FORM 20-F
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

     ¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
       OF THE SECURITIES EXCHANGE ACT OF 1934

OR

     x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934
   For the fiscal year ended December 31, 2013

OR

     ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

OR

     ¨   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

                                         Date of event requiring this shell company report                     

For the transition period from                      to                     

                                                                                    Commission file number 001-34104

 

 

Navios Maritime Acquisition Corporation

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s Name into English)

Republic of Marshall Islands

(Jurisdiction of incorporation or organization)

7 Avenue de Grande Bretagne, Office 11B2

Monte Carlo, MC 98000 Monaco

(Address of principal executive offices)

Todd E. Mason

Thompson Hine LLP

335 Madison Ave

New York, NY 10017

Todd.Mason@thompsonhine.com

(212) 908-3946

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

       

Name of each exchange on which registered

Common Stock, par value $.0001 per share       New York Stock Exchange LLC

Securities registered or to be registered pursuant to

Section 12 (g) of the Act.

      None

Securities for which there is a reporting obligation pursuant to

Section 15(d) of the Act.

      None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

136,714,942 Shares of Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934.    Yes  ¨        No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x        No  ¨

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

Large Accelerated Filer  ¨

   Accelerated Filer  x    Non-Accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ¨

   Other  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  x

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I

   

Item 1. Identity of Directors, Senior Management and Advisers

    3

Item 2. Offer Statistics and Expected Timetable

    3

Item 3. Key Information

    3

Item 4. Information on the Company

    36

Item 4A. Unresolved Staff Comments

   

59

Item 5. Operating and Financial Review and Prospects

   

59

Item 6. Directors, Senior Management and Employees

   

89

Item 7. Major Stockholders and Related Party Transactions

    95

Item 8. Financial Information

    103

Item 9. Listing Details

    104

Item 10. Additional Information

    105

Item 11. Quantitative and Qualitative Disclosures about Market Risks

    119

Item 12. Description of Securities Other than Equity Securities

    120

PART II

   

Item 13. Defaults, Dividend Arrearages and Delinquencies

    121

Item 14. Material Modifications to the Rights of Shareholders and Use of Proceeds

    121

Item 15. Controls and Procedures

    121

Item 16A. Audit Committee Financial Expert

    122

Item 16B. Code of Ethics

    122

Item 16C. Principal Accountant Fees and Services

    122

Item 16D. Exemptions from the Listing Standards for Audit Committees

    123

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

    123

Item 16F. Change in Registrant’s Certifying Accountant

    123

Item 16G. Corporate Governance

    123

Item 16H. Mine Safety Disclosures

    123

Item 17. Financial Statements

    123

Item 18. Financial Statements

    123

Item 19. Exhibits

    124

Signatures

    128

EX-8.1

   

EX-12.1

   

EX-12.2

   

EX-13.1

   

EX-15.1

   

 

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FORWARD-LOOKING STATEMENTS

This Annual Report should be read in conjunction with the financial statements and accompanying notes included herein.

Statements included in this Annual Report on Form 20-F (this “Annual Report”) which are not historical facts (including our statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements which are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business, and the markets in which we operate as described in this Annual Report. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

   

our ability to maintain or develop new and existing customer relationships, including our ability to enter into charters for our vessels;

 

   

our ability to successfully grow our business and our capacity to manage our expanding business;

 

   

our future operating and financial results, including the amount of fixed hire and profit share that we may receive;

 

   

our ability to identify and consummate desirable acquisitions, joint ventures or strategic alliances, business strategy, areas of possible expansion, and expected capital expenditure or operating expenses;

 

   

tanker industry trends, including charter rates and vessel values and factors affecting vessel supply and demand;

 

   

our ability to take delivery of, integrate into our fleet, and employ the newbuildings we have on firm order or any newbuildings we may order in the future and the ability of shipyards to deliver vessels on a timely basis;

 

   

the aging of our vessels and resultant increases in operation and drydocking costs;

 

   

the ability of our vessels to pass classification inspection and vetting inspections by oil majors;

 

   

significant changes in vessel performance, including increased vessel breakdowns;

 

   

the creditworthiness of our charterers and the ability of our contract counterparties to fulfill their obligations to us;

 

   

our ability to repay outstanding indebtedness, to obtain additional financing and to obtain replacement charters for our vessels, in each case, at commercially acceptable rates or at all;

 

   

changes to governmental rules and regulations or action taken by regulatory authorities and the expected costs thereof;

 

   

potential liability from litigation and our vessel operations, including discharge of pollutants;

 

   

changes in general economic and business conditions;

 

   

general domestic and international political conditions, including wars, acts of piracy and terrorism;

 

   

changes in production of or demand for oil and petroleum products, either globally or in particular regions; and

 

   

changes in the standard of service or the ability of our technical manager to be approved as required.

 

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These and other forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties, including those set forth below, as well as those risks discussed in “Item 3. Key Information”.

The forward-looking statements, contained in this Annual Report, are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated.

The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

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PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

 

Item 3. Key Information

 

A. Selected Financial Data

Navios Maritime Acquisition Corporation (sometimes referred to herein as “Navios Acquisition,” the “Company,” “we” or “us”) was incorporated in the Republic of Marshall Islands on March 14, 2008 (refer to Item 4. Information on the Company).

Navios Acquisition’s selected historical financial information and operating results for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 is derived from the audited consolidated financial statements of Navios Acquisition. The selected consolidated statement of operations for the years ended December 31, 2013, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The consolidated statement of operations data for the years ended December 31, 2010 and December 31, 2009, and the balance sheet data as of December 31, 2011, 2010 and as of December 31, 2009, have been derived from our audited financial statements which are not included in this document available at www.sec.gov. The selected consolidated financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”. the consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report. The information is only a summary and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report and section “Item 5. Operating and Financial Review and Prospects.” The selected consolidated financial data is a summary of, is derived from, and is qualified by reference to, our audited consolidated financial statements and notes thereto, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The historical data included below and elsewhere in this Annual Report is not necessarily indicative of our future performance.

 

(In thousands of U.S. dollars)   Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December  31,
2011
    Year ended
December  31,
2010
    Year ended
December  31,
2009
 

Revenue

  $ 202,397      $ 151,097      $ 121,925      $ 33,568      $  

Time charter expenses

    (6,762     (2,824 )     (3,499 )     (355 )      

Direct vessel expenses

    (3,096 )     (2,622 )     (633 )            

Management fees (entirely through related party transactions)

    (71,392 )     (47,043 )     (35,679 )     (9,752 )      

General and administrative expenses

    (7,017 )     (3,853 )     (4,241 )     (1,902 )     (994 )

Share based compensation

                       (2,140 )      

Transaction costs

                       (8,019 )      

Depreciation and amortization

    (63,880 )     (49,644 )     (38,638 )     (10,120      

Loss on bond and debt extinguishment

    (33,973           (935 )     (5,441      

Interest income

    315        445        1,414        862        346   

Interest expenses and finance cost, net

    (58,386 )     (49,432 )     (43,165 )     (10,651      

Loss on sale of vessel

    (21,098                        

Other income

    4,787        280        155        434          

Other expense

    (487 )     (202 )     (561 )     (30 )       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

  $ (58,592 )   $ (3,798 )   $ (3,857 )   $ (13,546   $ (648
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic

  $ (0.57 )   $ (0.08 )   $ (0.08 )   $ (0.43   $ (0.03

Net loss per share, diluted

  $ (0.57 )   $ (0.08 )   $ (0.08 )   $ (0.43   $ (0.02

 

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Balance Sheet Data (at period end)   Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year ended
December  31,
2011
    Year ended
December  31,
2010
    Year ended
December  31,
2009
 

Current assets, including cash

    120,801        71,795        78,907        81,202        142   

Vessels, net

    1,353,131        940,738        774,624        529,659         

Total assets

    1,656,661        1,370,644        1,195,469        1,005,087        251,635   

Current portion of long-term debt

    34,714        19,724        11,928        5,086         

Total long-term debt, excluding current portion

    1,119,734        974,362        833,483        704,332         

Series D Convertible Preferred Stock

    12,000        6,000                     

Total Stockholders equity

    450,822        225,304        238,849        253,728        141,990   

Cash Flow Data

         

Net cash (used in) /provided by operating activities

    (29,571     81,877        64,233        11,300        (623 )

Net cash (used in)/provided by investing activities

    (293,740     (205,956 )     (225,777 )     (103,602 )     708   

Net cash provided by financing activities

    363,300        125,625        141,484        154,575         

Cash dividends declared per common share

    0.20        0.20        0.20        0.05         

Fleet Data:

         

Vessels at end of period

    33        19        14        9         

 

B. Capitalization and indebtedness.

Not applicable.

 

C. Reasons for the offer and use of proceeds.

Not applicable.

 

D. Risk factors

Risk Factors Relating to Our Business

Delays in deliveries of our newbuild vessels, or our decision to cancel, or our inability to otherwise complete the acquisitions of any newbuildings we may decide to acquire in the future, could harm our operating results and lead to the termination of any related charters.

Our newbuilding vessels, as well as any newbuildings we may contract to acquire or order in the future, could be delayed, not completed or cancelled, which would delay or eliminate our expected receipt of revenues under any charters for such vessels. The shipbuilder or third party seller could fail to deliver the newbuilding vessel or any other vessels we acquire or order, or we could cancel a purchase or a newbuilding contract because the shipbuilder has not met its obligations, including its obligation to maintain agreed refund guarantees in place for our benefit. For prolonged delays, the customer may terminate the time charter.

Our receipt of newbuildings could be delayed, canceled, or otherwise not completed because of:

 

   

quality or engineering problems or failure to deliver the vessel in accordance with the vessel specifications;

 

   

changes in governmental regulations or maritime self-regulatory organization standards;

 

   

work stoppages or other labor disturbances at the shipyard;

 

   

bankruptcy or other financial or liquidity problems of the shipbuilder;

 

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a backlog of orders at the shipyard;

 

   

political or economic disturbances in the country or region where the vessel is being built;

 

   

weather interference or catastrophic event, such as a major earthquake or fire;

 

   

the shipbuilder failing to deliver the vessel in accordance with our vessel specifications;

 

   

our requests for changes to the original vessel specifications;

 

   

shortages of or delays in the receipt of necessary construction materials, such as steel; or

 

   

our inability to finance the purchase of the vessel.

If delivery of any newbuild vessel acquired, or any vessel we contract to acquire in the future is materially delayed, it could materially adversely affect our results of operations and financial condition.

If we fail to manage our planned growth properly, we may not be able to expand our fleet successfully, which may adversely affect our overall financial position.

While we have no specific plans, we do intend to continue to expand our fleet in the future. Our growth will depend on:

 

   

locating and acquiring suitable vessels;

 

   

identifying reputable shipyards with available capacity and contracting with them for the construction of new vessels;

 

   

integrating any acquired vessels successfully with our existing operations;

 

   

enhancing our customer base;

 

   

managing our expansion; and

 

   

obtaining required financing, which could include debt, equity or combinations thereof.

Additionally, the marine transportation and logistics industries are capital intensive, traditionally using substantial amounts of indebtedness to finance vessel acquisitions, capital expenditures and working capital needs. If we finance the purchase of our vessels through the issuance of debt securities, it could result in:

 

   

default and foreclosure on our assets if our operating cash flow after a business combination or asset acquisition were insufficient to pay our debt obligations;

 

   

acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant;

 

   

our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and

 

   

our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding.

In addition, our business plan and strategy is predicated on buying vessels in a distressed market at what we believe is near the low end of the cycle in what has typically been a cyclical industry. However, there is no assurance that charter rates and vessels asset values will not sink lower, or that there will be an upswing in shipping costs or vessel asset values in the near-term or at all, in which case our business plan and strategy may not succeed in the near-term or at all. Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty experienced in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures. We may not be successful in growing and may incur significant expenses and losses.

 

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We may not have adequate insurance to compensate us for damage to or loss of our vessels, which may have a material adverse effect on our financial condition and results of operation.

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

We may face unexpected maintenance costs, which could materially adversely affect our business, financial condition and results of operations.

If our vessels suffer damage or require upgrade work, they may need to be repaired at a drydocking facility. Our vessels may occasionally require upgrade work in order to maintain their classification society rating or as a result of changes in regulatory requirements. In addition, our vessels will be off-hire periodically for intermediate surveys and special surveys in connection with each vessel’s certification by its classification society. The costs of drydock repairs are unpredictable and can be substantial and the loss of earnings while these vessels are being repaired and reconditioned, as well as the actual cost of these repairs, would decrease our earnings. Our insurance generally only covers a portion of drydocking expenses resulting from damage to a vessel and expenses related to maintenance of a vessel will not be reimbursed. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility on a timely basis or may be forced to move a damaged vessel to a drydocking facility that is not conveniently located to the vessel’s position. The loss of earnings while any of our vessels are forced to wait for space or to relocate to drydocking facilities that are far away from the routes on which our vessels trade would further decrease our earnings.

We rely on our technical managers to provide essential services to our vessels and run the day-to-day operations of our vessels.

Pursuant to our technical management agreements we are provided with services essential to the business of our vessels, including vessel maintenance, crewing, purchasing, shipyard supervision, insurance and assistance with vessel regulatory compliance, by our technical managers, including a subsidiary of Navios Holdings and a technical manager affiliated with the seller from the acquisition of seven VLCCs in September 2010 (the “VLCC Acquisition”). This technical manager will continue to provide such services for an interim period subsequent to the closing of the VLCC Acquisition, after which the technical management of certain of our VLCCs is expected to be provided directly by the subsidiary of Navios Holdings. Our operational success and ability to execute our strategy will depend significantly upon the satisfactory performance of the aforementioned services by the current technical managers. The failure of our technical managers to perform these services satisfactorily could have a material adverse effect on our business, financial condition and results of operations.

Our vessels may be subject to unbudgeted periods of off-hire, which could materially adversely affect our business, financial condition and results of operations.

Under the terms of the charter agreements under which our vessels operate, or are expected to operate in the case of the newbuildings, when a vessel is “off-hire,” or not available for service or otherwise deficient in its condition or performance, the charterer generally is not required to pay the hire rate, and we will be responsible for all costs (including the cost of bunker fuel) unless the charterer is responsible for the circumstances giving

 

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rise to the lack of availability. A vessel generally will be deemed to be off-hire if there is an occurrence preventing the full working of the vessel due to, among other things:

 

   

operational deficiencies;

 

   

the removal of a vessel from the water for repairs, maintenance or inspection, which is referred to as drydocking;

 

   

equipment breakdowns;

 

   

delays due to accidents or deviations from course;

 

   

occurrence of hostilities in the vessel’s flag state or in the event of piracy;

 

   

crewing strikes, labor boycotts, certain vessel detentions or similar problems; or

 

   

our failure to maintain the vessel in compliance with its specifications, contractual standards and applicable country of registry and international regulations or to provide the required crew.

Risks Relating to Our Industry

The cyclical nature of the tanker industry may lead to volatility in charter rates and vessel values, which could adversely affect our future earnings.

Oil has been one of the world’s primary energy sources for a number of decades. The global economic growth of previous years had a significant impact on the demand for oil and subsequently on the oil trade and shipping demand. However, from the second half of 2008 until recently the world’s economies experienced a major economic slowdown and uncertainty remains with respect to the ongoing recovery, the sustainability of which is very difficult to forecast is expected to continue to have a significant impact on world trade, including the oil trade. If the tanker market, which has historically been cyclical, is depressed in the future, our earnings and available cash flow may be materially adversely affected. Our ability to employ our vessels profitably will depend upon, among other things, economic conditions in the tanker market. Fluctuations in charter rates and tanker values result from changes in the supply and demand for tanker capacity and changes in the supply and demand for liquid cargoes, including petroleum and petroleum products.

Historically, the crude oil markets have been volatile as a result of the many conditions and events that can affect the price, demand, production and transport of oil, including competition from alternative energy sources. Decreased demand for oil transportation may have a material adverse effect on our revenues, cash flows and profitability. The factors affecting the supply and demand for tankers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable. The current global financial crisis has intensified this unpredictability.

The factors that influence demand for tanker capacity include:

 

   

demand for and supply of liquid cargoes, including petroleum and petroleum products;

 

   

developments in international trade;

 

   

waiting days in ports;

 

   

changes in oil production and refining capacity and regional availability of petroleum refining capacity;

 

   

environmental and other regulatory developments;

 

   

global and regional economic conditions;

 

   

the distance chemicals, petroleum and petroleum products are to be moved by sea;

 

   

changes in seaborne and other transportation patterns, including changes in distances over which cargo is transported due to geographic changes in where oil is produced, refined and used;

 

   

competition from alternative sources of energy;

 

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armed conflicts and terrorist activities;

 

   

political developments; and

 

   

embargoes and strikes.

The factors that influence the supply of tanker capacity include:

 

   

the number of newbuilding deliveries;

 

   

the scrapping rate of older vessels;

 

   

port or canal congestion;

 

   

the number of vessels that are used for storage or as floating storage offloading service vessels;

 

   

the conversion of tankers to other uses, including conversion of vessels from transporting oil and oil products to carrying drybulk cargo and the reverse conversion;

 

   

availability of financing for new tankers;

 

   

the phasing out of single-hull tankers due to legislation and environmental concerns;

 

   

the price of steel;

 

   

the number of vessels that are out of service;

 

   

national or international regulations that may effectively cause reductions in the carrying capacity of vessels or early obsolescence of tonnage; and

 

   

environmental concerns and regulations.

Furthermore, the extension of refinery capacity in China, India and particularly the Middle East through 2018 is expected to exceed the immediate consumption in these areas, and an increase in exports of refined oil products is expected as a result. This coupled with announced refinery closures in the Australia, Japan and Europe should increase trade in refined oil products.

Historically, the tanker markets have been volatile as a result of the many conditions and factors that can affect the price, supply and demand for tanker capacity. The recent global economic crisis may further reduce demand for transportation of oil over long distances and supply of tankers that carry oil, which may materially affect our future revenues, profitability and cash flows.

We believe that the current order book for tanker vessels represents a significant percentage of the existing fleet; however the percentage of the total tanker fleet on order as a percent of the total fleet declined from 18% at the end of 2011 to 11% at the end of 2013. An over-supply of tanker capacity may result in a reduction of charter hire rates. If a reduction in charter rates occurs, we may only be able to charter our vessels at unprofitable rates or we may not be able to charter these vessels at all, which could lead to a material adverse effect on our results of operations.

Charter rates in the crude oil, product and chemical tanker sectors of the seaborne transportation industry in which we operate have significantly declined from historically high levels in 2008 and may remain depressed or decline further in the future, which may adversely affect our earnings.

Charter rates in the crude oil, product and chemical tanker sectors have significantly declined from historically high levels in 2008 and may remain depressed or decline further. For example, the Baltic Dirty Tanker Index declined from a high of 2,347 in July 2008 to 453 in mid-April 2009, which represents a decline of approximately 81%. Since January 2013 it has traded between a low of 577 and a high of 1,344; as of March 12, 2014, it stood at 678. The Baltic Clean Tanker Index fell from 1,509 in the early summer of 2008 to 345 in April 2009, or approximately 77%. It has traded between a low of 483 and a high of 729 since January 2013 and stood at 629 as of March 12, 2014. Of note is that Chinese imports of crude oil have steadily increased from 3 million barrels per day in 2008 to about 6.7 million barrels per day in January 2014 and the US has steadily increased its

 

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total petroleum product exports by 265% to 3.8 million barrels per day in November 2013 from 1 million barrels per day in January 2006. If the tanker sector of the seaborne transportation industry, which has been highly cyclical, is depressed in the future at a time when we may want to sell a vessel, our earnings and available cash flow may be adversely affected. We cannot assure you that we will be able to successfully charter our vessels in the future at rates sufficient to allow us to operate our business profitably or to meet our obligations, including payment of debt service to our lenders. Our ability to renew the charters on vessels that we may acquire in the future, the charter rates payable under any replacement charters and vessel values will depend upon, among other things, economic conditions in the sector in which our vessels operate at that time, changes in the supply and demand for vessel capacity and changes in the supply and demand for the seaborne transportation of energy resources and commodities.

Spot market rates for tanker vessels are highly volatile and are currently at relatively low levels historically and may further decrease in the future, which may adversely affect our earnings in the event that our vessels are chartered in the spot market.

We intend to deploy at least some of our product, chemical tankers and VLCCs in the spot market. Although spot chartering is common in the product, chemical, tanker and VLCCs sectors, product, chemical tanker and VLCCs’ charter hire rates are highly volatile and may fluctuate significantly based upon demand for seaborne transportation of crude oil and oil products and chemicals, as well as tanker supply. The World oil demand is influenced by many factors, including international economic activity; geographic changes in oil production, processing, and consumption; oil price levels; inventory policies of the major oil and oil trading companies; and strategic inventory policies of countries such as the United States and China. The successful operation of our vessels in the spot charter market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. Furthermore, as charter rates for spot charters are fixed for a single voyage that may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.

The spot market is highly volatile, and, in the past, there have been periods when spot rates have declined below the operating cost of vessels. Currently, charter hire rates are at relatively low rates historically and there is no assurance that the crude oil, product and chemical tanker charter market will recover over the next several months or will not continue to decline further.

Additionally, if the spot market rates or short-term time charter rates become significantly lower than the time charter equivalent rates that some of our charterers are obligated to pay us under our existing charters, the charterers may have incentive to default under that charter or attempt to renegotiate the charter. If our charterers fail to pay their obligations, we would have to attempt to re-charter our vessels at lower charter rates, which would affect our ability to comply with our loan covenants and operate our vessels profitably. If we are not able to comply with our loan covenants and our lenders choose to accelerate our indebtedness and foreclose their liens, we could be required to sell vessels in our fleet and our ability to continue to conduct our business would be impaired.

Certain of our VLCC vessels are contractually committed to time charters or operation in pools, with the remaining terms of these charters expiring during the period from and including 2014 through 2026. We are not permitted to unilaterally terminate the charter agreements of the VLCC vessels due to upswings in the tanker industry cycle, when spot market voyages might be more profitable. We may also decide to sell a vessel in the future. In such a case, should we sell a vessel that is committed to a long-term charter, we may not be able to realize the full charter free fair market value of the vessel during a period when spot market charters are more profitable than the charter agreement under which the vessel operates. We may re-charter the VLCC vessels on long-term charters or charter them in the spot market or place them in pools upon expiration or termination of the vessels’ current charters. If we are not able to employ the VLCC vessels profitably under time charters or in the spot market, our results of operations and operating cash flow may suffer.

 

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Any decrease in shipments of crude oil from the Arabian Gulf or West Africa may adversely affect our financial performance.

The demand for VLCC oil tankers derives primarily from demand for Arabian Gulf and West African crude oil, which, in turn, primarily depends on the economies of the world’s industrial countries and competition from alternative energy sources. A wide range of economic, social and other factors can significantly affect the strength of the world’s industrial economies and their demand for Arabian Gulf and West African crude oil.

Among the factors that could lead to a decrease in demand for exported Arabian Gulf and West African crude oil are:

 

   

increased use of existing and future crude oil pipelines in the Arabian Gulf or West African regions;

 

   

a decision by the Organization of the Petroleum Exporting Countries (“OPEC”) to increase its crude oil prices or to further decrease or limit their crude oil production;

 

   

armed conflict or acts of piracy in the Arabian Gulf or West Africa and political or other factors;

 

   

increased oil production in other regions, such as the United States, Russia and Latin America; and

 

   

the development and the relative costs of nuclear power, natural gas, coal and other alternative sources of energy.

Any significant decrease in shipments of crude oil from the Arabian Gulf or West Africa may materially adversely affect our financial performance.

Eighteen of the vessels we have acquired are second-hand vessels, and we may acquire more second-hand vessels in the future. The acquisition and operation of such vessels may result in increased operating costs and vessel off-hire, which could materially adversely affect our earnings.

Two of our LR1 product tanker vessels, six of our MR2 product tanker vessels and ten of our VLCC vessels that we have acquired are second-hand vessels, and we may acquire more second-hand vessels in the future. Our inspection of second-hand vessels prior to purchase does not provide us with the same knowledge about their condition and cost of any required or anticipated repairs that we would have had if these vessels had been built for and operated exclusively by us. Generally, we will not receive the benefit of warranties on second-hand vessels.

In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Due to improvements in engine technology, older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage or the geographic regions in which we may operate. We cannot predict what alterations or modifications our vessels may be required to undergo in the future. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

Although we have considered the age and condition of the vessels in budgeting for operating, insurance and maintenance costs, we may encounter higher operating and maintenance costs due to the age and condition of these vessels, or any additional vessels we acquire in the future. The age of some of the VLCC vessels may result in higher operating costs and increased vessel off-hire periods relative to our competitors that operate newer fleets, which could have a material adverse effect on our results of operations.

 

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Our growth depends on continued growth in demand for crude oil, refined petroleum products (clean and dirty) and bulk liquid chemicals and the continued demand for seaborne transportation of such cargoes.

Our growth strategy focuses on expansion in the crude oil, product and chemical tanker sectors. Accordingly, our growth depends on continued growth in world and regional demand for crude oil, refined petroleum (clean and dirty) products and bulk liquid chemicals and the transportation of such cargoes by sea, which could be negatively affected by a number of factors, including:

 

   

the economic and financial developments globally, including actual and projected global economic growth;

 

   

fluctuations in the actual or projected price of crude oil, refined petroleum products or bulk liquid chemicals;

 

   

refining capacity and its geographical location;

 

   

increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;

 

   

decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures;

 

   

availability of new, alternative energy sources; and

 

   

negative or deteriorating global or regional economic or political conditions, particularly in oil-consuming regions, which could reduce energy consumption or its growth.

The refining and chemical industries may respond to the economic downturn and demand weakness by reducing operating rates partially or completely closing refineries and by reducing or cancelling certain investment expansion plans, including plans for additional refining capacity, in the case of the refining industry. Continued reduced demand for refined petroleum products and bulk liquid chemicals and the shipping of such cargoes or the increased availability of pipelines used to transport refined petroleum products, and bulk liquid chemicals would have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.

Our growth depends on our ability to obtain customers, for which we face substantial competition. In the highly competitive tanker industry, we may not be able to compete for charters with new entrants or established companies with greater resources, which may adversely affect our results of operations.

We will employ our tanker vessels in the highly competitive crude oil, product and chemical tanker sectors of the shipping industry that is capital intensive and fragmented. Competition arises primarily from other vessel owners, including major oil companies and traders as well as independent tanker companies, some of whom have substantially greater resources and experience than us. Competition for the chartering of tankers can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Such competition has been enhanced as a result of the downturn in the shipping industry, which has resulted in an excess supply of vessels and reduced charter rates.

Medium to long-term time charters and bareboat charters have the potential to provide income at pre-determined rates over more extended periods of time. However, the process for obtaining longer term time charters and bareboat charters is highly competitive and generally involves a lengthy, intensive and continuous screening and vetting process and the submission of competitive bids that often extends for several months. In addition to the quality, age and suitability of the vessel, longer term shipping contracts tend to be awarded based upon a variety of other factors relating to the vessel operator. Competition for the transportation of crude oil, refined petroleum products and bulk liquid chemicals can be intense and depends on price, location, size, age, condition and acceptability of the vessel and our managers to the charterers.

 

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In addition to having to meet the stringent requirements set out by charterers, it is likely that we will also face substantial competition from a number of competitors who may have greater financial resources, stronger reputations or experience than we do when we try to re-charter our vessels. It is also likely that we will face increased numbers of competitors entering into the crude oil, product and chemical tanker sectors, including in the ice class sector. Increased competition may cause greater price competition, especially for medium- to long-term charters. Due in part to the highly fragmented markets, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets than ours.

As a result of these factors, we may be unable to obtain customers for medium- to long-term time charters or bareboat charters on a profitable basis, if at all. Even if we are successful in employing our vessels under longer term time charters or bareboat charters, our vessels will not be available for trading in the spot market during an upturn in the crude oil, product and chemical tanker market cycles, when spot trading may be more profitable. If we cannot successfully employ our vessels in profitable time charters our results of operations and operating cash flow could be adversely affected.

The market values of our vessels or vessels we may acquire have declined from historically high levels and may fluctuate significantly, which could cause us to breach covenants in our credit facilities, result in the foreclosure of certain of our vessels, limit the amount of funds that we can borrow and adversely affect our ability to purchase new vessels and our operating results. Depressed vessel values could also cause us to incur impairment charges.

Due to the sharp decline in world trade and tanker charter rates, the market values of our vessels and contracted new buildings and of tankers generally, are currently significantly lower than they would have been prior to the downturn in the second half of 2008. Within the past year smaller product tanker yard resale prices have remained flat or increased slightly. Vessel values may remain at current low, or lower, levels for a prolonged period of time and can fluctuate substantially over time due to a number of different factors, including:

 

   

prevailing level of charter rates;

 

   

general economic and market conditions affecting the shipping industry;

 

   

competition from other shipping companies;

 

   

types and sizes of vessels;

 

   

supply and demand for vessels;

 

   

other modes of transportation;

 

   

cost of newbuildings;

 

   

governmental or other regulations; and

 

   

technological advances.

If the market value of our vessels decreases, we may breach some of the covenants contained in the financing agreements relating to our indebtedness at the time. The credit facilities contain covenants including maximum total net liabilities over total net assets (effective in general after delivery of the vessels), minimum net worth and value to loan ratio covenants of 133% or lower, applicable after delivery of the vessels. If we breach any such covenants in the future and we are unable to remedy the relevant breach, our lenders could accelerate or require us to prepay a portion of our debt and foreclose on our vessels. In addition, if the book value of a vessel is impaired due to unfavorable market conditions, we would incur a loss that could have a material adverse effect on our business, financial condition and results of operations.

In addition, as vessels grow older, they generally decline in value. We will review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review certain indicators of potential impairment, such as undiscounted projected operating cash flows expected from the future operation of the vessels, which can be volatile for vessels employed on

 

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short-term charters or in the spot market. Any impairment charges incurred as a result of declines in charter rates would negatively affect our financial condition and results of operations. In addition, if we sell any vessel at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount on our financial statements, resulting in a loss and a reduction in earnings. Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels, the cost of acquisition may increase and this could materially adversely affect our business, financial condition and results of operations.

Future increases in vessel operating expenses, including rising fuel prices, could materially adversely affect our business, financial condition and results of operations.

Under our time charter agreements, the charterer is responsible for substantially all of the voyage expenses, including port and canal charges and fuel costs and we are generally responsible for vessel operating expenses. Vessel operating expenses are the costs of operating a vessel, primarily consisting of crew wages and associated costs, insurance premiums, management fees, lubricants and spare parts and repair and maintenance costs. In particular, the cost of fuel is a significant factor in negotiating charter rates. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil, actions by members of OPEC and other oil and gas producers, war, terrorism and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations.

We receive a daily rate for the use of our vessels, which is fixed through the term of the applicable charter agreement. Our charter agreements do not provide for any increase in the daily hire rate in the event that vessel-operating expenses increase during the term of the charter agreement. The charter agreements for certain of our VLCC vessels expire during the period from and including 2014 through 2026. Because of the long-term nature of these charter agreements, incremental increases in our vessel operating expenses over the term of a charter agreement will effectively reduce our operating income and, if such increases in operating expenses are significant, adversely affect our business, financial condition and results of operations.

The crude oil, product and chemical tanker sectors are subject to seasonal fluctuations in demand and, therefore, may cause volatility in our operating results.

The crude oil, product and chemical tanker sectors of the shipping industry have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The product and chemical tanker markets are typically stronger in the fall and winter months in anticipation of increased consumption of oil and natural gas in the northern hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, revenues are typically weaker during the fiscal quarters ended June 30 and September 30, and, conversely, typically stronger in fiscal quarters ended December 31 and March 31. Our operating results, therefore, may be subject to seasonal fluctuations.

Current global economic uncertainty may negatively impact our business.

In recent years, there has been a significant adverse shift in the global economy, with operating businesses facing tightening credit, weakening demand for goods and services, deteriorating international liquidity conditions, and declining markets. Lower demand for tanker cargoes as well as diminished trade credit available for the delivery of such cargoes may create downward pressure on charter rates. If the current global economic environment persists or worsens, we may be negatively affected in the following ways:

 

   

We may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate such vessels profitably.

 

   

The market value of our vessels could decrease significantly, which may cause us to recognize losses if any of our vessels are sold or if their values are impaired. In addition, such a decline in the market value of our vessels could prevent us from borrowing under our credit facilities or trigger a default under one of their covenants.

 

   

Charterers could have difficulty meeting their payment obligations to us.

 

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If the contraction of the global credit markets and the resulting volatility in the financial markets continues or worsens that could have a material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common stock to decline.

The employment of our vessels could be adversely affected by an inability to clear the oil majors’ risk assessment process, and we could be in breach of our charter agreements with respect to the VLCC vessels.

The shipping industry, and especially the shipment of crude oil, refined petroleum products (clean and dirty) and bulk liquid chemicals, has been, and will remain, heavily regulated. The so-called “oil majors” companies, such as Exxon Mobil, BP p.l.c., Royal Dutch Shell plc., Chevron, ConocoPhillips and Total S.A. together with a number of commodities traders, represent a significant percentage of the production, trading and shipping logistics (terminals) of crude oil and refined products worldwide. Concerns for the environment have led the oil majors to develop and implement a strict ongoing due diligence process when selecting their commercial partners. This vetting process has evolved into a sophisticated and comprehensive risk assessment of both the vessel operator and the vessel, including physical ship inspections, completion of vessel inspection questionnaires performed by accredited inspectors and the production of comprehensive risk assessment reports. In the case of term charter relationships, additional factors are considered when awarding such contracts, including:

 

   

office assessments and audits of the vessel operator;

 

   

the operator’s environmental, health and safety record;

 

   

compliance with the standards of the International Maritime Organization (the “IMO”), a United Nations agency that issues international trade standards for shipping;

 

   

compliance with heightened industry standards that have been set by several oil companies;

 

   

shipping industry relationships, reputation for customer service, technical and operating expertise;

 

   

shipping experience and quality of ship operations, including cost-effectiveness;

 

   

quality, experience and technical capability of crews;

 

   

the ability to finance vessels at competitive rates and overall financial stability;

 

   

relationships with shipyards and the ability to obtain suitable berths;

 

   

construction management experience, including the ability to procure on-time delivery of new vessels according to customer specifications;

 

   

willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and

 

   

competitiveness of the bid in terms of overall price.

Under the terms of our charter agreements, our charterers require that these vessels and the technical manager are vetted and approved to transport oil products by multiple oil majors. Our failure to maintain any of our vessels to the standards required by the oil majors could put us in breach of the applicable charter agreement and lead to termination of such agreement, and could give rise to impairment in the value of our vessels.

Should we not be able to successfully clear the oil majors’ risk assessment processes on an ongoing basis, the future employment of our vessels, as well as our ability to obtain charters, whether medium- or long-term, could be adversely affected. Such a situation may lead to the oil majors’ terminating existing charters and refusing to use our vessels in the future, which would adversely affect our results of operations and cash flows.

 

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We depend on significant customers for part of our revenue. Charterers may terminate or default on their obligations to us, which could materially adversely affect our results of operations and cash flow, and breaches of the charters may be difficult to enforce.

We derive a significant part of our revenue from a number of charterers. For the fiscal year ended December 31, 2013, DOSCO and Navig8 accounted for 32.0% and 22.4%, respectively, of our total revenue. The loss of these or any of our customers, a customer’s failure to make payments or perform under any of the applicable charters, a customer’s termination of any of the applicable charters, the loss or damage beyond repair to any of our vessels, our failure to deliver the vessel within a fixed period of time or a decline in payments under the charters could have a material adverse effect on our business, results of operations and financial condition. In addition, the charterers of the VLCC vessels are based in, and have their primary assets and operations in, the Asia-Pacific region, including the People’s Republic of China. The charter agreements for the VLCC vessels are governed by English law and provide for dispute resolution in English courts or London-based arbitral proceedings. There can be no assurance that we would be able to enforce any judgments against these charterers in jurisdictions where they are based or have their primary assets and operations. Even after a charter contract is entered, charterers may terminate charters early under certain circumstances. The events or occurrences that will cause a charter to terminate or give the charterer the option to terminate the charter generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, the vessel becoming subject to seizure for more than a specified number of days or the failure of the related vessel to meet specified performance criteria. In addition, the ability of a charterer to perform its obligations under a charter will depend on a number of factors that are beyond our control.

These factors may include general economic conditions, the condition of the crude oil, product and chemical tanker sectors of the shipping industry, the charter rates received for specific types of vessels and various operating expenses. The costs and delays associated with the default by a charterer of a vessel may be considerable and may adversely affect our business, results of operations, cash flows and financial condition.

We cannot predict whether our charterers will, upon the expiration of their charters, re-charter our vessels on favorable terms or at all. If our charterers decide not to re-charter our vessels, we may not be able to re-charter them on terms similar to our current charters or at all. In the future, we may also employ our vessels on the spot charter market, which is subject to greater rate fluctuation than the time charter market. If we receive lower charter rates under replacement charters or are unable to re-charter all of our vessels, our results of operations and financial condition could be materially adversely affected.

If we experienced a catastrophic loss and our insurance is not adequate to cover such loss, it could lower our profitability and be detrimental to operations.

The ownership and operation of vessels in international trade is affected by a number of inherent risks, including mechanical failure, personal injury, vessel and cargo loss or damage, business interruption due to political conditions in foreign countries, hostilities, piracy, terrorism, labor strikes and/or boycotts, adverse weather conditions and catastrophic marine disaster, including environmental accidents and collisions. All of these risks could result in liability, loss of revenues, increased costs and loss of reputation. We maintain hull and machinery insurance, protection and indemnity insurance, which include environmental damage and pollution and war risk insurance, consistent with industry standards, against these risks on our vessels and other business assets. However, we cannot assure you that we will be able to insure against all risks adequately, that any particular claim will be paid out of our insurance, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. Our insurers also require us to pay certain deductible amounts, before they will pay claims, and insurance policies may contain limitations and exclusions, which, although we believe will be standard for the shipping industry, may nevertheless increase our costs and lower our profitability. Additionally, any increase in environmental and other regulations may also result in increased costs for, or the lack of availability of, insurance against the risks of environmental damage, pollution and other claims. Our inability to obtain insurance sufficient to cover potential claims or the failure of insurers to pay any significant claims could lower our profitability and be detrimental to our operations.

 

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Furthermore, even if insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement ship in the event of a loss. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. In addition, our protection and indemnity associations may not have enough resources to cover claims made against them. Our payment of these calls could result in significant expenses to us, which could reduce our cash flows and place strains on our liquidity and capital resources.

We are subject to various laws, regulations and conventions, including environmental and safety laws that could require significant expenditures both to maintain compliance with such laws and to pay for any uninsured environmental liabilities including any resulting from a spill or other environmental incident.

The shipping business and vessel operation are materially affected by government regulation in the form of international conventions, national, state and local laws, and regulations in force in the jurisdictions in which vessels operate, as well as in the country or countries of their registration. Governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer requirements or competition, may require us to make capital and other expenditures. Because such conventions, laws and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions, laws and regulations, or the impact thereof on the fair market price or useful life of our vessels. In order to satisfy any such requirements, we may be required to take any of our vessels out of service for extended periods of time, with corresponding losses of revenues. In the future, market conditions may not justify these expenditures or enable us to operate our vessels, particularly older vessels, profitably during the remainder of their economic lives. This could lead to significant asset write downs. In addition, violations of environmental and safety regulations can result in substantial penalties and, in certain instances, seizure or detention of our vessels.

Additional conventions, laws and regulations may be adopted that could limit our ability to do business, require capital expenditures or otherwise increase our cost of doing business, which may materially adversely affect our operations, as well as the shipping industry generally. For example, in various jurisdictions legislation has been enacted, or is under consideration, that would impose more stringent requirements on air pollution and water discharges from our vessels. For example, the International Maritime Organization (“IMO”) periodically proposes and adopts amendments to revise the International Convention for the Prevention of Pollution from Ships (“MARPOL”), such as the revision to Annex VI which came into force on July 1, 2010. The revised Annex VI implements a phased reduction of the sulfur content of fuel and allows for stricter sulfur limits in designated emission control areas (“ECAs”). Thus far, ECAs have been formally adopted for the Baltic Sea area (limits Sox emissions only); the North Sea area including the English Channel (limiting SOx emissions only) and the North American ECA (which came into effect from August 1, 2012 limiting SOx, NOx and particulate matter emissions). The United States Caribbean Sea ECA entered into force on January 1, 2013 and has been effective since January 1, 2014, limiting SOx, NOx and particulate matter emissions.

California has adopted more stringent low sulfur fuel requirements within California-regulated waters. In addition, the IMO, the U.S. and states within the U.S. have proposed or implemented requirements relating to the management of ballast water to prevent the harmful effects of foreign invasive species.

The operation of vessels is also affected by the requirements set forth in the International Safety Management (“ISM”) Code. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe vessel operation and describing procedures for dealing with emergencies. Further to this, the IMO has introduced the first ever mandatory measures for an international greenhouse gas reduction regime for a global industry sector. The Energy Efficiency measures took effect on January 1, 2013 and apply to all ships of 400 gross tonnage and above. They include the development of a ship energy efficiency management plan (“SEEMP”) which is akin to a safety management plan, which the industry

 

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will have to comply with. The failure of a ship owner or bareboat charterer to comply with the ISM Code and IMO measures may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports.

We operate a fleet of crude, product and chemical tankers that are subject to national and international laws governing pollution from such vessels. Several international conventions impose and limit pollution liability from vessels. An owner of a tanker vessel carrying a cargo of “persistent oil” as defined by the International Convention for Civil Liability for Oil Pollution Damage (the “CLC”) is subject under the convention to strict liability for any pollution damage caused in a contracting state by an escape or discharge from cargo or bunker tanks. This liability is subject to a financial limit calculated by reference to the tonnage of the ship, and the right to limit liability may be lost if the spill is caused by the shipowner’s intentional or reckless conduct. Liability may also be incurred under the CLC for a bunker spill from the vessel even when she is not carrying such cargo, but is in ballast.

When a tanker is carrying clean oil products that do not constitute “persistent oil” that would be covered under the CLC, liability for any pollution damage will generally fall outside the CLC and will depend on other international conventions or domestic laws in the jurisdiction where the spillage occurs. The same principle applies to any pollution from the vessel in a jurisdiction which is not a party to the CLC. The CLC applies in over 100 jurisdictions around the world, but it does not apply in the United States, where the corresponding liability laws such as the Oil Pollution Act of 1990 (the “OPA”) discussed below, are particularly stringent.

For vessel operations not covered by the CLC, including those operated under our fleet, at present, international liability for oil pollution is governed by the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”). In 2001, the IMO adopted the Bunker Convention, which imposes strict liability on shipowners for pollution damage and response costs incurred in contracting states caused by discharges, or threatened discharges, of bunker oil from all classes of ships not covered by the CLC. The Bunker Convention also requires registered owners of ships over a certain size to maintain insurance to cover their liability for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime, including liability limits calculated in accordance with the Convention on Limitation of Liability for Maritime Claims 1976, as amended (the “1976 Convention”), discussed in more detail in the following paragraph. The Bunker Convention became effective in contracting states on November 21, 2008 and, as of February 28, 2014, had 74 contracting states comprising approximately 90.72% of the gross tonnage of the world’s merchant fleet. In non-contracting states, liability for such bunker oil pollution typically is determined by the national or other domestic laws in the jurisdiction where the spillage occurs.

The CLC and Bunker Convention also provide vessel owners a right to limit their liability, depending on the applicable national or international regime. The CLC includes its own liability limits. The 1976 Convention is the most widely applicable international regime limiting maritime pollution liability. Rights to limit liability under the 1976 Convention are forfeited where a spill is caused by a shipowner’s intentional or reckless conduct. Certain jurisdictions have ratified the IMO’s Protocol of 1996 to the 1976 Convention, referred to herein as the “Protocol of 1996.” The Protocol of 1996 provides for substantially higher liability limits in those jurisdictions than the limits set forth in the 1976 Convention. Finally, some jurisdictions, such as the United States, are not a party to either the 1976 Convention or the Protocol of 1996, and, therefore, a shipowner’s rights to limit liability for maritime pollution in such jurisdictions may be uncertain.

Environmental legislation in the United States merits particular mention as it is in many respects more onerous than international laws, representing a high-water mark of regulation with which ship owners and operators must comply, and of liability likely to be incurred in the event of non-compliance or an incident causing pollution. Such regulation may become even stricter if laws are changed as a result of the April 2010 Deepwater Horizon oil spill in the Gulf of Mexico. In the United States, the OPA establishes an extensive regulatory and liability regime for the protection and cleanup of the environment from cargo and bunker oil spills from vessels, including tankers. The OPA covers all owners and operators whose vessels trade in the United

 

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States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone. Under the OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or substantial threats of discharges, of oil from their vessels. In response to the 2010 Deepwater Horizon oil incident in the Gulf of Mexico, the U.S. House of Representatives passed and the U.S. Senate considered but did not pass a bill to strengthen certain requirements of the OPA; similar legislation may be introduced in the future.

In addition to potential liability under the federal OPA, vessel owners may in some instances incur liability on an even more stringent basis under state law in the particular state where the spillage occurred. For example, California regulations prohibit the discharge of oil, require an oil contingency plan be filed with the state, require that the ship owner contract with an oil response organization and require a valid certificate of financial responsibility, all prior to the vessel entering state waters.

In the last decade, the EU has become increasingly active in the field of regulation of maritime safety and protection of the environment. In some areas of regulation the EU has introduced new laws without attempting to procure a corresponding amendment to international law. Notably, the EU adopted in 2005 a directive, as amended in 2009, on ship-source pollution, imposing criminal sanctions for pollution not only where pollution is caused by intent or recklessness (which would be an offence under MARPOL), but also where it is caused by “serious negligence.” The concept of “serious negligence” may be interpreted in practice to be little more than ordinary negligence. The directive could therefore result in criminal liability being incurred in circumstances where it would not be incurred under international law. Criminal liability for a pollution incident could not only result in us incurring substantial penalties or fines, but may also, in some jurisdictions, facilitate civil liability claims for greater compensation than would otherwise have been payable.

We maintain insurance coverage for each owned vessel in our fleet against pollution liability risks in the amount of $1.0 billion in the aggregate for any one event. The insured risks include penalties and fines as well as civil liabilities and expenses resulting from accidental pollution. However, this insurance coverage is subject to exclusions, deductibles and other terms and conditions. If any liabilities or expenses fall within an exclusion from coverage, or if damages from a catastrophic incident exceed the aggregate liability of $1.0 billion for any one event, our cash flow, profitability and financial position would be adversely impacted.

Climate change and government laws and regulations related to climate change could negatively impact our financial condition.

We are and will be, directly and indirectly, subject to the effects of climate change and may, directly or indirectly, be affected by government laws and regulations related to climate change. A number of countries have adopted or are considering the adoption of regulatory frameworks to reduce greenhouse gas emissions, such as carbon dioxide and methane. In the United States, the United States Environmental Protection Agency (“EPA”) has declared greenhouse gases to be dangerous pollutants and has issued greenhouse gas reporting requirements for emissions sources in certain industries (which do not include the shipping industry).

In addition, while the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which requires adopting countries to implement national programs to reduce greenhouse gas emissions, the IMO intends to develop limits on greenhouse gases from international shipping. It has responded to the global focus on climate change and greenhouse gas emissions by developing specific technical and operational efficiency measures and a work plan for market-based mechanisms in 2011. These include the mandatory measures of the ship energy efficiency management plan (“SEEMP”), outlined above, and an energy efficiency design index (“EEDI”) for new ships. The IMO is also considering its position on market-based measures through an expert working group, which was expected to report back to its Marine Environment Protection Committee (“MEPC”) in late 2012. Among the

 

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numerous proposals being considered by the working group are the following: a port state levy based on the amount of fuel consumed by the vessel on its voyage to the port in question; a global emissions trading scheme which would allocate emissions allowances and set an emissions cap; and an international fund establishing a global reduction target for international shipping, to be set either by the UNFCCC or the IMO. At its 64th session in October 2012, the MEPC indicated that 2015 was the target year for Member States to identify market-based measures for international shipping. At its 65th session, held from May 2013, the MEPC continued its work on developing technical and operational measures relating to energy-efficiency measures for ships, following the entry into force, on January 1, 2013, of the mandatory efficiency measures. Further measures considered by the MEPC include the use of a phased approach to implementation. Following an Expert Workshop, endorsed by the MEPC at its 64th session, MEPC 65 agreed to initiate a study regarding an updated greenhouse gas emissions’ estimate for international shipping, the outcome of which is due to be presented to the MEPC at its 66th session in March 2014. Although submissions were made regarding the market-based measures referred to above, discussions on that topic were suspended for a future session.

In December 2011, UN climate change talks took place in Durban and concluded with an agreement referred to as the Durban Platform for Enhanced Action. The Durban Conference did not result in any proposals specifically addressing the shipping industry’s role in climate change but the progress that has been made by the IMO in this area was widely acknowledged throughout the negotiating bodies of the UNFCCC process.

The EU announced in April 2007 that it planned to expand the EU emissions trading scheme by adding vessels, and a proposal from the European Commission (“EC”) was expected if no global regime for reduction of seaborne emissions had been agreed to by the end of 2011. As of January 31, 2013 the EC had stopped short of proposing that emissions from ships be included in the EU’s emissions-trading scheme. However, on October 1, 2012 it announced that it would propose measures to monitor verify and report on greenhouse-gas emissions from the shipping sector in early 2013. On June 28, 2013, the EC adopted a Communication setting out a strategy for progressively including greenhouse gas emissions from maritime transport in the EU’s policy for reducing its overall GHG emissions. The first step proposed by the EC is an EU Regulation that would establish an EU-wide system for the monitoring, reporting and verification of carbon dioxide emissions from large ships starting in 2018. The draft Regulation is currently working its way through the various stages of the EU legislative process and will require approval from both the European Council and European Parliament before entering into force. This Regulation may be seen as indicative of an intention to maintain pressure on the international negotiating process.

We cannot predict with any degree of certainty what effect, if any, possible climate change and government laws and regulations related to climate change will have on our operations, whether directly or indirectly. However, we believe that climate change, including the possible increase in severe weather events resulting from climate change, and government laws and regulations related to climate change may affect, directly or indirectly, (i) the cost of the vessels we may acquire in the future, (ii) our ability to continue to operate as we have in the past, (iii) the cost of operating our vessels, and (iv) insurance premiums, deductibles and the availability of coverage. As a result, our financial condition could be negatively impacted by significant climate change and related governmental regulation, and that impact could be material.

We are subject to vessel security regulations and we incur costs to comply with adopted regulations. We may be subject to costs to comply with similar regulations that may be adopted in the future in response to terrorism.

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002 (“MTSA”) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters

 

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subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea (“SOLAS”) created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect in July 2004, and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the International Ship and Port Facilities Security (“ISPS”) Code. Among the various requirements are:

 

   

on-board installation of automatic information systems, or AIS, to enhance vessel-to-vessel and vessel-to-shore communications;

 

   

on-board installation of ship security alert systems;

 

   

the development of vessel security plans; and

 

   

compliance with flag state security certification requirements.

The U.S. Coast Guard regulations, intended to be aligned with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid International Ship Security Certificate (“ISSC”) that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We will implement the various security measures addressed by the MTSA, SOLAS and the ISPS Code and take measures for our vessels or vessels that we charter to attain compliance with all applicable security requirements within the prescribed time periods. Although management does not believe these additional requirements will have a material financial impact on our operations, there can be no assurance that there will not be an interruption in operations to bring vessels into compliance with the applicable requirements and any such interruption could cause a decrease in charter revenues. Furthermore, additional security measures could be required in the future that could have significant financial impact on us.

Our international activities increase the compliance risks associated with economic and trade sanctions imposed by the United States, the European Union and other jurisdictions.

Our international operations could expose us to risks associated with trade and economic sanctions prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines, penalties and other sanctions. During 2011 and continuing into 2012, the scope of sanctions imposed against the government of Iran and persons engaging in certain activities or doing certain business with and relating to Iran has been expanded by a number of jurisdictions, including the United States, the European Union and Canada. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act (“CISADA”), which expanded the scope of the former Iran Sanctions Act. The scope U.S. sanctions against Iran were expanded subsequent to CISADA by, among other U.S. laws, the National Defense Authorization Act of 2012 (the 2012 NDAA), the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA), Executive Order 13662, and the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA). The foregoing laws, among other things, expand the application of prohibitions to non-U.S. companies, such our company, and introduce limits on the ability of companies and persons to do business or trade with Iran when such activities relate to specific activities such as investment in Iran, the supply or export of refined petroleum or refined petroleum products to Iran, the supply and delivery of goods to Iran which could enhance Iran’s petroleum or energy sector, and the transportation of crude oil from Iran to countries which do not enjoy Iran crude oil sanctions waivers (our tankers called in Iran but did not engage in the prohibited activities specifically identified by these sanctions.) Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations, and the law may change. Moreover, despite relevant provisions in charter parties forbidding the use of our vessels in trade that would violate economic sanctions, our charterers may nevertheless violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation and be imputed to us.

 

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We are constantly monitoring developments in the United States, the European Union and other jurisdictions that maintain economic sanctions against Iran, other countries, and other sanctions targets, including developments in implementation and enforcement of such sanctions programs. Expansion of sanctions programs, embargoes and other restrictions in the future (including additional designations of countries subject to sanctions), or modifications in how existing sanctions are interpreted or enforced, could prevent our tankers from calling on ports in sanctioned countries or could limit their cargoes. If any of the risks described above materialize, it could have a material adverse impact on our business and results of operations.

To reduce the risk of violating economic sanctions, we have a policy of compliance with applicable economic sanctions laws and have implemented and continue to implement and diligently follow procedures to avoid economic sanctions violations.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and anti-corruption laws in other applicable jurisdictions.

As an international shipping company, we may operate in countries known to have a reputation for corruption. The U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other anti-corruption laws and regulations in applicable jurisdictions generally prohibit companies registered with the SEC and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Under the FCPA, U.S. companies may be held liable for some actions taken by strategic or local partners or representatives. Legislation in other countries includes the U.K. Bribery Act which is broader in scope than the FCPA because it does not contain an exception for facilitating payments. We and our customers may be subject to these and similar anti-corruption laws in other applicable jurisdictions. Failure to comply with such legal requirements could expose us to civil and/or criminal penalties, including fines, prosecution and significant reputational damage, all of which could materially and adversely affect our business and results of operations, including our relationships with our customers, and our financial results. Compliance with the FCPA, the U.K. Bribery Act and other applicable anti-corruption laws and related regulations and policies imposes potentially significant costs and operational burdens. Moreover, the compliance and monitoring mechanisms that we have in place including our Code of Ethics, which incorporates our anti-bribery and corruption policy may not adequately prevent or detect possible violations under applicable anti-bribery and anti-corruption legislation.

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of contents of vessels, delays in the loading, offloading or delivery and the levying of customs, duties, fines and other penalties.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our future customers and may, in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, and results of operations.

A failure to pass inspection by classification societies could result in our vessels becoming unemployable unless and until they pass inspection, resulting in a loss of revenues from such vessels for that period and a corresponding decrease in operating cash flows.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and with SOLAS. A vessel must undergo an annual survey, an intermediate survey and a special survey. In lieu of a special survey, a vessel’s

 

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machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked every two to three years for inspection of the underwater parts of such vessel. If any of our vessels fail any annual survey, intermediate survey, or special survey, the vessel may be unable to trade between ports and, therefore, would be unemployable, potentially causing a negative impact on our revenues due to the loss of revenues from such vessel until it was able to trade again.

The operation of ocean-going vessels entails the possibility of marine disasters including damage or destruction of a vessel due to accident, the loss of a vessel due to piracy, terrorism or political conflict, damage or destruction of cargo and similar events that are inherent operational risks of the tanker industry and may cause a loss of revenue from affected vessels and damage to our business reputation and condition, which may in turn lead to loss of business.

The operation of ocean-going vessels entails certain inherent risks that may adversely affect our business and reputation. Our vessels and their cargoes are at risk of being damaged or lost due to events such as:

 

   

damage or destruction of vessel due to marine disaster such as a collision;

 

   

the loss of a vessel due to piracy and terrorism;

 

   

cargo and property losses or damage as a result of the foregoing or less drastic causes such as human error, mechanical failure and bad weather;

 

   

environmental accidents as a result of the foregoing;

 

   

business interruptions and delivery delays caused by mechanical failure, human error, acts of piracy, war, terrorism, political action in various countries, labor strikes, potential government expropriation of our vessels or adverse weather conditions; and

 

   

other events and circumstances;

In addition, increased operational risks arise as a consequence of the complex nature of the crude oil, product and chemical tanker industry, the nature of services required to support the industry, including maintenance and repair services, and the mechanical complexity of the tankers themselves. Compared to other types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision or other cause, due to the high flammability and high volume of the oil transported in tankers. Damage and loss could also arise as a consequence of a failure in the services required to support the industry, for example, due to inadequate dredging. Inherent risks also arise due to the nature of the product transported by our vessels. Any damage to, or accident involving, our vessels while carrying crude oil could give rise to environmental damage or lead to other adverse consequences. Each of these inherent risks may also result in death or injury to persons, loss of revenues or property, higher insurance rates, damage to our customer relationships, delay or rerouting.

Any of these circumstances or events could substantially increase our costs. For example, the costs of replacing a vessel or cleaning up environmental damage could substantially lower our revenues by taking vessels out of operation permanently or for periods of time. Furthermore, the involvement of our vessels in a disaster or delays in delivery, damage or the loss of cargo may harm our reputation as a safe and reliable vessel operator and cause us to lose business. Our vessels could be arrested by maritime claimants, which could result in the interruption of business and decrease revenue and lower profitability.

Some of these inherent risks could result in significant damage, such as marine disaster or environmental incidents, and any resulting legal proceedings may be complex, lengthy, costly and, if decided against us, any of these proceedings or other proceedings involving similar claims or claims for substantial damages may harm our reputation and have a material adverse effect on our business, results of operations, cash flow and financial position. In addition, the legal systems and law enforcement mechanisms in certain countries in which we operate

 

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may expose us to risk and uncertainty. Further, we may be required to devote substantial time and cost defending these proceedings, which could divert attention from management of our business. Crew members, tort claimants, claimants for breach of certain maritime contracts, vessel mortgagees, suppliers of goods and services to a vessel, shippers of cargo and other persons may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages, and in many circumstances a maritime lien holder may enforce its lien by “arresting” a vessel through court processes. Additionally, in certain jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s lien has arisen, but also any “associated” vessel owned or controlled by the legal or beneficial owner of that vessel. If any vessel ultimately owned and operated by us is “arrested,” this could result in a material loss of revenues, or require us to pay substantial amounts to have the “arrest” lifted.

Any of these factors may have a material adverse effect on our business, financial conditions and results of operations.

The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.

We expect that our vessels will call in ports in South America and other areas where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows and financial condition.

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

The shipping industry has historically been affected by acts of piracy in regions such as the South China Sea and the Gulf of Aden. Although the frequency of sea piracy worldwide decreased during 2013 to its lowest level since its increase in 2009, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea. A significant example of the heightened level of piracy came in February 2011 when the M/V Irene SL, a crude oil tanker and the Arabian Sea which was not affiliated with us, was captured by pirates in the Arabian Sea while carrying crude oil estimated to be worth approximately $200 million. In December 2009, the Navios Apollon, a vessel owned by our affiliate, Navios Maritime Partners L.P. (“Navios Partners”), was seized by pirates 800 miles off the coast of Somalia while transporting fertilizer from Tampa, Florida to Rozi, India and was released on February 27, 2010. In January 2014, one of our vessels, the Nave Atropos, came under attack from a pirate action group in international waters off the coast of Yemen. The crew and the on-board security team successfully implemented the counter piracy action plan and standard operating procedures to deter the attack with no consequences to the vessel or her crew. These piracy attacks have resulted in regions (in which our vessels are deployed) being characterized by insurers as “war risk” zones or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such insurance coverage could increase significantly and such insurance coverage may be more difficult to obtain. Crew costs, including those due to employing onboard security guards, could increase in such circumstances. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition, results of operations and cash flows. Acts of piracy on ocean-going vessels could adversely affect our business and operations.

Terrorist attacks, increased hostilities or war could lead to further economic instability, increased costs and disruption of our business.

Terrorist attacks, such as the attacks in the United States on September 11, 2001 and the United States’ continuing response to these attacks, the attacks in London on July 7, 2005, as well as the threat of future terrorist

 

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attacks, continue to cause uncertainty in the world financial markets, including the energy markets. The continuing conflicts in Iraq and Afghanistan and other current and future conflicts, may adversely affect our business, operating results, financial condition, ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute further to economic instability.

In addition, oil facilities, shipyards, vessels, pipelines and oil and gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil and other refined products to or from certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the distribution, production or transportation of oil and other refined products to be shipped by us could entitle our customers to terminate our charter contracts, which would harm our cash flow and our business.

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

Governments could requisition vessels of a target business during a period of war or emergency, resulting in a loss of earnings.

A government could requisition a business’ vessels for title or hire. Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although a target business would be entitled to compensation in the event of a requisition of any of its vessels, the amount and timing of payment would be uncertain.

Disruptions in world financial markets and the resulting governmental action in Europe, the United States and in other parts of the world could have a material adverse impact on our ability to obtain financing required to acquire vessels or new businesses. Furthermore, such a disruption would materially adversely affect our results of operations, financial condition and cash flows.

Global financial markets and economic conditions have been severely disrupted and volatile in recent years and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited supply of credit. The renewed crisis in Argentina, civil unrest in Ukraine and other parts of the world, and continuing concerns relating to the European sovereign debt crisis have led to increased volatility in global credit and equity markets. Several European countries including Greece, Portugal and Cyprus have been affected by increasing public debt burdens and weakening economic growth prospects. In recent years, Standard and Poor’s Rating Services and Moody’s Investors Service (“Moody’s”) downgraded the long-term ratings of most European countries’ sovereign debt and initiated negative outlooks. Such downgrades could negatively affect those countries’ ability to access the public debt markets at reasonable rates or at all, materially affecting the financial conditions of banks in those countries, including those with which we maintain cash deposits and equivalents, or on which we rely on to finance our vessel and new business acquisitions. Cash deposits and cash equivalents in excess of amounts covered by government-provided insurance are exposed to loss in the event of non-performance by financial institutions. We maintain cash deposits and equivalents in excess of government-provided insurance limits at banks in Greece and other European nations, which may expose us to a loss of cash deposits or cash equivalents.

Furthermore, the United States and other parts of the world are exhibiting volatile economic trends and were recently in a recession. Despite signs of recovery, the outlook for the world economy remains uncertain. For

 

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example, the credit markets worldwide and in the U.S. have experienced significant contraction, de-leveraging and reduced liquidity, and the U.S. federal government, state governments and foreign governments have implemented and are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The SEC, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws. Recently, a number of financial institutions have experienced serious financial difficulties and, in some cases, have entered bankruptcy proceedings or are in regulatory enforcement actions. These issues, along with the repricing of credit risk and the difficulties currently experienced by financial institutions have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets, many lenders have increased margins on lending rates, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts), or have refused to refinance existing debt at all. Additionally, certain banks that have historically been significant lenders to the shipping industry have reduced or ceased lending activities in the shipping industry. New banking regulations, including larger capital requirements and the resulting policies adopted by lenders, could reduce lending activities. We may experience difficulties obtaining financing commitments, including commitments to refinance our existing debt as payments come due under our credit facilities, in the future if lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. Due to the fact that we would possibly cover all or a portion of the cost of any new acquisition with debt financing, such uncertainty, combined with restrictions imposed by our current debt, could hamper our ability to finance vessels or other assets and new business acquisitions.

In addition, the economic uncertainty worldwide has made demand for shipping services volatile and has reduced charter rates, which may adversely affect our results of operations and financial condition. Currently, the economies of China, Japan, other Asian Pacific countries and India are the main driving force behind the development in seaborne transportation. Reduced demand from such economies has driven decreased rates and vessel values.

We could face risks attendant to changes in economic environments, changes in interest rates, and instability in certain securities markets, among other factors. Major market disruptions and the uncertainty in market conditions and the regulatory climate in the U.S., Europe and worldwide could adversely affect our business or impair our ability to borrow amounts under any future financial arrangements. The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors could have a material adverse effect on our results of operations, financial condition or cash flows.

Because international tanker companies often generate most or all of their revenues in U.S. dollars but incur a portion of their expenses in other currencies, exchange rate fluctuations could cause us to suffer exchange rate losses, thereby increasing expenses and reducing income.

We engage in worldwide commerce with a variety of entities. Although our operations may expose us to certain levels of foreign currency risk, our transactions are predominantly U.S. dollar-denominated. Transactions in currencies other than the functional currency are translated at the exchange rate in effect at the date of each transaction. Expenses incurred in foreign currencies against which the U.S. dollar falls in value can increase, decreasing our income. A greater percentage of our transactions and expenses in the future may be denominated in currencies other than U.S. dollar. As part of our overall risk management policy, we will attempt to hedge these risks in exchange rate fluctuations from time to time. We may not always be successful in such hedging activities and, as a result, our operating results could suffer as a result of un-hedged losses incurred as a result of exchange rate fluctuations. For example, as of December 31, 2013, the value of the U.S. dollar as compared to the Euro decreased by approximately 4.0% compared with the respective value as of December 31, 2012. A greater percentage of our transactions and expenses in the future may be denominated in currencies other than the U.S. dollar.

 

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Labor interruptions and problems could disrupt our business.

Certain of our vessels are manned by masters, officers and crews that are employed by third parties. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out normally and could have a material adverse effect on our business, results of operations, cash flow and financial condition.

In the highly competitive product and chemical tanker sectors of the shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources, which may adversely affect our results of operations.

We employ our vessels in the product and chemical tanker sectors, highly competitive markets that are capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than us. Competition for the transportation of refined petroleum products (clean and dirty) and bulk liquid chemicals can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and our managers to the charterers. Due in part to the highly fragmented markets, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets than ours.

 

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Risks Relating to Our VLCC Vessels

The indemnity may be inadequate to cover any damages.

The Securities Purchase Agreement for the VLCC vessels acquired through the VLCC Acquisition has a cap on indemnity obligations, subject to certain exceptions, of $58.7 million. Although we performed substantial due diligence with respect to the VLCC Acquisition, there can be no assurance that there will not be undisclosed liabilities or other matters not discovered in the course of such due diligence and the $58.7 million indemnity may be inadequate to cover these or other damages related to breaches of such agreement. In addition, after the return to Navios Acquisition of 217,159 shares on November 4, 2011 in settlement of claims relating to representation and warranties attributable to the sellers and the return of the balance of the escrow shares to the sellers, it may be difficult to enforce an arbitration award for any amount of damages.

A large proportion of the revenue from the VLCC vessels is derived from a Chinese state-owned company, and changes in the economic and political environment in China or in Chinese relations with other countries could adversely affect our ability to continue this customer relationship.

DOSCO, a wholly owned subsidiary of the Chinese state-owned COSCO, charters four of our VLCC vessels. Changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions, could restrict DOSCO’s ability to continue its relationship with us. If DOSCO becomes unable to perform under its charter agreements with us, we could suffer a loss of revenue that could materially adversely affect our business, financial condition, and results of operations. In addition, we may have limited ability in Chinese courts to enforce any awards for damages that we may suffer if DOSCO were to fail to perform its obligations under our charter agreements.

One of the vessels is subject to a mutual sale provision between the subsidiary that owns the vessel and the charterer of the vessel, which, if exercised, could reduce the size of our fleet and reduce our future revenue.

The Shinyo Ocean is subject to a mutual sale provision whereby we or the charterer can request the sale of the vessel provided that a price can be obtained that is at least $3,000,000 greater than the agreed depreciated value of the vessel as set forth in the charter agreement. If this provision is exercised, we may not be able to obtain a replacement vessel for the price at which the vessel is sold. In such a case, the size of our fleet would be reduced and we may experience a reduction in our future revenue.

Risks Related to Our Relationship with Navios Holdings and Its Affiliates

Navios Holdings has limited recent experience in the crude oil, product and chemical tanker sectors.

Navios Tankers Management Inc (“the Manager”), a wholly-owned subsidiary of Navios Holdings, oversees the commercial and administrative management of our entire fleet and the technical management of a portion of our fleet. Navios Holdings is a vertically-integrated seaborne shipping and logistics company with 60 years of operating history in the shipping industry that held approximately 43.1% of our shares of common stock as of March 14, 2014. Other than with respect to South American operations, Navios Holdings has limited recent experience in the crude oil, chemical and product tanker sectors. Such limited experience could cause Navios Holdings or the Manager to make decisions that a more experienced operator in the sector might not make. If Navios Holdings or the Manager is not able to properly assess or ascertain a particular aspect of the crude oil, product or chemical tanker sectors, it could have a material adverse effect on our operations.

Navios Holdings may compete directly with us, causing certain officers to have a conflict of interest.

Angeliki Frangou and Ted C. Petrone are each officers and/or directors of both Navios Holdings and Navios Acquisition. We operate in the crude oil, product and chemical tanker sectors of the shipping industry, and although Navios Holdings does not currently operate in those sectors, there is no assurance it will not enter them. If it does, we may compete directly with Navios Holdings for business opportunities.

 

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Navios Holdings, Navios Partners and Navios Acquisition share certain officers and directors who may not be able to devote sufficient time to our affairs, which may affect our ability to conduct operations and generate revenues.

Angeliki Frangou and Ted C. Petrone are each officers and/or directors of both Navios Holdings and Navios Acquisition, and Ms. Frangou is an officer and director of Navios Partners. As a result, demands for our officers’ time and attention as required from Navios Acquisition, Navios Partners and Navios Holdings may conflict from time to time and their limited devotion of time and attention to our business may hurt the operation of our business.

The loss of key members of our senior management team could disrupt the management of our business.

We believe that our success depends on the continued contributions of the members of our senior management team, including Ms. Angeliki Frangou, our Chairman and Chief Executive Officer. The loss of the services of Ms. Frangou or one of our other executive officers or senior management members could impair our ability to identify and secure new charter contracts, to maintain good customer relations and to otherwise manage our business, which could have a material adverse effect on our financial performance and our ability to compete.

We are dependent on a subsidiary of Navios Holdings for the commercial and administrative management of our fleet and the technical management of a portion of our fleet, which may create conflicts of interest.

As we subcontract the technical and commercial management of our fleet, including crewing, maintenance and repair, to the Manager, a subsidiary of Navios Holdings, and on an interim basis to other third party managers, the loss of these services or the failure of the Manager to perform these services could materially and adversely affect the results of our operations. Although we may have rights against the Manager if it defaults on its obligations to us, you will have no recourse directly against it. Further, we expect that we will need to seek approval from our respective lenders to change our commercial and technical managers. Navios Holdings has responsibilities and relationships to owners other than Navios Acquisition that could create conflicts of interest between us and Navios Holdings or our Manager. These conflicts may arise in connection with the provision of chartering services to us for our fleet versus carriers managed by Navios Holdings’ subsidiaries or other companies affiliated with Navios Holdings.

Navios Holdings, our affiliate and a greater than 5% holder of our common stock, Angeliki Frangou, our Chairman and Chief Executive Officer, and certain of our officers and directors collectively own a substantial interest in us, and, as a result, may influence certain actions requiring stockholder vote.

As of March 14, 2014, Navios Holdings, Angeliki Frangou, our Chairman and Chief Executive Officer, and certain of our officers and directors beneficially own, in the aggregate, 45.9% of our issued and outstanding shares of common stock, which permits them to influence the outcome of effectively all matters requiring approval by our stockholders at such time, including the election of directors and approval of significant corporate transactions. Furthermore, if Navios Holdings and Ms. Frangou or an affiliate ceases to hold a minimum of 30% of our common stock then we will be in default under our credit facilities.

Risks Related to Our Common Stock and Capital Structure

We are incorporated in the Republic of the Marshall Islands, a country that does not have a well-developed body of corporate law, which may negatively affect the ability of public stockholders to protect their interests.

Our corporate affairs are governed by our amended and restated articles of incorporation and bylaws, and by the Marshall Islands Business Corporations Act, or the BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors

 

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under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. Stockholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, public stockholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling stockholders than would stockholders of a corporation incorporated in a United States jurisdiction.

We are incorporated under the laws of the Marshall Islands and our directors and officers are non-U.S. residents, and although you may bring an original action in the courts of the Marshall Islands or obtain a judgment against us, our directors or our management based on U.S. laws in the event you believe your rights as a stockholder have been infringed, it may be difficult to enforce judgments against us, our directors or our management.

We are incorporated under the laws of the Republic of the Marshall Islands, and all of our assets are located outside of the United States. Our business will be operated primarily from our offices in Athens, Greece. In addition, our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our directors and officers. Although you may bring an original action against us or our affiliates in the courts of the Marshall Islands based on U.S. laws, and the courts of the Marshall Islands may impose civil liability, including monetary damages, against us or our affiliates for a cause of action arising under Marshall Islands law, it may impracticable for you to do so given the geographic location of the Marshall Islands.

Because the Public Company Accounting Oversight Board is not currently permitted to inspect registered public accounting firms in Greece, including our independent registered public accounting firm, you may not benefit from such inspections.

Auditors of U.S. public companies, including our independent registered public accounting firm, are required by the laws of the United States to undergo periodic Public Company Accounting Oversight Board (“PCAOB”) inspections to assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. The laws of certain European Union countries, including Greece, do not currently permit the PCAOB to conduct inspections of accounting firms established and operating in such European Union countries. Accordingly, the PCAOB is currently prevented from fully evaluating the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures. Unlike shareholders or potential shareholders of most U.S. public companies, our shareholders would be deprived of the possible benefits of such PCAOB inspections.

Since we are a foreign private issuer, we are not subject to certain SEC regulations that companies incorporated in the United States would be subject to.

We are a “foreign private issuer” within the meaning of the rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States public companies including:

 

   

the rules under the Exchange Act requiring the filing with the SEC, of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

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the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and

 

   

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months).

Accordingly, investors in our common stock may not be able to obtain all of the information of the type described above, and our stockholders may not be afforded the same protections or information generally available to investors holding shares in public companies in the United States.

Anti-takeover provisions in our amended and restated articles of incorporation could make it difficult for our stockholders to replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.

Several provisions of our amended and restated articles of incorporation and bylaws could make it difficult for our stockholders to change the composition of our board of directors in any one year, preventing them from changing the composition of our management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. These provisions include those that:

 

   

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

 

   

provide for a classified board of directors with staggered, three-year terms;

 

   

require a super-majority vote in order to amend the provisions regarding our classified board of directors with staggered, three-year terms; and

 

   

prohibit cumulative voting in the election of directors.

These anti-takeover provisions could substantially impede the ability of stockholders to benefit from a change in control and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.

Registration rights held by our initial stockholders and others may have an adverse effect on the market price of our common stock.

Certain stockholders, which include Navios Holdings and certain members of the management of Navios Acquisition, Navios Holdings and Navios Partners, are entitled to demand that we register the resale of their common stock totaling 67,320,507 shares. In addition, one third-party holder has an effective resale registration statement with respect to 1,677,759 shares of common stock. If all of these stockholders exercise their registration rights with respect to all of their shares of common stock, including the effective resale registration statement, there will be an additional 68,998,266 shares of common stock eligible for trading in the public market. The presence of these additional shares may have an adverse effect on the market price of our common stock.

The New York Stock Exchange may delist our securities from quotation on its exchange, which could limit your ability to trade our securities and subject us to additional trading restrictions.

Our securities are listed on the New York Stock Exchange (“NYSE”), a national securities exchange. Although we currently satisfy the NYSE minimum listing standards, which only requires that we meet certain requirements relating to stockholders’ equity, number of round-lot holders, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that our securities will continue to be listed on NYSE in the future.

 

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If NYSE delists our securities from trading on its exchange, we could face significant material adverse consequences, including:

 

   

a limited availability of market quotations for our securities;

 

   

a limited amount of news and analyst coverage for us;

 

   

a decreased ability for us to issue additional securities or obtain additional financing in the future; and

 

   

limited liquidity for our stockholders due to thin trading.

Risks Related to Our Indebtedness

We may not be able to access our debt financing, which may affect our ability to make payments with respect to our vessels.

Our ability to borrow amounts under our current and future credit facilities will be subject to the satisfaction of customary conditions precedent and compliance with terms and conditions included in the loan documents, including a minimum liquidity financial covenant, and to circumstances that may be beyond our control such as world events, economic conditions, the financial standing of the bank or its willingness to lend to shipping companies such as us. Prior to each drawdown, we will be required, among other things, to provide our lenders with satisfactory evidence that certain conditions precedent have been met. To the extent that we are not able to satisfy these requirements, including as a result of a decline in the value of our vessels, we may not be able to draw down the full amount under certain of our credit facilities without obtaining a waiver or consent from the respective lenders.

We have substantial indebtedness and may incur substantial additional indebtedness, which could adversely affect our financial health and our ability to obtain financing in the future, react to changes in our business and make debt service payments.

We have substantial indebtedness, and we may also increase the amount of our indebtedness in the future. The terms of our credit facilities and other instruments and agreement governing our indebtedness do not prohibit us from doing so. Our substantial indebtedness could have important consequences for our stockholders.

Because of our substantial indebtedness:

 

   

our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, vessel or other acquisitions or general corporate purposes may be impaired in the future;

 

   

if new debt is added to our debt levels after the vessel acquisition, the related risks that we now face would increase and we may not be able to meet all of our debt obligations;

 

   

a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes, and there can be no assurance that our operations will generate sufficient cash flow to service this indebtedness;

 

   

we will be exposed to the risk of increased interest rates because our borrowings under the credit facilities will be at variable rates of interest;

 

   

it may be more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness;

 

   

we may be more vulnerable to general adverse economic and industry conditions;

 

   

we may be at a competitive disadvantage compared to our competitors with less debt or comparable debt at more favorable interest rates and, as a result, we may not be better positioned to withstand economic downturns;

 

   

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

 

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our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, or we may be prevented from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business.

Highly leveraged companies are significantly more vulnerable to unanticipated downturns and set backs, whether directly related to their business or flowing from a general economic or industry condition, and therefore are more vulnerable to a business failure or bankruptcy.

The agreements and instruments governing our indebtedness do or will contain restrictions and limitations that could significantly impact our ability to operate our business and adversely affect our stockholders.

The agreements and instruments governing our indebtedness impose certain operating and financial restrictions on us.

Among other restrictions, these restrictions may limit our ability to:

 

   

incur or guarantee additional indebtedness or issue certain preferred stock;

 

   

create liens on our assets;

 

   

make investments;

 

   

engage in mergers and acquisitions or sell all or substantially all of our properties or assets;

 

   

redeem or repurchase capital stock, pay dividends or make other restricted payments and investments;

 

   

make capital expenditures;

 

   

change the management of our vessels or terminate the management agreements we have relating to our vessels;

 

   

enter into long-term charter arrangements without the consent of the lender;

 

   

transfer or sell any of our vessels; and

 

   

enter into certain transactions with our affiliates.

Therefore, we will need to seek permission from our lenders in order to engage in some corporate and commercial actions that we believe would be in the best interest of our business, and a denial of permission may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. Our lenders’ interests may be different from our interests, and we cannot guarantee that we will be able to obtain our lenders’ permission when needed. This may prevent us from taking actions that are in our best interest. Any future credit agreement may include similar or more restrictive restrictions.

Our credit facilities contain requirements that the value of the collateral provided pursuant to the credit facilities must equal or exceed by a certain percentage the amount of outstanding borrowings under the credit facilities and that we maintain a minimum liquidity level. In addition, our credit facilities contain additional restrictive covenants, including a minimum net worth requirement and maximum total net liabilities over net assets. It is an event of default under our credit facilities if such covenants are not complied with or if Navios Holdings, Ms. Angeliki Frangou, our Chairman and Chief Executive Officer, and their respective affiliates cease to hold a minimum percentage of our issued stock. In addition, the indenture governing the notes also contains certain provisions obligating us in certain instances to make offers to purchase outstanding notes with the net proceeds of certain sales or other dispositions of assets or upon the occurrence of an event of loss with respect to a mortgaged vessel, as defined in the indenture. Our ability to comply with the covenants and restrictions contained in our agreements and instruments governing our indebtedness may be affected by economic, financial and industry conditions and other factors beyond our control. If we are unable to comply with these covenants and restrictions, our indebtedness could be accelerated. If we are unable to repay indebtedness, our lenders could proceed against the collateral securing that indebtedness. In any such case, we may be unable to borrow under

 

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our credit facilities and may not be able to repay the amounts due under our agreements and instruments governing our indebtedness. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent. Our ability to comply with these covenants in future periods will also depend substantially on the value of our assets, our charter rates, our success at keeping our costs low and our ability to successfully implement our overall business strategy. Any future credit agreement or amendment or debt instrument may contain similar or more restrictive covenants.

Our ability to generate the significant amount of cash needed to service our other indebtedness and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

Our ability to make scheduled payments on or to refinance our obligations under, our indebtedness will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business factors, many of which may be beyond our control.

We will use cash to pay the principal and interest on our indebtedness. These payments limit funds otherwise available for working capital, capital expenditures, vessel acquisitions and other purposes. As a result of these obligations, our current liabilities may exceed our current assets. We may need to take on additional indebtedness as we expand our fleet, which could increase our ratio of indebtedness to equity. The need to service our indebtedness may limit funds available for other purposes and our inability to service indebtedness in the future could lead to acceleration of our indebtedness and foreclosure on our owned vessels.

Our credit facilities mature on various dates through 2022 and our ship mortgage notes mature on November 15, 2021. In addition, borrowings under certain of the credit facilities have amortization requirements prior to final maturity. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of indebtedness and the indebtedness incurrence restrictions imposed by the agreements governing our indebtedness, as well as prevailing market conditions.

We could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our indebtedness service and other obligations. Our credit facilities, the indenture governing our notes and any future indebtedness may, restrict our ability to dispose of assets and use the proceeds from any such dispositions. If we do not reinvest the proceeds of asset sales in our business (in the case of asset sales of no collateral with respect to such indebtedness) or in new vessels or other related assets that are mortgaged in favor of the lenders under our credit facilities (in the case of assets sales of collateral securing), we may be required to use the proceeds to repurchase senior indebtedness. We cannot assure you we will be able to consummate any asset sales, or if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet indebtedness service obligations when due.

Most of our credit facilities require that we maintain loan to collateral value ratios in order to remain in compliance with the covenants set forth therein. If the value of such collateral falls below such required level, we would be required to either prepay the loans or post additional collateral to the extent necessary to bring the value of the collateral as compared to the aggregate principal amount of the loan back to the required level. We cannot assure you that we will have the cash on hand or the financing available to prepay the loans or have any unencumbered assets available to post as additional collateral. In such case, we would be in default under such credit facility and the collateral securing such facility would be subject to foreclosure by the applicable lenders.

 

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Moreover, certain of our credit facilities are secured by vessels currently under construction pursuant to shipbuilding contracts. Because we rely on these facilities to finance the scheduled payments as they come due under the shipbuilding contracts, it is possible that any default under such a facility would result, in the absence of other available funds, in default by us under the associated shipbuilding contract. In such a case, our rights in the related newbuild would be subject to foreclosure by the applicable creditor. In addition, a payment default under a shipbuilding contract would give the shipyard the right to terminate the contract without any further obligation to finish construction and may give it rights against us for having failed to make the required payments.

An increase or continuing volatility in interest rates would increase the cost of servicing our indebtedness and could reduce our profitability, earnings and cash flow.

Amounts borrowed under our term loan facilities fluctuate with changes in LIBOR. LIBOR has been volatile, with the spread between LIBOR and the prime lending rate widening significantly at times. We may also incur indebtedness in the future with variable interest rates. As a result, an increase in market interest rates would increase the cost of servicing our indebtedness and could materially reduce our profitability, earnings and cash flows. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial indebtedness. Because the interest rates borne by our outstanding indebtedness may fluctuate with changes in LIBOR, if this volatility were to continue, it could affect the amount of interest payable on our debt, which in turn, could have an adverse effect on our profitability, earnings and cash flow.

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

We are incorporated under the laws of the Republic of the Marshall Islands and our subsidiaries are also incorporated under the laws of the Republic of the Marshall Islands, the Cayman Islands, Hong Kong, the British Virgin Islands and certain other countries other than the United States, and we conduct operations in countries around the world. Consequently, in the event of any bankruptcy, insolvency or similar proceedings involving us or one of our subsidiaries, bankruptcy laws other than those of the United States could apply. We have limited operations in the United States. If we become a debtor under the United States bankruptcy laws, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would become a debtor in the United States or that a United States bankruptcy court would be entitled to, or accept, jurisdiction over such bankruptcy case or that courts in other countries that have jurisdiction over us and our operations would recognize a United States bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction.

We may be unable to raise funds necessary to finance the change of control repurchase offer required by the indenture governing our notes.

If we experience specified changes of control, we would be required to make an offer to repurchase all of our outstanding notes (unless otherwise redeemed) at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the repurchase date. The occurrence of specified events that could constitute a change of control will constitute a default under our credit facilities. There are also change of control events that would constitute a default under the credit facilities that would not be a change of control under the indenture. In addition, our credit facilities prohibit the purchase of notes by us in the event of a change of control, unless and until such time as the indebtedness under our credit facilities is repaid in full. As a result, following a change of control event, we would not be able to repurchase notes unless we first repay all indebtedness outstanding under our credit facilities and any of our other indebtedness that contains similar provisions; or obtain a waiver from the holders of such indebtedness to permit us to repurchase the notes. We may be unable to

 

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repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase outstanding notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. In addition, our failure to purchase the notes after a change of control in accordance with the terms of the indenture would constitute an event of default under the indenture, which in turn would result in a default under our credit facilities.

Our inability to repay the indebtedness under our credit facilities will constitute an event of default under the indenture governing our notes, which could have materially adverse consequences to us. In the event of a change of control, we cannot assure you that we would have sufficient assets to satisfy all of our obligations under our credit facilities and the notes. Our future indebtedness may also require such indebtedness to be repurchased upon a change.

We may require additional financing to acquire vessels or businesses or to exercise vessel purchase options, and such financing may not be available.

In the future, we may be required to make substantial cash outlays to exercise options or to acquire vessels or business and will need additional financing to cover all or a portion of the purchase prices. We may seek to cover the cost of such items with new debt collateralized by the vessels to be acquired, if applicable, but there can be no assurance that we will generate sufficient cash or that debt financing will be available. Moreover, the covenants in our credit facilities, the indenture or other debt, may make it more difficult to obtain such financing by imposing restrictions on what we can offer as collateral.

Our senior notes are subject to restrictions on transfer within the United States or to U.S. persons and may be subject to transfer restrictions under the laws of other jurisdictions.

Our senior notes have not been and will not be registered under the Securities Act and are and will continue to be subject to restrictions on transferability and resale. The senior notes were offered in reliance upon an exemption from registration under the Securities Act and applicable state securities laws. Therefore, the notes may be transferred or resold only in a transaction registered under or exempt from the Securities Act and applicable state securities laws. In addition, the notes will not have the benefit of any exchange offer or other registration rights.

Tax Risks

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

We will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of our gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of our assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. stockholders of a PFIC may be subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.

Based on our current and projected methods of operations, and an opinion of counsel, we believe that we were not a PFIC for the 2013, 2012 and 2011 taxable years (we were treated as a PFIC for the 2008 and 2009 taxable years), and we do not believe that we will be a PFIC for 2014 and subsequent taxable years. For post-2010 taxable years, our U.S. counsel, Thompson Hine LLP, is of the opinion that (1) the income we receive from the time chartering activities and assets engaged in generating such income should not be treated as passive

 

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income or assets, respectively, and (2) so long as our income from time charters exceeds 25.0% of our gross income for each taxable year after our 2010 taxable year and the value of our vessels contracted under time charters exceeds 50.0% of the average value of our assets for each taxable year after our 2010 taxable year, we should not be a PFIC for any taxable year after our 2010 taxable year. This opinion is based on representations and projections provided to our counsel by us regarding our assets, income and charters, and its validity is conditioned on the accuracy of such representations and projections.

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

Under the U.S. Internal Revenue Code (the “Code”), 50% of the gross shipping income of a vessel-owning or chartering corporation, such as us and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States is characterized as U.S.-source shipping income and such income is subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the treasury regulations promulgated there under (“Treasury Regulations”). In general, the exemption from U.S. federal income taxation under Section 883 of the Code provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations, it will not be subject to the net basis and branch profit taxes or the 4% gross basis tax described below on its U.S.-Source International Transportation Income.

We expect that we and each of our vessel-owning subsidiaries will qualify for this statutory tax exemption and we will take this position for U.S. federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S.-source income.

If we or our vessel-owning subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries would be subject for those years to a 4% U.S. federal income tax on its U.S.-source shipping income. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings.

Other Tax Jurisdictions

In accordance with the currently applicable Greek law , foreign flagged vessels that are managed by Greek or foreign ship management companies having established an office in Greece are subject to duties towards the Greek state which are calculated on the basis of the relevant vessel’s tonnage. The payment of said duties exhausts the tax liability of the foreign ship owning company and the relevant manager against any tax, duty, charge or contribution payable on income from the exploitation of the foreign flagged vessel.

 

Item 4. Information on the Company

 

A. History and development of Navios Acquisition

Navios Acquisition Corporation (“Navios Acquisition” or the “Company”) was formed on March 14, 2008 under the laws of the Republic of the Marshall Islands and has its principal offices located at 7 Avenue de Grande Bretagne, Office 11B2, Monte Carlo, MC 98000 Monaco. Our agent for service is Trust Company of the Marshall Islands, Inc., located at Trust Company Complex, Ajeltake Island, P.O. Box 1405, Majuro, Marshall Islands MH96960.

Navios Acquisition owns a large fleet of modern crude oil, refined petroleum product and chemical tankers providing world-wide marine transportation services. The Company’s strategy is to charter its vessels to international oil companies, refiners and large vessel operators under long, medium and short-term charters. The Company is committed to providing quality transportation services and developing and maintaining long-term relationships with its customers. The operations of Navios Acquisition are managed by Navios Tankers Management Inc. (the “Manager”) a subsidiary of Navios Maritime Holdings Inc. (“Navios Holdings”) from its head offices in Monte Carlo, Monaco.

 

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On July 1, 2008, Navios Acquisition completed its initial public offering, or its IPO. On May 28, 2010, Navios Acquisition consummated the vessel acquisition which constituted its initial business combination. Following such transaction, Navios Acquisition commenced its operations as an operating company.

As of December 31, 2013, Navios Holdings had 47.8% of the voting power and 50.5% of the economic interest in Navios Acquisition.

Equity Transactions

Preferred Stock

On each of August 31, 2012, October 31, 2012, February 13, 2013 and April 24, 2013, Navios Acquisition issued 300 shares (1,200 in the aggregate) of its authorized Series D Preferred Stock (nominal value $12.0 million) to a shipyard, in partial settlement of the purchase price of the three newbuild LR1 product tankers, the Nave Cassiopeia, the Nave Cetus and the Nave Rigel. The preferred stock contains a 6% per annum dividend payable quarterly, starting one year after delivery of each vessel. The Series D Preferred Stock will mandatorily convert into shares of common stock 30 months after the issuance, at a price per share of common stock equal to $10.00. The holder of the preferred stock shall have the right to convert the shares of preferred stock into common stock prior to the scheduled maturity date at a price of $7.00 per share of common stock. The preferred stock does not have any voting rights. Navios Acquisition is obligated to redeem the Series D Preferred Stock (or converted common shares), at the holder’s option exercisable beginning 18 months after the issuance, at par payable at up to 12 equal quarterly installments. The convertible preferred stock is classified as temporary equity (i.e. apart from permanent equity) as a result of the redemption feature upon exercise of the put option granted to the holder of the preferred stock.

Common Stock

In February 2013, Navios Acquisition completed multiple offerings, including registered direct offerings, of a total of 35,246,791 shares of its common stock, at a price of $2.85 per share representing gross proceeds of $100.5 million. The offerings were conducted as follows:

 

   

The first registered direct offering of 7,719,300 shares of common stock was completed on February 21, 2013, raising $22.0 million of gross proceeds.

 

   

The second registered direct offering of 9,825,000 shares of common stock was completed on February 26, 2013, raising $28.0 million of gross proceeds.

 

   

In addition, Navios Holdings and certain members of management of Navios Acquisition, Navios Holdings and Navios Partners purchased an aggregate of 17,702,491 shares of common stock in a private placement that was completed on February 26, 2013, raising $50.5 million of gross proceeds.

Total net proceeds, of the transactions in February 2013, net of agents’ costs of $4.0 million and offering costs of $0.5 million, amounted to $96.0 million.

In May 2013, Navios Acquisition completed the placement of a total of 32,876,712 shares of its common stock, at a price of $3.65 per share, representing gross proceeds of $120.0 million. The placement included a registered direct offering of 16,438,356 shares of common stock which raised $60.0 million of gross proceeds and a placement of 16,438,356 common shares to Navios Holdings which raised $60.0 million of gross proceeds. Both placements closed on May 21, 2013.

Total net proceeds of the transactions in May 2013, net of agents’ costs of $4.2 million and offering costs of $0.4 million, amounted to $115.4 million.

On September 16, 2013, Navios Acquisition completed the placement of a total of 25,974,026 shares of common stock, at a price of $3.85 per share, representing gross proceeds of $100.0 million and net proceeds of

 

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$96.1 million. The placement included a registered direct offering of 12,987,013 shares of common stock which raised $50.0 million of gross proceeds and a private placement of 12,987,013 shares of common stock to Navios Holdings which raised $50.0 million of gross proceeds.

Total net proceeds of the above transactions, net of agents’ costs of $3.5 million and offering costs of $0.4 million, amounted to $96.1 million.

In October 2013, Navios Acquisition authorized and issued in the aggregate 2,100,000 restricted shares of common stock and options to purchase 1,500,000 shares of common stock having an exercise price of $3.91 per share, to its directors and/or officers. These awards of restricted common stock and stock options are based on service conditions only and vest over three years.

The fair value of stock option grants is determined with reference to option pricing model, and principally adjusted Black-Scholes models. The fair value of restricted stock is determined by reference to the quoted stock price on the date of grant. Compensation expense is recognized based on a graded expense model over the vesting period.

The effect of compensation expense arising from the stock-based arrangements described above amounts to $1.1 million, as of December 31, 2013, and it is reflected in general and administrative expenses on the income statement. The recognized compensation expense for the year is presented as adjustment to reconcile net income to net cash provided by operating activities on the statements of cash flows.

The estimated compensation cost relating to service conditions of non-vested (a) stock options and (b) restricted stock, not yet recognized was $1.1 million and $7.4 million, respectively, as of December 31, 2013 and is expected to be recognized over the weighted average period of 2.82 years.

On February 20, 2014, Navios Acquisition completed the public offering of 14,950,000 shares of its common stock at $3.85 per share, raising gross proceeds of $57.6 million. These figures include 1,950,000 shares sold pursuant to the underwriters’ option, which was exercised in full. Total net proceeds of the above transactions, net of agents’ costs of $3.0 million and offering costs $0.3 million, amounted to $54.2 million.

Vessel Deliveries, Acquisitions and Sales

2014

On March 10, 2014, Navios Acquisition took delivery of the Nave Buena Suerte, a 2011-built VLCC of 297,491 dwt for a total cost of $57.0 million.

On February 12, 2014, Navios Acquisition took delivery of the Nave Quasar, a 2010-built VLCC of 297,376 dwt for a total cost of $54.5 million.

On February 4, 2014, Navios Acquisition took delivery of the Nave Galactic, a 2009-built VLCC of 297,168 dwt for a total cost of $51.5 million.

2013

On December 6, 2013, Navios Acquisition sold the Shinyo Navigator to an unaffiliated third party purchaser for an aggregate price of $18.1 million. The loss on sale of $21.1 million was calculated as the sales price less the

 

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carrying value of the vessel of $38.5 million and related selling expenses of $0.7 million and bunkers written-off of $0.04 million. This loss is included under the loss on sale of vessels in the consolidated statements of operations.

On October 23, 2013, Navios Acquisition took delivery of the Nave Lucida, a 2005 Japanese — built MR2 product tanker, for a total cost of $16.8 million paid in cash.

On September 30, 2013, Navios Acquisition took delivery of the Bougainville, a 50,626 dwt South Korean — built MR2 product tanker, for a total cost of $35.6 million paid in cash.

On September 24, 2013, Navios Acquisition took delivery of the Nave Dorado, a 2005 Japanese — built MR2 product tanker, for a total cost of $16.8 million paid in cash.

On September 5, 2013, Navios Acquisition took delivery of the Nave Constellation, a 45,281 dwt South Korean — built chemical tanker, for a total cost of $34.3 million paid in cash.

On September 3, 2013, Navios Acquisition took delivery of the Nave Alderamin, a 49,998 dwt South Korean — built MR2 product tanker, for a total cost of $37.3 million. Cash paid was $9.9 million and $27.5 million was transferred from vessel deposits.

On August 13, 2013, Navios Acquisition took delivery of the Nave Celeste, a 298,717 dwt South Korean — built VLCC, for a total cost of $35.9 million paid in cash.

On July 22, 2013, Navios Acquisition took delivery of the Nave Universe, a 45,313 dwt South Korean — built chemical tanker, for a total cost of $34.2 million paid in cash.

On July 9, 2013, Navios Acquisition took delivery of the Nave Pulsar, a 50,922 dwt South Korean — built MR2 product tanker, for a total cost of $23.6 million paid in cash.

On July 9, 2013, Navios Acquisition took delivery of the Nave Capella, a 49,995 dwt South Korean — built MR2 product tanker, for a total cost of $37.2 million. Cash paid was $9.6 million and $27.5 million was transferred from vessel deposits.

On June 26, 2013, Navios Acquisition took delivery of the Nave Equinox, a 50,922 dwt South Korean — built MR2 product tanker, for a total cost of $23.5 million paid in cash.

On June 10, 2013, Navios Acquisition took delivery of the Nave Titan, a 49,999 dwt South Korean — built MR2 product tanker, for a total cost of $37.1 million. Cash paid was $9.6 million and $27.6 million was transferred from vessel deposits.

On April 24, 2013, Navios Acquisition took delivery of the Nave Atropos, a 74,695 dwt South Korean — built LR1 product tanker, for a total cost of $48.2 million. The $48.2 million consisted of: (i) cash paid of $17.1 million (ii) the issuance of $3.0 million of Series D Preferred Stock; and (iii) $28.1 million was transferred from vessel deposits.

On March 22, 2013, Navios Acquisition took delivery of the Nave Orion, a 49,999 dwt South Korean — built MR2 product tanker, for a total cost of $38.1 million. Cash paid was $8.2 million and $29.9 million was transferred from vessel deposits.

On February 13, 2013, Navios Acquisition took delivery of the Nave Rigel, a 74,673 dwt South Korean — built LR1 product tanker, for a total cost of $47.9 million. The $47.9 million consisted of: (i) cash paid of $16.6 million; (ii) the issuance of $3.0 million Series D Preferred; and (iii) $28.3 million was transferred from vessel deposits.

 

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On January 24, 2013, Navios Acquisition took delivery of the Nave Bellatrix, a 49,999 dwt South Korean — built MR2 product tanker, for a total cost of $38.0 million. Cash paid was $4.6 million and $33.5 million was transferred from vessel deposits.

2012

On November 9, 2012, Navios Acquisition took delivery of the Nave Aquila, a 49,991 dwt South Korean — built MR2 product tanker, for a total cost of $37.8 million. Cash paid was $12.7 million and $25.1 million was transferred from vessel deposits.

On October 30, 2012, Navios Acquisition took delivery of the Nave Cetus, a 74,581 dwt South Korean — built LR1 product tanker, for a total cost of $44.0 million. Cash paid was $27.5 million, $3.0 million shares of Series D Preferred Stock were issued and $13.5 million was transferred from vessel deposits.

On August 31, 2012, Navios Acquisition took delivery of the Nave Cassiopeia, a 74,711 dwt South Korean — built LR1 product tanker, for a total cost of $43.8 million. Cash paid was $27.3 million, $3.0 million shares of Series D Preferred Stock were issued and $13.5 million was transferred from vessel deposits.

On July 31, 2012, Navios Acquisition took delivery of the Nave Atria, a 49,992 dwt South Korean — built MR2 product tanker, for a total cost of $37.6 million. Cash paid was $9.0 million and $28.6 million was transferred from vessel deposits.

On January 20, 2012, Navios Acquisition took delivery of the Nave Estella, a 75,000 dwt South Korean — built LR1 product tanker, for a total cost of $44.6 million. Cash paid was $11.0 million and $33.6 million was transferred from vessel deposits.

 

B. Business Overview

Introduction

Navios Acquisition owns a large fleet of modern crude oil, refined petroleum product and chemical tankers providing worldwide marine transportation services. Our strategy is to charter our vessels to international oil companies, refiners and large vessel operators under long, medium and short-term charters. We are committed to providing quality transportation services and developing and maintaining long-term relationships with our customers. We believe that the Navios brand will allow us to take advantage of increasing global environmental concerns that have created a demand in the petroleum products/crude oil seaborne transportation industry for vessels and operators that are able to conform to the stringent environmental standards currently being imposed throughout the world.

Navios Acquisition’s Fleet

As of March 14, 2014, our fleet consists of a total of 43 double-hulled tanker vessels, aggregating approximately 4.8 million deadweight tons, or dwt. The fleet includes ten VLCC tankers (over 200,000 dwt per ship), which transport crude oil, eight Long Range 1 (“LR1”) product tankers (50,000-79,999 dwt per ship), 21 Medium Range 2 (“MR2”) product tankers (30,000-49,999 dwt per ship) and four chemical tankers (25,000 dwt per ship), which transport refined petroleum products and bulk liquid chemicals. Of the 43 vessels in our current fleet, we have taken delivery of ten VLCC tankers, eight LR1 tankers, 14 MR2 product tankers and four chemical tankers, and we expect to take delivery of five vessels in the remaining of 2014, and two vessels in 2015 based on current construction schedule. All the vessels that we have taken delivery of, as well as three of the MR2 that we will take delivery of during 2014, are currently chartered-out to high-quality counterparties, including affiliates of Shell, Formosa Petrochemical Corporation, Sinochem Group, SK Shipping and DOSCO (a wholly owned subsidiary of COSCO) with an average remaining charter period of approximately 1.9 years. As of March 14, 2014, we had charters covering 86.6% of available days in 2014, 44.6% of available days in 2015 and 22.0% of available days in 2016, based on the estimated scheduled delivery dates for vessels under construction.

 

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Vessels

 

Type

 

Built/Delivery
Date

 

DWT

   

Net Charter
Rate(1)

   

Profit Share

 

Expiration

Date(2)

Owned Vessels

           

Nave Cielo

  LR1 Product Tanker   2007     74,671        11,850      50%/50%   May 2014
          12,838 (3)   50%/50%   May 2015

Nave Ariadne

  LR1 Product Tanker   2007     74,671        11,850      50%/50%   May 2014
          12,838 (3)   50%/50%   May 2015

Nave Cosmos

  Chemical Tanker   2010     25,130        12,188      50%/50%   August 2014

Nave Polaris

  Chemical Tanker   2011     25,145        12,188      50%/50%   July 2014

Shinyo Splendor

  VLCC   1993     306,474        38,019      None   May 2014

Nave Celeste

  VLCC   2003     298,717        42,705      None   December 2016

C. Dream

  VLCC   2000     298,570        29,625      50% above $30,000   March 2019
          40% above $40,000  

Shinyo Ocean

  VLCC   2001     281,395        38,400      50% above $43,500   January 2017

Shinyo Kannika

  VLCC   2001     287,175        38,025      50% above $44,000   February 2017

Shinyo Saowalak

  VLCC   2010     298,000        48,153      35% above $54,388   June 2025
          40% above $59,388  
          50% above $69,388  

Shinyo Kieran

  VLCC   2011     297,066        48,153      35% above $54,388   June 2026
          40% above $59,388  
          50% above $69,388  

Buddy

  MR2 Product Tanker   2009     50,470        13,825 (4,10)   None   July 2014

Bull

  MR2 Product Tanker   2009     50,542        13,825 (4,10)   None   July 2014

Nave Andromeda

  LR1 Product Tanker   2011     75,000        12,000 (5)   100% up to $15,000   November 2014
          50% above $15,000  

Nave Estella

  LR1 Product Tanker   2012     75,000        11,850 (6)   90% up to $15,000   January 2015
          50% above $15,000  

Nave Atria

  MR2 Product Tanker   2012     49,992        13,331 (7)   50% /50%   July 2015

Nave Cassiopeia

  LR1 Product Tanker   2012     74,711        12,838 (3)   50% /50%   February 2015

Nave Cetus

  LR1 Product Tanker   2012     74,581        11,850      50% /50%   April 2014
          12,838 (3)    50% /50%   April 2015

Nave Aquila

  MR2 Product Tanker   2012     49,991        13,331 (7)   50% /50%   November 2015

Nave Bellatrix

  MR2 Product Tanker   2013     49,999        13,331 (8)   50% /50%   January 2016

Nave Rigel

  LR1 Product Tanker   2013     74,673        11,850      50% /50%   August 2014
          12,838 (3)   50% /50%   August 2015

Nave Orion

  MR2 Product Tanker   2013     49,999        13,331 (8)   50% /50%   March 2016

Nave Atropos

  LR1 Product Tanker   2013     74,695        11,850      50% /50%   October 2014
          12,838 (3)   50% /50%   October 2015

Nave Titan

  MR2 Product Tanker   2013     49,999        13,825 (9)   50% /50%   June 2016

Nave Equinox

  MR2 Product Tanker   2007     50,922        15,306     None   May 2014

Nave Capella

  MR2 Product Tanker   2013     49,995        13,825 (10)   None   July 2014

Nave Pulsar

  MR2 Product Tanker   2007     50,922        15,306     None   May 2014

Nave Universe

  Chemical Tanker   2013     45,513        14,869 (11)   50% /50%   July 2015

Nave Constellation

  Chemical Tanker   2013     45,281        14,869 (11)   50% /50%   September 2015

Nave Alderamin

  MR2 Product Tanker   2013     49,998        15,000      None   February 2015

Bougainville

  MR2 Product Tanker   2013     50,626        15,356 (12)   100%   September 2014
          15,663      100%   September 2015
          15,976      100%   September 2016
          16,296      100%   September 2017

Nave Dorado

  MR2 Product Tanker   2005     47,999        12,500      100% up to $14,000   October 2014
          50% above $14,000  

Nave Lucida

  MR2 Product Tanker   2005     47,999        12,500      100% up to $14,000   October 2014
          50% above $14,000  

Nave Galactic

  VLCC   2009     297,168        Floating Rate (14)   None   February 2015

Nave Quasar

  VLCC   2010     297,376        20,475      50% above $24,375   February 2015

Nave Buena Suerte

  VLCC   2011     297,491        Floating Rate (15)   None   March 2015

 

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Owned Vessels to be
Delivered

                              
  TBN     MR2        Q2 2014        50,000         14,319 (13)      50 %/50% 
  TBN     MR2        Q3 2014        50,000         14,319 (13)      50 %/50% 
  TBN     MR2        Q3 2014        51,200        
  TBN     MR2        Q4 2014        50,000         14,319 (13)      50 %/50% 
  TBN     MR2        Q4 2014        51,200        
  TBN     MR2        Q1 2015        51,200        
  TBN     MR2        Q2 2015        51,200        

 

(1) Net time charter-out rate per day (net of commissions).

 

(2) Estimated dates assuming midpoint of redelivery of charterers.

 

(3) Charterer’s option to extend the charter for an additional year at $13,825 net per day plus 50% profit sharing.

 

(4) Following the default of their charterer in July 2013, the charter contracts of the two MR2 product tankers, the Buddy and the Bull, have been terminated and the vessels have been rechartered to a third party for a one year period.

 

(5) Charterer’s option to extend the charter for 1+1 years at $13,000 net 1st optional year plus 100% profit up to $16,000 plus 50% profit sharing above $16,000; $14,000 net 2nd optional year plus 100% profit up to $17,000 plus 50% profit sharing above $17,000. Profit sharing formula is calculated monthly and incorporates $2,000 premium above the relevant index.

 

(6) Charterer’s option to extend the charter for 1+1 years at $11,850 net 1st optional year plus 90% profit up to $16,000 plus 50% profit sharing above $16,000; $11,850 net 2nd optional year plus 90% profit up to $17,000 plus 50% profit sharing above $17,000. Profit sharing formula is calculated monthly and incorporates $2,000 premium above the relevant index.

 

(7) Charterer’s option to extend the charter for 1+ 1 years at $14,566 net 1st optional year plus profit sharing; $15,553 net 2nd optional year plus profit sharing. The profit sharing will be calculated monthly and profits will be split equally between each party. Profit sharing formula incorporates $1,000 premium above the relevant index.

 

(8) Charterer’s option to extend the charter for 1 year at $14,813 net plus profit sharing. The charterers will receive 100% of the first $1,000 in profits above the base rate and the owners will receive 100% of the next $1,000. Thereafter, all profits will be split equally to each party.

 

(9) Charterer’s option to extend the charter for 1 year at $15,306 net plus profit sharing. The charterers will receive 100% of the first $1,000 in profits above the base rate and the owners will receive 100% of the next $1,000. Thereafter, all profits will be split equally to each party.

 

(10) Charterer’s option to extend for 1 year at $14,813 net per day.

 

(11) Charterer’s option to extend for an additional year at a rate of $16,088 net per day, plus 50% profit sharing.

 

(12) Rate can reach a maximum of $20,475 net per day calculated basis a specific world scale formula. Both rate and ceiling increase by 2% annually.

 

(13) Charter duration two years. Charterer’s option to extend for an additional year at a rate of $15,306 net per day plus 50% profit sharing.

 

(14) Rate is based upon daily Baltic International Tanker Routes (“BITR”), Route Tanker Dirty 3 ME Gulf to Japan (“TD3”) adjusted for vessel’s service speed/cons with an additional premium of $750 per day pro rata (“pdpr”).

 

(15) Rate based on VLCC pool earnings.

Competitive Strengths

We believe that the following strengths will allow us to maintain a competitive advantage within the international shipping market:

 

   

Modern, High–Quality Fleet.     We own a large fleet of modern, high–quality double–hull tankers that are designed for enhanced safety and low operating costs. We believe that the increased enforcement of stringent environmental standards currently being imposed throughout the world has resulted in a shift in major

 

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charterers’ preference towards greater use of modern double–hull vessels. We also have a large proportion of young product and chemical tankers in our fleet. Since our inception, we have committed to and have fully financed investments of over $1.9 billion, including investments of approximately $0.9 billion in newbuilding constructions. As of March 14, 2014, our fleet had an average age of approximately 4.6 years. Once we have taken delivery of all of our vessels, scheduled to occur by the end of the second quarter of 2015, the average age of our fleet will be 5.0 years. We believe that owning and maintaining a modern, high–quality fleet reduces off–hire time and operating costs, improves safety and environmental performance and provides us with a competitive advantage in securing employment for our vessels.

 

   

Operating Visibility Through Contracted Revenues.     All of the vessels that we have taken delivery of as of March 14, 2014, as well as the three MR2 that we will take delivery of in the second and third quarter of 2014, are chartered out with an average remaining charter period of approximately 1.9 years, and we believe our existing charter coverage provides us with predictable, contracted revenues and operating visibility. As of March 14, 2014, we had charters covering 86.6% of available days in 2014, 44.6% of available days in 2015 and 22.0% of available days in 2016, based on the estimated scheduled delivery dates for vessels under construction. The charter arrangements for our ten VLCC tankers, eight contracted LR1 tankers, 17 MR2 product tankers and four chemical tankers represent $ 213.4 million in 2014, $153.9 million in 2015 and $107.9 million in 2016 of aggregate contracted net charter revenue, exclusive of any profit sharing.

 

   

Diversified Fleet.     Our diversified fleet, which includes VLCC, product and chemical tankers, allows us to serve our customers’ international crude oil, petroleum product and liquid bulk chemical transportation needs. VLCC tankers transport crude oil and operate on primarily long–haul trades from the Arabian Gulf to the Far East, North America and Europe. Product tankers transport a large number of different refined oil products, such as naphtha, gasoline, kerosene, jetfuel and gasoil, and principally operate on short– to medium–haul routes. Chemical tankers transport primarily organic and inorganic chemicals, vegetable oils and animal fats. We believe that our fleet of vessels servicing the crude oil, product and chemical tanker transportation sectors provides us with more balanced exposure to oil and commodities and more diverse opportunities to generate revenues than would a focus on any single shipping sector.

 

   

High Quality Counterparties.     Our strategy is to charter our vessels to international oil companies, refiners and large vessel operators under long, medium and short–term charters. We are committed to providing safe and quality transportation services and developing and maintaining long–term relationships with our customers, and we believe that our modern fleet will allow us to charter–out our vessels to what management views as high–quality counterparties and for long periods of time. Our current charterers include: Shell, one of the largest global groups of energy and petrochemical companies, operating in over 90 countries; Dalian Ocean Shipping Company (“DOSCO”), a wholly owned subsidiary of the China Ocean Shipping Company (“COSCO”), one of China’s largest state–owned enterprises specializing in global shipping, logistics and ship building and repairing; Sinochem, a Fortune Global 500 company; Formosa Petrochemical Corporation, a leading Taiwanese energy company; Navig8, a company that controls a substantial fleet of product tankers; and SK Shipping Company Limited, a leading Korean shipowner and transportation company and part of the Korean multinational business conglomerate, the SK Group and their respective affiliates.

 

   

An Experienced Management Team and a Strong Brand.     We have an experienced management team that we believe is well regarded in the shipping industry. The members of our management team have considerable experience in the shipping and financial industries. We also believe that we will be able to leverage the management structure at our affiliate, Navios Holdings, which benefits from a reputation for reliability and performance and operational experience in both the tanker and drybulk markets. Our management team is led by Angeliki Frangou, our Chairman and Chief Executive Officer, who has over 20 years of experience in the shipping industry. Ms. Frangou is also the Chairman & Chief Executive Officer of Navios Holdings and Navios Partners and has been a Chief Executive Officer of various shipping and finance companies in the past. Ms. Frangou is a member of a number of recognized shipping committees. We believe that our well respected management team and strong brand may present us with market opportunities not afforded to other industry participants.

 

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Business Strategy

We seek to generate predictable and growing cash flow through the following:

 

   

Strategically Manage Sector Exposure.     We operate a fleet of crude carriers and product and chemical tankers, which we believe provides us with diverse opportunities with a range of producers and consumers. As we grow our fleet, we expect to adjust our relative emphasis among the crude oil, product and chemical tanker sectors according to our view of the relative opportunities in these sectors. We believe that having a mixed fleet of tankers provides the flexibility to adapt to changing market conditions and will allow us to capitalize on sector–specific opportunities through varying economic cycles.

 

   

Enhance Operating Visibility With Charter–Out Strategy.     We believe that we are a safe, cost–efficient operator of modern and well–maintained tankers. We also believe that these attributes, together with our strategy of proactively working towards meeting our customers’ chartering needs, will contribute to our ability to attract leading charterers as customers and to our success in obtaining attractive long–term charters. We will also seek profit sharing arrangements in our long–term time charters, to provide us with potential incremental revenue above the contracted minimum charter rates. Depending on then applicable market conditions, we intend to deploy our vessels to leading charterers on a mix of long, medium and short–term time charters, with a greater emphasis on long–term charters and profit sharing. We believe that this chartering strategy will afford us opportunities to capture increased profits during strong charter markets, while benefiting from the relatively stable cash flows and high utilization rates associated with longer-term time charters. As of March 14, 2014, we had charters covering 86.6% of available days in 2014, 44.6% of available days in 2015 and 22.0% of available days in 2016, based on the estimated scheduled delivery dates for vessels under construction. We will look to secure employment for the newbuilding product tankers scheduled for delivery over the next three years, as we draw nearer to taking delivery of the vessels.

 

   

Capitalize on Low Vessel Prices.    We intend to grow our fleet using Navios Holdings’ global network of relationships and extensive experience in the marine transportation industry, coupled with our financial resources and financing capability, to make selective acquisitions of young, high quality, modern, double–hulled vessels in the product, crude oil, and chemical tanker sectors. We are focused on purchasing tanker assets at favorable prices. We believe that developments in the marine transportation industry, particularly in the product tanker, crude oil transportation, and chemical tanker sectors, as well as the recent financial crisis which continues to adversely affect the availability of credit to shipping industry participants have created significant opportunities to acquire vessels near historically low (inflation-adjusted) prices and employ them in a manner that will provide attractive returns on capital. Developments in the banking industry continue to limit the availability of credit to shipping industry participants, creating opportunities for well–capitalized companies with access to additional available financing. Although there has been a trend towards consolidation over the past 15 years, the tanker market remains fragmented. In the ordinary course of our business, we engage in the evaluation of potential candidates for acquisitions and strategic transactions.

 

   

Leverage the Experience, Brand, Network and Relationships of Navios Holdings.    We intend to capitalize on the global network of relationships that Navios Holdings has developed during its long history of investing and operating in the marine transportation industry. This includes decades–long relationships with leading charterers, financing sources and key shipping industry players. When charter markets and vessel prices are depressed and vessel financing is difficult to obtain, as is currently the case, we believe the relationships and experience of Navios Holdings and its management enhances our ability to acquire young, technically advanced vessels at cyclically low prices and employ them under attractive charters with leading charterers. Navios Holdings’ long involvement and reputation for reliability in the Asia Pacific region have also allowed it to develop privileged relationships with many of the largest institutions in Asia. Through its established reputation and relationships, Navios Holdings has had access to opportunities not readily available to most other industry participants that lack Navios Holdings’ brand recognition, credibility and track record.

 

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Benefit from Navios Holdings’ Leading Risk Management Practices and Corporate Managerial Support.    Risk management requires the balancing of a number of factors in a cyclical and potentially volatile environment. Fundamentally, the challenge is to appropriately allocate capital to competing opportunities of owning or chartering vessels. In part, this requires a view of the overall health of the market, as well as an understanding of capital costs and returns. Navios Holdings actively engages in assessing financial and other risks associated with fluctuating market rates, fuel prices, credit risks, interest rates and foreign exchange rates.

Navios Holdings closely monitors credit exposure to charterers and other counterparties and has established policies designed to ensure that contracts are entered into with counterparties that have appropriate credit history. Counterparties and cash transactions are limited to high–credit, quality–collateralized corporations and financial institutions. Navios Holdings has strict guidelines and policies that are designed to limit the amount of credit exposure. We believe that Navios Acquisition will benefit from these established policies.

 

   

Implement and Sustain a Competitive Cost Structure.    Pursuant to our management agreement with the “Manager”, a wholly owned subsidiary of Navios Holdings, the Manager coordinates and oversees the commercial, technical and administrative management of our fleet. The current technical managers of the VLCC vessels, affiliates of the seller of the vessels acquired as part of the VLCC Acquisition are technical ship management companies that have provided technical management to the VLCC vessels acquired during the VLCC Acquisition prior to the consummation of the acquisition thereof. These technical managers will continue to provide such services for an interim period, after which the technical management of our fleet is expected to be provided solely by the Manager. We believe that the Manager will be able to do so at rates competitive with those that would be available to us through independent vessel management companies. For example, pursuant to our management agreement with Navios Holdings, management fees of our vessels are fixed through May 2014. We believe this external management arrangement will enhance the scalability of our business by allowing us to grow our fleet without incurring significant additional overhead costs. We believe that we will be able to leverage the economies of scale of Navios Holdings and manage operating, maintenance and corporate costs. At the same time, we believe the young age and high–quality of the vessels in our fleet, coupled with Navios Holdings’ safety and environmental record, will position us favorably within the crude oil, product and chemical tanker transportation sectors with our customers and for future business opportunities.

Our Customers

We provide or will provide seaborne shipping services under charters with customers that we believe are creditworthy.

Our major customers during 2013 were: DOSCO and Navig8 Chemicals Shipping and Trading Co. For the year ended December 31, 2013, these two customers accounted for 32.0% and 22.4%, respectively, of Navios Acquisition’s revenue.

Our major customers during 2012 were: DOSCO and STX Panocean Co. LTD. For the year ended December 31, 2012, these two customers accounted for 43.3% and 10.7%, respectively, of Navios Acquisition’s revenue.

For the year ended December 31, 2011, DOSCO, Blue Light Chartering Inc and Jacob Tank Chartering GMBH & CO. KG accounted for 43.9%, 11.5% and 11.3%, respectively, of Navios Acquisition’s revenue.

Although we believe that if any one of our charters were terminated we could re-charter the related vessel at the prevailing market rate relatively quickly, the permanent loss of a significant customer or a substantial decline in the amount of services requested by a significant customer could harm our business, financial condition and results of operations if we were unable to re-charter our vessel on a favorable basis due to then–current market conditions, or otherwise.

 

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Expenses

Management fees:    Pursuant to a Management Agreement dated May 28, 2010, the “Manager”, a subsidiary of Navios Holdings, provides for five years from the closing of the Company’s initial vessel acquisition, commercial and technical management services to Navios Acquisition’s vessels for a daily fee of $6,000 per owned MR2 product tanker and chemical tanker vessel and $7,000 per owned LR1 product tanker vessel and $10,000 per VLCC tanker vessel for the first two years. On May 4, 2012, Navios Acquisition amended its existing Management Agreement with the Manager, to fix the fees for ship management services of its owned fleet at current rates for two additional years, through May 28, 2014. This daily fee covers all of the vessels’ operating expenses, other than certain fees and costs. During the remaining one year of the term of the Management Agreement, Navios Acquisition expects it will reimburse Navios Holdings for all of the actual operating costs and expenses it incurs in connection with the management of its fleet. Actual operating costs and expenses will be determined in a manner consistent with how the initial fixed fees were determined. Drydocking expenses are fixed for the first four years under these agreements for up to $0.3 million per LR1 and MR2 product tanker vessel and will be reimbursed at cost for VLCC vessels. Commencing as of March 30, 2012, Navios Acquisition can, upon request to the Manager, partially or fully defer the reimbursement of drydocking and other extraordinary fees and expenses under the Agreement to a later date, but not later than January 5, 2015, and if reimbursed on a later date, such amounts will bear interest at a rate of 1% per annum over LIBOR. Commencing as of September 28, 2012, Navios Acquisition could, upon request, reimburse the Manager partially or fully, for any fixed management fees outstanding for a period of not more than nine months under the Agreement at a later date, but not later than December 31, 2014, and if reimbursed on a later date, such amounts will bear interest at a rate of 1% per annum over LIBOR. Total management fees for the years ended December 31, 2013, 2012 and 2011 amounted to $71.4 million, $47.0 million and $35.7 million, respectively.

General and administrative expenses:    On May 28, 2010, Navios Acquisition entered into an administrative services agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which a subsidiary of Navios Holdings provides certain administrative management services to Navios Acquisition which include: bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services. For the years ended December 31, 2013, 2012 and 2011, the fees for administrative services rendered by Navios Holdings amounted to $3.5 million, $2.1 million and $1.5 million, respectively.

Off-hire

When the vessel is “off-hire,” the charterer generally is not required to pay the basic hire rate, and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time charter. A vessel generally will be deemed off-hire if there is a loss of time due to, among other things:

 

   

operational deficiencies; drydocking for repairs, maintenance or inspection; equipment breakdowns; or delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or

 

   

the shipowner’s failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.

Under some of our charters, the charterer is permitted to terminate the time charter if the vessel is off-hire for an extended period, which is generally defined as a period of 90 or more consecutive off-hire days.

Termination

We are generally entitled to suspend performance under the time charters covering our vessels if the customer defaults in its payment obligations. Under some of our time charters, either party may terminate the charter in the event of war in specified countries or in locations that would significantly disrupt the free trade of the vessel. Under some of our time charters covering our vessels require us to return to the charterer, upon the loss of the vessel, all advances paid by the charterer but not earned by us.

 

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Management of Ship Operations, Administration and Safety

Navios Holdings provides, through a wholly owned subsidiary, expertise in various functions critical to our operations. Pursuant to a management agreement and an administrative services agreement with Navios Holdings, we have access to human resources, financial and other administrative functions, including:

 

   

bookkeeping, audit and accounting services;

 

   

administrative and clerical services;

 

   

banking and financial services; and

 

   

client and investor relations.

Technical management services are also provided, including:

 

   

commercial management of the vessel;

 

   

vessel maintenance and crewing;

 

   

purchasing and insurance; and

 

   

shipyard supervision.

For more information on the management agreement we have with Navios Holdings and the administrative services agreement we have with Navios Holdings, please read “Item 7. — Unit holders and Related Party Transactions”.

Oil Company Tanker Vetting Process

Traditionally there have been relatively few charterers in the oil transportation business and that part of the industry has been undergoing consolidation. The so called “oil majors”, such as Exxon Mobil, BP p.l.c., Royal Dutch Shell plc. Chevron, ConocoPhillips and Total S.A., together with a few smaller companies, represent a significant percentage of the production, trading and, especially, seaborne transportation of crude oil and refined petroleum products worldwide. Concerns about the environment have led oil majors to develop and implement a strict due diligence process, known as vetting, when selecting vessels and considering their managers. Vetting has evolved into a sophisticated and comprehensive assessment of both the vessel and the vessel manager. While numerous factors are considered and evaluated prior to a commercial decision, the oil majors, through their association, Oil Companies International Marine Forum (OCIMF), have developed two basic tools: the Ship Inspection Report program, which is known as SIRE, and the Tanker Management & Self Assessment program, which is known as TMSA. Based upon commercial risk, there are three levels of assessment used by oil majors:

 

   

terminal use, which clears a vessel to call at one of the oil major’s terminals;

 

   

voyage charter, which clears the vessel for a single voyage; and

 

   

period charter, which clears the vessel for use for an extended period of time.

The depth and complexity of each of these levels of assessment varies. Each charter agreement for our vessels requires that the applicable vessel have a valid SIRE report (less than six months old) in the OCIMF website as recommended by OCIMF. In addition, under the terms of the charter agreements, the charterers require that our vessels and their technical managers be vetted and approved to transport crude oil or refined petroleum products (as applicable) by multiple oil majors. The technical manager is responsible for obtaining and maintaining the vetting approvals required to operate our vessels.

Competition

The market for international seaborne crude oil transportation services is fragmented and highly competitive. Seaborne crude oil transportation services generally are provided by two main types of operators: major oil company captive fleets (both private and state-owned) and independent ship owner fleets. In addition,

 

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several owners and operators pool their vessels together on an ongoing basis, and such pools are available to customers to the same extent as independently owned and operated fleets. Many major oil companies and other oil trading companies also operate their own vessels and use such vessels not only to transport their own crude oil but also to transport crude oil for third party charterers in direct competition with independent owners and operators in the tanker charter market. Competition for charters is intense and is based upon price, location, size, age, condition and acceptability of the vessel and its manager. Due in part to the fragmented tanker market, competitors with greater resources could enter the tanker market and operate larger fleets through acquisitions or consolidations and may be willing or able to accept lower prices than us, which could result in our achieving lower revenues from our vessels.

Governmental and Other Regulations

Sources of applicable rules and standards

Shipping is one of the world’s most heavily regulated industries, and, in addition, it is subject to many industry standards. Government regulation significantly affects the ownership and operation of vessels. These regulations consist mainly of rules and standards established by international conventions, but they also include national, state, and local laws and regulations in force in jurisdictions where vessels may operate or are registered, and which are commonly more stringent than international rules and standards. This is the case particularly in the United States and, increasingly, in Europe.

A variety of governmental and private entities subject vessels to both scheduled and unscheduled inspections. These entities include local port authorities (the U.S. Coast Guard, harbor masters or equivalent entities), classification societies, flag state administration (country vessel of registry), and charterers, particularly terminal operators. Certain of these entities require vessel owners to obtain permits, licenses, and certificates for the operation of their vessels. Failure to maintain necessary permits or approvals could require a vessel owner to incur substantial costs or temporarily suspend operation of one or more of its vessels.

Heightened levels of environmental and quality concerns among insurance underwriters, regulators, and charterers continue to lead to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for vessels that conform to stricter environmental standards. Vessel owners are required to maintain operating standards for all vessels that will emphasize operational safety, quality maintenance, continuous training of officers and crews and compliance with U.S. and international regulations.

The International Maritime Organization, or IMO, has adopted a number of international conventions concerned with ship safety and with preventing, reducing or controlling pollution from ships. These fall into two main categories, consisting firstly of those concerned generally with ship safety standards, and secondly of those specifically concerned with measures to prevent pollution.

Ship safety regulation

In the former category the primary international instrument is the Safety of Life at Sea Convention of 1974, as amended, or SOLAS, together with the regulations and codes of practice that form part of its regime. Much of SOLAS is not directly concerned with preventing pollution, but some of its safety provisions are intended to prevent pollution as well as promote safety of life and preservation of property. These regulations have been and continue to be regularly amended as new and higher safety standards are introduced with which we are required to comply.

An amendment of SOLAS introduced the International Safety Management (ISM) Code, which has been effective since July 1998. Under the ISM Code the party with operational control of a vessel is required to develop an extensive safety management system that includes, among other things, the adoption of a safety and

 

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environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by the flag state for the vessel, under the ISM Code. Noncompliance with the ISM Code and other IMO regulations, such as the mandatory ship energy efficiency management plan (“SEEMP”) which is akin to a safety management plan and came into effect on January 1, 2013, may subject a ship owner to increased liability, may lead to decreases in available insurance coverage for affected vessels, and may result in the denial of access to, or detention in, some ports. For example, the United States Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in ports in the United States and European Union.

 

Security Regulations

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, MTSA came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect on July 1, 2004, and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the ISPS Code. Among the various requirements are:

 

   

on-board installation of automatic information systems to enhance vessel-to-vessel and vessel-to shore communications;

 

   

on-board installation of ship security alert systems;

 

   

the development of vessel security plans; and

 

   

compliance with flag state security certification requirements.

The U.S. Coast Guard regulations, intended to be aligned with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels had on board, by July 1, 2004, a valid ISSC that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code.

International regulations to prevent pollution from ships

In the second main category of international regulation, the primary instrument is the International Convention for the Prevention of Pollution from Ships, or MARPOL, which imposes environmental standards on the shipping industry set out in Annexes I-VI of MARPOL. These contain regulations for the prevention of pollution by oil (Annex I), by noxious liquid substances in bulk (Annex II), by harmful substances in packaged forms within the scope of the International Maritime Dangerous Goods Code (Annex III), by sewage (Annex IV), by garbage (Annex V), and by air emissions (Annex VI).

These regulations have been and continue to be regularly amended as new and higher standards of pollution prevention are introduced with which we are required to comply. For example, MARPOL Annex VI, together with the NOx Technical Code established thereunder, sets limits on sulphur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. It also includes a global cap on the sulphur content of fuel oil and allows for special areas to be established with more stringent controls on emissions. Originally adopted in September 1997, Annex VI came into force in May 2005 and was amended in October 2008 (as was the NOx Technical Code) to provide for progressively more stringent limits on such emissions from 2010 onwards. The revised Annex VI provides, in particular, for a reduction of the global sulfur cap, initially to 3.5% (from the previous cap of 4.5%), with effect

 

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from January 1, 2012, then progressively reducing to 0.50% effective from January 1, 2020, subject to a feasibility review to be completed no later than 2018; and the establishment of new tiers of stringent nitrogen oxide emissions standards for marine engines, depending on their date of installation. We anticipate incurring costs in complying with these more stringent standards.

The revised Annex VI further allows for designation, in response to proposals from member parties, of Emission Control Areas (ECAs) that impose accelerated and/or more stringent requirements for control of sulfur oxide, particulate matter, and nitrogen oxide emissions. Thus far, ECAs have been formally adopted for the Baltic Sea area (limits Sox emissions only); the North Sea area including the English Channel (limiting SOx emissions only) and the North American ECA (which came into effect from August 1, 2012 limiting SOx, NOx and particulate matter emissions). The United States Caribbean Sea ECA entered into force on January 1, 2013 and has been effective since January 1, 2014, limiting SOx, NOx and particulate matter emissions. For the currently-designated ECAs, much lower sulfur limits on fuel oil content are being phased in (1% from July 2010 and 0.1% from January 1, 2015). At its 65th session, the MEPC considered and agreed to proposed draft amendments to MARPOL Annex VI regulation 13 on Nitrogen Oxides (NOx), to amend the date for the implementation of the so called “Tier III” standards within ECAs to January 1, 2021, from the current effective date of January 1, 2016. NOx control requirements apply to installed marine diesel engines of over 130 kW output power, and different levels (Tiers) of control apply based on the ship’s construction date. Tier III controls apply only to specified ships while operating in ECAs designated to limit NOx emissions (currently the North American ECA and the United States Caribbean Sea ECA). The draft amendments will be circulated for consideration at MEPC 66 in March 2014, with a view to adoption. These more stringent fuel standards, when fully in effect, are expected to require measures such as fuel switching, vessel modification adding distillate fuel storage capacity, or addition of exhaust gas cleaning scrubbers, to achieve compliance, and may require installation and operation of further control equipment at significantly increased cost.

The revised Annex I to the MARPOL Convention entered into force in January 2007. It incorporates various amendments to the MARPOL Convention and imposes construction requirements for oil tankers delivered on or after January 1, 2010. On August 1, 2007, Regulation 12A (an amendment to Annex I) came into force imposing performance standards for accidental oil fuel outflow and requiring oil fuel tanks to be located inside the double-hull in all ships with an aggregate oil fuel capacity of 600 cubic meters and above, and which are delivered on or after August 1, 2010, including ships for which the building contract is entered into on or after August 1, 2007 or, in the absence of a contract, for which keel is laid on or after February 1, 2008. All of our newbuild tanker vessels comply with Regulation 12A.

Greenhouse gas emissions

In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases, which are suspected of contributing to global warming. Currently, the greenhouse gas emissions from international shipping do not come under the Kyoto Protocol.

In December 2011, UN climate change talks took place in Durban and concluded with an agreement referred to as the Durban Platform for Enhanced Action. In preparation for the Durban Conference, the International Chamber of Shipping (“ICS”) produced a briefing document, confirming the shipping industry’s commitment to cut shipping emissions by 20% by 2020, with significant further reductions thereafter. The ICS called on the participants in the Durban Conference to give the IMO a clear mandate to deliver emissions reductions through market-based measures, for example a shipping industry environmental compensation fund. Notwithstanding the ICS’ request for global regulation of the shipping industry, the Durban Conference did not result in any proposals specifically addressing the shipping industry’s role in climate change. The European Union announced in April 2007 that it planned to expand the European Union emissions trading scheme by adding vessels, and a proposal from the European Commission was expected if no global regime for reduction of

 

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seaborne emissions had been agreed by the end of 2011. As of January 31, 2013, the Commission stopped short of proposing that emissions from ships be included in the EU’s emissions-trading scheme (“ETS”). However, on October 1, 2012, it announced that it would propose measures to monitor, verify and report on greenhouse gas emissions from the shipping sector in early 2013. On June 28, 2013, the European Commission adopted a Communication setting out a strategy for progressively including greenhouse gas emissions from maritime transport in the EU’s policy for reducing its overall GHG emissions. The first step proposed by the Commission is an EU Regulation that would establish an EU-wide system for the monitoring, reporting and verification of carbon dioxide emissions from large ships starting in 2018. The draft Regulation is currently working its way through the various stages of the EU legislative process and will require approval from both the European Council and European Parliament before entering into force. This Regulation may be seen as indicative of an intention to maintain pressure on the international negotiating process. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, or individual countries where we operate, including the U.S., that restrict emissions of greenhouse gases from vessels could require us to make significant financial expenditures we cannot predict with certainty at this time.

Other international regulations to prevent pollution

In addition to MARPOL, other more specialized international instruments have been adopted to prevent different types of pollution or environmental harm from ships. In February 2004, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will not enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. To date, there has not been sufficient adoption of this standard by member-states representing enough of the gross tonnage of the world’s fleet for it to take force. However, as of February 28, 2014, the Convention has been ratified by 38 states, representing 30.38% of the global merchant shipping fleet’s gross tonnage and its entry-into-force with attendant compliance costs may therefore be anticipated in the foreseeable future.

European regulations

European regulations in the maritime sector are in general based on international law. However, since the Erika incident in 1999, the European Community has become increasingly active in the field of regulation of maritime safety and protection of the environment. It has been the driving force behind a number of amendments of MARPOL (including, for example, changes to accelerate the time-table for the phase-out of single hull tankers, and to prohibit the carriage in such tankers of heavy grades of oil), and if dissatisfied either with the extent of such amendments or with the time-table for their introduction it has been prepared to legislate on a unilateral basis. In some instances where it has done so, international regulations have subsequently been amended to the same level of stringency as that introduced in Europe, but the risk is well established that EU regulations may from time to time impose burdens and costs on shipowners and operators which are additional to those involved in complying with international rules and standards. In some areas of regulation the EU has introduced new laws without attempting to procure a corresponding amendment of international law. Notably, it adopted in 2005 a directive on ship-source pollution, imposing criminal sanctions for pollution not only where this is caused by intent or recklessness (which would be an offence under MARPOL), but also where it is caused by “serious negligence.” The directive could therefore result in criminal liability being incurred in circumstances where it would not be incurred under international law. Experience has shown that in the emotive atmosphere often associated with pollution incidents, retributive attitudes towards ship interests have found expression in negligence being alleged by prosecutors and found by courts on grounds. Moreover, there is skepticism that the notion of “serious negligence” is likely to prove any narrower in practice than ordinary negligence. Criminal liability for a pollution incident could not only result in us incurring substantial penalties or fines but may also, in some jurisdictions, facilitate civil liability claims for greater compensation than would otherwise have been payable.

 

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United States environmental regulations and laws governing civil liability for pollution

Environmental legislation in the United States merits particular mention as it is in many respects more onerous than international laws, representing a high-water mark of regulation with which shipowners and operators must comply, and of liability likely to be incurred in the event of non-compliance or an incident causing pollution.

U.S. federal legislation, including notably the Oil Pollution Act of 1990, or OPA, establishes an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including cargo or bunker oil spills from tankers. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone. Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or substantial threats of discharges, of oil from their vessels. In addition to potential liability under OPA as the relevant federal legislation, vessel owners may in some instances incur liability on an even more stringent basis under state law in the particular state where the spillage occurred.

Title VII of the Coast Guard and Maritime Transportation Act of 2004, or the CGMTA, amended OPA to require the owner or operator of any non-tank vessel of 400 gross tons or more, that carries oil of any kind as a fuel for main propulsion, including bunkers, to prepare and submit a response plan for each vessel on or before August 8, 2005. The vessel response plans must include detailed information on actions to be taken by vessel personnel to prevent or mitigate any discharge or substantial threat of such a discharge of ore from the vessel due to operational activities or casualties. OPA currently limits liability of the responsible party for single-hull tank vessels over 3,000 gross tons liability to the greater of $3,200 per gross ton or $23.5 million (this amount is reduced to $6.4 million if the vessel is less than 3,000 gross tons).

For tank vessels over 3,000 gross tons, other than a single-hull vessel, liability is limited to $2,000 per gross ton or $17.0 million (or $4.27 million for a vessel less than 3,000 gross tons), whichever is greater. These amounts are periodically adjusted for inflation. These limits of liability do not apply if an incident was directly caused by violation of applicable United States federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities.

In response to the Deepwater Horizon incident in the Gulf of Mexico, in 2010 the U.S. Congress has proposed, but has not formally adopted legislation that would amend OPA to mandate stronger safety standards and increased liability and financial responsibility for offshore drilling operations, but the bill did not seek to change the OPA liability limits applicable to vessels. While Congressional activity on this topic is expected to continue to focus on offshore facilities rather than on vessels generally, it cannot be known with certainty what form any such new legislative initiatives may take.

In addition, the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, which applies to the discharge of hazardous substances (other than oil) whether on land or at sea, contains a similar liability regime and provides for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $0.5 million for vessels not carrying hazardous substances as cargo or residue, unless the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited.

We currently maintain, for each of our owned vessels, insurance coverage against pollution liability risks in the amount of $1.0 billion per incident. The insured risks include penalties and fines as well as civil liabilities and expenses resulting from accidental pollution. However, this insurance coverage is subject to exclusions, deductibles and other terms and conditions. If any liabilities or expenses fall within an exclusion from coverage, or if damages from a catastrophic incident exceed the $1.0 billion limitation of coverage per incident, our cash flow, profitability and financial position could be adversely impacted.

 

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Under OPA, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum liability under OPA. Under the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the U.S. Coast Guard regulations by providing a certificate of responsibility from third party entities that are acceptable to the U.S. Coast Guard evidencing sufficient self-insurance.

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

OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states’ environmental laws impose unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessels owners’ responsibilities under these laws.

The United States Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under CERCLA. The EPA regulates the discharge of ballast water and other substances incidental to the normal operation of vessels in U.S. waters using a Vessel General Permit, or VGP, system pursuant to the CWA, in order to combat the risk of harmful organisms that can travel in ballast water carried from foreign ports. Compliance with the conditions of the VGP is required for commercial vessels 79 feet in length or longer (other than commercial fishing vessels.) On March 28, 2013 the EPA adopted the 2013 VGP which took effect on December 19, 2013. The 2013 VGP is valid for five years. This new 2013 VGP imposes a numeric standard to control the release of non-indigenous invasive species in ballast water discharges. In addition, through the CWA certification provisions that allow US states to place additional conditions on use of the VGP within state waters, a number of states have proposed or implemented a variety of stricter ballast water requirements including, in some states, specific treatment standards.

Compliance with new U.S. federal and state requirements could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering U.S. waters.

The Federal Clean Air Act (“CAA”) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to CAA vapor control and recovery standards (“VCS”) for cleaning fuel tanks and conducting other operations in regulated port areas, and to CAA emissions standards for so-called “Category 3 “marine diesel engines operating in U.S. waters. In April 2010, EPA adopted regulations implementing the provision of MARPOL Annex VI regarding emissions from Category 3 marine diesel engines. Under these regulations, both U.S. and foreign-flagged ships must comply with the applicable engine and fuel standards of MARPOL Annex VI, including the stricter North America

 

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ECA standards which took effect in August 2012, when they enter U.S. ports or operate in most internal U.S. waters including the Great Lakes. MARPOL Annex VI requirements are discussed in greater detail above under “International regulations to prevent pollution from ships.” We may incur costs to install control equipment on our vessels to comply with the new standards. Also under the CAA, the U.S. Coast Guard has since 1990 regulated the safety of VCSs that are required under EPA and state rules. Our vessels operating in regulated port areas have installed VCSs that are compliant with EPA, state and U.S. Coast Guard requirements. On July 16, 2013, the U.S. Coast Guard adopted regulations that made its VCS requirements more compatible with new EPA and State regulations, reflected changes in VCS technology, and codified existing U.S. Coast Guard guidelines.

We intend to comply with all applicable state and U.S. federal regulations in the ports where our vessels call.

International laws governing civil liability to pay compensation or damages

We operate a fleet of product and chemical tankers that are subject to national and international laws governing pollution from such vessels. Several international conventions impose and limit pollution liability from vessels. An owner of a tanker vessel carrying a cargo of “persistent oil” as defined by the International Convention for Civil Liability for Oil Pollution Damage (the “CLC”) is subject under the convention to strict liability for any pollution damage caused in a contracting state by an escape or discharge from cargo or bunker tanks. This liability is subject to a financial limit calculated by reference to the tonnage of the ship, and the right to limit liability may be lost if the spill is caused by the shipowner’s intentional or reckless conduct. Liability may also be incurred under the CLC for a bunker spill from the vessel even when she is not carrying such cargo, but is in ballast.

When a tanker is carrying clean oil products that do not constitute “persistent oil” that would be covered under the CLC, liability for any pollution damage will generally fall outside the CLC and will depend on other international conventions or domestic laws in the jurisdiction where the spillage occurs. The same principle applies to any pollution from the vessel in a jurisdiction which is not a party to the CLC. The CLC applies in over 100 jurisdictions around the world, but it does not apply in the United States, where the corresponding liability laws such as the OPA discussed above, are particularly stringent. In 2001, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, which imposes strict liability on shipowners for pollution damage in jurisdictional waters of ratifying states caused by discharges of “bunker oil.” The Bunker Convention defines “bunker oil” as “any hydrocarbon mineral oil, including lubricating oil, used or intended to be used for the operation or propulsion of the ship, and any residues of such oil.” The Bunker Convention also requires registered owners of ships over a certain size to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended, or the 1976 Convention). The Bunker Convention entered into force on November 21, 2008, and as of February 28, 2014 had 74 contracting states comprising approximately 90.72% of the gross tonnage of the world’s merchant fleet. In other jurisdictions liability for spills or releases of oil from ships’ bunkers continues to be determined by the national or other domestic laws in the jurisdiction where the events or damages occur.

Outside the United States, national laws generally provide for the owner to bear strict liability for pollution, subject to a right to limit liability under applicable national or international regimes for limitation of liability. The most widely applicable international regime limiting maritime pollution liability is the 1976 Convention. Rights to limit liability under the 1976 Convention are forfeited where a spill is caused by a shipowners’ intentional or reckless conduct. Some states have ratified the 1996 LLMC Protocol to the 1976 Convention, which provides for liability limits substantially higher than those set forth in the 1976 Convention to apply in such states. Finally, some jurisdictions are not a party to either the 1976 Convention or the 1996 LLMC Protocol, and, therefore, shipowners’ rights to limit liability for maritime pollution in such jurisdictions may be uncertain.

 

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Inspection by Classification Societies

Every sea going vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned. The classification society also undertakes, on request, other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case or to the regulations of the country concerned. For maintenance of the class, regular and extraordinary surveys of hull, machinery (including the electrical plant) and any special equipment classed are required to be performed as follows:

 

   

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

 

   

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

 

   

Class Renewal Surveys:    Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery (including the electrical plant), and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging, to determine the thickness of its steel structure. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a shipowner has the option of arranging with the classification society for the vessel’s integrated hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.

Risk of Loss and Liability Insurance

General

The operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, and cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. The OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of any vessel trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for ship owners and operators trading in the United States market. While Navios Acquisition believes that its insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.

Hull and Machinery Insurance

Navios Acquisition has obtained marine hull and machinery and war risk insurance, which includes the risk of actual or constructive total loss, for all of its vessels. The vessels will each be covered up to at least fair market value, with deductibles in amounts ranging between $100,000 and $250,000, depending on the size of the tanker

 

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vessel. Navios Acquisition has also extended its war risk insurance to include war loss of hire for any loss of time to the vessel, including for physical repairs, caused by a warlike incident and piracy seizure for up to 270 days of detention / loss of time There are no deductibles for the war risk insurance or the war loss of hire cover.

Navios Acquisition has arranged, as necessary, increased value insurance for its vessels. With the increased value insurance, in case of total loss of the vessel, Navios Acquisition will be able to recover the sum insured under the increased value policy in addition to the sum insured under the hull and machinery policy. Increased value insurance also covers excess liabilities that are not recoverable in full by the hull and machinery policies by reason of under insurance. Navios Acquisition does not expect to maintain loss of hire insurance for its vessels. Loss of hire insurance covers business interruptions that result in the loss of use of a vessel.

Protection and Indemnity Insurance

Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, which covers Navios Acquisition’s third-party liabilities in connection with the operation of its ships. This includes third-party liability and other related expenses of injury or death of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations.

Navios Acquisition’s protection and indemnity insurance coverage for oil pollution is limited to $1.0 billion per event. The 13 P&I Associations that comprise the International Group insure approximately 95% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Each vessel that Navios Acquisition acquires will be entered with P&I Associations of the International Group. Under the International Group reinsurance program for the current policy year, each P&I club in the International Group is responsible for the first $9.0 million of every claim. In every claim the amount in excess of $9.0 million and up to $80.0 million is shared by the clubs under a pooling agreement. Any claim in excess of $80.0 million is reinsured by the International Group under the General Excess of Loss Reinsurance Contract. This policy currently provides an additional $2.0 billion of coverage for non-oil pollution claims. Further to this, overspill protection has been placed by the International Group for claims up to $1 billion in excess of $2.08 billion, i.e. $3.08 billion in total. For passengers and crew claims the overall limit is $3.0 billion any one event any one vessel with a sub-limit of $2.0 billion for passengers.

As a member of a P&I Association, which is a member of the International Group, Navios Acquisition will be subject to calls payable to the associations based on its claim records as well as the claim records of all other members of the individual associations, and members of the pool of P&I Associations comprising the International Group. The P&I Associations’ policy year commences on February 20th. Calls are levied by means of Estimated Total Premiums (“ETP”) and the amount of the final installment of the ETP varies according to the actual total premium ultimately required by the club for a particular policy year. Members have a liability to pay supplementary calls which might be levied by the board of directors of the club if the ETP is insufficient to cover amounts paid out by the club.

Exchange Controls

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

Facilities

We have offices at 7 Avenue de Grande Bretagne, Office 11B2, Monte Carlo, MC 98000 Monaco. We believe that our office facilities are suitable and adequate for our business as it is presently conducted. We

 

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presently occupy office space provided by Navios Holdings. Navios Holdings has agreed that it will make such office space, as well as certain office and secretarial services, available to us, as may be required by us from time to time.

Crewing and Staff

The Manager crews its vessels primarily with Greek, Filipino, Romanian, Russian and Ukranian officers and Filipino seamen. The Manager is responsible for selecting its Greek officers. For other nationalities, officers and seamen are referred to us by local crewing agencies. Navios Acquisition requires that all of its seamen have the qualifications and licenses required to comply with international regulations and shipping conventions.

Administrative Services

On May 28, 2010, Navios Acquisition entered into an administrative services agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which Navios Holdings provides certain administrative management services to Navios Acquisition, which include bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other services. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services. See “Item 7B-Related Party Transactions — the Administrative Services Agreement.”

Legal Proceedings

To the knowledge of management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such.

 

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C. Organizational Structure

The table below lists the Company’s wholly-owned subsidiaries as of December 31, 2013.

 

Navios Maritime Acquisition Corporation and Subsidiaries:

  

Nature

  

Country of Incorporation

Company Name

     

Aegean Sea Maritime Holdings Inc.

   Sub-Holding Company    Marshall Is.

Amorgos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Andros Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Antikithira Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Antiparos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Amindra Shipping Co.

   Sub-Holding Company    Marshall Is.

Crete Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Folegandros Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Ikaria Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Ios Shipping Corporation

   Vessel-Owning Company    Cayman Is.

Kithira Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Kos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Mytilene Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Navios Maritime Acquisition Corporation

   Holding Company    Marshall Is.

Navios Acquisition Finance (U.S.) Inc.

   Co-Issuer    Delaware

Rhodes Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Serifos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Shinyo Dream Limited

   Vessel-Owning Company    Hong Kong

Shinyo Kannika Limited

   Vessel-Owning Company    Hong Kong

Shinyo Kieran Limited

   Vessel-Owning Company    British Virgin Is.

Shinyo Loyalty Limited

   Vessel-Owning Company    Hong Kong

Shinyo Navigator Limited

   Vessel-Owning Company(2)    Hong Kong

Shinyo Ocean Limited

   Vessel-Owning Company    Hong Kong

Shinyo Saowalak Limited

   Vessel-Owning Company    British Virgin Is.

Sifnos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Skiathos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Skopelos Shipping Corporation

   Vessel-Owning Company    Cayman Is.

Syros Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Thera Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Tinos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Oinousses Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Psara Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Antipsara Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Samothrace Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Thasos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Limnos Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Skyros Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Alonnisos Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Makronisos Shipping Corporation(1)

   Vessel-Owning Company    Marshall Is.

Iraklia Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Paxos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Antipaxos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Donoussa Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Schinousa Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Navios Acquisition Europe Finance Inc

   Sub-Holding Company    Marshall Is.

Sikinos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Kerkyra Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Lefkada Shipping Corporation

   Vessel-Owning Company    Marshall Is.

Zakytnthos Shipping Corporation

   Vessel-Owning Company    Marshall Is.

 

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(1) Each company has the rights over a shipbuilding contract of a tanker vessel.

 

(2) Former vessel-owner of the Shinyo Navigator which was sold to an unaffiliated third party on December 6, 2013.

Affiliates included in the financial statements accounted for under the equity method:

In the consolidated financial statements of Navios Acquisition, Navios Europe with ownership interest of 47.5% is included as affiliate and is accounted for under the equity method, for such periods during which the entity was affiliate of Navios Acquisition. See Note 9 to the notes to Consolidated Financial Statements, included herein.

 

D. Property, plants and equipment

Other than our vessels, we do not have any other material property, plant or equipment.

 

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

Overview

We are an owner and operator of tanker vessels focusing in the transportation of petroleum products (clean and dirty) and bulk liquid chemicals and we are incorporated in the Republic of the Marshall Islands.

On May 25, 2010, we consummated the Product and Chemical Tanker Acquisition, the acquisition of 13 vessels (11 product tankers and two chemical tankers), for an aggregate purchase price of $457.7 million, including amounts to be paid for future contracted vessels to be delivered. On September 10, 2010, we consummated the VLCC Acquisition, for an aggregate purchase price of $587.0 million.

Equity Transactions

On each of August 31, 2012, October 31, 2012, February 13, 2013, and April 24, 2013, Navios Acquisition issued 300 shares (1,200 in the aggregate) of its authorized Series D Preferred Stock (nominal value $12.0 million) to a shipyard, in partial settlement of the purchase price of the four newbuild LR1 product tankers, the Nave Cassiopeia, the Nave Cetus, the Nave Rigel and the Nave Atropos. The preferred stock contains a 6% per annum dividend payable quarterly, starting one year after delivery of each vessel. The Series D Preferred Stock will mandatorily convert into shares of common stock 30 months after the issuance, at a price per share of common stock equal to $10.00. The holder of the preferred stock shall have the right to convert the shares of preferred stock into common stock prior to the scheduled maturity date at a price of $7.00 per share of common stock. The preferred stock does not have any voting rights. Navios Acquisition is obligated to redeem the Series D Preferred Stock (or converted common shares), at the holder’s option exercisable beginning 18 months after the issuance, at par payable at up to 12 equal quarterly installments. The convertible preferred stock is classified as temporary equity (i.e. apart from permanent equity) as a result of the redemption feature upon exercise of the put option granted to the holder of the Series D Preferred Stock.

In February 2013, Navios Acquisition completed multiple offerings, including registered direct offerings, of a total of 35,246,791 shares of its common stock, at a price of $2.85 per share representing gross proceeds of $100.5 million. The offerings were conducted as follows:

 

   

The first registered direct offering of 7,719,300 shares of common stock was completed on February 21, 2013, raising $22.0 million of gross proceeds.

 

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The second registered direct offering of 9,825,000 shares of common stock was completed on February 26, 2013, raising $28.0 million of gross proceeds.

 

   

In addition, Navios Holdings and certain members of management of Navios Acquisition, Navios Holdings and Navios Partners purchased an aggregate of 17,702,491 shares of common stock in a private placement that was completed on February 26, 2013, raising $50.5 million of gross proceeds.

Total net proceeds, of the transactions in February 2013, net of agents’ costs of $4.0 million and offering costs of $0.5 million, amounted to $96.0 million.

In May 2013, Navios Acquisition completed the placement of a total of 32,876,712 shares of its common stock, at a price of $3.65 per share, representing gross proceeds of $120.0 million. The placement included a registered direct offering of 16,438,356 shares of common stock which raised $60.0 million of gross proceeds and a placement of 16,438,356 common shares to Navios Holdings which raised $60.0 million of gross proceeds. Both placements closed on May 21, 2013.

Total net proceeds of the transactions in May 2013, net of agents’ costs of $4.2 million and offering costs of $0.4 million, amounted to $115.4 million.

On September 16, 2013, Navios Acquisition completed the placement of a total of 25,974,026 shares of common stock, at a price of $3.85 per share, representing gross proceeds of $100.0 million and net proceeds of $96.1 million. The placement included a registered direct offering of 12,987,013 shares of common stock which raised $50.0 million of gross proceeds and a private placement of 12,987,013 shares of common stock to Navios Holdings which raised $50.0 million of gross proceeds.

Total net proceeds of the above transactions, net of agents’ costs of $3.5 million and offering costs of $0.4 million, amounted to $96.1 million.

In October 2013, Navios Acquisition authorized and issued in the aggregate 2,100,000 restricted shares of common stock and options to purchase 1,500,000 shares of common stock having an exercise price of $3.91 per share, to its directors and/or officers. These awards of restricted common stock and stock options are based on service conditions only and vest over three years.

On February 20, 2014, Navios Acquisition completed the public offering of 14,950,000 shares of its common stock at $3.85 per share, raising gross proceeds of $57.6 million. These figures include 1,950,000 shares sold pursuant to the underwriters’ option, which was exercised in full. Total net proceeds of the above transactions, net of agents’ costs of $3.0 million and offering costs $0.3 million, amounted to $54.2 million.

Fleet Development

2012

On January 20, 2012, Navios Acquisition took delivery of the Nave Estella, a 75,000 dwt South Korean —built LR1 product tanker, for a total cost of $44.6 million. Cash paid was $11.0 million and $33.6 million was transferred from vessel deposits.

On July 31, 2012, Navios Acquisition took delivery of the Nave Atria, a 49,992 dwt South Korean — built MR2 product tanker, for a total cost of $37.6 million. Cash paid was $9.0 million and $28.6 million was transferred from vessel deposits.

On August 31, 2012, Navios Acquisition took delivery of the Nave Cassiopeia, a 74,711 dwt South Korean — built LR1 product tanker, for a total cost of $43.8 million. Cash paid was $27.3 million, $3.0 million shares of Series D Preferred Stock were issued and $13.5 million was transferred from vessel deposits.

 

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On October 30, 2012, Navios Acquisition took delivery of the Nave Cetus, a 74,581 dwt South Korean —built LR1 product tanker, for a total cost of $44.0 million. Cash paid was $27.5 million, $3.0 million shares of Series D Preferred Stock were issued and $13.5 million was transferred from vessel deposits.

On November 9, 2012, Navios Acquisition took delivery of the Nave Aquila, a 49,991 dwt South Korean —built MR2 product tanker, for a total cost of $37.8 million. Cash paid was $12.7 million and $25.1 million was transferred from vessel deposits.

2013

On January 24, 2013, Navios Acquisition took delivery of the Nave Bellatrix, a 49,999 dwt South Korean —built MR2 product tanker, for a total cost of $38.0 million. Cash paid was $4.6 million and $33.5 million was transferred from vessel deposits.

On February 13, 2013, Navios Acquisition took delivery of the Nave Rigel, a 74,673 dwt South Korean —built LR1 product tanker, for a total cost of $47.9 million. The $47.9 million consisted of: (i) cash paid of $16.6 million, (ii) the issuance of $3.0 million Series D Preferred; and (iii) $28.3 million was transferred from vessel deposits.

On March 22, 2013, Navios Acquisition took delivery of the Nave Orion, a 49,999 dwt South Korean — built MR2 product tanker, for a total cost of $38.1 million. Cash paid was $8.2 million and $29.9 million was transferred from vessel deposits.

On April 24, 2013, Navios Acquisition took delivery of the Nave Atropos, a 74,695 dwt South Korean —built LR1 product tanker, for a total cost of $48.2 million. The $48.2 million consisted of: (i) cash paid of $17.1 million (ii) the issuance of $3.0 million of Series D Preferred Stock; and (iii) $28.1 million was transferred from vessel deposits.

On June 10, 2013, Navios Acquisition took delivery of the Nave Titan, a 49,999 dwt South Korean — built MR2 product tanker, for a total cost of $37.1 million. Cash paid was $9.6 million and $27.6 million was transferred from vessel deposits.

On June 26, 2013, Navios Acquisition took delivery of the Nave Equinox, a 50,922 dwt South Korean —built MR2 product tanker, for a total cost of $23.5 million paid in cash.

On July 9, 2013, Navios Acquisition took delivery of the Nave Capella, a 49,995 dwt South Korean — built MR2 product tanker, for a total cost of $37.2 million. Cash paid was $9.6 million and $27.5 million was transferred from vessel deposits.

On July 9, 2013, Navios Acquisition took delivery of the Nave Pulsar, a 50,922 dwt South Korean — built MR2 product tanker, for a total cost of $23.6 million paid in cash.

On July 22, 2013, Navios Acquisition took delivery of the Nave Universe, a 45,313 dwt South Korean — built Chemical tanker, for a total cost of $34.2 million paid in cash.

On August 13, 2013, Navios Acquisition took delivery of the Nave Celeste, a 298,717 dwt South Korean — built VLCC, for a total cost of $35.9 million paid in cash.

On September 3, 2013, Navios Acquisition took delivery of the Nave Alderamin, a 49,998 dwt South Korean-built MR2 product tanker, for a total cost of $37.3 million. Cash paid was $9.9 million and $27.5 million was transferred from vessel deposits.

 

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On September 5, 2013, Navios Acquisition took delivery of the Nave Constellation, a 45,281 dwt South Korean — built Chemical tanker, for a total cost of $34.3 million paid in cash.

On September 24, 2013, Navios Acquisition took delivery of the Nave Dorado, a 2005 Japanese built MR2 product tanker, for a total cost of $16.8 million paid in cash.

On September 30, 2013, Navios Acquisition took delivery of the Bougainville, a 50,626 dwt South Korean-built MR2 product tanker, for a total cost of $35.6 million paid in cash.

On October 23, 2013, Navios Acquisition took delivery of the Nave Lucida, a 2005 Japanese built MR2 product tanker, for a total cost of $16.8 million paid in cash.

On December 6, 2013, Navios Acquisition sold the Shinyo Navigator to an unaffiliated third party purchaser for an aggregate price of $18.1 million. The loss on sale of $21.1 million was calculated as the sales price less the carrying value of the vessel of $38.5 million and related selling expenses of $0.7 million and bunkers written-off of $0.04 million. This loss is included under the loss on sale of vessels in the consolidated statements of operations.

2014

On February 4, 2014, Navios Acquisition took delivery of the Nave Galactic, a 2009-built VLCC of 297,168 dwt for a purchase price of $51.5 million.

On February 12, 2014, Navios Acquisition took delivery of the Nave Quasar, a 2010-built VLCC of 297,376 dwt for a purchase price of $54.5 million.

On March 10, 2014, Navios Acquisition took delivery of the Nave Buena Suerte, a 2011-built VLCC of 297,491 dwt for a purchase price of $57.0 million.

 

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The historical results discussed below, and the historical financial statements and related notes included elsewhere in this annual report, present operating results of the fleet for the periods from January 1, 2011 to December 31, 2013.

 

Navios Maritime Acquisition Corporation and
Subsidiaries:

     

Country of
Incorporation

  Statement of operations
 

Nature

    2013   2012   2011

Company Name

         

Aegean Sea Maritime Holdings Inc.

  Sub-Holding Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Amorgos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Andros Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Antikithira Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   6/7 - 12/31

Antiparos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Amindra Shipping Co.

  Sub-Holding Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   4/28 - 12/31

Crete Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Folegandros Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Ikaria Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Ios Shipping Corporation

  Vessel-Owning Company   Cayman Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Kithira Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   6/7 - 12/31

Kos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Mytilene Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Navios Maritime Acquisition Corporation

  Holding Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Navios Acquisition Finance (U.S.) Inc.

  Co-Issuer   Delaware   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Rhodes Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Serifos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Dream Limited

  Vessel-Owning Company   Hong Kong   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Kannika Limited

  Vessel-Owning Company   Hong Kong   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Kieran Limited

  Vessel-Owning Company   British Virgin Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Loyalty Limited

  Vessel-Owning Company   Hong Kong   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Navigator Limited

  Vessel-Owning Company(2)   Hong Kong   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Ocean Limited

  Vessel-Owning Company   Hong Kong   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Shinyo Saowalak Limited

  Vessel-Owning Company   British Virgin Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Sifnos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Skiathos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Skopelos Shipping Corporation

  Vessel-Owning Company   Cayman Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Syros Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Thera Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Tinos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   1/1 - 12/31

Oinousses Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   10/5 - 12/31

Psara Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   10/5 - 12/31

Antipsara Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   1/1 - 12/31   1/1 - 12/31   10/5 - 12/31

Samothrace Shipping Corporation

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Thasos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Limnos Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Skyros Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Alonnisos Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Makronisos Shipping Corporation(1)

  Vessel-Owning Company   Marshall Is.   3/19 -12/31    

Iraklia Shipping Corporation

  Vessel-Owning Company   Marshall Is.   4/2 -12/31    

Paxos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   4/25 -12/31    

Antipaxos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   4/25 -12/31    

Donoussa Shipping Corporation

  Vessel-Owning Company   Marshall Is.   6/28 -12/31    

Schinousa Shipping Corporation

  Vessel-Owning Company   Marshall Is.   6/28 - 12/31    

Navios Acquisition Europe Finance Inc

  Sub-Holding Company   Marshall Is.   6/4/ - 12/31    

Sikinos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   7/3 - 12/31    

Kerkyra Shipping Corporation

  Vessel-Owning Company   Marshall Is.   11/8 - 12/31    

Lefkada Shipping Corporation

  Vessel-Owning Company   Marshall Is.   11/8 - 12/31    

Zakytnthos Shipping Corporation

  Vessel-Owning Company   Marshall Is.   11/8 - 12/31    

 

(1) Each company has the rights over a shipbuilding contract of a tanker vessel.
(2) Former vessel-owner of the Shinyo Navigator which was sold to an unaffiliated third party on December 6, 2013.

Our Charters

For the year ended December 31, 2013, Navios Acquisition’s customers representing 10% or more of total revenue were, Dalian Ocean Shipping Co., and Navig8 Chemicals Shipping and Trading Co which accounted for 32.0% and 22.4%, respectively.

 

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For the year ended December 31, 2012, Navios Acquisition’s customers representing 10% or more of total revenue were, Dalian Ocean Shipping Co., and STX Panocean Co. LTD which accounted for 43.3% and 10.7%, respectively.

For the year ended December 31, 2011, Navios Acquisition’s customers representing 10% or more of total revenue were, Dalian Ocean Shipping Co., Blue light Chartering Inc and Jacob Tank Chartering GMBH &CO. KG. which accounted for 43.9%, 11.5% and 11.3%, respectively.

No other customers accounted for 10% or more of total revenue for any of the years presented.

Our revenues are driven by the number of vessels in the fleet, the number of days during which the vessels operate and our charter hire rates, which, in turn, are affected by a number of factors, including:

 

   

the duration of the charters;

 

   

the level of spot and long-term market rates at the time of charter;

 

   

decisions relating to vessel acquisitions and disposals;

 

   

the amount of time spent positioning vessels;

 

   

the amount of time that vessels spend undergoing repairs and upgrades in drydock;

 

   

the age, condition and specifications of the vessels; and

 

   

the aggregate level of supply and demand in the tanker shipping industry.

Time charters are available for varying periods, ranging from a single trip (spot charter) to long-term which may be any years. In general, a long-term time charter assures the vessel owner of a consistent stream of revenue. Operating the vessel in the spot market affords the owner greater spot market opportunity, which may result in high rates when vessels are in high demand or low rates when vessel availability exceeds demand. We intend to operate our vessels in a mix of short-term and long-term charter market. Vessel charter rates are affected by world economics, international events, weather conditions, strikes, governmental policies, supply and demand and many other factors that might be beyond our control.

We could lose a customer or the benefits of a charter if:

 

   

the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise;

 

   

the customer exercises certain rights to terminate the charter the vessel;

 

   

the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter; or

 

   

a prolonged force majeure event affecting the customer, including damage to or destruction of relevant production facilities, war or political unrest prevents us from performing services for that customer.

If we lose a charter, we may be unable to re-deploy the related vessel on terms as favorable to us due to the long-term nature of most charters and the cyclical nature of the industry or we may be forced to charter the vessel on the spot market at then market rates which may be less favorable than the charter that has been terminated. The loss of any of our customers, time charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions in the event we are unable to replace such customer, time charter or vessel.

Under some of our time charters, either party may terminate the charter contract in the event of war in specified countries or in locations that would significantly disrupt the free trade of the vessel. Some of the time charters covering our vessels require us to return to the charterer, upon the loss of the vessel, all advances paid by the charterer but not earned by us.

 

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Vessels Operations

Under our charters, our vessel manager is generally responsible for commercial, technical, health and safety and other management services related to the vessels’ operation, and the charterer is responsible for bunkering and substantially all of the vessel voyage costs, including canal tolls and port charges.

Pursuant to a Management Agreement dated May 28, 2010, the Manager, a subsidiary of Navios Holdings, provides for five years from the closing of the Company’s initial vessel acquisition, commercial and technical management services to Navios Acquisition’s vessels for a daily fee of $6,000 per owned MR2 product tanker and chemical tanker vessel and $7,000 per owned LR1 product tanker vessel and $10,000 per VLCC tanker vessel for the first two years. On May 4, 2012, Navios Acquisition amended its existing Management Agreement with the Manager, to fix the fees for ship management services of its owned fleet at current rates for two additional years, through May 28, 2014. This daily fee covers all of the vessels’ operating expenses, other than certain fees and costs. During the remaining one year of the term of the Management Agreement, Navios Acquisition expects it will reimburse Navios Holdings for all of the actual operating costs and expenses it incurs in connection with the management of its fleet. Actual operating costs and expenses will be determined in a manner consistent with how the initial fixed fees were determined. Drydocking expenses are fixed for the first four years under these agreements for up to $0.3 million per LR1 and MR2 product tanker vessel and will be reimbursed at cost for VLCC vessels. Commencing as of March 30, 2012, Navios Acquisition can, upon request to the Manager, partially or fully defer the reimbursement of drydocking and other extraordinary fees and expenses under the Agreement to a later date, but not later than January 5, 2015, and if reimbursed on a later date, such amounts will bear interest at a rate of 1% per annum over LIBOR. Commencing as of September 28, 2012, Navios Acquisition could, upon request, reimburse the Manager partially or fully, for any fixed management fees outstanding for a period of not more than nine months under the Agreement at a later date, but not later than December 31, 2014, and if reimbursed on a later date, such amounts will bear interest at a rate of 1% per annum over LIBOR.

Extraordinary costs and expenses include fees and costs resulting from:

 

   

time spent on insurance and salvage claims;

 

   

time spent vetting and pre-vetting the vessels by any charterers in excess of 10 days per vessel per year;

 

   

the deductible of any insurance claims relating to the vessels or for any claims that are within such deductible range;

 

   

the significant increase in insurance premiums which are due to factors such as “acts of God” outside the control of the Manager;

 

   

repairs, refurbishment or modifications, including those not covered by the guarantee of the shipbuilder or by the insurance covering the vessels, resulting from maritime accidents, collisions, other accidental damage or unforeseen events (except to the extent that such accidents, collisions, damage or events are due to the fraud, gross negligence or willful misconduct of the Manager, its employees or its agents, unless and to the extent otherwise covered by insurance);

 

   

expenses imposed due to any improvement, upgrade or modification to, structural changes with respect to the installation of new equipment aboard any vessel that results from a change in, an introduction of new, or a change in the interpretation of, applicable laws, at the recommendation of the classification society for that vessel or otherwise;

 

   

costs associated with increases in crew employment expenses resulting from an introduction of new, or a change in the interpretation of, applicable laws or resulting from the early termination of the charter of any vessel;

 

   

any taxes, dues or fines imposed on the vessels or the Manager due to the operation of the vessels;

 

   

expenses incurred in connection with the sale or acquisition of a vessel such as inspections and technical assistance; and

 

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any similar costs, liabilities and expenses that were not reasonably contemplated by us and the Manager as being encompassed by or a component of the fixed daily fees at the time the fixed daily fees were determined.

Payment of any extraordinary fees or expenses to the Manager could significantly increase our vessel operating expenses and impact our results of operations.

During the remaining term of the Management Agreement, we expect that we will reimburse the Manager for all of the actual operating costs and expenses it incurs in connection with the management of our fleet.

Administrative Services

On May 28, 2010, Navios Acquisition entered into an administrative services agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which a subsidiary of Navios Holdings provides certain administrative management services to Navios Acquisition which include: rent, bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services.

 

A. Operating results

Trends and Factors Affecting Our Future Results of Operations

We believe the principal factors that will affect our future results of operations are the economic, regulatory, political and governmental conditions that affect the shipping industry generally and that affect conditions in countries and markets in which our vessels engage in business. Other key factors that will be fundamental to our business, future financial condition and results of operations include:

 

   

the demand for seaborne transportation services;

 

   

the ability of Navios Holdings’ commercial and chartering operations to successfully employ our vessels at economically attractive rates, particularly as our fleet expands and our charters expire;

 

   

the effective and efficient technical management of our vessels;

 

   

Navios Holdings’ ability to satisfy technical, health, safety and compliance standards of major commodity traders; and

 

   

the strength of and growth in the number of our customer relationships, especially with major commodity traders.

In addition to the factors discussed above, we believe certain specific factors will impact our combined and consolidated results of operations. These factors include:

 

   

the charter hire earned by our vessels under our charters;

 

   

our access to capital required to acquire additional vessels and/or to implement our business strategy;

 

   

our ability to sell vessels at prices we deem satisfactory;

 

   

our level of debt and the related interest expense and amortization of principal; and

 

   

the level of any dividend to our stockholders.

 

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Period over Period Comparisons

Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

The following table presents consolidated revenue and expense information for the years ended December 31, 2013 and 2012. This information was derived from the audited consolidated financial statements of Navios Acquisition for the respective periods.

 

(in thousands of U.S. dollars)    Year ended
December 31,
2013
    Year ended
December 31,
2012
 

Revenue

   $ 202,397      $ 151,097   

Time charter and voyage expenses

     (6,762 )     (2,824

Direct vessel expenses

     (3,096 )     (2,622

Management fees (entirely through related party transactions)

     (71,392 )     (47,043

General and administrative expenses

     (7,017 )     (3,853

Depreciation and amortization

     (63,880 )     (49,644

Loss on bond and debt extinguishment

     (33,973       

Interest income

     315        445   

Interest expenses and finance cost, net

     (58,386 )     (49,432

Loss on sale of vessel

     (21,098       

Other income

     4,787        280   

Other expense

     (487     (202
  

 

 

   

 

 

 

Net loss

   $ (58,592 )   $ (3,798
  

 

 

   

 

 

 

Set forth below are selected historical and statistical data for Navios Acquisition for each of the years ended December 31, 2013 and 2012 that we believe may be useful in better understanding Navios Acquisition’s financial position and results of operations.

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 

FLEET DATA

    

Available days(1)

     9,653        5,786   

Operating days(2)

     9,618        5,751   

Fleet utilization(3)

     99.6 %     99.4 %

Vessels operating at period end

     33        19   

AVERAGE DAILY RESULTS

    

Time Charter Equivalent per day(4)

   $ 20,267      $ 25,625   

 

(1) Available days:    for the fleet are total calendar days the vessels were in Navios Acquisition’s possession for the relevant period after subtracting off-hire days associated with major repairs, drydocking or special surveys. The shipping industry uses available days to measure the number of days in a relevant period during which vessels should be capable of generating revenues.

 

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

 

(3) Fleet utilization:    Fleet utilization is the percentage of time that Navios Acquisition’s vessels were available for generating revenue, and is determined by dividing the number of operating days during a relevant period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels.

 

(4) Time Charter Equivalent:    Time Charter Equivalent is defined as voyage and time charter revenues less voyage expenses during a relevant period divided by the number of available days during the period.

 

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For the year ended December 31, 2013, Navios Acquisition had 9,653 available days, after it took delivery of the Nave Cetus in October 2012, the Nave Aquila in November 2012, the Nave Bellatrix in January 2013, the Nave Rigel in February 2013, the Nave Orion in March 2013, the Nave Atropos in April 2013, the Nave Titan and the Nave Equinox in June 2013, the Nave Capella, the Nave Pulsar and the Nave Universe in July 2013, the Nave Celeste in August 2013, the Nave Constellation, the Nave Alderamin, the Nave Dorado and the Bougainville in September 2013 and the Nave Lucida in October 2013.

There were 5,786 available days in the comparative period in 2012.

Revenue:    Revenue for the year ended December 31, 2013 increased by $51.3 million or 34.0% to $202.4 million, as compared to $151.1 million for the same period in 2012. The increase was mainly attributable to the acquisition of the vessels mentioned above. As a result of the vessel acquisitions, available days of the fleet increased to 9,653 days for the year ended December 31, 2013, as compared to 5,786 days for year ended December 31, 2012. TCE decreased to $20,267 for the year ended December 31, 2013, from $25,625 for the year ended December 31, 2012 due to the fact that the vessels that were delivered in 2013 were of a smaller type (mainly MR2s) than the average fleet of the previous year, therefore they are fixed at lower rates.

Time charter and voyage expenses:    Time charter and voyage expenses for the year ended December 31, 2013 increased by $3.9 million to $6.8 million, as compared to $2.8 million for the year ended December 31, 2012. The increase was attributable to: (a) $3.4 million increase in voyage expenses incurred in the year due to the fact that certain vessels were employed in voyage charter; and (b) $0.6 million increase in broker commission costs.

Direct vessel expenses:    Direct vessel expenses, comprised of the amortization of dry dock and special survey costs, of certain vessels of our fleet amounting to $3.1 million for the year ended December 31, 2013, as compared to $2.6 million for the year ended December 31, 2012.

Management fees:    Management fees for the year ended December 31, 2013 increased by $24.3 million to $71.4 million, as compared to $47.0 million for the year ended December 31, 2012. The increase was attributable to the increase in the number of vessels operating under Navios Acquisition’s fleet. Pursuant to the Management Agreement dated May 28, 2010, the Manager, provides for five years from the closing of the vessels’ acquisition, commercial and technical management services to Navios Acquisition’s vessels for a daily fee of $6,000 per owned MR2 product tanker and chemical tanker vessel, $7,000 per owned LR1 product tanker vessel and $10,000, per owned VLCC vessel for the first two years. On May 4, 2012, Navios Acquisition amended its existing Management Agreement with the Manager, to fix the fees for ship management services of its owned fleet at current rates for two additional years, through May 28, 2014. This daily fee covers all of the vessels’ operating expenses, other than certain extraordinary fees and costs. During the remaining term of the management agreement, Navios Acquisition will reimburse the Manager for all of the actual operating costs and expenses it incurs in connection with the management of its fleet. Actual operating costs and expenses will be determined in a manner consistent with how the initial fixed fees were determined. Drydocking expenses are fixed for the first four years under these agreements for up to $0.3 million per LR1 and MR2 product tanker vessel and will be reimbursed at cost for VLCC vessels.

General and administrative expenses:    Total general and administrative expenses for the year ended December 31, 2013 increased by $3.2 million or 82.1% to $7.0 million compared to $3.9 million for the year ended December 31, 2012. The increase was mainly attributable to a: (a) $1.1 million increase due to stock based compensation recognized in connection with the issuance of 2,100,000 restricted shares and options to purchase 1,500,000 shares of common stock; (b) $1.4 million increase in administrative expenses paid to the Manager due to the increased number of vessels in Navios Acquisition’s fleet; and (c) $0.7 million increase in other general and administrative expenses, including professional, other fees and travelling expenses. On May 28, 2010, Navios Acquisition entered into an administrative services agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which a subsidiary of Navios Holdings provides certain administrative management services to Navios Acquisition which include: rent, bookkeeping, audit and accounting services, legal and insurance

 

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services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services. For the years ended December 31, 2013 and 2012, the expenses charged by Navios Holdings for administrative services were $3.5 million and $2.1 million, respectively. The remaining balance of $3.5 million and $1.7 million of general and administrative expenses for the years ended December 31, 2013 and 2012, respectively, related to stock based compensation for the year ended December 31, 2013, as well as legal, consulting, travel and professional fees including audit fees for the years ended December 31, 2013 and December 31, 2012.

Depreciation and amortization:    Depreciation and amortization increased by $14.2 million to $63.9 million for the year ended December 31, 2013 as compared to $49.6 million for the year ended December 31, 2012. The increase of $14.2 million was attributable to: (a) an increase in depreciation expense of $11.8 million due to the acquisitions of the vessel the Nave Bellatrix in January 2013, the Nave Rigel in February 2013, the Nave Orion in March 2013, the Nave Atropos in April 2013, the Nave Titan and the Nave Equinox in June 2013, the Nave Capella, the Nave Pulsar and the Nave Universe in July 2013, the Nave Celeste in August 2013, the Nave Constellation, the Nave Alderamin, the Nave Dorado and the Bougainville in September 2013 and the Nave Lucida in October 2013; and (b) an increase of $4.0 million in accelerated amortization of the intangible assets associated with the charter-out contracts of two MR2 product tanker vessels, following charterer’s default, partially mitigated by a decrease in amortization of favorable and unfavorable lease terms that were recognized in relation to the acquisition of the rights on the time charter-out contracts of the vessels of $1.6 million. Depreciation of vessel is calculated using an estimated useful life of 25 years for the date the vessel was originally delivered from the shipyard. Intangible assets are amortized over the contract periods, which range from 3.17 to 15.00 years.

Loss on bond and debt extinguishment:    In October 2010 and May 2011, the Company issued a total of $505.0 million in senior notes at a fixed rate of 8.625% due on November 1, 2017 (the “2017 Notes”). On November 13, 2013, Navios Acquisition completed the sale of $610.0 million of 8.125% Senior Notes due 2021 (the “2021 Notes”). The net proceeds from the sale of the 2021 Notes were used to redeem any and all of Navios Acquisition’s outstanding 2017 Notes and pay related transaction fees and expenses and for general corporate purposes. The effect of this transaction was the recognition of a $34.0 million loss in the consolidated statements of operations under “Loss on bond and debt extinguishment”, which was comprised of a $8.7 million loss relating to the write off of unamortized deferred finance costs and a $25.3 million loss relating to tender premium paid and cash payments for transaction fees and expenses in connection with the 2017 Notes extinguishment.

Interest income:    Interest income for year ended December 31, 2013 decreased by $0.1 million to $0.3 million compared to $0.4 million for the year ended December 31, 2012.

Interest expense and finance cost, net:    Interest expense and finance cost, net for the year ended December 31, 2013 increased by $9.0 million to $58.4 million, as compared to $49.4 million for the year ended December 31, 2012. The increase was due to: (a) the increase in average outstanding loan balance to $532.3 million in the year ended December 31, 2013 from $486.2 million in the year ended December 31, 2012; and (b) the effect of the $610.0 million of 8.125% Senior Notes due 2021, which were issued on November 13, 2013, partially offset by the effect of $505.0 million of 8.625% due 2017 Notes extinguishment. As of December 31, 2013 and 2012, the outstanding loan balance under Navios Acquisition’s credit facilities was $1,154.4 million and $1,029.1 million, respectively, and the weighted average interest rate as of December 31, 2013 and 2012 was 2.96% and 3.25%, respectively.

Loss on sale of vessel:    On December 6, 2013, Navios Acquisition sold the Shinyo Navigator to an unaffiliated third party purchaser for an aggregate price of $18.1 million. The loss on sale of $21.1 million was calculated as the sales price less the carrying value of the vessel of $38.5 million and related selling expenses of $0.7 million and bunkers written-off of $0.04 million. This loss is included under the loss on sale of vessels in the consolidated statements of operations.

 

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Other income:    Other income increased by $4.5 million to $4.8 million for the year ended December 31, 2013 compared to $0.3 million for the year ended December 31, 2012. Following the default of their charterer in June 2013, the original charters of two MR2 product tankers, have been terminated. Pursuant to the rehabilitation plan of the defaulted charterer, Navios Acquisition will be paid, partly in cash and partly in shares, for a loss claim that was accepted by competent court in December 2013. Navios Acquisition recognized a $4.6 million income in the consolidated statements of operations under “Other income” since the loss claim has been accepted by the court and the acceptance is irrevocable.

Other expense:    Other expense increased to a $0.5 million for the year ended December 31, 2013 compared to $0.2 million for the same period in 2012. The increase of $0.3 million was mainly attributable to miscellaneous expenses.

Period over Period Comparisons

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

The following table presents consolidated revenue and expense information for the years ended December 31, 2012 and 2011. This information was derived from the audited consolidated financial statements of Navios Acquisition for the respective periods.

 

(in thousands of U.S. dollars)    For the Year
Ended
December 31,
2012
    For the Year
Ended
December 31,
2011
 

Revenue

   $ 151,097      $ 121,925   

Time charter and voyage expenses

     (2,824     (3,499 )

Direct vessel expenses

     (2,622 )     (633

Management fees (entirely through related party transactions)

     (47,043 )     (35,679 )

General and administrative expenses

     (3,853 )     (4,241 )

Loss on bond and debt extinguishment

           (935 )

Depreciation and amortization

     (49,644 )     (38,638 )

Interest income

     445        1,414   

Interest expenses and finance cost, net

     (49,432 )     (43,165 )

Other income

     280        155   

Other expense

     (202     (561
  

 

 

   

 

 

 

Net loss

   $ (3,798 )   $ (3,857 )
  

 

 

   

 

 

 

Set forth below are selected historical and statistical data for Navios Acquisition for each of the years ended December 31, 2012 and 2011 that we believe may be useful in better understanding Navios Acquisition’s financial position and results of operations.

 

     Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

FLEET DATA

    

Available days(1)

     5,786        4,053   

Operating days(2)

     5,751        4,004   

Fleet utilization(3)

     99.4 %     98.8 %

Vessels operating at period end

     19        14   

AVERAGE DAILY RESULTS

    

Time Charter Equivalent per day(4)

   $ 25,625      $ 29,218   

 

(1) Available days:    for the fleet are total calendar days the vessels were in Navios Acquisition’s possession for the relevant period after subtracting off-hire days associated with major repairs, drydocking or special surveys. The shipping industry uses available days to measure the number of days in a relevant period during which vessels should be capable of generating revenues.

 

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

 

(3) Fleet utilization:    Fleet utilization is the percentage of time that Navios Acquisition’s vessels were available for generating revenue, and is determined by dividing the number of operating days during a relevant period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable employment for its vessels.

 

(4) Time Charter Equivalent:    Time Charter Equivalent is defined as voyage and time charter revenues less voyage expenses during a relevant period divided by the number of available days during the period.

For the year ended December 31, 2012, Navios Acquisition had 5,786 available days, after it took delivery of the Shinyo Kieran in June 2011, the Bull and the Buddy in July 2011, the Nave Andromeda in November 2011, the Nave Estella in January 2012, the Nave Atria in July 2012, the Nave Cassiopeia in August 2012, the Nave Cetus in October 2012 and the Nave Aquila in November 2012. There were 4,053 available days in the comparative period in 2011.

Revenue:    Revenue for the year ended December 31, 2012 increased by $29.2 million or 24.0% to $151.1 million, as compared to $121.9 million for the same period in 2011. The increase was mainly attributable to the acquisition of the vessels mentioned above. As a result of the vessel acquisitions, available days of the fleet increased to 5,786 days for the year ended December 31, 2012, as compared to 4,053 days for year ended December 31, 2011. TCE decreased to $25,625 for the year ended December 31, 2012, from $29,218 for the year ended December 31, 2011.

Time charter and voyage expenses:    Time charter expenses for the year ended December 31, 2012 decreased by $0.7 million to $2.8 million, as compared to $3.5 million for the year ended December 31, 2011. The decrease was attributable to a: (a) $0.4 million decrease in bunker costs; (b) $0.1 million decrease in port expenses; and (c) $0.6 million decrease in miscellaneous voyage expenses, partially offset by a $0.4 million increase in broker commission costs. Time charter expenses are expensed over the period of the time charter.

Direct vessel expenses:    Direct vessel expenses, comprised of the amortization of dry dock and special survey costs, of three VLCC vessels that were completed in August 2011, October 2011 and April 2012, respectively, and of two LR1 product tankers that were completed in May 2012 and June 2012, respectively, amounted to $2.6 million for the year ended December 31, 2012. Direct vessel expenses for the comparative period in 2011 were $0.6 million and were related to dry dock and special survey costs of two VLCC vessels.

Management fees:    Management fees for the year ended December 31, 2012 increased by $11.3 million to $47.0 million, as compared to $35.7 million for the year ended December 31, 2011. The increase was attributable to the increase in the number of vessels operating under Navios Acquisition’s fleet. Pursuant to the Management Agreement dated May 28, 2010, the Manager, provides for five years from the closing of the vessels’ acquisition, commercial and technical management services to Navios Acquisition’s vessels for a daily fee of $6,000 per owned MR2 product tanker and chemical tanker vessel, $7,000 per owned LR1 product tanker vessel and $10,000, per owned VLCC vessel for the first two years. On May 4, 2012, Navios Acquisition amended its existing Management Agreement with the Manager, to fix the fees for ship management services of its owned fleet at current rates for two additional years, through May 28, 2014. This daily fee covers all of the vessels’ operating expenses, other than certain extraordinary fees and costs. During the remaining term of the management agreement, Navios Acquisition will reimburse the Manager for all of the actual operating costs and expenses it incurs in connection with the management of its fleet. Actual operating costs and expenses will be determined in a manner consistent with how the initial fixed fees were determined. Drydocking expenses are fixed for the first four years under these agreements for up to $0.3 million per LR1 and MR2 product tanker vessel and will be reimbursed at cost for VLCC vessels.

 

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General and administrative expenses:    Total general and administrative expenses for the year ended December 31, 2012 decreased by $0.3 million or 7.1% to $3.9 million compared to $4.2 million for the year ended December 31, 2011. The decrease was mainly attributable to a: (a) $0.1 million decrease in travelling expenses; (b) $0.3 decrease in consulting fees; (c) $0.5 million decrease in audit, professional and other fees partially offset by a $0.6 million increase in administrative expenses paid to the Manager due to the increased number of vessels in Navios Acquisition’s fleet. On May 28, 2010, Navios Acquisition entered into an administrative services agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which a subsidiary of Navios Holdings provides certain administrative management services to Navios Acquisition which include: rent, bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services. For the years ended December 31, 2012 and 2011, the expenses charged by Navios Holdings for administrative services were $2.1 million and $1.5 million, respectively. The remaining balance of $1.8 million and $2.7 million of general and administrative expenses for the years ended December 31, 2012 and 2011, respectively, related to legal, consulting, travel and professional fees including audit fees.

Loss on bond and debt extinguishment:    In connection with the cancellation of certain committed credit in June 2011, the deferred finance fees in the amount of $0.9 million were written-off in the Statement of Operations.

Depreciation and amortization:    Depreciation and amortization increased by $11.0 million to $49.6 million for the year ended December 31, 2012 as compared to $38.6 million for the year ended December 31, 2011. The increase of $11.0 million was attributable to: (a) an increase in depreciation expense of $8.7 million due to the acquisitions of the vessel the Nave Polaris in January 2011, the Shinyo Kieran in June 2011, the Buddy and the Bull in July 2011 , the Nave Andromeda in November 2011, the Nave Estella in January 2012, the Nave Atria in July 2012, the Nave Cassiopeia in August 2012, the Nave Cetus in October 2012 and the Nave Aquila in November 2012; and (b) an increase in amortization expense of $2.3 million due to the favorable and unfavorable lease terms that were recognized in relation to the acquisition of the rights on the time charter-out contracts of the vessels. Depreciation of vessel is calculated using an estimated useful life of 25 years for the date the vessel was originally delivered from the shipyard. Intangible assets are amortized over the contract periods, which range from 3.17 to 15.00 years.

Interest income:    Interest income for year ended December 31, 2012 decreased by $1.0 million to $0.4 million compared to $1.4 million for the year ended December 31, 2011.

Interest expense and finance cost, net:    Interest expense and finance cost, net for the year ended December 31, 2012 increased by $6.2 million to $49.4 million, as compared to $43.2 million for the year ended December 31, 2011. The increase was due to: (a) the increase in average outstanding loan balance to $486.2 million in the year ended December 31, 2012 from 327.2 million in the year ended December 31, 2011; and (b) the full effect of the Additional Notes, which were issued on May 26, 2011. As of December 31, 2012 and 2011, the outstanding loan balance under Navios Acquisition’s credit facilities was $1,029.1 million and $885.4 million, respectively, and the weighted average interest rate as of December 31, 2012 and 2011 was 3.25% and 3.16%, respectively.

Other income:    Other income increased by $0.1 million to $0.3 million for the year ended December 31, 2012 compared to $0.2 million for the year ended December 31, 2011. The increase of $0.1 million was mainly attributable to miscellaneous income.

Other expense:    Other expense decreased to $0.2 million for the year ended December 31, 2012 compared to $0.6 million for the same period in 2011. The decrease of $0.4 million was due to a: (i) $0.3 million decrease in claims reserves; and (ii) $0.1 million decrease in miscellaneous expenses.

 

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B. Liquidity and Capital Resources and Uses

Our primary short-term liquidity needs are to fund general working capital requirements, drydocking expenditures, deposits for vessels under construction, minimum cash balance maintenance as per our credit facility agreements and debt repayment, while our long-term liquidity needs primarily relate to expansion and investment capital expenditures and other maintenance capital expenditures and debt repayment. Expansion capital expenditures are primarily for the purchase or construction of vessels to the extent the expenditures increase the operating capacity of or revenue generated by our fleet, while maintenance capital expenditures primarily consist of drydocking expenditures and expenditures to replace vessels in order to maintain the operating capacity of or revenue generated by our fleet. We anticipate that our primary sources of funds for our short-term liquidity needs will be cash flows from operations and bank borrowings which we believe that will be sufficient to meet our existing short-term liquidity needs for at least the next 12 months. Generally, our long-term sources of funds will be from cash from operations, long-term bank borrowings and other debt or equity financings. We expect that we will rely upon external financing sources, including bank borrowings, to fund acquisitions and expansion and investment capital expenditures. We cannot assure you that we will be able to secure adequate financing or obtaining additional funds on favorable terms, to meet our liquidity needs. Please also refer to “Item 3.D.Risk Factors -Risks Related to Our Indebtedness.”

2013

In February 2013, Navios Acquisition completed multiple offerings, including registered direct offerings, of a total of 35,246,791 shares of its common stock, at a price of $2.85 per share representing gross proceeds of $100.5 million. The offerings were conducted as follows:

 

   

The first registered direct offering of 7,719,300 shares of common stock was completed on February 21, 2013, raising $22.0 million of gross proceeds.

 

   

The second registered direct offering of 9,825,000 shares of common stock was completed on February 26, 2013, raising $28.0 million of gross proceeds.

 

   

In addition, Navios Holdings and certain members of management of Navios Acquisition, Navios Holdings and Navios Partners purchased an aggregate of 17,702,491 shares of common stock in a private placement that was completed on February 26, 2013, raising $50.5 million of gross proceeds.

Total net proceeds, of the transactions in February 2013, net of agents’ costs of $4.0 million and offering costs of $0.5 million, amounted to $96.0 million.

In May 2013, Navios Acquisition completed the placement of a total of 32,876,712 shares of its common stock, at a price of $3.65 per share, representing gross proceeds of $120.0 million. The placement included a registered direct offering of 16,438,356 shares of common stock which raised $60.0 million of gross proceeds and a placement of 16,438,356 common shares to Navios Holdings which raised $60.0 million of gross proceeds. Both placements closed on May 21, 2013.

Total net proceeds of the transactions in May 2013, net of agents’ costs of $4.2 million and offering costs of $0.4 million, amounted to $115.4 million.

On September 16, 2013, Navios Acquisition completed the placement of a total of 25,974,026 shares of common stock, at a price of $3.85 per share, representing gross proceeds of $100.0 million and net proceeds of $96.1 million. The placement included a registered direct offering of 12,987,013 shares of common stock which raised $50.0 million of gross proceeds and a private placement of 12,987,013 shares of common stock to Navios Holdings which raised $50.0 million of gross proceeds.

Total net proceeds of the above transactions, net of agents’ costs of $3.5 million and offering costs of $0.4 million, amounted to $96.1 million.

 

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In October 2013, Navios Acquisition authorized and issued in the aggregate 2,100,000 restricted shares of common stock and options to purchase 1,500,000 shares of common stock having an exercise price of $3.91 per share, to its directors and/or officers. These awards of restricted common stock and stock options are based on service conditions only and vest over three years.

The fair value of stock option grants is determined with reference to option pricing model, and principally adjusted Black-Scholes models. The fair value of restricted stock is determined by reference to the quoted stock price on the date of grant. Compensation expense is recognized based on a graded expense model over the vesting period.

The effect of compensation expense arising from the stock-based arrangements described above amounts to $1.1 million, as of December 31, 2013, and it is reflected in general and administrative expenses on the income statement.

The estimated compensation cost relating to service conditions of non-vested (a) stock options and (b) restricted stock, not yet recognized was $1.1 million and $7.4 million, respectively, as of December 31, 2013 and is expected to be recognized over the weighted average period of 2.82 years.

2014

On February 20, 2014, Navios Acquisition completed the public offering of 14,950,000 shares of its common stock at $3.85 per share, raising gross proceeds of $57.6 million. These figures include 1,950,000 shares sold pursuant to the underwriters’ option, which was exercised in full.

Total net proceeds of the above transactions, net of agents’ costs of $3.0 million and offering costs $0.3 million, amounted to $54.2 million.

Navios Acquisition finances its capital requirements with cash flows from operations, equity contributions from stockholders, bank loans and the issuance of the 2021 Notes. The main uses of funds have been capital expenditures for the acquisition of new vessels, expenditures incurred in connection with ensuring that the owned vessels comply with international and regulatory standards, repayments of bank loans and payments of dividends.

Our contracts for the construction of our vessels are cancellable in various cases among which are, the shipbuilders’ inability to meet its obligations for delivery of the vessel until a set deadline and in accordance with its specifications, our inability to finance the purchase of the vessel, bankruptcy or other financial or liquidity problems of the shipbuilder and our inability to obtain requisite permits or approvals. (See D. Risk factors , Risk Factors Relating to Our Business: Delays in deliveries of our newbuild vessels, or our decision to cancel, or our inability to otherwise complete the acquisitions of any newbuildings we may decide to acquire in the future, could harm our operating results and lead to the termination of any related charters.)

In February 2014, the Shinyo Splendor, the Nave Atropos, the Nave Rigel and the cash proceeds from the sale of the Shinyo Navigator, having a total fair value of $124.4 million were released from the collateral package securing the 8.125% First Priority Ship Mortgage Notes due 2021 and were substituted by the two VLCCs; the Nave Galactic and the Nave Quasar having a total fair value of $131.3 million as of December 31, 2013.

On February 6, 2014, Navios Acquisition entered into a loan agreement of $51.0 million (divided in two tranches of $25.5 million each). The facility bears interest at a margin of LIBOR plus 310 bps. Each tranche of the facility is repayable in 28 consecutive quarterly equal repayment installments of $0.4 million each with a final balloon payment of $14.3 million to be repaid on the last repayment date. The repayment starts in May 2014. As of March 14, 2014 the amount of $51.0 million was fully drawn.

 

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As of March 13, 2014, the remaining contractual installments for our tanker vessels to be delivered on various dates through June 2015, were $146.7 million, of which $20.4 million will be paid through cash on hand and $126.3 million will be financed through debt financing, out of which $49.5 million is already committed.

Cash flows for the year ended December 31, 2013 compared to the year ended December 31, 2012:

The following table presents cash flow information for the years ended December 31, 2013 and 2012. This information was derived from the audited consolidated statement of cash flows of Navios Acquisition for the respective periods.

 

(Expressed in thousands of U.S. dollars)    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 

Net cash (used in)/ provided by operating activities

   $ (29,571 )   $ 81,877   

Net cash used in investing activities

     (293,740 )     (205,956 )

Net cash provided by financing activities

     363,300        125,625   
  

 

 

   

 

 

 

Change in cash and cash equivalents

   $ 39,989      $ 1,546   
  

 

 

   

 

 

 

Cash (used in)/ provided by operating activities for the year ended December 31, 2013 as compared to the year ended December 31, 2012:

Net cash used in operating activities decreased by $111.4 million to $29.6 million outflow for the year ended December 31, 2013 as compared to $81.9 million inflow for the same period in 2012. The increase is analyzed as follows:

The net loss for the year ended December 31, 2013 was $58.6 million compared to a $3.8 million loss for the year ended December 31, 2012. In determining net cash provided by operating activities for the years ended December 31, 2013, net loss was adjusted for the effect of depreciation and amortization of $63.9 million, $21.1 million loss on sale of vessel, $11.6 million for amortization and write-off of deferred finance fees and bond premium, $3.4 million non-cash settlement received, (See Note 20: Other Income), $3.1 million for the amortization of drydock and special survey costs and $1.1 million stock based compensation. For the period ended December 31, 2012, net income was also adjusted for the effects of certain non-cash items, including depreciation and amortization of $49.6 million, $2.8 million amortization and write-off of deferred financing cost, net and $2.6 million for the amortization of drydock and special survey costs.

Amounts due to related parties decreased by $77.5 million from $85.5 million at December 31, 2012 to $8.0 million at December 31, 2013. Excluding the effect of payment to related party for newbuilding costs of $22.9 million (see Note 16, Transactions with Related Parties) the decrease was a result of a $45.5 million decrease of payables relating to management fees and a $9.1 million decrease in payables relating to accrued administrative expenses and other items due to affiliated companies. Please refer to relevant discussion below, under “Related Parties Transactions.”

Payment for drydock and special survey cost incurred in the year ended December 31, 2013 was $0.2 million and related to the drydock and special survey costs incurred for certain vessels of the fleet. Payment for drydock and special survey cost incurred in the year ended December 31, 2012 was $2.9 million.

Accounts receivable increased by $3.3 million from $5.1 million for the year ended December 31, 2012, to $8.4 million for the year ended December 31, 2013 due to the increase receivables due from charterers.

Restricted cash from operating activities increased by $1.5 million for the year ended December 31, 2013 and related to the cash held in retention accounts for the payment of interest under our credit facilities.

Accounts payable increased by $0.3 million from $1.3 million for the year ended December 31, 2012 to $1.6 million for the year ended December 31, 2013. This increase was attributable to the increase in broker’s payable by $0.1 million and the increase of $0.1 million in legal and professional fees.

 

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Prepaid expenses and other current assets increased by $1.9 million to $4.6 million for the year ended December 31, 2013 from $2.7 million for the year ended December 31, 2012. The increase by $1.9 million was due to short-term receivable of $3.4 million recognized pursuant to the rehabilitation process for the defaulted charterer which is included as non-cash item, partially mitigated by $1.6 million representing the amounts advanced to certain counterparties for working capital purposes as per the charters entered with them that were reclassified under caption “Other long term assets.”

Other long term assets increased by $4.6 million to $5.5 million for the year ended December 31, 2013 from $0.9 million for the year ended December 31, 2012. The increase is due to (a) $1.2 million long term receivable recognized pursuant to the rehabilitation process incurred above and (b) $3.9 million increase in the advances paid to certain counterparties for working capital purposes as per the charters entered with them mitigated by a decrease of $0.4 million in other long term receivables.

Accrued expenses decreased by $1.0 million to $12.0 million for the year ended December 31, 2013, from $13.0 million on December 31, 2012. The decrease was attributable to a $2.3 million decrease in accrued voyage expenses and a $0.1 million decrease in accrued interest partially mitigated by a $1.5 million increase in accrued professional fees and expenses.

Deferred voyage revenue primarily relates to cash received from charterers prior to it being earned. These amounts are recognized as revenue over the voyage or charter period. Deferred voyage revenue increased by $3.4 million to $7.1 million for the year ended December 31, 2013 from $3.7 million on December 31, 2012.

Long Term Liabilities decreased by $0.2 million to $0.0 million for the year ended December 31, 2013 from $0.2 million on December 31, 2012. Long term liabilities are related to the long term portion of the straight line effect of revenue of the vessels acquired in July 2011, which was written-off in 2013 pursuant to the charterer default.

Cash used in investing activities for the year ended December 31, 2013 as compared to the year ended December 31, 2012:

Net cash used in investing activities increased by $87.8 million to $293.7 million at December 31, 2013 from $206.0 million at December 31, 2012.

Net cash used in investing activities for the year ended December 31, 2013, resulted from: (a) $288.9 million paid for acquisitions of vessels; (b) $24.9 million paid as deposits for the acquisition of the vessels that will be delivered to Navios Acquisition at various dates through June 2015; (c) $4.8 million for investment in Navios Europe; and (d) $2.7 million from loan granted to Navios Europe. The $321.2 million was partially mitigated by a $10.1 million decrease in restricted cash and $17.4 million from net proceeds from the sale of a vessel.

Net cash used in investing activities for the year ended December 31, 2012, resulted from: (a) $83.3 million paid for the acquisition of vessels; and (b) $142.1 million paid as deposits for the acquisition of the vessels that will be delivered to Navios Acquisition at various dates through October 2014. The $225.4 million was partially offset by a $19.4 million decrease in restricted cash.

Cash provided by financing activities for the year ended December 31, 2013 as compared to the year ended December 31, 2012:

Net cash provided by financing activities decreased by $237.7 million to $363.3 million at December 31, 2013 from $125.6 million at December 31, 2012.

Net cash provided by financing activities for the year ended December 31, 2013 was $363.3 million. Net cash provided by financing activities resulted from a $155.6 million loan proceeds net of deferred finance fees,

 

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$595.4 million proceeds from issuance of ship mortgage and senior notes, net of debt issuance costs and $307.5 million from net proceeds from equity offering. This increase was partially offset by: (a) $505.0 million repayment of the 2017 Notes; (b) $22.9 million payment to related party; (c) a $12.3 million increase in restricted cash; (d) $100.2 million of loan repayments; (e) a $35.0 million repayment of a loan from a related party; and (f) dividends paid of $19.7 million.

Net cash provided by financing activities for the year ended December 31, 2012 was $125.6 million. Net cash provided by financing activities resulted from a $162.8 million loan proceeds net of deferred finance fees and $5.0 million proceeds from related party loan, net of deferred finance fees. This increase was partially offset by: (a) a $8.7 million increase in restricted cash; (b) $13.7 million for loan repayments; (c) a $10.0 million repayment of a loan from a related party; and (d) dividends paid of $9.8 million.

Cash flows for the year ended December 31, 2012 compared to the year ended December 31, 2011:

The following table presents cash flow information for the years ended December 31, 2012 and 2011. This information was derived from the audited consolidated statement of cash flows of Navios Acquisition for the respective periods.

 

(Expressed in thousands of U.S. dollars)    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Net cash provided by operating activities

   $ 81,877        64,233   

Net cash used in investing activities

     (205,956 )     (225,777

Net cash provided by financing activities

     125,625        141,484   
  

 

 

   

 

 

 

Change in cash and cash equivalents

   $ 1,546        (20,060 )
  

 

 

   

 

 

 

Cash provided by operating activities for the year ended December 31, 2012 as compared to the year ended December 31, 2011:

Net cash provided by operating activities increased by $17.7 million to $81.9 million for the year ended December 31, 2012 as compared to $64.2 million for the same period in 2011. The increase is analyzed as follows:

The net loss for the year ended December 31, 2012 was $3.8 million compared to $3.9 million loss for the year ended December 31, 2011. In determining net cash provided by operating activities for the years ended December 31, 2012, net loss was adjusted for the effect of depreciation and amortization of $49.6 million, $2.8 million for amortization and write-off of deferred finance cost, net and $2.6 million for the amortization of drydock and special survey costs. For the period ended December 31, 2011, net income was also adjusted for the effects of certain non-cash items, including depreciation and amortization of $38.6 million, $3.2 million amortization and write-off of deferred financing cost, net and $0.6 million for the amortization of drydock and special survey costs.

Amounts due to related parties increased by $41.9 million from $43.6 million at December 31, 2011 to $85.5 million at December 31, 2012, as a result of a: (a) $33.6 million increase in management fees, accrued administrative expenses and other payables due to affiliated companies; (b) $6.1 million non-cash increase in pre-building costs; and (c) $2.2 million increase in expenses incurred by the Manager in relation to drydock and special survey costs of one VLCC vessel and two LR1 product tanker vessels. Please see disclosures contained under “Item 7.B.Related Party Transactions.”

Payment for drydock and special survey cost incurred in the year ended December 31, 2012 was $2.9 million and related to the drydock and special survey costs incurred for one VLCC and two LR1 tanker vessels of the fleet. Payment for drydock and special survey cost incurred in the year ended December 31, 2011 was $7.8 million and related to the drydock and special survey costs incurred for two VLCC tanker vessels.

 

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Accounts receivable decreased by $1.4 million from $6.5 million for the year ended December 31, 2011, to $5.1 million for the year ended December 31, 2012 and were related to receivables from charterers.

Restricted cash from operating activities decreased by $0.3 million for the year ended December 31, 2012 and related to the cash held in retention accounts for the payment of interest under our credit facilities.

Accounts payable increased by $0.3 million from $1.0 million for the year ended December 31, 2011 to $1.3 million for the year ended December 31, 2012. This increase was attributable to the increase in broker’s payable by $0.2 million and the increase in other creditors by $0.2 million partially offset by a decrease of $0.1 million in legal and professional fees.

Prepaid expenses and other current assets increased by $2.2 million to $2.7 million for the year ended December 31, 2012 from $0.5 million for the year ended December 31, 2011. The increase was mainly due to the amounts advanced to certain counterparties for working capital purposes as per the charters entered with them.

Other long term assets decreased by $0.4 million to $0.9 million for the year ended December 31, 2012 from $1.3 million for the year ended December 31, 2011. On October 28, 2011, the charter contract of the Nave Ariadne (ex. Ariadne Jacob) and the Nave Cielo (ex. Colin Jacob) were terminated prior to their original expiration date in June 2013. Navios Acquisition entered into certain settlement agreements with charterers that provided for an amount of approximately $5.0 million to compensate for the early termination of the charters and to cover outstanding receivables, out of which $1.5 million will be settled in installments until June 2015, the long term portion being $0.9 million.

Accrued expenses decreased by $2.5 million to $13.0 million for the year ended December 31, 2012, from $15.5 million on December 31, 2011. The decrease was attributable to a $4.2 million decrease in accrued other expenses partially offset by a $1.5 million increase in accrued voyage expenses and a $0.2 million increase in accrued interest.

Deferred voyage revenue primarily relates to cash received from charterers prior to it being earned. These amounts are recognized as revenue over the voyage or charter period. Deferred voyage revenue increased by $0.4 million to $3.7 million for the year ended December 31, 2012 from $3.3 million on December 31, 2011.

Long Term Liabilities decreased by $0.3 million to $0.2 million for the year ended December 31, 2012 from $0.5 million on December 31, 2011. Long term liabilities are related to the long term portion of the straight line effect of revenue of the vessels acquired in July 2011.

Cash used in investing activities for the year ended December 31, 2012 as compared to the year ended December 31, 2011:

Net cash used in investing activities decreased by $19.9 million to $205.9 million at December 31, 2012 from $225.8 million at December 31, 2011.

Net cash used in investing activities for the year ended December 31, 2012, resulted from: (a) $83.3 million paid for the acquisition of vessels; and (b) $142.1 million paid as deposits for the acquisition of the vessels that will be delivered to Navios Acquisition at various dates through October 2014. The $225.4 million was partially offset by a $19.4 million decrease in restricted cash.

Net cash used in investing activities for the year ended December 31, 2011, resulted from: (a) $140.7 million paid for the acquisition of vessels; (b) $78.5 million paid as deposits for the acquisition of the vessels that will be delivered to Navios Acquisition at various dates through October 2014; (c) $7.8 million paid for improvements in certain VLCC vessels; and (d) $10.4 million of intangible assets and liabilities associated with the acquisition of two MR2 vessels in July 2011. The $237.4 million was partially offset by a $3.8 million decrease in restricted cash.

 

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Cash provided by financing activities for the year ended December 31, 2012 as compared to the year ended December 31, 2011:

Net cash provided by financing activities decreased by $15.9 million to $125.6 million at December 31, 2012 from $141.5 million at December 31, 2011.

Net cash provided by financing activities for the year ended December 31, 2012 was $125.6 million. Net cash provided by financing activities resulted from a $162.8 million loan proceeds net of deferred finance fees and $5.0 million proceeds from related party loan, net of deferred finance fees. This increase was partially offset by: (a) a $8.7 million increase in restricted cash; (b) $13.7 million for loan repayments; (c) a $10.0 million repayment of a loan from a related party; and (d) dividends paid of $9.8 million.

Net cash provided by financing activities for the year ended December 31, 2011 was $141.5 million. Net cash provided by financing activities resulted from $252.1 million loan proceeds net of deferred finance fees and $33.2 million proceeds from related party loan, net of deferred finance fees. This increase was partially offset by: (a) a $1.7 million increase in restricted cash; (b) $126.3 million for loan repayments; (c) a $6.0 million repayment of a loan from a related party; and (d) dividends paid of $9.8 million.

Reconciliation of Adjusted EBITDA to Net Cash from Operating Activities

 

Expressed in thousands of U.S. dollars

   Year Ended
December  31,
2013
(unaudited)
    Year Ended
December  31,
2012
(unaudited)
    Year Ended
December  31,
2011
(unaudited)
 

Net Cash from Operating Activities

   $ (29,571   $ 81,877      $ 64,233   

Net increase in operating assets

     8,231        3,030        12,972   

Net decrease/ (increase) in operating liabilities

     60,080        (33,619 )     (38,603 )

Net interest cost

     58,071        48,987        41,751   

Amortization of deferred finance fees

     (2,908     (2,820 )     (2,253 )

Non- cash settlement received

     3,446               
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

   $ 97,349      $ 97,455      $ 78,100   
  

 

 

   

 

 

   

 

 

 

(1)

 

     Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Net cash (used)/ provided by operating activities

   $ (29,571   $ 81,877      $ 64,233   

Net cash used in investing activities

   $ (293,740   $ (205,956 )   $ (225,777 )

Net cash provided by financing activities

   $ 363,300      $ 125,625      $ 141,484   

Adjusted EBITDA in this document represents loss plus interest expense and finance cost plus depreciation and amortization and finance income, before stock based compensation of $1.1 million, loss on sale of vessel of $21.1 million and the write-off of unamortized deferred finance costs and bond premium of $8.7 million in connection with the bond and debt extinguishment.

Adjusted EBITDA is presented because Navios Acquisition believes that Adjusted EBITDA is basis upon which liquidity can be assessed and present useful information to investors regarding Navios Acquisition’s ability to service and/or incur indebtedness, pay capital expenditures, meet working capital requirements and pay dividends. Adjusted EBITDA is “non-GAAP financial measure” and should not be considered a substitute for net income, cash flow from operating activities and other operations or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity.

 

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While Adjusted EBITDA is frequently used as a measure of operating results and the ability to meet debt service requirements, the definition of Adjusted EBITDA used here may not be comparable to that used by other companies due to differences in methods of calculation.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for the analysis of Navios Acquisition results as reported under U.S. GAAP. Some of these limitations are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future. Adjusted EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, Adjusted EBITDA should not be considered as a principal indicator of Navios Acquisition performance. Furthermore, our calculation of Adjusted EBITDA may not be comparable to that reported by other companies due to differences in methods of calculation.

Adjusted EBITDA for the year ended December 31, 2013 decreased by $0.1 million to $97.3 million from $97.5 million in the year ended December 31, 2012. The decrease in Adjusted EBITDA was due to a: (i) $25.3 million increase in expenses relating to cash portion of loss on bond extinguishment; (ii) $24.3 million increase in management fees; (iii) $3.9 million increase in time charter expenses; (iv) $2.1 million increase in general and administrative expenses; and (v) $0.3 million increase in other expense. The above decrease was partially mitigated by a: (a) $51.3 million increase in revenue due to the acquisitions of the vessels described above and (b) $4.5 million increase in other income.

Adjusted EBITDA for the year ended December 31, 2012, increased by $20.3 million to $97.5 million, as compared to $77.2 million for the same period in 2011. The increase in Adjusted EBITDA was due to a: (a) $29.2 million increase in revenue due to the acquisitions of the Shinyo Kieran in June 2011, the Bull and the Buddy in July 2011, the Nave Andromeda in November 2011, the Nave Estella in January 2012, the Nave Atria in July 2012, the Nave Cassiopeia in August 2012, the Nave Cetus in October 2012 and the Nave Aquila in November 2012; (b) $0.9 million write-off of deferred financing costs incurred in 2011; (c) $0.3 million decrease in general and administrative expenses; (d) $0.5 million increase in other income/ (expense), net; and (e) $0.7 million decrease in time charter expenses. The above $31.6 million increase was partially offset by an $11.3 million increase in management fees.

Long-Term Debt Obligations and Credit Arrangements

In October 2010 and May 2011 the Company issued a total of $505.0 million in senior notes at a fixed rate of 8.625% due on November 1, 2017 (the “2017 Notes”). On November 13, 2013, Navios Acquisition completed the sale of $610.0 million of 8.125% Senior Notes due 2021 (the “2021 Notes”). The net proceeds from the sale of the 2021 Notes of $595.4 million were used to redeem any and all of Navios Acquisitions’ outstanding 2017 Notes and pay related transaction fees and expenses, any redemption premium, to fund the repayment of outstanding borrowing of $43.0 million under a term loan and for general corporate purposes. The effect of this transaction was the recognition of a $34.0 million loss in the consolidated statements of operations under “Loss on bond and debt extinguishment”, which comprises a $8.7 million loss relating to the write off of unamortized deferred finance costs and a $25.3 million loss relating to cash payments for transaction fees and expenses in connection with the 2017 Notes extinguishment.

Senior Notes:

8 1/8% First Priority Ship Mortgages:    On November 13, 2013, the Company and its wholly owned subsidiary, Navios Acquisition Finance (US) Inc. (together with the Company, the “2021 Co-Issuers”) issued $610.0 million in senior notes due on November 15, 2021 at a fixed rate of 8.125%.

The 2021 Notes are fully and unconditionally guaranteed on a joint and several bases by all of Navios Acquisition’s subsidiaries with the exception of Navios Acquisition Finance (a co-issuer of the ship mortgage

 

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notes). The subsidiary guarantees are full and unconditional as that term is defined by Regulation S-X Rule 3-10, except for the fact that the indenture provides for an individual subsidiary’s guarantee to be automatically released in certain customary circumstances, such as when a subsidiary is sold or all assets are sold, the capital stock is sold, when the subsidiary is designated as an “unrestricted subsidiary” for the purposes of the bond indenture, upon liquidation or dissolution or upon legal or covenant defeasance or satisfaction and discharge, of the 2021 Notes, which are unregistered.

The 2021 Co-Issuers have the option to redeem the 2021 Notes in whole or in part, at any time (i) before November 15, 2016, at a redemption price equal to 100% of the principal amount, plus a make-whole premium, plus accrued and unpaid interest, if any, and (ii) on or after November 15, 2016, at a fixed price of 106.094% of the principal amount, which price declines ratably until it reaches par in 2019, plus accrued and unpaid interest, if any.

At any time before November 15, 2016, the 2021 Co-Issuers may redeem up to 35% of the aggregate principal amount of the 2021 Notes with the net proceeds of an equity offering at 108.125% of the principal amount of the 2021 Notes, plus accrued and unpaid interest, if any, so long as at least 65% of the originally issued aggregate principal amount of the 2021 Notes remains outstanding after such redemption.

In addition, upon the occurrence of certain change of control events, the holders of the 2021 Notes will have the right to require the 2021 Co-Issuers to repurchase some or all of the 2021 Notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date.

The 2021 Notes contain covenants which, among other things, limit the incurrence of additional indebtedness, issuance of certain preferred stock, the payment of dividends, redemption or repurchase of capital stock or making restricted payments and investments, creation of certain liens, transfer or sale of assets, entering in transactions with affiliates, merging or consolidating or selling all or substantially all of the 2021 Co-Issuers’ properties and assets and creation or designation of restricted subsidiaries. The 2021 Co-Issuers were in compliance with the covenants as of December 31, 2013.

Credit Facilities

Commerzbank AG, Alpha Bank A.E., and Credit Agricole Corporate and Investment Bank:    Navios Acquisition assumed a loan agreement dated April 7, 2010, with Commerzbank AG, Alpha Bank A.E. and Credit Agricole Corporate and Investment Bank of up to $150.0 million (divided in six equal tranches of $25.0 million each) to partially finance the construction of two chemical tankers and four product tankers. Each tranche of the facility is repayable in 12 equal semi-annual installments of $0.75 million each with a final balloon payment of $16.0 million to be repaid on the last repayment date. The repayment of each tranche started six months after the delivery date of the respective vessel which that tranche financed. It bears interest at a rate of LIBOR plus 250 bps. The loan also requires compliance with certain financial covenants. As of December 31, 2013, the facility was fully drawn and $137.3 million was outstanding.

BNP Paribas SA Bank and DVB Bank S.E.:    Navios Acquisition assumed a loan agreement dated April 8, 2010, of up to $75.0 million (divided in three equal tranches of $25.0 million each) for the purpose of part-financing the purchase price of three product tankers. Each of the tranches is repayable in 12 equal semi-annual installments of $0.75 million each with a final balloon payment of $16.0 million to be repaid on the last repayment date. The repayment date of each tranche started six months after the delivery date of the respective vessel which that tranche finances. It bears interest at a rate of LIBOR plus 250 bps. The loan also requires compliance with certain financial covenants. As of December 31, 2013, $74.3 million was outstanding and no amount remained to be drawn under this facility.

DVB Bank S.E. and ABN AMRO Bank N.V.:    On May 28, 2010, Navios Acquisition entered into a loan agreement with DVB Bank S.E. and ABN AMRO BANK N.V. of up to $52.0 million (divided into two tranches

 

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of $26.0 million each) to partially finance the acquisition costs of two product tanker vessels. Each tranche of the facility is repayable in 24 equal quarterly installments of $0.45 each with a final balloon payment of $15.2 million to be repaid on the last repayment date. The repayment of each tranche started three months after the delivery date of the respective vessel. It bears interest at a rate of LIBOR plus 275 bps. The loan also requires compliance with certain financial covenants. On December 29, 2011, Navios Acquisition prepaid $2.5 million in relation to an amendment to its credit facility. After the prepayment, the outstanding amount under each tranche is repayable in five quarterly installments of $0.2 million each, 13 equal quarterly installments of $0.45 million each, with a final balloon payment of $15.2 million to be repaid on the last repayment date. On December 31, 2012, Navios Acquisition prepaid $0.5 million in relation to an amendment to its credit facility. After the prepayment, the outstanding amount under each tranche is repayable in two quarterly installments of $0.2 million each, 13 equal quarterly installments of $0.45 million each, with a final balloon payment of $15.2 million to be repaid on the last repayment date. As of December 31, 2013, the facility was fully drawn and $39.4 million was outstanding.

Cyprus Popular Bank Public Co Ltd:    In September 2010, Navios Acquisition (through four subsidiaries) entered into an $80.0 million revolving credit facility with Cyprus Popular Bank Public Co Ltd to partially finance the acquisition and construction of vessels and for investment and working capital purposes. On September 7, 2012, the amount of the facility was reduced to $32.4 million. Drawings under the facility are secured by assignments of construction contracts and guarantees, as well as security interests in related assets. The facility bears interest at a rate of LIBOR plus 275 bps. Pursuant to an agreement dated December 31, 2012, the maturity of the facility was extended to match the delivery of the vessel. The facility was fully repaid in the second quarter of 2013 and no amount was available to be drawn.

Eurobank Ergasias S.A.:    On October 26, 2010, Navios Acquisition entered into a loan agreement with Eurobank Ergasias S.A. of up to $52.2 million, of which $51.6 million is drawn (divided into two tranches of $26.1 million and 25.5 million, respectively) to partially finance the acquisition costs of two LR1 product tanker vessels. Each tranche of the facility is repayable in 32 quarterly installments of $0.35 million and $0.34 million, respectively, with a final balloon payment of $15.1 million and $14.7 million, respectively, to be repaid on the last repayment date. The repayment of each tranche started three months after the delivery date of the respective vessel. The loan bears interest at a rate of LIBOR plus (i) plus 250 bps for the period prior to the delivery date in respect of the vessel being financed, and (ii) thereafter 275 bps. The loan also requires compliance with certain financial covenants. The facility was fully drawn and $46.5 million was outstanding as of December 31, 2013.

Eurobank Ergasias S.A.:    On December 6, 2010, Navios Acquisition entered into a loan agreement with Eurobank Ergasias S.A. of up to $52.0 million out of which $46.2 million has been drawn (divided into two tranches of $23.1 million each) to partially finance the acquisition costs of two LR1 product tanker vessels. Each tranche of the facility is repayable in 32 equal quarterly installments of $0.31 million each with a final balloon payment of $13.3 million, to be repaid on the last repayment date. The repayment of each tranche started three months after the delivery date of the respective vessel. It bears interest at a rate of LIBOR plus 300 bps. The loan also requires compliance with certain financial covenants. The facility was fully drawn and $43.4 million was outstanding as of December 31, 2013.

ABN AMRO BANK N.V.:    On July 8, 2011, Navios Acquisition entered into a loan agreement with ABN AMRO Bank N.V of up to $55.1 million (divided into two equal tranches) to partially finance the purchase price of two MR2 product tanker vessels. The total amount of $54.8 million was drawn under this facility. Each tranche of the facility is repayable in 12 quarterly installments of $0.75 each and 12 quarterly installments of $0.57 million each with a final balloon payment of $11.6 million to be repaid on the last repayment date. The repayment started in October 2011 and it bears interest at a rate of LIBOR plus 325 bps. The loan also requires compliance with certain financial covenants. As of December 31, 2013, $41.3 million was outstanding under this loan agreement ($20.7 million from each of the two tranches) and no further amounts were available to be drawn.

DVB Bank SE:    On December 7, 2011, Navios Acquisition entered into a loan agreement with DVB Bank SE of up to $51.0 million, of which $44.4 million was drawn (divided into two tranches of $22.2 million each) to

 

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partially finance the purchase price of two LR1 product tanker vessels. Each tranche of the facility is repayable in 28 quarterly installments of $0.35 million each with a final balloon payment of $12.4 million to be repaid on the last repayment date. The repayment started three months after the delivery of the respective vessel and it bears interest at a rate of LIBOR plus 270 bps per annum. The loan previously required compliance with certain financial covenants. The facility was fully repaid on November 12, 2013.

NORDDEUTSCHE LANDESBANK GIROZENTRALE:    On December 29, 2011, Navios Acquisition entered into a loan agreement with NORDDEUTSCHE LANDESBANK GIROZENTRALE of up to $28.1 million to partially finance the purchase price of one MR2 product tanker vessel. The facility is repayable in 32 quarterly installments of $0.39 million each with a final balloon payment of $15.6 million to be repaid on the last repayment date. The repayment starts three months after the delivery of the vessel and it bears interest at a rate of LIBOR plus: (a) up to but not including the Drawdown Date of, 175 bps per annum; (b) thereafter until, but not including, the tenth Repayment Date, 250 bps per annum; and (c) thereafter 300 bps per annum. The loan also requires compliance with certain financial covenants. As of December 31, 2013, $25.0 million was drawn and outstanding under this loan agreement and $3.2 million remained to be drawn.

DVB Bank SE and Emporiki Bank of Greece S.A.:    On December 29, 2011, Navios Acquisition entered into a loan agreement with DVB Bank SE and Emporiki Bank of Greece S.A. of up to $56.3 million (divided into two tranches of $28.1 million each) to partially finance the purchase price of two MR2 product tanker vessels. Each tranche of the facility is repayable in 32 quarterly installments of $0.39 million each with a final balloon payment of $15.6 million to be repaid on the last repayment date. The repayment starts three months after the delivery of the respective vessel and it bears interest at a rate of LIBOR plus: (a) up to but not including the Drawdown Date of, 175 bps per annum; (b) thereafter until, but not including, the tenth Repayment Date, 250 bps per annum; and (c) thereafter 300 bps per annum. The loan also requires compliance with certain financial covenants. As of December 31, 2013, $49.9 million was drawn and outstanding under this loan agreement and $6.3 million remained to be drawn.

The Navios Holdings Credit Facility:    Navios Acquisition entered into a $40.0 million credit facility with Navios Holdings and paid $0.4 million as an arrangement fee. The $40.0 million facility has a margin of LIBOR plus 300 bps and pursuant to an agreement dated November 8, 2011, the Navios Holdings’ credit facility was extended to December 2014. Pursuant to an amendment in October 2010, the facility will be available for multiple drawings up to a limit of $40.0 million. As of December 31, 2013, there was no amounts outstanding amount under this facility and $40.0 million remained to be drawn.

Deutsche Bank Ag Filiale Deutschlandgeschäft:    On July 9, 2013, Navios Acquisition entered into a loan agreement, with Deutsche Bank Ag Filiale Deutschlandgeschäft of up to $48.5 million (divided in three tranches of up to $13.9 million, $13.9 million and $20.6 million each), to partially finance the acquisition of three product tankers. The two tranches of the facility are repayable in 19 quarterly installments of $0.35 million and $0.39 million, respectively, with a final balloon payment of $7.3 million and $6.6 million, respectively, to be repaid on the last repayment date. The third tranche of the facility is repayable in one installment of $0.08 million, 18 installments of $0.34 million, with a final balloon installment of $14.3 million, to be repaid on the last repayment date. The facility bears interest at a rate of LIBOR plus 325 bps. The loan also requires compliance with certain financial covenants. As of December 31, 2013, the facility was fully drawn and $47.7 million was outstanding.

HSH Nordbank AG:    On August 20, 2013, Navios Acquisition entered into a loan agreement with HSH Nordbank AG of up to $40.3 million (divided in two tranches of $20.2 million each), to partially finance the acquisition of two chemical tanker vessels. Each tranche of the facility is repayable in 28 quarterly installments of $0.32 million with a final balloon payment of $11.3 million to be paid on the last repayment date. The facility bears interest at a rate of LIBOR plus 320 bps. The loan also requires compliance with certain financial covenants. As of December 31, 2013, the facility was fully drawn and $39.7 million was outstanding.

As of December 31, 2013, the total amount available to be drawn from all our facilities was $49.5 million.

 

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HSH Nordbank AG:    On February 6, 2014, Navios Acquisition entered into a loan agreement of $51.0 million (divided in two tranches of $25.5 million each). The facility bears interest at a margin of LIBOR plus 310 bps. Each tranche of the facility is repayable in 28 consecutive quarterly equal repayment installments of $0.4 million each with a final balloon payment of $14.3 million to be repaid on the last repayment date. The repayment starts in May 2014. As of March 14, 2014 the amount of $51.0 million was fully drawn.

The loan facilities include, among other things, compliance with loan to value ratios and certain financial covenants: (i) minimum liquidity higher of $40.0 million or $1.0 million per vessel, including vessels under construction; (ii) net worth ranging from $50.0 million to $75.0 million up to January 2013 and up to $135.0 million thereafter; and (iii) total liabilities divided by total assets, adjusted for market values to be lower than 75%, as of January 1, 2014 and thereafter. It is an event of default under the credit facilities if such covenants are not complied with, including the loan to value ratios for which the Company may provide sufficient additional security to prevent such an event.

As of December 31, 2013, the Company was in compliance with its covenants.

Amounts drawn under the facilities are secured by first preferred mortgages on Navios Acquisition’s vessels and other collateral and are guaranteed by each vessel-owning subsidiary. The credit facilities contain a number of restrictive covenants that prohibit or limit Navios Acquisition from, among other things: incurring or guaranteeing indebtedness; entering into affiliate transactions; changing the flag, class, management or ownership of Navios Acquisition’s vessels; changing the commercial and technical management of Navios Acquisition’s vessels; selling Navios Acquisition’s vessels; and subordinating the obligations under each credit facility to any general and administrative costs relating to the vessels, including the fixed daily fee payable under the management agreement. The credit facilities also require Navios Acquisition to comply with the ISM Code and ISPS Code and to maintain valid safety management certificates and documents of compliance at all times.

 

C. Research and development, patents and licenses, etc.

Not applicable.

 

D. Trend information

Our results of operations depend primarily on the charter hire rates that we are able to realize for our vessels, which depend on the demand and supply dynamics characterizing the tanker market at any given time. For other trends affecting our business please see other discussions in “Item 5-Operating and Financial Review and Prospects”.

 

E. Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

F. Contractual Obligations and Contingencies

The following table summarizes our long-term contractual obligations as of December 31, 2013:

 

     Payments due by period  
(In thousands of U.S. dollars)    Less than
1 year
     1-3 years      3-5 years      More than
5 years
     Total  

Long term debt obligations(1)

   $ 34,714       $ 113,145       $ 155,762       $ 850,827       $ 1,154,448   

Vessel deposits(2),(3)

     258,540         44,310                       302,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 293,254       $ 157,455       $ 155,762       $ 850,827       $ 1,457,298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Navios Holdings, Navios Acquisition and Navios Partners will make available to Navios Europe (in each case, in proportion to their ownership interests in Navios Europe) revolving loans up to $24.1 million to fund working capital requirements (collectively, the “Navios Revolving Loans”). See Note 9 for the Investment in Navios Europe and respective ownership interests.

As of December 31, 2013, the amount undrawn from the revolving facility was $18.5 million, of which Navios Acquisition is committed to fund $8.8 million.

 

1. The amount identified does not include interest costs associated with the outstanding credit facilities, which are based on LIBOR, plus the costs of complying with any applicable regulatory requirements and a margin ranging from 1.75% to 3.25% per annum or the $610.0 million Notes which have a fixed rate of 8.125%.

 

2. Future remaining contractual installments for the Navios Acquisition tanker vessels to be delivered on various dates through June 2015.

 

3. As of March 13, 2014, the remaining contractual installments for our tanker vessels to be delivered on various dates through June 2015, were $146.7 million, of which $20.4 million will be paid through cash on hand and $126.3 million will be financed through debt financing, out of which $49.5 million is already committed. (See B. Liquidity and Capital Resources and Uses).

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates in the application of our accounting policies based on the best assumptions, judgments and opinions of management. Following is a discussion of the accounting policies that involve a higher degree of judgment and the methods of their application that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions. For a description of all of our significant accounting policies, see Note 2 to the Notes to Consolidated Financial Statements, included herein.

Fair Value of Vessels:    As of December 31, 2013, Navios Acquisition owned and operated a fleet of 33 vessels, with an aggregate carrying value of $1,394.3 million, including the carrying value of existing time charters on its fleet of vessels. On a vessel-by-vessel basis, as of December 31, 2013, the carrying value of 19 of Navios Acquisition’s vessels (including the carrying value of the time charter, if any, on the specified vessel) exceeds the estimated fair value of those same vessels (including the estimated fair value of the time charter, if any, on the specified vessel) by approximately $104.2 million in aggregate (the unrealized loss).

As of December 31, 2012, Navios Acquisition owned and operated a fleet of 19 vessels, with an aggregate carrying value of $995.4 million, including the carrying value of existing time charters on its fleet of vessels. On a vessel-by-vessel basis, as of December 31, 2012, the carrying value of 18 of Navios Acquisition’s vessels (including the carrying value of the time charter, if any, on the specified vessel) exceeds the estimated fair value of those same vessels (including the estimated fair value of the time charter, if any, on the specified vessel) by approximately $142.8 million in aggregate (the unrealized loss).

 

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A vessel-by-vessel summary as of December 31, 2013, follows (with an * indicating those individual vessels whose carrying value exceeds its estimated fair value, including the related time charter, if any):

 

Vessel name

   Date of
Acquisition
     Purchase
Price(1)
     Carrying
Value as of
December 31,
2013(1)
 
     (In millions of U.S. dollars)  

Nave Cielo

     6/29/2010       $ 44.2       $ 37.7 *

Nave Ariadne

     7/2/2010       $ 44.1       $ 37.6 *

Nave Cosmos

     7/27/2010       $ 31.8       $ 28.1 *

Shinyo Kannika

     9/10/2010       $ 81.3       $ 65.3 *

Shinyo Kieran

     6/8/2011       $ 139.7       $ 125.5 *

Shinyo Ocean

     9/10/2010       $ 81.7       $ 64.9 *

Shinyo Splendor

     9/10/2010       $ 45.0       $ 30.7 *

C. Dream

     9/10/2010       $ 62.2       $ 52.3 *

Shinyo Saowalak

     9/10/2010       $ 137.6       $ 119.1 *

Nave Polaris

     1/27/2011       $ 31.8       $ 28.3 *

Buddy

     7/12/2011       $ 37.3       $ 33.7 *

Bull

     7/18/2011       $ 37.3       $ 33.7 *

Nave Andromeda

     11/14/2011       $ 44.3       $ 40.9 *

Nave Estella

     1/20/2012       $ 44.6       $ 41.5 *

Nave Atria

     7/31/2012       $ 37.6       $ 35.7   

Nave Cassiopeia

     8/31/2012       $ 43.8       $ 41.8 *

Nave Cetus

     10/31/2012       $ 44.0       $ 42.2 *

Nave Aquila

     11/9/2012       $ 37.8       $ 36.2 *

Nave Bellatrix

     1/24/2013       $ 38.0       $ 36.7   

Nave Orion

     3/22/2013       $ 38.1       $ 37.0   

Nave Rigel

     2/13/2013       $ 47.9       $ 46.4

Nave Atropos

     4/24/2013       $ 48.2       $ 47.0

Nave Titan

     6/10/2013       $ 37.1       $ 36.4   

|Nave Capella

     7/9/2013       $ 37.2       $ 36.5   

Nave Alderamin

     9/3/2013       $ 37.3       $ 36.9   

Nave Universe

     7/22/2013       $ 34.2       $ 33.7   

Nave Constellation

     9/5/2013       $ 34.3       $ 33.9   

Nave Equinox

     6/26/2013       $ 23.5       $ 22.9   

Nave Pulsar

     7/9/2013       $ 23.6       $ 23.1   

Bougainville

     9/30/2013       $ 35.6       $ 35.2   

Nave Dorado

     9/24/2013       $ 16.8       $ 16.6   

Nave Lucida

     10/23/2013       $ 16.8       $ 16.7   

Nave Celeste

     8/12/2013       $ 35.9       $ 40.3   
     

 

 

    

 

 

 
      $ 1,530.6       $ 1,394.5   
     

 

 

    

 

 

 

 

(1) All amounts include related time charter, if any.

 

     Although the aforementioned excess of carrying value over fair value represents an estimate of the loss that Navios Acquisition would sustain on a hypothetical disposition of those vessels as of December 31, 2013, the recognition of the unrealized loss absent a disposition (i.e. as an impairment) would require, among other things, that a triggering event had occurred and that the undiscounted cash flows attributable to the vessel are also less than the carrying value of the vessel (including the carrying value of the time charter, if any, on the specified vessel).

Use of Estimates:    The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

 

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and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates the estimates and judgments, including those related to uncompleted voyages, future drydock dates, the selection of useful lives for tangible assets, expected future cash flows from long-lived assets to support impairment tests, provisions necessary for accounts receivables, provisions for legal disputes, and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions and/or conditions.

Vessels, Net:    Vessels are stated at historical cost, which consists of the contract price, delivery and acquisition expenses and capitalized interest costs while under construction. Vessels acquired in an asset acquisition or in a business combination are recorded at fair value. Subsequent expenditures for major improvements and upgrading are capitalized, provided they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. Expenditures for routine maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight line method over the useful life of the vessels, after considering the estimated residual value. Management estimates the residual values of our tanker vessels based on a scrap value cost of steel times the weight of the ship noted in lightweight ton (LWT). Residual values are periodically reviewed and revised to recognize changes in conditions, new regulations or other reasons. Revisions of residual values affect the depreciable amount of the vessels and affects depreciation expense in the period of the revision and future periods. Up to December 31, 2012, management estimated the residual values of its vessels based on a scrap rate of $285 per LWT. Effective January 1, 2013, following management’s reassessment after considering current market trends for scrap rates and ten-year average historical scrap rates of the residual values of the company’s vessels, the estimated scrape value per LWT was increased to $360 per LWT. This change reduced depreciation expense by $2.7 million for the year ended December 31, 2013 (approximately $0.02 per share).

Management estimates the useful life of our vessels to be 25 years from the vessel’s original construction. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is re-estimated to end at the date such regulations become effective.

Impairment of long-lived Asset Group:    Vessels, other fixed assets and other long lived assets held and used by Navios Acquisition are reviewed periodically for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be fully recoverable. Navios Acquisition’s management evaluates the carrying amounts and periods over which long-lived assets are depreciated to determine if events or changes in circumstances have occurred that would require modification to their carrying values or useful lives. In evaluating useful lives and carrying values of long-lived assets, certain indicators of potential impairment, are reviewed such as undiscounted projected operating cash flows, vessel sales and purchases, business plans and overall market conditions.

Undiscounted projected net operating cash flows are determined for each asset group (consisting of the individual vessel and the intangible with respect to the time charter agreement to that vessel) and compared to the vessel carrying value and related carrying value of the intangible with respect to the time charter agreement attached to that vessel or the carrying value of deposits for new buildings. Within the shipping industry, vessels are customarily bought and sold with a charter attached. The value of the charter may be favorable or unfavorable when comparing the charter rate to then current market rates. The loss recognized either on impairment (or on disposition) will reflect the excess of carrying value over fair value (selling price) for the vessel individual asset group.

During the fourth quarter of fiscal 2013, management concluded that events occurred and circumstances had changed, which indicated the potential impairment of Navios Acquisition’s long-lived assets may exist. These indicators included the volatility in the charter market and related impact that the current tanker sector has on

 

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management’s expectation for future revenues. As a result, an impairment assessment of long-lived assets was performed.

The Company determined undiscounted projected net operating cash flows for each vessel and deposits for buildings and compared it to the vessel’s carrying value together with the carrying value of the related intangible. The significant factors and assumptions used in the undiscounted projected net operating cash flow analysis included: determining the projected net operating cash flows by considering the charter revenues from existing time charters for the fixed fleet days (Company’s remaining charter agreement rates) and an estimated daily time charter equivalent for the unfixed days (based on a combination of the Company’s remaining charter agreement rates and the 10-year average historical one year time charter rates) over the remaining economic life of each vessel, net of brokerage and address commissions, excluding days of scheduled off-hires, management fees fixed until May 2014 and thereafter assuming an annual increase of 3.0% and utilization rate of 98.6% based on the fleets historical performance.

In connection with its annual impairment testing on its vessels as of December 31, 2013, the Company performs sensitivity analysis on the most sensitive and/or subjective assumptions that have the potential to affect the outcome of the test, principally the projected charter rate used to forecast future cash flow for unfixed days. In that regard, there would continue to be no impairment required to be recognized on any of the Company’s vessels when assuming a decline in the 10-year average (of the one-year charter rate for similar vessels), which is the rate that the Company uses to forecast future cash flow for unfixed days, ranging from 28% to 86% (depending on the vessel).

For the deposits for new build vessels, the net cash flows also included the future cash out flows to make vessel ready for use, all remaining progress payments to shipyards and other pre-delivery expenses (e.g. capitalized interest). Accordingly, no impairment charge was recorded.

The assessment concluded that step two of the impairment analysis was not required and no impairment of vessels and the intangible assets existed as of December 31, 2013, as the undiscounted projected net operating cash flows exceeded the carrying value.

In the event that impairment would occur, the fair value of the related asset would be determined and a charge would be recorded to operations calculated by comparing the asset’s carrying value to its fair value. Fair value is estimated primarily through the use of third-party valuations performed on an individual vessel basis.

Although management believes the underlying assumptions supporting this assessment are reasonable, if charter rate trends and the length of the current market downturn, vary significantly from our forecasts, management may be required to perform step two of the impairment analysis in the future that could expose Navios Acquisition to material impairment charges in the future.

No impairment loss was recognized for any of the periods presented.

Revenue Recognition:    Revenue is recorded when services are rendered, under a signed charter agreement or other evidence of an arrangement, the price is fixed or determinable, and collection is reasonably assured. Revenue is generated from the voyage charter and the time charter of vessels.

Voyage revenues for the transportation of cargo are recognized ratably over the estimated relative transit time of each voyage. A voyage is deemed to commence when a vessel is available for loading and is deemed to end upon the completion of the discharge of the current cargo. Estimated losses on voyages are provided for in full at the time such losses on voyages are provided for in full at the time such losses become evident. Under a voyage charter, a vessel is provided for the transportation of specific goods between specific ports in return for payment of an agreed upon freight per ton of cargo.

Revenues from time chartering of vessels are accounted for as operating leases and are thus recognized on a straight-line basis as the average revenue over the rental periods of such charter agreements, as service is

 

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performed. A time charter involves placing a vessel at the charterers’ disposal for a period of time during which the charterer uses the vessel in return for the payment of a specified daily hire rate. Under time charters, operating costs such as for crews, maintenance and insurance are typically paid by the owner of the vessel.

Profit-sharing revenues are calculated at an agreed percentage of the excess of the charterer’s average daily income (calculated on a quarterly or half-yearly basis) over an agreed amount and accounted for on an accrual basis based on provisional amounts and for those contracts that provisional accruals cannot be made due to the nature of the profit share elements, these are accounted for on the actual cash settlement.

Revenues are recorded net of address commissions. Address commissions represent a discount provided directly to the charterers based on a fixed percentage of the agreed upon charter or freight rate. Since address commissions represent a discount (sales incentive) on services rendered by the Company and no identifiable benefit is received in exchange for the consideration provided to the charterer, these commissions are presented as a reduction of revenue.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

Set forth below are the names, ages and positions of Navios Acquisition’s directors, executive officers and key employees.

 

Name

   Age     

Position

Angeliki Frangou

     49       Chairman, Chief Executive Officer and Director

Ted C. Petrone

     58       President and Director

Nikolaos Veraros, CFA

     43       Director

John Koilalous

     83       Director

Leonidas Korres

     38       Chief Financial Officer

Brigitte Noury

     67       Director

Anna Kalathakis

     44       Director, Senior Vice President — Legal Risk Management

George Galatis

     51       Director

Vasiliki Papaefthymiou

     45       Secretary

Angeliki Frangou has been our Chairman and Chief Executive Officer since our inception. Ms. Frangou has also been Chairman and CEO of Navios Maritime Holdings Inc. (NYSE: NM) — our sponsor — since August 2005. In addition, Ms. Frangou has been the Chairman and Chief Executive Officer of Navios Maritime Partners L.P. (NYSE: NMM), an affiliated limited partnership, since August 2007. Ms. Frangou has been the Chairman of the Board of Directors of Navios South American Logistics Inc. since its inception in December 2007. Previously, Ms. Frangou served as Chairman, Chief Executive Officer and President of International Shipping Enterprises Inc., which acquired Navios Holdings. From 1990 until August 2005, Ms. Frangou was the Chief Executive Officer of Maritime Enterprises Management S.A. and its predecessor company, which specialized in the management of dry cargo vessels. Ms. Frangou is the Chairman of IRF European Finance Investments Ltd., listed on the SFM of the London Stock Exchange. From September 2012 to June 2013, Ms. Frangou served as a Board member of Eurobank Ergasias S.A. Ms. Frangou is Member of the Board of the United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited, Vice Chairman of China Classification Society Mediterranean Committee, a member of the International General Committee and of the Hellenic and Black Sea Committee of Bureau Veritas, as well as a member of Greek Committee of Nippon Kaiji Kyokai. Since July 2013, Ms. Frangou has been a Member of the Board of Visitors of the Columbia University School of Engineering and Applied Science. Ms. Frangou received a bachelor’s degree in mechanical engineering, summa cum laude, from Fairleigh Dickinson University and a master’s degree in mechanical engineering from Columbia University.

 

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Ted C. Petrone has been our President and a member of our Board of Directors since March 2008. He has also been a director of Navios Holdings since May 2007, and has served as President of Navios Corporation since in September 2006. He heads Navios Holdings’ worldwide commercial operations. Mr. Petrone has served in the maritime industry for 36 years, 33 of which he has spent with Navios Holdings. After joining Navios Holdings as an assistant vessel operator, Mr. Petrone worked there in various operational and commercial positions. For the last 15 years, Mr. Petrone has been responsible for all the aspects of the daily commercial activity, encompassing the trading of tonnage, derivative hedge positions and cargoes. Mr. Petrone graduated from New York Maritime College at Fort Schuyler with a bachelor in science degree in maritime transportation. He has also served aboard U.S. Navy (Military Sealift Command) tankers.

Nikolaos Veraros, CFA, has been a member of our Board of Directors since June 2008. Mr. Veraros has over 15 years of experience in shipping finance and currently serves as a financial consultant to various shipping companies. He has also worked as a senior equity analyst for National Securities, S.A., a subsidiary of National Bank of Greece. He is a Chartered Financial Analyst (CFA), a Certified Market Maker for Derivatives in the Athens Stock Exchange, and a Certified Analyst from the Hellenic Capital Market Commission. Mr. Veraros received his bachelor of science degree in business administration from the Athens University of Economics and Business, from which he graduated as valedictorian, and his master of business administration degree in finance and accounting from the William E. Simon Graduate School of Business Administration at the University of Rochester. Mr. Veraros is also the Chairman of our Audit Committee and is an independent director.

John Koilalous has been a member of our Board of Directors since June 2008. Mr. Koilalous began his career in the shipping industry in the City of London in 1949, having worked for various firms both in London and Piraeus. He entered the adjusting profession in 1969, having worked for Francis and Arnold, a maritime insurance adjusting firm, for 18 years and then with Pegasus Adjusting Services Ltd., of which he was the founder and, until his retirement at the end of 2008, the Managing Director. He still remains active in an advisory capacity on matters of marine insurance claims. Mr. Koilalous is also a member of our Audit Committee and is an independent director.

Leonidas Korres has been our Chief Financial Officer since April 2010, and previously our Senior Vice President for Business Development from January 2010. Mr. Korres served as the Special Secretary for Public Private Partnerships in the Ministry of Economy and Finance of the Hellenic Republic from October 2005 until November 2009. Prior to that, from April 2004 to October 2005, Mr. Korres served as Special Financial Advisor to the Minister of Economy and Finance of the Hellenic Republic and as liquidator of the Organizational Committee for the Olympic Games Athens 2004 S.A. From 2001 to 2004, Mr. Korres worked as a senior financial advisor for KPMG Corporate Finance. From October 2007 until January 2010, Mr. Korres was a member of the board of directors of Navios Partners. From May 2003 to December 2006, Mr. Korres was Chairman of the Center for Employment and Entrepreneurship, a non-profit company. From June 2008 until February 2009, Mr. Korres served as a board member and audit committee member of Hellenic Telecommunications Organization S.A. (trading on the Athens and New York Stock Exchanges). From June 2004 until November 2009, Mr. Korres served on the board of Hellenic Olympic Properties S.A., which was responsible for operating the Olympic venues. Mr. Korres earned his bachelor’s degree in economics from the Athens University of Economics and Business and his master’s degree in finance from the University of London.

Brigitte Noury has been a member of our Board of Directors since May 2010. Ms. Noury served from March 2002 until December 2009 as Director of Corporate & Investment Banking Asset & Recovery Management — Europe for Societe Generale. She also served from June 1989 until February 2002 as Head of Shipping at Societe Generale. In addition, she served as Vice President — Shipping at Banque Indosuez from 1987 to 1989. Before that Ms. Noury served as Financial Controller at Banque Internationale pour l’Afrique Occidentale (later acquired by BNP Paribas). Ms. Noury received a master of economic sciences degree and a diploma in business administration from the University of Dijon. Ms. Noury is also a member of our Audit Committee and Nominating Committee and is an independent director.

 

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Anna Kalathakis has been a member of our Board of Directors and Senior Vice President — Legal Risk Management since May 2010. Ms. Kalathakis has been Chief Legal Risk Officer from November 2012, and Senior Vice President — Legal Risk Management of Navios Holdings from December 2005 until October 2012. Before joining Navios Holdings, Ms. Kalathakis was the General Manager of the Greek office of A Bilbrough & Co. Ltd. (Managers of the London Steam-Ship Owners’ Mutual Insurance Association Limited, the “London P&I Club”) and an Associate Director of the London P&I Club where she gained experience in the handling of liability and contractual disputes in both the dry and tanker shipping sectors (including collisions, oil pollution incidents, groundings, etc.). She previously worked for a U.S. maritime law firm in New Orleans, having qualified as a lawyer in Louisiana in 1995, and also served in a similar capacity for a London maritime law firm. She qualified as a solicitor in England and Wales in 1999 and was admitted to the Piraeus Bar in Greece, in 2003. She received a bachelor’s degree International Relations from Georgetown University and holds a master of business administration degree from European University in Brussels and a juris doctor degree from Tulane Law School.

George Galatis has served as a member of our Board of Directors since July 2010. He is currently the Executive Vice President — Product Development at Demo Pharmaceutical Industry having served as a Senior Vice President — Project Development since 1999. Mr Galatis also served as a technical manager in Pharmaceutical Industry Projects at Telos Consulting Ltd. of London from 1994 to 1999. Previously, Mr. Galatis served as an engineer, technical manager and product manager at various shipping companies in the United States and the U.K. Mr. Galatis is a mechanical engineer and holds a bachelor’s degree in mechanical engineering and master’s degree in robotics from the University of Newcastle upon Tyne. Mr. Galatis is also a member of our Nominating Committee and is an independent director.

Vasiliki Papaefthymiou has been our Secretary since our inception. Ms. Papaefthymiou has also served as Executive Vice President — Legal and a member of Navios Holdings’ Board of Directors since August 25, 2005, and prior to that was a member of the Board of Directors of ISE. Ms. Papaefthymiou has also served as General Counsel for Maritime Enterprises Management S.A. since October 2001, where she has advised the company on shipping, corporate and finance legal matters. Ms. Papaefthymiou provided similar services as General Counsel to Franser Shipping from October 1991 to September 2001. Ms. Papaefthymiou received her undergraduate degree from the Law School of the University of Athens and a master’s degree in maritime law from Southampton University in the United Kingdom. Ms. Papaefthymiou is admitted to practice law before the Bar in Piraeus, Greece.

 

B. Compensation

Compensation

Our independent directors are entitled to receive $50,000 in cash per year, from the respective start of their service on our board of directors. Ms. Frangou receives a fee of $150,000 per year for acting as a director and as our Chairman of the Board. No other executive officer has received any cash compensation for services rendered.

In October 2013, Navios Acquisition authorized and issued in the aggregate 2,100,000 restricted shares of common stock and options to purchase 1,500,000 shares of common stock having an exercise price of $3.91 per share, to its directors and/or officers. These awards of restricted common stock and stock options are based on service conditions only and vest over three years.

For the year ended December 31, 2013, aggregate annual compensation paid to our current non-management executive directors was $0.2 million; and $0.15 million was paid to Ms. Frangou for acting as a director and as our Chairman of the Board.

For the year ended December 31, 2012, aggregate annual compensation paid to our current non-management executive directors was $0.2 million; and $0.15 million was paid to Ms. Frangou for acting as a director and as our Chairman of the Board.

 

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C. Board Practices

Board Classes

Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of John Koilalous, George Galatis and Brigitte Noury, will expire at our 2015 annual meeting of stockholders, as their term was renewed for three years at our 2013 annual meeting. The term of office of the second class of directors, consisting of Ted C. Petrone and Nikolaos Veraros, will expire at our 2016 annual meeting of stockholders. The term of office of the third class of directors, consisting of Angeliki Frangou and Anna Kalathakis, will expire at our 2014 annual meeting.

Director Independence

Our board of directors has determined that Messrs. Veraros, Koilalous, Galatis and Ms. Noury are “independent directors” as defined in the New York Stock Exchange listing standards and Rule 10A-3 of the Exchange Act. We will always seek to have a board of directors comprising of a majority of independent directors.

Board committees

Our board of directors has an audit committee, a nominating committee and a compensation committee. Our board of directors has adopted a charter for the audit committee as well as a code of conduct and ethics that governs the conduct of our directors and officers.

Audit committee

Our audit committee consists of Messrs. Veraros, Koilalous and Ms. Noury. Each member of our audit committee is financially literate under the current listing standards of the New York Stock Exchange, and our board of directors has determined that Mr. Veraros qualifies as an “audit committee financial expert,” as such term is defined by SEC rules.

The audit committee reviews the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee also selects our independent registered public accounting firm, reviews and approves the scope of the annual audit, reviews and evaluates with the independent public accounting firm our annual audit and annual consolidated financial statements, reviews with management the status of internal accounting controls, evaluates problem areas having a potential financial impact on us that may be brought to the committee’s attention by management, the independent registered public accounting firm or the board of directors, and evaluates all of our public financial reporting documents.

Any expense reimbursements payable to members of our audit committee are reviewed and approved by our board of directors, with the interested director or directors abstaining from such review and approval.

Nominating committee

A nominating committee of the board of directors has been established, which consists of Messrs. Veraros, Koilalous, Galatis, and Ms. Noury, each of whom is an independent director. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee considers persons identified by its members, management, stockholders, investment bankers and others.

 

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Compensation committee

The board of directors has established a compensation committee of three independent directors, Messrs. Nikolaos Veraros, who serves as Chairman, George Galatis and John Koilalous. The compensation committee is governed by a written charter, which was approved by the board of directors. The compensation committee is responsible for reviewing and approving the compensation of the Company’s executive officers, for establishing, reviewing and evaluating, in consultation with senior management, the long-term strategy of employee compensation and approving any material change to existing compensation plans.

Code of conduct and ethics

We have adopted a code of conduct and ethics applicable to our directors and officers in accordance with applicable federal securities laws and the rules of the New York Stock Exchange.

Conflicts of Interest

Stockholders and potential investors should be aware of the following potential conflicts of interest:

 

   

None of our officers and directors is required to commit their full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among various business activities, including those related to Navios Holdings and Navios Partners.

 

   

Each of our directors has, or may come to have other fiduciary obligations. Angeliki Frangou, our Chairman and Chief Executive Officer, is the Chairman and Chief Executive Officer of Navios Holdings and Navios Partners. In addition, Ms. Frangou is the Chairman of the board of directors of IRF European Finance Investments, Ltd. Ted C. Petrone, our president and a member of our board of directors, is the president of Navios Corporation, a subsidiary of Navios Holdings, and a director of Navios Holdings. Mr. Veraros is a senior analyst at Investments & Finance, Ltd., an investment banking firm specializing in the shipping industry. Mr. Koilalous is the founder and managing director of Pegasus Adjusting Services, Ltd., an adjusting firm in the shipping industry. Ms. Kalathakis is Chief Legal Risk Officer of Navios Holdings.

 

   

We have entered a Management Agreement, expiring May 28, 2015, with a subsidiary of Navios Holdings, pursuant to which such subsidiary provides certain commercial and technical ship management services for a fixed daily fee of $6,000 per owned MR2 product tanker and chemical tanker vessel, $7,000 per owned LR1 product tanker vessel and $10,000 per owned VLCC tanker vessel for the first four years of the term of that agreement.

 

   

We entered into an Administrative Services Agreement with Navios Holdings, expiring on May 28, 2015, pursuant to which a subsidiary of Navios Holdings provides certain administrative management services to Navios Acquisition which include: bookkeeping, audit and accounting services, legal and insurance services, administrative and clerical services, banking and financial services, advisory services, client and investor relations and other. Navios Holdings is reimbursed for reasonable costs and expenses incurred in connection with the provision of these services.

 

   

We have not adopted a policy that expressly prohibits our directors, officers, security holders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such parties may have an interest in certain transactions in which we are involved, and may also compete with us.

We cannot assure you that any of the above mentioned conflicts will be resolved in our favor.

 

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Navios Holdings has a significant ownership interest. As a result of Navios Holdings’ significant ownership stake in us and our common management, there are certain potential conflicts of interest, including potential competition as to acquisition targets and, after an acquisition has been consummated, potential competition and business relationships with each other.

All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including Navios Holdings, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties, and such transactions will require prior approval, in each instance, by a unanimous vote of our disinterested “independent” directors or the members of our board who do not have an interest in the transaction.

Please see “Item 7.-Major Stockholders and Related Party Transactions.”

Facilities

We do not own any real estate or other physical property. We have offices at 7 Avenue de Grande Bretagne, Office 11B2, Monte Carlo, MC 98000 Monaco.

 

D. Employees

Employees of Navios Holdings and its subsidiaries provide assistance to us and our operating subsidiaries pursuant to the management agreement and the administrative services agreement; therefore Navios Acquisition does not employ additional staff.

The Manager crews its vessels primarily with Greek, Filipino, Romanian, Russian and Ukranian officers and Filipino seamen. The Manager is responsible for selecting its Greek officers. For other nationalities, officers and seamen are referred to us by local crewing agencies. Navios Acquisition requires that all of its seamen have the qualifications and licenses required to comply with international regulations and shipping conventions.

Navios Holdings also provides on-shore advisory, operational and administrative support to us pursuant to service agreements. Please see “Item 7.-Major Stockholders and Related Party Transactions.”

 

E. Share Ownership

The following table sets forth certain information regarding beneficial ownership, based on 151,664,942 shares of common stock outstanding as of March 14, 2014, of our common stock held by Navios Holdings, each of our officers and directors and by all of our directors and officers as a group. The information is not necessarily indicative of beneficial ownership for any other purposes.

Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

 

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