form10ka62708.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(Amendment No. 2)
(Mark One)

 X           Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2007

               Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:  2-63322

                                                        INTERNATIONAL SHIPHOLDING CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
 
11 North Water Street, Mobile, Alabama (Address of principal executive offices)
 
  
36-2989662
(I.R.S. Employer
Identification No.)
 
 
36602
(Zip Code)
(251)-243-9100
(Registrant’s telephone number, including area code)

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

                          Title of each class                                                                                                     Name of each exchange on which registered
                 Common Stock, $1 Par Value                                                                                                                                                                                  New York Stock Exchange
    
             


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
          Yes o
      No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
   
        Yeso 
                      No þ
 
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 þ
                     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.   o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

       
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller Reporting Company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
   
     Yes o
  No þ
 
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007, based upon the closing price of the common stock as reported by the New York Stock Exchange on such date, was approximately $96,267,951.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
     
Class
Common Stock, $1 par value,
  
Outstanding at March 31, 2008
7,675,142 shares

 

1 
 
 

EXPLANATORY NOTE

International Shipholding Corporation (the “Company”) owns a 50% equity interest in Dry Bulk Cape Holding Inc., a Panamanian company (“Dry Bulk”).  Dry Bulk is a holding company engaged in international bulk carrier operations through its six wholly-owned subsidiaries.  In 2007, the Company’s ownership interest in Dry Bulk met the significant subsidiary test, as defined by Rule 210.1-02(w), at the 20% level for Pretax Income.  Additionally, the Company’s ownership interest in Dry Bulk met the same test for 2006 and 2005.  As a result, the Company is required by Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934 (the “Exchange Act”) to provide audited consolidated balance sheets for Dry Bulk as of December 31, 2007 and 2006 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the three years ended December 31, 2007, 2006 and 2005 by June 30, 2008.

On April 30, 2008, the Company filed Form 10-K/A (Amendment No. 1) containing the 2005 audited financial statements for Belden Cement Holding Inc. (“BCH”) and the 2006 partial unaudited financial statements for Belden Shipholding PTE LTD (“BSH”).  The Company sold its interest in BSH in November of 2006 and was provided limited information from the new owners.  The 2006 partial unaudited financial statements for BSH were based on Singapore Financial Reporting Standards.  In accordance with Rule 3-09 of Regulation S-X, a reconciliation from the Singapore Financial Reporting Standards financial statements to U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) is included in this Form 10-K/A.

 Item 15 is the only portion of the Company’s 2007 Form 10-K being supplemented or amended by this Form 10-K/A.


This Amendment No. 2 does not change any other information set forth in the original filing of the Company’s Form 10-K, including Amendment No. 1, for the year ended December 31, 2007. However, in accordance with Rule 12b-15, Amendment No. 1, filed on April 30, 2008, includes new Rule 13a-14(a)/15d-14(a) certifications as Exhibits 31.1 and 31.2 and new Rule 13a-14(b)/15d-14(b) certifications as Exhibits 32.1 and 32.2.





ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following financial statements, schedules and exhibits are filed as part of this report:


(a)  1.                   Financial Statement Schedules


(i)  
The following financial statement schedules of Dry Bulk Cape Holding Inc. are included on pages A-1 through A-11 of this Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Income for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005
Notes to the Consolidated Financial Statements

(ii)  
The following financial statement schedules of Belden Shipholding PTE LTD included on pages B-1 through     B-2 of this Form 10-K/A pursuant to Rule 3-09 of Regulation S-X;  These statements are unaudited and include a reconciliation to U.S. Generally Accepted Accounting Principles.

Consolidated Balance Sheet at September 30, 2006
Consolidated Profit and Loss Account Statement for the nine months ended September 30, 2006


2



2.  
Exhibits

(3.1)
Restated Certificate of Incorporation of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)
(3.2)
By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)
(4.1)
Specimen of Common Stock Certificate (filed as an exhibit to the Registrant's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980 and incorporated herein by reference)
(10.1)
Credit Agreement, dated as of September 30, 2003, by and among LCI Shipholdings, Inc. and Central Gulf Lines, Inc., as Joint and Several Borrowers, the banks and financial institutions listed therein, as Lenders, Deutsche Schiffsbank Aktiengesellschaft as Facility Agent and Security Trustee, DnB NOR Bank ASA, as Documentation Agent, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.2 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)
(10.2)
Credit Agreement, dated as of December 6, 2004, by and among LCI Shipholdings, Inc., Central Gulf Lines, Inc. and Waterman Steamship Corporation, as Borrowers, the banks and financial institutions listed therein, as Lenders, Whitney National Bank, as Administrative Agent, Security Trustee and Arranger, and the Registrant, Enterprise Ship Company, Inc., Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG Railway, Inc., as Guarantors (filed with the Securities and Exchange Commission as Exhibit 10.3 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)
(10.3)
Credit Agreement, dated September 26, 2005, by and among Central Gulf Lines, Inc., as Borrower, the banks and financial institutions listed therein, as Lenders, DnB NOR Bank ASA, as Facility Agent and Arranger, and Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee and Arranger, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 30, 2005 and incorporated herein by reference)
(10.4)
Credit Agreement, dated December 13, 2005, by and among CG Railway, Inc., as Borrower, the investment company, Liberty Community Ventures III, L.L.C., as Lender, and the Registrant, as Guarantor
(10.5)
Consulting Agreement, dated January 1, 2006, between the Registrant and Niels W. Johnsen (filed with the Securities and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for the annual period ended December 31, 2005 and incorporated herein by reference)
(10.6)
Consulting Agreement, dated April 30, 2007, between the Registrant and Erik F. Johnsen (filed with the Securities and Exchange Commission as Exhibit 10.6 to the Registrant’s Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)
(10.7)
International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.8)
Form of Stock Option Agreement for the Grant of Non-Qualified Stock Options under the International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.6 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.9)
Description of Life Insurance Benefits Provided by the Registrant to Niels W. Johnsen and Erik F. Johnsen Plan (filed with the Securities and Exchange Commission as Exhibit 10.8 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.10)
Memorandum of Agreement of the Registrant, dated as of August 24, 2007, providing for the Registrant’s purchase of one 6400 CEU Panamanian flagged pure car and truck carrier (filed with the Securities and Exchange Commission as Exhibit 10.10 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference) (Confidential treatment requested on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.)
(10.11)
 Loan Agreement, dated as of September 10, 2007, by and amongWaterman Steamship Corporation, as borrower, the Registrant, as guarantor, DnB NOR Bank ASA, as facility agent and security trustee. (filed with the Securities and Exchange Commission as Exhibit 10.11 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)
(10.12)
SHIPSALES Agreement, dated as of September 21, 2007, by and between East Gulf Shipholding, Inc., as   buyer, and Clio Marine Inc., as seller (filed with the Securities and Exchange Commission as Exhibit 10.12 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference) (Confidential treatment requested on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.)
(10.13)
 Facility Agreement, dated as of January 23, 2008, by and among East Gulf Shipholding, Inc., as borrower,     the Registrant, as guarantor, the banks and financial institutions party thereto, as lenders, DnB NOR Bank ASA, as facility agent, and Deutsche Schiffsbank Aktiengesellschaft, as security trustee (filed with the Securities and Exchange Commission as Exhibit 10.13 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)
(23.1)
Consent of Ernst & Young LLP*
(23.2)
Consent of Deloitte & Touche S.p.A., Independent Registered Public Accounting Firm*
(31.1)
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
(31.2)
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
(32.1)
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
(32.2)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *



*
Submitted electronically herewith.







SIGNATURES

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


INTERNATIONAL SHIPHOLDING CORPORATION
(Registrant)


June 27, 2008
By
 /s/ Manuel G. Estrada
 
                                                                                                Manuel G. Estrada
                                                                     Vice President and Chief Financial Officer


3 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Dry Bulk Cape Holding Inc.:

We have audited the accompanying consolidated balance sheets of Dry Bulk Cape Holding Inc. and subsidiaries (the “Group”) as of December 31, 2007 and 2006 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the three years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dry Bulk Cape Holding Inc. and subsidiaries  as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.


/s/ DELOITTE & TOUCHE S.p.A.


Genoa, Italy
June 16, 2008
 

 
A-1

  DRY BULK CAPE HOLDING INC.  
            
             
  CONSOLIDATED BALANCE SHEETS
            
  (In thousands of USD)  
            
   
December 31,
2007
    
December 31,
2006
  
  ASSETS  
            
             
  CURRENT ASSETS   
            
    Cash (Note 3)
     2,351       54  
    Receivables from the Shipping Pool (Note 4)
     2,946       2,207  
    Receivables from management company  (Note 5)
     1,517       179  
    Other receivable (Note 6)
     195       1,786  
    Inventories   (Note 7)
     215       359  
    Other current assets  
     4       3  
             Total current assets  
     7,228       4,588  
                 
    Restricted Cash (Note 3)
     1,000       1,000  
    Vessels, net of accumulated depreciation  (Note 8)
     104,921       110,058  
    Vessels under construction (Note 9)
     13,636       -  
    Other assets  (Note 10)
     987       701  
  TOTAL ASSETS
     127,772       116,347  
                 
  LIABILITIES AND SHAREHOLDERS’ EQUITY  
                
                 
  CURRENT LIABILITIES  
                
    Advances to a related party  (Note 11)
     -       198  
    Accrued expenses  (Note 12)
     784       720  
    Advances from shareholders (Note 13)
     260       260  
    Current portion of bank borrowings  (Note 14)
     6,500       6,500  
            Total current liabilities  
     7,544       7,678  
                 
  Long term bank borrowings, net of current portion  (Note 14)
     96,036       90,500  
             Total liabilities  
     103,580       98,178  
                 
  SHAREHOLDERS’ EQUITY  (Note 15)
                
    Common shares   
     -       -  
    Additional paid-in capital  
     8,202       6,702  
    Retained earnings  
     15,990       11,467  
             Total shareholders’ equity  
     24,192       18,169  
                 
  TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
     127,772       116,347  
                 
  See notes to consolidated financial statements. 
                
 

 A-2


 
 
 


DRY BULK CAPE HOLDING INC.
                  
                   
CONSOLIDATED STATEMENTS OF INCOME
                  
(In thousands of USD)
                  
   
For the year ended December 31, 2007
    
For the year ended December 31, 2006
    
For the year ended December 31, 2005
  
                   
                   
Shipping income  (Note 16)
     31,772       25,805       15,595  
                         
Costs of shipping income
                        
Vessel expenses  (Note 17)
     (6,080 )     (5,549 )     (2,701 )
Vessel depreciation
     (5,137 )     (5,356 )     (3,277 )
      (11,217 )     (10,905 )     (5,978 )
                         
GROSS PROFIT
     20,555       14,900       9,617  
                         
Management fees (Note 18)
     (768 )     (768 )     (526 )
General and administrative expenses
     (221 )     (90 )     (38 )
      (989 )     (858 )     (564 )
                         
OPERATING INCOME
     19,566       14,042       9,053  
                         
Financial expenses, net (Note 19)
     (6,243 )     (6,426 )     (2,965 )
                         
NET INCOME
     13,323       7,616       6,088  
                         
                         
See notes to consolidated financial statements.
                        

 

 A-3


 
 
 

DRY BULK CAPE HOLDING INC.
 

CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
For the years ended December 31, 2007, 2006 and 2005
(In thousands of USD)
                               
         
Additional
                    
   
Common
    
Paid-In
    
Retained
          
Comprehensive
  
   
Stock
    
Capital
    
Earnings
    
Total
    
Income
  
                               
BALANCE—
January 1, 2005
     -       6,662       4,363       11,025        
                                       
  Net income
     -       -       6,088       6,088       6,088  
                                         
  Capital increase
     -       40       -       40          
                                         
  Dividends paid
     -       -       (5,000 )     (5,000 )        
                                         
BALANCE—
December 31, 2005
     -       6,702       5,451       12,153          
                                         
  Net income
     -       -       7,616       7,616       7,616  
                                         
  Dividends paid
     -       -       (1,600 )     (1,600 )        
                                         
BALANCE—
December 31, 2006
     -       6,702       11,467       18,169          
                                         
  Net income
     -       -       13,323       13,323       13,323  
                                         
  Capital increase
             1,500               1,500          
                                         
  Dividends paid
     -       -       (8,800 )     (8,800 )        
                                         
BALANCE—
December 31, 2007
     -       8,202       15,990       24,192          
                                         
                                         
See notes to consolidated financial statements.
                                  



A-4


DRY BULK CAPE HOLDING INC.
                  
                   
CONSOLIDATED STATEMENTS OF CASH FLOWS
                  
(In thousands of USD)
                  
   
Year ended December 31, 2007
    
Year ended December 31, 2006
    
Year ended December31, 2005
  
OPERATING ACTIVITIES:
                  
  Net income
     13,323       7,616       6,088  
  Adjustments to reconcile net income to net cash provided
                        
  by operating activities:
                        
    Depreciation of vessels
     5,137       5,356       3,277  
    Amortization of deferred dry-docking charges
     121       5       -  
    Amortization of deferred financing costs
     66       66       71  
    Fair value adjustment on derivative instruments
     -       -       (236 )
    Changes in operating assets and liabilities:
                        
    Other receivables
     1,591       (1,475 )     172  
    Inventories
     144       (175 )     20  
    Payments for dry-docking charges
     (473 )     (250 )     -  
    Other assets and receivables from Shipping Pool and management company
     (2,078 )     (1,869 )     (152 )
    Trade accounts payable
     -       (285 )     (434 )
    Accrued expenses and payables to related companies
     (134 )     (355 )     1,074  
    Interest rate swap termination
     -       -       (292 )
           Net cash provided by operating activities
     17,697       8,634       9,588  
                         
INVESTING ACTIVITIES:
                        
  Purchases of vessels / payments on vessels under construction
     (13,636 )      -       (48,500 )
  Increase in Restricted Cash
     -       (1,000 )     -  
  Net variation in settlement account with DryLog Group
     -       520       (350 )
           Net cash used in investing activities
     (13,636 )     (480 )     (48,850 )
                         
FINANCING ACTIVITIES:
                        
  Proceeds from bank borrowings
     12,036       -       103,500  
  Repayments of bank borrowings
     (6,500 )     (6,500 )     (59,238 )
  Capital increase
     1,500       -       -  
  Dividends paid
     (8,800 )     (1,600 )     (5,000 )
           Net cash provided by / (used in) financing activities
     (1,764 )     (8,100 )     39,262  
NET INCREASE IN CASH
     2,297       54       -  
CASH AT BEGINNING OF YEAR
     54       -       -  
CASH AT END OF YEAR
     2,351       54       -  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
                        
INFORMATION:
                        
 Interest paid
     6,666       6,365       2,280  
See notes to consolidated financial statements.
                        
 
 
 
A-5
 
 
DRY BULK CAPE HOLDING INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
(Amounts expressed in thousands of USD unless otherwise stated)

 

1.
ORGANIZATION AND BUSINESS
 
Dry Bulk Cape Holding Inc. (the “Company”) was founded on September 16, 2003 and is incorporated in the Republic of Panama.  DryLog Bulkcarriers Ltd. and Cape Shipholding Inc. (collectively, the “Shareholders”) each owned 50% of the Company’s outstanding common shares.  The Company’s common stock is not publicly traded.

At December 31, 2004, the Company had two subsidiaries: Dry Bulk Africa Ltd. (“Bulk Africa”) and Dry Bulk Australia Ltd (“Bulk Australia”).    These subsidiaries were initially incorporated in Liberia, but are now incorporated in the British Virgin Islands (“BVI”).   Each of the foregoing subsidiaries owns a bulk carrier cape size vessel: the “M.V. Africa” and the “M.V. Australia”, respectively.

In November 2005, the Company established in the British Virgin Islands two new subsidiaries: Dry Bulk Fern Ltd (“Bulk Fern”) and Dry Bulk Cedar Ltd (“Bulk Cedar”).

In November 2005, each of these new subsidiaries purchased a bulk carrier panamax vessel built in 1998: “M.V. Bulk Fern” and “M.V. Bulk Cedar” respectively.

During 2007, the Company has incorporated in the British Virgin Islands two new subsidiaries, Dry Bulk Oceanis Ltd. and Dry Bulk Americas Ltd..  Through these new entities, the Company has entered into a ship sale agreement with Mitsui & Co. Ltd. for the acquisition of two handysize vessels to be delivered in 2012.  The purchase price of each vessel is in two currency denomination and is the sum of USD 17.70 million and JPY 1.77 billion.

Collectively, the Company and its subsidiaries are referred to as the “Group” herein.

The Group is engaged in international bulk carrier shipping operations.

Starting from the end of November 2005, M.V. Bulk Fern and M.V. Bulk Cedar are employed in time charter contracts with a related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda., which is 35% owned by DryLog Group, the parent company of DryLog Bulkcarriers Ltd.  The consolidated statement of income for the year ended December 31, 2005 includes only one month operating activity of M.V. Bulk Fern and M.V. Bulk Cedar.

According to the time charter contracts, considered as operating lease contracts, the hire is a rata per day or pro-rata for the period starting from the vessels’ delivery, excluding the off-hire period.  The time charter contracts will expire in October 2008 (+/- 2 months in charter option).

M. V. Africa and the M.V. Australia participate in the C Transport Cape Size Ltd. shipping pool (the “Shipping Pool”).  There are approximately eight other vessels in the Shipping Pool as of December 31, 2007; of which three (3) vessels are owned 75%, 75%, and 37.5%, respectively, by DryLog  Group.  Since September 2004, the Shipping Pool has been ultimately owned and managed by DryLog Group.

In accordance with the pool agreement, the entire result of operations of the Shipping Pool will be allocated to each member vessel on the basis of a key figure expressing the relative theoretical earnings capacity of such member vessel, based on the cargo carrying capacity, capability and efficiency of operations and on any deficiency whatsoever attributable to any member vessel, including the consequence of such member vessel’s age, flag or crewing.  No portion of the results of operations of the Shipping Pool is attributed to the DryLog Group, the ultimate shareholder of the Shipping Pool.

During each year, the Shipping Pool determines the amount of the result of business to be corresponded by way of a provisional hire paid monthly to each pool vessel, taking into account cash availability and cash flow projections. The final distribution is calculated on the net pool result and is made each calendar year following the presentation of the audited accounts of the operations of the Shipping Pool.  Such final distribution is determined by the vessels owners and not by the shareholder of the Shipping Pool.  All the pool results as of December 31, 2007 have been computed and attributed to the vessel owners based on the above described Pool rules.

During 2007, an agreement has been reached among the owners of the vessels participating in the Shipping Pool and the DryLog Group for the termination of the pool as of January 1, 2008.  The control of the Shipping Pool, C Transport Cape Size (CTC), has been assumed by the DryLog Group as of January 1, 2008, including that of CTC’s commercial portfolio and relevant risk.  Contemporaneous with the termination agreement, the Company also entered into three years time charter with CTC at a fixed hire per day for M.V. Africa and the M.V. Australia.  The fixed charter rates have been calculated by reference to the prevailing market charter rates and the fair value of CTC’s commercial portfolio at the calculation date designated in the termination agreement (June 30, 2007).  The agreed fixed hire rates are calculated on a mark to market basis of the existing commercial portfolio as of June 30, 2007, less 5% for 2008 and 2009 and less 15% for 2010.  The simultaneous termination of the Shipping Pool and the entering into fixed rate three year lease contracts is viewed as a lease modification.  Accordingly, the off-market terms of the CTC’s commercial portfolio that was included in the calculation of the fixed rate lease will be recognized over the three year lease term and the shipping income to be recognized for M.V. Australia and M.V. Africa starting from January 1, 2008 will be based on the daily rates agreed in the three years time charter with CTC.

The Group has no employees. The operating management is provided by the DryLog Group.  The technical manager of the vessels was a related company, Ceres Hellenic Shipping Enterprises Ltd, through the end of November 2005.  The nature of the relationship is such that the DryLog Group shareholders have an interest in Ceres Hellenic Shipping Enterprises Ltd.

Starting from December 2005, a related company, Unisea Shipping Ltd, was appointed as technical manager.  A shareholder and a member of the Board of Directors of Unisea Shipping Ltd is also a member of the Board of Directors of the DryLog Ltd.

 

 
A-6
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of accounting—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Consolidation—The consolidated financial statements include the financial statements of the Company and its 100% controlled subsidiaries.  Those subsidiaries included Bulk Africa, Bulk Australia, Bulk Fern and Bulk Cedar for the years ended December 31, 2007, 2006 and 2005, and, in addition, Bulk Oceanis and Bulk Americas for the year ended December 31, 2007.

The financial statements used for the preparation of the consolidated financial statements are those as of December 31, 2007 and 2006, the dates coinciding with the year-end for each year presented of the group holding company, approved by the stockholders of the individual companies or prepared by the Boards of Directors for their approval.

The assets and liabilities of the consolidated companies are consolidated on the line-by-line method, eliminating the book value of the investments against the related net equities of the companies.

The difference between the carrying value of the investments and the corresponding net equity is allocated to the assets and liabilities based on the current values at the time of acquisition.  No instances of the application of this policy occurred during 2007 and 2006.

Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances

Use of Estimates—The preparation of the Group’s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities reported therein and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results reported in future periods may differ from these estimates.

Revenues— The Group’s revenue from the two vessels in the Shipping Pool is based on an allocation of the Shipping Pool’s annual distributable income (net income of the Shipping pool).  Shipping Pool annual distributable income is initially attributed to each member vessel on the basis of a key figure, expressing the relative theoretical earnings capacity of the member vessel, based on the cargo carrying capacity, capability and efficiency of operation in and between respective trades in which the member vessels are employed, and on any deficiency attributable to any member vessel including the consequence of such member vessel’s age, flag or crewing.  The Shipping Pool’s annual distributable income is then allocated giving weighting to each vessel and the number of days the vessel was available for charter excluding off-hire periods.  The off-hire periods for each vessel consist of dry-docking, laid-up periods, extended periods of break-down and other mutually agreed periods.

The Shipping Pool’s annual distributed income is computed based on the terms of the underlying Shipping Pool Agreement, and as ultimately agreed on an annual basis by the Shipping Pool’s Committee.   The Shipping Pool periodically enters into freight forward and bunker hedging contracts in an attempt to hedge the availability of the pool fleet and stabilize the amount of the Shipping Pool’s income to be allocated to Shipping Pool participants.   These derivative contracts are accounted for by the Shipping Pool on a cash basis when determining the amount of income that is earned by each vessel annually.  Each Shipping Pool participant’s proportionate share of Shipping Pool derivative contract settlements is treated as a component of the annual distributed income when ultimately realized.

The time charter revenues from M.V. Bulk Fern and M.V. Bulk Cedar are recognized when the services are rendered and are allocated between reporting periods based on relative transit time in each reporting period with the related expenses recognized as incurred.

Interest income is accrued on a time basis, by reference to the principal outstanding and to the effective interest rate applicable.

Foreign Currencies—The functional currency of the Group is United States dollar (“USD”) because the majority of its revenues, costs, vessels purchases, and debt and trade liabilities are either priced, incurred, payable or otherwise measured in USD.   Transactions denominated in foreign currencies are translated into USD using the rate ruling at the date of the transaction.  Monetary assets and liabilities denominated into foreign currencies are translated into USD, at year-end rates.  All resulting exchange differences are dealt with in the consolidated statement of income.

Cash and Cash Equivalents— Until the end of 2005, the Group did not maintain cash accounts in its own name. Rather, Shipping Pool distributions and other vessels’ revenues are received by (and expenditures paid by) the DryLog Group on the Group’s behalf.

In 2006, the Group decided to open a bank account in USD in order to pay and receive cash directly.  The Group considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  At December 31, 2007 and 2006, cash consists only of those in the Group’s bank accounts.

Vessel expenses and dry-docking cost— Vessel expenses are direct costs incurred to operate the Group’s vessels. These costs are expensed as incurred.

The Groups defers certain costs related to the dry-docking of the vessels. Deferred dry-docking costs are capitalized as incurred and amortized on a straight-line basis over the period between dry-dockings (generally five years).  No dry-docking costs were incurred in 2005 while in 2007 and 2006, the Group incurred dry-docking costs of USD 473 thousand and USD 250 thousand respectively.

Financial instruments— Financial instruments carried on the balance sheet include accounts and other receivables, trade and other payables as well as long-term debt. The Group was also a party to financial instruments that reduce exposure to fluctuations in interest rates. The Company’s interest rate swap arrangements are initially recorded at cost and are remeasured to fair value at subsequent reporting date. The fair value of all financial instruments approximates their carrying values.

Changes in fair value of derivative financial instruments that are designated as effective cash flow hedges, are recognized directly as a component of shareholders’ equity. Amounts presented as a component of shareholders’ equity are recognized in the income statement in the same period in which the hedged firm commitment or forecasted transaction affects net income. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in the consolidated statement of income as they arise.  The Company did not enter into any new derivative contracts in 2005, 2006 or 2007.

Deferred Financing Costs—The Group defers loan arrangement costs incurred in connection with its bank loans and amortizes them over the loan repayment period as incremental interest expenses.

Inventories—Inventories are valued at the lower of cost or market. Cost is determined on a First-in, First-out (FIFO) basis.

Vessels, net— The Group’s vessels are stated at historical cost, less accumulated depreciation. The cost of the vessel, less an estimated residual value, is depreciated on a straight-line basis over its estimated remaining useful life. The vessel's life is estimated at 25 years from the date of the completion of construction and its residual value is based on its scrap value.

Maintenance and repairs that do not extend the useful life of the asset are charged to operations as incurred. Major renovation costs and modifications are capitalized and depreciated over the estimated remaining useful life.

Construction work in progress represents vessels under construction and is stated at cost.  It is not depreciated until the vessels are completed and ready for use.

Interest and finance costs relating to vessels, barges, and other equipment under construction are capitalized to properly reflect the cost of assets acquired.  No interest was capitalized as part of the vessel cost in 2005 and 2006 while USD 293 thousand of interest was capitalized as part of construction in progress in 2007.

Impairment losses are recorded on vessels when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the vessels’ carrying amount.  In the evaluation of the fair value and future benefits of vessels, the Group performs an analysis of the anticipated undiscounted future net cash flows of the vessels.  If the carrying value of the related vessels exceeds the undiscounted cash flows, the carrying value of the vessel is reduced to its fair value.  Various factors including future charter rates and vessel operating costs are included in this analysis.  The Group determined that no impairment loss needed to be recognized in 2006 and 2007.

Income Taxes— Although the Company is incorporated in the Republic of Panama, it has no business activities in Panama.  Earnings from transactions that are completed, consummated or take effects outside Panama, are not considered to be taxable in Panama. Dividends received by Panamanian companies are only taxed when derived from earnings taxable in Panama.  Consequently, dividends received from the Company’s BVI subsidiaries are not subject to taxation.  Revenues arising from international shipping commerce of national merchant ships legally registered in Panama, even if the shipping contracts have been entered into Panama, are also specifically exempt from taxation.

All the subsidiaries are currently incorporated in the BVI.   Based on their activities, they are categorized as International Business Companies (“IBC”) and thus not subject to income taxation in the BVI.   There are no withholding taxes on the distribution of IBC profits as dividends to the Company.

The Group provides for income taxes in accordance with Financial Accounting Standards Board Statement No. 109, “Accounting for Income Taxes”.  Under Statement No. 109, the liability method is used in accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.   Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

Due to the nature of the Group’s operations, no income taxes have been reflected in the accompanying consolidated financial statements.

Comprehensive Income—Comprehensive income is defined as the change in equity of a company during a period from non-owner sources. Comprehensive income of the Group for the years ended December 31, 2006 and 2007 consisted only of the reported net income.
 
 
A-7

Recent Accounting Pronouncement—In September 2006, the FASB issued FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities”.  This guidance eliminates one of the accounting methods used to plan for major maintenance activities.  This FSP should be applied to the first fiscal year beginning after December 15, 2006.  Adoption of this standard on January 1, 2007 did not have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The provisions of SFAS 157 should be applied prospectively.  This guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158), which amends various preceding guidance covering the accounting and disclosure for pension and post requirement plans.  This Statement requires companies to recognize an asset or liability for the funded status of their benefit plans annually through Other Comprehensive Income Additionally the statement changes the date in which the funded status can be measured (eliminates the 90 day window) with limited exceptions. The effective date of the recognition of the funded status is for years ending after December 15, 2006, and adoption did not have a material effect on the Company’s financial statements. The effective date for the change in acceptable measurement date is for fiscal years ending after December 15, 2008. This guidance is not expected to have a material effect on the Company’s consolidated financial statements.
 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an Amendment of SFAS No. 115” (SFAS 159), which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, which few exceptions.  SFAS 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities.  The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election.  SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007.  This guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.  This Interpretation is effective as of January 1, 2007, and the cumulative effects of applying this Interpretation would have been required to be recorded an adjustment to retained earnings as of January 1, 2007.  On January 1, 2007, the Company adopted the provisions of FIN No. 48. There was no material effect upon adoption.

 
In April 2007, the FASB issued FSP No. FIN 39-1, "Amendment of FASB Interpretation No. 39." This FSP replaces certain terms in FIN No. 39 with "derivative instruments" (as defined in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities") and permits the offsetting of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The FSP is effective for fiscal years beginning after November 15, 2007. Adoption of the Statement on January 1, 2008, is not expected to have a material impact on the Company's consolidated financial statements.
 
 
 In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". The Statement establishes revised principles and requirements for how the Company will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of the Statement on January 1, 2008, is not expected to have a material impact on the Company's consolidated financial statements.
 
 
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". The Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Adoption of the Statement on January 1, 2008, is not expected to have a material impact on the Company's consolidated financial statements.
 

3.
CASH AND RESTRICTED CASH
 
As of December 31, 2007 and 2006, cash of USD 2,351 and USD54 thousand, respectively, reflects the balance at year-end of the Group’s bank accounts denominated in US Dollars.
Restricted cash of USD 1,000 thousand represents restricted cash as a result of the Group’s debt agreement with HSH Nordbank AG as discussed in Note 14.

4.
RECEIVABLES FROM THE SHIPPING POOL
 
As of December 31, 2007 and 2006, this caption of USD 2,946 and 2,207 thousand, respectively, entirely relates to the amount due from the Shipping Pool, C Transport Cape Size Ltd., mainly as a result of the final distribution (revenue adjustment) to be paid by the Shipping Pool, determined on the basis of the net pool results for M.V. Africa and M.V. Australia.

5.
RECEIVABLES FROM MANAGEMENT COMPANY
 
As of December 31, 2007 and 2006, this caption of USD 1,517 thousand and USD179 thousand, respectively, includes the amounts advanced to a related company, Unisea Shipping Ltd, in connection with the technical management of the vessels.

6.
OTHER RECEIVABLES
 
As of December 31, 2006, the balance of other receivables entirely refers to the insurance receivable related to the damage at the rudder stock suffered in September of 2006 by the M.V. Bulk Cedar.  The vessel remained in the shipyard for a period of 62 days (off-hire) and the total cost for repairing the vessel of USD 2 million was paid and recognized within vessel expenses during the year 2006.

The amount of USD 1,786, as of December 31, 2006, represented the portion of the loss incurred that the Company considered probable to recover through it’s submitted insurance claim, and was estimated based on the best available information.

During 2007, the Group has collected USD 1.5 million from insurance companies and the balance of USD 195 thousand, as of December 31, 2007, has been collected in full at the beginning of 2008.

7.
INVENTORIES
 
The amount of USD 215 thousand and USD 359 thousand as of December 31, 2007 and 2006, respectively, shown as inventories represents the cost of lubricants on board the vessels as at the end of the year.

 

 
A-8

8.
VESSELS, NET OF ACCUMULATED DEPRECIATION
 
The 2007 and 2006 movements in this caption are the following (in USD thousands):

   
2007
    
2006
  
Cost
            
At January 1,
     121,500       121,500  
Acquisitions in
     -       -  
At December 31,
     121,500       121,500  
                 
Accumulated depreciation
                
At January 1,
     11,442       6,086  
Charge for the year
     5,137       5,356  
At December 31,
     16,579       11,442  
                 
Net Book Value
                
At January 1,
     110,058       115,415  
At December 31,
     104,921       110,058  
 
The present insured value of the vessels in respect of actual and/or constructive total loss is USD 288 million.

There are collateral registered on vessels M.V. Australia, M.V. Africa, M.V. Bulk Cedar and M.V. Bulk Fern as security for the unpaid balance of the bank borrowings.


9.
VESSELS UNDER CONSTRUCTION
 
The amount of USD 13.6 million shown in the line item “Vessels under construction” relates to the first installment paid to Mitsui & Co. plus additional costs (including interest expenses and bank commission for USD 293 thousand and USD74 thousand, respectively) incurred during 2007 in connection with the building of two handysize vessels at the Tsuneishi Yard.  Delivery is expected in 2012 and the purchase price of each vessel, denominated in two currencies, is the sum of USD 17.7 million and JPY 1.77 billion.

As a condition for the release of the pre-delivery loan, the Group assigned the rights arising from the construction contracts in favor of HSH Nordbank AG.


10.
OTHER ASSETS
 
Other assets of USD 987 thousand and USD 701 thousand as of December 31, 2007 and 2006, respectively, include the following:

-  
USD 390 thousand (USD 456 thousand as of December 31, 2006) related to unamortized deferred financing costs, including legal expenses in connection with bank borrowings from HSH Nordbank AG, and

-  
USD 597 thousand (USD 245 thousand as of December 31, 2006) related to the unamortized deferred dry-docking charges.

The movements in this caption are the following (in USD thousands):


   
Deferred
    
Deferred
    
Total
  
   
Financing
    
Dry-docking
        
   
Costs
    
Charges
        
Balance as of January 1, 2006
     411       -       411  
Increase
     111       250       361  
Amortization
     (66 )     (5 )     (71 )
Balance as of December 31, 2006
     456       245       701  
Increase
     -       473       473  
Amortization
     (66 )     (121 )     (187 )
Balance as of December 31, 2007
     390       597       987  

In 2007, the dry-docking costs incurred of USD 473 thousand were for M.V. Bulk Africa.
 

11.
ADVANCES TO A RELATED PARTY
 
As of December 31, 2006, this caption of USD 198 thousand entirely related to the amount paid in advance by the related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda, in connection with the time charter contracts of M.V. Bulk Fern and M.V. Bulk Cedar for 2007 hire.  The balance at December 31, 2007 is zero.


12.
ACCRUED EXPENSES
 
The amount of USD 784 thousand and USD 720 thousand as of December 31, 2007 and 2006, respectively, mainly relates to accrued interest expenses.


13.           ADVANCES FROM SHAREHOLDERS
 
In 2004, each Shareholder advanced cash to the Company in the amount of USD 150 thousand for a total of USD 300 thousand. The cash advance is pursuant to the Joint Venture Agreement, signed on November 5, 2003 by the Shareholders.  The advance was made to meet the working capital needs of the Group and is interest-free.  The advance will be repaid at the discretion of the Company’s Board of Directors. During 2005, part of the cash advance for USD 40 thousand was converted into capital, and as a consequence at the end of 2005 the advances from shareholders amount to USD 260 thousand.  No changes in this balance occurred during 2006 and 2007.
 

 
A-9

14.     BANK BORROWINGS
 
    The bank borrowings are composed as following (in USD thousands):

   
Current
    
Long term
    
Total
  
   
portion
    
portion
        
                   
HSH Nordbank AG - USD 103,500 loan facility
     6,500       84,000       90,500  
                         
HSH Nordbank AG - USD 30,090 loan facility
     -       12,036       12,036  
                         
Balance as of December 31, 2007
     6,500       96,036       102,536  

The HSH Nordbank AG loan of original USD 103,500 thousand,  is repayable in 32 consecutive quarterly installments starting from January 28, 2006. The first 12 installments will amount to USD 1,625 thousand each, and the remaining 20 installments will amount to USD 2,125 thousand each. With the last installment, the Group should also make a final balloon payment of USD 41,500 thousand. The repayment schedule is the following (in USD thousands):

 
2008.............................. 6,500
2009...............................8,500
2010...............................8,500
2011...............................8,500
Thereafter................... 58,500

Total                            90,500
 
The interest rate on this loan is LIBOR plus a spread which approximates 6.31% at December 31, 2007 (6.62% at December 31, 2006).

The above facility is collateralized by first priority mortgage registered over all Group's vessels, as well as assignments of such vessel's earnings and insurance.

The facility loan agreement with HSH Nordbank AG signed at the end of November 2005 requires the Group to comply with some financial covenants. The most significant of the covenants include a requirement to maintain: (1) a minimum cash liquidity of USD 1 million and (2) a ratio of current assets to current liabilities not less than one (excluding the current portion of the loan).  In case the Group will not meet the financial covenants and such is not remedied immediately, the bank could request the immediate repayment of the loan’s outstanding amount.  As of December 31, 2007, all the financial covenants under the loan agreement are met.

During 2007, the Group entered into a pre-delivery loan facility for the amount of USD 30,090 thousand from HSH Nordbank AG in order to finance the construction of 2 Tsuneishi Handymaxes as described above. The facility covers 85% of the pre-delivery purchase price and was drawn down, as of year-end, for an amount of USD 12,036 thousand. The facility will be repaid at the expected date of vessels delivery in 2012.  The Group will also need to find the financial resources needed to fully pay the pre-delivery loan facility and to pay the last installments to the shipyard in order to finalize the purchase of the two vessels.

The interest rate on this pre-delivery loan is the LIBOR plus a spread which approximates 5.81% at December 31, 2007.

In order for the pre-delivery loan to be released, the Group assigned the rights arising from the construction contracts in favor of HSH Nordbank AG.


15.           SHAREHOLDERS’ EQUITY
 
The authorized share capital of the Company is 600 no par value shares divided into 300 “A” Class shares and 300 “B” Class shares, out of which 500 shares have been issued.  Cape Holding Ltd beneficially holds 250 “A” Class shares and by Drylog Bulkcarriers Ltd beneficially holds 250 “B” Class shares.  All shares confer the same rights and are subject to the same obligations and restrictions

On the basis of the Joint Venture Agreement signed on November 5, 2003, the two 50% shareholders have agreed to contribute by way of equity to the Group:

   o  
an amount not exceeding USD 6,347 thousand per shareholder, and

o  
all amounts payable from time to time by the Group under the loan agreements to the extent to which such amounts cannot be funded by the net earnings of the Group.

Each shareholder shall contribute towards the equity contribution in accordance with their owner percentage in the Group. As of December 31, 2006, the additional paid in capital to the Group from the shareholders was USD 6,702 thousand, of which 50% of the amount was paid by each shareholder. In 2007, the shareholders decided to increase the additional paid in capital to USD 8,202 thousand providing cash for a total amount of USD 1.5 million.

The Joint Venture Agreement provides that, a shareholder cannot, without prior written consent of the other shareholder:

o  
   mortgage, pledge or otherwise encumber its legal or beneficial interest in the shares,

o  
   sell, transfer or otherwise dispose of all or any of its shares or any legal interest therein, and or

o  
   enter into any agreement with respect to the voting rights attached to all or any of its shares.

The shareholders can, however, transfer any of their shares to an entity within the same Group. The joint venture agreement continues to be effective until: (a) each shareholder transfers its shares in the Group to the other shareholder, or (b) an effective resolution is passed or a binding offer is made to wind up the Group, whichever is the earlier.

The changes in the shareholders’ equity during 2007 are shown in the consolidated statements of shareholders equity.


16.           SHIPPING INCOME
 
The shipping income is composed as following (in USD thousands):

   
2007
    
2006
    
2005
  
Revenues from Shipping Pool
     24,527       19,060       14,943  
Revenues from time charters contracts
     7,245       6,745       652  
                         
Total shipping income
     31,772       25,805       15,595  

Revenues from the Shipping Pool relate to the income distributed by a related company, C Transport Cape Size Ltd, in connection with the employment of the vessels M.V. Africa and M.V. Australia. The increase in the pool revenues is mainly due to the positive trend of the shipping market and to the performance of the pool company.

Revenues from time charter contracts relate to the hire paid by a related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda., for M.V. Bulk Fern and M.V. Bulk Cedar.

See Note 2 for further discussion on the revenue recognition policy of the Group.
 

 
A-10
 
17.           VESSEL EXPENSES
 
The detail of the vessel expenses is the following (in USD thousands):


   
2007
    
2006
    
2005
  
Wages
     2,681       2,425       1,239  
Maintenance
     467       767       220  
Lube oils
     831       643       256  
Insurance
     577       505       330  
Stores
     333       301       162  
Spare parts
     310       287       124  
Victualling
     227       265       128  
Certificates & Class
     111       123       45  
Amortization of deferred dry-docking charges
     121       5       -  
Sundry expenses
     422       228       197  
Total
     6,080       5,549       2,701  


The 2006 maintenance costs include about USD 0.22 million related to the cost for the damage to the rudder stock suffered in September by the M.V. Bulk Cedar (USD 2.0 million) net of USD 1.78 million representing the portion of the repair costs incurred that the Company considered probable to recover through it’s submitted insurance claim as described in Note 6.


18.
MANAGEMENT FEES
 
The detail of the management fees is the following:

   
2007
    
2006
    
2005
  
Ceres Hellenic Shipping Enterprises Ltd
     -       -       264  
Unisea Shipping Ltd
     576       576       158  
DryLog Ltd
     192       192       104  
                         
Total
     768       768       526  

The ship management agreement with, Ceres Hellenic Shipping Enterprises Ltd, was terminated in November 2005 when the new technical manger, Unisea Shipping Ltd was appointed.

In 2007 and 2006, Drylog Ltd (the shareholder of DryLog Bulkcarriers Ltd) provided the accounting, reporting, treasury and other corporate functions to the Group for a management fee of USD 4 thousand per month per vessel (total fees of USD 192 thousand in 2007 and 2006).

 
19.
FINANCIAL EXPENSES, NET
 
This caption includes the following (in USD thousands):

   
2007
    
2006
    
2005
  
Interest income
     149       62       45  
Loan interest expenses
     (6,326 )     (6,422 )     (3,175 )
Interest rate swaps
     -       -       236  
Amortization of deferred financing costs
     (66 )     (66 )     (71 )
                         
Total financial expenses, net
     (6,243 )     (6,426 )     (2,965 )

 
20.
RELATED PARTIES
 
In 2007 and 2006, transactions with related parties are those with C Transport Cape Size Ltd, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda, Unisea Shipping Ltd, DryLog Ltd, (as described in Notes 1, 4, 11, 16 and 18) and with the shareholders, DryLog Bulkcarriers Ltd and Cape Shipholding Inc. (as described in Note 15 and 18).

 

21.           DERIVATIVE CONTRACTS
 
Drylog Group assumed, in connection of its acquisitions of four vessels in 2003 (which included M.V. Africa and M.V. Australia), interest rate swaps in which the seller was original counter party.   Bulk Africa and Bulk Australia agreed with Drylog ltd. to assume the rights and obligation under the interest rate swaps in proportion of the combined value of M.V. Africa and M.V. Australia to the vessels acquired (four vessels). The Group utilized those interest rate swaps to manage the exposure of interest rate movements on its credit facilities.

The Group received USD 3,285 thousand from the Drylog Group; which amount was in proportion to the cash received by the Drylog Group in connection with its assumption of the interest rate swaps referred to above.  Such interest rate swaps fix its interest rates from 3.74% to 5.27% through the following terms:

     
Notional
  
Expiration
  
Fair
 
Obligor
  
Amount
  
Date
  
Value
     
(portion attributable to the Group)
        
 
Bulk Africa
  
25,900
  
Dec. 31, 2005
  
1,620
 
Bulk Australia
  
26,600
  
Dec. 31, 2006
  
1,665
               
 
Total
  
52,500
      
3,285


Dry Log Group and the Group decided to terminate these contracts.  The Group paid its share of the fee of USD 665 thousand to terminate in 2004 interest rate swaps with notional amounts attributable to the Group amounting to USD 42,000 thousand and paid its share of the fee of USD 292 thousand in June 2005 to terminate effective in June 2005 the remaining interest rate swaps with notional amount attributable to the Group amount to USD 10,500 thousand.

As of December 31, 2006 and 2007, there are no open derivative contracts.



22.           SUBSEQUENT EVENTS
 
M.V. Bulk Cedar was sold in March 2008 for USD 69.3 million (net of sales commissions) with an expected delivery date of June 2008.  The existing time charter contract with a related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda. (CCBC), will be terminated as a result.  As consequence of such termination, the Group will pay to CCBC an early termination penalty of, on the basis of the above expected delivery date, about USD 15.1 million.  The Group, on the basis of the above sale price, early termination penalty and expected delivery date, expects to realize in 2008 a net gain of about USD 32.60 million.

M.V. Bulk Fern continue to be employed in time charter contracts with a related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda.  The time charter contracts will expire in October 2008 (+/- 2 months in charter option).

The Shipping Pool, as more fully described in Note 1, was terminated as of January 1, 2008.  Contemporaneous with such termination, the Group entered into with C Transport Cape Size (the same legal entity under which the Shipping Pool was operated) two three-year fixed rate time charter contracts involving M.V. Bulk Africa and M.V. Bulk Australia three years also starting from January 1, 2008.

According to the time charter contracts described above for M.V. Africa and M.V. Australia (three years time charter with C Transport Cape Size Ltd), M.V. Bulk Fern (TC with CCBC until October 2008) and M.V. Bulk Cedar (time charter with CCBC until the sale execution expected at the end of June 2008), the minimum total contractual future rentals for the Group in the next years is expected to be in the following amounts (assuming no off-hire periods):


Year
USD/000
  
     
2008
   26,189  
2009
   20,966  
2010
   25,420  
       
Total
   72,575  






A-11
 

 

 
 
 
 
 
 
Belden Shipholding PTE LTD Consolidated Condensed Balance Sheet
Reconciliation to US GAAP as of 30 September 2006


 


   
Non-Audited Statements
        
Reconciliation to US GAAP
    
US GAAP Statements
  
   
US$
        
US$
    
US$
  
ASSETS
                      
Current assets
     5,125,485                 5,125,485  
Non-current assets
     120,268,034                 120,268,034  
     Total Assets
   $ 125,393,519               $ 125,393,519  
                           
                           
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
                          
Current liabilities
     4,039,220                 4,039,220  
Non-current liabilities
     103,796,356                 103,796,356  
     Total Liabilities
     107,835,576                 107,835,576  
                           
Stockholder’s Investment:
                          
Share capital
     230,000                 230,000  
Other Comprehensive Loss
     -       a     (310,442 )     (310,442 )
Retained Earnings
     17,327,943       a     310,442       17,638,385  
     Total Stockholders’ Investment
     17,557,943                     17,557,943  
                               
Total Liabilities and Stockholders’ Investment
   $ 125,393,519                   $ 125,393,519  


a. To properly reflect the accounting treatment for derivative instruments under US GAAP.  Under Singapore Financial Reporting Standards, the fair market value of a derivative instrument accounted for as a cash flow hedge is recognized to net income, whereas, under US GAAP, the fair market value is recorded to other comprehensive income within equity.  The amount recognized to net income for the nine months ended September 30, 2006 was $310,442.
 
 
 
 

 
B-1
 
 

 
 
 
 
 
Belden Shipholding PTE LTD Consolidated Profit and Loss Account
Reconciliation to US GAAP for the nine months ended 30 September 2006



 
   
Non-Audited Statements
          
Reconciliation to US GAAP
    
US GAAP Statements
  
   
US$
          
US$
    
US$
  
Revenue
     24,498,804                   24,498,804  
Other income
     1,442,886                   1,442,886  
Vessel operating expenses
     (10,359,676 )                 (10,359,676 )
Commission
     (299,357 )                 (299,357 )
Depreciation of property, plant and equipment
     (4,940,637 )                 (4,940,637 )
Legal and consultancy fee
     (80,521 )                 (80,521 )
Staff costs
     (687,628 )                 (687,628 )
Other operating expenses
     (1,873,661 )                 (1,873,661 )
Profit from operations
     7,700,210                   7,700,210  
                             
                             
Finance costs
     (4,422,951 )     a       310,442       (4,112,509 )
Share of results of associate
     -                       -  
Profit before taxation
     3,277,259                       3,587,701  
                                 
Income tax expense
     -                       -  
Profit after taxation
   $ 3,277,259                     $ 3,587,701  

a. To properly reflect the accounting treatment for derivative instruments under US GAAP.  Under Singapore Financial Reporting Standards, the fair market value of a derivative instrument accounted for as a cash flow hedge is recognized to net income, whereas, under US GAAP, the fair market value is recorded to other comprehensive income within equity.  The amount recognized to net income for the nine months ended September 30, 2006 was $310,442.




B-2