack
of Historical Operating Data for Vessels Before their Acquisition





Consistent
with shipping industry practice, other than inspection of the physical condition
of the vessels and examinations of classification society records, there is no
historical financial due diligence process when we acquire vessels. Accordingly,
we do not obtain the historical operating data for the vessels from the sellers
because that information is not material to our decision to make acquisitions,
nor do we believe it would be helpful to potential investors in our common stock
in assessing our business or profitability. Most vessels are sold under a
standardized agreement, which, among other things, provides the buyer with the
right to inspect the vessel and the vessel’s classification society records. The
standard agreement does not give the buyer the right to inspect, or receive
copies of, the historical operating data of the vessel. Prior to the delivery of
a purchased vessel, the seller typically removes from the vessel all records,
including past financial records and accounts related to the vessel. In
addition, the technical management agreement between the seller’s technical
manager and the seller is automatically terminated and the vessel’s trading
certificates are revoked by its flag state following a change in
ownership.





Consistent
with shipping industry practice, we treat the acquisition of a vessel (whether
acquired with or without charter) as the acquisition of an asset rather than a
business. Although vessels are generally acquired free of charter, we have
acquired (and may in the future acquire) some vessels with time charters. Where
a vessel has been under a voyage charter, the vessel is delivered to the buyer
free of charter, and it is rare in the shipping industry for the last charterer
of the vessel in the hands of the seller to continue as the first charterer of
the vessel in the hands of the buyer. In most cases, when a vessel is under time
charter and the buyer wishes to assume that charter, the vessel cannot be
acquired without the charterer’s consent and the buyer’s entering into a
separate direct agreement with the charterer to assume the charter. The purchase
of a vessel itself does not transfer the charter, because it is a separate
service agreement between the vessel owner and the charterer.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of those financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.





Critical
accounting policies are those that reflect significant judgments of
uncertainties and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies, because they generally involve a
comparatively higher degree of judgment in their application. For a description
of all our accounting policies, see Note 2 to our consolidated financial
statements included herein.




58




Revenue
Recognition





We
currently generate all of our revenue from time charters. Time charters are for
a specific period of time at a specific rate per day, and are generally not as
complex or as subjective as voyage charters. For long-term time charters,
revenue is recognized on a straight-line basis over the term of the
charter.





Vessel
Lives and Impairment





The
carrying value of each of our vessels represents its original cost at the time
it was delivered or purchased less depreciation. We depreciate our dry bulk
vessels on a straight-line basis over their estimated useful lives, estimated to
be 28 years from date of initial delivery from the shipyard to the original
owner. Depreciation is based on cost less the estimated residual salvage value.
Salvage, or scrap, value is based upon a vessel’s lightweight tonnage (“lwt”)
multiplied by a scrap rate. We use a scrap rate of $150 per lwt, which we
believe is common in the dry bulk shipping industry, to compute each vessel’s
salvage value. An increase in the useful life of a dry bulk vessel or in its
salvage value would have the effect of decreasing the annual depreciation charge
and extending it into later periods. A decrease in the useful life of a dry bulk
vessel or in its salvage value would have the effect of increasing the annual
depreciation charge. However, when regulations place limitations over the
ability of a vessel to trade on a worldwide basis, the vessel’s useful life is
adjusted to end at the date such regulations become effective. The estimated
scrap value is used in the computation of depreciation expense and
recoverability of the carrying value of each vessel when evaluating for
impairment of vessels. Management’s estimates for salvage values may differ from
actual results.





The
carrying values of the Company’s vessels may not represent their fair market
value at any point in time since the market prices of second-hand vessels tend
to fluctuate with changes in charter rates and the cost of newbuildings.
Historically, both charter rates and vessel values tend to be cyclical. We
evaluate the carrying amounts and periods over which long-lived assets are
depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flow for each vessel and
compare it to the vessel carrying value. This assessment is made at the
individual vessel level since separately identifiable cash flow information for
each vessel is available. In developing estimates of future cash flows, the
Company must make assumptions about future charter rates, ship operating
expenses, and the estimated remaining useful lives of the vessels. These
assumptions are based on historical trends as well as future expectations.
Although management believes that the assumptions used to evaluate potential
impairment are reasonable and appropriate, such assumptions are highly
subjective. In the event that an impairment were to occur, we would determine
the fair value of the related asset and record a charge to operations calculated
by comparing the asset’s carrying value to the estimated fair value. We estimate
fair value primarily through the use of third party valuations performed on an
individual vessel basis.





Deferred
Drydock Cost





There
are two methods that are used by the shipping industry to account for
drydockings; (a) the deferral method where drydock costs are capitalized when
incurred and amortized over the period to the next scheduled drydock; and (b)
expensing drydocking costs in the period it is incurred. We use the deferral
method of accounting for drydock expenses. Under the deferral method, drydock
expenses are capitalized and amortized on a straight-line basis until the next
drydock, which we estimate to be a period of two to three years. We believe the
deferral method better matches costs with revenue than expensing the costs as
incurred. We use judgment when estimating the period between drydocks performed,
which can result in adjustments to the estimated amortization of drydock
expense. If the vessel is disposed of before the next drydock, the remaining
balance in deferral drydock is written-off to the gain or loss upon disposal of
vessels in the period when contracted. We expect that our vessels will be
required to be drydocked approximately every 30 to 60 months for major repairs
and maintenance that cannot be performed while the vessels are operating. Costs
capitalized as part of the drydocking include actual costs incurred at the
drydock yard and parts and supplies used in making such repairs.




59




Vessel
Acquisitions





Where
we identify any intangible assets or liabilities associated with the acquisition
of a vessel, we record all identified tangible and intangible assets or
liabilities at fair value. Fair value is determined by reference to market data
and the amount of expected future cash flows. We value any asset or liability
arising from the market value of the time charters assumed when an acquired
vessel is delivered to us.





Where
we have assumed an existing charter obligation or enter into a time charter with
the existing charterer in connection with the purchase of a vessel at charter
rates that are less than market charter rates, we record a liability in Fair
Value below contract Value of time charters acquired based on the difference
between the assumed charter rate and the market charter rate for an equivalent
vessel. Conversely, where we assume an existing charter obligation or enter into
a time charter with the existing charterer in connection with the purchase of a
vessel at charter rates that are above market charter rates, we record an asset
in Fair Value above contract Value of time charters acquired, based on the
difference between the market charter rate and the contracted charter rate for
an equivalent vessel. This determination is made at the time the vessel is
delivered to us, and such assets and liabilities are amortized to revenue over
the remaining period of the charter. The determination of the fair value of
acquired assets and assumed liabilities requires us to make significant
assumptions and estimates of many variables including market charter rates,
expected future charter rates, future vessel operation expenses, the level of
utilization of our vessels and our weighted average cost of capital. The use of
different assumptions could result in a material change in the fair value of
these items, which could have a material impact on our financial position and
results of operations. In the event that the market charter rates relating to
the acquired vessels are lower than the contracted charter rates at the time of
their respective deliveries to us, our net earnings for the remainder of the
terms of the charters may be adversely affected although our cash flows will not
be so affected.





Deferred
Financing Costs





Fees
incurred for obtaining new loans or refinancing existing ones are deferred and
amortized to interest expense over the life of the related debt. Unamortized
deferred financing costs are written off when the related debt is repaid, or
there is a reduction in the facility, and such amounts are expensed in the
period the repayment or refinancing is made.





Results
of Operations for the years ended December 31, 2008, 2007 and 2006





Factors
Affecting Our Results of Operations





We
believe that the important measures for analyzing future trends in our results
of operations consist of the following:




2008
                                                                    2007
                                                                    2006Ownership
      Days
                                                                    7,229
                                                                    6,166
                                                                    5,288Available
      Days
                                                                    7,172
                                                                    6,073
                                                                    5,224Operating
      Days
                                                                    7,139
                                                                    6,039
                                                                    5,203Fleet
      Utilization
                                                                    99.5%
                                                                    99.4%
                                                                    99.6%





·
            Ownership
      days:  We define ownership days as the aggregate number
      of days in a period during which each vessel in our fleet has been owned
      by us. Ownership days are an indicator of the size of our fleet over a
      period and affect both the amount of revenues and the amount of expenses
      that we record during a period. Ownership days in 2008 increased due to
      the acquisition of two second-hand vessels which delivered in June and
      September of 2008, and the delivery of three newbuilding vessels in June,
      October, and November 2008. Ownership days in 2007 increased by the
      delivery of three vessels in the second quarter of 2007, net
      of  the sale of one vessel in the first quarter of 2007. In
      2006, we added three vessels to our initial fleet of 13 vessels. The
      increase in ownership days in 2006 resulted from the additional three
      vessels and operations for the full calendar year of vessels acquired in
      2005.




60




·
            Available
      days:  We define available days as the number of our
      ownership days less the aggregate number of days that our vessels are
      off-hire due to vessel familiarization upon acquisition, scheduled repairs
      or repairs under guarantee, vessel upgrades or special surveys and the
      aggregate amount of time that we spend positioning our vessels. The
      shipping industry uses available days to measure the number of days in a
      period during which vessels should be capable of generating revenues.
      Available days in 2007 increased due to a larger fleet size, net of
      positioning one vessel for sale and drydocks. Available days in 2006
      increased due to larger fleet size. In 2008, three of our vessels were
      drydocked. In 2007, five of our vessels drydocked compared to six in
      2006.




·
            Operating
      days:  We define operating days as the number of our
      available days in a period less the aggregate number of days that our
      vessels are off-hire due to any reason, including unforeseen
      circumstances. The shipping industry uses operating days to measure the
      aggregate number of days in a period during which vessels actually
      generate revenues.




·
            Fleet
      utilization:  We calculate fleet utilization by dividing
      the number of our operating days during a period by the number of our
      available days during the period. The shipping industry uses fleet
      utilization to measure a company’s efficiency in finding suitable
      employment for its vessels and minimizing the amount of days that its
      vessels are off-hire for reasons other than scheduled repairs or repairs
      under guarantee, vessel upgrades, special surveys or vessel positioning.
      Our fleet continues to perform at very high utilization
    rates.




·
            TCE
      rates:  We define TCE rates as our voyage and time
      charter revenues less voyage expenses during a period divided by the
      number of our available days during the period, which is consistent with
      industry standards. TCE rate is a standard shipping industry performance
      measure used primarily to compare daily earnings generated by vessels on
      time charters with daily earnings generated by vessels on voyage charters,
      because charter hire rates for vessels on voyage charters are generally
      not expressed in per day amounts while charter hire rates for vessels on
      time charters generally are expressed in such amounts. All our vessels are
      employed on time charters hence our TCE rate is equal to the time charter
      rate.




Voyage
and Time Charter Revenue





Shipping
revenues are highly sensitive to patterns of supply and demand for vessels of
the size and design configurations owned and operated by a Company and the
trades in which those vessels operate. In the drybulk sector of the shipping
industry, rates for the transportation of drybulk cargoes such as ores, grains,
steel, fertilizers, and similar commodities, are determined by market forces
such as the supply and demand for such commodities, the distance that cargoes
must be transported, and the number of vessels expected to be available at the
time such cargoes need to be transported. The demand for shipments then is
significantly affected by the state of the economy globally and in discrete
geographical areas. The number of vessels is affected by newbuilding deliveries
and by the removal of existing vessels from service, principally because of
scrapping.





Revenues
are also affected by the mix of charters between spot (voyage charter) and
long-term (time charter). Because shipping revenues and voyage expenses are
significantly affected by the mix between voyage charters and time charters,
vessel revenues are bench-marked on the basis of time charter equivalent (“TCE”)
revenues. TCE revenue comprises revenue from vessels operating on time charters,
or TC revenue, and voyage revenue less voyage expenses from vessels operating on
voyage charters in the spot market. TCE revenue serves as a measure of analyzing
fluctuations between financial periods and as a method of equating revenue
generated from a voyage charter to time charter revenue. TCE revenue also serves
as an industry standard for measuring revenue and comparing results between
geographical regions and among competitors.





Our
economic decisions are based on anticipated TCE rates and we evaluate financial
performance based on TCE rates achieved. Our revenues are driven primarily by
the number of vessels in our fleet, the number of days during which our vessels
operate and the amount of the daily charter hire rates that our vessels earn
under charters, which, in turn, are affected by a number of factors,
including:




61




·
            the
      duration of our charters;


·
            our
      decisions relating to vessel acquisitions and
  disposals;


·
            the
      amount of time that we spend positioning our
  vessels;


·
            the
      amount of time that our vessels spend in dry-dock undergoing
      repairs;


·
            maintenance
      and upgrade work;


·
            the
      age, condition and specifications of our
  vessels;


·
            levels
      of supply and demand in the dry bulk shipping industry;
  and


·
            other
      factors affecting spot market charter rates for dry bulk
      carriers.





All
our revenues for the years ended December 31, 2008 and December 31, 2007 and
December 31, 2006 were earned from time charters, hence our TCE revenue is equal
to the TC revenue. As is common in the shipping industry, we pay commissions
ranging from 1.25% to 6.25% of the total daily charter hire rate of each charter
to unaffiliated ship brokers and in-house brokers associated with the
charterers, depending on the number of brokers involved with arranging the
charter.





Net
revenues for the year ended December 31, 2008 of $185,424,949 included billed
time charter revenues of $194,253,142, amortization of Fair Value below contract
Value of time charters acquired of $799,540, and deductions for brokerage
commissions of $9,627,733. Net revenues for the year ended December 31, 2008
were 49% greater than net revenues for the year ended December 31, 2007,
primarily due to a larger fleet size as reflected by the increased operating
days and an increase in daily time charter rates.





Net
revenues for the year ended December 31, 2007 of $124,814,804 included billed
time charter revenues of $135,412,594, deductions for brokerage commissions of
$6,857,790 and amortization of Fair Value below contract Value of time charters
acquired of $3,740,000. Net revenues for the year ended December 31, 2007 were
19% greater than net revenues for the year ended December 31, 2006, primarily
due to a larger fleet size as reflected by increased operating days and an
increase in daily time charter rates.  Net revenues for the year ended
December 31, 2006 of $104,648,197 included billed time charter revenues of
$113,900,922, deductions for brokerage commissions of $5,790,725 and net
amortization of Fair Value above/below contract Value of time charters acquired
of $3,462,000.





Voyage
Expenses





To
the extent that we employ our vessels on voyage charters, we will incur expenses
that include port and canal charges, bunker (fuel oil) expenses and commissions,
as these expenses are borne by the vessel owner on voyage charters. Port and
canal charges and bunker expenses primarily increase in periods during which
vessels are employed on voyage charters because these expenses are for the
account of the vessels. Currently all our vessels are employed under time
charters that require the charterer to bear all of those expenses, hence we
expect that any port and canal charges and bunker expenses, if incurred, will
represent a relatively minor portion of our vessels’ overall
expenses.





Vessel
Expenses





Vessel
expenses for the years ended December 31, 2008, 2007 and 2006 were $36,270,382,
$27,143,515 and $21,562,034, respectively. Vessel expenses increase as the fleet
size increases. Vessel expenses also increased due to increases in vessel crew
costs and cost of oil based consumables such as lubricants and paints. Vessel
expenses for the year ended December 31, 2008 included $34,065,337 in vessel
operating costs and $2,205,047 in technical management fees. Vessel expenses for
the year ended December 31, 2007 included $25,338,098 in vessel operating costs
and $1,805,417 in technical management fees. Vessel expenses for the year ended
December 31, 2006 included $20,070,181 in vessel operating costs and $1,491,853
in technical management fees.


Vessel operating
expenses include crew wages and related costs, the cost of insurance, expenses
relating to repairs and maintenance, the cost of spares and consumable stores,
tonnage taxes, pre-operating costs associated with the delivery of acquired
vessels including providing the newly acquired vessels with initial provisions
and stores, other miscellaneous expenses, and technical management
fees.




62




Insurance
expense varies with overall insurance market conditions as well as the insured’s
loss record, level of insurance and desired coverage. The main insurance
expenses include Protection and Indemnity (“P & I”) insurance (i.e.
liability insurance) costs, and hull and machinery insurance (i.e. asset
insurance) costs. Certain other insurances, such as basic war risk premiums
based on voyages into designated war risk areas are often for the account of the
charterers as the fleet is entirely time chartered.





With
regard to vessel operating expenses, we have entered into technical management
agreements for each of our vessels with our independent technical managers, V.
Ships, Wilhelmsen Ship Management, and Anglo Eastern International Ltd. In
conjunction with our management, our managers have established an operating
expense budget for each vessel. Included in Vessel Expenses is a daily fixed
management fee for each vessel in our operating fleet paid to our independent
technical managers. For the years ended December 31, 2008, 2007, and 2006, the
technical management fees averaged $9,041, $8,906, and $8,583 per month per
vessel, respectively. All deviations from the budgeted amounts are for our
account.





Technical
management services include managing day-to-day vessel operations, performing
general vessel maintenance, ensuring regulatory and classification society
compliance, supervising the maintenance and general efficiency of vessels,
arranging the hire of qualified officers and crew, arranging dry-docking and
repairs, purchasing stores, supplies, spare parts and new equipment, appointing
supervisors and technical consultants and providing technical
support.





Our
vessel expenses, which generally represent costs under the vessel operating
budgets, cost of insurance and vessel registry and other regulatory fees, will
increase with the enlargement of our fleet. Other factors beyond our control,
some of which may affect the shipping industry in general, may also cause these
expenses to increase, including, for instance, developments relating to market
prices for crew, insurance and petroleum-based lubricants and
supplies.





Depreciation
and Amortization





For
the years ended December 31, 2008, 2007 and 2006, total depreciation and
amortization expense was $33,948,840, $26,435,646 and $21,812,486, respectively.
Total depreciation and amortization expense for the year ended December 31, 2008
includes $31,379,444 of vessel depreciation and $2,569,396 of amortization of
deferred drydocking costs. Total depreciation and amortization expense for the
year ended December 31, 2007 includes $24,791,502 of vessel depreciation and
$1,644,144 of amortization of deferred drydocking costs. Comparable amounts for
the year ended December 31, 2006 were $21,031,357 of vessel depreciation and
$781,129 of amortization of deferred drydocking costs.





The
cost of our vessels is depreciated on a straight-line basis over the expected
useful life of each vessel. Depreciation is based on the cost of the vessel less
its estimated residual value. We estimate the useful life of our vessels to be
28 years from the date of initial delivery from the shipyard to the original
owner. Furthermore, we estimate the residual values of our vessels to be $150
per lightweight ton, which we believe is common in the dry bulk shipping
industry. Our depreciation charges will increase as our fleet expands.
Drydocking relates to our regularly scheduled maintenance program necessary to
preserve the quality of our vessels as well as to comply with international
shipping standards and environmental laws and regulations. Management
anticipates that vessels are to be drydocked every two and a half years and,
accordingly, these expenses are deferred and amortized over that
period.





General
and Administrative Expenses





Our
general and administrative expenses include onshore vessel administration
related expenses such as legal and professional expenses and recurring
administrative and other expenses including payroll and expenses relating to our
executive officers and office staff, office rent and expenses, directors fees,
and directors and officers insurance. General and administrative expenses also
include non-cash compensation expenses.




63




General
and administrative expenses for the years ended December 31, 2008, 2007 and 2006
were $34,567,070, $11,776,511 and $18,293,348, respectively. General and
administrative expenses in 2008 were impacted primarily by cash and non-cash
compensation (performance-based compensation and amortization of restricted
stock awards) to our executive officers and office staff, and by administrative
costs associated with operating a larger fleet, including the extensive
newbuilding program.





General
and administrative expenses include non-cash compensation charges of
$11,111,885, $4,256,777, and $13,070,473, respectively in 2008, 2007, and 2006.
These non-cash compensation charges relate to the stock options and restricted
stock units granted to members of management and certain directors of the
Company under the 2005 Stock Incentive Plan (see Note 10) and non-cash,
non-dilutive charges relating to profits interests awarded to members of the
Company’s management by the Company’s former principal shareholder Eagle
Ventures LLC. Amounts recorded with respect to the stock options and the
restricted stock units were $11,111,885, $1,118,965 and $47,033 in 2008, 2007
and 2006, respectively. Amounts recorded with respect to the non-cash,
non-dilutive charges relating to profits interests were $0, $3,137,812 and
$13,023,440 in 2008, 2007 and 2006, respectively.





Members
of the Company’s management had been awarded profits interests in the Company’s
former principal shareholder Eagle Ventures LLC that entitled such persons to an
economic interest of up to 16.7% on a fully diluted basis (assuming all profits
interests were vested) in any appreciation in the value of the assets of Eagle
Ventures LLC (including shares of the Company’s common stock owned by Eagle
Ventures LLC when sold). These profits interests diluted only the interests of
owners of Eagle Ventures LLC, and did not dilute direct holders of the Company’s
common stock. However, the Company’s statement of operations reflects non-cash
charges for compensation related to the profits interests. In the aggregate, one
fourth of the profits interests were service-related and the remaining profits
interests were performance related.  Since these profits interests
would not be settled in stock of the Company, they were being accounted for as a
liability plan as described in paragraph 32 of SFAS No. 123(R).  The
compensation charge was based on the fair value of the profits interests by
marking to market the assets of Eagle Ventures LLC at the end of each reporting
period. The impact of any changes in the estimated fair value of the profits
interests was recorded as a change in estimate cumulative to the date of change.
The impact on the amortization of the compensation charge of any changes to the
estimated vesting periods for the performance related profits interests was
adjusted prospectively as a change in estimate. As Eagle Ventures LLC has sold
all of its remaining holdings in the Company, the non-cash, non-dilutive charges
relating to profits interests ended in the first quarter of 2007 and there will
be no charges in future periods.





Interest
and Finance Costs




Interest
Expense, exclusive of capitalized interest, consists of:





2008
                      
                      
                      2007
                      
                      
                      2006Loan
      Interest
                      
                      $
                      15,545,287
                      
                      
                      $
                      12,259,010
                      
                      
                      $
                      9,694,244Commitment
      Fees
                      
                      
                      26,449
                      
                      
                      
                      239,739
                      
                      
                      
                      676,126Amortization
      of Deferred Financing Costs
                      
                      
                      244,837
                      
                      
                      
                      242,357
                      
                      
                      
                      178,246Total
      Interest Expense
                      
                      $
                      15,816,573
                      
                      
                      $
                      12,741,106
                      
                      
                      $
                      10,548,616





Amortization
of deferred financing costs relating to our operating fleet is included in
interest expense. These financing costs relate to costs associated with our
revolving credit facility and these are amortized over the life of the facility.
For the years ended December 31, 2008, 2007, and 2006, the amortization of
deferred financing costs was $244,837, $242,357, and $178,246,
respectively.





Interest
expense includes loan interest incurred on borrowings from the Company’s
revolving credit facility for the vessels in operation, commitment fees incurred
on the unused portion of the revolving credit facility, and the amortization of
financing costs associated with the revolving credit facility (see section Revolving Credit
Facility).




64




For
2008, interest rates on our outstanding debt ranged from 3.10% to 6.99%,
including a margin over LIBOR applicable under the terms of the amended
revolving credit facility. The weighted average effective interest rate was
5.46%. Commitment fees incurred on the undrawn portion of the facility ranged
from 0.25% to 0.3% on the unused portions of the revolving credit
facility.





For
2007, interest rates on our outstanding debt ranged from 4.97% to 6.56%,
including a margin over LIBOR applicable under the terms of the amended
revolving credit facility. The weighted average effective interest rate was
5.44%. Commitment fees incurred on the undrawn portion of the facility was 0.25%
on the unused portions of the revolving credit facility.





For
2006, interest rates on our outstanding debt ranged from 4.97% to 6.32%,
including a margin over LIBOR applicable under the terms of the amended
revolving credit facility. The weighted average effective interest rate was
5.39%. Commitment fees incurred on the undrawn portion of the facility ranged
from 0.25% to 0.4% on the unused portions of the revolving credit
facility.





Cash
interest paid during 2008, 2007, and 2006, exclusive of capitalized interest,
amounted to $13,557,351, $13,031,996, and $10,194,882,
respectively.





As
our fleet increases in size, interest expense will increase as a result of
additional debt drawn from our revolving credit facility to finance the
acquisition of vessels. Interest costs on borrowings made for the construction
of our newbuilding vessels are capitalized until the vessels are delivered (see
below).





Write-off
of Deferred Financing Costs





In
December 2008, we entered into a second Amendatory Agreement to our
$1,600,000,000 revolving credit facility. Among other things, the credit
facility amends the amount of the credit facility to $1,350,000,000. In
connection with the second amendment we have recorded a one-time non-cash charge
of $2,089,701, which is a write-off of deferred finance costs associated with
the reduction of the credit facility.





Capitalized
Interest





We
have contracted for the construction of 27 newbuilding vessels of which 3
vessels have been constructed and delivered in 2008. Interest costs on
borrowings made for the construction of the vessels in our newbuilding program
are capitalized until the vessels are delivered.





Capitalized
interest in 2008 amounted to $26,211,616, which includes $24,392,000 in interest
and $1,819,616 in amortization of financing costs. For 2007, capitalized
interest amounted to $9,400,288 ($8,964,989 in interest and $435,299 in
amortization of financing costs) compared to $259,580 ($236,152 in interest and
$23,428 in amortization of financing costs) in 2006. The increase in capitalized
interest is substantially due to additional borrowings to fund the construction
of the newbuilding vessels. Cash paid for capitalized interest during 2008,
2007, and 2006 amounted to $20,385,190, $8,775,957, and $126,702,
respectively.





Interest
Rate Swaps





We
have entered into interest rate swaps to effectively convert a portion of our
debt from a floating to a fixed-rate basis. Under these swap contracts,
exclusive of applicable margins, we pay fixed rate interest and receive
floating-rate interest amounts based on three-month LIBOR settings. The swaps
are designated and qualify as cash flow hedges.




65




As
of December 31, 2008, the following swap contracts were
outstanding:





Notional
      Amount Outstanding –
                      December
      31, 2008
                    
                    
                    Fixed
      Rate
                    
                    
                    Maturity  $             
      84,800,000
                      
                      
                      
                      5.240%
                      
                      
                      
                      09/2009*25,776,443
                      
                      
                      
                      4.900%
                      
                      
                      
                      03/201010,995,000
                      
                      
                      
                      4.980%
                      
                      
                      
                      08/2010202,340,000
                      
                      
                      
                      5.040%
                      
                      
                      
                      08/2010100,000,000
                      
                      
                      
                      4.220%
                      
                      
                      
                      09/201030,000,000
                      
                      
                      
                      4.538%
                      
                      
                      
                      09/201025,048,118
                      
                      
                      
                      4.740%
                      
                      
                      
                      12/201136,752,038
                      
                      
                      
                      5.225%
                      
                      
                      
                      08/201281,500,000
                      
                      
                      
                      3.895%
                      
                      
                      
                      01/2013144,700,000
                      
                      
                      
                      3.580%
                      
                      
                      
                      10/20119,162,500
                      
                      
                      
                      3.515%
                      
                      
                      
                      10/20113,405,174
                      
                      
                      
                      3.550%
                      
                      
                      
                      10/201117,050,000
                      
                      
                      
                      3.160%
                      
                      
                      
                      11/2011$            771,529,273


*
Upon maturity of the $84,800,000 swap in September 2009, a swap with the same
notional amount will commence with a fixed interest rate of 3.90% that matures
in September 2013.








We
record the fair value of the interest rate swaps as an asset or liability on the
balance sheet. The effective portion of the swap is recorded in accumulated
other comprehensive income. Accordingly, $50,538,060 and $13,531,883 has been
recorded in Fair Value of derivative instruments (liabilities) in the Company’s
balance sheets as of December 31, 2008 and 2007, respectively.





Foreign
Currency Swaps





The
shipping industry’s functional currency is the U.S. dollar. All our revenues and
the majority of our operating expenses and the entirety of our management
expenses are in U.S. dollars. Therefore we do not use or intend to use financial
derivatives to mitigate the risk of exchange rate fluctuations for our revenues
and expenses.





However,
as we have entered into a newbuilding program for vessels to be built in Japan
and which are priced in Japanese yen, we have entered into foreign exchange swap
transactions to hedge foreign currency risks to our vessel newbuilding
contracts. These swaps are designated and qualify as cash flow
hedges.





At
December 31, 2007, the Company had outstanding foreign currency swap contracts
for notional amounts aggregating 11.28 billion Japanese yen swapped into the
equivalent of $104,259,998.





At
December 31, 2008, the Company had outstanding foreign currency swap contracts
for notional amounts aggregating 8.6 billion Japanese yen swapped into the
equivalent of $80,378,030.





The
Company records the fair value of the currency swaps as an asset or liability in
its financial statements. The effective portion of the swap is recorded in
accumulated other comprehensive income. Accordingly, an amount of $15,258,780
and $932,638 has been recorded in Fair Value of derivative instruments and other
assets in the accompanying financial statements as of December 31, 2008 and
December 31, 2007, respectively.





In
February 2009, the Company settled its outstanding foreign currency swaps
contracts at a gain aggregating $13,673,774. This gain will offset the cost of
the vessels on the remaining three vessels upon their delivery in March 2009,
January 2010 and February 2010, respectively.




66




Write-off
of Advances for Vessel Construction





In
December 2008, we reached an agreement with Yangzhou Dayang Shipbuilding Co.,
Ltd., to convert eight charter-free Supramax vessel construction contracts in
our newbuilding program into options on the part of the Company, for
consideration of $440,000. The carrying value of the advanced payment in
connection with the acquisition of these construction contracts from Kyrini
Shipping Inc and the cost of the eight newly converted shipbuilding contract
options were in excess of the fair value of the eight options, and as such, we
recorded an impairment charge of $3,882,888.




Gain
on Sale of Vessel





On
February 27, 2007, we sold the SHIKRA, a 1984-built Handymax vessel, to an
unrelated third party for $12,525,000. We incurred total expenses of $513,518
relating to the sale. We recorded a gain on the sale of $872,568.





EBITDA





EBITDA
represents operating earnings before extraordinary items, depreciation and
amortization, interest expense, and income taxes, if any. EBITDA is included
because it is used by certain investors to measure a company’s financial
performance. EBITDA is not an item recognized by GAAP and should not be
considered a substitute for net income, cash flow from operating activities and
other operations or cash flow statement data prepared in accordance with
accounting principles generally accepted in the United States or as a measure of
profitability or liquidity. EBITDA is presented to provide additional
information with respect to the Company’s ability to satisfy its obligations
including debt service, capital expenditures, and working capital requirements.
While EBITDA is frequently used as a measure of operating results and the
ability to meet debt service requirements, the definition of EBITDA used here
may not be comparable to that used by other companies due to differences in
methods of calculation.





Our
revolving credit facility permits us to pay dividends in amounts up to
cumulative free cash flows which is our earnings before extraordinary or
exceptional items, interest, taxes, depreciation and amortization (Credit
Agreement EBITDA), less the aggregate amount of interest incurred and net
amounts payable under interest rate hedging agreements during the relevant
period and an agreed upon reserve for dry-docking. Therefore, we believe that
this non-GAAP measure is important for our investors as it reflects our ability
to pay dividends. Following an amendment to the revolving credit facility in
December 2008, payment of dividends has been suspended until certain covenants
requirements have been met and until our board of directors determines in its
discretion to declare and pay future dividends. The following table is a
reconciliation of net income, as reflected in the consolidated statements of
operations, to the Credit Agreement EBITDA:


2008
                            
                            2007
                            
                            2006Net
      Income
                            $61,632,809
                            
                            $52,243,981
                            
                            $33,801,540Interest
      Expense
                            15,816,573
                            
                            12,741,106
                            
                            10,548,616Depreciation
      and Amortization
                            33,948,840
                            
                            26,435,646
                            
                            21,812,486Amortization
      of fair value (below) above market of time charter
acquired
                            (799,540)
                            
                            3,740,000
                            
                            3,462,000EBITDA
                            110,598,682
                            
                            95,160,733
                            
                            69,624,642Adjustments
      for Exceptional Items:Write-off
      of Advances for Vessel Construction (1)
                            3,882,888
                            
                            -
                            
                            -Write-off
      of Financing Fees (1)
                            2,089,701
                            
                            -
                            
                            -Non-cash
      Compensation Expense (2)
                            11,111,885
                            
                            4,256,777
                            
                            13,070,473Credit
      Agreement EBITDA
                            $127,683,156
                            
                            $99,417,510
                            
                            $82,695,115




(1)
                            One
      time charge (see Notes to the financial statements)(2)
                            Stock
      based compensation related to stock options, restricted stock units, and
      management’s  participation in profits interests in Eagle
      Ventures LLC (see Notes to our financial
  statements)


67




Effects
of Inflation





The
Company does not believe that inflation has had or is likely, in the foreseeable
future, to have a significant impact on vessel operating expenses, drydocking
expenses and general and administrative expenses.





Liquidity
and Capital Resources





Net
cash provided by operating activities during the years ended December 31, 2008
and 2007 was $109,535,918 and $82,889,373, respectively. The increase was
primarily due to cash generated from the operation of the fleet for 7,229operating
days in 2008 compared to 6,166 operating days in 2007.





Net
cash used in investing activities during 2008, was $336,657,686. Investing
activities during 2008 reflected the purchase of the GOLDENEYE and REDWING,
which were delivered in the second and third quarter of 2008, respectively, and
advances for the newbuilding vessel construction program. During 2008, we also
incurred $219,245 in leasehold improvements relating to the expansion of our
office space.





Net
cash provided by financing activities during 2008 was $83,426,938. We borrowed
$192,358,513 from our revolving credit facility which was used to partly fund
the REDWING and fund the advances for the construction of newbuilding vessels,
three of which, WREN, WOODSTAR and CROWNED EAGLE delivered during the year. In
2008, we also paid $93,592,906 in dividends.





As
of December 31, 2008, our cash balance was $9,208,862 compared to a cash balance
of $152,903,692 at December 31, 2007. In addition, $11,500,000 in cash deposits
are maintained with our lender for loan compliance purposes and this amount is
recorded in Restricted Cash on our balance sheet as of December 31, 2008. Also
recorded in Restricted Cash is an amount of $276,056 which is collateralizing a
letter of credit relating to our office lease.





In
December 2008, our revolving credit facility was amended to $1,350,000,000 (See
section entitled “Revolving
Credit Facility” for a description of the facility and its amendments).
As of December 31, 2008, borrowings under this facility aggregated $789,601,403.
The facility also provides us with the ability to borrow up to $20,000,000 for
working capital purposes, none of which has been borrowed as of December 31,
2008.





In
December 2008, commencing with the fourth quarter of 2008, our board of
directors has determined to suspend the payment of dividends to stockholders in
order to increase cash flow, optimize financial flexibility and enhance internal
growth. We anticipate that our current financial resources, together with cash
generated from operations and, if necessary, borrowings under our revolving
credit facility will be sufficient to fund the operations of our fleet,
including our working capital requirements, for at least the next 12 months. Our
amended credit facility also provides us with the funds required to meet our
newbuilding commitments. We were in compliance with all of the covenants
contained in our amended debt agreements as of December 31, 2008.





Our
loan agreements for our borrowings are secured by liens on our vessels and
contain various financial covenants. The covenants relate to our financial
position, operating performance and liquidity. We are currently in compliance
with all such covenants. The market value of drybulk vessels is sensitive, among
other things, to changes in the drybulk charter market. The recent general
decline in the drybulk carrier charter market has resulted in lower charter
rates for vessels in the drybulk market. The decline in charter rates in the
drybulk market coupled with the prevailing difficulty in obtaining financing for
vessel purchases have adversely affected drybulk vessel values. A continuation
of these conditions, could lead to a significant decline in the fair market
values of our vessels, which could impact our compliance with these loan
covenants. The recent developments in the credit markets and related impact on
the drybulk charter market and have also resulted in additional risks. The
occurrence of one or more of these risk factors could adversely affect our
results of operations or financial condition. Please refer to the section
entitled “Risk Factors” in Part I of this document.





It
is our intention to fund our future acquisition related capital requirements
initially through borrowings under the amended revolving credit facility and to
repay all or a portion of such borrowings from time to time with cash generated
from operations and from net proceeds of issuances of securities. On December
31, 2007, the Company filed an S-3 shelf registration, subsequently amended,
which would enable the Company to issue such securities.




68




Dividends





Our
policy is to declare quarterly dividends to stockholders in March, May, August
and November. Our amended revolving credit facility permits us to pay quarterly
dividends in amounts up to cumulative free cash flows which is our quarterly
earnings before extraordinary or exceptional items, interest, taxes,
depreciation and amortization (Credit Agreement EBITDA), less the aggregate
amount of interest incurred and net amounts payable under interest rate hedging
agreements during the relevant period and an agreed upon reserve for drydocking
for the period, provided that there is not a default or breach of loan covenant
under the credit facility and the payment of the dividends would not result in a
default or breach of a loan covenant. Depending on market conditions in the dry
bulk shipping industry and acquisition opportunities that may arise, we may be
required to obtain additional debt or equity financing which could affect our
dividend policy. In this connection, the drybulk market has recently declined
substantially. In December 2008, commencing with the fourth quarter of 2008, the
Company’s board of directors has determined to suspend the payment of dividends
to stockholders in order to increase cash flow, optimize financial flexibility
and enhance internal growth.  In the future, the declaration and
payment of dividends, if any, will always be subject to the discretion of the
board of directors, restrictions contained in the amended credit facility and
the requirements of Marshall Islands law. The timing and amount of any dividends
declared will depend on, among other things, the Company’s earnings, financial
condition and cash requirements and availability, the ability to obtain debt and
equity financing on acceptable terms as contemplated by the Company’s growth
strategy, the terms of its outstanding indebtedness and the ability of the
Company’s subsidiaries to distribute funds to it.





In
2008, the Company declared four quarterly dividends in the aggregate amount of
$2.00 per share of its common stock in February, May, August and November.
Aggregate payments were $93,592,906 for dividends declared in 2008.





In
2007, the Company declared four quarterly dividends in the aggregate amount of
$1.98 per share of its common stock in February, April, July and November.
Aggregate payments were $82,134,982 for dividends declared in 2007.


In
2006, the Company declared four quarterly dividends in the aggregate amount of
$2.08 per share of its common stock in January, April, July and October.
Aggregate payments were $71,729,500 for dividends declared in 2006.





Sale
of Common Stock





On
June 28, 2006 the Company sold 2,750,000 shares of its common stock in a private
placement at $12.00 per share, raising gross proceeds of $33,000,000 before
deduction of fees and expenses of $1,770,811.





On
January 16, 2007, our then principal shareholder, Eagle Ventures LLC, sold
7,202,679 shares of the Company’s common stock from its holdings of the
Company’s common stock in a secondary sale.  The Company did not
receive any proceeds from this offering.





On
March 6, 2007, we sold 5,400,000 shares of our common stock for $18.95 per
share, raising gross proceeds of $102,330,000. On March 23, 2007, we raised an
additional $7,841,870 in gross proceeds from the underwriter’s exercise of their
over-allotment option for the purchase of 413,819 shares of our common stock. We
used the net proceeds from the offering to fund a portion of the acquisition
costs of three vessels, the SHRIKE, SKUA and KITTIWAKE, which were
delivered in the second quarter of 2007.





On
September 21, 2007, we sold 5,000,000 shares of our common stock for $25.90 per
share, raising gross proceeds of $129,500,000.





We
have incurred fees and expenses aggregating $5,642,117 for the share sales in
2007.




69




Revolving
Credit Facility





On
July 3, 2008, the Company’s existing $1,600,000,000 revolving credit facility
was amended. Among other things, the amended facility provided an additional
incremental commitment of up to $200,000,000 under the same terms and conditions
as the existing facility, subject to satisfaction of certain additional
conditions. The Company now also has the ability to purchase additional dry bulk
vessels in excess of 85,000dwt and over 10 years of age, but no more than 20
years of age, with certain limitations. The agreement also provides for the
purchase or acquisition of more than one additional vessel en bloc or the
acquisition of beneficial ownership in one or more additional vessel(s). The
agreement amended the margin applicable over the Libor interest rate on
borrowings to 0.95% for the next two years. Thereafter, if the advance ratio is
less than 35%, the margin will be 0.80% per year; if the advance ratio is equal
to or greater than 35% but less than 60%, the margin will be 0.95%; if the
advance ratio is equal to or greater than 60%, the margin will be 1.05%. The
agreement also amended the commitment fee on the undrawn portion of the
revolving credit facility to 0.30%. In connection with this second amendment,
applicable arrangement fees were to be incurred and these fees were to be in
proportion to the arrangement fees previously incurred when the revolving
facility was increased to $1,600,000,000 in 2007. All other terms and conditions
remained unchanged.





On
December 17, 2008, the Company entered into a second Amendatory Agreement to its
$1,600,000,000 revolving credit facility. Among other things, the credit
facility amendment amends the amount of the credit facility to $1,350,000,000.
The agreement amends the minimum security value of the credit facility to
include the aggregate market value of the vessels in the Company’s operating
fleet and the deposits on its newbuilding contracts. The agreement amends the
minimum security value clause of the credit facility from 130% to 100% of the
aggregate principal amount of debt outstanding under the credit facility. The
agreement also provides that future dividend payments will be based on
maintaining a minimum security value of 130%. The agreement reduces the minimum
net worth clause of the credit facility from $300,000,000 to $75,000,000 for
2009, subject to annual review thereafter. The agreement also amends the
interest margin to 1.75% over LIBOR.





The
Company’s
revolving credit facility contains financial covenants requiring us, among other
things, to ensure that we maintain with the lender $500,000 per delivered
vessel. As of December 31, 2008 the Company has recorded $11,500,000 as
restricted cash in the accompanying balance sheets. At December 31, 2008, the
Company’s debt consisted of $789,601,403 in net borrowings under the amended
Revolving Credit Facility. These borrowings consisted of $392,951,457 for the 23
vessels currently in operation and $396,649,946 to fund the Company’s
newbuilding program. As of December 31, 2008, $560,398,597 is available for
additional borrowings under the credit facility, including $20,000,000 for
working capital purposes. The facility is available in full until July 2012 when
availability will begin to reduce in 10 semi-annual reductions of $63,281,250
with a balloon payment of $717,187,500 in July 2017. The Company will also pay
on a quarterly basis a commitment fee of 0.3% per annum on the undrawn portion
of the facility. In connection with the various amendments to the revolving
credit facility, for 2008, the Company has recorded deferred financing costs
aggregating $13,945,190. It will also pay the lender an annual agency fee of
$65,000.





Our
ability to borrow amounts under the amended revolving credit facility will be
subject to the satisfaction of certain customary conditions precedent and
compliance with terms and conditions included in the loan documents. In
connection with vessel acquisitions, amounts borrowed may not exceed 75% of the
value of the vessels securing our obligations under the credit facility. Our
ability to borrow such amounts, in each case, is subject to our lender’s
approval of the vessel acquisition. Our lender’s approval will be based on the
lender’s satisfaction of our ability to raise additional capital through equity
issuances in amounts acceptable to our lender and the proposed employment of the
vessel to be acquired.





Our
obligations under the amended revolving credit facility are secured by a first
priority mortgage on each of the vessels in our fleet and such other vessels
that we may from time to time include with the approval of our lender, and by a
first assignment of all freights, earnings, insurances and requisition
compensation relating to our vessels. The facility also limits our ability to
create liens on our assets in favor of other parties.




70




The
revolving credit facility, as amended, contains financial covenants requiring
us, among other things, to ensure that:





·
            the
      aggregate market value of the vessels in our fleet that secure our
      obligations under the revolving credit facility, as determined by an
      independent shipbroker on a charter free basis, at all times exceeds 100%
      of the aggregate principal amount of debt outstanding under the new credit
      facility and the notional or actual cost of terminating any related
      hedging arrangements;




·
            we
      maintain an adjusted net worth, i.e., total assets less consolidated debt
      of an amount not less than $75,000,000 during any accounting period in
      2009, and then subject to an annual
review;




·
            our
      EBITDA, as defined in the credit agreement, will at all times be not less
      than 2x the aggregate amount of interest incurred and net amounts payable
      under interest rate hedging arrangements during the relevant period;
      and




·
            we
      maintain with the lender $500,000 per delivered
  vessel.




For
the purposes of the revolving credit facility, our “total assets” includes our
tangible fixed assets and our current assets, as set forth in our consolidated
financial statements, except that the value of any vessels in our fleet that
secure our obligations under the facility are measured by their fair market
value rather than their carrying value on our consolidated balance
sheet.





The
revolving credit facility permits us to pay dividends in amounts up to our
earnings before extraordinary or exceptional items, interest, taxes,
depreciation and amortization (EBITDA), less the aggregate amount of interest
incurred and net amounts payable under interest rate hedging agreements during
the relevant period and an agreed upon reserve for dry-docking, provided that
there is not a default or breach of loan covenant under the credit facility and
the payment of the dividends would not result in a default or breach of a loan
covenant. The agreement also provides that future dividend payments will be
based on maintaining a minimum security value of 130%.





Contractual
Obligations





The
following table sets forth our expected contractual obligations and their
maturity dates as of December 31, 2008:





(in
      thousands of U.S. dollars)
                                        
                                        Within
                                          One Year
                                        
                                        
                                        One
      to
                                          Three Years
                                        
                                        
                                        Three
      to
                                          Five Years
                                        
                                        
                                        More
      than
                                          Five years
                                        
                                        
                                        TotalVessels
      (1)
                                        
                                        $
                                        248,526
                                        
                                        
                                        $
                                        376,836
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        $
                                        625,362Bank
      Loans
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        $
                                        789,601
                                        
                                        
                                        
                                        789,601Interest
      and borrowing fees (2)
                                        
                                        
                                        48,833
                                        
                                        
                                        
                                        97,666
                                        
                                        
                                        
                                        85,358
                                        
                                        
                                        
                                        183,292
                                        
                                        
                                        
                                        415,149Office
      lease (3)
                                        
                                        
                                        649
                                        
                                        
                                        
                                        1,437
                                        
                                        
                                        
                                        1,670
                                        
                                        
                                        
                                        3,689
                                        
                                        
                                        
                                        7,445Total
                                        
                                        $
                                        298,008
                                        
                                        
                                        $
                                        475,939
                                        
                                        
                                        $
                                        87,028
                                        
                                        
                                        $
                                        976,582
                                        
                                        
                                        $
                                        1,837,557





(1)
            The
      balance of the contract price in US dollars for the 24 newbuilding vessels
      which are to be constructed and delivered between 2009 and
      2011.


(2)
            The
      Company is a party to floating-to-fixed interest rate swaps covering
      aggregate notional amount of $771,529,273. Interest and borrowing fees
      includes capitalized interest for the newbuilding
  vessels.


(3)
            Remainder
      of the lease on the office space which we
  occupy.




Capital
Expenditures





Our
capital expenditures relate to the purchase of vessels and capital improvements
to our vessels which are expected to enhance the revenue earning capabilities
and safety of these vessels.





We
make capital expenditures from time to time in connection with our vessel
acquisitions. As of December 31, 2008, our fleet currently consists of 23
Supramax vessels which are currently operational and 24 newbuilding vessels
which have been contracted for construction.




71




In
addition to acquisitions that we may undertake in future periods, the Company’s
other major capital expenditures include funding the Company’s maintenance
program of regularly scheduled drydocking necessary to preserve the quality of
our vessels as well as to comply with international shipping standards and
environmental laws and regulations. Although the Company has some flexibility
regarding the timing of its dry docking, the costs are relatively predictable.
Management anticipates that vessels are to be drydocked every two and a half
years. Funding of these requirements is anticipated to be met with cash from
operations. We anticipate that this process of recertification will require us
to reposition these vessels from a discharge port to shipyard facilities, which
will reduce our available days and operating days during that
period.





Drydocking
costs incurred are deferred and amortized to expense on a straight-line basis
over the period through the date of the next scheduled drydocking for those
vessels. In 2008, three of our vessels were drydocked. In 2007 and 2006, five
and six vessels passed drydock surveys, respectively. In 2006, six of our
vessels passed drydock surveys. For 2008, 2007 and 2006, we spent $2,388,776,
$3,624,851 and $2,324,726, respectively on vessel drydockings. The following
table represents certain information about the estimated costs for anticipated
vessel drydockings in the next four quarters, along with the anticipated
off-hire days:





Quarter Ending
                    Off-hire
      Days(1)
                    Projected
      Costs(2)March
      31, 2009
                    44
                    $1.00
      millionJune
      30, 2009
                    22
                    $0.50
      millionSeptember
      30, 2009
                    66
                    $1.50
      millionDecember
      31, 2009
                    44
                    $1.00
      million




(1)
                              Actual
      duration of drydocking will vary based on the condition of the vessel,
      yard schedules and other factors.(2)
                              Actual
      costs will vary based on various factors, including where the drydockings
      are actually
performed.


Contracted
Time Charter Revenue





We
have time charter contracts currently for all our vessels in the operating
fleet. The contracted time charter revenue schedule, included in Management’s
Discussion and Analysis of Financial Condition and results of operation, reduces
future contracted revenue for any estimated off-hire days relating to
drydocks.




Off-balance
Sheet Arrangements





We
do not have any off-balance sheet arrangements.


72




Item
7A. Quantitative and
Qualitative Disclosures about Market Risk




Interest
Rate Risk





The
Company is exposed to market risk from changes in interest rates, which could
impact its results of operations and financial condition. The Company’s
objective is to manage the impact of interest rate changes on earnings and cash
flows of its borrowings. The Company expects to manage this exposure to market
risk through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
expects to use interest rate swaps to manage net exposure to interest rate
changes related to its borrowings and to lower its overall borrowing
costs.





As
of December 31, 2008, the Company’s debt consisted of $789,601,403 in loans
under the revolving credit facility at a margin plus variable rates above the
LIBOR. During the year ended December 31, 2008, interest rates on the
outstanding debt ranged from 3.10% to 6.99% (including margins). The weighted
average effective interest rate was 5.46%.





The
Company entered into interest rate swaps to effectively convert a substantial
portion of its debt from a floating to a fixed-rate basis. The swaps are
designated and qualify as cash flow hedges. As of December 31, 2008, the Company
had the following swap contracts outstanding:




Notional
      Amount Outstanding –
                        December
      31, 2008
                      
                      
                      Fixed
      Rate
                      
                      
                      Maturity  $             
      84,800,000
                        
                        
                        
                        5.240%
                        
                        
                        
                        09/2009*25,776,443
                        
                        
                        
                        4.900%
                        
                        
                        
                        03/201010,995,000
                        
                        
                        
                        4.980%
                        
                        
                        
                        08/2010202,340,000
                        
                        
                        
                        5.040%
                        
                        
                        
                        08/2010100,000,000
                        
                        
                        
                        4.220%
                        
                        
                        
                        09/201030,000,000
                        
                        
                        
                        4.538%
                        
                        
                        
                        09/201025,048,118
                        
                        
                        
                        4.740%
                        
                        
                        
                        12/201136,752,038
                        
                        
                        
                        5.225%
                        
                        
                        
                        08/201281,500,000
                        
                        
                        
                        3.895%
                        
                        
                        
                        01/2013144,700,000
                        
                        
                        
                        3.580%
                        
                        
                        
                        10/20119,162,500
                        
                        
                        
                        3.515%
                        
                        
                        
                        10/20113,405,174
                        
                        
                        
                        3.550%
                        
                        
                        
                        10/201117,050,000
                        
                        
                        
                        3.160%
                        
                        
                        
                        11/2011$            771,529,273


*Upon
maturity of the $84,800,000 swap in September 2009, a swap with the same
notional amount will commence with a fixed interest rate of 3.90% that matures
in September 2013.





The
Company records the fair value of the interest rate swaps as an asset or
liability on the balance sheet. The effective portion of the swap is recorded in
accumulated other comprehensive income. Accordingly, $50,538,060 and $13,531,883
has been recorded in Fair Value of derivative instruments (liabilities) in the
Company’s balance sheets as of December 31, 2008 and 2007,
respectively.





Foreign
Currency and Exchange Rate Risk





The
shipping industry’s functional currency is the U.S. dollar. The Company
generates all of its revenues in U.S. dollars. The majority of the Company’s
operating expenses and the entirety of its management expenses are in U.S.
dollars. The Company does not intend to use financial derivatives to mitigate
the risk of exchange rate fluctuations for its revenues and
expenses.




73




The
Company has entered into foreign exchange swap transactions to hedge foreign
currency risks on its capital asset transactions (vessel newbuildings). The
swaps are designated and qualify as cash flow hedges. The Company has entered
into foreign exchange swap transactions to hedge the Japanese yen (JPY) exposure
into US dollars for the purchase price in Japanese yen of five new-build vessels
which are expected to be delivered to the Company from August 2008 to February
2010. At December 31, 2008, the Company had outstanding foreign currency swap
contracts for notional amounts aggregating JPY 8,599,000,000 swapped into
equivalent US $80,378,030. The Company records the fair value of the currency
swaps as an asset or liability in its financial statements. The effective
portion of the swap is recorded in accumulated other comprehensive income.
Accordingly, an amount of $15,039,535 and $932,638 has been recorded in Fair
Value of derivative instruments and other assets in the accompanying financial
statements as of December 31, 2008 and December 31, 2007,
respectively.


In
February 2009, the Company settled its outstanding foreign currency swaps
contracts at a gain aggregating $13,673,774. This gain will offset the cost of
the vessels on the remaining three vessels upon their delivery in March 2009,
January 2010 and February 2010, respectively.


74




Item
8. Financial Statements and
Supplementary Data


The information
required by this item is contained in the financial statements set forth in Item
15(a) under the caption “Consolidated Financial Statements” as part of this
Annual Report on Form 10-K.






Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure




None.






Item
9A. Controls and
Procedures








Disclosure
Controls and Procedures




Our
management, including our Chief Executive Officer and our Chief Financial
Officer, has conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits to the SEC under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.






Management’s
Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange
Act. The Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States.




Management
has conducted an assessment of the effectiveness of the Company’s internal
control over financial reporting based on the framework established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, management has determined
that the Company’s internal control over financial reporting as of December 31,
2008 is effective.




Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States, and that receipts and expenditures are being made only in
accordance with authorizations of management and the directors of the Company;
and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.




The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report appearing on page
F-3 of the Consolidated Financial Statements.




75




Internal
Control Over Financial Reporting




In
addition, we evaluated our internal control over financial reporting, (as
defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of
1934), and there have been no changes in our internal control over financial
reporting that occurred during the fourth quarter of 2008 that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




Inherent
Limitations on Effectiveness of Controls




Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls or our internal control
over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. Our disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.






Item
9B. Other
Information




None


76




PART
III






Item
10. Directors, Executive
Officers and Corporate Governance






Directors




The
information concerning our directors required under this Item is incorporated
herein by reference from our proxy statement, which will be filed with the
Securities and Exchange Commission, relating to our Annual Meeting of
Stockholders (our “2009 Proxy Statement”).






Executive
Officers




The
information concerning our Executive Officers required under this Item is
incorporated herein by reference from our 2009 Proxy Statement.






Code
of Ethics




The
information concerning our Code of Conduct is incorporated herein by reference
from our 2009 Proxy Statement.






Audit
Committee




The
information concerning our Audit Committee is incorporated herein by reference
from our 2009 Proxy Statement.






Audit
Committee Financial Experts




The
information concerning our Audit Committee Financial Experts is incorporated
herein by reference from our 2009 Proxy Statement.






Item
11. Executive
Compensation




The
information required under this Item is incorporated herein by reference from
our 2009 Proxy Statement.






Item
12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters




The
information required under this Item is incorporated herein by reference from
our 2009 Proxy Statement.


77




Item
13. Certain Relationships and
Related Transactions




The
information required under this Item is incorporated herein by reference from
our 2009 Proxy Statement.




Item
14. Principal Accountant Fees
and Services




Information
about the fees for 2008 for professional services rendered by our independent
registered public accounting firm is incorporated herein by reference from our
2009 Proxy Statement. Our Audit Committee’s policy on pre-approval of audit and
permissible non-audit services of our independent registered public accounting
firm is incorporated by reference from our 2009 Proxy
Statement.


78




PART
IV




Item
15. Exhibits, Financial
Statement Schedules




(a) 
Documents filed as part of this Annual Report on Form 10-K




1.
            Consolidated
      Financial Statements: See accompanying Index to Consolidated Financial
      Statements.




2.
            Consolidated
      Financial Statement Schedule: Financial statement schedules are omitted
      due to the absence of conditions under which they are
    required




(b) 
Exhibits




3.1
                                                                                                Amended
      and Restated Articles of Incorporation of the Company*3.2
                                                                                                Amended
      and Restated Bylaws of the Company*3.2.1
                                                                                                Certificate
      of Designation of Series A Junior Participating Preferred
      Stock
                                                                                                  (Incorporated by reference to
      Exhibit 3.1 to the Company’s registration statement on Form 8-A dated
      November 13, 2007).4.1
                                                                                                Form
      of Share Certificate of the Company*4.1.1
                                                                                                Form
      of Senior Indenture ***4.1.2
                                                                                                Form
      of Subordinated Indenture ***4.1.3
                                                                                                Rights
      Agreement
                                                                                                  (Incorporated by reference to
      the Company’s Report on Form 8-K filed on November 13,
      2007)10.1
                                                                                                Form
      of Registration Rights Agreement*10.2
                                                                                                Form
      of Management Agreement*10.2.1
                                                                                                Form
      of Restricted Stock Unit Award Agreement
                                                                                                  (Incorporated by reference to
      the Registrant’s Quarterly Report on Form 10-Q for the period ending
      September 30, 2007, filed on November 9, 2007).10.2.2
                                                                                                Securities
      Purchase Agreement
                                                                                                  (Incorporated
      by reference to the Company’s Report on Form 8-K filed on June 23,
      2006).10.3
                                                                                                Form
      of Third Amended and Restated Credit Agreement (Incorporated by reference to
      the Company’s Report on Form 8-K filed on October 25,
      2007).10.3.1
                                                                                                Second
      Amendatory Agreement of Third Amended and Restated Credit Agreement (Incorporated by reference to
      Exhibit 4.9 to the Company’s registration statement on Form S-3POSASR,
      Registration No. 333-148417 filed on March 2,
  2009).  79
  10.4
                                                                                                  Eagle
      Bulk Shipping Inc. 2005 Stock Incentive Plan*10.5
                                                                                                  Amended
      and Restated Employment Agreement for Mr. Sophocles N. Zoullas* (Incorporated by reference to
      the Company’s Report on Form 8-K filed on June 20,
      2008).21.1
                                                                                                  Subsidiaries
      of the Registrant (Incorporated by reference to
      Exhibit 21 to the Company’s registration statement on Form S-3POSASR,
      Registration No. 333-148417 filed on March 2,
  2009).23.1
                                                                                                  Consent
      of Ernst & Young LLP23.2
                                                                                                  Consent
      of Seward & Kissel LLP31.1
                                                                                                  Rule
      13a-14(d) / 15d-14(a)_Certification of CEO31.2
                                                                                                  Rule
      13a-14(d) / 15d-14(a)_Certification of CFO32.1
                                                                                                  Section
      1350 Certification of CEO32.2
                                                                                                  Section
      1350 Certification of CFO*
      Incorporated by reference to the Registration Statement on Form S-1,
      Registration No. 333-123817 filed on June 20, 2005.
                                                                                                    **
      Incorporated by reference to the Report on Form 8-K filed on July 31,
      2006.
                                                                                                    ***
      Incorporated by reference to the Registrant’s annual report on Form 10-K
      for the period ending December 31, 2005 filed on March 14,
      2006.
                                                                                                    ****  Incorporated
      by reference to the Registration Statement on Form S-1, Registration No.
      333-139745 filed on December 29, 2006















SIGNATURES






Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.






EAGLE
      BULK SHIPPING INC.
 
 By:
              /s/ Sophocles ZoullasName:  Sophocles
      ZoullasTitle:    
      Chief Executive Officer




March
2, 2009




80




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 2, 2009.




Signature
                Title/s/
      Sophocles Zoullas
                Chief
      Executive Officer and DirectorSophocles
      Zoullas/s/
      David B. Hiley
                DirectorDavid
      B. Hiley/s/
      Douglas P. Haensel
                DirectorDouglas
      P. Haensel/s/
      Joseph Cianciolo
                DirectorJoseph
      Cianciolo/s/
      Forrest E. Wylie
                DirectorForrest
      E. Wylie/s/
      Alexis P. Zoullas
                DirectorAlexis
      P. Zoullas/s/
      Jon Tomasson
                DirectorJon
      Tomasson/s/
      Alan Ginsberg
                Chief
      Financial Officer and Principal Accounting OfficerAlan
      Ginsberg




81


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS








Reports
      of Independent Registered Public Accounting Firm
                      F-2Consolidated
      Balance Sheets at December 31, 2008 and 2007
                      F-4Consolidated
      Statements of Operations for the Years ended December 31, 2008, 2007 and
      2006
                      F-5Consolidated
      Statements of Changes in Stockholders’ Equity for the Years ended December
      31,
                        2008,
      2007 and 2006
                      F-6Consolidated
      Statements of Cash Flows for the Years ended December 31, 2008, 2007 and
      2006
                      F-7Notes
      to Consolidated Financial Statements
                      F-8






F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








The
Board of Directors and Stockholders of Eagle Bulk Shipping Inc.








We
have audited the accompanying consolidated balance sheets of Eagle Bulk
Shipping Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





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





In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries at December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.





We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Eagle Bulk
Shipping Inc.’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 27, 2009 expressed an unqualified opinion
thereon.








/s/
      Ernst & Young LLP





New
York, New York


February
27, 2009


F-2


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The
Board of Directors and Stockholders of Eagle Bulk Shipping Inc.





We
have audited Eagle Bulk Shipping Inc.’s (the “company”) internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO criteria”). The company’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report of Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In
our opinion, Eagle Bulk Shipping Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2008, based on the COSO criteria.





We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Eagle Bulk Shipping Inc. as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31,
2008, and our report dated February 27, 2009 expressed an unqualified
opinion thereon.





/s/
      Ernst & Young LLP


New
York, New York


February
27, 2009




F-3


EAGLE
BULK SHIPPING INC.


CONSOLIDATED
BALANCE SHEETS




December
      31,2008
                                                              
                                                              2007ASSETS:Current
      assets:Cash
      and cash equivalents
                                                              $9,208,862
                                                              
                                                              $152,903,692Accounts
      receivable
                                                              4,357,837
                                                              
                                                              3,392,461Prepaid
      expenses
                                                              3,297,801
                                                              
                                                              1,158,113Total
      current assets
                                                              16,864,500
                                                              
                                                              157,454,266Noncurrent
      assets:Vessels
      and vessel improvements, at cost, net of accumulated
                                                                depreciation
      of $84,113,047 and $52,733,604, respectively
                                                              874,674,636
                                                              
                                                              605,244,861Advances
      for vessel construction
                                                              411,063,011
                                                              
                                                              344,854,962Restricted
      cash
                                                              11,776,056
                                                              
                                                              9,124,616Deferred
      drydock costs, net of accumulated amortization of
                                                                $5,022,649
      and $2,453,253, respectively
                                                              3,737,386
                                                              
                                                              3,918,006Deferred
      financing costs
                                                              24,270,060
                                                              
                                                              14,479,024Fair
      value above contract value of time charters acquired
                                                              4,531,115
                                                              
                                                              —Fair
      value of derivative instruments and other assets
                                                              15,258,780
                                                              
                                                              932,638Total
      noncurrent assets
                                                              1,345,311,044
                                                              
                                                              978,554,107Total
      assets
                                                              $1,362,175,544
                                                              
                                                              $1,136,008,373LIABILITIES
      & STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                                              $2,037,060
                                                              
                                                              $3,621,559Accrued
      interest
                                                              7,523,057
                                                              
                                                              455,750Other
      accrued liabilities
                                                              3,021,975
                                                              
                                                              1,863,272Fair
      value below contract value of time charters acquired
                                                              2,863,184
                                                              
                                                              —Unearned
      charter hire revenue
                                                              5,958,833
                                                              
                                                              4,322,024Total
      current liabilities
                                                              21,404,109
                                                              
                                                              10,262,605Noncurrent
      liabilities:Long-term
      debt
                                                              789,601,403
                                                              
                                                              597,242,890Fair
      value below contract value of time charters acquired
                                                              29,205,196
                                                              
                                                              —Fair
      value of derivative instruments
                                                              50,538,060
                                                              
                                                              13,531,883Total
      noncurrent liabilities
                                                              869,344,659
                                                              
                                                              610,774,773Total
      liabilities
                                                              890,748,768
                                                              
                                                              621,037,378Commitment
      and contingenciesStockholders’
      equity:Preferred
      stock, $.01 par value, 25,000,000 shares authorized, none
      issued
                                                              —
                                                              
                                                              —Common
      stock, $.01 par value, 100,000,000 shares authorized, 47,031,300 and
      46,727,153 shares issued and outstanding, respectively
                                                              470,313
                                                              
                                                              467,271Additional
      paid-in capital
                                                              614,241,646
                                                              
                                                              602,929,530Retained
      earnings (net of dividends declared of $262,118,388 and $168,525,482
      as of December 31, 2008 and 2007, respectively)
                                                              (107,786,658)
                                                              
                                                              (75,826,561)Accumulated
      other comprehensive loss
                                                              (35,498,525)
                                                              
                                                              (12,599,245)Total
      stockholders’ equity
                                                              471,426,776
                                                              
                                                              514,970,995Total
      Liabilities and Stockholders’ Equity
                                                              $1,362,175,544
                                                              
                                                              $1,136,008,373




The
accompanying notes are an integral part of these Consolidated Financial
Statements.




F-4


EAGLE
BULK SHIPPING INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS











Year
      Ended December 31,2008
                        
                        2007
                        
                        2006Revenues,
      net of commissions
                        $185,424,949
                        
                        $124,814,804
                        
                        $104,648,197Vessel
      expenses
                        36,270,382
                        
                        27,143,515
                        
                        21,562,034Depreciation
      and amortization
                        33,948,840
                        
                        26,435,646
                        
                        21,812,486General
      and administrative expenses
                        34,567,070
                        
                        11,776,511
                        
                        18,293,348Write-off  of
      advances for vessel construction
                        3,882,888
                        
                        —
                        
                        —Gain
      on sale of vessel
                        —
                        
                        (872,568)
                        
                        —Total
      operating expenses
                        108,669,180
                        
                        64,483,104
                        
                        61,667,868Operating
      Income
                        76,755,769
                        
                        60,331,700
                        
                        42,980,329Interest
      expense
                        15,816,573
                        
                        12,741,106
                        
                        10,548,616Interest
      income
                        (2,783,314)
                        
                        (4,653,387)
                        
                        (1,369,827)Write-off
      of deferred financing costs
                        2,089,701
                        
                        —
                        
                        —Net
      interest expense
                        15,122,960
                        
                        8,087,719
                        
                        9,178,789Net
      income
                        $61,632,809
                        
                        $52,243,981
                        
                        $33,801,540Weighted
      average shares outstanding:Basic
                        46,800,550
                        
                        42,064,911
                        
                        34,543,836Diluted
                        46,888,788
                        
                        42,195,561
                        
                        34,543,862Per
      share amounts:Basic
      net income
                        $1.32
                        
                        $1.24
                        
                        $0.98Diluted
      net income
                        $1.31
                        
                        $1.24
                        
                        $0.98Cash
      dividends declared and paid
                        $2.00
                        
                        $1.98
                        
                        $2.08







The
accompanying notes are an integral part of these Consolidated Financial
Statements.




F-5


EAGLE
BULK SHIPPING INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY




Retained
      EarningsShares
                                  
                                  Common
                                      Shares
                                  
                                  Additional
                                      Paid-In
                                      Capital
                                  
                                  NetIncome
                                  
                                  Cash
      Dividends
                                  
                                  Accumulated
      Deficit
                                  
                                  Other
      Comprehensive Income
                                  
                                  Total
      Stockholders’ EquityBalance
      at January 1, 2006
                                  33,150,000
                                  
                                  $331,500
                                  
                                  $320,822,037
                                  
                                  
                                  
                                  
                                  
                                  $(8,007,600)
                                  
                                  $2,647,077
                                  
                                  $315,793,014Comprehensive
      income :Net
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  33,801,540
                                  
                                  —
                                  
                                  33,801,540
                                  
                                  —
                                  
                                  33,801,540Net
      unrealized losses on
                                    derivatives
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (69,453)
                                  
                                  (69,453)Comprehensive
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  33,732,087Stock
      offering, net  of issuance costs
                                  2,750,001
                                  
                                  27,500
                                  
                                  30,682,367
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  30,709,867Cash
      dividends
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (71,729,500)
                                  
                                  (71,729,500)
                                  
                                  —
                                  
                                  (71,729,500)Non-cash
      compensation
                                  —
                                  
                                  —
                                  
                                  13,070,473
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  13,070,473Balance
      at December 31, 2006
                                  35,900,001
                                  
                                  $359,000
                                  
                                  $364,574,877
                                  
                                  
                                  
                                  
                                  
                                  $(45,935,560)
                                  
                                  $2,577,624
                                  
                                  $321,575,941Comprehensive
      income :Net
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  52,243,981
                                  
                                  —
                                  
                                  52,243,981
                                  
                                  —
                                  
                                  52,243,981Net
      unrealized losses on
                                    derivatives
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (15,176,869)
                                  
                                  (15,176,869)Comprehensive
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  37,067,112Stock
      offering, net  of issuance costs
                                  10,813,819
                                  
                                  108,138
                                  
                                  233,921,613
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  234,029,751Exercise
      of stock options
                                  13,333
                                  
                                  133
                                  
                                  176,263
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  176,396Cash
      dividends
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (82,134,982)
                                  
                                  (82,134,982)
                                  
                                  —
                                  
                                  (82,134,982)Non-cash
      compensation
                                  —
                                  
                                  —
                                  
                                  4,256,777
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  4,256,777Balance
      at December 31, 2007
                                  46,727,153
                                  
                                  $467,271
                                  
                                  $602,929,530
                                  
                                  
                                  
                                  
                                  
                                  $(75,826,561)
                                  
                                  $(12,599,245)
                                  
                                  $514,970,995Comprehensive
      income :Net
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  61,632,809
                                  
                                  —
                                  
                                  61,632,809
                                  
                                  —
                                  
                                  61,632,809Net
      unrealized losses on
                                    derivatives
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (22,899,280)
                                  
                                  (22,899,280)Comprehensive
      income
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  38,733,529Exercise
      of stock options
                                  13,333
                                  
                                  134
                                  
                                  237,194
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  237,328Vesting
      of restricted shares
                                  260,814
                                  
                                  2,608
                                  
                                  (36,663)
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (34,055)Cash
      dividends
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  (93,592,906)
                                  
                                  (93,592,906)
                                  
                                  —
                                  
                                  (93,592,906)Issuance
      of common shares
                                  30,000
                                  
                                  300
                                  
                                  608,100
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  608,400Non-cash
      compensation –
                                    Restricted
      Stock
                                  —
                                  
                                  —
                                  
                                  10,503,485
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  —
                                  
                                  10,503,485Balance
      at December 31, 2008
                                  47,031,300
                                  
                                  $470,
      313
                                  
                                  $614,241,646
                                  
                                  
                                  
                                  
                                  
                                  $(107,786,658)
                                  
                                  $(35,498,525)
                                  
                                  $471,426,776





The
accompanying notes are an integral part of these Consolidated Financial
Statements.




F-6


EAGLE
BULK SHIPPING INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
                                                          
                                                          2007
                                                          
                                                          2006Cash
      flows from operating activitiesNet
      income
                                                          $61,632,809
                                                          
                                                          $52,243,981
                                                          
                                                          $33,801,540Adjustments
      to reconcile net income to net cash provided by operating
      activities:Items
      included in net income not affecting cash flows:Depreciation
                                                          31,379,443
                                                          
                                                          24,791,502
                                                          
                                                          21,031,357Amortization
      of deferred drydocking costs
                                                          2,569,396
                                                          
                                                          1,644,144
                                                          
                                                          781,129Amortization
      of deferred financing costs
                                                          244,837
                                                          
                                                          242,357
                                                          
                                                          178,246Write-off
      of deferred financing costs
                                                          2,089,701
                                                          
                                                          —
                                                          
                                                          —Write-off
      of advances for
      vessel construction
                                                          3,882,888
                                                          
                                                          —
                                                          
                                                          —Amortization
      of fair value (below) above contract value of time charter
      acquired
                                                          (799,540)
                                                          
                                                          3,740,000
                                                          
                                                          3,462,000Gain
      on sale of vessel
                                                          —
                                                          
                                                          (872,568)
                                                          
                                                          —Non-cash
      compensation expense
                                                          11,111,885
                                                          
                                                          4,256,777
                                                          
                                                          13,070,473Changes
      in operating assets and liabilities:Accounts
      receivable
                                                          (965,376)
                                                          
                                                          (2,776,256)
                                                          
                                                          (335,111)Prepaid
      expenses
                                                          (2,139,688)
                                                          
                                                          (137,292)
                                                          
                                                          (507,676)Accounts
      payable
                                                          (1,584,499)
                                                          
                                                          1,971,400
                                                          
                                                          (469,199)Accrued
      interest
                                                          1,707,326
                                                          
                                                          (344,933)
                                                          
                                                          286,052Accrued
      expenses
                                                          1,158,703
                                                          
                                                          146,148
                                                          
                                                          1,292,455Drydocking
      expenditures
                                                          (2,388,776)
                                                          
                                                          (3,624,851)
                                                          
                                                          (2,324,726)Unearned
      charter hire revenue
                                                          1,636,809
                                                          
                                                          1,608,964
                                                          
                                                          268,538Net
      cash provided by operating activities
                                                          109,535,918
                                                          
                                                          82,889,373
                                                          
                                                          70,535,078Cash
      flows from investing activities:Vessels
      and vessel improvements and Advances for vessel
    construction
                                                          (336,438,441)
                                                          
                                                          (458,262,048)
                                                          
                                                          (130,759,211)Purchase
      of other fixed assets
                                                          (219,245)
                                                          
                                                          —
                                                          
                                                          —Proceeds
      from sale of vessel
                                                          —
                                                          
                                                          12,011,482
                                                          
                                                          —Net
      cash used in investing activities
                                                          (336,657,686)
                                                          
                                                          (446,250,566)
                                                          
                                                          (130,759,211)Cash
      flows from financing activitiesIssuance
      of common shares
                                                          237,328
                                                          
                                                          239,848,264
                                                          
                                                          33,000,000Equity
      issuance costs
                                                          —
                                                          
                                                          (5,642,117)
                                                          
                                                          (2,031,920)Bank
      borrowings
                                                          192,358,513
                                                          
                                                          369,708,070
                                                          
                                                          99,974,820Repayment
      of bank debt
                                                          —
                                                          
                                                          (12,440,000)
                                                          
                                                          —Changes
      in restricted cash
                                                          (2,651,440)
                                                          
                                                          (2,600,000)
                                                          
                                                          100,000Deferred
      financing costs
                                                          (12,890,502)
                                                          
                                                          (12,749,841)
                                                          
                                                          (1,340,304)Cash
      used to net share settle equity awards
                                                          (34,055)
                                                          
                                                          —
                                                          
                                                          —Cash
      dividend
                                                          (93,592,906)
                                                          
                                                          (82,134,982)
                                                          
                                                          (71,729,500)Net
      cash provided by financing activities
                                                          83,426,938
                                                          
                                                          493,989,394
                                                          
                                                          57,973,096Net
      increase/(decrease) in Cash
                                                          (143,694,830)
                                                          
                                                          130,628,201
                                                          
                                                          (2,251,037)Cash
      at beginning of period
                                                          152,903,692
                                                          
                                                          22,275,491
                                                          
                                                          24,526,528Cash
      at end of period
                                                          $9,208,862
                                                          
                                                          $152,903,692
                                                          
                                                          $22,275,491Supplemental
      cash flow information:Cash
      paid during the period for Interest (including Capitalized interest of
      $20,385,190, $8,775,957 and $126,702 in 2008, 2007 and 2006,
      respectively and Commitment Fees)
                                                          $33,942,541
                                                          
                                                          $21,807,953
                                                          
                                                          $10,321,584





The
accompanying notes are an integral part of these Consolidated Financial
Statements.


F-7


EAGLE
BULK SHIPPING INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








Note 1.  Basis
of Presentation and General Information:





The
accompanying consolidated financial statements include the accounts of Eagle
Bulk Shipping Inc. and its wholly-owned subsidiaries (collectively, the
“Company”, “we” or “our”). The Company is engaged in the ocean transportation of
dry bulk cargoes worldwide through the ownership and operation of dry bulk
vessels. The Company’s fleet is comprised of Supramax and Handymax bulk carriers
and the Company operates its business in one business segment.





The
Company is a holding company incorporated in 2005, under the laws of the
Republic of the Marshall Islands and is the sole owner of all of the outstanding
shares of its wholly-owned subsidiaries incorporated in the Republic of the
Marshall Islands. The primary activity of each of the subsidiaries is the
ownership of a vessel. The operations of the vessels are managed by a
wholly-owned subsidiary of the Company, Eagle Shipping International (USA) LLC,
a Republic of the Marshall Islands limited liability company.





As
of December 31, 2008, the Company’s operating fleet consists of 23 vessels. The
Company has an extensive vessel newbuilding program and as of December 31, 2008,
with contracts for the construction of 24 vessels. The following tables present
certain information concerning the Company’s fleet as of December 31,
2008:





No. of Vessels
            Dwt
            Vessel
              Type
            Delivery
            EmploymentVessels in Operation23
      Vessels
            1,184,939
            20
      Supramax
            
            Time
      Charter3
      Handymax
            
            Time
      CharterVessels to be delivered3
      Vessels
            159,300
            53,100
      dwt series Supramax
            2009-2010
            2
      Vessels on Time Charter and 1 Vessel Charter Free4
      Vessels
            224,000
            56,000
      dwt series Supramax
            2009-2010
            1
      Vessel on Time Charter and 3 Vessels Charter Free17
      Vessels(1)
            986,000
            58,000
      dwt series Supramax
            2009-2011
            17
      Vessels on Time Charter


(1) After
converting eight shipbuilding contracts into options on December 17, 2008. See
Note 3.





The
following table represents certain information about the Company’s charterers
which individually accounted for more than 10% of the Company’s gross time
charter revenue during the periods indicated:





Charterer
                      %  of  Consolidated Time
      Charter Revenue2008
                      
                      2007
                      
                      2006Charterer
      A
                      -
                      
                      12.9%
                      
                      15.1%Charterer
      B
                      23.9%
                      
                      22.3%
                      
                      19.2%Charterer
      C
                      -
                      
                      -
                      
                      13.2%Charterer
      D
                      -
                      
                      12.4%
                      
                      12.2%Charterer
      H
                      14.7%
                      
                      11.0%
                      
                      -Charterer
      L
                      15.9%
                      
                      -
                      
                      -Charterer
      M
                      13.5%
                      
                      -
                      
                      -






F-8





Note 2.  Significant
Accounting Policies:





(a)
            Principles
      of Consolidation: The accompanying consolidated financial
      statements have been prepared in accordance with U.S. generally accepted
      accounting principles and include the accounts of Eagle Bulk
      Shipping Inc. and its wholly-owned subsidiaries. All significant
      intercompany balances and transactions were eliminated upon
      consolidation.





(b)
            Use of
      Estimates: The preparation of consolidated financial statements in
      conformity with U.S. generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those
  estimates.





(c)
            Other
      Comprehensive Income: The Company follows the provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 130,
      “Reporting Comprehensive Income”, which requires separate presentation of
      certain transactions, which are recorded directly as components of
      stockholders’ equity. The Company records the fair value of interest rate
      swaps and foreign currency swaps as an asset or liability on the balance
      sheet. The effective portion of the swap is recorded in accumulated other
      comprehensive income. Comprehensive Income is composed of net income and
      gains or losses relating to the
swaps.





(d)
            Cash, Cash
      Equivalents and Restricted Cash: The Company considers highly
      liquid investments such as time deposits and certificates of deposit with
      an original maturity of three months or less to be cash equivalents.
      Restricted Cash includes minimum cash deposits required to be maintained
      with a bank for loan compliance purposes and an amount of $276,056 which
      is collateralizing a letter of
credit.





(e)
            Accounts
      Receivable: Accounts receivable includes receivables from
      charterers for hire. At each balance sheet date, all potentially
      uncollectible accounts are assessed for purposes of determining the
      appropriate provision for doubtful
accounts.





(f)
            Insurance
      Claims: Insurance claims are recorded on an accrual basis and
      represent the claimable expenses, net of deductibles, incurred through
      each balance sheet date, which are expected to be recovered from insurance
      companies. Any remaining costs to complete the claims are included in
      accrued liabilities.





(g)
            Vessels and
      vessel improvements, at Cost: Vessels are stated at cost which
      consists of the contract price and other direct costs relating to
      acquiring and placing the vessels in service. Major vessel improvements
      are capitalized and depreciated over the remaining useful lives of the
      vessels.





(h)
            Vessel
      Depreciation: Depreciation is computed using the straight-line
      method over the estimated useful life of the vessels, after considering
      the estimated salvage value. Each vessel’s salvage value is equal to the
      product of its lightweight tonnage and estimated scrap rate. Management
      estimates the useful life of the Company’s vessels to be 28 years
      from the date of initial delivery from the shipyard to the original owner.
      Management estimates the scrap rate to be $150 per lightweight ton.
      Secondhand vessels are depreciated from the date of their acquisition
      through their remaining estimated useful
life.





(i)
            Intangibles:
      Where the Company identifies any intangible assets or liabilities
      associated with the acquisition of a vessel, the Company records all
      identified tangible and intangible assets or liabilities at fair value.
      Fair value is determined by reference to market data and the amount of
      expected future cash flows. The Company values any asset or liability
      arising from the market value of the time charters assumed when a vessel
      is acquired. When the time charters assumed are above market charter
      rates, the difference between the market charter rate and assumed charter
      rate is recorded as Fair value above contract value of time charters
      acquired. When the time charters assumed are below market charter rates,
      the difference between the market charter rate and assumed charter rate is
      recorded as Fair value below contract value of time charters acquired.
      Such assets and liabilities are amortized to revenue over the remaining
      period of the time charters.






F-9





(j)
            Impairment
      of Long-Lived Assets: The Company uses SFAS No. 144
      “Accounting for the Impairment or Disposal of Long-lived Assets,” which
      addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets. The standard requires that, long-lived
      assets and certain identifiable intangibles held and used or disposed of
      by an entity be reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of the assets may not be
      recoverable. 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 should evaluate the asset for an
      impairment loss. Measurement of the impairment loss is based on the fair
      value of the asset as provided by third parties or discounted cash flow
      analyses. In this respect, management regularly reviews the carrying
      amount of the vessels in connection with the estimated recoverable amount
      for each of the Company’s vessels.





(k)
            Accounting
      for Dry-Docking Costs: The Company follows the deferral method of
      accounting for dry-docking costs whereby actual costs incurred are
      deferred and are amortized on a straight-line basis over the period
      through the date the next dry-docking is scheduled to become due,
      generally 30 months. Unamortized dry-docking costs of vessels that are
      sold are written off and included in the calculation of the resulting gain
      or loss in the year of the vessels’
sale.





(l)
            Deferred
      Financing Costs: Fees incurred for obtaining new loans or
      refinancing existing ones are deferred and amortized to interest expense
      over the life of the related debt. Unamortized deferred financing costs
      are written off when the related debt is repaid or refinanced and such
      amounts are expensed in the period the repayment or refinancing is
      made.





(m)
            Other fixed
      assets: Other fixed assets are stated at cost less accumulated
      depreciation. Depreciation is based on straight line basis over the
      estimated useful life of the asset. Other fixed assets consist principally
      of leasehold improvements, computers and software, and are depreciated
      over 3-10 years. As of December 31, 2008, other fixed assets, net of
      $219,245 is included in non-current other
  assets.





(n)
            Accounting
      for Revenues and Expenses: Revenues are generated from time charter
      agreements. Time charter revenues are recognized on a straight-line basis
      over the term of the respective time charter agreements as service is
      provided. Time charter hire revenue brokerage Commissions are recorded in
      the same period as these revenues are recognized. Vessel operating
      expenses are accounted for on the accrual
basis.





(o)
            Unearned
      Charter Hire Revenue: Unearned charter hire revenue represents cash
      received from charterers prior to the time such amounts are earned. These
      amounts are recognized as revenue as services are provided in future
      periods.





(p)
            Repairs and
      Maintenance: All repair and maintenance expenses are expensed as
      incurred and is recorded in Vessel
Expenses.





(q)
            Protection
      and Indemnity Insurance: The Vessel’s Protection and Indemnity
      Insurance is subject to additional premiums referred to as “back calls” or
      “supplemental calls” which are accounted for on an accrual basis and is
      recorded in Vessel Expenses.





(r)
            Derivatives:
      SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities” as amended establishes accounting and reporting standards
      requiring that every derivative instrument (including certain derivative
      instruments embedded in other contracts) be recorded in the balance sheet
      as either an asset or liability measured at its fair value, with changes
      in the derivatives’ fair value recognized currently in earnings unless
      specific hedge accounting criteria are
met.






F-10





(s)
            Earnings
      Per Share: Earnings per share is computed by dividing the net
      income by the weighted average number of common shares outstanding during
      the period. Diluted earnings per share reflects the impact of stock
      options and restricted stock unless their impact is
      antidilutive.





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





(u)
            Interest
      Rate Risk Management: The Company is exposed to the impact of
      interest rate changes. The Company’s objective is to manage the impact of
      interest rate changes on earnings and cash flows of its borrowings. The
      Company may use interest rate swaps to manage net exposure to interest
      rate changes related to its
borrowings.





(v)
            Federal
      Income Taxes: The Company is a Republic of Marshall Islands
      Corporation. Pursuant to various tax treaties and the current United
      States Internal Revenue Code, the Company does not believe its operations
      prospectively will be subject to federal income taxes in the United States
      of America.





Impact
of Recently Issued Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”), and in February 2008, the FASB issued
Staff Position (FSP) 157-1 and FSP 157-2. FSP 157-1 removes certain leasing
transactions from the scope of SFAS 157. FSP 157-2 partially defers the
effective date of SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities that are recognized at fair value on a nonrecurring
basis (at least annually). In October 2008 the FASB issued FSP 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active”, which clarifies the application of SFAS No. 157 for financial
assets in a market that is not active. FSP 157-3 was effective upon issuance.
SFAS No. 157 defines fair value, establishes a frame work for
measuring fair value and expands disclosure of fair value measurements. SFAS
No. 157 does not require any new fair value measurements but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. SFAS No. 157 is effective
for financial assets and liabilities in fiscal years beginning after
November 15, 2007, and for non-financial assets and liabilities in fiscal
years beginning after November 15, 2008, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. Our adoption of the provisions of SFAS No. 157 on
January 1, 2008, with respect to financial assets and liabilities measured
at fair value, did not have a material impact on our financial condition or
results of operations. We are currently evaluating the effect, if any, of the
adoption of SFAS No. 157 for non-financial assets and liabilities on its
financial condition and results of operations, including for the purpose of
assessing valuation of long-lived asset impairment.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”).
SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value, and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Upon adoption, we did
not elect the fair value option for any items within the scope of SFAS 159, and,
therefore, the adoption of SFAS No. 159 did not impact our financial
condition or results of operations.






F-11





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) will significantly
change the accounting for business combinations. Under SFAS 141(R), an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) will change the accounting
treatment for certain specific acquisition related items including:
(1) expensing acquisition related costs as incurred; (2) valuing
noncontrolling interests at fair value at the acquisition date of a controlling
interest; and (3) expensing restructuring costs associated with an acquired
business. SFAS No. 141(R) also includes a substantial number of new
disclosure requirements. SFAS No. 141(R) is to be applied
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. SFAS No. 141(R) will have an impact on our
accounting for any future business combinations once adopted.





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“SFAS No. 161”). SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 is effective for
fiscal years beginning after November 15, 2008. We are currently assessing
the new disclosure requirements required by SFAS No. 161.





In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS No. 162”).
SFAS No. 162 seeks to clarify the hierarchy of accounting principles
by raising FASB Statements of Accounting Concepts to the same level as FASB
Statements of Accounting Standards and directing the Statement of Auditing
Standards No. 69 to entities rather than to auditors.
SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board’s amendment to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. We do not expect the adoption of
SFAS No. 162 to have a material impact on our financial
statements.





Note 3.  Vessels





a.
Vessel and vessel improvements





At
December 31, 2008, the Company’s operating fleet consisted of 23 dry bulk
vessels. In June 2008, October 2008 and November 2008 the Company took delivery
of the Wren, Woodstar and Crowned Eagle, three of its 27 newbuild vessels,
respectively. The Wren and Woodstar have been recorded at fair market value in
connection with the acquisition of its construction contracts from Kyrini
Shipping Inc. in 2007. In May 2008, the Company acquired two Supramax vessels,
Goldeneye and Redwing, for a total purchase price of $146,100,000. The Goldeneye
and Redwing were delivered in June 2008 and September 2008, respectively. The
Company acquired 3 vessels in 2007, 3 vessels in 2006, 13 vessels in 2005 and
sold a vessel in 2007.





Vessel
and vessel improvements consist of the following:





Balance
      vessels and vessel improvements, at December 31, 2006
            
            $
      502,141,951Purchase
      of vessels and vessel improvements
            
            139,033,326Disposal
      of vessel
            
            (11,138,914)Depreciation
      expense
            
            (24,791,502)Balance
      vessels and vessel improvements, at December 31, 2007
            
            $
      605,244,861Purchase
      of vessels and vessel improvements
            
            148,023,788Delivery
      of newbuild vessels
            
            152,785,430Depreciation
      expense
            
            (31,379,443)Balance
      vessels and vessel improvements, at December 31, 2008
            
            $874,674,636







F-12




b.
Advances for vessel construction





In
2007, the Company contracted for construction of thirty five Supramax vessels,
five in Japan and thirty in China. The Company took delivery of two Chinese
built vessels, the Wren in June 2008, and the Woodstar in October 2008. In
November 2008, the Company took delivery of the Crowned Eagle, the first of its
five Japanese newbuilt vessels.





As
of December 31, 2008 the total cost of the contracts for the remaining four
Supramax vessels under construction at a shipyard in Japan is equivalent to
$134,081,383. These vessels construction contracts are Japanese yen based and as
of December 31, 2008, the Company has advanced an equivalent of $57,148,837 in
progress payments towards these contracts. The remaining four vessels are
expected to be delivered between 2009 and 2010. The Company will incur
additional associated costs relating to the construction of these
vessels.





The
Company acquired the rights to the construction of the newbuilding vessels in
China from Kyrini Shipping Inc., an unrelated privately held Greek shipping
company for consideration of $150,000,000, and this amount is included in the
total construction cost. The acquisition comprised purchase contracts for the
construction of the 26 Supramax vessels and time charter employment contracts
for 21 of the 26 vessels. The charter rates on the employment contracts acquired
from Kyrini were either below or above market rates for equivalent time charters
prevailing at the time the foregoing vessel contracts were
acquired.  The present values of the above and below market charters
at the date of acquisition were estimated by the Company at $4,531,115 and
$32,867,920, respectively, and were recorded as assets and liabilities in the
consolidated balance sheets. These amounts will be amortized to revenue over the
life of the time charters assumed on these vessels. For the twelve months ended
December 31, 2008, net revenues included $799,540 as amortization of the below
market rate charters.  As of December 31, 2008, the unamortized above
and below market rate charters was $4,531,115 and $32,068,380,
respectively.





The
Company also received an option from the shipyard in China, Yanghzou Dayang
Shipbuilding Co., Ltd., for the construction of 9 additional Supramax vessels.
On December 27, 2007, the Company exercised four of these options and the
options for the remaining five vessels expired on March 31, 2008.





On
December 17, 2008, the Company reached an agreement with Yanghzou Dayang
Shipbuilding Co., Ltd., the ship builder in China, to convert eight charter-free
Supramax shipbuilding contracts into options on the part of the Company, for a
consideration of $440,000. The deposits of $47,370,000 previously paid by the
Company to the builder for those eight contracts are applied to payments in
respect of other ships being constructed by the builder. In addition, the
delivery date for one of the ships under construction has been rescheduled from
September 2009 to November 2010. The carrying value of the advanced payment in
connection with the acquisition of the construction contracts from Kyrini
Shipping Inc and the cost of the eight newly converted shipbuilding contract
options were recorded as an impairment charge of $3,882,888.





As
of December 31, 2008 the Company has 20 Supramax vessels under construction at
the shipyard in China. The total cost of the construction project in China is
approximately $859,098,055, of which the Company has advanced $310,668,055 in
progress payments towards the construction of these vessels. These vessels are
expected to be delivered between 2009 and 2011. The Company will incur
additional costs relating to the construction of these vessels, including
capitalized interest, insurance, legal, and technical supervision
costs.





As
of December 31, 2008, the Company has advanced a net of $411,063,011 in progress
payments towards the newbuilding vessels.





At
December 31, 2008, the Company had 24 vessels under construction. Advances for
Vessel Construction consist of the following:





Advances
      for Vessel Construction at December 31, 2006
              
              $
      25,190,941Progress
      Payments
              
              309,053,973Capitalized
      Interest
              
              9,400,288Legal
      and Technical Supervision Costs
              
              1,209,760Advances
      for Vessel Construction at December 31, 2007
              
              $
      344,854,962Progress
      Payments
              
              188,461,866Capitalized
      Interest
              
              26,211,616Legal
      and Technical Supervision Costs
              
              8,202,885Write-off
      advances for vessel construction
              
              (3,882,888)Delivery
      of Newbuild Vessel
              
              (152,785,430)Advances
      for Vessel Construction at December 31, 2008
              
              $
      411,063,011






F-13




Note 4.  Other
Accrued Liabilities





Accrued
Liabilities consist of:





December
      31, 2008
            
            December
      31, 2007Vessel
      Expenses
            $2,055,929
            
            $966,771Accrued
      Compensation Expense
            -
            
            800,000Other
      Expenses
            966,046
            
            96,501Balance
            $3,021,975
            
            $
      1,863,272





Note 5.  Long-term
debt





At
December 31, 2008, the Company’s debt consisted of $789,601,403 in net
borrowings under the amended Revolving Credit Facility. These borrowings
consisted of $392,951,457 for the 23 vessels currently in operation and
$396,649,946 to fund the Company’s newbuilding program.





On
July 3, 2008, the Company’s then existing $1,600,000,000 revolving credit
facility was amended. Among other things, the amended facility provided an
additional incremental commitment of up to $200,000,000 under the same terms and
conditions as the existing facility, subject to satisfaction of certain
additional conditions. The Company also has the ability to purchase additional
dry bulk vessels in excess of 85,000dwt and over 10 years of age, but no more
than 20 years of age, with certain limitations. The agreement also provides for
the purchase or acquisition of more than one additional vessel en bloc or the acquisition of
beneficial ownership in one or more additional vessel(s). The agreement amended
the margin applicable over the Libor interest rate on borrowings to 0.95% for
the next two years. Thereafter, if the advance ratio is less than 35%, the
margin will be 0.80% per year; if the advance ratio is equal to or greater than
35% but less than 60%, the margin will be 0.95%; if the advance ratio is equal
to or greater than 60%, the margin will be 1.05%. The agreement also amended the
commitment fee on the undrawn portion of the revolving credit facility to 0.30%.





On
December 17, 2008, the Company entered into a second Amendatory Agreement to its
$1,600,000,000 revolving credit facility. Among other things, the credit
facility amends the amount of the credit facility to $1,350,000,000. The
agreement amends the minimum security value of the credit facility to include
the aggregate market value of the vessels in the Company’s operating fleet and
the deposits on its newbuilding contracts. The agreement amends the minimum
security value clause of the credit facility from 130% to 100% of the aggregate
principal amount of debt outstanding under the credit facility. The agreement
also provides that future dividend payments will be based on maintaining a
minimum security value of 130%. The agreement reduces the minimum net worth
clause of the credit facility from $300,000,000 to $75,000,000 for 2009, subject
to annual review thereafter. The agreement also amends the interest margin to
1.75% over LIBOR. In connection with the second amendment to the revolving
credit facility, the Company recorded deferred financing costs of $13,945,190
and a one-time non-cash charge of $2,089,701, to write-off a portion of deferred
finance costs associated with the reduction of the credit facility.





The
Company’s
revolving credit facility contains financial covenants requiring us, among other
things, to ensure that we maintain with the lender $500,000 per delivered
vessel. As of December 31, 2008 the Company has recorded $11,500,000 as
restricted cash in the accompanying balance sheets. As of December 31, 2008,
$560,398,597 is available for additional borrowings under the credit facility.
The facility is available in full until July 2012 when availability will begin
to reduce in 10 semi-annual reductions of $63,281,250 with a full repayment of
$717,187,500 in July 2017. The Company will also pay on a quarterly basis a
commitment fee of 0.3% per annum on the undrawn portion of the
facility.






F-14





For
the twelve months ended December 31, 2008, interest rates on the outstanding
debt ranged from 3.10% to 6.99%, including a margin of 0.80% to 1.75% over LIBOR
applicable under the terms of the amended revolving credit facility. The
weighted average effective interest rate was 5.46%. The Company incurred a
commitment fee ranging from 0.25% to 0.30% on the undrawn portion of the
revolving credit facility. Interest costs on borrowings used to fund the
Company’s newbuilding program are capitalized until the vessels are
delivered.





Interest
Expense, exclusive of capitalized interest, consists of:





2008
                
                
                2007
                
                
                2006Loan
      Interest
                
                $
                15,545,287
                
                
                $
                12,259,010
                
                
                $
                9,694,244Commitment
      Fees
                
                
                26,449
                
                
                
                239,739
                
                
                
                676,126Amortization
      of Deferred Financing Costs
                
                
                244,837
                
                
                
                242,357
                
                
                
                178,246Write-off
      of Deferred Financing Costs
                
                
                2,089,701
                
                
                
                —
                
                
                
                —Total
      Interest Expense
                
                $
                17,906,274
                
                
                $
                12,741,106
                
                
                $
                10,548,616





Interest
paid, excluding capitalized interest, amounted to $13,557,351 in 2008,
$13,031,996 in 2007 and $10,194,882 in 2006.





Interest-Rate
Swaps





The
Company has entered into interest rate swaps to effectively convert a portion of
its debt from a floating to a fixed-rate basis. Under these swap contracts,
exclusive of applicable margins, the Company will pay fixed rate interest and
receive floating-rate interest amounts based on three-month LIBOR settings. The
swaps are designated and qualify as cash flow hedges. The following table
summarizes the interest rate swaps in place as of December 31, 2008, and
December 31, 2007.




Notional
      Amount
                                                  Outstanding
      –
                                                  December
      31, 2008
                                                
                                                
                                                Notional
      Amount Outstanding –
                                                  December
      31, 2007
                                                
                                                Fixed
      Rate
                                                
                                                Maturity$
                                                84,800,000
                                                
                                                $
                                                84,800,000
                                                
                                                5.240%
                                                
                                                09/2009*25,776,443
                                                
                                                
                                                25,776,443
                                                
                                                4.900%
                                                
                                                03/201010,995,000
                                                
                                                
                                                10,995,000
                                                
                                                4.980%
                                                
                                                08/2010202,340,000
                                                
                                                
                                                202,340,000
                                                
                                                5.040%
                                                
                                                08/2010100,000,000
                                                
                                                
                                                100,000,000
                                                
                                                4.220%
                                                
                                                09/201030,000,000
                                                
                                                
                                                30,000,000
                                                
                                                4.538%
                                                
                                                09/201025,048,118
                                                
                                                
                                                25,048,118
                                                
                                                4.740%
                                                
                                                12/201136,752,038
                                                
                                                
                                                36,752,038
                                                
                                                5.225%
                                                
                                                08/201281,500,000
                                                
                                                
                                                -
                                                
                                                3.895%
                                                
                                                01/2013144,700,000
                                                
                                                
                                                -
                                                
                                                3.580%
                                                
                                                10/20119,162,500
                                                
                                                
                                                -
                                                
                                                3.515%
                                                
                                                10/20113,405,174
                                                
                                                
                                                -
                                                
                                                3.550%
                                                
                                                10/201117,050,000
                                                
                                                
                                                -
                                                
                                                3.160%
                                                
                                                11/2011$
                                                771,529,273
                                                
                                                $
                                                515,711,599


*Upon
maturity of the $84,800,000 swap in September 2009, a swap with the same
notional amount will commence with a fixed interest rate of 3.90% that matures
in September 2013.






F-15





The
Company records the fair value of the interest rate swaps as an asset or
liability on its balance sheet. The effective portion of the swap is recorded in
accumulated other comprehensive income. Accordingly, liabilities of $50,538,060
and $13,531,883 have been recorded in Fair value of derivative
instruments in the Company’s balance sheets as of December 31, 2008, and
December 31, 2007, respectively.





Foreign
Currency swaps





The
Company has entered into foreign exchange swap transactions to hedge foreign
currency risks on its capital asset transactions (vessel newbuildings). The
swaps are designated and qualify as cash flow hedges.





At
December 31, 2007, the Company had outstanding foreign currency swap contracts
for notional amounts aggregating 11.28 billion Japanese yen swapped into the
equivalent of $104,259,998. During 2008, the Company made progress payments in
Japanese yen to the shipyard in Japan. At December 31, 2008, the Company had
outstanding foreign currency swap contracts for notional amounts aggregating 8.6
billion Japanese yen swapped into the equivalent of $80,378,030.





The
Company records the fair value of the currency swaps as an asset or liability in
its financial statements. The effective portion of the currency swap is recorded
in accumulated other comprehensive income. Accordingly, an amount of $15,039,535
and $932,638 have been recorded in Fair value of derivative instruments and
other assets in the accompanying balance sheets as of December 31, 2008, and
December 31, 2007, respectively.





In
February 2009, the Company settled its outstanding foreign currency swaps
contracts at a gain aggregating $13,673,774. This gain will offset the cost of
the vessels on the remaining three vessels upon their delivery in March 2009,
January 2010 and February 2010, respectively.





Note 6.  Fair
Value Measurements





The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:





Cash and cash equivalents—the
carrying amounts reported in the consolidated balance sheet for interest-bearing
deposits approximate their fair value due to their short-term nature
thereof.





Debt—the carrying amounts of
borrowings under the revolving credit agreement approximate their fair value,
due to the variable interest rate nature thereof.





Interest rate swaps—the fair
value of interest rate swaps (used for hedging purposes) is the estimated amount
that the Company would receive or pay to terminate the swaps at the reporting
date.





Foreign currency swaps—the
fair value of foreign currency swaps (used for hedging purposes) is the
estimated amount that the Company would receive or pay to terminate the swaps at
the reporting date.





Effective
January 1, 2008, the Company adopted SFAS 157, which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.  The fair value hierarchy for
disclosure of fair value measurements under SFAS 157 is as follows:





Level
1 – Quoted prices in active markets for identical assets or
liabilities


Level
2 – Quoted prices for similar assets and liabilities in active markets or inputs
that are observable


Level
3 – Inputs that are unobservable (for example cash flow modeling inputs based on
assumptions)






F-16




The
following table summarizes assets and liabilities measured at fair value on a
recurring basis at December 31, 2008, as required by SFAS 157:





Level
      1
                        Level
      2
                        Level
      3Assets:Foreign
      currency contracts
                        —
                        $15,039,535
                        —Liabilities:Interest
      rate contracts
                        —
                        $50,538,060
                        —





The
fair value of the interest rate and foreign currency swap contracts are based on
quoted market prices for a similar contract and can be validated through
external sources.




Note 7.  Commitments
and Contingencies




Vessel
Technical Management Contract





The
Company has technical management agreements for each of its vessels with
independent technical managers. The Company paid average monthly technical
management fees of $9,041 per vessel in 2008 and $8,906 per vessel in
2007.





Operating
Lease





Operating
Lease





In
December 2005, the Company entered into a lease for office space. The lease is
secured by a Letter of Credit backed by cash collateral of $124,616 which amount
is recorded as restricted cash in the accompanying balance sheets. In March
2008, the Company amended the lease to incorporate additional office space. The
amended lease expires in 2018. The cash collateral securing the lease has been
increased by $151,440. The Company has recorded the total Cash collateral of
$276,056 as restricted cash.





The
future minimum commitments under the leases for office space as of December 31,
2008 are as follows:





2009
                
                $
                648,5522010
                
                
                648,5522011
                
                
                788,5192012
                
                
                835,175Thereafter
                
                
                4,523,865Total
                
                $
                7,444,663




Note 8.  Earnings
Per Common Share





The
computation of basic earnings per share is based on the weighted average number
of common shares outstanding during the period. Diluted net income per share
gives effect to stock options and restricted stock units using the treasury
stock method, unless the impact is anti-dilutive. Diluted net income per share
as of December 31, 2008, does not include 1,704,787 restricted stock units and
50,001 stock options as their effect was anti-dilutive.





2008
                                
                                
                                2007
                                
                                
                                2006Net
      Income
                                
                                $
                                61,632,809
                                
                                
                                $
                                52,243,981
                                
                                
                                $
                                33,801,540Weighted
      Average Shares – Basic
                                
                                
                                46,800,550
                                
                                
                                
                                42,064,911
                                
                                
                                
                                34,543,836Dilutive
      effect of stock options and restricted stock units
                                
                                
                                88,238
                                
                                
                                
                                130,650
                                
                                
                                
                                26Weighted
      Average Shares – Diluted
                                
                                
                                46,888,788
                                
                                
                                
                                42,195,561
                                
                                
                                
                                34,543,862Basic
      Earnings Per Share
                                
                                $
                                1.32
                                
                                
                                $
                                1.24
                                
                                
                                $
                                0.98Diluted
      Earnings Per Share
                                
                                $
                                1.31
                                
                                
                                $
                                1.24
                                
                                
                                $
                                0.98




F-17





Note 9.  2005
Stock Incentive Plan





The
Company adopted the 2005 Stock Incentive Plan for the purpose of affording an
incentive to eligible persons. The 2005 Stock Incentive Plan provides for the
grant of equity-based awards, including stock options, stock appreciation
rights, restricted stock, restricted stock units, stock bonuses, dividend
equivalents and other awards based on or relating to the Company’s common shares
to eligible non-employee directors, selected officers and other employees and
independent contractors. The plan is administered by a committee of the
Company’s Board of Directors. An aggregate of 2.6 million shares of the
Company’s common stock has been authorized for issuance under the
plan.





As
of December 31, 2005, no grants had been made under the plan. On March 17, 2006,
the Company granted options to purchase 56,666 shares of the Company’s common
stock to its independent non-employee directors. These options vested and became
exercisable on the grant date at an exercise price of $13.23 per share. During
2007, options to purchase 13,333 shares were exercised. The options expire ten
years from the date of grant.





On
January 12, 2007, the Company granted options to purchase 13,334 of the
Company’s common shares to its independent non-employee directors and 524,000 of
the Company’s common shares to members of its management. The options have an
exercise price of $17.80 per share and they vested and became exercisable for
the non-employee directors on the grant date while the options for management
vest and become exercisable over three years. All options expire ten years from
the date of grant. During 2008, options to purchase 13,333 shares were exercised
and 26,667 options were forfeited.





On
May 23, 2007, the Company granted options to purchase 50,001 of the Company’s
common shares to its independent non-employee directors. These options vested
and became exercisable on the grant date at an exercise price of $21.88 per
share. The options expire ten years from the date of grant.





For
purposes of determining compensation cost for the Company’s stock option plans
using the fair value method of FAS 123(R), the fair value of the options granted
was estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: risk free interest rate of 5%,
dividend yield ranging from 9% to 15%, expected stock price volatility factor of
0.33.  The Company has recorded non-cash compensation charges of
$301,477, $448,037 and $47,033 relating to the fair value of these stock options
in 2008, 2007 and 2006, respectively.





In
2006 and 2007, the Company granted Dividend Equivalent Rights Awards to its
independent non-employee directors and members of its management. The Dividend
Equivalent Rights award entitles the participant to receive a Dividend
Equivalent payment each time the Company pays a dividend to the Company’s
stockholders. The amount of the Dividend Equivalent payment is equal to the
number of Dividend Equivalent Rights multiplied by the amount of the per share
dividend paid by the Company on its stock on the date the dividend is
paid.





On
March 17, 2006, the Company granted a Dividend Equivalent Rights Award to its
independent non-employee directors equivalent to 62,964 shares of the Company’s
common stock.  During 2007, the Company granted an additional Dividend
Equivalent Rights Award to its independent non-employee directors equivalent to
45,370 shares of the Company’s common stock. In 2007, the Company also granted a
Dividend Equivalent Rights Award to members of its management equivalent to
524,000 shares of the Company’s common stock. The Company recorded $1,236,337,
$1,210,457 and $95,267 as compensation expense for the Dividend Equivalent
payments in 2008, 2007 and 2006, respectively.






F-18




In
2007 the Company granted 793,713 Restricted Stock Units (“RSUs”) to members of
its management. Each Restricted Stock Unit granted to the participant represents
the right to receive one share of the Company’s Common Stock as of the date of
vesting, with such vesting to occur ratably over three years. The fair value of
the non-vested restricted stock at the grant date, equivalent to the market
value at the date of grants, is $21,912,547. During the year ended December 31,
2008, 260,814 RSUs were vested and 5,219 were forfeited. Amortization of this
charge, which is included in non-cash compensation expense, for the year ended
December 31, 2008 and 2007, were $7,282,819 and $670,928, respectively. The
remaining expense for the years ended 2009 and 2010 will be $7,283,857 and
$6,613,967, respectively.





In
June 2008, the Company granted 833,333 RSUs, vesting ratably over five years, to
its Chief Executive Officer as part of an employment agreement. In August 2008,
the Company granted 105,000 RSUs, vesting ratably over three years, to a new
member of management. The fair value of the non-vested RSUs at the grant date,
equivalent to the market value at the date of grants, is $27,089,190.
Amortization of this charge, which is included in non-cash compensation expense,
for the year ended December 31, 2008, was $2,919,189. The remaining expense for
the years ended 2009, 2010 and 2011 will be $5,796,398, $5,796,398 and
$5,450,402, respectively, and $7,126,803 thereafter.





As
of December 31, 2008, RSUs covering a total of 1,466,013 of the Company’s shares
are outstanding. The Restricted Stock Unit also entitles the participant to
receive a Dividend Equivalent payment on the unvested portion of the underlying
shares granted under the award, each time the Company pays a dividend to the
Company’s stockholders. The Company has also recorded $2,464,662 and $180,000 in
compensation expense for the Restricted Stock Units Dividend Equivalent payments
in 2008 and 2007, respectively.





On
January 15, 2008, the Company granted 30,000 shares of its common stock, which
vested on the grant date, to its independent non-employee directors. The fair
value of the stock at the grant date was equal to the closing stock price on
that date and a total amount of $608,400 has been recorded in non-cash
compensation expense in 2008.





On
January 23, 2009, the Company granted options to purchase 222,815 of the
Company’s common shares to its independent non-employee directors. These options
vested and became exercisable on the grant date at an exercise price of $5.00
per share and expire six years from the date of grant.





Note 10.  Non-cash
Compensation





The
Company has recorded non-cash compensation charges of $11,111,885, $4,256,777
and $13,070,473, respectively in 2008, 2007 and 2006. These non-cash
compensation charges relate to the stock options and restricted stock units
granted to certain directors of the Company and members of management under the
2005 Stock Incentive Plan (see Note 9) and non-cash, non-dilutive charges
relating to profits interests awarded to members of the Company’s management by
the Company’s former principal shareholder Eagle Ventures LLC. Amounts recorded
with respect to the stock options were $301,477 and $1,118,965 in 2008 and 2007,
respectively. Amounts recorded with respect to the non-cash, non-dilutive
charges relating to profits interests were $0, $3,137,812 and $13,023,440 in
2008, 2007 and 2006, respectively.





Members
of the Company’s management had been awarded profits interests in the Company’s
former principal shareholder Eagle Ventures LLC that entitled such persons to an
economic interest of up to 16.7% on a fully diluted basis (assuming all profits
interests were vested) in any appreciation in the value of the assets of Eagle
Ventures LLC (including shares of the Company’s common stock owned by Eagle
Ventures LLC when sold). These profits interests diluted only the interests of
owners of Eagle Ventures LLC, and did not dilute direct holders of the Company’s
common stock. However, the Company’s statement of operations reflects non-cash
charges for compensation related to the profits interests. In the aggregate, one
fourth of the profits interests were service-related and the remaining profits
interests were performance related.  Since these profits interests
would not be settled in stock of the Company, they were being accounted for as a
liability plan as described in paragraph 32 of SFAS No. 123(R).  The
compensation charge was based on the fair value of the profits interests by
marking to market the assets of Eagle Ventures LLC at the end of each reporting
period. The impact of any changes in the estimated fair value of the profits
interests was recorded as a change in estimate cumulative to the date of change.
The impact on the amortization of the compensation charge of any changes to the
estimated vesting periods for the performance related profits interests was
adjusted prospectively as a change in estimate. As Eagle Ventures LLC has sold
all of its remaining holdings in the Company, the non-cash, non-dilutive charges
relating to profits interests ended in the first quarter of 2007 and there will
be no charges in future periods.




F-19





The
non-cash compensation expenses recorded by the Company and included in General
and Administrative Expenses are as follows:





2008
                      
                      
                      2007
                      
                      
                      2006Stock
      Option Plans
                      
                      $
                      301,477
                      
                      
                      $
                      1,118,965
                      
                      
                      $
                      47,033Restricted
      Stock Grants
                      
                      
                      10,202,008
                      
                      
                      
                      -
                      
                      
                      
                      -Stock
      Grants
                      
                      
                      608,400
                      
                      
                      
                      -
                      
                      
                      
                      -Non-dilutive
      Profits Interests
                      
                      
                      -
                      
                      
                      
                      3,137,812
                      
                      
                      
                      13,023,440Total
      Non-cash compensation expense
                      
                      $
                      11,111,885
                      
                      
                      $
                      4,256,777
                      
                      
                      $
                      13,070,473








Note 11.  Capital
Stock





Common  Stock





On
June 28, 2006 the Company sold 2,750,000 shares of its common stock at $12.00
per share raising gross proceeds of $33,000,000 before deduction of fees and
expenses of $1,770,811.





On
March 6, 2007, the Company sold 5,400,000 of the Company’s common shares for
$18.95 per share, raising gross proceeds of $102,330,000. On March 23, 2007, the
Company raised an additional $7,841,870 in gross proceeds from the underwriter’s
exercise of their over-allotment option for the sale of 413,819 of the Company’s
common shares.





On
September 21, 2007, the Company sold 5,000,000 of the Company’s common shares at
a price of $25.90 per share, raising gross proceeds of
$129,500,000.





The
Company has incurred fees and expenses aggregating $5,642,117 for the shares
sold in 2007.





Dividends





The
Company’s policy is to declare quarterly dividends to shareholders in March,
May, August and November. Payment of dividends is in the discretion of the Board
of Directors and is limited by the terms of certain agreements to which the
Company and its subsidiaries are parties to and provisions of Marshall Islands
law. The Company’s revolving credit facility permits it to pay quarterly
dividends in amounts up to its cumulative free cash flows, which is our earnings
before extraordinary or exceptional items, interest, taxes, depreciation and
amortization (Credit Agreement EBITDA), less the aggregate amount of interest
incurred and net amounts payable under interest rate hedging agreements during
the relevant period and an agreed upon reserve for dry-docking for the period,
provided that there is not a default or breach of a loan covenant under the
credit facility and the payment of the dividends would not result in a default
or breach of a loan covenant. Depending on market conditions in the dry bulk
shipping industry and acquisition opportunities that may arise, the Company may
be required to obtain additional debt or equity financing which could affect its
dividend policy. In this connection, the drybulk market has recently declined
substantially. In December 2008, commencing with the fourth quarter of 2008, the
Company’s board of directors has determined to suspend the payment of dividends
to stockholders in order to increase cash flow, optimize financial flexibility
and enhance internal growth.  In the future, the declaration and
payment of dividends, if any, will always be subject to the discretion of the
board of directors, restrictions contained in the credit facility and the
requirements of Marshall Islands law. The timing and amount of any dividends
declared will depend on, among other things, the Company’s earnings, financial
condition and cash requirements and availability, the ability to obtain debt and
equity financing on acceptable terms as contemplated by the Company’s growth
strategy, the terms of its outstanding indebtedness and the ability of the
Company’s subsidiaries to distribute funds to it.






F-20





In
2008, the Company declared four quarterly dividends in the aggregate amount of
$2.00 per share of its common stock in February, May, August and November.
Aggregate payments were $93,592,906 for dividends declared in 2008.





In
2007, the Company declared four quarterly dividends in the aggregate amount of
$1.98 per share of its common stock in February, April, July and November.
Aggregate payments were $82,134,982 for dividends declared in 2007.




In
2006, the Company declared four quarterly dividends in the aggregate amount of
$2.08 per share of its common stock in January, April, July and October.
Aggregate payments were $71,729,500 for dividends declared in 2006.





Note 12.  Shareholder
Rights Plan





On
November 9, 2007, the Company’s board of directors adopted a shareholder rights
plan and declared a dividend distribution of one Right for each outstanding
share of our common stock to shareholders of record on the close of business on
November 23, 2007. Each Right is nominally exercisable, upon the occurrence of
certain events, for one one-thousandth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$125.00 per unit, subject to adjustment.




Note 13.  2008,
2007 and 2006 Quarterly Results of Operations (Unaudited)





Consolidated Statement of Operations(Unaudited)
                                Three
      Months
                                  ended
                                  March 31,
                                
                                Three
      Months
                                  ended
                                  June 30,
                                
                                Three
      Months
                                  ended
                                  September 30,
                                
                                Three
      Months
                                  ended
                                  December 31,2008Revenues,
      net of commissions
                                $36,686,016
                                
                                $37,223,200
                                
                                $51,553,232
                                
                                $59,962,501Total
      Operating Expenses
                                20,376,459
                                
                                19,750,394
                                
                                25,002,973
                                
                                43,539,354Operating
      Income
                                16,309,557
                                
                                17,472,806
                                
                                26,550,259
                                
                                16,423,147Net
      Income
                                14,345,810
                                
                                14,906,130
                                
                                23,221,617
                                
                                9,159,252Basic
      Net Income Per Share
                                0.31
                                
                                0.32
                                
                                0.50
                                
                                0.20Diluted
      Net Income Per Share
                                0.31
                                
                                0.32
                                
                                0.49
                                
                                0.20Cash
      dividends declared and paid
                                0.50
                                
                                0.50
                                
                                0.50
                                
                                0.502007Revenues,
      net of commissions
                                $26,908,532
                                
                                $28,338,047
                                
                                $33,955,704
                                
                                $35,612,521Total
      Operating Expenses
                                16,067,004
                                
                                14,601,064
                                
                                15,580,744
                                
                                18,234,292Operating
      Income
                                10,841,528
                                
                                13,736,983
                                
                                18,374,960
                                
                                17,378,229Net
      Income
                                8,487,788
                                
                                11,924,695
                                
                                15,501,895
                                
                                16,329,603Basic
      Net Income Per Share
                                $0.23
                                
                                $0.29
                                
                                $0.37
                                
                                $0.35Diluted
      Net Income Per Share
                                $0.23
                                
                                $0.29
                                
                                $0.37
                                
                                $0.35Cash
      dividends declared and paid
                                $0.51
                                
                                $0.50
                                
                                $0.47
                                
                                $0.502006Revenues,
      net of commissions
                                $23,790,052
                                
                                $24,105,383
                                
                                $28,358,830
                                
                                $28,393,932Total
      Operating Expenses
                                11,262,744
                                
                                12,910,077
                                
                                16,442,389
                                
                                21,052,658Operating
      Income (Loss)
                                12,527,308
                                
                                11,195,306
                                
                                11,916,441
                                
                                7,341,274Net
      Income (Loss)
                                10,792,501
                                
                                9,391,736
                                
                                9,100,737
                                
                                4,516,566Basic
      Net Income Per Share
                                $
      0.33
                                
                                $
      0.28
                                
                                $0.27
                                
                                $0.13Diluted
      Net Income Per Share
                                $
      0.33
                                
                                $
      0.28
                                
                                $0.27
                                
                                $0.13Cash
      dividends declared and paid
                                $
      0.57
                                
                                $0.50
                                
                                $0.50
                                
                                $0.51









F-21