d1313146_6-k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the month of August 2012
 
Commission File Number 001-33922
 
DRYSHIPS INC.
 
80 Kifissias Avenue
Amaroussion 15125, Athens Greece
(Address of principal executive offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F [X]       Form 40-F [  ]
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [  ].
 
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [  ].
 
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.


 
 

 


INFORMATION CONTAINED IN THIS FORM 6-K REPORT
 
Attached hereto as Exhibit 99.1 to this Report on Form 6-K are the Management's Discussion and Analysis of Financial Condition and Results of Operations and the unaudited interim condensed consolidated financial statements and related information and data of DryShips Inc. (the "Company") as of and for the six-month period ended June 30, 2012.
 
Attached hereto as Exhibit 101 to this Report on Form 6-K is the Interactive Data File relating to the following materials from this Report on Form 6-K, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2011 and June 30, 2012 (unaudited); (ii) Unaudited Interim Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2011 and 2012; (iii) Unaudited Interim Condensed Consolidated Statements of Comprehensive Income/ (Loss) for the six-month periods ended June 30, 2011 and 2012; (iv) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2012; and (v) Notes to Unaudited Interim Condensed Consolidated Financial Statements.  Users of this data are advised, in accordance with Rule 406T of Regulation S-T promulgated by the Securities and Exchange Commission, that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under those sections.

This Report on Form 6-K and the exhibits hereto are hereby incorporated by reference into the Company's Registration Statement on Form F-3 ASR (Registration No. 333-169235) filed with the Securities and Exchange Commission on September 7, 2010.


 
 
 

 


SIGNATURES

Pursuant to the requirements 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.
 
 
DRYSHIPS INC.
 
(Registrant)
   
     
     
Dated:  August 17, 2012
By:
/s/ George Economou
   
George Economou
   
Chief Executive Officer


 
 
 

 

Exhibit 99.1


 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise specified herein, references to "DryShips" or the "Company" or "we" shall include DryShips Inc. and its subsidiaries. The following management's discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes included herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth in the section entitled "Risk Factors" included in the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the "Commission") on March 16, 2012 and our Registration Statement on Form F-3ASR, filed with the Commission on September 7, 2010. See also the discussion in the section entitled "Forward Looking Statements" below.

Results of Operations
Six-months ended June 30, 2012 compared to the six-months ended June 30, 2011.
Selected Financial Data
(Expressed in thousands of U.S. Dollars)
 
 
Six-month period ended June 30,
 
 
Change
 
 
 
2011
 
 
2012
 
 
Amount
 
 
%
 
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
Voyage revenues and amortization of above market acquired time charters
 
$
195,476
 
 
$
157,145
 
 
$
(38,331)
     
(19.6)%
 
Revenues from drilling contracts and amortization of above market acquired drilling contracts
 
 
235,955
 
 
 
426,490
 
 
 
190,535
     
80.8%
 
 
 
 
431,431
 
 
 
583,635
 
 
 
152,204
     
35.3%
 
EXPENSES:
 
 
   
 
 
   
 
 
           
Voyage expenses
 
 
12,062
 
 
 
10,484
 
 
 
(1,578)
     
(13.1)%
 
Vessels, drilling rigs and drillships operating expenses
 
 
147,843
 
 
 
274,188
 
 
 
126,345
     
85.5%
 
Depreciation and amortization
 
 
121,021
 
 
 
166,034
 
 
 
45,013
     
37.2%
 
Vessel impairment charge
   
112,104
     
-
     
(112,104)
     
(100.0)%
 
Loss on sale of assets, net
 
 
705
 
 
 
963
 
 
 
258
     
36.6%
 
Gain from vessel insurance proceeds
 
 
(25,064)
 
 
 
-
 
 
 
25,064
     
(100.0)%
 
General and administrative expenses
 
 
53,930
 
 
 
65,344
 
 
 
11,414
     
21.2%
 
Legal settlements and other
 
 
-
 
 
 
(1,606)
 
 
 
(1,606)
     
-
 
Operating income
 
 
8,830
 
 
 
68,228
 
 
 
59,398
     
672.7%
 
 
 
 
   
 
 
   
 
 
           
OTHER INCOME /(EXPENSES):
 
 
   
 
 
   
 
 
           
Interest and finance costs
 
 
(64,459)
 
 
 
(108,253)
 
 
 
(43,794)
     
67.9%
 
Interest income
 
 
15,557
 
 
 
1,906
 
 
 
(13,651)
     
(87.7)%
 
Loss on interest rate swaps
 
 
(39,775)
 
 
 
(21,714)
 
 
 
18,061
     
(45.4)%
 
Other, net
 
 
3,812
 
 
 
2,576
 
 
 
(1,236)
     
(32,4)%
 
Total other expenses, net
 
 
(84,865)
 
 
 
(125,485)
 
 
 
(40,620)
     
47.9%
 
 
 
 
   
 
 
   
 
 
           
LOSS BEFORE INCOME TAXES
 
 
(76,035)
 
 
 
(57,257)
 
 
 
18,778
     
(24.7)%
 
Income taxes
 
 
(9,778)
 
 
 
(21,628)
 
 
 
(11,850)
     
121.2%
 
 
 
 
   
 
 
   
 
 
           
NET LOSS
 
 
(85,813)
 
 
 
(78,885)
 
 
 
6,928
     
(8.1)%
 
Less: Net (income)/loss attributable to non controlling interests
 
 
(2,511)
 
 
 
13,227
 
 
 
15,738
     
(626.8)%
 
NET LOSS ATTRIBUTABLE TO DRYSHIPS INC.
 
$
(88,324)
 
 
$
(65,658)
 
 
$
22,666
     
(25.7)%
 
 
 
 
1

 

 Revenues
 
Drybulk Carrier segment
 
Voyage revenues decreased by $50.6 million, or 26.6%, to $139.5 million for the six-month period ended June 30, 2012, as compared to $190.1 million for the six-month period ended June 30, 2011. A decrease of $42.2 million, or 22.3%, is attributable to lower hire rates during the six-month period ended June 30, 2012, as compared to the relevant period in 2011. This decrease was slightly set off by the increase of $1.2 million, or 0.6% attributable to the increase in voyage days by 51 days, from 6,342 days to 6,393 days, during the six-month period ended June 30, 2012, as compared to the six-month period ended June 30, 2011, while the average number of vessels being operated during each period remained approximately the same. Amortization of above market acquired time charters decreased by $9.6 million, or 5.0%, during the six-month period ended June 30, 2012, as compared to the relevant period in 2011, relating to the vessels acquired through OceanFreight Inc. during the third quarter of 2011.
 
Tanker segment
 
Voyage revenues increased by $12.3 million, or 232.1%, to $17.6 million for the six-month period ended June 30, 2012, as compared to $5.3 million for the six-month period ended June 30, 2011. The increase is attributable to a larger fleet comprising of seven vessels (Saga, Vilamoura, Daytona, Belmar, Calida, Petalidi and Lipari) as compared to a fleet comprising of three vessels (Saga, Vilamoura and Daytona) in the first half of 2011.
 
Offshore Drilling segment

Revenues from drilling contracts increased by $190.5 million, or 80.8%, to $426.5 million for the six-month period ended June 30, 2012, as compared to $236.0 million for the six-month period ended June 30, 2011. The increase is primarily attributable to the operation of the Ocean Rig Mykonos and the Ocean Rig Poseidon that commenced drilling activities during third quarter of 2011, which contributed $155.8 million in aggregate revenues during the six-month period ended June 30, 2012. Further, the Ocean Rig Olympia and the Ocean Rig Corcovado, which commenced drilling activities during the first and second quarters of 2011, respectively, contributed an aggregate of $126.5 million in revenues during the six-month period ended June 30, 2012, as compared to $45.3 million in aggregate revenues during the same period in 2011, which is offset by decreased revenues amounting to an aggregate of $46.4 million for the Leiv Eiriksson and the Eirik Raude, due to lower rates and utilization during 2012. The maximum day rates for the contracts on which our drilling units were employed during the six-month period ended June 30, 2012 ranged between approximately $449,000 and $648,000 per day. The maximum day rates for the contracts on which our drilling units were employed during the six-month period ended June 30, 2011, ranged between approximately $415,000 and $665,000 per day. Revenues for the six-month period ended June 30, 2012 also include $24.6 million for loss of hire insurance recovery related to Ocean Rig Corcovado..

Voyage expenses
 
Drybulk Carrier segment
 
Voyage expenses decreased by $3.4 million, or 28.6%, to $8.5 million for the six-month period ended June 30, 2012, as compared to $11.9 million for the six-month period ended June 30, 2011. The decrease is attributable to lower hire rates during the six-month period ended June 30, 2012, as compared to the corresponding period in 2011, that resulted in lower brokerage and address commissions charged during the same period.
 
Tanker segment
 
Voyage expenses increased by $1.8 million, or 900.0%, to $2.0 million for the six-month period ended June 30, 2012, as compared to $0.2 million for the six-month period ended June 30, 2011. The increase is attributable to a larger fleet comprising of seven vessels (Saga, Vilamoura, Daytona, Belmar, Calida, Petalidi and Lipari) as compared to a fleet comprising of three vessels (Saga, Vilamoura and Daytona) in the first half of 2011.
 
Offshore Drilling segment
 
The Offshore Drilling segment did not incur any voyage expenses during the relevant periods.
 
Vessels, drilling rigs and drillships operating expenses
 
 
2

 
 
Drybulk Carrier segment
 
Vessels operating expenses decreased by $4.0 million, or 10.1%, to $35.7 million for the six-month period ended June 30, 2012, as compared to $39.7 million for the six-month period ended June 30, 2011. The decrease is mainly attributable to a lower cost for the drydocking of vessels during the first half of 2012, as compared to the costs incurred during the relevant period in 2011.
 
Tanker segment
 
Vessels operating expenses increased by $4.1 million, or 102.5%, to $8.1 million for the six-month period ended June 30, 2012, as compared to $4.0 million for the six-month period ended June 30, 2011. The increase is attributable to a larger fleet in 2012 comprising of seven vessels (Saga, Vilamoura, Daytona, Belmar, Calida, Petalidi and Lipari) as compared to a fleet comprising of three vessels (Saga, Vilamoura and Daytona) in the first half of 2011.
 
Offshore Drilling segment
 
Drilling rigs and drillships operating expenses increased by $126.3 million, or 121.3%, to $230.4 million for the six-month period ended June 30, 2012, compared to $104.1 million for the six-month period ended June 30, 2011. The increase in operating expenses was mainly due to the commencement of drilling operations of the Ocean Rig Mykonos and the Ocean Rig Poseidon, resulting in operating expenses of $64.4 million in total. In addition, for the six-month period ended June 30, 2012, the operating expenses relating to the Leiv Eiriksson, the  Eirik Raude and the Ocean Rig Corcovado increased by $31.7 million, mainly due to a more extensive maintenance program and upgrades performed during the six-month period ended June 30, 2012. Furthermore, operating expenses related to  the Ocean Rig Olympia increased by $24.2 million during the six month period ended June 30, 2012 due to the fact that the drillship was fully operational during such period as compared to the same period in 2011, when the drillship was operating for less than a quarter.
 
Depreciation and amortization expense
 
Drybulk Carrier segment
 
Depreciation and amortization expense decreased by $6.3 million, or 11.7%, to $47.4 million for the six-month period ended June 30, 2012, as compared to $53.7 million for the six-month period ended June 30, 2011. The decrease is attributable to the fleet renewal and the impairment charges incurred, which led to the decrease of the depreciable value of the vessels while the average number of vessels remained approximately the same, for the six-month periods ended June 30, 2011 and 2012.
 
Tanker segment
 
Depreciation and amortization expense increased by $4.4 million, or 209.5%, to $6.5 million for the six-month period ended June 30, 2012, as compared to $2.1 million for the six-month period ended June 30, 2011. The increase is attributable to the delivery of the vessels Belmar, Calida, Petalidi and Lipari after the first half of 2011.
 
Offshore Drilling segment

Depreciation and amortization expense for the drilling units increased by $46.9 million, or 71.9%, to $112.1 million for the six-month period ended June 30, 2012, as compared to $65.2 million for the six-month period ended June 30, 2011. The increase in depreciation and amortization was mainly attributable to the $35.6 million of depreciation related to the depreciation of the Ocean Rig Poseidon and the Ocean Rig Mykonos, which were delivered during the third quarter of 2011. In addition, the Ocean Rig Olympia contributed $8.9 million more of depreciation in the six-month period ended June 30, 2012, as compared to the same period of 2011, due to ownership of the drillship for the entire six-month period in 2012.
 
Vessel impairment charge

Drybulk Carrier segment

During the six-month period ended June 30, 2011, we recorded a loss of $112.1 million due to our decision to sell five of our vessels (La Jolla, Conquistador, Brisbane, Samsara and Toro). No such loss was recorded during the relevant period in 2012.

Tanker segment

The Tanker segment did not incur any impairment loss during the relevant periods.
 
 
3

 
 
Drilling Rig segment

The Drilling segment did not incur any impairment loss during the relevant periods.

Loss on sale of assets, net
 
Drybulk Carrier segment
 
Loss on sale of assets amounted to $1.0 million for the six-month period ended June 30, 2012, due to the sale of three of our vessels Avoca, Padre and Positano, while for the relevant period in 2011 there was a loss on sale of assets amounting to $0.6 million, due to the sale of one of our vessels (Primera).

 Tanker segment
 
The Tanker segment did not incur any asset sales during the relevant periods.

Offshore Drilling segment
 
Gain on asset sales amounted to $0.04 million for the six-month period ended June 30, 2012, while for the relevant period in 2011 there was a loss on sale of assets amounting to $0.1 million, related to disposal of office equipment.
 
Gain from vessel insurance proceeds

Drybulk Carrier segment

The Company, during the six-month period ended June 30, 2011, recorded a gain of $25.1 million due to the insurance proceeds received for the total loss of the vessel Oliva.

General and administrative expenses
 
Drybulk Carrier segment
 
General and administrative expenses decreased by $7.7 million, or 22.3%, to $26.9 million for the six-month period ended June 30, 2012, compared to $34.6 million for the six-month period ended June 30, 2011. This decrease was mainly due to the decrease of $8.1 million in stock-based compensation, which was partly offset by the increase in consultancy fees of $1.9 million.
 
Tanker segment
 
General and administrative expenses increased by $2.4 million, or 126.3%, to $4.3 million for the six-month period ended June 30, 2012, compared to $1.9 million for the six-month period ended June 30, 2011. The increase is attributable to a larger fleet in 2012 comprising of seven vessels (Saga, Vilamoura, Daytona, Belmar, Calida, Petalidi and Lipari) as compared to a fleet comprising of three vessels (Saga, Vilamoura and Daytona) in the first half of 2011.
 
Offshore Drilling segment
 
General and administrative expenses increased by $16.7 million, or 95.9%, to $34.1 million for the six-month period ended June 30, 2012, as compared to $17.4 million for the six-month period ended June 30, 2011. This increase is mainly due to increased costs related to the management of six drilling units during the six-month period ended June 30, 2012, as compared to four drilling units during the corresponding six-month period ended June 30, 2011, as well as expenses related to the operation of the Company's office in Brazil that commenced operations in late 2011.

 
4

 
 
Legal settlements and other
 
Drybulk Carrier segment
 
For the drybulk carrier segment, a gain of $8.0 million was realized for the six-month period ended June 30, 2012, mainly due to compensation received from charterers as a result of the earlier redelivery of a number of vessels during 2012. No such gains were incurred during the relevant period in 2011.
 
Tanker segment
 
The Tanker segment did not incur such gains or losses during the relevant periods.
 
Offshore Drilling segment
 
The Offshore Drilling segment incurred net losses of $6.4 million, mainly associated with a claim related to import/export taxes duties in Angola that was settled during the second quarter of 2012. No such losses were incurred during the relevant period in 2011.
 
Interest and finance costs
 
Drybulk Carrier segment
 
Interest and finance costs increased by $1.3 million, or 2.8%, to $47.0 million for the six-month period ended June 30, 2012, as compared to $45.7 million for the six-month period ended June 30, 2011. The increase is mainly due to increased finance costs resulting from higher average debt and increased amortization of our convertible senior notes compared to the corresponding period in 2011.
 
Tanker segment
 
Interest and finance costs amounted to $0.7 million for the six-month period ended June 30, 2012, while for the six-month period ended June 30, 2011, the major part of interest and finance costs were capitalized to vessels under construction. The increase is mainly due to increased finance costs resulting from higher average debt due to the delivery of the vessels Calida, Petalidi and Lipari in 2012.
 
Offshore Drilling segment
 
Interest and finance costs increased by $39.5 million, or 188.1%, to $60.5 million for the six-month period ended June 30, 2012, as compared to $21.0 million for the six-month period ended June 30, 2011. The increase is mainly associated with higher level of debt during the first half of 2012, as compared to the corresponding period in 2011.
 
Interest income
 
Drybulk Carrier segment
 
Interest income decreased by $3.6 million, or 69.2%, to $1.6 million for the six-month period ended June 30, 2012, as compared to $5.2 million for the six-month period ended June 30, 2011. The decrease was mainly due to a decreased average cash balance and lower interest rates on our deposits during 2012, as compared to 2011.
 
Tanker segment
 
The Tanker segment did not earn any interest income during the relevant periods.
 
Offshore Drilling segment
 
Interest income decreased by $10.1 million, or 97.1%, to $0.3 million for the six-month period ended June 30, 2012, compared to $10.4 million for the six-month period ended June 30, 2011. The decrease was mainly due to lower interest rates on our deposits during 2012, as compared to 2011.
 
 
5

 
 
Loss on interest rate swaps
 
Drybulk Carrier segment
 
Losses on interest rate swaps decreased by $12.6 million, or 59.4%, to $8.6 million for the six-month period ended June 30, 2012, as compared to $21.2 million for the six-month period ended June 30, 2011. The loss for the six-month period ended June 30, 2012, was mainly due to mark to market losses of outstanding swap positions as swap rates trended downwards.
 
Tanker segment
 
Losses on interest rate swaps amounted to $2.2 million for the six-month period ended June 30, 2012. The Tanker segment did not incur any gain/(loss) on interest rate swaps during the relevant period in 2011 because the Company entered into swap agreements for this segment in 2012.
 
Offshore Drilling segment
 
Losses on interest rate swaps decreased by $7.7 million, or 41.4%, to $10.9 million for six-month period ended June 30, 2012, as compared to $18.6 million for the six-month period ended June 30, 2011. The loss for the six-month period ended June 30, 2012, was mainly due to mark to market losses of outstanding swap positions as swap rates trended downwards.
 
Other, net
 
Drybulk carrier segment
 
Other, net decreased by $1.9 million, to a gain of $0.7 million for the six-month period ended June 30, 2012, compared to a gain of $2.6 million for the six-month period ended June 30, 2011. The decrease is mainly attributable to the gain from the sale of $57 million of senior notes of Ocean Rig UDW Inc. ("Ocean Rig"), during the six-month period ended June 30, 2011 as compared to the sale of $18 million of senior notes of Ocean Rig in the relevant period in 2012.
 
Tanker segment
 
Other, net amounted to a loss of $0.02 million for the six-month period ended June 30, 2012, compared to a loss of $0.01 million for the relevant period in 2011.
 
Offshore Drilling segment

Other, net increased by $0.7 million, or 53.8%, to a gain of $1.9 million for the six-month period ended June 30, 2012, compared to a gain of $1.3 million for the six-month period ended June 30, 2011. The increase is due to gains arising from foreign currency exchange rate differences.
 
Income taxes
 
Drybulk Carrier segment
 
We did not incur any income taxes on international shipping income in our Drybulk Carrier segment for the relevant periods.
 
Tanker segment
 
We did not incur any income taxes on international shipping income in our Tanker segment for the relevant periods.
 
Offshore Drilling segment
 
Income taxes increased by $11.8 million, or 120.4%, to $21.6 million for the six-month period ended June 30, 2012, compared to $9.8 million for the six-month period ended June 30, 2011. Since our drilling units operate around the world, they may become subject to taxation in many different jurisdictions. The basis for such taxation depends on the relevant regulations in the countries in which we operate. Consequently, there is no expected relationship between the income tax expense or benefit for the period and the income or loss before taxes.

 
6

 
 
Liquidity

As of June 30, 2012, we had cash and cash equivalents of $366.3 million and $369.2 million of restricted cash related to (i) bank deposits which are used to fund the loan installments coming due, (or "retention accounts"); (ii) bank deposits permanently blocked as cash collateral; and (iii) required minimum cash and cash equivalents, (or "minimum liquidity").

Our cash and cash equivalents increased by $115.2 million, or 45.9%, to $366.3 million as of June 30, 2012, compared to $251.1 million as of December 31, 2011 and our restricted cash decreased by $36.4 million, or 9.0%, to $369.2 million as of June 30, 2012, compared to $405.6 million as of December 31, 2011. The increase in our cash and cash equivalents was mainly due to the net proceeds of borrowings under our senior secured credit facilities amounting to $110.7 million, proceeds of $18.7 million, in connection with the sale of senior notes of Ocean Rig, the net proceeds of $116.7 million from the sale of vessels, the net proceeds of $180.5 million in connection with our sale of common shares of Ocean Rig owned by us and cash from operations of approximately $131.5 million, which were partly offset by loan repayments of $214.0 million, advances for vessels and drilling units under construction amounting to $56.2 million and $209.1 million paid in connection with vessel and drilling rig acquisitions and improvements. The decrease in restricted cash was primarily due to the release of cash collateral of approximately $36.4 million pursuant to the terms of amendments to our credit facilities. Working capital is defined as current assets minus current liabilities (including the current portion of long-term debt). Our working capital deficit amounted to $128.1 million as of June 30, 2012, compared to $186.2 million as of December 31, 2011. The decrease in our working capital deficit by $58.1 million for the six-month period ended June 30, 2012 is primarily due to the increase in cash and cash equivalents described above. We believe that we will be able to satisfy our liquidity needs for the next 12 months with the cash we generate from our operations and, if required, proceeds from future debt or equity issuances.

Since our formation, our principal source of funds has been equity provided by our shareholders through equity offerings or at-the-market sales, operating cash flows and long-term borrowings. Our principal use of funds has been capital expenditures to establish and grow our fleet, the maintenance of the quality of our vessels, compliance with international shipping standards, environmental laws and regulations, the funding of working capital requirements, principal repayments on outstanding loan facilities and the payment of dividends.

As of June 30, 2012, we had total indebtedness of $4.4 billion under our senior secured credit facilities and senior notes, excluding unamortized financing fees.

Please refer to the discussion on Long-term Debt as detailed in Note 9 of our unaudited interim condensed consolidated financial statements for the six-month period ended June 30, 2012.

Cash flow

Net cash provided by operating activities was $131.5 million for the six-month period ended June 30, 2012. In determining net cash provided by operating activities for the six-month period ended June 30, 2012, net loss was adjusted for the effects of certain non-cash items including $166.0 million of depreciation and amortization, $1.0 million of loss on sale of assets, $15 million of amortization and write-off of deferred financing costs, $18.6 million of amortization of deferred convertible senior debt costs and $6.8 million of non-cash stock based compensation expenses. Moreover for the six-month period ended June 30, 2012, net loss was also adjusted for the effects of non-cash items such as the gain in the change in fair value of derivatives of $25.1 million, amortization of discontinued cash flow hedges of $6.5 million and amortization of above market value acquired time charters of $8.7 million. Net loss was also adjusted for the decrease in security deposits amounting to $33.1 million and a gain on sale of senior notes of Ocean Rig of $0.7 million. The Company had net cash outflows for working capital of approximately $20.0  million for the six-month period ended June 30, 2012. Net cash provided by operating activities was $137.5 million for the six-month period ended June 30, 2011.

Net cash used in investing activities was $93.5 million for the six-month period ended June 30, 2012. The Company made payments of $56.2 million for advances for vessels and drilling units under construction and $209.1 million for vessel and drilling rig acquisitions and improvements. These cash outflows were offset by the decrease of $36.4 million in the amount of cash deposits required by our lenders, proceeds of $18.7 million in connection with the sale of senior notes of Ocean Rig and the net proceeds of $116.7 million from the sale of vessels. Net cash used in investing activities was $993.6 million for the six-month period ended June 30, 2011.

Net cash provided by financing activities was $77.2 million for the six-month period ended June 30, 2012, consisting mainly of the borrowings of $128.1 million under our long term credit facilities and the net proceeds of $180.5 million in connection with the sale of common shares of Ocean Rig owned by us, which were offset by $17.4 million in payments for financing costs and repayments of $214.0 million of debt under our long-term credit facilities. Net cash provided by financing activities was $832.3 million for the six-month period ended June 30, 2011.
 
 
7

 

Financing activities

Long-term debt
As of June 30, 2012, the Company was in compliance with, or had the ability to remedy breaches of, the financial covenants contained in its credit facilities. As of June 30, 2012, we were not in compliance with loan-to-value ratios contained in certain of our loan agreements under which a total of $583.3 million was outstanding as of that date. As a result, we may be required to prepay indebtedness or provide additional collateral to our lenders in the form of cash in the total amount of $146.5 million in order to comply with these ratios. For more information, see "Item 5.B. Liquidity and Capital Resources – Breach of Financial Covenants under Secured Credit Facilities" in our Annual Report on Form 20-F for the year ended December 31, 2011 filed with the Commission on March 16, 2012.

If we fail to obtain a waiver for any covenant breach or remedy any such breach within the required time period or comply with the applicable covenants in the original loan agreements, as applicable, our lenders could accelerate our indebtedness and foreclose on our vessels. In addition, if conditions in the drybulk charter, tanker and offshore drilling markets decline from current levels and the market value of our vessels declines even further, we may seek to restructure our outstanding indebtedness.  For more information, see Note 9 to our unaudited interim condensed consolidated financial statements for the six-month period ended June 30, 2012.

As of June 30, 2012, we had $1.8 billion of remaining installment payments under our drybulk, tanker and drillship newbuilding contracts. We have not obtained financing for our four newbuilding Panamax drybulk vessels, two newbuilding Capesize drybulk vessels, five newbuilding tanker hulls and three newbuilding drillships. We plan to finance these capital expenditures, amounting to $1,572.9 million in the aggregate, with new debt or equity financing.

As of June 30, 2012, we had a total of $4.2 billion in debt outstanding (net of financing fees) under our credit facilities with various institutions and our senior notes. The table below reflects the classification of certain debt repayments scheduled to be due after June 30, 2012 as payable by such date indicated below.


Twelve months ending
 
Total
(in thousands)
June 30, 2013
 
$
512,575
 
June 30, 2014
 
 
710,993
 
June 30, 2015
 
 
998,825
 
June 30, 2016
 
 
1,434,820
 
June 30, 2017 and thereafter
 
 
707,524
 
     
4,364,737
 
Less: Financing fees
 
 
(169,963)
 
 
 
$
4,194,774
 
 
 Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations and Contingencies

The following table sets forth our contractual obligations and their maturity dates as of June 30, 2012:
 
 
Obligations
 
Total
   
1st year
   
2nd year
   
3rd year
   
4th year
   
5th year
and
thereafter
 
(In thousands of Dollars)
 
 
   
 
   
 
   
 
   
 
   
 
 
Shipbuilding contracts-Vessels (1)
  $ 693,095     $ 448,685     $ 173,010     $ 71,400     $ -     $ -  
Shipbuilding contracts-Drillships (2)
    1,096,826       -       1,096,826       -       -       -  
Retirement Plan Benefits (3)
    2,139       91       86       124       160       1,678  
Operating leases (4)
    2,736       1,232       1,232       272       -       -  
Office space rent (5)
    195       52       52       52       39       -  
Total
  $ 1,794,991     $ 450,060     $ 1,271,206     $ 71,848     $ 199     $ 1,678  
 
 
8

 
 
(1)
As of June 30, 2012, aggregate amounts of $11.6 million, $116.3 million and $70.2 million had been paid to the applicable shipyard for the construction cost of four newbuilding Panamax drybulk vessels, seven newbuilding Capesize drybulk vessels and five newbuilding tanker hulls, respectively.

(2)
As of June 30, 2012, our majority-owned subsidiary Ocean Rig made an aggregate of $726.6 million of construction and construction-related payments for the Company's three seventh generation drillships.

(3)
Ocean Rig has three defined benefit plans for its employees managed and funded through Norwegian life insurance companies at June 30, 2012. The pension plans covered 50 employees by June 30, 2012. Pension liabilities and pension costs are calculated based on the actuarial cost method as determined by an independent third party actuary.

(4)
We entered into two three-year office lease agreements with an unrelated party, which commenced on September 1, and October 1, 2011. These leases include an option for an additional two and three year term, which must be exercised at least six months prior to the end of the term of the contracts which expire in September and October 2014, respectively. Ocean Rig also entered a three year office lease with a third party in Nicosia Cyprus, which commenced on September 1, 2010. The lease agreements relating to office spaces are considered to be operational lease contracts.

(5) 
We lease office space in Athens, Greece, from a son of Mr. George Economou, our President Chairman and Chief Executive Officer.

Recent Developments

·On August 7, 2012, Ocean Rig entered into an amortizing interest rate swap agreement for an initial notional amount of $450.0 million maturing in July 2017. This agreement was entered into to hedge Ocean Rig's exposure to interest rate fluctuations by fixing the interest rate at 1.0425% from July 2013 until July 2017.
 
Significant Accounting policies
 
A discussion of our significant accounting policies is included in Note 2 in the Company's Annual Report on Form 20-F for the year ended December 31, 2011.

Changes in Accounting Policies

There have been no material changes to our accounting policies in the six-month period ended June 30, 2012, except for the additional accounting policies, which are as follows:
 
Short-term investments—Short-term investments generally represent investments in time deposits, which have maturities in excess of three months but less than twelve months. These investments are accounted for at cost.

Voyage charter: Voyage charter is a charter where a contract is made in the spot market for the use of a vessel for a specific voyage for a specified freight rate per ton.  If a charter agreement exists and collection of the related revenue is reasonably assured, revenue is recognized as it is earned ratably during the duration of the period of each voyage. A voyage is deemed to commence upon the completion of discharge of the vessel's previous cargo and is deemed to end upon the completion of discharge of the current cargo. Demurrage income represents payments by a charterer to a vessel owner when loading or discharging time exceeds the stipulated time in the voyage charter and is recognized ratably as earned during the related voyage charter's duration period.

Voyage related and vessel operating costs: Voyage expenses, primarily consisting of commissions, port, canal and bunker expenses that are unique to a particular charter, are paid for by the Company under voyage charter arrangements, except for commissions, which are either paid for by the Company or are deducted from the freight revenue. All voyage and vessel operating expenses are expensed as incurred, except for commissions. Commissions are deferred and amortized over the related voyage charter period to the extent revenue has been deferred since commissions are earned as the Company's revenues are earned.

 
9

 
 
FORWARD-LOOKING STATEMENTS

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

The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection therewith. This document and any other written or oral statements made by the Company or on its behalf may include forward-looking statements, which reflect its current views with respect to future events and financial performance. This document includes assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as "forward-looking statements." The Company cautions that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material. When used in this document, the words "anticipate," "estimate," "project," "forecast," "plan," "potential," "may," "should," and "expect" reflect forward-looking statements.

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

·  
future operating or financial results;
·  
statements about planned, pending or recent acquisitions, business strategy and expected capital spending or operating expenses, including drydocking and insurance costs;
·  
the Company's ability to enter into new contracts for drilling rigs and drillships and future utilization rates and contract rates for drilling rigs and drillships;
·  
future capital expenditures and investments in the construction, acquisition and refurbishment of drilling rigs and drillships (including the amount and nature thereof and the timing of completion thereof);
·  
statements about drybulk and tanker shipping market trends, including charter rates and factors affecting supply and demand;
·  
the Company's ability to obtain additional financing and comply with covenants in such financing arrangements;
·  
expectations regarding the availability of vessel acquisitions; and
·  
anticipated developments with respect to pending litigation.

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

Important factors that, in the Company's view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market conditions, including changes in charter rates and drybulk vessel, drilling unit and tanker values, failure of a seller to deliver one or more drilling units, tankers or drybulk vessels, failure of a buyer to accept delivery of a drilling unit, tanker or vessel, inability to procure acquisition financing, default by one or more charterers of the Company's ships, changes in demand for drybulk commodities or oil, changes in demand that may affect attitudes of time charterers, scheduled and unscheduled drydocking, changes in DryShips' voyage and operating expenses, including bunker prices, dry-docking and insurance costs, vessel breakdowns and instances of off-hires, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents, international hostilities and political events or acts by terrorists and other factors.

 
10

 
 

DRYSHIPS INC.
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
Page
 
 
Consolidated Balance Sheets as of December 31, 2011 and June 30, 2012 (unaudited)
F-2
Unaudited Interim Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2011 and 2012
F-3
Unaudited Interim Condensed Consolidated Statements of Comprehensive Income/ (Loss) for the six-month periods ended June 30, 2011 and 2012
F-4
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2012
F-5
Notes to Unaudited Interim Condensed Consolidated Financial Statements
F-6


 
 
F-1

 

DRYSHIPS INC.
Consolidated Balance Sheets
As of December 31, 2011 and June 30, 2012 (unaudited)
(Expressed in thousands of U.S. Dollars – except for share and per share data)
 
 
December 31, 2011
 
 
June 30,
2012
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash and cash equivalents
 
$
251,143
 
 
$
366,292
 
Restricted cash
 
 
72,765
 
 
 
67,344
 
Trade accounts receivable, net of allowance for doubtful receivables of $18,420 and $18,458
 
 
139,971
 
 
 
147,072
 
Due from related parties (Note 4)
 
 
26,146
 
 
 
36,015
 
Other current assets (Note 5)
 
 
80,052
 
 
 
160,106
 
Total current assets
 
 
570,077
 
 
 
776,829
 
 
 
 
 
 
 
 
 
 
FIXED ASSETS, NET:
 
 
 
 
 
 
 
 
Advances for vessels and drillships under construction and acquisitions (Note 6)
 
 
1,027,889
 
 
 
972,570
 
Vessels, net (Note 7)
 
 
1,956,270
 
 
 
2,063,115
 
Drilling rigs, drillships, machinery and equipment, net (Note 7)
 
 
4,587,916
 
 
 
4,527,770
 
Total fixed assets, net
 
 
7,572,075
 
 
 
7,563,455
 
 
 
 
 
 
 
 
 
 
OTHER NON-CURRENT ASSETS:
 
 
 
 
 
 
 
 
Restricted cash
 
 
332,801
 
 
 
301,899
 
Intangible assets, net
 
 
9,062
 
 
 
8,341
 
Above-market acquired time charters
 
 
40,102
 
 
 
31,404
 
Financial instruments (Note 10)
 
 
-
 
 
 
138
 
Other non-current assets (Note 8)
 
 
97,572
 
 
 
112,220
 
Total other non-current assets
 
 
479,537
 
 
 
454,002
 
Total assets
 
$
8,621,689
 
 
$
8,794,286
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
Current portion of long-term debt (Note 9)
 
$
429,149
 
 
$
499,823
 
Accounts payable and other current liabilities
 
 
58,774
 
 
 
62,053
 
Accrued liabilities
 
 
119,838
 
 
 
139,246
 
Due to related parties (Note 4)
 
 
7,518
 
 
 
8,404
 
Deferred revenue
 
 
40,880
 
 
 
93,810
 
Financial instruments (Note 10)
 
 
100,104
 
 
 
101,567
 
Total current liabilities
 
 
756,263
 
 
 
904,903
 
 
 
 
 
 
 
 
 
 
NON-CURRENT LIABILITIES
 
 
 
 
 
 
 
 
Long-term debt, net of current portion (Note 9)
 
 
3,812,686
 
 
 
3,694,951
 
Financial instruments (Note 10)
 
 
102,346
 
 
 
75,957
 
Deferred revenue
 
 
9,172
 
 
 
59,873
 
Other non-current liabilities
 
 
2,560
 
 
 
3,246
 
Total non-current liabilities
 
 
3,926,764
 
 
 
3,834,027
 
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 13)
 
 
-
 
 
 
-
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
 
 
Preferred stock, $0.01 par value; 500,000,000 shares authorized at December 31, 2011 and June 30, 2012; 100,000,000 shares designated as Series A Convertible preferred stock; 0 shares of Series A Convertible Preferred Stock issued and outstanding at December 31, 2011 and June 30, 2012, respectively
 
 
-
 
 
 
-
 
Common stock, $0.01 par value; 1,000,000,000 shares authorized at December 31, 2011 and June 30, 2012; 424,762,094 and 424,762,244 shares issued and outstanding at December 31, 2011 and June 30, 2012, respectively (Note 11)
 
 
4,247
 
 
 
            4,247
 
Treasury stock; $0.01 par value; 1,000,000  and 11,000,000 shares at December 31, 2011 and  June 30, 2012, respectively (Note 11)
 
 
(10
)
 
 
              (110
Additional paid-in capital (Note 11)
 
 
2,908,950
 
 
 
2,831,085
 
Accumulated other comprehensive loss (Note 14)
 
 
(28,610
)
 
 
(19,531
Retained earnings
 
 
260,751
 
 
 
195,093
 
Total Dryships Inc. stockholders' equity
 
 
3,145,328
 
 
 
3,010,784
 
Non controlling interests (Note 18)
 
 
793,334
 
 
 
1,044, 572
 
Total stockholders' equity
 
 
3,938,662
 
 
 
4,055,356
 
Total liabilities and stockholders' equity
 
$
8,621,689
 
 
$
8,794,286
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 
 
F-2

 

DRYSHIPS INC.
Unaudited Interim Condensed Consolidated Statements of Operations
For the six-month periods ended June 30, 2011 and 2012
(Expressed in thousands of U.S. Dollars - except for share and per share data)
 
 
 
 
Six-month period ended
 
 
 
 
June 30,
 
 
 
 
2011
 
 
 
2012
 
REVENUES:
 
 
 
 
 
 
 
 
 
Voyage revenues and amortization of above market acquired time charters
 
 
195,476
 
 
 
157,145
 
Leasing revenues
 
 
71,357
 
 
 
-
 
Service revenues and amortization of above market acquired drilling contracts
 
 
164,598
 
 
 
426,490
 
Total Revenues (Note 16)
 
$
431,431
 
 
$
583,635
 
 
 
 
 
 
 
 
 
 
EXPENSES:
 
 
 
 
 
 
 
 
Voyage expenses
 
 
12,062
 
 
 
10,484
 
Vessels, drilling rigs and drillships operating expenses
 
 
147,843
 
 
 
274,188
 
Depreciation and amortization
 
 
121,021
 
 
 
166,034
 
Loss on sale of assets, net (Note 7)
 
 
705
 
 
 
963
 
Vessel impairment charge
   
112,104
     
-
 
Gain from vessel insurance proceeds
   
(25,064
   
-
 
General and administrative expenses
 
 
53,930
 
 
 
65,344
 
Legal settlements and other (Note 13)
 
 
-
 
 
 
(1,606
)
Operating income
 
 
8,830
 
 
 
68,228
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME / (EXPENSES):
 
 
 
 
 
 
 
 
Interest and finance costs (Note 15)
 
 
(64,459
)
 
 
(108,253
)
Interest income
 
 
15,557
 
 
 
1,906
 
Loss on interest rate swaps (Note 10)
 
 
(39,775
)
 
 
(21,714
)
Other, net
 
 
3,812
 
 
 
2,576
 
Total other expenses, net
 
 
(84,865
)
 
 
(125,485
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LOSS BEFORE INCOME TAXES
 
 
(76,035
)
 
 
(57,257
)
Income taxes (Note 19)
 
 
(9,778
)
 
 
(21,628
)
NET LOSS
 
 
(85,813
)
 
 
(78,885
)
 
 
 
 
 
 
 
 
 
Less: Net (income)/loss attributable to non controlling interest
 
 
(2,511
)
 
 
13,227
 
NET LOSS ATTRIBUTABLE TO DRYSHIPS INC.
 
$
(88,324
)
 
$
(65,658
)
 
 
 
 
 
 
 
 
 
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (Note 17)
 
$
(92,254
)
 
$
(65,658
)
 
 
 
 
 
 
 
 
 
LOSS PER COMMON SHARE ATTRIBUTABLE TO DRYSHIPS INC. COMMON STOCKHOLDERS, BASIC AND DILUTED (Note 17)
 
$
(0.27
)
 
$
(0.17
)
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES, BASIC AND DILUTED (Note 17)
 
 
344,259,487
 
 
 
380,152,244
 
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
 
 
 
F-3

 
 
DRYSHIPS INC.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the six-month periods ended June 30, 2011 and 2012
(Expressed in thousands of U.S. Dollars – except for share and per share data)
 
 
 
 
 
 
 
 
 
Six-month period ended
June 30,
 
 
 
2011
 
 
2012
 
- Net loss
 
$
(85,813
)
 
$
(78,885
)
Other comprehensive income/(loss:)
 
 
 
 
 
 
 
 
- Unrealized gain on Senior Notes
 
 
1,197
 
 
 
2,059
 
- Reclassification of gain associated with Senior Notes to Consolidated Statement of Operations
 
 
(1,257
)
 
 
(709
- Reclassification of losses on previously designated cash flow hedges to Consolidated Statement of Operations, net
 
 
6,544
 
 
 
6,544
 
- Reclassification of realized losses associated with capitalized interest to Consolidated Statement of Operations, net
 
 
126
 
 
 
274
 
- Actuarial gains
 
 
140
 
 
 
102
 
Other comprehensive income/(loss)
 
$
6,750
 
 
$
8,270
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
 
(79,063
)
 
 
(70,615
)
- Less: comprehensive (income)/loss attributable to non controlling interests
 
 
(4,010
 
 
11,167
 
Comprehensive loss attributable to Dryships Inc.
 
$
(83,073
)
 
$
(59,448
)
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
 
 
F-4

 

DRYSHIPS INC.
Unaudited Interim Condensed Consolidated Statements of Cash Flows
For the six-month periods ended June 30, 2011 and 2012
(Expressed in thousands of U.S. Dollars - except for share and per share data)

 
 
Six-month period ended
June 30,
 
 
 
2011
 
 
2012
 
Net Cash Provided by Operating Activities
 
$
137,492
 
 
$
131,503
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Vessel insurance proceeds
   
58,200
     
-
 
Option for future construction of rigs
 
 
(30,019
)
 
 
-
 
Proceeds from sale of notes
 
 
-
 
 
 
18,709
 
Vessels/drilling rigs acquisitions, improvements and other fixed assets
 
 
(251
)
 
 
(209,097
)
Advances for vessel acquisitions/drillships under construction.
 
 
(1,384,632
)
 
 
(56,210
)
Decrease in restricted cash
 
 
337,433
 
 
 
36,323
 
Proceeds from sale of vessels, net of costs
 
 
25,670
 
 
 
116,740
 
Net Cash Used in Investing Activities
 
 
(993,599
)
 
 
(93,535
)
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities :
 
 
 
 
 
 
 
 
Proceeds from long-term credit facility
 
 
1,378,313
 
 
 
128,103
 
Net proceeds from sale in ownerships of subsidiary
 
 
-
 
 
 
180,485
 
Payments of long-term credit facility
 
 
(509,169
)
 
 
(214,032
)
Payment of financing costs
 
 
(36,893
)
 
 
(17,375
)
Net Cash Provided by Financing Activities
 
 
832,251
 
 
 
77,181
 
Net (decrease)/ increase in cash and cash equivalents
 
 
(23,856
)
 
 
115,149
 
Cash and cash equivalents at beginning of period
 
 
391,530
 
 
 
251,143
 
Cash and cash equivalents at end of period
 
$
367,674
 
 
$
366,292
 
 
 
 
 
 
 
 
 
 

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

 
 
F-5

 

 DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
(Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)

1. Basis of Presentation and General Information:
 
The accompanying unaudited interim condensed consolidated financial statements include the accounts of DryShips Inc. and its subsidiaries (collectively, the "Company" or "DryShips"). DryShips was formed on September 9, 2004, under the laws of the Republic of the Marshall Islands.  The Company is a provider of international seaborne drycargo and oil transportation services and deepwater drilling services.
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and applicable rules and regulations from the U.S. Securities and Exchange Commission (the "SEC") for interim financial information. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. These statements and the accompanying notes should be read in conjunction with the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2011, filed with the SEC on March 16, 2012.

Certain prior period amounts have been reclassified to conform to the current year presentation including: a) the reclassification of part of deferred mobilization expenses and deferred revenue from current assets and current liabilities, respectively, to non-current assets and non-current liabilities and b) the reclassification of foreign exchange gains/losses in the Statement of operations from "General and administrative expenses" to "Other, net".

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Operating results for the six-month period ended June 30, 2012, are not necessarily indicative of the results that might be expected for the fiscal year ending December 31, 2012.
 
2. Significant Accounting policies:
 
A discussion of the Company's significant accounting policies can be found in the Company's consolidated financial statements included in the Annual Report on Form 20-F for the year ended December 31, 2011, filed with the SEC on March 16, 2012 (the "Consolidated Financial Statements for the year ended December 31, 2011"). There have been no material changes to these policies in the six-month period ended June 30, 2012, except for additional accounting policies, which are as follows:
 
Short-term investments—Short-term investments generally represent investments in time deposits, which have maturities in excess of three months but less than twelve months. These investments are accounted for at cost.

Voyage charter: Voyage charter is a charter where a contract is made in the spot market for the use of a vessel for a specific voyage for a specified freight rate per ton.  If a charter agreement exists and collection of the related revenue is reasonably assured, revenue is recognized as it is earned ratably during the duration of the period of each voyage. A voyage is deemed to commence upon the completion of discharge of the vessel's previous cargo and is deemed to end upon the completion of discharge of the current cargo. Demurrage income represents payments by a charterer to a vessel owner when loading or discharging time exceeds the stipulated time in the voyage charter and is recognized ratably as earned during the related voyage charter's duration period.
 
Voyage related and vessel operating costs: Voyage expenses, primarily consisting of commissions, port, canal and bunker expenses that are unique to a particular charter, are paid for by the Company under voyage charter arrangements, except for commissions, which are either paid for by the Company or are deducted from the freight revenue. All voyage and vessel operating expenses are expensed as incurred, except for commissions. Commissions are deferred and amortized over the related voyage charter period to the extent revenue has been deferred since commissions are earned as the Company's revenues are earned.
 
3. Working capital

 At June 30, 2012, the Company's current liabilities exceeded its current assets by $128,074. In addition and as further discussed in Note 13, the Company's expected short term capital commitments to fund the construction installments under the shipbuilding contracts in the twelve-month period ending June 30, 2013 amount to $448,685. Cash expected to be generated from operations assuming that current market charter hire rates would prevail in the twelve-month period ending June 30, 2013, may not be sufficient to cover the Company's capital commitments. The Company expects to finance its capital commitments with cash on hand, operational cash flow and debt or equity issuances.

 
 
F-6

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)

4. Transactions with Related Parties:

The amounts included in the accompanying consolidated balance sheets and unaudited interim condensed statements of operations are as follows:
 
 
 
 
 
 
 
 
 
December 31,
2011
 
 
June 30,
2012
 
Balance Sheet
 
 
 
 
 
 
Due to related party - Cardiff
 
$
(671
)
 
$
(2,019
Due to related party - Tri-Ocean Heidmar
 
 
(43
)
 
 
 -
 
Due to related party - TMS Dry
 
 
(6,804
)
 
 
  -
 
Due to related party –Vivid
 
 
-
 
 
 
(4,402
Due to related party –Basset
           
(1,983
)
Due to related party - Total
 
 
(7,518
)
 
 
(8,404
)
 
 
 
 
 
 
 
 
 
Due from related party - TMS Bulkers
 
 
19,579
 
 
 
27,159
 
Due from related party - TMS Tankers
 
 
6,324
 
 
 
8,511
 
Due from related party - Sigma and Blue Fin pool
 
 
243
 
 
 
345
 
Due from related party - Total
 
 
26,146
 
 
 
36,015
 
 
 
 
 
 
 
 
 
 
Advances for vessels and drillships under construction - Cardiff/TMS Bulkers/ TMS Tankers, for the year/ period
 
 
8,484
 
 
 
5,001
 
Vessels, drilling rigs, drillships, machinery and equipment, net - Cardiff/TMS Bulkers/TMS Tankers, for the year/period
 
 
9,195
 
 
 
6,017
 
Accounts payable and other current liabilities - Sigma Pool
 
 
111
 
 
 
31
 
Trade Accounts Receivable- Accrued Receivables- Sigma and Blue Fin Pool
   
549
     
1,785
 
Other current assets - Sigma and Blue Fin pool
 
 
3,635
 
 
 
4,639
 
Other non-current assets - Sigma and Blue Fin pool
 
 
675
 
 
 
825
 
Other non-current assets - TMS Dry
 
$
4,140
 
 
$
-
 
 
 
 
 
Six- month period
ended June 30,
 
Statement of Operations
 
2011
 
 
2012
 
Voyage Revenues - Sigma and Blue Fin pool
 
 
5,348
     
   15,068
 
Voyage expenses - TMS Tankers
 
 
(67
   
(249
Voyage expenses - TMS Bulkers
 
 
(2,359
   
(1,872
Voyage expenses – Cardiff Tankers
 
 
-
     
(31
Loss on sale of assets, net - commissions - TMS Bulkers
 
 
-
     
(1,180
General and administrative expenses:
 
 
           
- Consultancy fees - Fabiana
 
 
(1,919
   
(1,757
- Consultancy fees - Vivid
 
 
(205
   
(8,033
- Consultancy fees - Basset
   
-
     
(1,983
- Management fees - TMS Tankers
 
 
(787
   
(2,299
- Management fees - TMS Bulkers
 
 
(13,672
   
(13,711
- Rent
 
 
(10
   
(24
- Amortization of CEO stock based compensation
 
 
(15,635
   
(6,297
 
            (Per day and per quarter information in the note below is expressed in United States Dollars/Euros)
 
 
 
F-7

 

 DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
 
4. Transactions with Related Parties - continued:
 
TMS Bulkers Ltd. - TMS Tankers Ltd.:
 
Effective January 1, 2011, each of the Company's drybulk vessel-owning subsidiaries entered into new management agreements with TMS Bulkers Ltd. ("TMS Bulkers"), which replaced the Company's management agreements with Cardiff Marine Inc. ("Cardiff"), a related technical and commercial management company incorporated in Liberia, that were effective as of September 1, 2010 through December 31, 2010 and each of the Company's tanker ship-owning subsidiaries entered into new management agreements with TMS Tankers Ltd. ("TMS Tankers" and together with TMS Bulkers, the "Managers"). The Managers are beneficially majority owned by George Economou.
 
TMS Bulkers provides comprehensive drybulk ship management services, including technical supervision, such as repairs, maintenance and inspections, safety and quality, crewing and training as well as supply provisioning. TMS Bulkers' commercial management services include operations, chartering, sale and purchase, post-fixture administration, accounting, freight invoicing and insurance. Each new vessel management agreement provides for a fixed management fee, the same fee as was charged by Cardiff under the Company's previous management agreements effective from September 1, 2010 through December 31, 2010, of Euro 1,500 ($1,899 based on the Euro/U.S. Dollar exchange rate at June 30, 2012) per vessel per day, which is payable in equal monthly installments in advance and is automatically adjusted each year to the Greek Consumer Price Index for the previous year by not less than 3% and not more than 5%. Effective January 1, 2012, the fixed management fee was adjusted by 3% to Euro 1,545 per vessel per day ($1,956 based on the Euro/U.S. Dollar exchange rate at June 30, 2012).
 
If TMS Bulkers is requested to supervise the construction of a newbuilding vessel, in lieu of the management fee, the Company will pay TMS Bulkers an upfront fee equal to 10% of the budgeted supervision cost. For any additional attendance above the budgeted superintendent expenses, the Company will be charged extra at a standard rate of Euro 500 (or $633 based on the Euro/U.S. Dollar exchange rate as of June 30, 2012) per day.
 
TMS Tankers provides comprehensive tanker ship management services, including technical supervision, such as repairs, maintenance and inspections, safety and quality, crewing and training as well as supply provisioning. TMS Tankers' commercial management services include operations, chartering, sale and purchase, post-fixture administration, accounting, freight invoicing and insurance. Under the management agreements, TMS Tankers is entitled to a construction supervisory fee of 10% of the budgeted cost of the vessels under construction, payable up front in lieu of the fixed management fee. Once the vessel is operating, TMS Tankers is entitled to a daily management fee per vessel of Euro 1,700 ($2,153 based on the Euro/U.S. Dollar exchange rate at June 30, 2012), payable in equal monthly installments in advance and automatically adjusted each year to the Greek Consumer Price Index for the previous year by not less than 3% and not more than 5%. Effective January 1, 2012, the fixed management fee was adjusted by 3% to Euro 1,751($2,217 based on the Euro/U.S. Dollar exchange rate at June 30, 2012).
 
Under their respective agreements, the Managers are also entitled to (i) a discretionary incentive fee; (ii) a commission of 1.25% on charter hire agreements that are arranged by the Managers; and (iii) a commission of 1% of the purchase price on sales or purchases of vessels in the Company's fleet that are arranged by the Managers.
 
In the event that the management agreements are terminated for any reason other than a default by the Managers, the Company will be required to pay the management fee for a further period of three calendar months as from the date of termination. In the event of a change of control of the Company's ownership the Company will be required to pay the Managers a termination payment, representing an amount equal to the estimated remaining fees payable to the Managers under the then current term of the agreement, which such payment shall not be less than the fees for a period of 36 months and not more than a period of 48 months.
 
Each management agreement has an initial term of five years and will be automatically renewed for a five year period and thereafter extended in five year increments, unless the Company provides notice of termination in the fourth quarter of the year immediately preceding the end of the respective term.
 
Transactions with TMS Bulkers and TMS Tankers in Euros were settled on the basis of the average U.S. Dollar rate on the invoice date.

 
F-8

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
4. Transactions with Related Parties - continued:
 
TMS Dry Ltd.: OceanFreight Inc. ("OceanFreight") which was acquired by the Company on August 24, 2011, had contracted the technical and commercial management of its drybulk vessels to TMS Dry Ltd. ("TMS Dry"), a related party entity beneficially majority owned by the Company's Chairman, President and Chief Executive Officer, Mr. George Economou.
 
TMS Dry was engaged under separate vessel management agreements directly by OceanFreight's wholly-owned, vessel-owning subsidiaries. Under the vessel management agreements, OceanFreight paid a daily management fee per vessel, covering also superintendent's fee per vessel plus expenses for any services performed relating to the evaluation of the vessel's physical condition, supervision of shipboard activities or attendance upon repairs and drydockings. At the beginning of each calendar year, these fees were adjusted upwards according to the Greek consumer price index. Such increase could not be less than 3% and more than 5%. In the event that the management agreements were terminated for any reason other than TMS Dry's default, OceanFreight was required (i) to pay management fees for a further period of three calendar months as from the date of termination; and (ii) to pay an equitable proportion of any severance crew costs which materialize as per applicable Collective Bargaining Agreement (CBA). TMS Dry was entitled to a daily management fee per vessel of Euro 1,500 ($1,899 based on the Euro/U.S. Dollar exchange rate at June 30, 2012) for the drybulk vessels. TMS Dry was also entitled to (i) a discretionary incentive fee; (ii) extra superintendents' fees of Euro 500 ($633 based on the Euro/U.S. Dollar exchange rate at June 30, 2012) per day; (iii) a commission of 1.25% on charter hire agreements; and (iv) a commission of 1% of the purchase price on sale or purchases of vessels in OceanFreight's fleet. Furthermore, TMS Dry was entitled to a supervision fee payable upfront for vessels under construction equal to 10% of the approved annual budgeted cost.
 
On July 25, 2011, OceanFreight, TMS Dry and TMS Bulkers entered into an agreement providing for the termination of the management agreements with TMS Dry upon completion of the merger. Under this agreement TMS Dry received (a) $6,600 due to the change of control and waived its contractual entitlement to seek fees for three years; and (b) $2,400 commission due to the merger transaction. Pursuant to addendum No.1 to the management agreement, dated November 3, 2011, it was agreed, among other things, that the management agreements with TMS Dry would be terminated on December 31, 2011. Effective January 1, 2012, the Company novated the management agreements for each of the eleven OceanFreight vessels and hulls to TMS Bulkers on terms identical to those in the previous management agreements with TMS Dry, taking into account, the adjustments in TMS Bulkers in 2012.
 
Transactions with TMS Dry in Euros were settled on the basis of the average USD rate on the invoice date.
 
Global Services Agreement: On December 1, 2010, the Company entered into a Global Services Agreement with Cardiff, effective December 21, 2010, pursuant to which the Company has engaged Cardiff to act as consultant on matters of chartering and sale and purchase transactions for the offshore drilling units operated by the Company's majority-owned subsidiary, Ocean Rig UDW Inc. ("Ocean Rig"). Under the Global Services Agreement, Cardiff, or its subcontractor, (i) provides consulting services related to identifying, sourcing, negotiating and arranging new employment for offshore assets of Ocean Rig, including  Ocean Rig's drilling units; and (ii) identifies, sources, negotiates and arranges the sale or purchase of the offshore assets of Ocean Rig, including the Company's drilling units. In consideration of such services, the Company pays Cardiff a fee of 1.0% in connection with employment arrangements and 0.75% in connection with sale and purchase activities. For the six-month periods ended June 30, 2011 and June 30, 2012, the Company paid $800 and $2,815, respectively, as fees related to the Global Services Agreement regarding employment arrangements.
 
Transactions with Cardiff in Euros were settled on the basis of the average USD rate on the invoice date.
 
 
 
F-9

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
4. Transactions with Related Parties - continued:
 
George Economou: As the Company's Chairman, Chief Executive Officer (CEO) and principal shareholder, with a 14.2% shareholding, George Economou has the ability to exert influence over the operations of the Company.

In April 2012, companies affiliated with the Company's Chairman and CEO purchased a total of 2,185,000 common shares of Ocean Rig owned by DryShips, in the offering that was completed on April 17, 2012, at the public offering price (Note 11).
 
Fabiana Services S.A.: Under the consultancy agreements effective from February 3, 2005, between the Company and Fabiana Services S.A. ("Fabiana"), a related party entity incorporated in the Republic of the Marshall Islands, Fabiana provides consultancy services relating to the services of George Economou in his capacity as Chief Executive Officer of the Company (Note 12).
 
On January 25, 2010, the Compensation Committee approved a bonus in the form of 4,500,000 shares of the Company's common stock, with par value $0.01, be granted to Fabiana for the contribution of George Economou for CEO services rendered during 2009 as well as for anticipated services during the years 2010, 2011 and 2012. The shares vest over a period of three years, with 1,000,000 shares to vest on the grant date; 1,000,000 shares to vest on December 31, 2010 and 2011 respectively; and 1,500,000 shares to vest on December 31, 2012. In addition, the annual remuneration to be awarded to Fabiana under the consultancy agreement was increased to Euro 2.7 million ($3.4 million based on the exchange rate as of June 30, 2012).
 
On January 12, 2011, the Compensation Committee approved a bonus of $4 million and 9,000,000 shares of the Company's common stock payable for CEO services rendered during 2010. The shares were granted to Fabiana and vest over a period of eight years, with 1,000,000 shares to vest on the grant date and 1,000,000 shares to vest annually on December 31, 2011 through 2018, respectively.
 
Basset Holdings Inc.: Under the Consultancy Agreement effective from June 1, 2012, between the Company and Basset Holdings Inc. ("Basset"), a related party entity incorporated in the Republic of Marshall Islands, Basset provides consultancy services relating to the services of Antony Kandylidis in his capacity as Executive Vice-President of the Company. The annual remuneration to be awarded to Basset under the consultancy agreement is Euro 0.9 million ($1.1 million based on the exchange rate as of June 30, 2012). For the six month period ended June 30, 2012, the Company incurred costs of $1,983, including sign on bonus of Euro 1.5 million ($1.9 million based on the exchange rate as of June 30, 2012) related to this agreement.

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

Vivid Finance Limited: Under the consultancy agreement effective from September 1, 2010, between the Company and Vivid Finance Limited ("Vivid"), a company controlled by George Economou, Vivid provides the Company with financing-related services such as (i) negotiating and arranging new loan and credit facilities, interest rate swap agreements, foreign currency contracts and forward exchange contracts, (ii) renegotiating existing loan facilities and other debt instruments and, (iii) the raising of equity or debt in the capital markets. In exchange for its services, Vivid is entitled to a fee equal to 0.20% on the total transaction amount. The consultancy agreement has a term of five years and may be terminated (i) at the end of its term unless extended by mutual agreement of the parties; (ii) at any time by the mutual agreement of the parties; and (iii) by the Company after providing written notice to Vivid at least 30 days prior to the actual termination date.
 
Lease Agreement: The Company leases office space in Athens, Greece from a son of George Economou.
 
Sigma Tankers Inc. pool and Blue Fin Tankers Inc. pool: Tankers Saga, Daytona, Belmar and Calida are employed in the Sigma Tankers Inc. pool ("Sigma") while tankers Vilamoura, Petalidi and Lipari are employed in the Blue Fin Tankers Inc. pool ("Blue Fin"). The Sigma and Blue Fin pools are spot market pools managed by Heidmar Inc. George Economou is a member of the Board of Directors of Heidmar Inc.

 
 
F-10

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
5. Other Current assets
 
The amounts shown in the accompanying consolidated balance sheets are analyzed as follows:
 
 
 
 
 
 
 
 
 
 
December 31,
2011
 
 
June 30,
2012
 
Inventories
 
$
15,681
 
 
$
10,976
 
Deferred mobilization expenses
 
 
38,052
 
 
 
54,941
 
Prepayments and advances
 
 
15,750
 
 
 
17,260
 
Loss of hire proceeds (Note 13)
   
-
     
24,640
 
Refundable import taxes
 
 
-
 
 
 
37,484
 
Other
 
 
10,569
 
 
 
14,805
 
Balance at end of year/period
 
$
80,052
 
 
$
160,106
 

6. Advances for vessels and Drillships under Construction and Acquisitions:
 
The amounts shown in the accompanying consolidated balance sheets include milestone payments relating to the shipbuilding contracts with the shipyards, supervision costs and any material related expenses incurred during the construction periods, all of which are capitalized in accordance with the accounting policy discussed in Note 2 of the Consolidated Financial Statements for the year ended December 31, 2011.
 
The amounts shown in the accompanying consolidated balance sheets are analyzed as follows:
 
 
 
 
 
Balance at December 31, 2011
 
$
1,027,889
 
Advances for vessels/drillships under construction and related costs
 
 
223,111
 
Vessels/drillships delivered
 
 
(278,430
Balance at June 30, 2012
 
$
972,570
 
 
 
 
 
 
 
On January 3, 2012, April 25, 2012 and May 31, 2012, the Company took delivery of its newbuilding tankers Calida, Lipari and Petalidi, respectively, while the vessels Woolloomooloo (ex. H1637A) and Raraka (ex. H1638A) were delivered on February 6, 2012 and March 2, 2012, respectively.

 
 
F-11

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
7. Vessels, Drilling Rigs, Drillships, Machinery and Equipment:
 
The amounts in the accompanying consolidated balance sheets are analyzed as follows:
 
Vessels:
 
 
 
Cost
 
 
Accumulated
Depreciation
 
 
Net Book
Value
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
$
2,364,707
 
 
$
(408,437
)
 
$
1,956,270
 
Additions/transfers from vessels under construction
 
 
278,430
     
-
     
278,430
 
Vessel disposals
 
 
(132,950
   
15,251
     
(117,699
Depreciation
 
 
-
     
(53,886
   
(53,886
Balance, June 30, 2012
 
$
2,510,187
 
 
$
(447,072
)
 
$
2,063,115
 
 
On February 10, 2012, the Company concluded two Memoranda of Agreements for the sale of the vessels Avoca and Padre and on March 16, 2012, the Company concluded one Memorandum of Agreement for the sale of the vessel Positano, for a sale price of $118,000 in the aggregate. The Company has not classified the above vessels Avoca,  Padre and Positano as "held for sale" in the accompanying consolidated balance sheets, as of December 31, 2011 and as of June 30, 2012, respectively, as all criteria required for their classification as "Vessels held for sale" were not met. As of December 31, 2011, an impairment loss of $32,584 in the aggregate, was recognized, as a result of the reduction of the vessels' carrying amount to their fair value. The vessels Avoca and Padre were delivered to their new owners on February 22, 2012 and February 24, 2012, respectively, realizing a loss of $1,487. The vessel Positano was delivered to her new owners May 4, 2012, realizing a gain of $499.
 
Drilling rigs, drillships, machinery and equipment:
 
 
 
Cost
 
 
Accumulated
Depreciation
 
 
Net Book
Value
 
Balance, December 31, 2011
 
$
4,942,716
 
 
$
 (354,800
)    $
4,587,916
 
Additions
 
 
51,010
     
-
     
51,010
 
Disposals
   
(3
   
-
     
(3
Depreciation
 
 
-
     
(111,153
   
(111,153
Balance, June 30, 2012
  $  4,993,723     $  (465,953 )   $  4,527,770  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2012, all of the Company's operating vessels, drilling rigs and drillships, except the vessel Saldhana, have been pledged as collateral to secure bank loans (Note 9).
 
8. Other non-current assets:
 
The amounts included in the accompanying consolidated balance sheets are as follows:
 
 
December 31,
 
 
June 30,
 
 
 
2011
 
 
2012
 
Security deposits for derivatives
 
$
33,100
 
 
$
-
 
Option for construction of drillships
 
 
24,756
 
 
 
24,756
 
Deferred mobilization expenses
 
 
24,176
 
 
 
59,496
 
Other
 
 
15,540
 
 
 
27,968
 
Balance at end of year/period
 
$
97,572
 
 
$
112,220
 

 
F-12

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
8. Other non-current assets-continued:

As of December 31, 2011, security deposits of $33,100 for the Ocean Rig Poseidon and Ocean Rig Mykonos, were recorded as "Other non-current assets" in the accompanying consolidated balance sheet. These deposits were required by the counterparty due to the market loss in the swap agreements as of December 31, 2011. Following the commencement of operations of the Ocean Rig Mykonos, these deposits were no longer required.

On November 22, 2010, the Company, entered into an option contract with Samsung Heavy Industries Co. Ltd. ("Samsung") for the construction of up to four ultra-deepwater drillships, which will be "sister-ships" to the Ocean Rig Corcovado, Ocean Rig Olympia, Ocean Rig Poseidon and the Ocean Rig Mykonos, with certain upgrades to vessels design and specifications. The option agreement was novated by the Company to Ocean Rig on December 30, 2010. On May 16, 2011, Ocean Rig entered into an addendum to the option contract for the construction of up to two additional drillships with the same contract terms, conditions and specifications as the four optional drillships under the original agreement and extended the date to exercise the fourth option under the original agreement and the two additional options under the addendum from November 22, 2011 to January 31, 2012.
 
The Company has exercised three of the six options under the agreement and, as a result, has entered into shipbuilding contracts for three seventh generation, ultra-deepwater drillships with deliveries scheduled in July 2013, October 2013 and November 2013, respectively.

In 2012, Ocean Rig entered into addenda to the option contract to further extend the date by which Ocean Rig must exercise its three remaining options under the contract to October 4, 2012. Drillship deliveries are at the reasonable discretion of Samsung declaring the earliest available date based on Samsung's construction schedule.
 
9. Long-term debt:
 
The amount of long-term debt shown in the accompanying consolidated balance sheets is analyzed as follows:
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
June 30, 2012
 
Convertible Senior Notes
 
$
700,000
 
 
$
700,000
 
Ocean Rig Senior Notes
 
 
500,000
 
 
 
500,000
 
Loan Facilities - Drybulk Segment
 
 
841,453
 
 
 
747,589
 
Loan Facilities - Tanker Segment
 
 
130,048
 
 
 
233,815
 
Loan Facilities - Drilling Segment
 
 
2,279,167
 
 
 
2,183,333
 
Less: Deferred financing costs
 
 
(192,183
)
 
 
(169,963
Less: Dryships participation in Ocean Rig Senior Notes
 
 
(18,000
)
 
 
-
 
Add: Valuation of Dryships participation in Ocean Rig Senior Notes
 
 
1,350
 
 
 
-
 
Total debt
 
 
4,241,835
 
 
 
4,194,774
 
Less: Current portion
 
 
(429,149
)
 
 
(499,823
Long-term portion
 
$
3,812,686
 
 
$
3,694,951
 
 
 Convertible Senior Notes and Related Borrow Facility
 
In conjunction with the Company's public offering of an aggregate of $460,000 and $240,000 aggregate principal amount of 5% Convertible unsecured Senior Notes (the "Notes") in November 2009 and April 2010, respectively (collectively, the "Notes"), the Company entered into share lending agreements with an affiliate of the underwriter of the offering, or the share borrower, pursuant to which the Company loaned the share borrower approximately 36,100,000 shares of the Company's common stock. Under the share lending agreements, the share borrower is required to return the borrowed shares when the Notes are no longer outstanding. The Company did not receive any proceeds from the sale of the borrowed shares by the share borrower, but the Company did receive a nominal lending fee of $0.01 per share from the share borrower for the use of the borrowed shares. During 2011 and 2012, the share borrower returned 1,000,000 and 10,000,000, respectively, of the above loaned shares to the Company, which were not retired and are included as treasury stock in the accompanying balance sheets as of December 31, 2011 and June 30, 2012.
 
 
F-13

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
9. Long-term debt - continued:
 
The fair value of the outstanding loaned shares as of December 31, 2011 and June 30, 2012, was $70,200 and $54,969, respectively. On the day of the Notes issuance the fair value of the share lending agreements was determined to be $14,476, based on a 5.5% interest rate of the Notes without the share lending agreement and was recorded as debt issuance cost. Amortization of the issuance costs associated with the share lending agreement during the six-month periods ended June 30, 2011 and 2012 was $1,476 and $1,483, respectively, and is included in "Interest and finance costs." The unamortized balance as of December 31, 2011 and June 30, 2012, was $8,690 and $7,206, respectively.

Effective September 19, 2011, the applicable conversion price of the Notes changed to $6.9 per share. The previous conversion price of $7.19 per share was adjusted downward in connection with the Company's partial spin off of Ocean Rig common stock held by the Company. Since the Company's stock price was below the Notes conversion price of $6.9 as of June 30, 2012, the if-converted value did not exceed the principal amount of the Notes.
 
The total interest expense related to the Notes in the Company's unaudited interim condensed consolidated statement of operations for the six-month periods ended June 30, 2011 and 2012, was $33,760 and $36,121, respectively, of which $16,260 and $18,621, respectively are non-cash amortization of the discount on the liability component and $17,500 and $17,500, respectively are the contractual interest paid semi-annually at a coupon rate of 5% per year. At December 31, 2011 and June 30, 2012, the net carrying amount of the liability component and unamortized discount were $572,113 and $590,734, respectively, and $127,887 and $109,266, respectively.
 
The Company's interest expense associated with the $460,000 aggregate principal amount and $240,000 aggregate principal amount of Notes is accretive based on an effective interest rate of 12% and 14%, respectively.
 
Ocean Rig Senior Notes
 
On April 27, 2011, Ocean Rig issued $500,000 aggregate principal amount of its 9.5% senior unsecured notes due 2016 (the "OCR UDW Notes") offered in a private placement, resulting in net proceeds of approximately $487.5 million. The OCR UDW Notes are unsecured obligations and rank senior in right of payment to any future subordinated indebtedness and equally in right of payment to all of the Company's existing and future unsecured senior indebtedness.
 
The OCR UDW Notes are not guaranteed by any of the Company's subsidiaries. Ocean Rig may redeem some or all of the OCR UDW Notes as follows: (i) at any time and from time to time from April 27, 2014 to April 26, 2015, at a redemption price equal to 104.5% of the aggregate principal amount, plus accrued and unpaid interest to the date of redemption; or (ii) at any time and from time to time from April 27, 2015 at a redemption price equal to 102.5% of the aggregate principal amount, plus accrued and unpaid interest to the date of redemption. Upon a change of control, which occurs if 50% or more of Ocean Rig's shares are acquired by any person or group other than DryShips or its affiliates, the noteholders will have an option to require Ocean Rig to purchase all outstanding notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. As of June 30, 2012, Ocean Rig was in compliance with the agreement's financial covenants.
 
The total interest expense and debt amortization cost related to the OCR UDW Notes in the accompanying unaudited interim condensed consolidated statement of operations for the six-month periods ended June 30, 2011 and 2012, was $8,312 and $24,595, respectively. The contractual semi-annual coupon interest rate is 9.5% per year.
 
On April 26, 2011, DryShips agreed to purchase from three unaffiliated companies OCR UDW Notes in the total aggregate principal amount of $75,000. During the period from May 19, 2011 to July 27, 2011, the Company sold to third parties these senior unsecured notes with a notional amount of $57,000 resulting in a gain of $1,406. The remaining $18,000 of senior unsecured notes were also sold, during the period from March 15, 2012 to March 30, 2012, to third parties with a notional amount of $18,000 resulting in a gain of $709.
 
 
 
F-14

 

DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
9. Long-term debt - continued:

Term bank loans and credit facilities
 
The Company's bank loans are payable in U.S. Dollars in quarterly and semi-annual installments with balloon payments due at maturity between January 2015 and December 2020. Interest rates on the outstanding loans as at June 30, 2012 are based on LIBOR plus a margin, except for an amount of $486,111 from the Loan facilities which are based on a fixed interest rate.
 
On January 4, 2012, the Company entered into a supplemental agreement for the term bank loan dated July 23, 2008 and the vessel Woolloomooloo was pledged as collateral to secure the bank loan.
 
On February 9, 2012, the Company entered into two supplemental agreements for a shortfall in the security cover ratio and pledged 10,000,000 of its shares of Ocean Rig as additional security. The share pledge expired on March 31, 2012.
 
On February 14, 2012, the Company entered into a $122,580 secured credit facility to partially finance the construction costs relating to three of its Very Large Ore Carriers ("VLOCs") under construction, which are scheduled for delivery in September 2012, October 2012 and January 2013. The facility bears interest at LIBOR plus a margin and is repayable in forty eight installments. The facility is secured with guarantees from Cardiff and the Company. As at June 30, 2012, no amounts have been drawn down under this facility.
 
On March 19, 2012, the Company entered into a loan facility of up to $87,654 to partially finance the acquisition cost of vessel Raraka and the newbuildings H1241 and H1242. The loan bears interest at LIBOR plus a margin and is repayable in thirty-two quarterly installments plus a balloon payment payable with the last installment. The Company has drawn down an amount of $19,065 related to the vessel Raraka.
 
On May 9, 2012, Ocean Rig signed an amendment under its $800,000 secured term loan agreement with Nordea Finland Plc. to, among other things, terminate the guarantee by DryShips and remove the related covenants and the cross-acceleration provisions relating to the DryShips' indebtedness for its drybulk carrier and tanker fleet and Ocean Rig's indebtedness under its other credit facilities. As a result of the amendment, a default by DryShips under one of its loan agreements for its drybulk carrier and tanker fleet or a default by Ocean Rig under one of its other credit facilities and the acceleration of the related debt will no longer result in a cross-default under the $800,000 secured term loan agreement that would provide the lenders with the right to accelerate the outstanding debt under the loan agreement. In addition, under the terms of the loan agreement, as amended, (i) Ocean Rig is permitted to buy back its own common shares; (ii) Drillships Holdings Inc., is able to pay dividends to Ocean Rig as its shareholder; and (iii) Ocean Rig is permitted to pay dividends, make distributions and effect redemptions or returns of share capital in an amount of up to 50% of net income, provided it maintains minimum liquidity in an aggregate amount of not less than $200,000 in cash and cash equivalents and restricted cash and provide evidence to the lenders through cash flow forecasts that Ocean Rig will maintain such level for the next 12 months following the date of the dividend, distribution or redemption or return of share capital. The amendment also provides for a reduction in the amount of minimum free cash required to be maintained by Drillships Holdings Inc. from $75,000 to $50,000. Under the original agreement, Ocean Rig is also required to maintain minimum free cash of $100,000.

On May 14, 2012, Ocean Rig signed amendments to its two $495,000 credit facilities with Deutsche Bank Luxembourg S.A. as agent (the "Deutsche Bank Credit Facilities") to, among other things, remove the payment guarantee of DryShips, subject to reinstatement as discussed below and remove the financial covenants for DryShips and the cross-default provision relating to the DryShips' outstanding indebtedness for its drybulk carrier and tanker fleet. As a result of the amendments, a default by DryShips under one of its loan agreements for its drybulk carrier and tanker fleet will not result in a cross-default under the Deutsche Bank Credit Facilities that would provide Ocean Rig's lenders thereunder with the right to accelerate Ocean Rig's outstanding debt under these facilities.

 
F-15

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated)
 
9. Long-term Debt - continued:
 
In addition, the amendments also removed the automatic prepayment mechanism under the Deutsche Bank Credit Facilities. Ocean Rig is also required to increase its debt service reserve account by an aggregate amount of $57,000 beginning September 2014. Furthermore, under the amended Deutsche Bank Credit Facilities, Ocean Rig is permitted to pay dividends, make distributions and effect redemptions or returns of share capital in an amount of up to 50% of net income, provided it maintains minimum liquidity in an aggregate amount of not less than $200,000 in cash and cash equivalents and restricted cash and provide evidence to the lenders through cash flow forecasts that Ocean Rig will maintain such level for the next 12 months following the date of the dividend, distribution or redemption or return of share capital. Under the terms of the amended Deutsche Bank Credit Facilities, in the event of a breach by Ocean Rig of the financial covenants contained in its guarantees, the unconditional and irrevocable payment guarantees of DryShips will be reinstated; pursuant to which DryShips will be obligated to pay, upon demand by the lenders, any amount outstanding under the loans upon a failure by Ocean Rig to pay such amount. In addition, DryShips will be required to indemnify the lenders in respect of any losses they incur in respect of any amounts due under the loans that are not recoverable from DryShips under the guarantees and that Ocean Rig fails to pay. The amount payable by DryShips under the guarantees will be limited to $214.000 with respect to the facility for the Ocean Rig Poseidon and $225,000 with respect to the facility for the Ocean Rig Mykonos, in each case plus any other amounts that become payable in connection with the payment of such amount. The guarantees do not include any financial covenants applicable to DryShips or cross-default provisions in relation to DryShips' indebtedness for its drybulk carrier and tanker fleet.
 
On May 18, 2012, Ocean Rig signed an amendment under its $1,040,000 credit facility with DNB Bank ASA as agent, to amend the facility to, among other things, remove the cross-acceleration clause relating to DryShips' indebtedness for its drybulk carrier and tanker fleet. As a result of the amendment, a default by DryShips under one of its loan agreements for its drybulk carrier and tanker fleet and the acceleration of the related debt will not result in a cross-default under the $1,040,000 credit facility that would provide the lenders with the right to accelerate the outstanding debt under the facility. Under the terms of the facility, as amended, the cross acceleration relating to the DryShips' outstanding indebtedness for its drybulk carrier and tanker fleet is replaced with a cross acceleration relating to the outstanding indebtedness of Ocean Rig, which now provides a guarantee under the facility. Furthermore, under the amended credit facility, Drill Rigs Holdings Inc. is restricted from paying or declaring a dividend without the prior written consent of the lenders if the employment contract for the Leiv Eiriksson with the consortium coordinated by Rig Management Norway has expired or has been terminated, cancelled or rescinded until it has been replaced to the satisfaction of the majority of the lenders.
 
The aggregate available undrawn amounts under the Company's credit facilities at December 31, 2011 and June 30, 2012, were $109,037 and $189,743, respectively. The Company is required to pay a quarterly commitment fee of 1.08% as of December 31, 2011 and a quarterly commitment fee ranging from 0.25% to 1.14%, as of June 30, 2012, per annum on its undrawn portions of the lines of credit.
 
The weighted-average interest rates on the above outstanding debt were: 5.73% for the six-month period ended June 30, 2011 and 5.71% for the six-month period ended June 30, 2012.
 
The above loans are secured by first priority mortgages over the vessels, drilling rigs and drillships, corporate guarantees and first assignment of all freights, earnings, insurances and requisition compensation. The loans contain covenants including restrictions, without the bank's prior consent, as to changes in the management and ownership of the vessels, additional indebtedness and mortgaging of vessels and changes in the general nature of the Company's business. In addition, some of the vessel owning companies are not permitted to pay any dividends to DryShips nor DryShips is permitted to pay dividends to its shareholders without the lender's prior consent. The loans also contain certain financial covenants relating to the Company's financial position, operating performance and liquidity. The Company's secured credit facilities impose operating and negative covenants on the Company and its subsidiaries. These covenants may limit the Dryships' subsidiaries' ability to, among other things, without the relevant lenders' prior consent (i) incur additional indebtedness, (ii) change the flag, class or management of the vessel mortgaged under such facility, (iii) create or permit to exist liens on their assets, (iv) make loans, (v) make investments or capital expenditures, and (vi) undergo a change in ownership or control.
 
 
 
F-16

 
 
DRYSHIPS INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
June 30, 2012
 (Expressed in thousands of United States Dollars – except for share and per share data, unless otherwise stated
 
9. Long-term Debt - continued:

As of June 30, 2012, the Company was in compliance with its financial covenants or had the ability to remedy breaches of the financial covenants contained in its credit facilities. As of June 30, 2012, the Company was not in compliance with certain loan-to-value ratios contained in certain of its original loan agreements under which a total of $583,303 was outstanding as of that date. As a result, the Company may be required to prepay indebtedness or provide additional collateral to its lenders in the form of cash amounting to $146,536, in order to comply with these ratios, which is classified under current liabilities in the accompanying consolidated balance sheet.
 
Total interest incurred on long-term debt and amortization of debt issuance cost, including capitalized interest, for the six-months ended June 30, 2011 and 2012, amounted to $80,919, and $112,593, respectively. These amounts net of capitalized interest are included in "Interest and finance costs" in the accompanying unaudited interim condensed consolidated statements of operations.
 
The annual principal payments required to be made after June 30, 2012, including balloon payments, totaling $4,364,737 due through December 2020, are as follows:
 
 
 
 
June 30, 2013
 
$
512,575
 
June 30, 2014
 
 
710,993
 
June 30, 2015
 
 
998,825
 
June 30, 2016
 
 
1,434,820
 
June 30, 2017 and thereafter
 
 
707,524
 
Total principal payments
 
 
4,364,737
 
Less: Financing fees and equity component of notes
 
 
(169,963
)
Total debt
 
$
4,194,774
 
 
10. Financial Instruments and Fair Value Measurements:
 
All derivatives are carried at fair value on the consolidated balance sheet at each period end. Tabular disclosure of financial instruments is as follows:
 
Fair Values of Derivative Instruments in the Statement of Financial Position:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Derivatives
 
 
 
Liability Derivatives
 
Derivatives not designated as hedging instruments
 
Balance Sheet Location
 
December 31,
2011
Fair value
 
 
June 30,
2012
Fair value
 
Balance Sheet Location
 
December 31,
2011
Fair value
 
 
June 30,
2012
Fair value