UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
| Filed by the Registrant | x |
| Filed by a Party other than the Registrant | o |
Check the appropriate box:
| x | Preliminary Proxy Statement |
| o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| o | Definitive Proxy Statement |
| o | Definitive Additional Materials |
| o | Soliciting Material Pursuant to §240.14a-12 |
ENERGY INFRASTRUCTURE ACQUISITION CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| x | No fee required. |
| o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| o | Fee paid previously with preliminary materials. |
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
$19,625
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
ENERGY INFRASTRUCTURE ACQUISITION CORP.
| (4) | Date Filed: |
2/12/2008
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED JULY 14, 2008
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
OF ENERGY INFRASTRUCTURE ACQUISITION CORP.
AND PROSPECTUS FOR 41,721,747 SHARES OF COMMON STOCK AND 22,750,398 WARRANTS
OF ENERGY INFRASTRUCTURE MERGER CORPORATION
Joint Proxy Statement/Prospectus dated , 2008
and first mailed to stockholders on or about , 2008
Dear Energy Infrastructure Stockholders:
You are cordially invited to attend a special meeting of stockholders, or the Special Meeting, of Energy Infrastructure Acquisition Corp., a Delaware corporation, or Energy Infrastructure, to be held at 10:00 a.m. Eastern standard time, on July 17, 2008, at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York. At the meeting, you will be asked to consider proposals to approve the (i) redomiciliation of Energy Infrastructure as a Marshall Islands company through a merger with and into its wholly-owned Marshall Islands subsidiary, Energy Infrastructure Merger Corporation, or Energy Merger, in which Energy Merger will be the surviving corporation, which we refer to as the Redomiciliation Merger, (ii) acquisition by Energy Merger of all the outstanding shares of nine companies from Vanship Holdings Limited, or Vanship, a global shipping company carrying on business from Hong Kong, which we refer to as the Business Combination and (iii) the Dissolution and Plan of Liquidation of Energy Infrastructure, as contemplated by Energy Infrastructure’s certificate of incorporation, in the event Energy Infrastructure is not able to complete the Business Combination or the Redomiciliation Merger within the required time period for it to do so. Upon dissolution, Energy Infrastructure will, pursuant to a Plan of Liquidation, discharge its liabilities, wind up its affairs and distribute to its stockholders who own shares of Energy Infrastructure’s common stock issued as part of the units sold in Energy Infrastructure’s initial public offering, who we refer to as the “public stockholders,” their respective pro rata portion of the trust account in which the net proceeds of Energy Infrastructure's initial public offering were deposited (the “Trust Account”), as contemplated by Energy Infrastructure’s certificate of incorporation and Energy Infrastructure’s initial public offering prospectus.
On December 3, 2007, Energy Infrastructure, Energy Merger and Vanship entered into a Share Purchase Agreement, as subsequently amended and restated, which we refer to as the Share Purchase Agreement, pursuant to which Energy Merger will purchase all of the outstanding shares of each of nine special purpose vehicles, or SPVs, each of which owns one very large crude carrier, or VLCC, from Vanship in exchange for an aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger. In addition to such purchase price, Energy Merger will be obligated to effect the transfer of 425,000 warrants of Energy Merger from one of Energy Infrastructure's initial stockholders to Vanship upon completion of the Business Combination and Vanship may receive an additional 3,000,000 shares of Energy Merger common stock following each of the first and second anniversaries of the Business Combination (6,000,000 shares in the aggregate), subject to certain annual earning criteria of the vessels in Energy Merger's initial fleet, all as more particularly described in the joint proxy statement/prospectus. Energy Infrastructure and Energy Merger have entered into an Agreement and Plan of Merger, which we refer to as the Merger Agreement, pursuant to which Energy Infrastructure will merge with and into Energy Merger immediately prior to completion of the Business Combination. Energy Merger expects to change its name to Van Asia Tankers Corporation immediately prior to the Redomiciliation Merger. Energy Infrastructure's common stock and warrants are listed on the American Stock Exchange under the symbols EII and EII.WS, respectively. On June 13, 2008, the closing price of Energy Infrastructure’s common stock and warrants was $10.16 and $0.37, respectively. Energy Infrastructure expects the Energy Merger securities to be listed on the American Stock Exchange after the Business Combination. There is currently no market for Energy Merger’s securities.
The selling stockholders are offering for sale 14,500,000 shares. We will not receive any proceeds from the sale of the shares by the selling stockholders.
Enclosed is a notice of Special Meeting and joint proxy statement/prospectus containing detailed information concerning the Business Combination, the other proposals and the Special Meeting. Whether or not you plan to attend the Special Meeting, we urge you to read this material carefully and vote your shares. In particular, you should review the matters discussed under the caption “RISK FACTORS” beginning on page 39 .
THIS MEETING IS PARTICULARLY SIGNIFICANT IN THAT, IN THE EVENT THE REDOMICILIATION MERGER OR THE BUSINESS COMBINATION IS NOT APPROVED, STOCKHOLDERS MUST APPROVE ENERGY INFRASTRUCTURE'S DISSOLUTION AND LIQUIDATION IN ORDER FOR ENERGY INFRASTRUCTURE TO BE AUTHORIZED TO DISTRIBUTE THE PROCEEDS HELD IN THE TRUST ACCOUNT TO ITS PUBLIC STOCKHOLDERS. IT IS IMPORTANT THAT YOU VOTE YOUR SHARES AT THIS SPECIAL MEETING.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in the merger or otherwise, or passed upon the adequacy or accuracy of this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.
Andreas Theotokis
Chairman of the Board of Directors of Energy Infrastructure
Acquisition Corp.
Wilmington, Delaware
, 2008
ENERGY INFRASTRUCTURE ACQUISITION CORP.
Suite 1300, 1105 North Market Street
Wilmington, Delaware 19899
NOTICE OF SPECIAL MEETING OF
ENERGY INFRASTRUCTURE ACQUISITION CORP. STOCKHOLDERS
TO BE HELD ON JULY 17, 2008
To Energy Infrastructure Stockholders:
A Special Meeting of stockholders of Energy Infrastructure Acquisition Corp., a Delaware corporation, or Energy Infrastructure, will be held at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York on July 17, 2008, at 10:00 a.m., for the following purposes:
a. to consider and vote upon a proposal to adopt the Agreement and Plan of Merger, as such may be amended from time to time, by and between Energy Infrastructure and its wholly-owned Marshall Islands subsidiary, Energy Infrastructure Merger Corporation, or Energy Merger, whereby Energy Infrastructure will merge with and into Energy Merger, with Energy Merger as the surviving corporation. We refer to this merger as the “Redomiciliation Merger” and this proposal as the “Redomiciliation Merger Proposal.” As a result of the Redomiciliation Merger: (i) the separate corporate existence of Energy Infrastructure will cease; (ii) each share of Energy Infrastructure common stock, par value $0.0001 per share, will automatically be converted into one share of Energy Merger common stock, par value $0.0001 per share; and (iii) each outstanding warrant of Energy Infrastructure will be automatically assumed by Energy Merger with the same terms and restrictions, except that each will be exercisable for common stock of Energy Merger, all as more particularly described in the joint proxy statement/prospectus;
b. to consider and vote upon a proposal to approve and authorize the acquisition of nine SPVs, each owning one very large crude carrier, or VLCC, by Energy Merger from Vanship Holdings Limited, or Vanship, pursuant to the Share Purchase Agreement, as such may be amended from time to time, for an aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger. In addition to such purchase price, Energy Merger will be obligated to effect the transfer of 425,000 warrants of Energy Merger from one of Energy Infrastructure's initial stockholders to Vanship upon completion of the Business Combination and Vanship may receive an additional 3,000,000 shares of Energy Merger common stock following each of the first and second anniversaries of the Business Combination (6,000,000 shares in the aggregate), subject to certain annual earning criteria of the vessels in Energy Merger's initial fleet, all as more particularly described in the joint proxy statement/prospectus. We refer to this acquisition as the “Business Combination” and this proposal as the “Business Combination Proposal.” The approval of the Business Combination is conditioned upon the approval of the Redomiciliation Merger. Energy Merger cannot complete the Business Combination unless the Redomiciliation Merger is approved and completed; and
c. to approve the Dissolution of Energy Infrastructure and the proposed Plan of Liquidation in, or substantially in, the form of Appendix F to the accompanying proxy statement, in the event Energy Infrastructure has not received the requisite stockholder vote to approve the Business Combination and the Redomiciliation Merger.
Pursuant to Energy Infrastructure's certificate of incorporation, Energy Infrastructure is required to obtain stockholder approval of the proposed Business Combination. The proposed Redomiciliation Merger, which would occur immediately prior to the Business Combination, would result in holders of Energy Infrastructure common stock and warrants automatically holding equivalent securities in Energy Merger. Energy Merger will continue as a reporting company under U.S. securities laws.
Pursuant to Energy Infrastructure's amended and restated certificate of incorporation, Energy Infrastructure is required to obtain stockholder approval of the Business Combination. Energy Infrastructure will not consummate the Redomiciliation Merger unless the Business Combination is also approved. Similarly, the
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Business Combination will not take place if the Redomiciliation Merger is not approved. Each of the Redomiciliation Merger Proposal and Business Combination Proposal will be voted on separately, but both must be approved for the Business Combination to be completed.
The board of directors has fixed the record date as the close of business on June 23, 2008, as the date for determining stockholders entitled to receive notice of and to vote at the Special Meeting and any adjournment or postponement thereof. Only holders of record of Energy Infrastructure common stock on that date are entitled to have their votes counted at the Special Meeting or any adjournment or postponement.
Your vote is important. Please sign, date and return your proxy card as soon as possible to make sure that your shares are represented at the Special Meeting. If you are a stockholder of record, you may also cast your vote in person at the Special Meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank how to vote your shares, or you may cast your vote in person at the Special Meeting by obtaining a proxy from your brokerage firm or bank. With respect to your vote on the Redomiciliation Merger Proposal, your failure to vote or instruct your broker or bank how to vote will have the same effect as voting against the proposal.
After careful consideration of all relevant factors, Energy Infrastructure's board of directors has determined that these proposals are fair to and in the best interest of Energy Infrastructure and its stockholders, and has recommended that you vote or give instruction to vote “ FOR ” adoption of each of them.
By order of the Board of Directors,
Andrea Theotokis
Chairman of the Board of Directors of Energy Infrastructure Acquisition Corp.
Wilmington, Delaware
, 2008
UNTIL [ ], 2008, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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| Appendix A | Second Amended and Restated Share Purchase Agreement, dated as of July 3, 2008, by and among Vanship Holdings Limited, Energy Infrastructure Merger Corporation and Energy Infrastructure Acquisition Corp. |
| Appendix B | Form of Agreement and Plan of Merger by and between Energy Infrastructure Merger Corporation and Energy Infrastructure Acquisition Corp. |
| Appendix C | Fairness Opinion |
| Appendix D | Clarkson Research Services Limited “Desk appraisal” vessel valuations |
| Appendix E | Simpson, Spence & Young, Ltd. “Desk appraisal” valuations |
| Appendix F | Form of Plan of Liquidation |
| Appendix G | Form of Proxy |
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QUESTIONS AND ANSWERS ABOUT THE ENERGY INFRASTRUCTURE SPECIAL MEETING
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Q. What is the purpose of this document? |
A. This document serves as Energy Infrastructure's proxy statement and as the prospectus of Energy Merger. | |
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• As a proxy statement, this document is being provided to Energy Infrastructure stockholders because the Energy Infrastructure board of directors is soliciting their proxies to vote to approve, at a special meeting of stockholders, or the Special Meeting, (i) the acquisition of nine SPVs, each owning one VLCC, by Energy Merger, a wholly-owned Marshall Islands subsidiary of Energy Infrastructure, from Vanship pursuant to a definitive agreement, for an aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger (as well as an additional 3,000,000 shares of common stock of Energy Merger following each of the first and second anniversaries of the completion of the Business Combination, subject to annual certain earning criteria of the vessels in Energy Merger's initial fleet); (ii) the merger of Energy Infrastructure with and into Energy Merger, with Energy Merger as the surviving corporation and (iii) the Dissolution and Plan of Liquidation of Energy Infrastructure, in the event Energy Infrastructure is not able to complete the Business Combination or the Redomiciliation Merger within the required time period for it to do so. As a prospectus, Energy Merger is providing this document to Energy Infrastructure stockholders because Energy Merger is offering its shares of common stock in exchange for shares of Energy Infrastructure common stock and Energy Merger is assuming the outstanding warrants of Energy Infrastructure in the Redomiciliation Merger. The registration statement on Form F-1/F-4 of which this joint proxy statement/prospectus is a part is being filed by Energy Merger to register (i) the shares being offered in exchange for shares of Energy Infrastructure, (ii) the outstanding warrants of Energy Infrastructure that will be assumed by Energy Merger, (iii) the resale of 13,500,000 shares of common stock that Energy Merger will issue to Vanship in respect of the stock consideration portion of the aggregate purchase price of the SPVs, (iv) the resale of 425,000 warrants and the shares of common stock underlying such warrants that will be transferred to Vanship upon completion of the Business Combination, and (v) the resale of an additional 1,000,000 units to be issued to George Sagredos, Energy Infrastructure's Chief Operating Officer, President and director (or any assignee) upon consummation of the Business Combination. |
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Q. What is being voted on? |
A. You are being asked to vote on three proposals: | |
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• the merger of Energy Infrastructure with and into Energy Merger, its wholly-owned Marshall Islands subsidiary, for the purpose of redomiciling Energy Infrastructure to the Marshall Islands as part of the acquisition of the SPVs, and as an effect of such merger, adopt the articles of incorporation of Energy Merger and bylaws, respectively — we call this merger the “Redomiciliation Merger” and this proposal the “Redomiciliation Merger Proposal”; |
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• the acquisition by Energy Merger of all the outstanding shares of nine SPVs owned by Vanship, pursuant to the terms of the Share Purchase Agreement, resulting in each SPV becoming wholly owned by Energy Merger — we call this acquisition the “Business Combination” and this proposal the “Business Combination Proposal; and |
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• the Dissolution of Energy Infrastructure and the proposed Plan of Liquidation in, or substantially in, the form of Appendix F to this proxy statement – we call this proposal the “Dissolution and Plan of Liquidation Proposal”. |
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Q. Why is Energy Infrastructure proposing the transactions? |
A. Energy Infrastructure was formed to acquire, through merger, capital stock exchange, asset acquisition or other similar business combination, a business in the energy or energy-related industries. Energy Infrastructure consummated its initial public offering on July 21, 2006. Together with the over-allotment option, which was exercised by the underwriters on August 31, 2006, the Company sold 20,925,000 units, generating aggregate gross proceeds of $209,250,000. | |
| Energy Infrastructure's proposed transaction pursuant to which it is to acquire all of the issued and outstanding shares of nine SPVs, each owning a VLCC, is intended to be a “business combination” under Energy Infrastructure's certificate of incorporation. Energy Infrastructure must submit the transaction to its stockholders for approval prior to completing a business combination. Energy Infrastructure has negotiated the terms of the Business Combination with Vanship and is now submitting the transaction to its stockholders for their approval. If the Business Combination has not been consummated by July 21, 2008, Energy Infrastructure will as promptly as possible dissolve and liquidate all funds held in the trust account as part of its overall plan of dissolution and liquidation. | ||
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Q. What are the interests of Energy Infrastructure's directors and officers in the transaction? |
A. In considering the recommendation of our board of directors that you vote to approve the Business Combination, you should be aware that certain of our directors and officers have interests in the Business Combination that are different from, or in addition to, yours. These interests include the following: | |
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• Some of our directors and executive officers hold our common stock or have options or warrants to purchase our common stock that we issued in consideration for their services and, as a result, will receive an equivalent number of shares, options, or warrants upon the consummation of the Redomiciliation Merger. |
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• Some of our directors and executive officers hold an aggregate of 6,094,247 shares that were purchased by them prior to our initial public offering, which shares do not have redemption rights and will not participate in liquidating distributions from the trust account in the event the Business Combination is not consummated. |
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• In connection with Energy Infrastructure's initial public offering, each of Energy Infrastructure's initial stockholders (each of whom is a director) has agreed to indemnify Energy Infrastructure based on his respective pro rata beneficial ownership in Energy Infrastructure immediately prior to the initial public offering for debts and obligations to vendors that are owed money by Energy Infrastructure for services rendered or products sold to Energy Infrastructure, but only to the extent necessary to ensure that certain liabilities do not reduce the initial $209,250,000 placed in the Trust Account. The obligations of Energy Infrastructure's initial stockholders to indemnify Energy Infrastructure remain in effect and extend to transaction expenses to be incurred in connection with Energy Infrastructure's seeking to complete the Business Combination. If the Business Combination is consummated, Energy Infrastructure's initial stockholders will not have to perform such obligations. |
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• Marios Pantazopoulos, our Chief Financial Officer and one of our directors will be a director of Van Asia Tankers Corporation following completion of the Business Combination. |
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Q. Why is Energy Infrastructure proposing to redomicile to the Marshall Islands? |
A. Vanship, a non-U.S. company with no substantial connection to the United States, has agreed to accept a substantial portion of the consideration for the sale of the SPVs in the form of stock of the acquiring corporation, provided that such corporation is incorporated outside of the United States. The SPVs have operated almost exclusively outside of the United States throughout their entire history. None of the ships owned by the SPVs are operated under U.S. flag, and these ships operate predominantly outside of U.S. territorial waters. It is expected that the ships will continue to be operated predominantly outside of the United States after the Business Combination. As a result, given the minimal contacts with the United States, Vanship is more comfortable acquiring a controlling interest in a Marshall Islands corporation than in a U.S. corporation, which would be subject to the jurisdiction of U.S. federal, state or local courts. |
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| In addition, Vanship is incorporated outside of the United States, and is aware that most of its competitors are incorporated in jurisdictions outside of the United States, such as the Republic of the Marshall Islands, and operate outside of the United States, and therefore are subject to little or no U.S. income tax. Prior to the proposed transaction, neither Vanship nor any of the SPVs was subject to the U.S. corporate net income tax (although a portion of the money paid to the shipowner by a charterer for the use of a vessel, or charter hire, may have been subject, from time to time, to the U.S. tax on gross U.S. source transportation income). If Vanship received stock in Energy Infrastructure and Energy Infrastructure remained a U.S. corporation, the income from operation of the ships, when distributed to Energy Infrastructure (following the Business Combination), would be subject to U.S. federal income tax at a top marginal rate of 35% at the Energy Infrastructure level, and any dividends from Energy Infrastructure to its non-U.S. stockholders, including Vanship, would additionally be subject to U.S. withholding tax of up to 30%. Vanship indicated that such taxation would be unacceptable to it. | ||
| Other factors also point in favor of redomiciling Energy Infrastructure. After the Business Combination, Energy Merger is expected to continue to be a foreign private issuer under the Securities Exchange Act of 1934, or the Exchange Act, which will reduce the reporting requirements under the Exchange Act and is expected to result in significantly lower costs associated with ongoing financial and reporting compliance than if Energy Merger were a U.S. corporation. | ||
| The relevant considerations are more fully described in “Reasons for the Redomiciliation Merger” under “Background and Reasons for the Business Combination and the Redomiciliation Merger.” |
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Q. Why is Energy Infrastructure proposing Dissolution and Plan of Liquidation? |
A. Energy Infrastructure was incorporated in Delaware on August 11, 2005 as a blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more businesses that support the process of bringing energy, in the form of crude oil, natural and liquefied petroleum gas, and refined and specialized products (such as petrochemicals), from production to final consumption throughout the world. On July 21, 2006, Energy Infrastructure consummated its initial public offering of 20,250,000 units with each unit consisting of one share of its common stock and one warrant. On August 31, 2006 the underwriters of Energy Infrastructure’s initial public offering exercised their over allotment option to purchase an additional 675,000 units, generating an additional $6,750,000 in gross proceeds. This, along with a private placement prior to the closing of the initial public offering, which generated gross proceeds of $8,253,980, resulted in a total of $209,250,000 in net proceeds, including certain deferred offering costs and deferred placement fees being held in the Trust Account. The initial public offering proceeds held in the Trust Account were to be used in connection with a business combination or to be returned to Energy Infrastructure's public stockholders if an initial business combination was not completed within eighteen months from the consummation of the initial public offering, or within twenty four months if a letter of intent, agreement in principle or definitive agreement relating to a business combination was executed by Energy Infrastructure within such eighteen-month period, all as set forth in Energy Infrastructure’s certificate of incorporation. On December 3, 2007, Energy Infrastructure entered into a Share Purchase Agreement, as subsequently amended and restated, pursuant to which Energy Merger is to purchase all of the outstanding shares of each of the SPVs from Vanship in exchange for an aggregate purchase price of $778,000,000, as more fully described in this proxy statement. In the event Energy Infrastructure fails to complete the contemplated business combination within the required time frame, Energy Infrastructure would be required to dissolve and liquidate as provided in its certificate of incorporation. |
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Q.
What vote is required to approve the Business Combination
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A. Under Energy Infrastructure's certificate of incorporation, approval of the Business Combination requires the affirmative vote of the holders of a majority of the shares of common stock voted at the Special Meeting, provided that there is a quorum. As noted above, Energy Infrastructure's initial stockholders have agreed to vote 5,268,849 of their shares, representing approximately 19% of the issued and outstanding shares of common stock, in accordance with the holders of a majority of the public shares voting in person or by proxy at the meeting. In addition, the holders of the 825,398 shares acquired in the private placement consummated immediately prior to Energy Infrastructure's initial public offering, representing approximately 3% of the issued and outstanding shares of common stock, and any shares of common stock issued upon conversion of Energy Infrastructure's convertible loans (if converted), which shares, together with the 825,398 shares acquired in the private placement, represent approximately 4% of the issued and outstanding shares of common stock, have agreed to vote in favor of the Business Combination. Together, the 5,268,849 shares held by Energy Infrastructure’s initial stockholders, the 825,398 shares acquired in the private placement and the shares of common stock issuable upon conversion of Energy Infrastructure’s convertible loans (if converted) represent approximately 23% of the issued and outstanding shares of common stock. If the stockholders approve the Business Combination, we will only have sufficient cash to pay the cash consideration portion of the aggregate purchase price of the vessels if holders of shares purchased in Energy Infrastructure's initial public offering, representing less than 5% of the shares sold in the initial public offering and the private placement, exercise their redemption rights at the time of casting a vote against the Business Combination. Accordingly, if the holders of 5% or more shares purchased in Energy Infrastructure's initial public offering and private placement (which number represents 1,087,520 of the shares of common stock sold in Energy Infrastructure's initial public offering and private placement) vote against the Business Combination and demand that Energy Infrastructure redeem their shares for their pro rata portion of the Trust Account established at the time of the initial public offering (as described below), Energy Infrastructure will not consummate the Business Combination. | |
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Q. What constitutes a quorum? |
A. The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the shares of Energy Infrastructure's common stock outstanding on the record date shall constitute a quorum. A quorum is required for business to be conducted at the Special Meeting. | |
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Q. What vote is required to approve the Redomiciliation Merger Proposal? |
A. Approval of the Redomiciliation Merger Proposal will require the affirmative vote of holders of a majority of the outstanding shares of Energy Infrastructure's common stock. | |
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Q. What vote is required to adopt the proposal to dissolve and approve the Plan of Liquidation? |
A. Approval of the Dissolution and Plan of Liquidation Proposal will require the affirmative vote of holders of a majority of the shares of Energy Infrastructure's common stock represented in person or by proxy and entitled to vote at the Special Meeting. |
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Q. How do the Energy Infrastructure insiders intend to vote their shares? |
A. Energy Infrastructure's initial stockholders have agreed to vote 5,268,849 of their shares in accordance with the holders of a majority of the public shares voting on the Business Combination Proposal in person or by proxy at the meeting. If holders of a majority of the public shares cast at the meeting vote for or against the Business Combination proposal, the initial stockholders will cast the 5,268,849 shares, representing approximately 19% of the issued and outstanding shares of common stock, in the same manner as such majority votes on such proposal. In addition, the holder of the 825,398 shares acquired in the private placement, representing approximately 3% of the issued and outstanding shares of common stock, and any shares of common stock issued upon conversion of the convertible loans, which shares, together with the 825,398 shares acquired in the private placement, represent approximately 4% of the issued and outstanding shares of common stock, have agreed to vote in favor of the Business Combination proposal. The initial stockholders, the holder of the 825,398 shares of common stock acquired in the private placement, and holder of the shares of common stock issuable upon conversion of the convertible loans (if converted), which together represent approximately 23% of the issued and outstanding shares of common stock, have agreed not to demand redemption of any shares owned by them. | |
| The initial holders intend to vote all of their shares in favor of the Redomiciliation Merger Proposal. None of the initial holders or any other directors or officers have purchased any shares of common stock or warrants in the market. By voting these shares for the Redomiciliation Merger Proposal, Energy Infrastructure's initial stockholders will increase the number of shares held by Energy Infrastructure's public stockholders that must be voted against the Redomiciliation Merger Proposal to reject the Redomiciliation Merger Proposal. | ||
| The initial holders intend to vote in favor of the Dissolution and Plan of Liquidation Proposal, in the event the Business Combination Proposal or the Redomiciliation Merger Proposal is not approved. | ||
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Q. Do Energy Infrastructure stockholders have appraisal rights under Delaware law? |
A. Under the General Corporation Law of the State of Delaware, you do not have appraisal rights with respect to your shares. | |
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Q. What happens post-Business Combination to the funds deposited in the Trust Account? |
A. The net proceeds of Energy Infrastructure's initial public offering, plus certain deferred offering costs and deferred placement fees have been deposited into a trust account maintained by Continental Stock Transfer & Trust Company, which we refer to as the Trust Account. Energy Infrastructure stockholders exercising redemption rights will receive $10.00 per share, plus a portion of the interest earned not previously released to Energy Infrastructure (net of taxes payable) out of the Trust Account. The balance of the funds in the Trust Account will be utilized to fund the cash consideration in respect of the acquisition of the nine SPVs. | |
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Q. When do you expect the Business Combination to be completed? |
A. If the Redomiciliation Merger and the Business Combination are approved at the Special Meeting, Energy Infrastructure expects to consummate both transactions promptly thereafter, provided that it has sufficient funds to do so. |
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What will I receive in the
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A. Energy Infrastructure stockholders will receive an equal number of shares of common stock of Energy Merger in exchange for their shares of Energy Infrastructure common stock, and Energy Merger will assume the outstanding Energy Infrastructure warrants, the terms and conditions of which will not change, except that they will become exercisable for shares of Energy Merger common stock. | |
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Q. How will the Redomiciliation Merger be accomplished? |
A. Energy Infrastructure will merge into Energy Merger, Energy Infrastructure's wholly owned subsidiary that is incorporated as a Marshall Islands company. As a result of the Redomiciliation Merger, each currently issued outstanding share of common stock of Energy Infrastructure will automatically convert into one ordinary share of Energy Merger. This procedure will result in your becoming a stockholder in Energy Merger instead of Energy Infrastructure. | |
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Q. Will the Energy Infrastructure stockholders be taxed as a result of the Redomiciliation Merger? |
A. Holders of Energy Infrastructure common stock and warrants generally should not recognize any gain or loss as a result of the Redomiciliation Merger for U.S. federal income tax purposes. We urge you to consult your own tax advisors with regard to your particular tax consequences of the Redomiciliation Merger. | |
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Q. Will Energy Infrastructure be taxed on the Redomiciliation Merger? |
A. Energy Infrastructure will generally recognize gain, but not loss, for U.S. federal income tax purposes as a result of the Redomiciliation Merger equal to the excess, if any, of the fair market value of each Energy Infrastructure asset at the effective time of the Redomiciliation Merger over the adjusted tax basis of such asset. | |
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Q. How much of Energy Infrastructure will its current public stockholders own post-Business Combination and post-Redomiciliation Merger? |
A. After the Business Combination and Redomiciliation Merger, if no Energy Infrastructure stockholders demand that Energy Infrastructure redeem their shares into a pro rata portion of the Trust Account, as a result of the issuance of 13,500,000 shares to Vanship in the Business Combination, the issuance of 1,000,000 units to Energy Infrastructure's President and Chief Operating Officer (or any assignee thereof), the issuance of 5,000,000 units to Vanship in connection with the Business Combination Private Placement and the issuance of 268,500 units upon the conversion of convertible loans aggregating $2,685,000, Vanship will own 39.4% of Energy Merger and the ownership interests of Energy Infrastructure public stockholders will be diluted so that they will only own 44.5% of Energy Merger a reduction from the approximately 77% of Energy Infrastructure's outstanding common stock they currently own. Existing Energy Infrastructure public stockholders could own less than approximately 44.5% if one or more Energy Infrastructure stockholders vote against the Business Combination Proposal and demand redemption of their shares into a pro rata portion of the Trust Account. Also, following the consummation of the Business Combination, there will be outstanding warrants to purchase up to 28,018,898 additional shares of Energy Merger common stock. We have also agreed to issue to Vanship an additional 3,000,000 shares of common stock of Energy Merger following each of the first and second anniversaries of the completion of the Business Combination (6,000,000 shares in the aggregate), subject to certain annual earning criteria of the vessels in Energy Merger's initial fleet. |
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Q. Do Energy Infrastructure stockholders have redemption rights? |
A. If you hold shares of common stock issued in Energy Infrastructure's initial public offering, then you have the right to vote against the Business Combination Proposal and demand that Energy Infrastructure redeem these shares for $10.00 per share, plus a portion of the interest earned not previously released to Energy Infrastructure (net of taxes payable). We sometimes refer to these rights to vote against the Business Combination and demand redemption of the shares as redemption rights. Holders of warrants issued by Energy Infrastructure do not have any redemption rights. | |
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Q. What happens if the Business Combination is not consummated? |
A. If Energy Infrastructure does not acquire the nine SPVs in the Business Combination, Energy Infrastructure will seek to dissolve and liquidate, pursuant to the terms of its certificate of incorporation, and as further described in the Dissolution and Plan of Liquidation Proposal. Energy Infrastructure's certificate of incorporation requires that it be dissolved if it does not consummate an eligible business combination by the later of (i) January 21, 2008 or (ii) July 21, 2008 in the event that either a letter of intent, an agreement in principle or a definitive agreement to complete an eligible business combination was executed but was not consummated by January 21, 2008. Energy Infrastructure entered into a letter of intent relating to a business combination with Vanship on August 31, 2007 and the parties entered into a definitive purchase agreement on December 3, 2007; as a result Energy Infrastructure is allowed an additional six months to complete the Business Combination to avoid liquidation. Under its certificate of incorporation as currently in effect, if Energy Infrastructure does not acquire at least majority control of a target business by July 21, 2008, Energy Infrastructure will be required to dissolve. | |
| In any liquidation, the funds held in the Trust Account, plus a portion of the interest earned not previously released to us (net of taxes payable and the repayment of convertible loans aggregating $2,685,000, if not earlier converted), together with any remaining out-of-trust net assets, will be distributed pro rata to Energy Infrastructure's common stockholders who hold shares issued in Energy Infrastructure's initial public offering. As of March 31, 2008, in the event of liquidation each common stockholder holding shares issued in Energy Infrastructure's initial public offering would have received $10.16 per share. The funds held in the Trust Account may not be distributed except upon our dissolution and, unless and until approval of a plan of dissolution is obtained from Energy Infrastructure's stockholders, the funds held in the Trust Account will not be released. Consequently, holders of a majority of Energy Infrastructure's outstanding stock must approve dissolution in order to receive the funds held in the Trust Account and the funds will not be available for any other corporate purpose. The procedures required for us to liquidate under the General Corporation Law of the State of Delaware may, or a vote against the Dissolution and Plan of Liquidation Proposal will, result in substantial delays in the liquidation of the Trust Account to Energy Infrastructure's public stockholders as part of our plan of dissolution and distribution. See “Risk Factors — Risks Relating to Energy Infrastructure Acquisition Corp.” for risks associated with the dissolution of Energy Infrastructure. |
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Q. How will the liquidation of Energy Infrastructure be accomplished? |
A. In the event the Redomiciliation Merger or the Business Combination is not approved, the liquidation of Energy Infrastructure will be effected pursuant to the terms of the Plan of Liquidation. The Plan of Liquidation provides for the discharge of Energy Infrastructure’s liabilities and the winding up of its affairs, including distribution to the public stockholders of the full purchase price of $10.00 per unit (plus a portion of the interest earned, but net of (i) taxes payable on interest earned, (ii) interest income released to us to fund our working capital, (iii) payment of quarterly interest payments on the convertible loan and repayment of the convertible loan upon the earlier to occur of our dissolution and liquidation or a business combination, if not converted, and (iv) repayment of the term loan, plus accrued interest), plus a pro rata share of any remaining net assets, subject to any valid claims by third parties that are not covered by amounts held in the trust account or the indemnities provided by our directors and officers. Energy Infrastructure’s initial stockholders have waived any interest in any such distribution and will not receive any of it. Stockholder approval of Energy Infrastructure’s dissolution is required by Delaware law, under which Energy Infrastructure is organized. Stockholder approval of the Plan of Liquidation is designed to comply with relevant provisions of U.S. federal income tax laws. The affirmative vote of a majority of Energy Infrastructure’s outstanding common stock will be required to approve the Dissolution and Plan of Liquidation Proposal. Our Board of Directors has unanimously approved Energy Infrastructure’s dissolution, deems it advisable and recommends that you approve the Dissolution and Plan of Liquidation Proposal so that in the event the Redomiciliation Merger Proposal or the Business Combination Proposal is not approved, Energy Infrastructure can commence its dissolution and liquidation without delay. In the event the Redomiciliation Merger Proposal or the Business Combination Proposal is not approved, the Board intends to approve the Plan of Liquidation, as required by Delaware law, immediately following stockholder approval of the Dissolution and Plan of Liquidation Proposal. | |
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Q. Why should I vote for the Dissolution and Plan of Liquidation Proposal? |
A. The Plan of Liquidation provides for the distribution to the public stockholders of the principal and accumulated interest of the Trust Account as contemplated by Energy Infrastructure’s certificate of incorporation, less Energy Infrastructure's debt and other obligations not subject to indemnification by our officers and directors. Stockholder approval of Energy Infrastructure’s dissolution is required by Delaware law, under which Energy Infrastructure is organized, and stockholder approval of the Plan of Liquidation is designed to comply with relevant provisions of U.S. federal income tax laws. In the event the Redomiciliation Merger Proposal or the Business Combination Proposal is not approved and the Dissolution and Plan of Liquidation Proposal is not approved, Energy Infrastructure will not be authorized to dissolve and liquidate, and will not be authorized to distribute the funds held in the Trust Account to the public stockholders. |
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How much do I get if the
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A. As of March 31, 2008, Energy Infrastructure had approximately $217,800,000 held in the Trust Account. If a liquidation were to have occurred on such date, Energy Infrastructure estimates that the amount held in the Trust Account, less approximately $5,139,000 to pay Energy Infrastructure’s debts and obligations not subject to indemnification, would have been distributed to the public stockholders. Thus, Energy Infrastructure estimates that the total amount available for distribution would have been $212,661,000, or approximately $10.16 per share. However, we cannot assure you that the amount actually available for distribution will not be reduced, whether as a result of third party claims or the failure of our officers and directors to satisfy their indemnification obligations. See “Risk Factors”. | |
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Q. What if I do not want to vote for the Dissolution and Plan of Liquidation Proposal? |
A. If you do not want the Dissolution and Plan of Liquidation Proposal to be approved, you must abstain, not vote or vote against it. You should be aware, however, that if the Dissolution and Plan of Liquidation Proposal is not approved, Energy Infrastructure will not be authorized to dissolve and liquidate, and will not be authorized to distribute the funds held in the Trust Account to the public stockholders. Whether or not you vote against it, if the Dissolution and Plan of Liquidation Proposal is approved, all public stockholders will be entitled to share ratably in the liquidation of the Trust Account. | |
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Q. What happens if the Dissolution and Plan of Liquidation Proposal is not approved? |
A. Energy Infrastructure’s certificate of incorporation requires that Energy Infrastructure be dissolved as promptly as practicable after July 21, 2008 if Energy Infrastructure has not consummated a qualified business combination as of such date. If the Redomiciliation Merger or the Business Combination is not approved, no such business combination will be completed by Energy Infrastructure by July 21, 2008. Therefore, if the Redomiciliation Merger or the Business Combination is not approved, it will have to be dissolved as promptly as practicable. If the Dissolution and Plan of Liquidation Proposal is not approved, Energy Infrastructure will not be authorized to dissolve and liquidate, and will not be authorized to distribute the funds held in the Trust Account to the public stockholders. | |
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Q. If the Dissolution and Plan of Liquidation Proposal is approved, what happens next? |
A. Energy Infrastructure will: | |
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file a certificate of dissolution with the Delaware Secretary of State;
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• adopt the Plan of Liquidation by Board action in compliance with Delaware law; |
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• conclude its negotiations with third parties and pay or adequately provide for the payment of its liabilities; |
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• distribute the proceeds of the Trust Account to the public stockholders, less Energy Infrastructure’s debts and obligations not subject to indemnification; and |
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• otherwise effectuate the Plan of Liquidation. |
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Q. If I am not going to attend the Special Meeting in person, should I return my proxy card instead? |
A. Yes. After carefully reading and considering the information in this joint proxy statement/prospectus, please fill out and sign your proxy card. Then return it in the return envelope as soon as possible, so that your shares may be represented at the Special Meeting. A properly executed proxy will be counted for the purpose of determining the existence of a quorum. | |
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Q. If I have redemption rights, how do I exercise them? |
A. If you wish to exercise your redemption rights, you must vote against the Business Combination Proposal and at the same time demand that Energy Infrastructure redeem your shares for cash. If, notwithstanding your vote, the Business Combination is completed, then you will be entitled to receive $10.00 per share, plus a portion of the interest earned not previously released to us (net of taxes payable), but subject to any valid claims by our creditors that are not covered by amounts in the trust account or by indemnities provided by our officers and directors. The actual per share redemption price will be calculated two business days prior to the consummation of the Business Combination. The redemption price would have been $10.24 per share, based on funds in the Trust Account as of March 31, 2008, though no assurance is given as to the actual redemption price, which could be lower than such amount. If you exercise your redemption rights, then you will be exchanging your shares of Energy Infrastructure common stock for cash and will no longer own these shares. You will be entitled to receive cash for these shares only if you continue to hold these shares through the closing of the Business Combination and then tender your stock certificate. If you do not make a demand to exercise your redemption rights at the time you vote against the Business Combination Proposal (or if you do not vote against the Business Combination Proposal), you will lose your redemption rights, and that loss cannot be remedied. | |
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Q. Who will manage Energy Merger after the Redomiciliation Merger and the Business Combination? |
A. Immediately following the Business Combination, the board of directors of Energy Merger shall consist of Captain Charles Arthur Joseph Vanderperre, Mr. Fred Cheng, Mr. Christoph Widmer, Mr. Marios Pantazopoulos, Dr. David Lawson, Mr. Shigeru Matsui, Mr. Mark Pawley and Mr. Rod Teeple and one independent director to be nominated or recommended by Energy Merger’s independent directors. Captain Vanderperre shall serve as Energy Merger's Chairman of the board of directors and Mr. Cheng shall serve as Energy Merger's Chief Executive Officer. Captain Vanderperre and Mr. Cheng are the directors and co-founders of Vanship. Mr. Pantazopoulos currently serves as a director, Chief Financial Officer, Treasurer and Secretary of Energy Infrastructure. | |
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Q. What will happen if I abstain from voting or fail to instruct my broker to vote? |
A. An abstention or the failure to instruct your broker how to vote (also known as a broker non-vote) is not considered a vote cast at the meeting with respect to the Business Combination Proposal and therefore your vote will have no effect on the vote relating to the Business Combination, and you will not be able to redeem your shares. An abstention or a broker non-vote will have the effect of voting against the Redomiciliation Merger Proposal. |
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Q. How do I change my vote? |
A. Send a later-dated, signed proxy card to Energy Infrastructure's secretary no later than _________, 2008, or attend the Special Meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Energy Infrastructure Acquisition Corp, Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899, Attn: Secretary. | |
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Q. If my shares are held in “street name,” will my broker automatically vote them for me? |
A. No. Your broker can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares. Your broker can tell you how to provide these instructions. | |
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Q. Do I need to turn in my old certificates? |
A. No. If you hold your securities in Energy Infrastructure in certificated form, as opposed to holding them through your broker, you do not need to exchange them for certificates issued by Energy Merger. Your current certificates will represent your rights in Energy Merger. You may exchange them by contacting the transfer agent, Continental Stock Transfer & Trust Company, Reorganization Department, and following their requirements for reissuance. If you elect redemption, you will need to deliver your old certificate to Continental Stock Transfer & Trust Company pursuant to instructions that will be provided to you by Energy Merger after completion of the Business Combination. | |
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Q. Who can help answer my questions? |
A. If you have questions, you may write or call Energy Infrastructure Acquisition Corp, at Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899, (302) 656-1771, Attention: Susan Dubb. | |
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Q. When and where will the Special Meeting be held? |
A. The meeting will be held at 10:00 a.m. Eastern standard time on July 17, 2008 at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York. | |
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Q. What other important considerations are there? |
A. You should also be aware that in pursuing the Business Combination, Energy Infrastructure has incurred substantial expenses. Energy Infrastructure currently has limited available funds outside the Trust Account. If for any reason the Business Combination is not consummated, Energy Infrastructure's creditors may seek to satisfy their claims from funds in the Trust Account. This could result in further depletion of the Trust Account, which would reduce a stockholder's portion of the Trust Account upon liquidation. As of March 31, 2008, claims by third parties against Energy Infrastructure amounted to $856,044 and Energy Infrastructure had resources of $280,007 outside the Trust Account to satisfy claims. |
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A. Under the Share Purchase Agreement and subject to its ability to do so under applicable law, Energy Merger has agreed to pay dividends of $1.54 per share to Energy Merger's public stockholders by the end of the first year following the consummation of the Business Combination. Vanship has agreed, and it is a condition to the closing of the Business Combination that Energy Merger insiders shall have agreed, to waive any right to receive dividend payments in the one-year period immediately following the consummation of the Business Combination in order to facilitate the payment of these dividends. The payment of these dividends is subject to a number of risks and Energy Merger may not have sufficient funds in its first year of operations to pay these dividends. See “Risk Factors — Risks Related to Energy Merger's Common Stock — Investors should not rely on an investment in Energy Merger if they require dividend income. It is not certain that Energy Merger will pay a dividend and the return on an investment in Energy Merger, if any, may come solely from the appreciation of its common stock, which is also not assured.” | |
| The payment of dividends following the Business Combination will be in the discretion of Energy Merger's board of directors and will depend on market conditions and Energy's Merger's business strategy in any given period. |
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SUMMARY
This section summarizes information related to the proposals to be voted on at the Special Meeting. These items are described in greater detail elsewhere in this joint proxy statement/prospectus. You should carefully read this entire joint proxy statement/prospectus and the other documents to which it refers you .
The Companies
Energy Infrastructure is a Business Combination Company TM , or BCC TM , which is a blank check company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business combination, one or more businesses that support the process of bringing energy, in the form of crude oil, natural and liquefied petroleum gas, and refined and specialized products (such as petrochemicals), from production to final consumption throughout the world. On July 21, 2006, Energy Infrastructure consummated its initial public offering of 20,250,000 units with each unit consisting of one share of its common stock and one warrant. Each warrant entitles the holder to purchase one share of Energy Infrastructure common stock at an exercise price of $8.00 per share. The units sold in Energy Infrastructure's initial public offering were sold at an offering price of $10.00 per unit, generating gross proceeds of $202,500,000. Prior to the closing of Energy Infrastructure's initial public offering, Energy Corp., a company formed under the laws of the Cayman Islands and controlled by Energy Infrastructure's President and Chief Operating Officer, purchased an aggregate of 825,398 units at a price of $10.00 per unit in a private placement, for aggregate gross proceeds of $8,253,980. On August 31, 2006 the underwriters of Energy Infrastructure's initial public offering exercised their over allotment option to purchase an additional 675,000 units, generating an additional $6,750,000 in gross proceeds. This resulted in a total of $209,250,000 in net proceeds, including certain deferred offering costs and deferred placement fees being held in the Trust Account. Energy Infrastructure's management has broad discretion with respect to the specific application of the net proceeds of the public offering, although substantially all of the net proceeds of the offerings are intended to be generally applied toward consummating a business combination. As of March 31, 2008, $217,799,903 was held in the Trust Account, including accrued interest of $8,549,903. As of March 31, 2008, the Trust Account had earned interest of $12,049,903, and of the $3,430,111 that Energy Infrastructure is entitled to withdraw from interest earned on the Trust Account for working capital purposes, as of March 31, 2008, it had withdrawn $2,881,775. As of March 31, 2008, Energy Infrastructure had withdrawn an additional $618,225 of interest from the Trust Account to pay principal and interest on loans made by certain of Energy Infrastructure's initial stockholders. Energy Infrastructure is permitted to withdraw an additional $1,548,336 of interest for working capital purposes, in addition to additional withdrawals to pay interest on convertible loans in the aggregate principal amount of $2,685,000 until completion of the Business Combination, at which time such loans will be converted into 268,500 units of Energy Merger.
For the period from August 11, 2005 (inception) to March 31, 2008, Energy Infrastructure has incurred $1,059,214 for consulting and professional fees, $19,883,804 of stock-based compensation (in the form of stock options that will be cancelled upon consummation of the Business Combination), $372,207 for franchise taxes, $220,583 for insurance expense, $132,592 for office expense, travel expenses of $377,833 and other operating and formation costs of $54,275.
Energy Infrastructure anticipates that it will incur total transaction costs of approximately $10,588,000 in connection with the Business Combination and Redomiciliation Merger. These transaction costs include legal expenses, fees for New Century Capital Partners' fairness opinion, fees to The Investment Bank of Greece and Maxim Group LLC, as financial advisors, fees to accountants and valuation consultants, roadshow expenses, printer fees and other miscellaneous expenses. Such costs do not include transaction costs of approximately $3,500,000 that Energy Infrastructure is required to reimburse to Vanship, primarily consisting of estimated attorney and accounting fees.
Energy Infrastructure anticipates that the costs to consummate the Business Combination will greatly exceed its available cash outside of the Trust Account. Energy Infrastructure has not sought and does not anticipate seeking any fee deferrals. Energy Infrastructure expects these costs will ultimately be borne by Energy Merger from the funds held in the Trust Account if the proposed Business Combination and Redomiciliation Merger are completed. If the Business Combination and Redomiciliation Merger are not completed,
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the costs will potentially be subject to the indemnification obligations of Energy Infrastructure's initial stockholders to the Trust Account. If these indemnification obligations are not performed or are inadequate, it is likely that vendors or service providers would seek to recover these expenses from the Trust Account, which could ultimately deplete the Trust Account and reduce a stockholder's current pro rata portion of the Trust Account upon liquidation.
The mailing address of Energy Infrastructure's principal executive office is Suite 1300, 1105 North Market Street, Wilmington, DE 19899, and its telephone number is (302) 656-1771, Attn: Susan Dubb.
The Redomiciliation Merger and the Business Combination
Pursuant to the Merger Agreement by and between Energy Infrastructure and Energy Merger, Energy Infrastructure will merge with and into Energy Merger, its wholly-owned subsidiary incorporated in the Marshall Islands, to effect the redomiciliation of Energy Infrastructure from a U.S. company to a Marshall Islands company. Immediately following the completion of the Redomiciliation Merger, Energy Merger will acquire all the outstanding shares of nine vessel-owning SPVs from Vanship. Each SPV owns one VLCC as described in “Information Concerning the SPVs — The Fleet.” The majority of the SPVs have historically operated and are expected to continue to operate with working capital deficits. See “Risk Factors — Risks Relating to Energy Merger — The majority of the SPVs have working capital deficits, which means that their current assets on December 31, 2007 were not sufficient to satisfy their current liabilities at that date.”
The nine vessels held by the SPVs will constitute the initial fleet of Energy Merger. The fleet consists of five modern, double-hull VLCCs that are expected to have an average age of approximately 9.5 years and four single-hull VLCCs that are expected to have an average age of approximately 16.7 years upon completion of the Business Combination. A single hull vessel is a ship design and construction method in which a vessel has only one hull. A double hull vessel is a ship hull design and construction method where the bottom and sides of the ship have two complete layers of watertight hull surface with one outer layer forming the normal hull of the ship, and a second inner hull which is somewhat further into the ship forming a redundant barrier to seawater in case the outer hull is damaged and leaks. The vessels have a combined cargo carrying capacity of 2,519,213 deadweight tons. All of the vessels in the initial fleet are Hong Kong-flagged and it is intended that they will remain Hong Kong-flagged following completion of the Business Combination. Prior to execution of the Share Purchase Agreement, the board of directors of Energy Infrastructure concluded that the Business Combination met all of the requirements set forth in the Form S-1 Registration Statement filed with the SEC at the time of Energy Infrastructure’s initial public offering.
The closing of the Business Combination is subject to certain conditions, including the approval by Energy Infrastructure's stockholders of the Redomiciliation Merger and the Business Combination described below.
Assuming the issuance of 1,000,000 units to Energy Infrastructure's President and Chief Operating Officer (or any assignee thereof), the issuance of 5,000,000 units to Vanship in connection with the Business Combination Private Placement and the issuance of 268,500 units upon the conversion of convertible loans aggregating $2,685,000 and assuming none of Energy Infrastructure's stockholders exercise redemption rights with respect to the Business Combination, upon consummation of the Business Combination, Vanship will own approximately 39.4% of Energy Merger's issued and outstanding common stock, and Energy Infrastructure's pre-Business Combination holders of common stock will own in the aggregate approximately 60.6% of Energy Merger's common stock (assuming no warrants are exercised). Holders of stock purchased in Energy Infrastructure's initial public offering will own 44.5% of Energy Merger's outstanding common stock, a reduction from the approximately 77% of Energy Infrastructure's outstanding common stock they currently own.
The following chart illustrates the ownership of the SPVs and various affiliations of the principals of Vanship before and after the Redomiciliation Merger and Business Combination.
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![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-ORGPG10.JPG)
| (1) | Owned by Van-Clipper Holding Co., Ltd., a 50/50 joint venture of Vanship and Clipper Group Invest Ltd. |
| (2) | Univan currently provides, and is expected to continue to provide, technical management of the vessels in the fleet subsequent to the Redomiciliation Merger and Business Combination through a subcontract relationship. |
Procedure
Under Delaware law, the affirmative vote of the holders of a majority of the outstanding shares of Energy Infrastructure's common stock is required to adopt the Merger Agreement, providing for the Redomiciliation Merger, and under Energy Infrastructure's certificate of incorporation, a majority of the votes cast at a meeting of stockholders at which a quorum is present must approve the proposed Business Combination. Promptly after obtaining approval from its stockholders to proceed with the Redomiciliation Merger and the Business Combination, Energy Infrastructure and Energy Merger will consummate the Redomiciliation Merger and immediately thereafter Energy Merger will consummate the Business Combination. Each public stockholder has the right to vote against the Business Combination Proposal and elect to redeem his, her or its shares for $10.00 per share, plus a portion of the interest earned not previously released to Energy Infrastructure (net of taxes payable).
Pursuant to Energy Infrastructure’s certificate of incorporation, if the holders of 30% or more of the shares of common stock sold in Energy Infrastructure’s initial public offering and private placement vote against the Business Combination and demand that Energy Infrastructure redeem their shares for their pro rata portion of the Trust Account established at the time of Energy Infrastructure’s initial public offering, Energy Infrastructure will not be permitted to consummate the Business Combination. However, notwithstanding adoption of the Business Combination Proposal, we will only have sufficient cash to pay the cash consideration portion of the aggregate purchase price of the vessels if public holders owning less than 5% of the total shares sold in Energy Infrastructure's initial public offering and the private placement consummated immediately prior to the initial public offering vote against the Business Combination and exercise their redemption
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rights. Accordingly, if the holders of 1,087,520 or more shares vote against the Business Combination Proposal and exercise their redemption rights, Energy Infrastructure will be required to abandon the Business Combination, notwithstanding approval by a majority of its stockholders. If holders of the maximum permissible number of shares elect redemption without Energy Infrastructure being required to abandon the Business Combination, as of March 31, 2008, a total of approximately $11,022,616 of the Trust Account would have been disbursed, leaving approximately $206,777,287 available in the Trust Account, plus up to $50,000,000 from the Business Combination Private Placement, for the purchase of the SPVs and the payment of liabilities. Energy Infrastructure estimates that it will be required to pay approximately $228,000,000 to Vanship in satisfaction of the cash consideration portion of the purchase price of the SPVs and Energy Merger will be required to maintain minimum cash reserves of $15,000,000 upon completion of the Business Combination in order to draw down funds under its credit facility to refinance the existing debt of the SPVs.
In connection with Energy Infrastructure's initial public offering, each of Energy Infrastructure's initial stockholders has agreed to indemnify Energy Infrastructure based on their respective pro rata beneficial ownership in Energy Infrastructure immediately prior to the initial public offering for debts and obligations to vendors that are owed money by Energy Infrastructure for services rendered or products sold to Energy Infrastructure, but only to the extent necessary to ensure that certain liabilities do not reduce the initial $209,250,000 placed in the Trust Account. The obligations of Energy Infrastructure's initial stockholders to indemnify Energy Infrastructure remain in effect and extend to transaction expenses to be incurred in connection with Energy Infrastructure's seeking to complete the Business Combination. Since these obligations were not collateralized or guaranteed, however, Energy Infrastructure cannot assure you that its initial stockholders would be able to satisfy their obligations if material liabilities are sought to be satisfied from the Trust Account. The indemnity obligation of Energy Infrastructure's initial stockholders includes certain accounting and legal fees of Vanship in case of a termination of the Share Purchase Agreement. If the Business Combination is consummated, Energy Infrastructure's initial stockholders will not have to perform such obligations.
Fairness Opinion
In determining to recommend that holders of Energy Infrastructure's securities vote for the Business Combination Proposal, the board of directors of Energy Infrastructure considered the fairness opinion of its financial advisor, New Century Capital Partners, dated October 17, 2007, and based upon and subject to the assumptions, qualifications and limitations set forth in the written fairness opinion, New Century Capital Partners determined that the consideration as stipulated in the Share Purchase Agreement was fair from a financial point of view to the stockholders of Energy Infrastructure. The full text of New Century Capital Partners' written fairness opinion, dated October 17, 2007, is attached as Annex C to this joint proxy statement/prospectus. We urge you to read the opinion and the section titled “Fairness Opinion” in this joint proxy statement/prospectus carefully for a description of the procedures followed, assumptions made, matters considered and limitations on the reviews undertaken. New Century Capital Partners' opinion does not constitute a recommendation to the board of directors or to the holders of Energy Infrastructure's securities as to how such person should vote or act on any of the proposals set forth in this joint proxy statement/prospectus. New Century Capital Partners has received a fee of $65,000 in connection with the preparation and issuance of its fairness opinion and was reimbursed for its attorney's fees. New Century Capital Partners will receive an additional fee of $180,000 in connection with the preparation and issuance of its opinion and will be reimbursed for up to $20,000 of additional attorney's fees, contingent upon completion of the Business Combination. The fee for the fairness opinion was negotiated by Energy Infrastructure and New Century Capital Partners. We believe the amount of this fee is consistent with industry custom and practice for the preparation of a fairness opinion. See “Risk Factors — Risks Relating to Energy Infrastructure Acquisition Corp — You should not place undue reliance on the fairness opinion” for further information relating to reliance on the fairness opinion prepared by New Century Capital Partners.
Interest of Maxim Group LLC
Upon consummation of the Business Combination, Maxim Group LLC is entitled to receive $82,540, which represents 1% of the gross proceeds from the private placement conducted prior to Energy Infrastructure's initial public offering. If the Business Combination is not consummated, the $82,540 that would have been released to Maxim will become part of the amount payable to the public stockholders upon the liquidation of the trust account as part of our stockholder-approved plan of dissolution and liquidation. Further, upon
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consummation of the Business Combination, the underwriters and Maxim Group LLC are entitled to receive $2,310,040 of contingent underwriting compensation, which amounts will be forfeited in the event the Business Combination is not consummated.
If the Business Combination Is Not Approved
Energy Infrastructure's certificate of incorporation requires that it be dissolved if it does not consummate an eligible business combination by the later of (i) January 21, 2008 or (ii) July 21, 2008 in the event that either a letter of intent, an agreement in principle or a definitive agreement to complete an eligible business combination was executed but was not consummated by January 21, 2008. Energy Infrastructure entered into a letter of intent relating to a business combination with Vanship on August 31, 2007 and the parties entered into a definitive purchase agreement on December 3, 2007. As a result, if Energy Infrastructure does not acquire at least majority control of a target business by July 21, 2008, Energy Infrastructure will be required to dissolve and distribute to its public stockholders on a pro rata basis the funds held in the Trust Account, plus a portion of the interest earned not previously released to us (net of taxes payable and the repayment of convertible loans aggregating $2,685,000, if not earlier converted), together with any remaining out-of-trust net assets. “See Risk Factors — Risks Related to Energy Infrastructure” for further information relating to risks associated with the dissolution of Energy Infrastructure.
Plan of Liquidation
The following describes briefly the material terms of the Dissolution and Plan of Liquidation Proposal of Energy Infrastructure. This information is provided to assist stockholders in reviewing this proxy statement and considering the Dissolution and Plan of Liquidation Proposal, but does not include all of the information contained herein and may not contain all of the information that is important to you. To understand fully the Dissolution and Plan of Liquidation Proposal being submitted for stockholder approval, you should carefully read this proxy statement, including the accompanying copy of the Plan of Liquidation attached as Appendix F , in its entirety.
| • | If the dissolution is approved, we will: |
| • | file a certificate of dissolution with the Delaware Secretary of State; |
| • | adopt a Plan of Liquidation in, or substantially in, the form of Appendix F to this proxy statement by Board action in compliance with Delaware law; |
| • | establish a contingency reserve for the satisfaction of any known or potential liabilities, consisting of (i) the indemnification obligations of our officers and directors provided to Energy Infrastructure at the time of its initial public offering and (ii) proceeds from the trust account (the “Trust Account”) sufficient to cover Energy Infrastructure’s known liabilities not otherwise subject to indemnification by any of our officers and directors; and |
| • | pay or adequately provide for the payment of our liabilities, including (i) existing liabilities for taxes and to providers of professional and other services, (ii) expenses of the dissolution and liquidation, and (iii) our obligations to Energy Infrastructure’s public stockholders in accordance with Energy Infrastructure’s certificate of incorporation. |
| • | We expect to make a liquidating distribution to the public stockholders from the Trust Account as soon as practicable following the filing of our certificate of dissolution with the Delaware Secretary of State after stockholder approval of the Dissolution and Plan of Liquidation Proposal and adoption of the Plan of Liquidation by our Board of Directors. Energy Infrastructure and its officers and directors are currently negotiating with Energy Infrastructure’s third parties regarding the satisfaction of Energy Infrastructure's other liabilities, which it expects to accomplish, concurrently with such liquidating distribution, with the proceeds of payments made from its contingency reserve, consisting of (i) the indemnification obligations of our officers and directors and (ii) proceeds from the Trust Account sufficient to cover any known liabilities of Energy Infrastructure not otherwise subject to indemnification by our officers and directors. As Energy Infrastructure does not have any material assets beyond the proceeds from Energy Infrastructure’s initial public offering held in the Trust Account, we do not anticipate that any additional distributions to stockholders will be made. |
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| • | As a result of Energy Infrastructure's liquidation, for U.S. federal income tax purposes, stockholders will recognize a gain or loss equal to the difference between (i) the amount of cash distributed to them (including distributions to any liquidating trust), less any known liabilities assumed by the stockholder or to which the distributed property is subject, and (ii) their tax basis in shares of Energy Infrastructure’s common stock. You should consult your tax advisor as to the tax effects of the Plan of Liquidation and Energy Infrastructure's dissolution in your particular circumstances. |
| • | Under Delaware law, stockholders will not have dissenters' rights in connection with the Dissolution and Plan of Liquidation. |
| • | Under Delaware law, if we distribute to public stockholders the proceeds currently held in the Trust Account, but fail to pay or make adequate provision for our liabilities, each of Energy Infrastructure’s public stockholders could be held liable for amounts due to Energy Infrastructure’s third parties to the extent of the stockholder's pro rata share of the liabilities not so discharged, but not in excess of the total amount received by such stockholder. |
Energy Infrastructure had incurred unpaid liabilities of approximately $2,464,632 as of March 31, 2008.
Each of our officers and directors have agreed to be personally liable to the extent of their pro rata beneficial interest in our company immediately prior to its initial public offering to ensure that the proceeds in the Trust Account are not reduced by the claims of (i) the various vendors or other entities for services rendered or products sold to us or (ii) any prospective target business that Energy Infrastructure did not pay, or reimburse, for the fees and expenses of third party service providers to such target which Energy Infrastructure agreed in writing to be liable for, in each case only to the extent the payment of such debts and obligations actually reduces the amount of funds in the Trust Account (or, in the event that such claim arises after the distribution of the Trust Account, to the extent necessary to ensure that Energy Infrastructure’s former stockholders are not liable for any amount of such loss, liability, claim, damage or expense).
If our stockholders do not vote to approve our Dissolution and Plan of Liquidation Proposal, our Board of Directors will explore what, if any, alternatives are available for the future of Energy Infrastructure. The Board believes, however, that there are no viable alternatives to Energy Infrastructure’s dissolution and liquidation pursuant to the Plan of Liquidation.
After careful consideration of all relevant factors, Energy Infrastructure’s Board of Directors has unanimously determined that the Dissolution and Plan of Liquidation of Energy Infrastructure are advisable, and are fair to and in the best interests of Energy Infrastructure and its stockholders. The Board has unanimously approved such Dissolution and Plan of Liquidation Proposal and recommends that you approve them.
Conditions; Termination
Approval of the Business Combination by stockholders of a majority of the votes cast at a meeting of stockholders at which a quorum is present is a condition to Energy Infrastructure’s consummating the Business Combination. The holders of Energy Infrastructure common stock issued prior to its initial public offering have agreed to vote 5,268,849 of their shares in accordance with the holders of a majority of the public shares voting in person or by proxy at the meeting. Holders of the common stock contained in the units purchased in the private placement, and shares of common stock issued upon conversion of the convertible loans (to the extent converted) have agreed to vote such shares in favor of the Business Combination. The 6,094,247 shares of common stock currently outstanding that may be voted in favor of the proposals presented in this joint proxy statement/prospectus represent 22.4% of Energy Infrastructure’s outstanding shares of common stock. Additionally, if holders of 5% or more of the shares purchased in Energy Infrastructure's initial public offering and private placement (which number represents 1,087,520 or more of the shares of Energy Infrastructure common stock issued in Energy Infrastructure's initial public offering and private placement) vote against the Business Combination and exercise their right to redeem their shares for cash, we will not have sufficient cash to pay the cash consideration portion of the aggregate purchase price of the vessels and the Business Combination will not be consummated. Notwithstanding approval by Energy Infrastructure's stockholders of the Business Combination, the Business Combination will not be consummated if holders of a majority of the outstanding shares of common stock of Energy Infrastructure do not approve the Redomiciliation Merger.
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The Merger Agreement
The Merger Agreement, the Share Purchase Agreement and the fairness opinion of New Century Capital Partners are annexed to this joint proxy statement/prospectus. We encourage you to read them in their entirety, as they are the key legal documents underlying the proposals being presented. They are also described in detail elsewhere in this joint proxy statement/prospectus.
Management
Immediately following the Business Combination, the board of directors of Energy Merger shall consist of Captain Charles Arthur Joseph Vanderperre, Mr. Fred Cheng, Mr. Christoph Widmer, Mr. Marios Pantazopoulos, Dr. David Lawson, Mr. Shigeru Matsui, Mr. Mark Pawley and Mr. Rod Teeple. There will be one vacancy on the board of directors and individuals to fill such vacancy will be nominated or recommended by Energy Merger’s independent directors. Such vacancy will be filled by vote of Energy Merger’s directors. Captain Vanderperre shall serve as Energy Merger's Chairman of the board of directors, Mr. Cheng shall serve as Energy Merger's Chief Executive Officer and Mr. Widmer shall serve as Energy Merger’s President and Chief Financial Officer. Captain Vanderperre and Mr. Cheng are the directors and co-founders of Vanship. Mr. Pantazopoulos currently serves as a director and Chief Financial Officer of Energy Infrastructure.
Energy Infrastructure Special Meeting
Date, Time and Place. The Special Meeting of Energy Infrastructure’s stockholders will be held at 10:00 a.m., Eastern standard time, on July 17, 2008, at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York.
Voting Power; Record Date. You will be entitled to vote or direct votes to be cast at the Special Meeting, if you owned Energy Infrastructure common stock at the close of business on June 23, 2008, the record date for the Special Meeting. You will have one vote for each share of Energy Infrastructure common stock you owned at that time. Warrants to purchase Energy Infrastructure common stock do not have voting rights.
Votes Required. Approval of the Business Combination Proposal will require the approval of a majority of the votes cast at a meeting of stockholders at which a quorum is present, and the approval of the Redomiciliation Merger Proposal and the Dissolution and Plan of Liquidation Proposal will require the affirmative vote of holders of a majority of Energy Infrastructure's outstanding common stock.
Notwithstanding approval of the Business Combination, the Business Combination will only proceed if holders of shares purchased in Energy Infrastructure's initial public offering representing less than 5% of the total shares sold in the initial public offering and the private placement (less than 1,087,520 shares), vote against the Business Combination and exercise their redemption rights.
Under Delaware law and Energy Infrastructure's bylaws, no other business may be transacted at the Special Meeting.
At the close of business on March 31, 2008, there were 27,221,747 shares of Energy Infrastructure common stock outstanding (including the 6,094,247 shares held by Energy Infrastructure's officers and directors and their respective affiliates, which were not purchased in Energy Infrastructure's initial public offering). Each share of Energy Infrastructure common stock entitles its holder to cast one vote per proposal.
Relation of Proposals. Energy Infrastructure will not consummate the Redomiciliation Merger unless the Business Combination is also approved. Similarly, the Business Combination will not take place if the Redomiciliation Merger is not approved. Each of the Redomiciliation Merger Proposal and Business Combination Proposal will be voted on separately, but both must be approved for the Business Combination to be completed.
Redemption Rights. Under Energy Infrastructure's certificate of incorporation, a holder of Energy Infrastructure common stock (other than an initial stockholder) who votes against the Business Combination may demand that Energy Infrastructure redeem his or her shares for cash, but such stockholder will only receive the redemption amount if the Business Combination is subsequently consummated. This demand must be made in writing at the same time the stockholder votes against the Business Combination, on the form of proxy card voted against the Business Combination. If you so demand, and the Business Combination is
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approved and consummated, Energy Infrastructure will redeem your shares for cash equal to $10.00 per share, plus a portion of the interest earned not previously released to us (net of taxes payable). You will be entitled to receive cash for your shares only if you continue to hold your shares through completion of the Business Combination and then tender your stock certificate(s) to Energy Infrastructure or to Energy Infrastructure's duly appointed tender agent. If you exercise your redemption rights, you will no longer own these Energy Infrastructure shares. Do not send your stock certificate(s) with your proxy card. If the Business Combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. Stockholders will not be requested to tender their shares of common stock before the Business Combination is consummated.
The Business Combination will not be consummated if holders of 1,087,520 or more shares of Energy Infrastructure common stock sold in its initial public offering (which number represents 5% of the shares sold in the initial public offering and the private place placement) exercise their redemption rights.
If the Business Combination is not consummated and Energy Infrastructure is not required to liquidate pursuant to the terms of its certificate of incorporation, it may seek another target business with which to effect a business combination.
Appraisal Rights. Under the General Corporation Law of the State of Delaware, appraisal rights are not available to Energy Infrastructure's stockholders in connection with the Business Combination or the Redomiciliation Merger.
Proxies; Board Solicitation. Your proxy is being solicited by the Energy Infrastructure board of directors on each proposal being presented to stockholders at the Special Meeting. Proxies may be solicited in person or by mail, telephone or other electronic means. If you grant a proxy, you may still vote your shares in person, which will have the effect of revoking any proxy granted before the Special Meeting.
Stock Ownership. The holdings of Energy Infrastructure's directors and significant stockholders are detailed in “Information Concerning Energy Infrastructure Acquisition Corp. — Energy Infrastructure Principal Stockholders.”
Energy Infrastructure's Recommendation; Interests of Energy Infrastructure's Management
After careful consideration, Energy Infrastructure's board of directors has determined that the Business Combination and the other proposals presented at the Special Meeting are fair to, and in the best interests of, Energy Infrastructure and its stockholders. The board of directors has approved and declared advisable the proposals, and recommends that you vote or direct that your vote to be cast “ FOR ” the adoption of each proposal.
When you consider the recommendation of the board of directors, you should keep in mind that the members of the board of directors have interests in the Business Combination that may be different from, or in addition to, yours. These interests include the following:
| • | If the proposed Business Combination is not completed, and Energy Infrastructure is subsequently required to liquidate, the shares of common stock owned by Energy Infrastructure's officers and directors and their affiliates will be worthless because the officers and directors are not entitled to liquidation distributions from Energy Infrastructure. In addition, the possibility that certain of Energy Infrastructure's officers and directors will be required to perform their obligations under the indemnity agreements referred to below will be substantially increased. |
| • | In connection with Energy Infrastructure's initial public offering, Energy Infrastructure's current officers and directors agreed to indemnify Energy Infrastructure to the extent of their pro rata beneficial interest in Energy Infrastructure immediately prior to the initial public offering for debts and obligations to vendors that are owed money by Energy Infrastructure for services rendered or products sold to Energy Infrastructure, but only to the extent necessary to ensure that certain liabilities do not reduce the initial $209,250,000 placed in the Trust Account. If the Business Combination is |
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| consummated, Energy Infrastructure's officers and directors will not have to perform such obligations. If the Business Combination is not consummated, however, certain of Energy Infrastructure's officers and directors would potentially be liable for any claims against the Trust Account by vendors who have not explicitly waived their right to make claims against the Trust Account. |
| • | All rights of Energy Infrastructure's officers and directors to be indemnified by Energy Infrastructure, and of Energy Infrastructure's directors to be exculpated from monetary liability with respect to prior acts or omissions, will continue after the Business Combination pursuant to provisions in Energy Merger's articles of incorporation. However, if the Business Combination is not approved and Energy Infrastructure subsequently liquidates, its ability to perform its obligations under those provisions will be substantially impaired since it will cease to exist. If the Business Combination is ultimately completed, Energy Merger's ability to perform such obligations will be substantially enhanced. |
Acquisition Financing
Energy Merger has entered into a $415.0 million term loan facility with DVB Merchant Bank (Asia) Ltd, Fortis Bank S.A./N.V., Singapore Branch, NIBC Bank Ltd, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ), Allied Irish Banks, p.l.c., Bayerische Hypo- und Vereinsbank AG, Singapore Branch, and The Governor and Company of the Bank of Ireland. Drawdown of the loan is subject to the approval of the Redomiciliation Merger and the Business Combination and certain other conditions, and the loan will be secured by, among other things, first and second mortgages on the VLCCs. Funds obtained under the financing will be used to refinance outstanding secured debt of the SPVs. See “Acquisition Financing.”
Certain U.S. Federal Income Tax Consequences
As described below under the heading “Taxation — Material United States Federal Income Tax Considerations,” the Redomiciliation Merger is expected to qualify as a reorganization under applicable U.S. federal income tax principles. If the Redomiciliation Merger qualifies as a nontaxable reorganization, no gain or loss generally will be recognized by Energy Infrastructure stockholders or warrant holders for U.S. federal income tax purposes as a result of their exchange of Energy Infrastructure common stock or warrants for the common stock or warrants of Energy Merger. Energy Infrastructure, however, generally will recognize gain (but not loss) for U.S. federal income tax purposes as a result of the Redomiciliation Merger equal to the excess, if any, of the fair market value of each of its assets over such asset's adjusted tax basis at the effective time of the Redomiciliation Merger. It is expected that Energy Merger should not recognize any gain or loss for U.S. federal income tax purposes as a result of the Business Combination, and that certain “anti-inversion” provisions in the Internal Revenue Code of 1986, as amended, or the Code, should not apply to treat Energy Merger as a U.S. corporation after the Business Combination and Redomiciliation Merger, but may apply to restrict Energy Infrastructure from using any net operating losses that might otherwise be available to it to offset any gain it will recognize as a result of the Redomiciliation Merger.
Quotation/Listing
Energy Infrastructure's common stock (EII) and warrants (EII.WS) are quoted on the American Stock Exchange. Energy Infrastructure expects the Energy Merger common stock and warrants to be listed on the American Stock Exchange after the Business Combination.
Anticipated Accounting Treatment
The Business Combination will be accounted for as a “reverse merger” since, among other considerations, immediately following completion of the transaction, the stockholder of the SPVs immediately prior to the Business Combination will have effective control of Energy Infrastructure through its approximately 39% stockholder interest in the combined entity, assuming no stockholder redemptions (40% in the event of maximum stockholder redemptions) and control of a majority of the board of directors and all of the senior executive positions. For accounting purposes, the SPVs (through Energy Merger, a newly-formed holding company) will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of the SPVs, i.e., the issuance of stock by the SPVs (through Energy
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Merger) for the stock of Energy Infrastructure and a cash dividend equal to the cash portion of the consideration. Accordingly, the combined assets, liabilities and results of operations of the SPVs will become the historical financial statements of Energy Infrastructure, and Energy Infrastructure's assets, liabilities and results of operations will be consolidated with the SPVs beginning on the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction, except that the concurrent acquisition of the 50% equity interest in three of the SPVs currently held by a third party will result in the step-up of the proportionate share of assets and liabilities acquired to reflect consideration paid.
As a result of the consummation of the Business Combination, the following charges to operations will be recorded by Energy Merger (the successor to Energy Infrastructure and the accounting acquiree) at the closing of the transaction (based on the December 31, 2007 financial statements):
| • | a charge to operations aggregating $17,943,921, representing the unamortized fair value of previously issued options to purchase 3,585,000 shares of common stock, as a result of the termination of such options held by George Sagredos and Andreas Theotokis; and |
| • | a charge to operations aggregating $10,619,900, representing the fair value of 1,000,000 units to be issued to George Sagredos (each unit consisting of one share of common stock and one common stock purchase warrant). |
Regulatory Matters
The acquisition and related transactions are not subject to any federal, state or foreign regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
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ENERGY INFRASTRUCTURE SELECTED FINANCIAL INFORMATION
Energy Infrastructure Acquisition Corp. was incorporated in Delaware on August 11, 2005 to serve as a vehicle for the acquisition through a merger, capital stock exchange, asset acquisition, or other similar business combination with one or more businesses in the energy or energy-related industries. Energy Infrastructure has not acquired an entity as of the date of this joint proxy statement/prospectus. Energy Infrastructure has selected December 31 as its fiscal year end. Energy Infrastructure is considered to be in the development stage and is subject to the risks associated with activities of development stage companies. The selected financial information set forth below should be read in conjunction with the audited financial statements of Energy Infrastructure for the period from August 11, 2005 (inception) to December 31, 2007, for the period from August 11, 2005 (inception) to December 31, 2005, for the years ended December 31, 2006 and 2007 and the unaudited financial statements for the three months ended March 31, 2007 and 2008, and related notes included elsewhere in this joint proxy statement/prospectus.
Energy Infrastructure Historical Financial Information
(In Thousands, Except Per Share Data)
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| For the Period from August 11, 2005 (Inception) to December 31, 2004 | For the Period from August 11, 2005 (inception) to March 31, 2008 | |||||||||||||||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||||||
| 2006 | 2007 | 2007 | 2008 | |||||||||||||||||||||
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Statement of Operations Data:
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| Operating expenses | $ | (910 | ) | $ | (5,924,945 | ) | $ | (12,971,706 | ) | $ | (3,316,275 | ) | $ | (3,202,946 | ) | $ | (22,100,507 | ) | ||||||
| Interest income | 1,781 | 3,139,543 | 6,369,468 | 1,777,221 | $ | 881,954 | 10,392,746 | |||||||||||||||||
| Net (loss) | (1,879 | ) | (2,841,301 | ) | (6,704,000 | ) | (1,565,997 | ) | (2,340,058 | ) | (11,887,238 | ) | ||||||||||||
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Balance Sheet Data:
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| Total assets (including cash and cash equivalents held in Trust Fund) | $ | 375,076 | $ | 212,082,482 | $ | 218,210,478 | $ | 219,746,715 | ||||||||
| Total liabilities | 351,955 | 6,371,208 | 7,563,904 | 8,530,374 | ||||||||||||
| Common stock subject to possible redemption | — | 64,619,129 | 64,619,129 | 64,619,129 | ||||||||||||
| Stockholders' equity | 23,121 | 212,082,482 | 146,027,445 | 146,597,212 | ||||||||||||
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SELECTED FINANCIAL INFORMATION FOR THE SPVS
(All Amounts in U.S. Dollars)
SHINYO ALLIANCE LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the years ended December 31, 2005, 2006 and 2007 have been derived from Shinyo Alliance Limited's audited financial statements included elsewhere in this joint proxy statement/ prospectus. The following selected historical statement of operations data for the year ended December 31, 2004, the selected historical balance sheet data as of December 31, 2005 and the selected historical cash flow data for the year ended December 31, 2004 have been derived from Shinyo Alliance Limited's audited financial statements not included in this joint proxy statement/prospectus. Shinyo Alliance Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Alliance Limited's audited financial statements. The following selected historical statement of operations data for the year ended December 31, 2003, the selected historical balance sheet data as of December 31, 2003 and 2004 and the selected historical cash flow data as of December 31, 2003 have been derived from our unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Alliance Limited's historical results do not necessarily indicate results expected for any future periods.
The statements of cash flows of Shinyo Alliance Limited for the year ended December 31, 2006 have been restated to reflect the correct classification of cash flows relating to drydocking. For more details, please see Note 2 to the financial statements for Shinyo Alliance Limited included elsewhere in this joint proxy statement/prospectus.
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Statement of Operations Data
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| Revenue | $ | 6,059 | 6,635 | $ | 9,399 | $ | 7,580 | $ | 10,877 | |||||||||||
| Total operating expenses | (3,476 | ) | (3,559 | ) | (4,591 | ) | (4,080 | ) | (4,841 | ) | ||||||||||
| Total other expense, net | (1,037 | ) | (941 | ) | (1,014 | ) | (715 | ) | (614 | ) | ||||||||||
| Operating income | 2,583 | 3,075 | 4,808 | 3,499 | 6,036 | |||||||||||||||
| Net income | 1,546 | 2,134 | 3,794 | 2,784 | 5,421 | |||||||||||||||
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Balance Sheet Data
(at end of period): |
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| Cash | 1,653 | 461 | 939 | 2,887 | 2,622 | |||||||||||||||
| Total assets | 24,852 | 36,089 | 52,833 | 51,335 | 48,259 | |||||||||||||||
| Total liabilities | 23,267 | 32,448 | 45,359 | 41,077 | 32,580 | |||||||||||||||
| Total shareholder's equity | 1,585 | 3,641 | 7,474 | 10,258 | 15,679 | |||||||||||||||
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Cash Flow Data:
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| Net cash provided operating activities | 2,581 | 3,283 | 5,701 | 1,434 | 5,777 | |||||||||||||||
| Net cash provided by (used in) investing activities | 39 | (13,886 | ) | (16,794 | ) | 6,014 | (42 | ) | ||||||||||||
| Net cash (used in) provided by financing activities | (2,179 | ) | 9,410 | 11,571 | (5,500 | ) | (6,000 | ) | ||||||||||||
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SHINYO LOYALTY LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the years ended December 31, 2005, 2006 and 2007 have been derived from Shinyo Loyalty Limited's audited financial statements included elsewhere in this joint proxy statement/ prospectus. The following selected historical statement of operations data for the year ended December 31, 2004, the selected historical balance sheet data as of December 31, 2005, and the selected historical cash flow data for the year ended December 31, 2004 have been derived from Shinyo Loyalty Limited's audited financial statements not included in this joint proxy statement/prospectus. Shinyo Loyalty Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Loyalty Limited's audited financial statements. The following selected historical statement of operations data for the period from September 8, 2003 (date of incorporation) to December 31, 2003, the selected historical balance sheet data as of December 31, 2003 and 2004 and the selected historical cash flow data for the period from September 8, 2003 (date of incorporation) to December 31, 2003 have been derived from our unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Loyalty Limited's historical results do not necessarily indicate results expected for any future periods.
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Statement of Operations Data
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| Revenue | $ | — | $ | 11,960 | $ | 11,582 | $ | 11,811 | $ | 13,177 | ||||||||||
| Total operating expenses | — | (5,067 | ) | (5,349 | ) | (5,791 | ) | (27,552 | ) | |||||||||||
| Total other expense, net | — | (2,301 | ) | (2,237 | ) | (1,860 | ) | (3,208 | ) | |||||||||||
| Operating income (loss) | — | 6,893 | 6,233 | 6,020 | (14,374 | ) | ||||||||||||||
| Net income (loss) | — | 4,592 | 3,995 | 4,160 | (17,582 | ) | ||||||||||||||
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Balance Sheet Data
(at end of period): |
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| Cash | — | 298 | 1,546 | 2,128 | 2,725 | |||||||||||||||
| Total assets | — | 57,107 | 54,400 | 52,192 | 49,067 | |||||||||||||||
| Total liabilities | — | 52,479 | 45,812 | 40,264 | 64,220 | |||||||||||||||
| Total shareholder's equity (deficit) | — | 4,627 | 8,588 | 11,928 | (15,153 | ) | ||||||||||||||
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Cash Flow Data:
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| Net cash provided by (used in) operating activities | — | 6,023 | 8,866 | 6,729 | (11,789 | ) | ||||||||||||||
| Net cash (used in) provided by investing activities | — | (56,585 | ) | 32 | 22 | (1,748 | ) | |||||||||||||
| Net cash provided by (used in) financing activities | — | 50,860 | (7,650 | ) | (6,170 | ) | 14,134 | |||||||||||||
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SHINYO KANNIKA LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the years ended December 31, 2005, 2006 and 2007 have been derived from Shinyo Kannika Limited's audited financial statements included elsewhere in this joint proxy statement/ prospectus. The following selected historical statement of operations data for the period from September 27, 2004 (date of incorporation) to December 31, 2004, the selected historical balance sheet data as of December 31, 2005 and the selected historical cash flow data for the period from September 27, 2004 (date of incorporation) to December 31, 2004 have been derived from Shinyo Kannika Limited's audited financial statements not included in this joint proxy statement/prospectus. Shinyo Kannika Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Kannika Limited's audited financial statements. The following selected historical balance sheet data as of December 31, 2004 have been derived from our unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Kannika Limited's historical results do not necessarily indicate results expected for any future periods.
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| 2005 | 2006 | 2007 | ||||||||||||||
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Statement of Operations Data
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| Revenue | $ | 9,575 | $ | 21,703 | $ | 22,820 | $ | 16,699 | ||||||||
| Total operating expenses | (1,770 | ) | (5,996 | ) | (6,208 | ) | (6,783 | ) | ||||||||
| Total other expense, net | (598 | ) | (4,199 | ) | (4,192 | ) | (4,063 | ) | ||||||||
| Operating income | 7,806 | 15,706 | 16,613 | 9,917 | ||||||||||||
| Net income | 7,208 | 11,507 | 12,420 | 5,854 | ||||||||||||
|
Balance Sheet Data (at end of period):
|
||||||||||||||||
| Cash | 19 | 1,951 | 7,480 | 10,325 | ||||||||||||
| Total assets | 103,597 | 98,886 | 108,778 | 134,011 | ||||||||||||
| Total liabilities | 96,388 | 80,170 | 80,642 | 100,021 | ||||||||||||
| Total shareholder's equity | 7,208 | 18,716 | 28,136 | 33,990 | ||||||||||||
|
Cash Flow Data:
|
||||||||||||||||
| Net cash (used in) provided by operating activities | (561 | ) | 20,692 | 16,128 | 10,302 | |||||||||||
| Net cash used in investing activities | (93,500 | ) | (1,960 | ) | (8,767 | ) | (25,257 | ) | ||||||||
| Net cash provided by (used in) financing activities | 94,080 | (16,800 | ) | (1,832 | ) | 17,800 | ||||||||||
28
SHINYO NAVIGATOR LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the period from September 21, 2006 (date of incorporation) to December 31, 2006 and the year ended December 31, 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the period from September 21, 2006 (date of incorporation) to December 31, 2006 and the year ended 2007 have been derived from Shinyo Navigator Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. Shinyo Navigator Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Navigator Limited's audited financial statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Navigator Limited's historical results do not necessarily indicate results expected for any future periods.
|
|
|
|
||||||
| Period from September 21, 2006 to December 31, 2006 | Year Ended December 31, 2007 | |||||||
|
Statement of Operations Data
|
||||||||
| Revenue | $ | 605 | $ | 15,513 | ||||
| Total operating expenses | (630 | ) | (9,084 | ) | ||||
| Total other expense, net | (345 | ) | (7,991 | ) | ||||
| Operating (loss) income | (25 | ) | 6,429 | |||||
| Net loss | (371 | ) | (1,562 | ) | ||||
|
Balance Sheet Data (at end of period):
|
||||||||
| Cash | 436 | 257 | ||||||
| Total assets | 98,894 | 94,343 | ||||||
| Total liabilities | 99,265 | 96,276 | ||||||
| Total shareholder's deficit | (371 | ) | (1,933 | ) | ||||
|
Cash Flow Data:
|
||||||||
| Net cash provided by operating activities | 317 | 8,600 | ||||||
| Net cash used in investing activities | (87,750 | ) | (2,000 | ) | ||||
| Net cash provided by (used in) financing activities | 87,869 | (6,779 | ) | |||||
29
SHINYO OCEAN LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the period from December 28, 2006 (date of incorporation) to December 31, 2006 and the year ended December 31, 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the period from December 28, 2006 (date of incorporation) to December 31, 2006 and the year ended December 31, 2007 have been derived from Shinyo Ocean Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. Shinyo Ocean Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Ocean Limited's audited financial statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Ocean Limited's historical results do not necessarily indicate results expected for any future periods.
|
|
|
|
||||||
|
Period from December 28, 2006 to
December 31, 2006 |
Year Ended December 31, 2007 | |||||||
| (In Thousands of US$) | ||||||||
|
Statement of Operations Data
|
||||||||
| Revenue | $ | — | $ | 15,105 | ||||
| Total operating expenses | (1 | ) | (7,524 | ) | ||||
| Total other expense, net | (14 | ) | (6,718 | ) | ||||
| Operating (loss) income | (1 | ) | 7,581 | |||||
| Net (loss) income | (15 | ) | 863 | |||||
|
Balance Sheet Data (at end of period):
|
||||||||
| Cash | — | 1,244 | ||||||
| Total assets | 11,340 | 111,632 | ||||||
| Total liabilities | 11,355 | 110,785 | ||||||
| Total shareholder's (deficit) equity | (15 | ) | 847 | |||||
|
Cash Flow Data:
|
||||||||
| Net cash provided by operating activities | — | 7,885 | ||||||
| Net cash used in investing activities | — | (102,816 | ) | |||||
| Net cash provided by financing activities | — | 96,175 | ||||||
30
ELITE STRATEGIC LIMITED AND SHINYO DREAM LIMITED
SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and the period from January 1, 2007 to September 6, 2007; the selected historical balance sheet data as of December 31, 2006 and September 6, 2007 and the selected historical cash flow data for the years ended December 31, 2005 and 2006 and the period from January 1, 2007 to September 6, 2007 of Elite Strategic Limited have been derived from Elite Strategic Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. The following selected historical statement of operations data for the year ended December 31, 2004, the selected historical balance sheet data as of December 31, 2005 and the selected historical cash flow data for the year ended December 31, 2004 have been derived from Elite Strategic Limited's audited financial statements not included in this joint proxy statement/prospectus. Elite Strategic Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Elite Strategic Limited's audited financial statements. The following selected historical statement of operations data for the year ended December 31, 2003, the selected historical balance sheet data as of December 31, 2003 and 2004 and the selected historical cash flow data for the year ended December 31, 2003 have been derived from Elite Strategic Limited's unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements.
The following selected historical statement of operations data for the period from July 20, 2007 (date of incorporation) to December 31, 2007, the selected balance sheet data as of December 31, 2007 and the selected historical cash flow data for the period from July 20, 2007 (date of incorporation) to December 31, 2007 of Shinyo Dream Limited have been derived from Shinyo Dream Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Dream Limited's audited financial statements.
The financial statements of Elite Strategic Limited serve as the predecessor financial statements of Shinyo Dream Limited as the operation of the vessel C. Dream was the only operating business of Elite Strategic Limited, and is the only operating business of Shinyo Dream Limited. On September 7, 2007, Shinyo Dream Limited acquired the vessel C. Dream and its operation from Elite Strategic Limited, an entity that is 50% owned by Vanship, for aggregate consideration of $86 million. The purchase resulted in a step up of $18,298,261 in the net assets acquired, equivalent to 50% of the excess of the aggregate consideration over the net book value of the vessel and its operations at the time of purchase. The following selected historical financial data of Shinyo Dream Limited are not comparable to the selected historical financial data of Elite Strategic Limited.
You should read the selected historical financial data in conjunction with the financial statements and the accompanying notes of Elite Strategic Limited and Shinyo Dream Limited and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Elite Strategic Limited's and Shinyo Dream Limited's historical results do not necessarily indicate results expected for any future periods.
The financial statement of Elite Strategic Limited for the years ended December 31, 2005 and 2006 and the period from January 1, 2007 to September 6, 2007 have been restated to reflect correct classification of our U.S. Transportation tax expense and cash flows relating to drydocking. For more details, please see Note 2 to the financial statements of Elite Strategic Limited included elsewhere in this joint proxy statement/ prospectus.
31
|
|
|
|
|
|
|
|
||||||||||||||||||
| Elite Strategic Limited | Shinyo Dream Limited | |||||||||||||||||||||||
| Period from September 8, 2003 to December 31, 2003 |
Year Ended December 31, |
Period from January 01, 2007 to September 06, 2007 |
Period from July 20,
2007 to December 31, 2007 |
|||||||||||||||||||||
| 2004 | 2005 | 2006 | ||||||||||||||||||||||
| (In Thousands of US$) | ||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||
|
Revenue of
Operations Data: |
||||||||||||||||||||||||
| Revenue | $ | 6,672 | $ | 7,158 | $ | 6,920 | $ | 8,048 | $ | 5,534 | $ | 4,914 | ||||||||||||
| Total operating expenses | (4,179 | ) | (4,335 | ) | (4,666 | ) | (5,011 | ) | (3,593 | ) | (1,953 | ) | ||||||||||||
| Total other expense, net | (1,670 | ) | (1,794 | ) | (1,649 | ) | (2,267 | ) | (1,507 | ) | (1,786 | ) | ||||||||||||
| Operating income | 2,493 | 2,823 | 2,254 | 3,037 | 1,941 | 2,961 | ||||||||||||||||||
| Net income | 823 | 1,029 | 604 | 770 | 434 | 1,174 | ||||||||||||||||||
|
Balance Sheet Data
(at end of period): |
||||||||||||||||||||||||
| Cash | 740 | 1,874 | 1,438 | 2,031 | 954 | 1,849 | ||||||||||||||||||
| Total assets | 60,228 | 58,754 | 56,622 | 54,910 | 51,998 | 77,631 | ||||||||||||||||||
| Total liabilities | 44,298 | 42,368 | 40,087 | 38,062 | 34,717 | 94,756 | ||||||||||||||||||
| Total shareholders' equity | 14,901 | 16,386 | 16,534 | 16,847 | 17,281 | (17,124 | ) | |||||||||||||||||
|
Cash Flow Data:
|
(Restated) | |||||||||||||||||||||||
| Net cash provided by operating activities | 1,149 | 3,541 | 2,592 | 3,988 | 1,134 | 2,044 | ||||||||||||||||||
| Net cash (used in) provided by investing activities | (58,787 | ) | (1 | ) | (10 | ) | (210 | ) | 417 | (68,701 | ) | |||||||||||||
| Net cash provided by (used in) financing activities | 57,978 | (2,406 | ) | (3,018 | ) | (3,184 | ) | (2,628 | ) | 68,506 | ||||||||||||||
32
SHINYO JUBILEE LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the years December 31, 2005, 2006 and 2007 have been derived from Shinyo Jubilee Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. The following selected historical statement of operations data for the year ended December 31, 2004, the selected historical balance sheet data as of December 31, 2005 and the selected historical cash flow data for the year December 31, 2004 have been derived from Shinyo Jubilee Limited's audited financial statements not included in this joint proxy statement/prospectus. Shinyo Jubilee Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Jubilee Limited's audited financial statements. The following selected historical statement of operations data for the period from September 8, 2003 (date of incorporation) to December 31, 2003, the selected historical balance sheet data as of December 31, 2003 and 2004 and the selected historical cash flow data for the period from September 8, 2003 (date of incorporation) to December 31, 2003 have been derived from our unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Jubilee Limited's historical results do not necessarily indicate results expected for any future periods.
The financial statements of Shinyo Jubilee Limited for the years ended December 31, 2005 and 2006 have been restated to reflect the correct classification of cash flows relating to drydocking and claims received. For more details, please see Note 2 to the financial statements of Shinyo Jubilee Limited included elsewhere in this joint proxy statement/prospectus.
|
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|
|
|
|
|
|||||||||||||||
| Period from September 8, 2003 to December 31, 2003 | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | |||||||||||||||||
| (In Thousands of US$) | ||||||||||||||||||||
| (Restated) | ||||||||||||||||||||
|
Statement of
Operations Data |
||||||||||||||||||||
| Revenue | — | $ | — | $ | 16,317 | $ | 20,340 | $ | 17,850 | |||||||||||
| Total operating expenses | — | (1 | ) | (10,851 | ) | (14,378 | ) | (13,193 | ) | |||||||||||
| Total other expense, net | — | (65 | ) | (1,589 | ) | (1,660 | ) | (1,132 | ) | |||||||||||
| Operating income (loss) | (1 | ) | (1 | ) | 5,466 | 5,962 | 4,657 | |||||||||||||
| Net (loss) income | (1 | ) | (66 | ) | 3,877 | 4,303 | 3,525 | |||||||||||||
|
Balance Sheet Data
(at end of period): |
||||||||||||||||||||
| Cash | — | — | 1,316 | 3,840 | 7,648 | |||||||||||||||
| Total assets | — | 5,250 | 39,325 | 37,953 | 42,305 | |||||||||||||||
| Total liabilities | 1 | 5,317 | 35,515 | 29,841 | 30,668 | |||||||||||||||
| Total shareholder's (deficit) equity | (1 | ) | (67 | ) | 3,810 | 8,112 | 11,637 | |||||||||||||
|
Cash Flow Data:
|
(Restated) | (Restated) | ||||||||||||||||||
| Net cash provided by operating activities | — | — | 5,390 | 5,972 | 6,571 | |||||||||||||||
| Net cash (used in) provided by investing activities | — | — | (30,750 | ) | 643 | (643 | ) | |||||||||||||
| Net cash provided by (used in) financing activities | — | — | 26,676 | (4,091 | ) | (2,120 | ) | |||||||||||||
33
SHINYO MARINER LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the years ended December 31, 2005, 2006 and 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the years ended December 31, 2005, 2006 and 2007 have been derived from Shinyo Mariner Limited's audited financial statements included elsewhere in this joint proxy statement/
prospectus. The following selected historical statement of operations data for the period from December 22, 2004 (date of incorporation) to December 31, 2004, the selected historical balance sheet data as of December 31, 2005 and the
selected historical cash flow data for the period from December 22, 2004 (date of incorporation) to December 31, 2004 have been derived from Shinyo Mariner Limited's audited financial statements not included in this joint proxy statement/prospectus. Shinyo Mariner Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see Note 1 to Shinyo Mariner Limited's audited financial statements. The following selected historical balance sheet data as of December 31, 2004 have been derived from our unaudited financial statements not included in this joint proxy statement/prospectus. We have prepared the unaudited information on the same basis as the audited financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair
presentation of the financial information set forth in those statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Mariner Limited's historical results do not necessarily indicate results expected for any future periods.
The statements of cash flows of Shinyo Mariner Limited for the year ended December 31, 2006 have been restated to reflect the correct classification of cash flows relating to drydocking. For more details, please see Note 2 to the financial statements of Shinyo Mariner Limited included elsewhere in this joint proxy statement/prospectus.
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||||||||||||
| Period from December 22, 2004 to December 31, 2004 | ||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| 2005 | 2006 | 2007 | ||||||||||||||
| (In Thousands of US$) | ||||||||||||||||
|
Statement of Operations Data
|
||||||||||||||||
| Revenue | $ | — | $ | 11,498 | $ | 8,857 | $ | 12,185 | ||||||||
| Total operating expenses | (1 | ) | (5,783 | ) | (7,853 | ) | (8,933 | ) | ||||||||
| Total other expense, net | (8 | ) | (2,274 | ) | (3,074 | ) | (2,895 | ) | ||||||||
| Operating (loss) income | (1 | ) | 5,715 | 1,005 | 3,252 | |||||||||||
| Net income (loss) | (9 | ) | 3,441 | (2,069 | ) | 356 | ||||||||||
|
Balance Sheet Data
(at end of period): |
||||||||||||||||
| Cash | — | 1,462 | 357 | 827 | ||||||||||||
| Total assets | 5,870 | 57,901 | 57,872 | 51,681 | ||||||||||||
| Total liabilities | 5,879 | 54,469 | 56,509 | 49,962 | ||||||||||||
| Total shareholder's (deficit) equity | (9,348 | ) | 3,432 | 1,363 | 1,719 | |||||||||||
|
Cash Flow Data:
|
(Restated) | |||||||||||||||
| Net cash provided by operating activities | — | 7,919 | 825 | 5,070 | ||||||||||||
| Net cash used in investing activities | — | (53,580 | ) | 750 | (750 | ) | ||||||||||
| Net cash provided by (used in) financing activities | — | 47,123 | (2,680 | ) | (3,850 | ) | ||||||||||
34
SHINYO SAWAKO LIMITED SELECTED FINANCIAL INFORMATION
The following selected historical statement of operations data for the period from March 2, 2006 (date of incorporation) to December 31, 2006 and the year ended December 31, 2007, the selected historical balance sheet data as of December 31, 2006 and 2007 and the selected historical cash flow data for the period from March 2, 2006 (date of incorporation) to December 31, 2006 and the year ended December 31, 2007 have been derived from Shinyo Sawako Limited's audited financial statements included elsewhere in this joint proxy statement/prospectus. Shinyo Sawako Limited's audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see note 1 to Shinyo Sawako Limited's audited financial statements. You should read the selected historical financial data in conjunction with those financial statements and the accompanying notes and “Management's Discussion and Analysis of Financial Condition and Result of Operations of the SPVs.” Shinyo Sawako Limited's historical results do not necessarily indicate results expected for any future periods.
|
|
|
|
||||||
| Period from March 2, 2006 to December 31, 2006 | Year Ended December 31, 2007 | |||||||
| (In Thousands of US$) | ||||||||
|
Statement of Operations Data
|
||||||||
| Revenue | $ | 20,028 | $ | 13,479 | ||||
| Total operating expenses | (11,978 | ) | (8,328 | ) | ||||
| Total other expense, net | (2,333 | ) | (2,290 | ) | ||||
| Operating income | 8,050 | 5,151 | ||||||
| Net income | 5,717 | 2,861 | ||||||
|
Balance Sheet Data (at end of period):
|
||||||||
| Cash | 5,676 | 6,707 | ||||||
| Total assets | 57,719 | 53,453 | ||||||
| Total liabilities | 52,002 | 44,874 | ||||||
| Total shareholder's equity | 5,717 | 8,579 | ||||||
|
Cash Flow Data:
|
||||||||
| Net cash provided by operating activities | 10,458 | 10,081 | ||||||
| Net cash used in investing activities | (53,887 | ) | — | |||||
| Net cash provided by (used in) financing activities | 49,105 | (9,050 | ) | |||||
35
ENERGY INFRASTRUCTURE ACQUISITION CORP. AND
SPVS TO BE ACQUIRED (TO BE KNOWN AS VAN ASIA TANKERS CORPORATION) UNAUDITED PRO FORMA SUMMARY FINANCIAL DATA
Anticipated Accounting Treatment
The Business Combination will be accounted for as a “reverse merger” since, among other considerations, immediately following completion of the transaction, the stockholder of the SPVs immediately prior to the Business Combination will have effective control of Energy Infrastructure through its approximately 39% stockholder interest in the combined entity, assuming no stockholder redemptions (40% in the event of maximum stockholder redemptions) and control of a majority of the board of directors and all of the senior executive positions. For accounting purposes, the SPVs (through Energy Merger, a newly-formed holding company) will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of the SPVs, i.e., the issuance of stock by the SPVs (through Energy Merger) for the stock of Energy Infrastructure and a cash dividend equal to the cash portion of the consideration. Accordingly, the combined assets, liabilities and results of operations of the SPVs will become the historical financial statements of Energy Infrastructure, and Energy Infrastructure's assets, liabilities and results of operations will be consolidated with the SPVs beginning on the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction, except that the concurrent acquisition of the 50% equity interest in three of the SPVs currently held by a third party will result in the step-up of the proportionate share of assets and liabilities acquired to reflect consideration paid.
The following unaudited pro forma summary financial information has been prepared assuming that the business combination has occurred at the beginning of the applicable period for pro forma statements of operations data and at the respective date for pro forma balance sheet data. Two different levels of approval of the acquisition by Energy Infrastructure's stockholders are presented, as follows:
| • | Assuming No Redemption of Shares: This presentation assumes that no stockholders exercised their redemption rights; and |
| • | Assuming Redemption of 1,087,520 Shares (5%): This presentation assumes that holders of 1,087,520 shares of Energy Infrastructure's outstanding common stock exercise their redemption rights. |
The unaudited pro forma summary information is for illustrative purposes only. You should not rely on the unaudited pro forma summary balance sheet as being indicative of the historical financial position that would have been achieved had the Business Combination been consummated as of the balance sheet date. See “Risk Factors — Risks Relating to Energy Merger — The historical financial and operating data of the SPVs and the pro forma summary financial information of Energy Merger may not be representative of Energy Merger's future results because Energy Merger has no operating history as a stand-alone entity or as a publicly traded company.”
36
Unaudited Pro Forma Summary Statements of Operations Data
(In Thousands, Except Per Share Amounts)
|
|
|
|
||||||
|
Three Months Ended
March 31, 2008 |
Year Ended December 31, 2007 | |||||||
| Revenue | $ | 36,715 | $ | 125,355 | ||||
| Operating income | $ | 16,397 | $ | 28,485 | ||||
| Net income | $ | 10,033 | $ | 11,781 | ||||
|
Net income per share – assuming no redemption of shares:
|
||||||||
| Basic | $ | 0.21 | $ | 0.25 | ||||
| Diluted | $ | 0.19 | $ | 0.23 | ||||
|
Shares used in computation of net income per share, assuming no redemption of shares:
|
||||||||
| Basic | 46,990,247 | 46,990,247 | ||||||
| Diluted | 52,136,575 | 52,136,575 | ||||||
|
Net income per share – assuming redemption of 1,087,520 of shares:
|
||||||||
| Basic | $ | 0.22 | $ | 0.26 | ||||
| Diluted | $ | 0.20 | $ | 0.23 | ||||
|
Shares used in computation of net income per share, assuming redemption of 1,087,520 shares:
|
||||||||
| Basic | 45,857,727 | 45,857,727 | ||||||
| Diluted | 51,004,055 | 51,004,055 | ||||||
The unaudited pro forma balance sheet data reflects the acquisition of the SPVs holding a fleet of vessels from Vanship and the drawdown of the loan to partially finance that transaction as further discussed in the “Summary” section of this document. The historical balance sheet of Energy Infrastructure at March 31, 2008 used in the preparation of the unaudited pro forma financial information has been derived from the unaudited balance sheet of Energy Infrastructure at March 31, 2008.
Separate pro forma balance sheet information has been presented for the following circumstances: (1) assuming that no Energy Infrastructure stockholders exercise their right to have their shares redeemed upon the consummation of the Business Combination and (2) assuming that holders of 1,087,520 shares of Energy Infrastructure common stock elect to have their shares redeemed upon the consummation of the Business Combination at the redemption value of $10.00 per share, based on the amount held in the Energy Infrastructure Trust Account, plus interest income to date thereon, at March 31, 2008.
For more detailed financial information, see “Unaudited Pro Forma Condensed Combined Financial Information”.
Unaudited Pro Forma Summary Balance Sheet Data
(In Thousands)
|
|
|
|
||||||
| At March 31, 2008 | ||||||||
| Assuming No Redemption of Shares | Assuming Redemption of 1,087,520 Shares | |||||||
| Current assets | $ | 21,768 | $ | 10,745 | ||||
| Total assets | 587,012 | 575,989 | ||||||
| Current liabilities | 55,895 | 55,895 | ||||||
| Total liabilities | 430,295 | 430,295 | ||||||
| Common stock subject to possible redemption | — | — | ||||||
| Stockholders' equity | 156,717 | 145,695 | ||||||
37
MARKET PRICE AND DIVIDEND INFORMATION
Energy Infrastructure's units commenced trading on the American Stock Exchange under the symbol “EIIU,” on July 18, 2006. Effective on October 4, 2006, Energy Infrastructure's common stock and warrants began to trade separately under the symbols “EII,” and “EII.WS”, respectively, and the units ceased trading. The closing high and low sales prices of Energy Infrastructure's units, common stock, and warrants as reported by the American Stock Exchange, for the quarters indicated are as follows:
|
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||||||||||||||||||
| Units | Common Stock | Warrants | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
|
2006:
|
||||||||||||||||||||||||
|
Third Quarter
(July 21 to September 30) |
$ | 10.00 | $ | 9.70 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Fourth Quarter
(October 1 to October 4) (1) |
9.85 | 9.74 | — | — | — | — | ||||||||||||||||||
|
Fourth Quarter
(October 5 to December 31) (1) |
— | — | 9.55 | 9.11 | 0.78 | 0.27 | ||||||||||||||||||
|
2007:
|
||||||||||||||||||||||||
| First Quarter | — | — | 9.64 | 9.31 | 0.86 | 0.45 | ||||||||||||||||||
| Second Quarter | — | — | 9.86 | 9.56 | 1.67 | 0.80 | ||||||||||||||||||
| Third Quarter | — | — | 9.9 | 9.61 | 1.66 | 0.82 | ||||||||||||||||||
| Fourth Quarter (October 1 to December 5) (2) | — | — | 10.83 | 9.71 | 1.61 | 1.07 | ||||||||||||||||||
| Fourth Quarter (December 6 to December 31) | — | — | 10.14 | 9.88 | 1.30 | 0.95 | ||||||||||||||||||
|
2008:
|
||||||||||||||||||||||||
| First Quarter | — | — | 10.01 | 9.86 | 1.14 | 0.28 | ||||||||||||||||||
| Second Quarter | — | — | 10.18 | 9.90 | 0.70 | 0.18 | ||||||||||||||||||
| (1) | Energy Infrastructure's units ceased trading on October 4, 2006. Energy Infrastructure's common stock and warrants commenced trading separately as of this date. |
| (2) | The last full trading day prior to the announcement of a proposal for a business combination involving Energy Merger. On July 11, 2008, the closing price of Energy Infrastructure common stock and warrants was $9.91 and $0.09, respectively. |
As of June 13, 2008, there were nine stockholders of record of Energy Infrastructure common stock and three holders of record of Energy Infrastructure warrants. Such numbers do not include beneficial owners holding shares or warrants through nominees.
Energy Infrastructure is a blank check company and as a result, has never declared or paid any dividends on its common stock.
Stockholders are urged to obtain a current market quotation for Energy Infrastructure securities.
Energy Merger's securities are not currently listed and do not trade on any stock exchange. Energy Merger has applied to list its common stock and warrants on the American Stock Exchange under the symbols “VAN” and “VAN.WS,” respectively. Energy Merger is a recently formed company and no dividends have been paid on any Energy Merger securities.
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RISK FACTORS
You should carefully consider the following risk factors, together with all of the other information included in this joint proxy statement/prospectus, before you decide whether to vote or direct your vote to be cast to approve the proposals contained in this proxy statement.
If we complete the acquisition of the SPVs pursuant to the Business Combination, we will be subject to a number of risks. You should carefully consider the risks we describe below and the other information included in this joint proxy statement/prospectus before you decide how you want to vote on the Business Combination Proposal. Following the closing of the acquisition, the market price of our common stock could decline due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information included in this joint proxy statement/prospectus, including our financial statements and the accompanying notes. You should pay particular attention to the fact that we would become a holding company with substantial operations outside of the United States. As a result, we would be subject to legal and regulatory environments that differ in many respects from those of the U.S. Our business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below.
Risks Relating to Energy Merger
Energy Merger has no operating history and may not operate profitably in the future.
Energy Merger was formed on November 30, 2007 as a wholly-owned subsidiary of Energy Infrastructure. Energy Merger has entered into an agreement and plan of merger with Energy Infrastructure and an agreement to acquire the capital stock of nine vessel-owning SPVs from Vanship but it has no operating history. Its financial statements do not provide a meaningful basis for you to evaluate its operations and ability to be profitable in the future and it may not be profitable in the future.
The historical financial and operating data of the SPVs and the pro forma combined financial information of Energy Merger may not be representative of Energy Merger's future results because Energy Merger has no operating history as a stand-alone entity or as a publicly traded company.
The historical financial and operating data of the SPVs and the pro forma combined financial information of Energy Merger may not be representative of Energy Merger's future results because Energy Merger has no operating history as a stand-alone entity or as a publicly traded company. Energy Merger's pro forma financial information has been adjusted to give effect to pro forma events that are directly attributable to the Business Combination, factually supportable, and expected to have a continuing impact on the combined results of the SPVs and Energy Infrastructure. The results of operations, cash flows and financial condition reflected in the SPVs financial statements include all expenses allocable to their operations. However, due to factors such as the additional administrative and financial obligations associated with operating as a publicly traded company, such financial information may not be indicative of the results of operations that the SPVs would have achieved had they operated as a public entities for all periods presented or of future results that Energy Merger may achieve as a publicly traded company with its expected holding company structure.
Energy Merger's senior executive officers and directors may not be able to organize and effectively manage a publicly traded operating company which could adversely affect Energy Merger's overall financial position.
None of the individuals who will serve as Energy Merger's senior executive officers or directors have previously organized and managed a publicly traded operating company, and Energy Merger's senior executive officers and directors may not be successful in doing so. The demands of organizing and managing a publicly traded operating company are much greater as compared to a private company and some of Energy Merger's senior executive officers and directors may not be able to meet those increased demands. Failure to organize and effectively manage Energy Merger could adversely affect Energy Merger's overall financial position.
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Energy Merger may be unable to retain key management personnel, which may negatively affect the effectiveness of its management and its results of operations.
Energy Merger's success will depend to a significant extent upon the abilities and efforts of Captain C.A.J. Vanderperre, its Chairman and Mr. Fred Cheng, its Chief Executive Officer and member of its board of directors. Captain Vanderperre and Mr. Cheng are the directors and co-founders of Vanship, the company from which Energy Merger will acquire its initial fleet and are co-founders of the Manager. Energy Merger's success will partially depend upon its ability to retain these two individuals and the loss of either of these individuals could adversely affect Energy Merger's business prospects and financial condition. Energy Merger does not intend to enter into employment agreements with, or maintain “key man” life insurance on, either of these individuals.
Energy Merger will depend on its Manager to operate its business.
Energy Merger is a recently formed company with no current plans to have any employees other than a Chief Executive Officer and Chief Financial Officer. Pursuant to a management agreement, Van Asia Capital Management, or the Manager, and its affiliate, Univan Ship Management Limited, or Univan, will provide Energy Merger with its officers and with technical, administrative and strategic services (including vessel maintenance, crewing, purchasing, shipyard supervision, insurance, assistance with regulatory compliance and financial services). The Manager is a newly formed ship management company that will have no operations prior to the Business Combination. Energy Merger's operational success and ability to execute its growth strategy will depend significantly upon the Manager's satisfactory performance of these services. Energy Merger's business will be harmed if the Manager fails to perform these services satisfactorily. In addition, if the management agreement were to be terminated or if its terms were to be altered, Energy Merger's business could be adversely affected, as it may not be able to immediately replace such services, or even if replacement services are immediately available, the terms offered may be less favorable to Energy Merger than the ones to be offered by the Manager.
Energy Merger's ability to compete for and to enter into new agreements for the hire of a vessel, or charters, and expand its relationships with its charterers will depend largely on its relationship with the Manager and the Manager's reputation and relationships in the shipping industry. If the Manager suffers material damage to its reputation or relationships, it may harm Energy Merger's ability to:
| • | renew existing charters upon their expiration; |
| • | obtain new charters; |
| • | successfully interact with shipyards during periods of vessel construction constraints; |
| • | obtain financing on commercially acceptable terms; |
| • | maintain satisfactory relationships with its customers and suppliers; or |
| • | successfully execute its growth strategy. |
If Energy Merger's ability to do any of the foregoing is impaired, it could have a material adverse effect on Energy Merger's business, results of operations and financial condition.
The Manager is expected to arrange that its affiliate, Univan, provide technical management for Energy Merger’s fleet. Univan is a technical ship management company that has provided technical management for the fleet prior to the completion of the Business Combination. If either the Manager or Univan encounter business or financial difficulties, Energy Merger may not be able to adequately charter, maintain or staff its vessels. Because the Manager and Univan are privately held, it is unlikely that information about their financial strength would become public prior to any default under the management agreement. As a result, an investor in Energy Merger's shares might have little advance warning of problems affecting the Manager or Univan, even though those problems could have a material adverse effect on Energy Merger. The loss of the Manager's or Univan's services or the failure by either of them to perform their obligations to Energy Merger could materially and adversely affect Energy Merger's business, financial condition, results of operations and ability to pay dividends.
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The Manager will effectively subsidize Energy Merger’s operations unless Energy Merger expands its fleet or sells vessels. This may lead the Manager to recommend purchases or sales of vessels that are not in Energy Merger’s best interest or may lead the Manager to seek to increase its fees under Energy Merger’s management agreement, either of which could have an adverse effect on Energy Merger’s results of operations.
Energy Merger’s management believes that its Manager will provide management services to Energy Merger that are of a value in excess of the management fee that Energy Merger will be initially obligated to pay the Manager. The management agreement provides that the Manager will receive a monthly administrative services fee of $25,000 in its first full year of operation, $50,000 in its second full year of operation and $75,000 in its third full year of operation. In addition, Energy Merger will be entitled to receive a daily vessel management fee of $3,500 for each vessel owned by Energy Merger. However, the nine vessels to be acquired in the Business Combination will not be subject to the daily vessel management fee. Energy Merger’s management believes that the Manager will effectively subsidize Energy Merger’s initial operations and will only break even on the services it provides to Energy Merger if Energy Merger expands its fleet or engages in sales and purchases of vessels. The Manager will earn commissions in the event of a sale or purchase of a vessel and will earn commissions on any charter hire paid to Energy Merger pursuant to a charter agreement that is procured by the Manager. This may incentivize the Manager to recommend and negotiate purchase and sale transactions at times or at prices that are not in Energy Merger’s best interests.
In addition, the fee structure under the management agreement is fixed until June 30, 2011 and subject to renegotiation annually thereafter. If the Manager is unable to break even or make a profit on the services it provides to Energy Merger, it may seek to significantly increase the management fees under the management agreement. In addition, if the Manager is not able to earn a profit on the services it provides to Energy Merger, it may not hire the personnel or contract with service providers who are adequately qualified to perform the services that it is obligated to provide to Energy Merger. A significant increase in management fees or the failure of the Manager to hire and retain qualified personnel could have a materially adverse effect on Energy Merger’s results of operations and ability to pay dividends.
Energy Merger will depend on directors who may have conflicts of interest.
Upon consummation of the Business Combination, Captain Charles Arthur Joseph Vanderperre will serve as the Chairman of Energy Merger's board of directors and Mr. Fred Cheng will be a member of Energy Merger's board of directors and Energy Merger's Chief Executive Officer. These two directors are also the directors and co-founders of Vanship, the company from which Energy Merger will acquire its initial fleet. In addition, these two individuals are the co-founders of the Manager and Captain Vanderperre founded and controls the Manager’s affiliate, Univan, the company which the Manager will procure as technical manager of the vessels in Energy Merger's fleet. None of Captain Vanderperre, Mr. Cheng, the Manager or Univan will be required to devote all of their professional time to Energy Merger. In addition, it is expected that all of them will continue to engage in shipping activities and other businesses not involving Energy Merger. Captain Vanderperre and Mr. Cheng may devote less time to Energy Merger than if they were not engaged in such other business activities, owe fiduciary duties to the stockholders of each company with which they are affiliated and may have conflicts of interest in matters involving or affecting Energy Merger and its customers. In addition, due to their respective interests in Vanship, the Manager and Univan, they may have conflicts of interest when faced with decisions that could have different implications for Vanship, the Manager and Univan than they do for Energy Merger. We cannot assure you that any of these conflicts of interest will be resolved in Energy Merger's favor.
One of Energy Merger's stockholders, Vanship, will be able to influence Energy Merger, including the outcome of stockholder votes, and the issuance of preferred stock to Vanship and concentration of ownership of Energy Merger's common shares by Vanship could have an adverse effect on the market price of Energy Merger's common stock.
Upon the completion of the Business Combination, assuming that Vanship purchases 5,000,000 units in the Business Combination Private Placement, Vanship is expected to own at least 39.4% of Energy Merger's outstanding shares of common stock. Pursuant to the contractual obligations of Energy Merger under the Share Purchase Agreement, Vanship is expected to (i) effectively control the election of seven individuals to
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initially serve on Energy Merger's nine person board of directors upon completion of the Business Combination and (ii) be issued one share of special voting preferred stock upon completion of the Business Combination. As the sole holder of special voting preferred stock, Vanship will have a continuing right to elect three of Energy Merger’s nine directors. In addition, the affirmative vote of a majority of the directors elected directly by Vanship will be required to approve the authorization or issuance of any additional shares of preferred stock.
While Vanship has no agreement, arrangement or understanding relating to the voting of its shares of Energy Merger's common stock or special voting preferred stock, it will effectively control the outcome of matters on which Energy Merger's stockholders are entitled to vote, including the election of directors, the adoption or amendment of provisions in Energy Merger's articles of incorporation or bylaws and possible mergers, corporate control contests and other significant corporate transactions. This concentration of ownership of common stock and sole ownership of special voting preferred stock may have the effect of delaying, deferring or preventing a change in control, a merger, consolidation, takeover or other business combination. This concentration of ownership of common stock and sole ownership of special voting preferred stock could also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Energy Merger, thereby depriving stockholders of Energy Merger from the opportunity to receive a control premium for their shares, which could in turn have an adverse effect on the market price of Energy Merger's common stock.
Vanship and its affiliates may acquire or charter vessels that compete with Energy Merger's fleet and such competition may adversely affect Energy Merger's business and results of operations.
Captain Vanderperre and Mr. Cheng, who will be Energy Merger's Chairman and Chief Executive Officer, respectively, upon consummation of the Business Combination, are the directors and co-founders of Vanship. Under the Share Purchase Agreement, Vanship has agreed that for the three years following the Business Combination it will not engage in any business that would directly compete with Energy Merger's anticipated business of owning and chartering VLCCs. However, this agreement is subject to certain exceptions and during the three year period subsequent to the Business Combination, Vanship will be permitted to engage in competitive businesses provided that it first offers the opportunity to acquire or participate in such competitive business to Energy Merger. In the event that Vanship were to offer Energy Merger the opportunity to acquire or participate in a competitive business and Energy Merger were to refuse such offer, Vanship would be permitted to pursue the business opportunity and compete with Energy Merger. In addition, Energy Merger's articles of incorporation provide that if a person, such as Captain Vanderperre or Mr. Cheng, who serves as a director or officer of both Vanship and Energy Merger acquires knowledge of a business opportunity that may be valuable to Energy Merger, such director or officer is not required to communicate or offer such business opportunity to Energy Merger unless the business opportunity is offered to such director or officer solely in such person's capacity as a director or officer of Energy Merger. If Energy Merger and Vanship were to compete in the business of owning and chartering VLCCs, we cannot assure you that the directors or officers of Energy Merger who also serve as directors or officers of Vanship, the Manager and Univan would provide business opportunities of which they become aware to Energy Merger in lieu of Vanship. As a result, Energy Merger's business and results of operations may be adversely affected.
Energy Merger’s Manager may manage, acquire or charter vessels that compete with Energy Merger’s fleet and such competition may adversely affect Energy Merger’s business and results of operations.
Energy Merger’s Manager will not be restricted from engaging in activities that may be competitive with Energy Merger. The Manager is a newly formed ship management company and in addition to managing Energy Merger’s operations and fleet, it intends to carry on an independent business managing other ships, shipping companies, shipping funds and other shipping related assets. Although the non-compete provisions of the Share Purchase Agreement generally will restrict Vanship from engaging in competitive businesses for three years following the completion of the Business Combination, the Manager, which is under common control with Vanship, will not be similarly restricted. In fulfilling its duties to Energy Merger, the Manager will be permitted to consider its overall responsibility in relation to all vessels entrusted to its management. If the Manager were to own or manage vessels that are in competition with Energy Merger’s operations, we cannot assure you that the Manager would provide business opportunities of which it becomes aware to
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Energy Merger in lieu of itself or other parties for whom it manages vessels. As a result, Energy Merger’s business and results of operations may be adversely affected.
The management agreement between Energy Merger and the Manager may be less favorable to Energy Merger than agreements that Energy Merger could obtain from unaffiliated third parties.
Upon consummation of the Business Combination, Energy Merger intends to enter into a management agreement with the Manager for management of substantially all of its operations as well as commercial management of Energy Merger's fleet. The Manager is a newly formed ship management company that is controlled by Captain Vanderperre. The management agreement has been negotiated in the context of an affiliated relationship. The negotiation of this agreement may have resulted in prices and other terms that are less favorable to Energy Merger than terms Energy Merger might have obtained in arm's-length negotiations with unaffiliated third parties for similar services. In addition, any future amendments to the management agreement may result in terms that are less favorable to Energy Merger than terms Energy Merger might obtain in arm's-length negotiations with an unaffiliated third party.
Energy Merger will depend upon a few significant customers for a large part of its revenue and the loss of one or more of these customers could adversely affect its financial performance.
Energy Merger expects to derive a significant part of its revenue from a small number of customers. For the year 2008, the SPVs that Energy Merger will acquire are expected to derive 100% of their revenue from five customers. If one or more of these customers is unable to perform under one or more charters with the SPVs and Energy Merger is not able to find a replacement charter, or if a customer exercises certain rights to terminate the charter, Energy Merger could suffer a loss of revenue that could materially adversely affect its business, financial condition, results of operations and cash available for distribution as dividends to its stockholders.
Time charters are charters under which the shipowner is paid charterhire on a per-day basis for a specified period of time and a consecutive voyage charter is a contract for hire of a ship under which the shipowner is paid freight on the basis of moving cargo from a loading port to a discharge port for more than one voyage over a period of time. We refer to our time charters and consecutive voyage charters collectively as period charters. Energy Merger could lose a customer or the benefits of a period charter if, among other events:
| • | the customer fails to make charter payments because of its financial inability, disagreements with Energy Merger or otherwise; |
| • | the customer terminates the charter because Energy Merger fails 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, referred to as off-hire, in which a vessel is out-of-service due to, among other things, repairs or drydockings, or Energy Merger defaults under the charter; |
| • | the customer terminates the charter because the vessel has been subject to seizure for more than the period specified in its charter; or |
| • | the customer terminates the charter because of the occurrence of war or hostilities between certain countries specified in its charter. |
If Energy Merger loses a key customer, it may be unable to obtain charters on comparable terms or may become subject to the volatile spot market, which is highly competitive and subject to significant price fluctuations. The loss of any of Energy Merger's customers, period charters or vessels, or a decline in payments under its charters, could have a material adverse effect on its business, results of operations and financial condition and its ability to pay dividends.
If Energy Merger fails to manage its planned growth properly, it may not be able to successfully expand its fleet, thereby adversely affecting its overall financial position.
Energy Merger intends to continue to expand its fleet. Energy Merger's growth will depend on:
| • | locating and acquiring suitable vessels; |
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| • | identifying and consummating acquisitions or joint ventures; |
| • | integrating any acquired vessels successfully with its existing operations; |
| • | enhancing its customer base; |
| • | managing its expansion; and |
| • | obtaining required financing. |
During periods in which charter hire rates are high, vessel values generally are high as well, and it may be difficult to identify vessels for acquisition at favorable prices. In addition, 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, and the possibility that new building warranties or indemnification agreements with respect to used vessels will be unenforceable or insufficient to cover potential losses and difficulties associated with imposing common standards, controls, procedures and policies. Energy Merger may not be successful in executing its growth plans and may incur significant expenses and losses, which could adversely affect the price of Energy Merger's common stock and warrants and its ability to pay dividends.
In the highly competitive VLCC shipping industry, Energy Merger may not be able to compete for charters with new entrants or established companies with greater resources which may adversely affect its results of operations.
Energy Merger will employ its vessels in a highly competitive market that is capital intensive and fragmented. Competition arises primarily from other vessel owners, including major oil companies as well as independent tanker companies, some of whom have substantially greater resources and experience than Energy Merger. Competition for the chartering of VLCCs can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Due in part to the fragmented market, competitors with greater resources could operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets, which could result in Energy Merger not obtaining full-time charters for its vessels or obtaining lower rates under its charters, either of which could adversely affect its results of operations.
Purchasing and operating secondhand vessels may result in increased operating costs and vessel off-hire, which could adversely affect Energy Merger's earnings.
Energy Merger will acquire a fleet of secondhand vessels with an average age of approximately 12.9 years and Energy Merger may purchase additional secondhand vessels in the future. Energy Merger's inspection of secondhand vessels prior to purchase does not provide it with the same knowledge about their condition and cost of any required or anticipated repairs that it would have had if these vessels had been built for and operated exclusively by Energy Merger. Generally, Energy Merger will not receive the benefit of warranties on secondhand 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, environmental or other equipment standards related to the age of tankers and other types of vessels may require expenditures for alterations or the addition of new equipment to Energy Merger's vessels to comply with safety or environmental laws or regulations that may be enacted in the future. These laws or regulations may also restrict the type of activities in which Energy Merger's vessels may engage or the geographic regions in which they may operate. Energy Merger cannot predict what alterations or modifications its vessels may be required to undergo in the future or that as its vessels age, market conditions will justify any required expenditures or enable it to operate its vessels profitably during the remainder of their useful lives. The acquisition of secondhand vessels may result in higher operating and maintenance costs due to the age and condition of those vessels which could adversely affect Energy Merger's earnings.
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Energy Merger's vessels may be subject to unbudgeted periods of off-hire, which could adversely affect its cash flow and financial condition.
Under the terms of the charter agreements under which the vessels in Energy Merger's initial fleet will operate, when a vessel is “off-hire,” or not available for service, the charterer generally is not required to pay the hire rate, and Energy Merger will be responsible for all costs, including the cost of fuel bunkers unless the charterer is responsible for the circumstances giving 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; |
| • | crewing strikes, labor boycotts, certain vessel detentions or similar problems; or |
| • | Energy Merger's 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. |
Any unbudgeted and sustained periods of off-hire would have an adverse effect on Energy Merger's cash flow, financial condition and results of operations.
Energy Merger may face unexpected maintenance costs, which could adversely affect its cash flow and financial condition.
If Energy Merger's vessels suffer damage or require upgrade work, they may need to be repaired at a drydocking facility. The vessels that Energy Merger will acquire may occasionally require upgrade work in order to maintain their classification society rating or as a result of changes in regulatory requirements. 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 its earnings. Energy Merger's insurance will generally only cover 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. Energy Merger may be unable to find space at a suitable drydocking facility or it 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 Energy Merger's vessels are forced to wait for space or to relocate to drydocking facilities that are farther away from the routes on which its vessels trade would further decrease its earnings.
For example, in 2006 the vessel Shinyo Mariner was scheduled for a special survey during which steel renewal work was to be undertaken at a Chinese state-owned shipyard. Prior to the renewal work, audio-gauging conducted to determine the thickness of the vessel's steel structures showed that the amount of steel renewal work for the vessel would be substantially more extensive than anticipated, requiring both more steel and more steel workers to complete the renewal. The yard subsequently advised that it did not employ enough steel workers to expediently complete the renewal project. In addition, the yard prioritized work on a Chinese state-owned vessel over work on the Shinyo Mariner. As a result of these factors, the steel renewal work took longer than expected and the Shinyo Mariner was drydocked for 170 days, instead of the scheduled 38 days. As a result of the prolonged drydock, the charterer of the vessel unilaterally terminated the then current charter agreement under which the Shinyo Mariner operated. The vessel Shinyo Alliance similarly had an unexpectedly long drydocking in 2006 as a result of a drydocking facility not having sufficient steel or steel workers for steel renewal work that was more extensive than anticipated, resulting in 110 days of drydocking instead of the scheduled 25 days.
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One of the vessels that Energy Merger expects to acquire is subject to a mutual sale provision between the SPV that owns the vessel and the charterer of the vessel, which, if exercised, could reduce the size of Energy Merger's fleet and reduce its future revenue.
The SPV that owns the vessel Shinyo Ocean has agreed to a mutual sale provision with its charterer whereby either party can request the sale of the vessel provided that a price can be obtained that is at least $3,000,000 greater than the then current value of the vessel as set forth in the charter agreement. If this provision is exercised, Energy Merger may not be able to obtain a replacement vessel for the price at which it sells the vessel. In such a case, the size of Energy Merger's fleet would be reduced and Energy Merger may experience a reduction in its future revenue.
Energy Merger may not have adequate insurance to compensate it if it loses its vessels, which may have a material adverse effect on its financial condition and results of operation.
There are a number of risks associated with the operation of ocean-going vessels, including mechanical failure, collision, human error, war, terrorism, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. Any of these events may result in loss of revenue, increased costs and decreased cash flows. In addition, following the terrorist attack in New York City on September 11, 2001, and the military response of the United States, the likelihood of future acts of terrorism may increase, and Energy Merger's vessels may face higher risks of attack. Future hostilities or other political instability, as shown by the attack on the Limburg in Yemen in October 2002, could affect Energy Merger's trade patterns and adversely affect its operations and revenue, cash flows and profitability and could preclude Energy Merger's ability to obtain insurance for such acts at reasonable rates and receive insurance proceeds for any resulting loss. In addition, the operation of any vessel is subject to the inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.
Energy Merger is expected to procure hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance coverage and war risk insurance for its fleet. Energy Merger does not expect to maintain for all of its vessels insurance against loss of hire, which covers business interruptions that result from the loss of use of a vessel. Energy Merger may not be adequately insured against all risks. If Energy Merger's insurance is not enough to cover claims that may arise, the deficiency may have a material adverse effect on Energy Merger's financial condition and results of operations.
Energy Merger cannot assure investors that it will adequately insure against all risks and Energy Merger may not be able to obtain adequate insurance coverage at reasonable rates for its fleet in the future. For example, a catastrophic spill could exceed Energy Merger's insurance coverage and have a material adverse effect on its financial condition. In addition, Energy Merger may not be able to procure adequate insurance coverage at commercially reasonable rates in the future and Energy Merger cannot guarantee that any particular claim will be paid. Moreover, Energy Merger's insurance policies may contain deductibles for which it will be responsible and limitations and exclusions which may increase its costs or lower its revenue. In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable. Furthermore, even if insurance coverage is adequate to cover Energy Merger's losses, Energy Merger may not be able to timely obtain a replacement ship in the event of a loss. Energy Merger may also be subject to calls, or premiums, in amounts based not only on its own claim records but also the claim records of all other members of the protection and indemnity associations through which Energy Merger will receive indemnity insurance coverage for tort liability. Energy Merger's payment of these calls could result in significant expenses to it that could reduce its cash flows and place strains on its liquidity and capital resources.
Energy Merger will not be able to take advantage of favorable opportunities in the current spot market with respect to vessels employed on medium- to long-term time charters.
The spot market for VLCCs is very volatile but is currently at an historically high level. The nine tankers that Energy Merger will acquire are contractually committed to period charters, with the remaining terms of these charters expiring during the period from and including 2009 through 2017. Although period charters will
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generally provide reliable revenue, they will also limit the portion of Energy Merger's fleet available for spot market voyages during an upswing in the tanker industry cycle, when spot market voyages might be more profitable. In addition, if Energy Merger were to sell a vessel that is committed to a medium or long term charter, Energy Merger 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. Energy Merger may re-charter its vessels on medium- or long-term charters or charter them in the spot market upon expiration or termination of the vessels' current charters. If Energy Merger is not able to employ its vessels profitably under time charters or in the spot market, its results of operations and operating cash flow may suffer and it may be unable to pay you dividends.
Unless Energy Merger sets aside reserves or is able to borrow funds for vessel replacement, at the end of a vessel's useful life Energy Merger's revenue will decline, which would adversely affect its business, results of operations and financial condition.
Unless Energy Merger maintains reserves or is able to borrow funds for vessel replacement, it will be unable to replace the vessels in its fleet upon the expiration of their remaining useful lives, which we expect to range from 5 to 17 years, based on a 25 year estimated useful life from the date of the vessel's initial delivery from the shipyard, or a useful life extending no later than the year 2015 with respect to single-hull vessels. Energy Merger's cash flows and income will be dependent on the revenue earned by the chartering of its vessels to customers. Any reserves set aside for vessel replacement would not be available for dividends. If Energy Merger is unable to replace the vessels in its fleet upon the expiration of their useful lives, its business, results of operations, financial condition and ability to pay dividends will be materially and adversely affected.
Delays in deliveries or non-delivery of newbuildings could harm Energy Merger's operations.
Energy Merger may contract to acquire newbuilding vessels subsequent to the completion of the Business Combination. The delivery of any newbuilding vessels could be delayed, cancelled or otherwise not completed as a result of, among other things: quality or engineering problems or delays in the receipt of construction materials such as steel; changes in governmental regulations or maritime organization standards; labor disturbances or catastrophic events at a shipyard or financial crisis of a shipbuilder; a backlog of orders at the relevant shipyards; political or economic disturbances which adversely affect the relevant shipyards; changes Energy Merger needs to make to the vessel specifications; Energy Merger's inability to obtain necessary permits or approvals or to receive the required classifications for the vessels; Energy Merger's inability to finance the purchase of the vessels; weather interference or a catastrophic event, such as a major earthquake or fire or any other force majeure; or a shipbuilder's failure to otherwise meet the scheduled delivery dates for the vessels or failure to deliver the vessels at all.
If the delivery of a vessel is delayed or cancelled in circumstances where Energy Merger has committed the vessel to a charter, Energy Merger may be obliged to source an alternative vessel for its customer and pay the differential between the rate agreed with Energy Merger and the rate for the substitute vessel. The costs involved could be significant. In addition, in some cases, if the delivery of a vessel to Energy Merger's customer is delayed, the customer may not be obliged to honor the relevant time charter.
If delivery of a vessel is delayed or cancelled, it could have an adverse effect on Energy Merger's business, results of operations, cash flow and financial condition.
Energy Merger, or any of its foreign corporate subsidiaries, may become subject to United States federal income taxation on its U.S. source shipping income.
Some of the vessels owned by the SPVs have in the past operated to and from the United States on occasion. Most of the vessels are operated under a time charter that allows the charterer to determine where the vessel goes. If a vessel operates to or from the United States, a portion of the charter income from the vessel attributable to such trips may constitute “United States source gross transportation income.” United States source gross transportation income generally is subject to U.S. federal income tax at a 4% rate, unless exempt under Section 883 of the Code. Section 883 of the Code generally provides an exemption from U.S. federal income tax in respect of gross income earned by certain foreign corporations from the international
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operation of ships, but only if a number of requirements are met (including requirements concerning the ownership of the foreign corporation). It is unclear at this time whether the exemption under Section 883 of the Code will be available to Energy Merger or any of the SPVs for any United States source gross transportation income that they might have earned or whether the SPVs will be entitled to reimbursement from the charterer under any charter for any United States tax that would be imposed if the exemption is not available.
Energy Merger is a holding company, and will depend on the ability of its subsidiaries to distribute funds to it in order to satisfy its financial obligations or to make dividend payments.
Energy Merger is a holding company and its subsidiaries, all of which will be wholly-owned by it either directly or indirectly, will own all of Energy Merger's operating assets. Energy Merger will have no significant assets other than the equity interests in its wholly-owned subsidiaries. As a result, Energy Merger's ability to make dividend payments depends on its subsidiaries and their ability to distribute funds to Energy Merger. If Energy Merger is unable to obtain funds from its subsidiaries, Energy Merger may not be able to meet all of its obligations and may not be able to pay dividends.
The assumptions underlying Energy Merger's “Forecasted Cash Available for Dividends, Reserves and Extraordinary Expenses” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.
The financial forecast in Energy Merger's “Statement of Forecasted Results of Operations and Cash Available for Dividends, Reserves and Extraordinary Expenses” has been prepared by the management of Energy Infrastructure and Energy Infrastructure has not received an opinion or report on it from any independent registered public accounting firm and the forecast has not been prepared in accordance with generally accepted accounting principles. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If Energy Merger does not achieve the forecasted results, Energy Merger may not be able to operate profitably, successfully implement its business strategy to expand its fleet or pay dividends to its stockholders in which event the market price of Energy Merger's common shares may decline materially.
Energy Merger's loan agreements will contain restrictive covenants that may limit its liquidity and corporate activities.
The new senior secured credit facility that Energy Merger has entered into will, and any future loan agreements may, impose operating and financial restrictions on Energy Merger and the SPVs. These restrictions will limit their ability to:
| • | incur additional indebtedness; |
| • | create liens on its assets; |
| • | sell capital stock of its subsidiaries; |
| • | make investments; |
| • | engage in mergers or acquisitions; |
| • | pay dividends; |
| • | make capital expenditures; |
| • | change the management of its vessels or terminate or materially amend the management agreement relating to each vessel; and |
| • | sell its vessels. |
Therefore, Energy Merger may need to seek permission from its lenders in order to engage in some important corporate or other actions. The lenders' interests may be different from those of Energy Merger and its stockholders, and Energy Merger cannot guarantee that it will be able to obtain the lenders' permission
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when needed or desired. This may prevent Energy Merger from taking actions that are in its best interest and restrict its growth and flexibility in operating its business.
Servicing the debt that Energy Merger will incur upon completion of the Business Combination will limit funds available for other purposes and if Energy Merger cannot service its debt, it may lose its vessels.
Energy Merger expects to incur approximately $415 million of indebtedness in connection with the purchase of the SPVs and may also incur additional debt to finance the acquisition of additional vessels. Pursuant to its term loan facility with its lenders, Energy Merger will be eligible to borrow no more than $415 million upon completion of the Business Combination and the actual amount that it will be able to draw down under its credit facility will depend on the estimated charter free value of the vessels that Energy Merger will acquire. Energy Merger will be required to dedicate a portion of its cash flow from operations to pay the principal and interest on its debt. These payments will limit funds available for working capital, capital expenditures and other purposes, including making distributions to stockholders and further equity or debt financing in the future. Amounts borrowed under the credit facility will bear interest at variable rates. Increases in prevailing rates would generally increase the amounts that Energy Merger would have to pay to its lenders, even though the outstanding principal amount would remain the same, and as a result its net income and cash flows would decrease. A 1/8% increase or decrease in the rate of interest that Energy Merger would have to pay to its lenders will cause its annual interest expense to increase or decrease by approximately $519,000. Energy Merger expects its earnings and cash flow to vary from year to year due to the cyclical nature of the tanker industry. If Energy Merger does not generate or reserve enough cash flow from operations to satisfy its debt obligations, it may have to undertake alternative financing plans, such as:
| • | seeking to raise additional capital; |
| • | refinancing or restructuring its debt; |
| • | selling tankers or other assets; or |
| • | reducing or delaying capital investments. |
However, these alternative financing plans, if necessary, may not be sufficient to allow Energy Merger to meet its debt obligations. If Energy Merger is unable to meet its debt obligations or if some other default occurs under its credit agreements, the lenders could elect to declare that debt, together with accrued interest and fees, to be immediately due and payable and proceed against the collateral securing that debt, which will constitute its entire fleet and substantially all of its assets.
The majority of the SPVs have working capital deficits, which means that their current assets on December 31, 2007 were not sufficient to satisfy their current liabilities as at that date.
All of the SPVs other than Shinyo Jubilee Limited and Shinyo Kannika Limited had working capital deficits as of December 31, 2007. A working capital deficit means that current liabilities exceed current assets. Current liabilities are those which will fall due for payment within one year, and include the portion of any long term loans payable in that period. Current assets are assets that are expected to be converted to cash or otherwise utilized within one year and, therefore, may be used to pay current liabilities as they become due in that period. We expect that for accounting purposes the majority of the SPVs will continue to show a working capital deficit upon and subsequent to completion of the Business Combination. There can be no assurance that the charter hire revenue of each of the SPVs will be sufficient to provide the cash-flow necessary to fund their planned operations following completion of the Business Combination. Charter hire revenue could be insufficient to fund an SPV's operations for a number of reasons, including, but not limited to:
| • | unbudgeted periods of off-hire; |
| • | loss of a customer, early termination of a charter agreement or delay in receipt of charter hire; |
| • | increases in operating expenses; or |
| • | an increase in the interest rate on Energy Merger's floating rate debt. |
See “ — Energy Merger's vessels may be subject to unbudgeted periods of off-hire, which could adversely affect its cash flow and financial condition,” “ — Energy Merger will depend on a few significant
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customers for a large part of its revenue and the loss of one or more of these customers could adversely affect its financial performance” and “ — Servicing the debt that Energy Merger will incur upon completion of the Business Combination will limit funds available for other purposes and if Energy Merger cannot service it debt, it may lose its vessels.”
In the event that one or more of the SPVs does not generate enough charter hire revenue to fund its operations, Energy Merger may be required to seek to raise additional capital, restructure or refinance its debt, sell tankers or other assets or reduce or delay capital investments. However, these alternative financing plans, if necessary, may not be sufficient to allow Energy Merger to meet its debt obligations. If Energy Merger is unable to meet its debt obligations or if some other default occurs under its credit agreements, the lenders could elect to declare that debt, together with accrued interest and fees, to be immediately due and payable and proceed against the collateral securing that debt, which will constitute its entire fleet and substantially all of its assets.
The market value of the vessels that Energy Merger will acquire, which is near historically high levels, may decrease, which could limit the amount of funds that it can borrow under its credit facility, cause it to fail to meet certain financial covenants in its credit facility and adversely affect its operating results.
The market value of VLCCs has been volatile and market prices for secondhand vessels are currently near historically high levels. You should expect the market value of the vessels that Energy Merger intends to acquire to fluctuate depending on general economic and market conditions affecting the shipping industry and prevailing charter hire rates, competition from other shipping companies and other modes of transportation, types, sizes and age of vessels, applicable governmental regulations and the cost of newbuildings. If the market value of Energy Merger's vessels declines, it may not be able to draw down funds under its credit arrangements, distribute dividends and it may not be able to obtain other financing or incur debt on terms that are acceptable to it or at all.
If the market value of Energy Merger's vessels decreases, it may breach some of the covenants contained in the financing agreements relating to its indebtedness at the time, including covenants in the credit facility that it expects to enter into in connection with the completion of the Business Combination. If it does breach any such covenants and it is unable to remedy the relevant breach, its lenders could accelerate its debt and foreclose on its vessels. In addition, if the book value of a vessel is impaired due to unfavorable market conditions or a vessel is sold at a price below its book value, Energy Merger would incur a loss that could have a material adverse effect on its business, financial condition, results of operations and ability to pay dividends.
Risks Relating to Energy Merger's Industry
Energy Merger's fleet will include four single hull tankers which may be unable to trade in many markets after 2010, thereby adversely affecting Energy Merger's overall financial position.
Four of the nine vessels that Energy Merger will acquire in the Business Combination are single hull tankers. The United States, the European Union and the International Maritime Organization, or IMO, have all imposed limits or prohibitions on the use of these types of tankers in specified markets after certain target dates, depending on certain factors such as the size of the vessel and the type of cargo. In the case of the four single hull tankers that Energy Merger will acquire, these phase out dates range from 2010 to 2015. As of April 15, 2005, the Marine Environmental Protection Committee of the IMO has amended the International Convention for the Prevention of Pollution from Ships to accelerate the phase out of certain categories of single hull tankers, including the types of vessels that will be included in Energy Merger's fleet, from 2015 to 2010 unless the relevant flag states extend the date. This change could result in some or all of the single hull tankers that Energy Merger will acquire being unable to trade in many markets after 2010.
Following a spill of approximately 10,800 tonnes of crude oil in South Korean waters by the 1993 built, single-hulled VLCC “Hebei Spirit” in November 2007, there have been a number of announcements by South Korean government officials and refiners that suggest that South Korea may ban the use of single-hull vessels no later than 2011. The single-hull vessels that Energy Merger will acquire occasionally operate in South Korean waters and any acceleration of the single-hull phase out by South Korea, or other regions in which
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these single-hull vessels trade, could affect Energy Merger's ability to employ and generate revenue from these vessels and could materially and adversely affect the market value of Energy Merger's shares.
In addition, single hull tankers are subject to more restrictive regulatory requirements than double hull tankers and are likely to be chartered less frequently and at lower rates. Additional regulations may be adopted in the future that could further adversely affect the useful lives of the single hull tankers that Energy Merger will acquire, as well as Energy Merger's ability to generate income from them. If the economic lives assigned to the tankers prove to be too long because of new regulations or other future events, higher depreciation expense and impairment losses could be required in future periods due to the reduction in the useful lives of the affected vessels, thereby having a materially adverse effect on Energy Merger's results of operations. In addition, any reduction in economic lives assigned to Energy Merger's vessels could result in a breach of covenants contained in the financing agreements relating to its indebtedness at the time. While Energy Merger may consider selling or converting one or more of its single hull vessels to other uses at some point in the future, it has no current plans to do so.
Vessel values may fluctuate which may result in the incurrence of a loss upon disposal of a vessel or increase the cost of acquiring additional vessels.
Vessel values may fluctuate due to a number of different factors, including: general economic and market conditions affecting the shipping industry; competition from other shipping companies; the types and sizes of available vessels; the availability of other modes of transportation; increases in the supply of vessel capacity; the cost of newbuildings; governmental or other regulations; prevailing freight rates, which are the rates paid to the shipowner by the charterer under a voyage charter, usually calculated either per ton loaded or as a lump sum amount; and the need to upgrade second hand and previously owned vessels as a result of charterer requirements, technological advances in vessel design or equipment or otherwise. In addition, as vessels grow older, they generally decline in value. Due to the cyclical nature of the product tanker market, if for any reason Energy Merger sells any of its owned vessels at a time when prices are depressed, it could incur a loss and Energy Merger's business, results of operations, cash flow and financial condition could be adversely affected.
Conversely, if vessel values are elevated at a time when Energy Merger wishes to acquire additional vessels, the cost of acquisition may increase and this could adversely affect Energy Merger's business, results of operations, cash flow and financial condition.
Shipments of crude oil from West Africa are at historically high levels and any decrease in shipments of crude oil from the Arabian Gulf or West Africa may adversely affect Energy Merger's financial performance.
The demand for very large crude carrier, or 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 which could lead to a decrease in demand for Arabian Gulf and West African crude oil are:
| • | increased refining capacity in the Arabian Gulf or West African regions; |
| • | increased use of existing and future crude oil pipelines in the Arabian Gulf or West African regions; |
| • | a decision by OPEC to increase its crude oil prices or to further decrease or limit their crude oil production; |
| • | armed conflict in the Arabian Gulf or West Africa and political or other factors; |
| • | increased oil production in other regions, such as Russia; and |
| • | the development and the relative costs of nuclear power, natural gas, coal and other alternative sources of energy. |
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Any significant decrease in shipments of crude oil from the Arabian Gulf may adversely affect Energy Merger's financial performance.
An economic slowdown in the Asia Pacific region could have a material adverse effect on Energy Merger's business, financial position and results of operations.
A significant number of the port calls made by Energy Merger's vessels are expected to involve the delivery of crude oil to ports in the Asia Pacific region. As a result, a negative change in economic conditions in any Asia Pacific country, but particularly in China or India, may have an adverse effect on Energy Merger's future business, financial position and results of operations, as well as its future prospects. In particular, in recent years, China has been one of the world's fastest growing economies in terms of gross domestic product, including demand for crude oil. Energy Merger cannot assure you that such growth will be sustained or that the Chinese economy will not experience contraction in the future. Moreover, any slowdown in the economies of the United States, the European Union or certain Asian countries may adversely effect economic growth in China and elsewhere. Energy Merger's business, financial position and results of operations, as well as its future prospects, will likely be materially and adversely affected by an economic downturn in any of these countries.
Operational risks inherent in the shipping industry could have a negative impact on our results of operations.
Our vessels and their cargoes are at risk of being damaged or lost due to events such as marine disasters, bad weather, human error, war, terrorism, piracy, stowaways and other circumstances or events. In addition, increased operational risks arise as a consequence of the complex nature of the crude oil tanker industry, the nature of the services required to support the industry, including maintenance and repair services and the mechanical complexity of the tankers themselves. Damage and loss could arise as a consequence of a failure in the services required to support the industry, for example, due to inadequate fuel being supplied to a vessel or 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.
Some of these inherent risks could result in significant damages, such as marine disaster or environmental accidents 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, we may be required to devote substantial time to these proceedings, time which we could otherwise devote to our business.
Our worldwide operations expose us to a variety of additional risks, including the risk of business interruptions due to political circumstances, hostilities, labor strikes and boycotts, potential changes in tax rates or policies and potential government expropriation of our vessels. In addition, inadequacies in the legal systems and law enforcement mechanisms in certain countries in which we operate may expose us to risk and uncertainty.
Any of these factors may have a material adverse effect on our business, results of operations, cash flow, financial condition and ability to pay dividends.
Labor interruptions and problems could disrupt our business.
Our owned vessels will be manned by masters, officers and crews that will be 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, financial condition and ability to pay dividends.
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Natural disasters, acts of war, terrorist attacks, epidemics and other events could adversely affect our business.
Increased globalisation has made our business vulnerable to worldwide political, economic and social conditions, particularly in Asia. Events which are beyond our control, including natural disasters, such as the earthquakes and tidal waves in the Indian Ocean in December 2004, and epidemics may adversely affect national or local economies, infrastructures and livelihoods. Such disasters, acts or events may have a material adverse effect on our business, operating results and financial position even if these events occur in areas where we do not have any direct operations by, for example, causing general commercial uncertainty and leading our customers to take a more cautious approach to business.
Acts of war may disrupt our business and affect our employees, markets and our customers. This could materially impact our revenues, costs of operations, overall results of operations and financial condition. The potential for war may also cause great uncertainty and have unpredictable consequences on our business. Our present geographic focus on Asia may make us vulnerable in the event of increased tension or hostilities in territories in the region including China, Taiwan and Korea.
In the aftermath of the terrorist attacks in the United States on 11 September 2001, the threat of future terrorist attacks continue to cause uncertainty in the world financial markets, and have contributed to greater economic instability in the global financial, energy and commodities markets. Future terrorist attacks may also negatively affect our operations and financial condition, and may directly impact our vessels or customers. Such attacks could lead to increased volatility of regional or world financial markets and may result in regional or world economic recession.
Any adverse changes in global political, economic or social conditions may result in decreased demand for crude oil and higher operating costs in general and may in turn cause our customers to defer or cancel charter contracts with us, which may have an adverse effect on our business, financial condition and results of operations.
Energy Merger's worldwide operations will expose it to global risks that may interfere with the operation of its vessels.
Energy Merger is expected to conduct its operations worldwide. Changing economic, political and governmental conditions in the countries where Energy Merger is incorporated or engaged in business or in Hong Kong where all its vessels are registered, affect Energy Merger's operations. In the past, political conflicts, particularly in the Arabian Gulf, resulted in attacks on vessels, mining of waterways and other efforts to disrupt shipping in the area. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea. The likelihood of future acts of terrorism may increase, and Energy Merger's vessels may face higher risks of being attacked. In addition, future hostilities or other political instability in regions where Energy Merger's vessels trade could have a material adverse effect on its trade patterns and adversely affect its operations and performance.
Rising fuel prices may adversely affect Energy Merger's results of operations.
Fuel is the most significant operating expense for the vessels that Energy Merger will acquire. Although the charterers of the vessels are responsible for fuel costs with respect to eight of the vessels in Energy Merger's initial fleet, one of the vessels operates under a consecutive voyage charter pursuant to which the vessel owner is responsible for fuel costs. In addition, an increase in the price of fuel would decrease the amount of profit share that Energy Merger is eligible to earn under the charter agreements that have a profit share arrangement. The price and supply of fuel is unpredictable and fluctuates based on events outside Energy Merger's control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. As a result, an increase in the price of fuel may adversely affect Energy Merger's results of operations.
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Exposure to currency exchange rate fluctuations will result in fluctuations in Energy Merger's cash flows and operating results.
Energy Merger will generate all its revenue in U.S. dollars, but its Manager will incur certain vessel operating expenses and general and administrative expenses, in currencies other than the U.S. dollar. 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. This difference could lead to fluctuations in expenses that Energy Merger will be required to reimburse to the Manager, which could affect its financial results. Expenses incurred in foreign currencies increase in dollar terms, which will be Energy Merger's functional and reporting currency, when the value of the U.S. dollar falls, which would reduce Energy Merger's profitability.
Energy Merger may become dependent on spot charters in the volatile shipping markets which may have an adverse impact on the stability of its cash flows and revenue.
Energy Merger may employ one or more of its vessels on spot charters when the existing period charters on its vessels expire. The spot charter market is highly competitive and rates within this market are subject to volatile fluctuations, while longer-term period time charters provide income at pre-determined rates over more extended periods of time. If Energy Merger decides to spot charter its vessels, there can be no assurance that Energy Merger will be successful in keeping all its vessels fully employed in these short-term markets or that future spot rates will be sufficient to enable its vessels to be operated profitably. A significant decrease in charter rates could affect the value of Energy Merger's fleet and could adversely affect its profitability and cash flows with the result that its ability to service and repay its debt to its lenders and to pay dividends to its stockholders could be impaired.
Energy Merger's operating results from its tankers will be subject to seasonal fluctuations, which may adversely affect its operating results and ability to pay dividends.
Energy Merger operates its tankers in markets that have historically exhibited seasonal variations in demand and, therefore, charter rates. This seasonality may result in quarter-to-quarter volatility in its operating results with respect to any of its vessels that become engaged in the spot charter market or that are subject to longer term charters that contain market related profit sharing arrangements. The tanker sector is typically stronger in the fourth and first quarters of the calendar year in anticipation of increased consumption of oil and petroleum in the northern hemisphere during the winter months. As a result, Energy Merger's revenue from its tankers may be weaker during the fiscal quarters ended June 30 and September 30, and, conversely, revenue may be stronger in fiscal quarters ended December 31 and March 31. This seasonality could increase the volatility of Energy Merger's operating results and cash flows and adversely affect Energy Merger's cash available for dividends in the future.
Charter rates for oil tankers have recently been at historically high levels and the cyclical nature of the tanker industry may lead to volatile changes in charter rates which may adversely affect Energy Merger's earnings.
Upon closing of the Business Combination, all of Energy Merger's vessels will be trading on medium or long-term charters, which expire during the period from and including 2009 through 2017. Historically, the tanker industry has been highly cyclical, with volatility in profitability and asset values resulting from changes in the supply of and demand for tanker capacity. Fluctuations in charter rates and vessel values result from these changes in the supply and demand for tanker capacity. Charter rates for oil tankers have recently been at historically high levels. If the tanker market is depressed in the future, Energy Merger's earnings and available cash flow may decrease.
The factors affecting the supply and demand for tanker vessels are outside of Energy Merger's control, and the nature, timing and degree of changes in industry conditions are unpredictable. The factors that influence demand for tanker capacity include:
| • | changes in global crude oil production; |
| • | demand for oil and production of crude oil and refined petroleum products; |
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| • | changes in oil production and refining capacity; |
| • | global and regional economic and political conditions; |
| • | the distance oil and oil products are to be moved by sea; |
| • | environmental and other regulatory developments; and |
| • | changes in seaborne and other transportation patterns, including changes in the distances over which cargo is transported due to geographic changes in where oil is produced, refined and used. |
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 out of service; and |
| • | national or international regulations that may effectively cause reductions in the carrying capacity of vessels or early obsolescence of tonnage. |
If the number of new ships delivered exceeds the number of tankers being scrapped and lost, tanker capacity will increase. If the supply of tanker capacity increases and the demand for tanker capacity does not increase correspondingly, the charter rates paid for Energy Merger's tankers could materially decline. Any decline in charter rates as a result of significant changes in the levels of the supply of and demand for tanker vessels or otherwise could negatively impact Energy Merger's business, results of operations, cash flow and financial condition.
Compliance with strict regulatory requirements, including environmental laws and regulations and inspection and vetting procedures, may have an adverse effect on Energy Merger's business.
The shipping industry is affected by numerous regulations in the form of international conventions, national, state and local laws as well as national and international regulations enforced in the jurisdictions in which Energy Merger's vessels will operate and be registered. Current regulation of vessels, particularly in the areas of safety and environmental impact, may change in the future and require Energy Merger to incur significant capital expenditures and/or additional operating costs in order to keep its vessels in compliance. In addition, any future carbon tax on the bunker fuel used by Energy Merger's vessels or a tax based on the carbon dioxide emissions of Energy Merger's vessels could significantly increase Energy Merger's operating costs. In addition, in the event of any breach of environmental laws or regulations, including as a result of environmental discharges, Energy Merger may be subject to severe fines and penalties.
International shipping is also subject to increasingly rigorous security and customs inspection and related procedures in countries of origin and destination and trans-shipment points. These procedures can result in cargo seizure, delays in the loading, offloading, trans-shipment or delivery of cargo and the levying of customs duties, fines or other penalties against exporters or importers and, in some cases, carriers.
Energy Merger will be required by various governmental and regulatory agencies to obtain certain permits, licenses and certificates in order to operate its fleet. Energy Merger will also be subject to stringent vetting procedures, carried out by its customers. Failure to hold valid permits, licenses and certificates or to secure and maintain sufficient vetting approvals from its customers could negatively affect Energy Merger's ability to employ its vessels, including as a result of its charterers cancelling or not renewing existing charters or a failure to attract new customers. In addition, a failure to hold a necessary permit, license, certificate or approval in respect of one vessel could have an adverse impact on other vessels under Energy Merger's control.
Each of these factors may adversely affect Energy Merger's business, results of operations, cash flow and financial condition.
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Capital expenditures and other costs necessary to operate and maintain Energy Merger's vessels may increase due to changes in governmental regulations, safety or other equipment standards, which may adversely affect Energy Merger's revenue.
Changes in 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 Energy Merger to make additional capital expenditures. In order to satisfy these requirements, Energy Merger may, from time to time, be required to take its vessels out-of-service for extended periods of time, with corresponding loss of revenue. In the future, market conditions may not justify these expenditures or enable Energy Merger to operate some or all of its vessels profitably during the remainder of their economic lives. In addition, Energy Merger may need to incur additional indebtedness to finance such capital expenditure, which may not be available on reasonable terms or at all, or which Energy Merger may be prohibited from incurring by the terms of its then existing indebtedness.
If any of Energy Merger's vessels fails to maintain its class certification and/or fails any annual survey, intermediate survey, drydocking or special survey, it could have a material adverse impact on Energy Merger's financial condition and results of operations.
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 the Safety of Life at Sea Convention or SOLAS. Energy Merger's vessels are expected to be classed with one or more classification societies that are members of the International Association of Classification Societies.
A vessel must undergo annual surveys, intermediate surveys, drydockings and special surveys. In lieu of a special survey, a vessel's machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Energy Merger's vessels are expected to be on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. The vessels in Energy Merger's fleet that are more than fifteen year old will be required to be dry-docked every 24 to 36 months. Vessels that are less than fifteen years old will be required to be dry-docked at least every five years. These dry dockings are required for inspection of the underwater parts and for repairs related to inspections.
If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on Energy Merger's financial condition and results of operations.
Maritime claimants could arrest Energy Merger's vessels, which could interrupt its cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arresting or attachment of one or more of Energy Merger's vessels could interrupt its cash flow and require it to pay large sums to have the arrest lifted which could have a material adverse effect on Energy Merger's financial condition and results of operations. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one of Energy Merger's vessels for claims relating to another of its vessels.
Governments could requisition Energy Merger's vessels during a period of war or emergency, resulting in loss of earnings.
A government could requisition for title or seize Energy Merger's vessels. Requisition for title occurs when a government takes control of a vessel and becomes the owner. Also, a government could requisition Energy Merger's vessels for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of Energy Merger's vessels could have a material adverse effect on Energy Merger's financial condition and results of operations.
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Risks Relating to Energy Merger's Common Stock
Energy Merger's common share price may be highly volatile and future sales of its common shares could cause the market price of its common shares to decline.
The market price of Energy Merger's common shares may fluctuate significantly in response to many factors, such as actual or anticipated fluctuations in its operating results, changes in financial estimates by securities analysts, economic and regulatory trends, general market conditions, rumors and other factors, many of which are beyond Energy Merger's control. Investors in Energy Merger's common shares may not be able to resell their shares at or above their purchase price due to those factors, which include the risks and uncertainties set forth in this joint proxy statements/prospectus.
If outstanding warrants are exercised, the underlying common shares will be eligible for future resale in the public market. “Market overhang'' from the warrants could have an adverse effect on the common stock's market price.
Outstanding warrants to purchase an aggregate of 21,750,398 shares of common stock issued in connection with Energy Infrastructure's private placement and initial public offering will become exercisable after consummation of the Business Combination. In addition, currently outstanding convertible loans aggregating $2,685,000 will be converted into 268,500 units at a price of $10.00 per unit, Energy Infrastructure will be issuing an aggregate of 1,000,000 units to its President and Chief Operating Officer (or any assignee thereof) upon consummation of the Business Combination, and Vanship will purchase up to 5,000,000 units at a purchase price of $10.00 per unit, all resulting in the issuance of up to 6,268,500 additional warrants. If these warrants are exercised, a substantial number of additional shares of common stock of Energy Merger will be eligible for resale in the public market, which could adversely affect the market price. In addition, exercise of such warrants and conversion of such convertible loans could cause dilution of existing stockholder interests in Energy Merger. See “Description of Energy Infrastructure Securitiese — Warrants.”
Registration rights held by Energy Infrastructure's stockholders who purchased shares prior to the initial public offering may have an adverse effect on the market price of Energy Merger's common stock.
Energy Infrastructure's initial stockholders who purchased common stock prior to the initial public offering are entitled to demand that Energy Merger register the resale of their shares at any time after they are released from escrow which, except in limited circumstances, will not be before July 18, 2009. If, after the Company consummates a Business Combination, it (or the surviving entity) subsequently consummates a liquidation, merger, stock exchange or other similar transaction which results in all of its stockholders of such entity having the right to exchange their shares of common stock for cash, securities or other property, then the initial stockholders' shares may be released from escrow prior to July 18, 2009 so that the initial stockholders can similarly participate. If such stockholders exercise their registration rights with respect to all of their shares, there will be an additional 5,268,849 shares of common stock eligible for trading in the public market. In addition, each of Energy Corp., which purchased units in Energy Infrastructure's private placement in July 2006 and holders of shares of common stock issuable upon conversion of the convertible loans is entitled to demand the registration of the securities underlying the 825,398 units and 268,500 units, respectively, at any time after Energy Infrastructure announces that it has entered into a letter of intent, an agreement in principle or a definitive agreement in connection with a business combination. Energy Infrastructure announced Energy Merger's entry into the Share Purchase Agreement on December 6, 2007. Under the Share Purchase Agreement, Energy Merger has agreed, with some limited exceptions, to include (i) the 13,500,000 shares of Energy Merger's common stock comprising the stock consideration portion of the aggregate purchase price for the SPVs, (ii) the shares of Energy Merger's common stock underlying the 425,000 warrants that Mr. George Sagredos will transfer to Vanship, and (iii) the 1,000,000 units and underlying shares and warrants included in the units to be issued to George Sagredos (or his assignees) in Energy Merger's registration statement of which this joint proxy statement/prospectus is a part. Energy Merger has also granted the holders of such securities (on behalf of themselves or their affiliates) the right, under certain circumstances and subject to certain restrictions, to demand that Energy Merger register the resale of such securities in the future. In addition, such securityholders will have the ability to exercise certain piggyback registration rights 180 days following the effective date of the Business Combination. In connection with Business Combination Private Placement, Energy Merger will grant to Vanship certain demand and piggyback registration rights with
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respect to up to 5,000,000 units. If all of these securityholders exercise their registration rights with respect to all of their warrants and shares of common stock, there will be additional warrants and shares of common stock eligible for trading in the public market. The sale or perception that these additional securities are available for sale may have an adverse effect on the market price of Energy Merger's warrants and common stock. See “Shares Eligible for Future Sale — Registration Rights.”
Investors should not rely on an investment in Energy Merger if they require dividend income. It is not certain that Energy Merger will pay a dividend and the return on an investment in Energy Merger, if any, may come solely from appreciation of its common stock, which is also not assured.
Under the Share Purchase Agreement and subject to its ability to do so under applicable law, Energy Merger has agreed to pay dividends of $1.54 per share to Energy Merger's public stockholders by the end of the first year following the consummation of the Business Combination. Vanship has agreed, and it is a condition to the closing of the Business Combination that Energy Merger insiders shall have agreed, to waive any right to receive dividend payments in the one-year period immediately following the consummation of the Business Combination in order to facilitate the payment of these dividends to Energy Merger's public stockholders. These dividend waivers will be made by stockholders holding approximately 55% of Energy Merger's common stock (on an undiluted basis) in the first year following the Business Combination and accordingly, annual dividends of $1.54 per share should not be considered indicative of any dividend payments subsequent to the first anniversary of the Business Combination.
Energy Merger's projection that it will be able to pay dividends of $1.54 per share to its public stockholders by the end of the first year following the Business Combination is based on numerous assumptions, including the assumption that no stockholders of Energy Merger vote against the Business Combination and demand that their shares be redeemed. Funds from the Trust Account that are used to redeem shares of Energy Merger's stock following completion of the Business Combination may decrease the amount of funds available for payment of these dividends. In addition, one or more assumptions which form the basis of such projection may not occur. Accordingly, Energy Merger may achieve lower than anticipated revenue in its first full year of operations and may incur expenses or liabilities that would reduce or eliminate the cash available for distribution of these dividends. As a result, Energy Merger may not have sufficient funds to pay dividends of $1.54 per share, or any other amount, to its public stockholders by the end of the first year following the completion of the Business Combination.
The payment of dividends following the Business Combination will be in the discretion of Energy Merger's board of directors and will depend on market conditions and Energy's Merger's business strategy in any given period. The timing and amount of dividends, if any, will depend on Energy Merger's earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in its loan agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividends, or if there is no surplus, dividends may be declared or paid out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. Energy Merger may not pay dividends in the anticipated amounts and frequency set forth in this joint proxy statement/prospectus or at all.
Investor confidence and the market price of Energy Merger's shares may be adversely impacted if Energy Merger's management is unable to establish and maintain an effective system of internal control over financial reporting.
Energy Merger will be subject to the reporting requirements of the U.S. Securities and Exchange Commission, or SEC, following the completion of the Redomiciliation Merger. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring public companies, including Energy Merger following the completion of the Redomiciliation Merger, to include a report of management of their internal control structure and procedures for financial reporting in their annual reports on Form 10-K or Form 20-F, as the case may be, that contain an assessment by management of the effectiveness of their internal controls over financial reporting. In addition, independent registered public accountants of these public companies must report on the effectiveness of such internal controls over financial reporting. These requirements may first apply to Energy Merger's annual report on Form 20-F for the fiscal year ending on
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December 31, 2008. Energy Merger's management may not conclude that its internal controls over financial reporting are effective. Moreover, even if Energy Merger's management does conclude that its internal controls over financial reporting are effective, if its independent registered public accountants are not satisfied with its internal control structure and procedures, the level at which its internal controls are documented, designed, operated or reviewed, or if the independent registered public accountants interpret the requirements, rules or regulations differently from Energy Merger's management, they may not concur with its management's assessment or may not issue a report that is unqualified. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of Energy Merger's financial statements, which could lead to a decline in the market price of its shares. We believe the total cost of Energy Merger's initial compliance and the future ongoing costs of complying with these requirements may be substantial.
In connection with the preparation of the SPVs' 2007 financial statements, management of Vanship determined that certain SPVs have incorrectly classified cash flows relating to drydocking, claims received and US transportation tax expenses in their previously issued financial statements. Management of Vanship determined that the previously issued financial statements of those SPVs should be restated to reflect the correct classification. The restatement resulted from a material weakness in internal control over financial reporting, namely, that management of Vanship did not have proper level of accounting knowledge, experience and training in the application of US GAAP. Although management of Vanship intends to address these material weaknesses by the end of 2008, there can be no assurance that such efforts will be successful, and similar errors could occur in future periods. Certain members of management of Vanship will assume management positions of Energy Merger and its Manager upon completion of the Business Combination. If management of Energy Merger following the Business Combination does not implement effective controls and procedures for financial reporting, Energy Merger may not be able to report accurately or timely its financial condition, its results of operations and cash flows. If it is unable to report its financial information accurately, it could be subject to, among other things, fines, securities litigation and a general loss of investor confidence, any one of which could adversely affect Energy Merger's financial condition and results of operations.
A change in financial reporting to international financial reporting standards, or IFRS, could make comparison of financial information more difficult and have an adverse effect on the trading price of Energy Merger's shares.
The financial statements of the SPVs presented in this joint proxy statement/prospectus were prepared in accordance with US GAAP. The future management team of Energy Merger is considering implementing financial information presentation under IFRS beginning with Energy Merger's financial year ending December 31, 2008. The future management team of Energy Merger is not able at this time to quantify the impact that the switch from US GAAP to IFRS will have on the financial position, results of operations and cashflows of the SPVs, and therefore on Energy Merger.
While the future management team of Energy Merger have indicated that any change to IFRS will be made only in accordance with applicable SEC rules, any such change would be expected to make comparison of financial information with historical US GAAP information more difficult and could adversely affect the trading price of Energy Merger’s shares.
Risks Related to the Redomiciliation Merger
Energy Merger is incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law, causing its public stockholders to have more difficulty in protecting their interests.
Energy Merger's corporate affairs are governed by its articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. 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
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legislative provisions, Energy Merger's 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. For more information with respect to how stockholder rights under Marshall Islands law compares with stockholder rights under Delaware law, please see the section entitled “Comparison of Energy Infrastructure and Energy Merger Stockholder Rights.”
Being a foreign private issuer will exempt Energy Merger from certain Securities and Exchange Commission requirements that provide stockholders the protection of information that must be made available to stockholders of United States public companies.
Energy Merger is expected to continue to be a foreign private issuer within the meaning of the rules promulgated under the Securities Exchange Act of 1934. As such, it will be exempt from certain provisions applicable to United States public companies including:
| • | The rules requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; |
| • | The sections of the Securities Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Securities Exchange Act; |
| • | Provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and |
| • | The sections of the Securities 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 transactions (i.e., a purchase and sale, or a sale and purchase, of the issuer's equity securities within less than six months). |
Because of these exemptions, Energy Merger's stockholders will not be afforded the same protections or information generally available to stockholders of Energy Infrastructure or investors holding shares in other public companies organized in the United States.
Energy Merger is incorporated under the laws of the Marshall Islands and its 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 Energy Merger, its directors or its 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 Energy Merger, its directors or its management.
Energy Merger is incorporated under the laws of the Republic of the Marshall Islands, and all of its assets are located outside of the United States. Energy Merger's business will be operated primarily from its offices in Hong Kong. In addition, Energy Merger's directors and officers, following the Redomiciliation Merger, will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents are and are expected to continue to be located outside the United States. As a result, it may be difficult or impossible for you to bring an action against Energy Merger 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 Energy Merger's assets or the assets of its directors and officers. Although you may bring an original action against Energy Merger, its affiliates or any expert named in this joint proxy statement/prospectus 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 Energy Merger, its affiliates or any expert named in this joint proxy statement/prospectus for a cause of action arising under Marshall Islands law, it may be impracticable for you to do so given the geographic location of the Marshall Islands. Furthermore, in order to enforce any such judgment against Energy Merger, its officers or its directors, it is likely that enforcement proceedings would need to be taken in jurisdictions where such assets are located, which are likely to be outside the Marshall Islands and United States. For more information regarding the relevant laws of the Marshall Islands, please read “Enforceability of Civil Liabilities.”
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There is a risk that Energy Merger could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Business Combination and Redomiciliation Merger, which could result in significantly greater U.S. federal income tax liability to Energy Merger.
Section 7874(b) (“Section 7874(b)”) of the Internal Revenue Code of 1986, as amended, or the Code, generally provides that a corporation organized outside the United States which acquires, directly or indirectly, pursuant to a plan or series of related transactions substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if stockholders of the acquired corporation own at least 80% (of either the voting power or the value) of the stock of the acquiring corporation after the acquisition. If Section 7874(b) were to apply to the Redomiciliation Merger, then Energy Merger, as the surviving entity, would be subject to U.S. federal income tax on its worldwide taxable income following the Business Combination and Redomiciliation Merger as if Energy Merger were a domestic corporation.
Although it is not expected that Section 7874(b) will apply to treat Energy Merger as a domestic corporation for U.S. federal income tax purposes, because of the absence of extensive guidance on how the rules of Section 7874(b) will apply to the transactions contemplated by the Business Combination and Redomiciliation Merger, this result is not entirely free from doubt. As a result, stockholders and warrant holders are urged to consult their own tax advisors on this issue. The balance of this discussion assumes that Energy Merger will be treated as a foreign corporation for U.S. federal income tax purposes. This topic is discussed in more detail below under the heading “Taxation — Material United States Federal Income Tax Considerations.”
Energy Infrastructure generally will recognize gain (but not loss) for U.S. federal income tax purposes as a result of the Redomiciliation Merger, which will result in increased U.S. federal income tax liability to Energy Infrastructure.
As a result of the Redomiciliation Merger, Energy Infrastructure generally will recognize gain (but not loss) for U.S. federal income tax purposes equal to the excess, if any, of the fair market value of each of its assets over such asset's adjusted tax basis at the effective time of the Redomiciliation Merger. Any such gain generally would be attributable to the appreciation in value of the non-cash assets of Energy Infrastructure (including its rights under the Share Purchase Agreement) at the time of the Redomiciliation Merger. Since any such gain will be determined based on the value of such assets at that time, the amount of such gain (and any U.S. federal income tax liability to Energy Infrastructure by reason of such gain) cannot be determined at this time. This topic is discussed in more detail below under the heading “Taxation — Material United States Federal Income Tax Considerations.” Stockholders and warrant holders are urged to consult their own tax advisors on this tax issue and other tax issues in connection with the Redomiciliation Merger.
There is a risk that Energy Merger will be classified as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. holders of common stock or warrants of Energy Merger.
Energy Merger will be treated as a PFIC for any taxable year in which either (1) at least 75% of its gross income (looking through certain corporate subsidiaries) is passive income or (2) at least 50% of the average value of its assets (looking through certain corporate subsidiaries) produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If Energy Merger were a PFIC for any taxable year during which a U.S. holder held its common stock or warrants, the U.S. holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Based on the expected composition of the assets and income of Energy Merger and its subsidiaries after the Business Combination and Redomiciliation Merger, it is not anticipated that Energy Merger will be treated as a PFIC following the Business Combination and Redomiciliation Merger. The actual PFIC status of Energy Merger for any taxable year, however, will not be determinable until after the end of its taxable year, and accordingly there can be no assurance as to the status of Energy Merger as a PFIC for the current taxable year or any future taxable year. We urge U.S. holders to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed discussion of the PFIC rules, see “Taxation — Material United States Federal Income Tax Considerations — Tax Consequences to U.S. Holders of Common Stock and Warrants of Energy Merger — Passive Foreign Investment Company Rules.”
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Risks Relating to Energy Infrastructure Acquisition Corp.
Energy Infrastructure's directors and executive officers have interests in the Business Combination that may be different from yours.
In considering the recommendation of Energy Infrastructure's directors to vote to approve the Business Combination, you should be aware that they have agreements or arrangements that provide them with interests in the Business Combination that may differ from, or may be in addition to, those of Energy Infrastructure stockholders generally. If the Business Combination is not approved and Energy Infrastructure does not acquire another target business by July 21, 2008, Energy Infrastructure will be required to liquidate and, subject to stockholder approval, it will distribute to all of the holders of shares issued in its initial public offering in proportion to their respective equity interests, an aggregate amount equal to funds on deposit in the Trust Account, including any interest not previously released to it (net of any taxes payable and the repayment of convertible loans aggregating $2,685,000, if not earlier converted), plus any remaining available assets. Energy Infrastructure's officers and directors have waived their respective rights to participate in any liquidation distribution with respect to the 5,268,849 shares of common stock issued to them prior to our initial public offering and Energy Corp. has waived its rights to participate in any liquidation with respect to the 825,398 shares of common stock acquired by it in the private placement and Energy Infrastructure would not distribute funds from the Trust Account with respect to the Energy Infrastructure warrants, which would expire.
In connection with Energy Infrastructure's initial public offering, Energy Infrastructure's current officers and directors agreed to indemnify Energy Infrastructure to the extent of their pro rata beneficial interest in Energy Infrastructure immediately prior to the initial public offering for debts and obligations to vendors that are owed money by Energy Infrastructure for services rendered or products sold to Energy Infrastructure, but only to the extent necessary to ensure that certain liabilities do not reduce the initial $209,250,000 placed in the Trust Account. If the Business Combination is consummated, Energy Infrastructure's officers and directors will not have to perform such obligations. If the Business Combination is not consummated, however, certain of Energy Infrastructure's officers and directors would potentially be liable for any claims against the Trust Account by vendors who have not explicitly waived their right to make claims against the Trust Account.
The personal and financial interests of the members of Energy Infrastructure's board of directors and executive officers may have influenced their motivation in identifying and selecting a target business and attempting to timely complete a business combination. Consequently, their discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in Energy Infrastructure's stockholders' best interest.
You should not place undue reliance on the fairness opinion.
The board of directors of Energy Infrastructure received an opinion from New Century Capital Partners on October 17, 2007 as to the fairness of the consideration to be paid to Vanship in exchange for the shares of the SPVs. The conclusion reached by New Century Capital Partners was partially based on a comparable company analysis that factored the closing stock price of certain comparable publicly traded shipping companies on October 16, 2007. There have been significant fluctuations in the market for publicly traded companies, including shipping companies, in the past several months and such fluctuations may continue until the Business Combination occurs. It is not certain what the implied enterprise value of the combined SPVs would be if the same analysis were performed based on market prices at the time of the Business Combination. Accordingly, it is not certain that the same analysis performed as of the date of the Business Combination would lead New Century Capital Partners to a view that the consideration to be paid to Vanship in exchange for the shares of the SPVs would be fair to Energy Infrastructure's stockholders from a financial point of view.
In addition, the fairness opinion was prepared for the benefit of Energy Infrastructure's board of directors and does not purport to opine as to the enterprise value of Energy Merger or the price at which Energy Merger's shares may trade subsequent to the Business Combination. Certain of the assumptions that were used by New Century Capital Partners in performing the analyses underlying the fairness opinion were provided by
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management of Energy Infrastructure. The management of Energy Merger subsequent to the Business Combination may have different views regarding such assumptions, including assumptions used in the discounted cash flow analysis related to the combined SPVs' weighted average cost of capital and the forecast financial information, including forecast capital expenditures, that should be reflected in valuing the combined SPVs as a going concern. Accordingly, the fairness opinion should not be used to assess the enterprise value of Energy Merger or the price at which Energy Merger's common stock will trade subsequent to the Business Combination.
For the foregoing reasons, investors are cautioned against placing undue reliance on the fairness opinion. The board of directors of Energy Infrastructure intends to obtain a bringdown fairness opinion prior to requesting the SEC to accelerate effectiveness of this joint proxy statement/prospectus.
The combined company's working capital could be reduced if stockholders exercise their redemption rights.
Pursuant to Energy Infrastructure's certificate of incorporation, holders of shares purchased in Energy Infrastructure's initial public offering (other than Energy Infrastructure's initial stockholders) may vote against the Business Combination and demand that Energy Infrastructure redeem their shares for a cash payment of $10.00 per share, plus a portion of the interest earned not previously released to it (net of taxes payable), as of the record date. Energy Infrastructure will not have sufficient cash to consummate the Business Combination if holders of 1,087,520 shares purchased in Energy Infrastructure’s initial public offering representing less than 5% of the shares sold in the initial public offering and private placement exercise these redemption rights. To the extent the Business Combination is consummated and holders have demanded to so redeem their shares, there will be a corresponding reduction in the amount of funds available to the combined company following the Business Combination. As of June 23, 2008, the record date, assuming the Business Combination is approved and completed, the maximum amount of funds that could be disbursed to Energy Infrastructure's stockholders upon the exercise of their redemption rights is approximately $11,022,616.
Energy Infrastructure may not have sufficient funds to complete the Business Combination.
If holders of the maximum permissible number of shares elect redemption without Energy Infrastructure being required to abandon the Business Combination pursuant to the terms of its certificate of incorporation, as of March 31, 2008, a total of approximately $66,817,208 of the Trust Account would have been disbursed, leaving approximately $150,982,695 available in the Trust Account, plus up to $50,000,000 from the Business Combination Private Placement, for the purchase of the SPVs and the payment of liabilities. Energy Infrastructure estimates that it will be required to pay approximately $228,000,000 to Vanship in satisfaction of the cash consideration portion of the purchase price of the SPVs and Energy Merger will be required to maintain minimum cash reserves of $15,000,000 upon completion of the Business Combination in order to draw down funds under its credit facility to refinance the existing debt of the SPVs. Accordingly, in the event that holders of 1,087,520 shares purchased in Energy Infrastructure’s initial public offering representing less than 5% of the shares sold in the initial public offering and private placement vote against the Business Combination Proposal and exercise their redemption rights, Energy Infrastructure will not have funds available to proceed with the Business Combination.
Energy Infrastructure will be required to dissolve and liquidate if it does not consummate a business combination, in which event its stockholders may be held liable for claims by third parties against Energy Infrastructure to the extent of distributions received by them.
If Energy Infrastructure does not consummate the Business Combination or another business combination by July 21, 2008, then, pursuant to Article sixth of its certificate of incorporation, Energy Infrastructure's officers must take all actions necessary in accordance with the General Corporation Law of the State of Delaware to dissolve and liquidate Energy Infrastructure as soon as reasonably practicable after that date. Therefore, Energy Infrastructure will be required to dissolve and liquidate the Trust Account to its public stockholders if it does not complete the Business Combination, or another business combination, by July 21, 2008.
Under Sections 280 through 282 of the General Corporation Law of the State of Delaware, stockholders of a corporation may be held liable for claims by third parties against the corporation to the extent of distributions received by them in dissolution of the corporation. If a corporation complies with certain procedures
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intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder's pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. Although Energy Infrastructure will seek stockholder approval to liquidate the Trust Account to its public stockholders as part of a plan of dissolution and liquidation, it does not intend to comply with those procedures. In the event that Energy Infrastructure's directors recommend, and the stockholders approve, a plan of dissolution and liquidation where it is subsequently determined that the reserve for claims and liabilities was insufficient, stockholders who received a return of funds from the Trust Account could be liable for claims made by creditors to the extent of distributions received by them. As such, Energy Infrastructure's stockholders could potentially be liable for any claims to the extent of distributions received by them in dissolution. Accordingly, third parties may seek to recover from Energy Infrastructure stockholders amounts owed to them by Energy Infrastructure.
The procedures Energy Infrastructure must follow under Delaware law if it is required to dissolve and liquidate may result in substantial delays in the liquidation of the Trust Account to its public stockholders as part of its plan of dissolution and distribution.
Energy Infrastructure may not meet the anticipated timing for the Dissolution and Plan of Liquidation.
Promptly following the special meeting, if our stockholders do not approve either the Redomiciliation Merger or the Business Combination and approve Energy Infrastructure’s Dissolution and Plan of Liquidation Proposal, Energy Infrastructure intends to file a certificate of dissolution with the Delaware Secretary of State and wind up our business promptly thereafter. Energy Infrastructure expects that they will make the liquidation distribution of the proceeds in the Trust Account to its public stockholders as soon as practicable following the filing of our certificate of dissolution with the Delaware Secretary of State after approval of the dissolution by the stockholders. Energy Infrastructure does not expect that there will be any additional assets remaining for distribution to stockholders after payment, provision for payment or compromise of our liabilities and obligations. There are a number of factors that could delay its anticipated timetable, including the following:
| • | delays in the payment, or arrangement for payment or compromise, of our remaining liabilities or obligations; |
| • | lawsuits or other claims asserted against us; and |
| • | unanticipated legal, regulatory or administrative requirements. |
We may not be able to settle all of our obligations to third parties.
We have current and future obligations to third parties. The Plan of Liquidation takes into account all of our known obligations and our best estimate of the amount reasonably required to satisfy such obligations. As part of the winding up process, we are attempting to settle these obligations with our third parties. We cannot assure you that we will be able to settle all of these obligations or that they can be settled for the amounts we have estimated. If we are unable to reach agreement with a third party relating to an obligation, that third party may bring a lawsuit against us. Our officers and directors have each agreed on a pro rata basis to be liable to ensure that the proceeds in the Trust Account are not reduced by claims of (i) various vendors' or other entities' expenses for services rendered or products sold to Energy Infrastructure or (ii) any prospective target business that Energy Infrastructure did not pay, or reimburse, for the fees and expenses of third party service providers to such target which Energy Infrastructure agreed in writing to be liable for, in each case to the extent the payment of such debts and obligations actually reduces the amount of funds in the Trust Account (or, in the event that such claim arises after the distribution of the Trust Account, to the extent necessary to ensure that Energy Infrastructure’s former stockholders are not liable for any amount of such loss, liability, claim, damage or expense).
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If our reserves for payments to third parties are inadequate, each stockholder may be liable to third parties for a pro rata portion of their claims up to the amount distributed to such stockholder by us.
Pursuant to Delaware law, we will continue to exist for three years after the dissolution becomes effective in order to complete the winding up of our affairs. If we fail to provide adequately for all our liabilities, each of our stockholders could be liable for payment to our third parties of the stockholder's pro rata portion of such third parties' claims up to the amount distributed to such stockholder in the liquidation.
We cannot assure you that claims will not be made against the Trust Account, the result of which could impair or delay its distribution to the public stockholders.
Energy Infrastructure currently has little available funds outside the Trust Account, and must make arrangements with vendors and service providers in reliance on the existing indemnification obligations of our officers and directors discussed above.
In addition, Energy Infrastructure’s third parties may seek to satisfy their claims from funds in the Trust Account if our officers and directors do not perform their indemnification obligations. This could further reduce a stockholder's distribution from the Trust Account, or delay stockholder distributions. We believe we have identified all of Energy Infrastructure’s liabilities, and do not expect the foregoing to occur.
Recordation of transfers of our common stock on our stock transfer books will be restricted as of the date fixed by the Board for filing the certificate of dissolution, and thereafter it generally will not be possible for stockholders to change record ownership of our stock.
After dissolution, Delaware law will prohibit transfers of record of our common stock except by will, intestate succession or operation of law. We believe, however, that after dissolution any trades of shares of our common stock held in “street name” will be tracked and marked with a due bill by the Depository Trust Company.
Our Board of Directors may delay implementation of the Plan of Liquidation, even if dissolution is approved by our stockholders.
Even if Energy Infrastructure’s dissolution is approved by our stockholders, our Board of Directors has reserved the right, in its discretion, to delay implementation of the Plan of Liquidation if it determines that doing so is in the best interests of Energy Infrastructure and its stockholders. The Board is, however, currently unaware of any circumstances under which it would do so.
If our stockholders do not approve the Dissolution and Plan of Liquidation Proposal, no assurances can be given as to how or when, if ever, amounts in the Trust Account will be distributed to our stockholders.
The certificate of incorporation of Energy Infrastructure provides that the Trust Account proceeds will be distributed to the public stockholders upon the liquidation and dissolution of Energy Infrastructure, and Delaware law requires that the stockholders approve such Dissolution and Plan of Liquidation Proposal. If Energy Infrastructure’s stockholders do not approve the Dissolution and Plan of Liquidation Proposal, Energy Infrastructure will not have the requisite legal authority to distribute the Trust Account proceeds to stockholders. In such case, no assurance can be given as to how or when, if ever, such amounts will be distributed.
If third parties bring claims against Energy Infrastructure, the proceeds held in trust could be reduced, which would result in a per-share liquidation value receivable by Energy Infrastructure's public stockholders from the Trust Account as part of its plan of dissolution and liquidation that is less than $10.00.
Energy Infrastructure's placing of funds in trust may not protect those funds from third party claims against it. Energy Infrastructure has not procured waivers from any creditors or prospective target businesses, and if the Business Combination is not effected, the material creditors of Energy Infrastructure would consist of its legal advisors, accountants, and service providers in connection with the Business Combination, such as experts and printers. As of March 31, 2008 claims by third parties amounted to $856,044.
Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of Energy Infrastructure's public stockholders, which would result in a per-share liquidation value receivable
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by Energy Infrastructure's public stockholders from funds held in the Trust Account that is less than $10.00 per share, plus interest (net of any taxes due on such interest and repayment of $2,685,000 of convertible loans).
In connection with its initial public offering, Energy Infrastructure's initial officers and directors each entered into a letter agreement whereby they agreed to indemnify Energy Infrastructure against any loss, liability, claims, damage and expense whatsoever (including, but not limited to, any and all legal and other expenses reasonably incurred in investigating, preparing or defending against any litigation, whether pending or threatened, or any claim whatsoever) which Energy Infrastructure may become subject as a result of any claim by any vendor that is owed money by Energy Infrastructure for services rendered or products sold but only to the extent necessary to ensure that such loss, liability, claim, damage or expense does not reduce the initial $209,250,000 in the Trust Account. Pursuant to these letter agreements, Energy Infrastructure may seek indemnity from its officers and directors to the extent of their pro rata beneficial interest in Energy Infrastructure immediately prior to the initial public offering and to the extent interest held in the Trust Account is not sufficient to fund the Energy Infrastructure's liabilities and expenses. Energy Infrastructure, Energy Merger and both of their boards of directors may be obligated to seek enforcement of the letter agreements to ensure against reductions in the Trust Account.
In the event that Energy Infrastructure's board recommends and its stockholders approve a plan of dissolution and liquidation where it is subsequently determined that the reserve for claims and liabilities is insufficient, stockholders who received a return of funds from the Trust Account as part of the liquidation could be liable for claims made by creditors.
Additionally, if Energy Infrastructure is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, the funds held in the Trust Account may be subject to applicable bankruptcy law, and may be included in Energy Infrastructure's bankruptcy estate and subject to the claims of third parties with priority over the claims of Energy Infrastructure's stockholders. Energy Infrastructure's stockholders could also be required to return any distributions received by them in dissolution as a preference or under other avoidance or recovery theories under applicable bankruptcy law. To the extent any bankruptcy claims deplete the Trust Account, Energy Infrastructure may not be able to return the liquidation amounts due to its public stockholders.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements. These forward-looking statements include information about possible or assumed future results of operations or the performance of Energy Merger after the Redomiciliation Merger or Business Combination, the expected completion and timing of the Redomiciliation Merger and other information relating to the Redomiciliation Merger or Business Combination. Words such as “projects,” “predicts,” “should,” “forecasts,” “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates,” and variations of such words and similar expressions are intended to identify the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements include statements regarding:
| • | the delivery and operation of assets of Energy Merger, the surviving corporation in the Redomiciliation Merger; |
| • | Energy Merger's future operating or financial results, including the amount of fixed hire and profit share that Energy Merger may receive; |
| • | future, pending or recent acquisitions, business strategy, areas of possible expansion, and expected capital spending or operating expenses; |
| • | future payments of dividends and the availability of cash for payment of dividends; |
| • | statements about tanker industry trends, including charter rates and vessel values and factors affecting vessel supply and demand; |
| • | expectations about the availability of vessels to purchase, the time which it may take to construct new vessels or vessels' useful lives; |
| • | expectations about the availability of insurance on commercially reasonable terms; |
| • | Energy Merger's ability to repay its credit facility, to obtain additional financing and to obtain replacement charters for its vessels; |
| • | assumptions regarding interest rates; |
| • | changes in production of or demand for oil and petroleum products, either globally or in particular regions; |
| • | greater than anticipated levels of newbuilding orders or less than anticipated rates of scrapping of older vessels; |
| • | change in the rate of growth of the world and various regional economies; |
| • | risks incident to vessel operation, including discharge of pollutants; and |
| • | unanticipated changes in laws and regulations, including laws and regulations related to the use of single-hulled vessels. |
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this joint proxy statement/prospectus and the documents that we reference herein and have filed as exhibits to the registration statement of which this joint proxy statement/prospectus forms a part completely and with the understanding that our actual future results and ability to pay dividends may be materially different from what we expect. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this joint proxy statement/prospectus, whether as a result of new information, future events or otherwise.
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THE ENERGY INFRASTRUCTURE SPECIAL MEETING
Time, Place and Purpose of the Special Meeting
This joint proxy statement/prospectus is being furnished to Energy Infrastructure stockholders as part of the solicitation of proxies by Energy Infrastructure's board of directors for use at the Special Meeting of Energy Infrastructure stockholders to be held at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York, on July 17, 2008, at 10:00 a.m. Eastern time. The purpose of the Special Meeting is for Energy Infrastructure stockholders to consider and vote on three proposals: (i) the merger of Energy Infrastructure with and into Energy Merger, its wholly-owned Marshall Islands subsidiary, for the purpose of redomiciling Energy Infrastructure to the Marshall Islands as part of the acquisition of the SPVs, and as an effect of such merger, adopt the articles of incorporation and bylaws of Energy Merger and (ii) the acquisition by Energy Merger of all the outstanding shares of nine vessel-owning SPVs from Vanship, pursuant to the terms of the Share Purchase Agreement, resulting in each SPV becoming wholly owned by Energy Merger, in exchange for an aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger. In addition to such purchase price, Energy Merger will be obligated to effect the transfer of 425,000 warrants of Energy Merger from one of Energy Infrastructure's initial stockholders to Vanship upon completion of the Business Combination and Vanship may receive an additional 3,000,000 shares of Energy Merger common stock following each of the first and second anniversaries of the Business Combination (6,000,000 shares in the aggregate), subject to certain annual earning criteria of the vessels in Energy Merger's initial fleet, all as more particularly described in this joint proxy statement/prospectus. Adoption and approval of the Business Combination is conditioned upon the adoption and approval of the Redomiciliation Merger. Energy Merger cannot complete the Business Combination unless the Redomiciliation Merger is adopted and approved. You are also being asked to vote upon a third proposal to approve the Dissolution and Plan of Liquidation of Energy Infrastructure, as contemplated by Energy Infrastructure’s certificate of incorporation in the event that Energy Infrastructure has not obtained the requisite stockholder approval of the Business Combination and Redomiciliation Merger. See “Dissolution and Liquidation” below. The Share Purchase Agreement is attached as Appendix A to this joint proxy statement/prospectus. The Merger Agreement is attached as Appendix B to this joint proxy statement/prospectus. This joint proxy statement/prospectus and the enclosed form of proxy are first being mailed to Energy Infrastructure stockholders on or about July _, 2008.
Record Date and Voting
The holders of record of shares of Energy Infrastructure common stock as of the close of business on the record date, which was June 23, 2008, are entitled to receive notice of, and to vote at, the Special Meeting. On the record date, there were 27,221,747 shares of Energy Infrastructure common stock outstanding.
The holders of a majority of the shares of Energy Infrastructure common stock that were outstanding on the record date, represented in person or by proxy, will constitute a quorum for purposes of the Special Meeting. A quorum is necessary to hold the Special Meeting. Abstentions and properly executed broker non-votes will be counted as shares present and entitled to vote for the purposes of determining a quorum. “Broker non-votes” result when the beneficial owners of shares of Energy Infrastructure common stock do not provide specific voting instructions to their brokers. Brokers are precluded from exercising their voting discretion with respect to the approval of non-routine matters such as the proposed merger, and, thus, absent specific instructions from the beneficial owner of those shares, brokers are not empowered to vote the shares with respect to the approval of such matters.
Holders of shares of Energy Infrastructure common stock will have one vote for each share of Energy Infrastructure common stock held by them at the close of business on the record date. Energy Infrastructure warrants do not have voting rights.
Required Vote
Approval of the Redomiciliation Merger requires the affirmative vote of holders of a majority of Energy Infrastructure's outstanding common stock. Approval of the Business Combination requires the affirmative vote of a majority of the votes cast at the Special Meeting, provided there is a quorum. If the stockholders
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approve the Business Combination, we will only have sufficient funds to complete the Business Combination if holders of shares purchased in Energy Infrastructure's initial public offering, representing less than 5% of the total shares sold in the initial public offering and private placement, exercise their redemption rights. Energy Infrastructure will not proceed with the Business Combination if holders of 1,087,520 (which number represents 5% of the total shares sold in Energy Infrastructure's initial public offering and private placement) or more of the shares of common stock issued in Energy Infrastructure's initial public offering vote against the Business Combination and exercise their right to redeem their shares into a pro rata portion of the Trust Account. In addition, pursuant to the Merger Agreement, it is a condition to the obligation of Energy Infrastructure and Vanship to consummate the Business Combination that the Redomiciliation Merger Proposal be approved by Energy Infrastructure's stockholders.
Abstaining from voting or not voting on a proposal (including broker non-votes), either in person or by proxy or voting instruction, will not have an effect on the vote relating to the Business Combination, since Energy Infrastructure's certificate of incorporation provides that only votes cast at the meeting will count toward the vote on the Business Combination. An abstention will not count toward the 5% “against and redeeming” vote that would result in the Business Combination's abandonment, and if you abstain you would be unable to exercise any redemption rights upon approval of the Business Combination. With respect to the Redomiciliation Merger Proposal an abstention or a broker non-vote will have the same effect as a vote against the proposal.
Broker Non-Votes
A broker non-vote occurs when a broker submits a proxy card with respect to shares held in a fiduciary capacity (typically referred to as being held in “street name”) but declines to vote on a particular matter because the broker has not received voting instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such shares on routine matters, but not on non-routine matters. Routine matters include the election of directors and ratification of auditors. The matters currently planned to be considered by the stockholders are not routine matters. As a result, brokers can only vote the Energy Infrastructure shares if they have instructions to do so. Broker non-votes will not be counted in determining whether the proposals to be considered at the meeting are approved.
Voting Your Shares
Each share of common stock that you own in your name entitles you to one vote per proposal. Your proxy card shows the number of shares you own.
There are three ways to vote your shares at the Special Meeting:
By signing and returning the enclosed proxy card. If you submit a proxy card, your “proxy,” whose names are listed on the proxy card, will vote your shares as you instruct on the card. If you sign and return the proxy card, but do not give instructions on how to vote your shares, your shares will be voted as recommended by the Energy Infrastructure board “ FOR ” approval of each proposal.
You can attend the Special Meeting and vote in person. We will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares.
Redemption Rights
Any holder of shares that were issued in Energy Infrastructure's initial public offering who votes against the Business Combination may, at the same time, demand that Energy Infrastructure redeem his, her or its shares for $10.00 per share, plus a portion of the interest earned and not previously released to Energy Infrastructure (net of taxes payable). If so demanded and the Business Combination is consummated, Energy Infrastructure will redeem the shares. A stockholder who has submitted a proxy but has not properly exercised redemption rights may still exercise those rights prior to the Special Meeting by submitting a later dated proxy, together with a demand that Energy Infrastructure redeem the stockholder's shares for $10.00 per share, plus a portion of the interest earned and not previously released to Energy Infrastructure (net of taxes payable), but subject to any valid claims by our creditors that are not covered by amounts in the trust account or
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indemnities provided by our officers and directors. After the Special Meeting, an Energy Infrastructure stockholder may not exercise redemption rights or correct invalidly exercised rights. You will only be entitled to receive cash for these shares if you continue to hold them through the closing of the Business Combination and then tender your stock certificate(s) to Energy Infrastructure or to Energy Infrastructure's duly appointed tender agent. If you exercise your redemption rights, then you will be exchanging your shares for cash and will no longer own these shares. Exercise of redemption rights will not affect any warrants held by that stockholder. Do not send your stock certificate(s) with your proxy. If the Business Combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. Stockholders will not be requested to tender their shares of common stock before the Business Combination is consummated.
You will lose your redemption rights if you submit an incomplete or untimely demand for redemption. To exercise redemption rights a Energy Infrastructure stockholder must:
| • | Vote against the Business Combination Proposal; |
| • | Contemporaneous with that vote against the Business Combination Proposal, send a written demand to Energy Infrastructure (Attn: Susan Dubb) at Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899, which demand must state: |
| • | The name and address of the stockholder; |
| • | That the stockholder has voted against the Business Combination; |
| • | That the stockholder demands redemption of the stockholder's shares into cash; and |
| • | The address for delivery of the check for the aggregate redemption payment to be received by the stockholder if the shares are redeemed into cash. |
If the Business Combination is approved by the Energy Infrastructure stockholders and is consummated, Energy Infrastructure will promptly pay to any holder who voted against the Business Combination and properly and timely demanded redemption and who has submitted the holder's stock certificate(s) to Energy Infrastructure, or to its duly appointed tender agent, the stockholder's pro rata portion of funds in the Trust Account. Any such payment will only be made after the holder submits his, her or its stock certificates to Energy Infrastructure or to its duly appointed tender agent. The certificate(s) representing the shares being redeemed should not be submitted prior to the meeting or at the time that the redeeming stockholder votes against the Business Combination and submits the written demand for redemption, but only after the Business Combination has been approved. (Energy Infrastructure recommends sending the certificate by registered mail with proper insurance, since risk of loss will remain with the stockholder until the certificate is received by Energy Infrastructure). Energy Infrastructure will not charge any stockholder for costs incurred by Energy Infrastructure with respect to the exercise of redemption rights, such as the costs of redeeming shares from street name to physical certificates.
The closing price of Energy Infrastructure's common stock on March 31, 2008 was $9.95 and the amount of cash held in the Trust Account on March 31, 2008 was $217,799,903. If a public stockholder would have elected to exercise redemption rights on such date, he or she would have been entitled to receive approximately $10.24 per share, though no assurance is given as to the actual redemption price, which could be lower than such amount.
Questions About Voting. If you have any questions about how to vote or direct a vote in respect of your Energy Infrastructure common stock, you may call Susan Dubb of Energy Infrastructure, at (302) 656-1771. You may also want to consult your financial and other advisors about the vote.
Revoking Your Proxy and Changing Your Vote. If you give a proxy, you may revoke it or change your voting instructions at any time before it is exercised by:
| • | If you sent in a proxy, by sending another proxy card with a later date; |
| • | Notifying Energy Infrastructure in writing before the Special Meeting that you have revoked your proxy; or |
| • | Attending the Special Meeting and voting in person. |
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If your shares are held in “street name,” consult your broker for instructions on how to revoke your proxy or change your vote.
If you do not vote your shares of Energy Infrastructure common stock in any of the ways described above, it will have the same effect as a vote against the adoption of the Redomiciliation Merger Proposal, but will not have the effect of a vote against the Business Combination Proposal and demand of redemption of your shares into a pro rata share of the Trust Account in which a substantial portion of the proceeds of Energy Infrastructure's initial public offering are held.
Solicitation Costs. Energy Infrastructure is soliciting proxies on behalf of the Energy Infrastructure board of directors. This solicitation is being made by mail, but also may be made in person or by telephone or other electronic means. Energy Infrastructure and its respective directors, officers, employees and consultants may also solicit proxies in person or by mail, telephone or other electronic means. These persons will not be paid for doing this.
Energy Infrastructure has not hired a firm to assist in the proxy solicitation process but may do so if it deems this assistance necessary. Energy Infrastructure will pay all fees and expenses related to the retention of any proxy solicitation firm.
Energy Infrastructure will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. Energy Infrastructure will reimburse them for their reasonable expenses.
Stock Ownership. Information concerning the holdings of certain Energy Infrastructure stockholders is set forth above in the Summary and below under “Beneficial Ownership of Securities.”
Dissolution and Liquidation
You are also being asked to vote for the adoption and approval of a proposal to allow Energy Infrastructure to dissolve and adopt a Plan of Liquidation, as contemplated by Energy Infrastructure’s certificate of incorporation, in the event that Energy Infrastructure has not obtained the requisite stockholder approval of the Business Combination and the Redomiciliation Merger.
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BACKGROUND AND REASONS FOR THE BUSINESS COMBINATION
AND THE REDOMICILIATION MERGER
Background of the Acquisition
The terms of the Share Purchase Agreement are the result of arm's length negotiations between representatives of Energy Infrastructure and Vanship Holdings Ltd., or Vanship. The following is a brief discussion of the background of Energy Infrastructure's efforts to identify potential candidates for a business combination, the selection of Vanship, and the negotiations.
Energy Infrastructure is a blank check company organized under the laws of the State of Delaware on August 11, 2005. We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses that supports the process of bringing energy, in the form of crude oil, natural and liquefied petroleum gas, and refined and specialized products (such as petrochemicals), from production to final consumption throughout the world. On July 21, 2006, Energy Infrastructure consummated its initial public offering of 20,250,000 units with each unit consisting of one share of its common stock and one warrant. Each warrant entitles the holder to purchase one share of Energy Infrastructure common stock at an exercise price of $8.00 per share. The units sold in Energy Infrastructure's initial public offering were sold at an offering price of $10.00 per unit, generating gross proceeds of $202,500,000. Prior to the closing of Energy Infrastructure's initial public offering, Energy Corp., a company formed under the laws of the Cayman Islands and controlled by Energy Infrastructure's President and Chief Operating Officer purchased an aggregate of 825,398 units at a price of $10.00 per unit in a private placement, for aggregate gross proceeds of $8,253,980. On August 31, 2006 the underwriters of Energy Infrastructure's initial public offering exercised their over allotment option to purchase an additional 675,000 units, generating an additional $6,750,000 in gross proceeds. This resulted in a total of $209,250,000 in net proceeds, including certain deferred offering costs and deferred placement fees being held in the Trust Account. Energy Infrastructure's units commenced trading on the American Stock Exchange under the symbol “EIIU,” on July 18, 2006. Effective on October 4, 2006, Energy Infrastructure's common stock and warrants began to trade separately under the symbols “EII,” and “EII.WS”, respectively, and the units ceased trading. The $209,250,000 which was placed into the Trust Account will be released to Energy Infrastructure upon consummation of the acquisition, or upon the dissolution and liquidation of Energy Infrastructure in accordance with the General Corporation Law of the State of Delaware. Subsequent to its initial public offering, Energy Infrastructure's officers and directors commenced an active search for a prospective business combination. Other than its initial public offering and the pursuit of a business combination, Energy Infrastructure has not engaged in any business to date.
Review of Prospective Business Combination Targets
Following Energy Infrastructure's initial public offering in July 2006 until June 1, 2007, the date of Energy Infrastructure's initial contact with Vanship, Energy Infrastructure evaluated 15 prospective transactions. Exploratory discussions were held with respect to effecting a business combination, either through a merger, the acquisition of an operating business or an asset acquisition, with nine of such prospective transactions. These candidates were engaged in the tanker, offshore supply, oil refinery and storage, terminal and oil rig sectors. Energy Infrastructure agreed to the substantive terms of a business combination with two of these companies. In connection therewith, Energy Infrastructure entered into a Memorandum of Understanding on April 24, 2007, with Ancora Investment Trust, a tanker operating company, for the initial purchase of 16 ships. Energy Infrastructure commenced due diligence which included reviewing the charter-party agreements for the vessels, reviewing class records and physically inspecting a number of vessels through an independent surveyor. The Memorandum of Understanding was subsequently terminated on July 3, 2007 due to the decision of Ancora not to sell the ships. Energy Infrastructure entered into a letter of intent dated October 8, 2007, with FR8, a freight and tanker operator, for the acquisition of its business. The letter of intent expired without a formal termination by the parties. Energy Infrastructure received preliminary information regarding the potential transaction with FR8 but did not commence due diligence.
Further to exploratory discussions, Energy Infrastructure's executive officers entered into negotiations or considered entering into negotiations with the prospective business combination targets appearing below. All
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of the prospective business combinations were accorded serious consideration by Energy Infrastructure's executive officers but other than the proposed transaction were rejected prior to reaching an agreement in principle.
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| Nature of Business | Activity Period | Reasons for Rejection | ||
| Oil Refinery & Gas Stations | September 2006 | Price disagreement | ||
| Tanker Fleet | October 2006 | Seller decided not to sell | ||
| LPG fleet & Gas Trader | October 2006 | Did not agree on valuation | ||
| Naptha Terminal | December 2006 | Sellers opted for other buyer | ||
| Natural Gas Exploration | January 2007 | Sellers' economics | ||
| Freight & Tanker Operator | February 2007 | Seller did not meet the deadlines | ||
| Oil Refinery | May 2007 | Did not agree on valuation | ||
| Tanker fleet | June 2007 | Seller decided not to sell | ||
| Oil Rigs | July/Aug 2007 | Seller decided not to sell |
Oil Refinery and Gas Stations (September 2006): This Company owned a retail distribution with long-term supply contracts, a terminal and a petroleum refinery facility in Puerto Rico with a marine dock and an inland distribution system. The refinery facility had been shut down since 2000, and a considerable amount of money was needed to reactivate it. Present cash flow earnings were poor and, in addition, the owner was unwilling to cede management control to Energy Infrastructure. Also, the target had a high asking price when compared to earnings generated. Also, as is the case in transactions involving refineries, there was no way to guaranty a specific forward EBITDA, which investors would require. During 2007, refinery margins collapsed as the price of crude fed to the refineries substantially surpassed the price increases to the finished products sold to the consumers.
Tanker Fleet (October 2006) and Naptha Terminal (December 2006): This Company comprised of five different classes of assets: (a) a crude oil terminal, (b) a crude oil pipeline, (c) real estate holdings, (d) a 49.94% stake in a tanker shipping company and (e) media investments. Both transactions involved political uncertainty, as the two major shareholders were involved in a management-control dispute over upcoming elections. In fact, after the elections, the Company decided to spin-off 34.5% of its Naptha Terminal to a foreign company while the tanker fleet, containing the hidden value for any acquirer, was never sold.
LPG Fleet & Gas Trader (October 2006): This family-owned enterprise comprised two different class of assets: (a) owned and chartered-in fleet of 20 and 4 LPG vessels, respectively, and an LPG trading company with several owned gas terminals. Energy Infrastructure did not proceed with this transaction because the parties were unable to agree on a valuation. The seller requested a certain percentage of premium above the market values of the owned fleet and equally a substantial premium above the profits of the trading company. Although the trading business was profitable, the owners were unwilling to sell the terminals, as they planned to exploit the real estate on which the terminals were built as building sites, which weakened substantially the trading profits. The terminals enabled the gas to be sold internally at local prices, which were much higher than the international market prices, a customary practice in the Mediterranean basin.
Natural Gas Exploration (January 2007): This Pakistan-based company had a concession to drill natural gas, but no production was ever started. Additionally, two key factors were missing at that time: (a) the certification of the reserves, and (b) the off-take agreement to sell the extracted gas. The company, due to pending shareholding changes and necessary government approvals, delayed the publication of the reserve certification and the execution by the state gas distribution company of the off-take agreement. As a result, it was unable to access a bank financing facility for the gas processing plant as well as for the pipeline connections to the state-owned pipeline grid. Given Energy Infrastructure's time constraints, a political risk factor, and the lack of a present cash-flow, the transaction was deemed inappropriate for Energy Infrastructure.
Freight & Tanker Operator (February 2007): This company, FR8, owned by an oil trading company, had two distinct class of assets: (a) an owned fleet of six operating and 10 new vessels (coming to the market in 2008 + 2009) and (b) a freight trading business. Although Energy Infrastructure considered this an attractive transaction, the seller decided, through their appointed investment bank advisor, to run an auction-style process, the timing of which resulted in the seller missing deadlines set by Energy Infrastructure.
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Oil Refinery (May 2007): This company, based in the northern part of Italy, owned (a) a refinery, (b) a storage facility and (c) retail gas stations. Although in terms of location, modern equipment and quality of output, it was a an interesting target, the seller decided to pursue an auction process with price indications much higher than what historical, present or potential future earnings could support at that time. Additional negative factors included the complex regulatory environment governing Italy, which had already caused other buyers to withdraw, and the inability to lock-in forward EBITDA after the collapse seen in 2007 in the refining margins, as discussed above.
Tanker Fleet (June 2007): This company, Ancora Investment Trust, owned a mixed fleet of 16 tankers with long-term charter coverage, which provided cash-flow and profit stability as well as a long-standing and proven technical management track record. Energy Infrastructure completed due diligence. However, the seller decided to abort the transaction due to divergent internal shareholders' views.
Oil Rigs (June – July 2007): This company comprised three jack-up rigs. However, because of the merger of the seller with another company, the disposal of these rigs was stalled until consummation of the merger and determination of business strategy by the merged company. The delay made the time frame no longer viable for Energy Infrastructure, which then focused exclusively on the Vanship transaction.
History of the Negotiations to Acquire the SPVs from Vanship
Energy Infrastructure's Chief Financial Officer, Marios Pantazopoulos, during the course of his prior employment with Oceanbulk Maritime SA, had previously had business contacts with Fortis Securities LLC, or Fortis, and its shipping team in Piraeus and Rotterdam. In October 2006, representatives of Fortis met with Mr. Pantazopoulos during the Athens Marine Money Conference to discuss Energy Infrastructure's initial public offering and Fortis's potential role in identifying potential acquisition targets for Energy Infrastructure. A meeting was scheduled for May 2007 so that principals of Fortis could meet with Mr. George Sagredos, Energy Infrastructure's Chief Operating Officer. Also in May 2007, Vanship engaged Fortis as financial advisor in connection with any sale of all or part of Vanship's fleet of VLCCs. In June 2007, Fortis provided Energy Infrastructure with an offering memorandum for Vanship as part of a selected bidding process. During this time, Energy Infrastructure was in contact with principals of Fortis.
Energy Infrastructure, its subsidiaries, affiliates and related parties had no prior connections or business contacts with Vanship or its subsidiaries, affiliates and related parties. Further, there is no relationship, affiliation or other connection between the officers, directors, and affiliates of Energy Infrastructure and the officers, directors, and affiliates of Vanship.
From June 1, 2007 until early August 2007, Fortis, Energy Infrastructure's management and Maxim Group LLC, a financial advisor to Energy Infrastructure and the lead underwriter of Energy Infrastructure's initial public offering, evaluated various scenarios in relation to the acquisition of certain vessels. Energy Infrastructure entered into a confidentiality agreement with Fortis on August 1, 2007 relating to the Vanship transaction.
After having discussions with Vanship management and proposing a potential structure for a business combination to Vanship management, a conference call was held on August 3, 2007 between Captain Vanderperre and Mr. Fred Cheng, representing Vanship, Messrs. George Sagredos and Marios Pantazopoulos, representing Energy Infrastructure, representatives of Maxim and representatives of Fortis.
On August 8 th , 2007, Messrs. Sagredos and Pantazopoulos, a representative of Fortis and a representative of Maxim flew to Hong Kong to attend a series of meetings with Vanship's principals and management team. The parties discussed potential structures for a business combination, general information regarding each other's business activities and procedural issues relating to a potential business combination. The structure for a business combination, vessels to be acquired and the basic financial terms and other obligations were tentatively agreed during this series of meetings. Energy Infrastructure's board determined during these meetings that the appropriate structure for this transaction would be to acquire the SPVs (which owned the VLCCs), as Vanship, the holding company, had additional interests, making an acquisition of the entire company impractical.
A non-binding term-sheet was executed on August 31, 2007. On September 15, 2007, Vanship confirmed that it had reached an agreement in principle with a joint venture partner that held a 50% indirect interest in
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three of the SPVs, pursuant to which Vanship would acquire a 100% direct interest in the three jointly held SPVs prior to or contemporaneously with the closing. Accordingly, Vanship commenced, as per its obligation under the term-sheet, to produce financial statements of the SPVs prepared in accordance with US GAAP and audited under US GAAS and Energy Infrastructure's legal and financial advisors commenced due diligence of the nine SPVs and commenced drafting a definitive purchase agreement. On September 28, 2007, Messrs. Sagredos and Cheng met to discuss procedures, strategy and management roles in connection with a potential business combination.
On October 6, 2007, during the Athens Marine Money Conference in Greece, Messrs. Sagredos and Pantazopoulos met with a representative of Fortis to discuss various aspects of the proposed transaction. On October 19 and 20, Captain Vanderperre and Mr. Cheng, representing Vanship and Mr. Sagredos and Mr. Pantazopoulos, representing Energy Infrastructure had various meetings. On October 19, 2007, New Century Capital Partners rendered its fairness opinion via a conference call to the entire board of directors of Energy Infrastructure, a written copy of which was subsequently delivered on October 17, 2007. On Monday, October 22, 2007, the board of directors of Energy Infrastructure held a meeting and voted to approve the transaction.
The transaction as currently structured is substantially the same as originally contemplated by the parties. However, it was originally contemplated that following the Business Combination the board of directors would consist of five representatives of Vanship and four representatives of Energy Infrastructure, with Mr. Sagredos serving as the Chief Operating Officer and Mr. Pantazopoulos serving as the Chief Financial Officer. As currently structured, Mr. Pantazopoulos will be the sole representative of Energy Infrastructure serving on the board of directors and none of the current management of Energy Infrastructure will have management responsibilities following the Business Combination.
On December 3, 2007 when Energy Infrastructure, Energy Merger and Vanship entered into the Share Purchase Agreement, the parties anticipated that Energy Merger would be able to obtain acquisition financing of up to $435 million. Such amount, taken together with the projected $220 million in Energy Infrastructure's Trust Account, was calculated to be sufficient to fund Energy Merger's committed cash consideration to Vanship of $643 million. Due to the reluctance of lenders to finance the acquisition of single-hull vessels and to support the leverage implied by $435 million of debt, Energy Merger was only able to obtain a maximum commitment for acquisition financing of $415 million. Due to the requirement imposed by Energy Merger's lenders that $15 million be placed in a working capital reserve upon drawdown of the loan, the combination of funds available under Energy Merger's term loan facility and funds in Energy Infrastructure's Trust Account is insufficient to fund the acquisition of the SPVs. In addition, the potential that shareholders of Energy Infrastructure may vote against the Business Combination Proposal and elect to have their shares redeemed may further decrease the availability of funds to complete the acquisition.
Under the Share Purchase Agreement, Vanship agreed to purchase up to 5,000,000 units of Energy Merger at a purchase price of $10 per unit, but only to the extent necessary to secure acquisition financing. Energy Merger's lenders did not make Vanship's purchase of units a condition to their obligations under Energy Merger's committed term sheet. Nevertheless, in February 2008, Vanship indicated to management of Energy Infrastructure that unless Energy Merger was able to obtain additional acquisition financing before the closing of the Business Combination, it would in principal be prepared to purchase all of the 5,000,000 units of Energy Merger's common stock and warrants for an aggregate purchase price of $50,000,000 at the closing of the Business Combination in order to provide funds for Energy Merger to complete the acquisition and meet its initial working capital needs.
Even with the proceeds of the purchase of units by Vanship, Energy Infrastructure will not have funds available to complete the Business Combination if a sufficient number of its stockholders vote against the Business Combination Proposal and exercise their redemption rights. Accordingly, Energy Merger determined in February 2008 that it would offer to the public pursuant to the prospectus of which this joint proxy statement/prospectus forms a part, such number of shares of its common stock equal to the number of shares of Energy Infrastructure common stock that are required to be redeemed upon completion of the Business Combination. There is no certainty that Energy Merger will be successful in any such public offer. The inability of Energy Merger to successfully complete such public offer if stockholders of Energy Infrastructure elect
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to exercise their redemption rights could result in Energy Merger not having sufficient funds to complete the Business Combination, or alternatively, having sufficient funds to complete the Business Combination, but leaving Energy Merger with minimal working capital, no excess cash to fund the acquisition of additional vessels and insufficient free cash to pay dividends to its stockholders.
Advisors
Energy Infrastructure engaged the following advisors to assist management in identifying, evaluating, structuring and marketing transactions with potential targets.
On December 18, 2006, Energy Infrastructure entered into an advisory agreement to engage Maxim Group LLC, or Maxim, the lead underwriter in Energy Infrastructure's initial public offering, to advise Energy Infrastructure and provide services in connection with identifying a potential acquisition target. Those services included creating financial models and valuation analysis, advice on structuring, assisting in the preparation of term sheets and letters of intent, soliciting and acting as an intermediary in discussions with a potential acquisition target, assisting in the negotiation and preparation of agreements and assisting in due diligence. In exchange for such services, Energy Infrastructure is obligated to pay Maxim a financial advisory fee payable in cash equal to 0.75% of the consideration received by the acquisition target in the transaction, but not to exceed $2,750,000. The advisory fee shall be payable upon the consummation of a transaction. In addition, to the advisory fee, if Maxim introduced the acquisition target to Energy Infrastructure, Energy Infrastructure agreed to pay Maxim a finder's fee payable in cash equal to 0.50% of the consideration received by the acquisition target in the transaction at the consummation of the transaction. If a transaction is not consummated by Energy Infrastructure Maxim is not entitled to receive the advisory fees or the finder's fee. The continuing obligations of Energy Infrastructure to Maxim under the Underwriting Agreement, dated July 20, 2006, are separate and apart from the obligations of Energy Infrastructure to Maxim under this advisory agreement. Energy Infrastructure is also obligated to reimburse Maxim for all reasonable out-of-pocket expenses, that have been approved by Energy Infrastructure, incurred by Maxim in connection with the services being provided. On July 2, 2007, Energy Infrastructure entered into an advisory agreement to engage the Investment Bank of Greece, or IBG, to advise Energy Infrastructure and provide services in connection with identifying a potential acquisition target. IBG was engaged to assist in identifying potential acquisition targets, including integrated shipping companies, shipping pool services and assets/vessels of a company, and to provide advice, and assistance with respect to defining objectives, performing valuation analysis, structuring, planning, negotiating and financing a potential transaction. IBG may also provide services for transactions identified by a third party. In the event that an acquisition is consummated, IBG will receive a fixed fee of $1,200,000. In addition to such fixed fee, and whether or not a transaction is consummated, IBG will also be reimbursed by Energy Infrastructure for all pre-approved reasonable out-of-pocket expenses arising out of the engagement.
Vanship engaged Fortis in May 2007 as financial advisor in connection with any sale of all or part of Vanship’s fleet of VLCCs. Vanship’s engagement letter with Fortis contemplates that Vanship will be obligated to pay Fortis a success fee based on 1% of the total value of the consideration received by Vanship in the Business Combination. Any such success fee will be payable solely by Vanship and not by any of the SPVs.
Reasons for the Redomiciliation Merger
Vanship, a non-U.S. company with no substantial connection to the United States, will receive a substantial portion of the consideration for the sale of the SPVs in the form of stock of a publicly-traded corporation incorporated outside of the United States. Vanship stated that it was not willing to accept this stock as consideration for the SPVs if the purchasing company is a U.S. corporation.
The SPVs have operated almost exclusively outside of the United States throughout their entire history. None of the ships owned by the SPVs are operated under U.S. flag, and these ships operate predominantly outside of U.S. territorial waters. It is expected that the ships will continue to be operated predominantly outside of the United States after the Business Combination. As a result, given the minimal contacts with the United States, Vanship is more comfortable acquiring a controlling interest in a Marshall Islands corporation than in a U.S. corporation, which would be subject to the jurisdiction of U.S. federal, state or local courts.
In addition, Vanship is incorporated outside of the United States, and is aware that most of its competitors are incorporated in jurisdictions outside of the United States, such as the Republic of the Marshall
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Islands, operate outside of the United States, and therefore are subject to little or no U.S. income tax. Prior to the proposed transaction, neither Vanship nor any of the SPVs was subject to the U.S. corporate net income tax (although a portion of the charter hire may have been subject, from time to time, to the U.S. tax on gross U.S. source transportation income). If Vanship received stock in Energy Infrastructure and Energy Infrastructure remained a U.S. corporation, the income from operation of the ships, when distributed to Energy Infrastructure (following the Business Combination), would be subject to U.S. federal income tax at a top marginal rate of 35% at the Energy Infrastructure level, and any dividends from Energy Infrastructure to its non-U.S. stockholders, including Vanship, would additionally be subject to U.S. withholding tax of up to 30%. Vanship indicated that such taxation would be unacceptable to it.
Vanship and the board of directors of Energy Infrastructure also concluded that redomiciling to the Marshall Islands would permit greater flexibility and possibly improved economics in structuring future acquisitions as Energy Merger expands, because a non-U.S. owner of a potential target would likely view being a stockholder in a publicly-traded Marshall Islands corporation more favorably than being a stockholder in a U.S. corporation. In addition, as a foreign (non-U.S.) corporation, Energy Merger is expected to qualify for foreign private issuer status with the U.S. Securities and Exchange Commission, which would reduce the reporting requirements under the Securities Exchange Act of 1934, as amended, and result in significantly lower costs associated with ongoing financial and reporting compliance.
For the reasons described above, Vanship and the board of directors of Energy Infrastructure determined that in order to compete in the most favorable manner with other international shipping companies listed in the U.S. public markets, almost all of which are domiciled outside of the United States, it was advisable for Energy Infrastructure to redomicile to the Republic of the Marshall Islands by means of the Redomiciliation Merger.
Satisfaction of 80% Test
In accordance with the terms of the initial public offering, it is a requirement that the target of Energy Infrastructure's initial business combination have a fair market value equal to at least 80% of the amount in the Trust Account (exclusive of the underwriters' contingent compensation and Maxim Group LLC's contingent placement fees being held in the Trust Account) at the time of the Business Combination. The Energy Infrastructure board of directors, based on their financial skills, knowledge of and experience in the international shipping industry, determined that it was qualified to make the determination with regard to the net asset requirement. As a result of the Redomiciliation Merger, Energy Infrastructure will merge with and into Energy Merger, with Energy Merger as the surviving corporation. On December 3, 2007, Energy Merger entered into a Share Purchase Agreement with respect to shares of the nine SPVs. Based on the independent vessel valuations in the form of “desk appraisals” performed by purchase and sale brokers recognized in the international shipping industry, Energy Infrastructure's board of directors, after consulting with its shipbroker and financial advisor Maxim and relying on the fairness opinion of New Century Capital Partners, determined that the aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger, which amount was negotiated at arms-length, was fair to and in the best interests of Energy Infrastructure and its stockholders and appropriately reflects the value of the vessels held by the SPVs. In reaching this conclusion, Energy Infrastructure's board of directors also took into account that Energy Merger may issue up to an additional 6,000,000 shares of Energy Merger to Vanship if certain revenue targets are achieved. Energy Infrastructure's board of directors was satisfied that, consistent with industry practice, the value of the Share Purchase Agreement that Energy Merger entered into is equivalent in value to the underlying value of the vessels to which the Share Purchase Agreement relates. On March 31, 2008, 80% of the net assets of Energy Infrastructure was equal to $ 169,000,000. Accordingly, the board of directors determined that the requirement that the target of Energy Infrastructure's initial business combination will have a fair market value equal to at least 80% of the amount that will be held the Trust Account (exclusive of the underwriters' contingent compensation and Maxim Group LLC's contingent placement fees being held in the Trust Account) at the time of the Business Combination is satisfied.
Energy Infrastructure directors and executive officers, who have interests in the merger that may be different from, or in addition to, the interests of its unaffiliated stockholders, have actively participated in the
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negotiations related to the Share Purchase Agreement. See “Risk Factors — Risks Relating to Energy Infrastructure Acquisition Corp. — Energy Infrastructure's directors and executive officers have interests in the Business Combination that may be different from yours.”
Recommendations of the Board of Directors
Energy Infrastructure's board of directors, after reviewing the transaction criteria set forth herein, concluded that the Redomiciliation Merger with Energy Merger and the Business Combination was the only business combination transaction that had been evaluated by Energy Infrastructure's board of directors that satisfied all of its criteria.
Fairness Opinion
New Century Capital Partners delivered its written fairness opinion to the board of directors on October 17, 2007, and subsequently made a formal presentation, via a conference call, to Energy Infrastructure's board of directors on October 19, 2007. The fairness opinion stated that, as of October 17, 2007, based upon and subject to the assumptions made, matters considered, procedures followed, methods employed and limitations on New Century Capital Partners' review as set forth in the fairness opinion, it is New Century Capital Partners' opinion that the consideration to be paid in conjunction with the Business Combination was fair, from a financial point of view, to the stockholders of Energy Infrastructure. The fairness opinion provided by New Century Capital Partners is based on the consideration described in the draft Share Purchase and Merger Agreement dated October 16, 2007 (which agreement was subsequently renamed the Share Purchase Agreement and executed on December 3, 2007). The consideration to be paid to Vanship which is contemplated by the October 16, 2007 draft Share Purchase and Merger Agreement is identical to that contemplated by the executed December 3, 2007 Share Purchase Agreement. The full text of the written fairness opinion of New Century Capital Partners is attached as Appendix C and is incorporated by reference into this joint proxy statement/prospectus.
You are urged to read the New Century Capital Partners' fairness opinion carefully and in its entirety for a description of the assumptions made, matters considered, procedures followed, methods employed and limitations on the review that it has undertaken in rendering its fairness opinion. The summary of the New Century Capital Partners' fairness opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the fairness opinion.
The New Century Capital Partners' fairness opinion is for the use and benefit of Energy Infrastructure's board of directors in connection with its consideration of the Business Combination and it does not constitute a recommendation to the board of directors or to any holders of Energy Infrastructure's common stock as to how to vote or proceed with respect to any of the proposals set forth in this joint proxy statement/prospectus.
In arriving at its opinion, New Century Capital Partners took into account an assessment of general economic, market and financial conditions, as well as its experience in connection with similar transactions and securities valuations generally. In so doing, among other things, New Century Capital Partners:
| • | Reviewed financial statements of the SPVs for the fiscal years 2005 and 2006; |
| • | Reviewed publicly available filings by Energy Infrastructure, including its Registration Statement on Form S-1 filed on July 17, 2006 and quarterly filings on Form 10-Q for the periods ended June 30, 2006, September 30, 2006, March 31, 2007, June 30, 2007 as well as Form 10-K for the year ended December 31, 2006; |
| • | Reviewed the draft Share Purchase and Merger Agreement dated on October 16, 2007; |
| • | Reviewed the term sheet relating to the Business Combination; |
| • | Reviewed the valuation reports prepared by Simpson, Spence & Young, Ltd. and Clarkson Research Services Limited, dated August 29, 2007 and October 12, 2007, respectively; |
| • | Conducted management financial and operational due diligence telephonically with Marios Pantazopoulos of Energy Infrastructure and Fred Cheng of Vanship; |
| • | Developed a selected group for comparative purposes of publicly traded tanker companies; |
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| • | Reviewed publicly available financial data, stock market performance data and trading multiples of companies in the business sector of tankers for comparative purposes; |
| • | Reviewed certain publicly available information for precedent single hull and double hull transactions for tanker acquisitions for the period January 1, 2005 to October 16, 2007; |
| • | Developed financial forecasts and a discounted cash flow analysis for the combined SPVs using assumptions supplied to New Century Capital Partners by Energy Infrastructure; and |
In rendering its fairness opinion, New Century Capital Partners assumed the accuracy and completeness of all of the information that has been supplied to it with respect to Energy Infrastructure, the SPVs and the vessels without assuming any responsibility for any independent verification of any such information. Further, New Century Capital Partners relied upon the assurance of management of Energy Infrastructure that they were not aware of any facts or circumstances that would make such information inaccurate or misleading in any respect material to its analysis. New Century Capital Partners has not made any physical inspection or independent appraisal of any of the properties or assets of Energy Infrastructure or Vanship, nor has New Century Capital Partners evaluated the solvency or fair value of Energy Infrastructure or any of the SPVs under any domestic or international laws relating to bankruptcy, insolvency, or similar matters. New Century Capital Partners assumed that the Business Combination will be consummated on the terms and conditions described in the draft Share Purchase and Merger Agreement reviewed by them. New Century Capital Partners' fairness opinion is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by New Century Capital Partners at the date of its written fairness opinion.
The written fairness opinion only addresses the matters specifically addressed therein. Without limiting the foregoing, the written opinion does not address: (i) matters that require legal, regulatory, accounting, insurance, tax or other professional advice; (ii) the underlying business decision of Energy Infrastructure or any other party to proceed with or effect the Business Combination; (iii) the fairness of any portion or aspect of the Business Combination not expressly addressed in the fairness opinion; (iv) the relative merits of the Business Combination as compared to any alternative business strategies that might exist for Energy Infrastructure or the effect of any other transaction in which Energy Infrastructure might engage; (v) any matters related to the risks associated with the assets and/or equity interests to be acquired in the Business Combination, including without limitation, the fluctuation in currency exchange rates, property rights and regulatory considerations; or (vi) the tax or legal consequences of the Business Combination to either Energy Infrastructure, its stockholders or any other party.
With respect to the financial information, forecasts and assumptions furnished to or discussed with New Century Capital Partners by Energy Infrastructure, New Century Capital Partners has assumed that such information has been reasonably prepared and that it reflects the best currently available estimates and judgment of Energy Infrastructure's management as to the expected future financial performance of the combined SPVs. For purposes of New Century Capital Partners’ written fairness opinion, New Century Capital Partners assumed that each of Energy Infrastructure and Vanship is not a party to any pending material transaction other than the Business Combination and those activities undertaken in the ordinary course of business. Further, New Century Capital Partners makes no representations as to the actual value which may be received in connection with the Business Combination, nor the legal, regulatory (foreign or domestic), tax or accounting effects of consummating the Business Combination.
New Century Capital Partners assumed that the Business Combination will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and all other applicable foreign, federal and state securities rules and regulations. New Century Capital Partners assumed that the Business Combination will be consummated substantially in accordance with the terms and conditions set forth in the draft Merger and Share Purchase Agreement, without any further amendments to these terms and conditions.
New Century Capital Partners' analysis and fairness opinion are necessarily based upon market, economic and other conditions as they existed on and could be evaluated on October 17, 2007. Accordingly, although subsequent developments may affect its fairness opinion, New Century Capital Partners has not assumed any obligation to update, review or reaffirm its fairness opinion.
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In connection with rendering its fairness opinion, New Century Capital Partners performed certain financial, comparative and other analyses as summarized below. Each of the analyses that New Century Capital Partners conducted provided a valuation methodology, in order to determine the valuation of the combined SPVs. The summary of New Century Partners' analyses and valuation methodologies described below are not a complete description of the analyses underlying New Century Capital Partners' fairness opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In addition, New Century Capital Partners may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions. The estimates contained in New Century Capital Partners' analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than the analyses suggest. Accordingly, New Century Capital Partners' analyses and estimates are inherently subject to substantial uncertainty. New Century Capital Partners believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete and misleading view of the process underlying the analyses that New Century Capital Partners performed in connection with the preparation of its fairness opinion.
The summaries of the financial reviews and analyses include information presented in tabular format. In order to fully understand New Century Capital Partners' financial reviews and analyses, the tables must be read together with the accompanying text of each summary. The tables alone do not constitute a complete description of the financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses that New Century Capital Partners performed.
The analyses performed were prepared solely as part of New Century Capital Partners' analysis of the fairness, from a financial point of view, to Energy Infrastructure with respect to the consideration to be paid in connection with the proposed acquisition of nine vessel-owning companies from Vanship, and were provided to Energy Infrastructure's board of directors in connection with the delivery of New Century Capital Partners' fairness opinion. The fairness opinion of New Century Capital Partners was just one of the many factors taken into account by Energy Infrastructure's board of directors in making its determination to approve the transaction, including those described elsewhere in this joint proxy statement/prospectus.
Comparable Company Analysis
This method applies the comparative public market information of companies comparable to the combined SPVs. The methodology assumes that companies in the same industry share similar markets. The potential for revenue and earnings growth is usually dependent upon the characteristics of the growth rates of these markets, and companies in the same industry experience similar operating characteristics. The underlying components in the comparable company analysis assume both the combined SPVs and the comparable companies are ongoing concerns.
Using publicly available information, New Century Capital Partners compared selected financial data of the SPVs with similar data of selected publicly traded tanker companies considered by New Century Capital Partners to be comparable to the combined SPVs, specifically New Century Capital Partners selected public tanker companies with a dividend yield over 7%, as such companies tend to trade based on multiples of cash flow or EBITDA. In this regard, New Century Capital Partners noted that although such companies were considered similar, none of the companies has the same management, makeup, size or combination of business as the combined SPVs. The comparable group includes: Aries Maritime Transport Limited, Arlington Tankers Limited, Double Hull Tankers, Inc., General Maritime Corporation, Knightsbridge Tankers Limited, Nordic American Tanker Shipping Limited, Omega Navigation Enterprises, Inc., and Ship Finance International Limited.
New Century Capital Partners analyzed the following financial data for each of the comparable companies: (1) the “enterprise value,” defined as common stock market value (the number of fully-diluted shares multiplied by the closing price of the common stock), plus total debt and preferred stock, less cash as a
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multiple of 2007 and 2008 estimated EBITDA (which EBITDA estimates reflect a mean consensus of research analysts' EBITDA estimates as reported by Institutional Brokers Estimate Service), for each of the comparable companies; and (2) the closing price of the common stock on October 16, 2007 as a multiple of the net asset value per share for each of the comparable companies. New Century Capital Partners also analyzed the annualized dividends per the closing price of the common stock on October 16, 2007. New Century Capital Partners performed valuation analyses by applying certain market trading statistics of the comparable companies to the historical and estimated financial results of the combined SPVs. The ranges of data in the comparable companies analysis is disclosed in the full Fairness Opinion in Exhibit 99.11 to this joint proxy statement/prospectus. While all data points were considered in New Century Capital Partners' analysis, New Century Capital Partners deemed the mean results of all the data to be more relevant than the range of the data.
New Century Capital Partners examined Wall Street research of the comparable companies, and for other publicly traded companies and New Century Capital Partners also examined other industry research and made the following observations: While a variety of valuation methodologies and metrics are used in determining a shipping company's value, New Century Capital Partners found that the majority of time companies are valued using next-year's EBITDA and applying an enterprise value/EBITDA multiple to determine a shipping company's value; additionally, but to a lesser extent, a company's current net asset value was considered. As a result, New Century Capital Partners applied weights to the various valuation methodologies in order to determine the combined SPVs' enterprise value and equity value. As a result of these valuation analyses, New Century Capital Partners derived an average implied enterprise value of approximately $993 million for the combined SPVs, which is higher than the offer price, including the present value of the earn-out, or $830 million, which supports the fairness of the transaction to the shareholders of Energy Infrastructure.
Precedent Transaction and Evaluation Analysis
New Century Capital Partners reviewed certain publicly available information for precedent single hull and double hull transactions for tanker acquisitions for the period January 1, 2005 to October 16, 2007 and New Century Capital Partners identified 66 relevant transactions involving purchases of other tanker shipping vessels. This analysis provided New Century with an asset valuation for each individual vessel, which helped New Century establish a minimum valuation for each vessel. The information New Century Capital Partners reviewed in the selected transactions consisted of the purchase price of single hull and double hull tankers divided by the deadweight tonnage of the vessel. Deadweight ton is a unit of a vessel's capacity for cargo, fuel, oil, stores and crew measured in metric tons of 1,000 kilograms. New Century Capital Partners calculated the mean price to deadweight tonnage multiples for single hull and double hull transactions to be $167 and $350, respectively.
Utilizing an average of the mean multiples paid in single hull and double hull transactions, New Century Capital Partners derived an implied enterprise value for the combined SPVs of $691.7 million. A summary of the average multiples utilizing the merger and acquisition analysis is as follows:
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| Comparable Transactions: | ||||||||||||||||||||||||||||||||||||
| SH Transactions | DH Transactions | Total Transactions | ||||||||||||||||||||||||||||||||||
| Year | P/Dwt | # Trans. |
Avg. Yr.
Built |
P/Dwt | # Trans. |
Avg. Yr.
Built |
Weighted P/Dwt | # Trans. |
Avg. Yr.
Built |
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2007
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$ | 163 | 21 | 1992 | $ | 323 | 6 | 1996 | $ | 257 | 27 | 1993 | ||||||||||||||||||||||||
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2006
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$ | 160 | 13 | 1991 | $ | 364 | 12 | 2000 | $ | 279 | 25 | 1995 | ||||||||||||||||||||||||
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2005
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$ | 192 | 6 | 1989 | $ | 350 | 8 | 1999 | $ | 284 | 14 | 1994 | ||||||||||||||||||||||||
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Total
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$ | 167 | 40 | 1991 | $ | 350 | 26 | 1999 | $ | 274 | 66 | 1994 | ||||||||||||||||||||||||
New Century Capital Partners reviewed valuation reports on the nine vessels prepared by Simpson, Spence & Young, Ltd. and Clarkson Research Services Limited, dated August 29, 2007 and October 12, 2007, respectively. The mean value of the nine vessels as stated in the valuation reports is $762.5 million. These valuation reports were prepared by leading shipbrokers and are based on reported transactions and the each of the broker's market knowledge. The valuations were each performed in October 2007, and are not a guide to the market value of the vessels at any other time. Market values in the shipping industry are highly volatile. The valuation certificates of each of Clarksons Research Services Limited and Simpson Spence and Young,
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Ltd. dated October 12, 2007 and October 9, 2007, respectively, are attached to this joint proxy statement/prospectus statement as Appendix E and Appendix G, respectively.
Utilizing the average of the enterprise values derived from the mean multiples paid in single hull and double hull transactions and the valuation reports, New Century Capital Partners derived an implied enterprise value of $727 million for the nine vessels.
New Century Capital Partners noted that the values derived from the precedent transaction analysis may not fully capture the value associated with the vessels. More specifically, the acquisition of the SPVs represents nine vessels purchased at one time, which should receive a premium valuation (e.g., this type of transaction is known as an “en-bloc” transaction and generally receives a premium valuation due to the rare opportunity of purchasing nine homogeneous vessels in one transaction). In addition, the vessels are being acquired with long-term class “A” charters and there are three vessels being purchased with profit sharing arrangements which can generate additional profit upside, though there can be no assurance this will happen. Furthermore, the acquisition provides a “homogeneous” fleet whereby the nine vessels have the same suppliers, crews and maintenance facilities which provides an opportunity to capitalize on the associated economies of scale.
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| Price/DWT |
($ in Millions)
Implied EV |
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| a. Method 1: single hull and double hull precedent transactions | $ | 274 | $ | 691.7 | ||||
| b. Method 2: Valuation Reports | 301 | 762.5 | ||||||
| Mean | 288 | $ | 727.1 | |||||
Discounted Cash Flow Analysis
New Century Capital Partners utilized a discounted cash flow analysis which calculates the present value of the combined SPVs based on the sum of the present value of the projected available cash flow streams and the terminal value of the equity.
New Century Capital Partners created financial projections, based on financial and operational assumptions provided by the management of Energy Infrastructure, of the cash flow available for distributions for the year ending December 30, 2008 through 2012. New Century Capital Partners projected future values of the combined SPVs by applying assumed EBITDA multiples of 9.0x, 10.0x and 11.0x to New Century Capital Partners’ projected (based on information received from the management of Energy Infrastructure) EBITDA for the year ending December 31, 2013. The projected future values were then discounted using a range of discount rates of 7.0% to 10.0% (Vanship's weighted average cost of capital was calculated at 6.9%), which yielded an implied range of enterprise values between $879 million to $1,123 million. The mean implied enterprise value derived from the discounted cash flow analysis was $995.9 million, which is higher than the offer price, including the present value of the earn-out, or $830 million, which supports the fairness of the transaction to the shareholders of Energy Infrastructure.
In determining the discount rates used in the discounted present value analysis, New Century Capital Partners noted, among other things, factors such as inflation, prevailing market interest rates, and the inherent business risk and rates of return required by investors. In determining the appropriate EBITDA multiple used in calculating the combined SPVs’ projected future enterprise value, New Century Capital Partners noted, among other things, the multiples at which public companies which New Century Capital Partners deemed comparable to the combined SPVs currently traded.
Conclusion
Based on the information and analyses set forth above, New Century Capital Partners delivered its written fairness opinion to Energy Infrastructure's board of directors, which stated that, as of October 17, 2007, based upon and subject to the assumptions made, matters considered, procedures followed, methods employed and limitations on its review as set forth in the fairness opinion, in the opinion of New Century Capital Partners, the consideration to be paid in conjunction with the acquisition of the SPVs is fair, from a financial point of view, to the stockholders of Energy Infrastructure. New Century Capital Partners received a fee of $65,000 in connection with the preparation and issuance of its fairness opinion and was reimbursed for its
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attorney's fees. In addition, New Century Capital Partners will receive an additional fee of $180,000 and will be reimbursed for additional attorney's fees, up to $20,000 contingent upon completion of the Business Combination. Energy Infrastructure agreed to indemnify New Century Capital Partners for certain liabilities that may arise out of the rendering of its fairness opinion. New Century Capital Partners' fee for providing the fairness opinion was determined based on arm's-length negotiations between the parties. Neither New Century Capital Partners, nor its affiliates, held any securities of Energy Infrastructure or Vanship, nor did any members or officers of New Century Capital Partners serve as a director of Energy Infrastructure or Vanship. New Century Capital Partners or one of its affiliates may provide investment banking and related services to Energy Infrastructure in the future.
General Matters Regarding Fairness Opinion
The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to particular circumstances and, therefore, such analyses and fairness opinion are not susceptible to summary description. Furthermore, New Century Capital Partners made qualitative and quantitative judgments as to the significance and relevance of each analysis and factor. Accordingly, New Century Capital Partners analyses must be considered as a whole. Considering any portion of such analyses and of the factors considered without considering all analyses and factors, could provide a misleading or incomplete view of the process underlying the conclusions expressed in the fairness opinion.
In its analysis, New Century Capital Partners made a number of assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Vanship, Energy Infrastructure and New Century Capital Partners. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those set forth in the analysis. In addition, analyses relating to the value of the SPVs do not purport to be appraisals or to reflect the prices at which securities of Energy Infrastructure may be sold after the merger is approved.
New Century Capital Partners' fairness opinion does not constitute a recommendation to the board of directors or to any holder of Energy Infrastructure's securities as to how such a person should vote or act with respect to any of the proposals set forth in this joint proxy statement/prospectus. The opinion does not address the decision of the board of directors to enter into the Business Combination as compared to any alternative business transactions that might be available to Energy Infrastructure nor does it address the underlying business decision to engage in the Business Combination.
New Century Capital Partners is an investment banking firm with experience in providing mergers and acquisitions investment banking advisory services, including providing fairness opinions and valuations, private placements, including PIPEs, and other investment banking services. The board of directors of Energy Infrastructure retained New Century Capital Partners based on its mergers and acquisitions expertise and reputation, including its previous experience in providing fairness opinions for blank-check transactions, as well as recommendations from other companies that had engaged New Century Capital Partners for similar purposes, and New Century Capital Partners' ability to render a fairness opinion within the required timeframe.
Energy Infrastructure Board Considerations
Energy Infrastructure's board of directors determined that the Redomiciliation Merger and the Business Combination are in the best interest of Energy Infrastructure and its stockholders. In reaching its determination, Energy Infrastructure's board of directors considered a number of factors, including the following material factors, which the Board believes favor the transaction:
| • | the written fairness opinion provided by New Century Capital Partners and the formal presentation made to the board of directors of Energy Merger by New Century Capital Partners via conference call that the consideration to be paid in conjunction with the Business Combination was fair, from a financial point of view, to Energy Infrastructure's stockholders, specifically, the board of directors gave significant weight to the discounted cash flow analysis, which allowed it to evaluate the potential of the SPVs following the Business Combination, and the comparable company analysis, which |
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| gave the board comfort that it was employing the correct multiples in its evaluation of the transaction and gave less weight to the precedent transaction and evaluation analysis, which gave the board comfort that its view of the transaction valuation was reasonable, but was discounted due to the fact that, as noted by New Century Capital Partners, its precedent transaction analysis did not capture the full value of the transaction; |
| • | the fact that the merger of Energy Infrastructure with and into Energy Merger with Energy Merger as the surviving corporation is expected to constitute a reorganization under the Code; |
| • | the high quality of the vessels owned by the SPVs, including the average age of approximately 12.9 years upon completion of the Business Combination; |
| • | the terms of the charter agreements entered into by the SPVs and the good reputations of the charterers under such agreements; |
| • | the reduced level of cash outlay required to complete the purchase of the SPVs, as compared to an all cash acquisition, because Vanship has agreed to accept shares as part of the purchase price, which will leave Energy Merger with a greater amount of cash following the Business Combination; |
| • | the fact that Vanship is an unaffiliated third party; |
| • | the “desk appraisal” vessel valuations obtained by Clarkson Research Services Limited and Simpson, Spence & Young, Ltd., which assisted the board in its conclusion that the consideration to be paid in the transaction was reasonable; |
| • | the assessment by Energy Infrastructure's management that, consistent with industry practice, the value of the Share Purchase Agreement that Energy Merger entered into is equivalent in value to the underlying value of the vessels respectively and thus the 80% net asset test was met; and |
| • | the fact that the agreement to purchase the nine SPVs from Vanship was the result of a comprehensive review conducted by Energy Infrastructure's board (with the assistance of its financial advisors) of the strategic alternatives available to Energy Infrastructure, leading to the conclusion that the Business Combination is in the best interests of Energy Infrastructure's stockholders. |
Energy Infrastructure's board of directors also considered potential risks relating to the Redomiciliation Merger and the Business Combination, including the following:
| • | Vanship may fail to deliver the SPVs to Energy Merger; |
| • | volatility of charter rates and vessel values; and |
| • | the risks and costs to Energy Infrastructure if the Business Combination is not completed, including the need to locate another suitable business combination or arrangement and obtain stockholder approval and complete the business combination by July 21, 2008. |
The foregoing discussion of the information and factors considered by Energy Infrastructure's board of directors is not intended to be exhaustive, but includes all currently known material factors, both positive and negative, that the board of directors considered in reaching its determination that the Redomiciliation Merger and the Business Combination is in the best interests of Energy Infrastructure and its stockholders. In view of the variety of factors considered in connection with its evaluation of the Business Combination, Energy Infrastructure's board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given differing weights to different factors. After weighing all of the different factors, Energy Infrastructure's board of directors unanimously determined to recommend that Energy Infrastructure stockholders vote “ FOR ” the approval and authorization of the Business Combination at the Special Meeting.
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Interest of Energy Infrastructure Directors and Officers in the Business Combination
When you consider the recommendation of Energy Infrastructure's board of directors that you vote in favor of approval of the Business Combination, you should keep in mind that certain of Energy Infrastructure's officers and directors have interests in the Business Combination that may be different from, or in addition to, your interest as a stockholder. These interests currently known to us are:
| • | Energy Infrastructure's officers and directors paid $25,000 in cash for a total of 5,268,849 shares of Energy Infrastructure common stock prior to the initial public offering. These shares, without taking into account any discount that may be associated with certain restrictions on these shares, collectively have a market value of approximately $52,635,802 based on Energy Infrastructure's share price of $9.99 as of May 5, 2008. Our initial stockholders have agreed to surrender up to an aggregate of 270,000 of their shares of common stock to us for cancellation upon consummation of a business combination in the event public stockholders exercise their right to have Energy Infrastructure redeem their shares for cash. Pursuant to this agreement, for each 1,000 shares redeemed up to 6,210,000 shares, our initial stockholders will surrender approximately 43.5 shares for cancellation. None of the 5,268,849 shares issued prior to the initial public offering to these individuals may be released from escrow until July 17, 2009 during which time the value of the shares may increase or decrease; however, since such shares were acquired for $0.004 per share, the holders are likely to benefit from the Business Combination notwithstanding any decrease in the market price of the shares. Further, if the Business Combination is not approved and Energy Infrastructure fails to consummate an alternative transaction within the requisite period and we are therefore required to liquidate, such shares do not carry the right to receive any distributions upon liquidation. |
| • | Energy Corp., a company formed under the laws of the Cayman Islands, which is controlled by our President and Chief Operating Officer, purchased 825,398 units in the private placement at a purchase price of $10.00 per unit (comprised of one share of common stock and one warrant to purchase a share of common stock of Energy Infrastructure) for a total of $8,253,980, and as of February 8, 2008, the aggregate market value of such securities was approximately $8,138,000. Energy Corp. has agreed to vote its common shares included in the units in favor of the Business Combination and thereby waive redemption rights with respect to those shares. If the Redomiciliation Merger is not approved and Energy Infrastructure fails to consummate an alternative transaction within the requisite period and Energy Infrastructure is therefore required to liquidate, those shares do not carry the right to receive distributions upon liquidation. No officers or directors of Energy Infrastructure or Energy Merger have purchased any securities of Energy Infrastructure in the after market. |
| • | In connection with Energy Infrastructure’s initial public offering, each of Energy Infrastructure’s initial stockholders (each of whom is a director) has agreed to indemnify Energy Infrastructure based on his respective pro rata beneficial ownership in Energy Infrastructure immediately prior to the initial public offering for debts and obligations to vendors that are owed money by Energy Infrastructure for services rendered or products sold to Energy Infrastructure, but only to the extent necessary to ensure that certain liabilities do not reduce the initial $209,250,000 placed in the Trust Account. The obligations of Energy Infrastructure’s initial stockholders to indemnify Energy Infrastructure remain in effect and extend to transaction expenses to be incurred in connection with Energy Infrastructure’s seeking to complete the Business Combination. If the Business Combination is consummated, Energy Infrastructure’s initial stockholders will not have to perform such obligations. |
| • | Maxim Group LLC, the underwriters of our initial public offering and financial advisor in connection with the Business Combination, has an interest in the Business Combination. Maxim's interest in the consummation of a business combination by Energy Infrastructure consists of $2,310,040 in contingent underwriting and private placement fees held in the Trust Account as of June 30, 2007 that it will receive upon the consummation of a business combination, 202,500 shares of our common stock deposited into escrow, subject to forfeiture, and released to Maxim only upon consummation of a business combination, as well as up to $2,750,000 that it will receive in its |
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| financial advisory role in the transaction. In addition, Maxim has an interest in having as few stockholders as possible exercise their redemption rights because Maxim has agreed that it will forfeit $0.10 per share (up to a maximum of $652,511) plus interest thereon of its contingent underwriting compensation for each share redeemed by a stockholder in connection with a business combination transaction. |
Energy Infrastructure's board of directors was aware of these arrangements during its deliberations on the merits of the Business Combination and in determining to recommend to the stockholders of Energy Infrastructure that they vote for in favor of the Business Combination.
Energy Merger. The board of directors of Energy Merger has unanimously determined that the Business Combination is advisable and in its best interests, based on the various shipping regulatory and tax advantages of operating an international shipping company domiciled in the Republic of the Marshall Islands versus a United States jurisdiction.
Anticipated Accounting Treatment
The Business Combination will be accounted for as a “reverse merger” since, immediately following completion of the transaction, the stockholder of the SPVs immediately prior to the Business Combination will have effective control of Energy Infrastructure through its approximately 39% stockholder interest in the combined entity, assuming no stockholder redemptions (40% in the event of maximum stockholder redemptions) and control of a majority of the board of directors and all of the senior executive positions. For accounting purposes, the SPVs (through Energy Merger, a newly-formed holding company) will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of the SPVs, i.e., the issuance of stock by the SPVs (through Energy Merger) for the stock of Energy Infrastructure and a cash dividend equal to the cash portion of the consideration. Accordingly, the combined assets, liabilities and results of operations of the SPVs will become the historical financial statements of Energy Infrastructure, and Energy Infrastructure's assets, liabilities and results of operations will be consolidated with the SPVs beginning on the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction, except that the concurrent acquisition of the 50% equity interest in the three of the SPVs currently held by a third party will result in the step-up of the proportionate share of assets and liabilities acquired to reflect consideration paid.
As a result of the consummation of the Business Combination, the following charges to operations will be recorded by Energy Merger (the successor to Energy Infrastructure and the accounting acquiree) at the closing of the transaction (based on the December 31, 2007 financial statements):
| • | a charge to operations aggregating $17,943,921, representing the unamortized fair value of previously issued options to purchase 3,585,000 shares of common stock, as a result of the termination of such options held by George Sagredos and Andreas Theotokis; and |
| • | a charge to operations aggregating $10,310,000, representing the fair value of 1,000,000 units to be issued to George Sagredos (each unit consisting of one share of common stock and one common stock purchase warrant). |
Regulatory Approvals
Energy Infrastructure and Energy Merger do not expect that the Redomiciliation Merger will be subject to any state or federal regulatory requirements other than filings under applicable securities laws and the effectiveness of the registration statement of Energy Merger of which this joint proxy statement/prospectus is part, and the filing of certain merger documents with the Registrar of Corporations of the Republic of the Marshall Islands and with the Secretary of State of the State of Delaware. Energy Infrastructure and Energy Merger intend to comply with all such requirements. We do not believe that, in connection with the completion of the Redomiciliation Merger, any consent, approval, authorization or permit of, or filing with or notification to, any merger control authority will be required in any jurisdiction.
Appraisal Rights
Under applicable Delaware law, Energy Infrastructure stockholders do not have the right to dissent and exercise appraisal rights to demand payment of the fair value of their Energy Infrastructure common stock if the Redomiciliation Merger is completed.
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THE SHARE PURCHASE AGREEMENT
On December 3, 2007, Energy Infrastructure, Energy Merger and Vanship entered into a Share Purchase Agreement which was amended and restated on February 6, 2008 and subsequently amended and restated on July 3, 2008. The summary of the material terms of the Share Purchase Agreement appearing below and elsewhere in this joint proxy statement/prospectus is subject to the terms and conditions of the Share Purchase Agreement. The Share Purchase Agreement is attached as Appendix A. This summary may not contain all of the information about the Share Purchase Agreement that is important to you. We encourage you to read carefully the Share Purchase Agreement in its entirety.
General
Upon delivery of the outstanding shares of the SPVs from Vanship, Energy Merger's fleet will be comprised of five double hull VLCCs and four single hull VLCCs. These VLCCs transport crude oil principally from the Middle East to Asia. The vessels have a combined cargo-carrying capacity of 2,519,213 deadweight tons and are expected to have an average age of approximately 12.9 years upon completion of the Business Combination. The vessels are currently 100% chartered out and are expected to have an average remaining charter life of approximately 5.7 years upon completion of the Business Combination. Vanship was established in September 2001 as a holding company and is registered in the Republic of Liberia.
Purchase Price
Pursuant to the Share Purchase Agreement, Energy Merger will acquire stock of nine SPVs each owning one vessel from Vanship for an aggregate purchase price of $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of Energy Merger's common stock. Such shares will be delivered to Vanship upon the closing of the Redomiciliation Merger.
Under the Share Purchase Agreement, Energy Merger has also agreed to issue to Vanship or its nominated affiliates an additional 3,000,000 shares of common stock of Energy Merger following each of the first and second 12-month periods following consummation of the Business Combination (up to 6,000,000 shares in the aggregate) if the vessels in Energy Merger's initial fleet achieve at least $75,000,000 in EBITDA (calculated in accordance with the terms of the Share Purchase Agreement) in each such 12-month period. The Share Purchase Agreement includes certain adjustments to the $75,000,000 EBITDA hurdle in the event that any of the vessels in Energy Merger's initial fleet are sold during either the first or second 12-month period following completion of the Business Combination.
The Share Purchase Agreement also contemplates that as conditions to the closing of the Business Combination:
| • | Vanship will purchase up to 5,000,000 units of Energy Merger to the extent necessary for Energy Merger to secure financing for the Business Combination at a purchase price of $10.00 per unit. Each unit will consist of one share of common stock and one common stock purchase warrant with an exercise price of $8.00 per share; |
| • | Mr. George Sagredos, a Director, President and Chief Operating Officer of Energy Infrastructure, will convert convertible loans aggregating $2,685,000 into 268,500 units, at a conversion price of $10.00 per unit. Each unit will consist of one share of common stock and one common stock purchase warrant with an exercise price of $8.00 per share; |
| • | Energy Merger will effect the transfer of 425,000 warrants to purchase Energy Infrastructure common stock, which warrants were originally purchased by Energy Corp., a company controlled by George Sagredos, Energy Infrastructure's President and Chief Operating Officer, to Vanship. Each warrant will be exercisable for one share of Energy Merger common stock with an exercise price of $8.00 per share; |
| • | Mr. George Sagredos and Mr. Andreas Theotokis, the Company's Chairman of the board of directors, shall have agreed to the termination of stock options to purchase an aggregate of 3,585,000 shares of common stock (exercisable at $0.01 per share) that were issued to them prior to Energy Infrastructure's initial public offering; |
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| • | Mr. George Sagredos (and any permitted assignee and/or transferee as permitted by the Share Purchase Agreement) will be issued 1,000,000 units of Energy Merger, consisting of one share of common stock and one common stock purchase warrant with an exercise price of $8.00 per share. |
The SPVs
Vanship is obligated to deliver shares of the SPVs on the closing date of the Business Combination.
Under the Share Purchase Agreement, Vanship covenants that it will use its best efforts to continue to keep each SPV, each vessel and the outstanding shares of the SPVs free and clear of any liens, other than permitted liens, and use its best efforts to ensure that each SPV shall forbear from creating any liens, claims or encumbrances of any kind upon the vessels, the outstanding shares of the SPVs or any other material assets of the SPVs, in each case other than in the ordinary course of business. Subject to the closing of the Business Combination having occurred and other limitations, Vanship will indemnify Energy Merger and Energy Infrastructure against losses resulting from the inaccuracy or breach of any representation or warranty made by Vanship in the Share Purchase Agreement, the non-fulfillment or breach of any agreement, covenant or undertaking of Vanship under the Share Purchase Agreement, any liability (other than the Carry-Over Financing (as defined in the Share Purchase Agreement)) of an SPV attributable to the operations or actions of any SPV or Vanship occurring on or prior to the closing date other than certain disclosed legal proceedings. Subject to certain exceptions, Vanship's indemnification obligations under the Share Purchase Agreement are limited to aggregate claims of $25,000,000.
Energy Merger has inspected each vessel's records of the relevant classification society.
Option Agreement
Under the Share Purchase Agreement, Energy Merger and Vanship have agreed to enter into an option agreement at the time of completion of the Business Combination. The option agreement provides that Energy Merger will have the option to acquire Vanship’s ownership interest in two 298,000 deadweight ton newbuilding VLCCs that are scheduled for delivery on or before June 30, 2010 and June 30, 2011, respectively. For purposes of this summary, references to Vanship also refer to any subsidiaries of Vanship that may have an ownership interest in either vessel at the time of exercise of the option. The option to acquire either vessel may be exercised until 90 days before the delivery date of the vessel at the higher of:
| • | Vanship’s proportionate interest in the aggregate of the charter-free fair market value of such vessel and any premium fairly attributable to any committed charter in respect of that vessel as agreed between Energy Merger and Vanship or in the absence of agreement determined by the average of two valuations made by internationally recognized ship brokers mutually acceptable to Energy Merger and Vanship; |
| • | the value of Vanship’s interest in such vessel as reflected in the financial statements of Vanship (taking into account all sums expended in respect of such vessel and allowing interest on such sums); and |
| • | the amount of any bona fide third party offer for such vessel. |
The valuations set forth above would be determined as of the date of Energy Merger’s proposed exercise of such option. The option agreement also provides that Vanship may sell either vessel to any third party prior to the exercise of the option, provided that Vanship first offers the right to acquire the vessel to Energy Merger on substantially identical terms and Energy Merger has either declined to proceed with such opportunity or failed to respond to such offer.
Non-Compete
Under the Share Purchase Agreement, Vanship has agreed that for the three years following the Business Combination it will not engage in any business that would directly compete with Energy Merger’s anticipated business of owning and chartering VLCCs. The agreement is subject to certain exceptions, including the following:
| • | Vanship will be permitted to participate as a minority shareholder with businesses that are competitive with Energy Merger; |
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| • | Vanship will be permitted to engage in businesses that are competitive with Energy Merger provided that it first offers the opportunity to acquire or participate in such competitive business to Energy Merger and Energy Merger has either declined to proceed with such opportunity or failed to respond to such offer; and |
| • | Vanship will be permitted to employ the two vessels that are subject to the option agreement summarized above in a manner that is competitive to Energy Merger if Energy Merger fails to exercise its option to purchase either of the vessels. |
The provisions of the Share Purchase Agreement that restrict Vanship’s ability to engage in businesses that may be in competition with Energy Merger do not apply to Energy Merger’s Manager, which is under common control with Vanship. Accordingly, Energy Merger’s Manager will not be restricted in its ability to own or manage other ships, shipping companies, shipping funds and other shipping related assets even if such activities may be competitive with Energy Merger’s business.
Lock-Up Period
The Share Purchase Agreement generally restricts Vanship and its affiliates, without the prior written consent of Energy Merger, from, directly or indirectly, offering, selling, agreeing to offer or sell, soliciting offers to purchase, granting any call option or purchasing any put option with respect to, pledge, borrow or otherwise dispose of (i) the 13,500,000 shares that it will receive from Energy Merger as stock consideration under the Share Purchase Agreement, (ii) the 425,000 warrants that it will receive from Mr. George Sagredos, and (iii) up to 5,000,000 units that Vanship may be obligated to purchase from Energy Merger in connection with the Business Combination and from engaging in certain other transactions relating to such securities for a period of (1) 180 days with respect to one-half of the shares comprising such securities; and (2) 365 days with respect to the remaining shares comprising such securities, in each case commencing upon the closing of the Business Combination. Mr. Sagredos (and any permitted assignee and/or transferee as permitted by the Share Purchase Agreement) will be subject to similar restrictions with respect to the 1,000,000 units issued to Mr. Sagredos or his assignees in connection with the Business Combination for a period of 180 days commencing upon the closing of the Business Combination.
Registration Rights
Under the Share Purchase Agreement, Energy Merger has agreed, with some limited exceptions, to include (i) the 13,500,000 shares of Energy Merger's common stock comprising the stock consideration portion of the aggregate purchase price for the SPVs, (ii) the shares of Energy Merger's common stock underlying the 425,000 warrants that Mr. George Sagredos will transfer to Vanship, and (iii) the 1,000,000 units and underlying shares and warrants included in the units issued to Mr. Sagredos (or his assignees) in Energy Merger's registration statement of which this joint proxy statement/prospectus is a part. We refer to these securities, collectively with the 6,000,000 shares of Energy Merger's common stock that Vanship is eligible to earn in the two year period following the Business Combination based on certain revenue targets, as the Registrable Securities. Energy Merger has also granted to the holders of such securities (on behalf of themselves or their affiliates that hold Registrable Securities) the right, under certain definitive, pre-determined circumstances and subject to certain restrictions, including lock-up and market stand-off restrictions, to require Energy Merger to register the Registrable Securities under the Securities Act of 1933, as amended, and to enter into and perform its obligations under customary underwriting agreements to facilitate the sale of the Registrable Securities. Under the Share Purchase Agreement, the holders of such securities also have the right to require Energy Merger to make available shelf registration statements permitting sales of shares into the market from time to time over an extended period. In addition, the holders of these securities will have the ability to exercise certain piggyback registration rights 180 days following the effective date of the Business Combination. In addition, in connection with the Business Combination Private Placement, Energy Merger will grant to Vanship certain demand and piggyback registration rights with respect to up to 5,000,000 units.
Director Nominees
Pursuant to the Share Purchase Agreement, at the effective time of the Redomiciliation Merger, Energy Merger's board of directors shall consist of nine persons, eight of whom (consisting of two Class A directors, three Class B directors and three Class C directors) shall be nominated by Vanship and one of whom (who
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shall be a Class A director) shall be nominated by Energy Merger's sole stockholder immediately prior to the effective time of the merger. Five of the directors nominated by Vanship shall qualify as independent directors under the Securities Act and the rules of any applicable securities exchange. Upon the consummation of the Redomiciliation Merger, Captain Vanderperre and Mr. Fred Cheng shall serve as Class C directors and Mr. Marios Pantazopoulos shall continue as a Class A director. Subject to the placement of director and officer liability insurance in form and substance satisfactory to each of the following individuals in his sole discretion, upon the completion of the Redomiciliation Merger:
(i) Captain Vanderperre shall serve as Chairman of the board of directors of Energy Merger or if he is unable or unwilling to accept such appointment, Vanship may nominate another individual to serve as Chairman of the board of directors; and
(ii) Mr. Fred Cheng shall serve as Chief Executive Officer of Energy Merger.
The Share Purchase Agreement also provides that, so long as Vanship owns at least 25% of the outstanding common stock of Energy Merger, Vanship will have the right to appoint one Class A, one Class B and one Class C director of Energy Merger. To give effect to this right, Energy Merger intends to amend its articles of incorporation immediately prior to the completion of the Business Combination to authorize one share of special voting preferred stock. This share will be issued to Vanship in connection with the Business Combination Private Placement. The special voting preferred stock will have voting and economic rights equivalent to one share of common stock except that the holder of the special voting preferred stock will be entitled to nominate and elect three of Energy Merger’s nine directors, and the consent of those three directors will be required for the authorization or issuance of any additional shares of preferred stock of Energy Merger. The one share of special voting preferred stock will be convertible into one share of common stock at the option of the holder. Simultaneously with the issuance of the special voting preferred stock, Energy Merger and Vanship will enter into an agreement whereby Vanship will agree to tender the special voting preferred stock to Energy Merger for conversion to common stock at such time as Vanship, together with its affiliates, owns less than 25% of the outstanding capital stock of Energy Merger.
Termination
The Share Purchase Agreement shall terminate and be of no further force and effect upon the earlier to occur of: (i) satisfaction of all obligations of all parties to the Share Purchase Agreement; (ii) from and after May 14, 2008 (or such later date as determined by the immediately following paragraph), on mutual agreement in writing of Vanship and Energy Infrastructure acting in good faith that the market has not reacted favorably to the transactions contemplated hereby, such mutual agreement not to be unreasonably withheld; (iii) in the event that the SEC has not cleared the Merger Proxy by July 21, 2008, notice by Vanship to Energy Merger and Energy Infrastructure that it has elected unilaterally to terminate the Share Purchase Agreement; and (iv) in the event Captain Vanderperre and Mr. Fred Cheng are not appointed to the respective offices of Energy Merger, notice by Vanship to Energy Merger and Energy Infrastructure that it has elected unilaterally to terminate the Share Purchase Agreement.
In the event the audited financial statements and the interim financial statements required to be delivered pursuant to the Share Purchase Agreement have not been prepared and delivered to Energy Infrastructure by December 14, 2007, then the May 14, 2008 date referred to in the immediately preceding paragraph shall be extended for the greater of (i) such period of time as shall equal the difference between December 14, 2007 and the date on which such financial statements (or the financial statements for a subsequent reporting period, in the event that the interim financial statements are stale) have been delivered to Energy Infrastructure, and (ii) 15 calendar days.
Expenses
The Share Purchase Agreement provides that e ach party shall be responsible for its own expenses in connection with the preparation, negotiation, execution and delivery of the Share Purchase Agreement, provided that the costs of preparing the audited financial statements and the interim financial statements required under the Share Purchase Agreement and the costs of Vanship's counsel together with any costs of counsel to Energy Infrastructure, Energy Merger or the lending parties in respect of obtaining the acquisition financing shall be borne by Vanship and reimbursed by Energy Merger and/or Energy Infrastructure to Vanship, upon
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the earlier of termination of the Share Purchase Agreement and the closing of the Business Combination, and the cost of any other audited or interim financial statements requested by the Securities and Exchange Commission shall be borne by Energy Infrastructure. Any stamp duties or other transfer or similar taxes payable to any governmental authority in relation to the transfer of the shares of the SPVs to Energy Merger shall be borne by Energy Merger. No broker, agent, finder, consultant or other person or entity is entitled to be paid based upon any agreement made by any party in connection with any transaction contemplated by the Share Purchase Agreement other than Fortis, which Vanship shall have the obligation to compensate, and Maxim Group and Investment Bank of Greece, which Energy Infrastructure shall have the sole obligation to compensate. Each party to the Share Purchase Agreement shall indemnify the other for any claim by any third party to such payment.
Conditions of the Share Purchase Agreement
The obligations of each of the parties to the Share Purchase Agreement is subject to the satisfaction or waiver of certain conditions precedent customary to transactions of this nature.
Governing Law
The Share Purchase Agreement is governed by and construed under the laws of the State of New York without regard to conflicts of laws principles.
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ACQUISITION FINANCING
Acquisition Financing
The following summary of the material terms of Energy Merger’s term loan facility does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the term loan agreements. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information, you should read the entire forms of loan agreement filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part.
Energy Merger has entered into (i) a $325.0 million long-term bank loan, or Loan A, with DVB Group Merchant Bank (Asia) Ltd, or DVB, Fortis Bank S.A./N.V., Singapore Branch, and NIBC Bank Ltd, or NIBC, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ), Allied Irish Banks, p.l.c., Bayerische Hypo- und Vereinsbank AG, Singapore Branch, and The Governor and Company of the Bank of Ireland, as lenders, DVB, Fortis Bank S.A./N.V., Singapore Branch, and NIBC, as mandated lead arrangers and bookrunners, DVB, as agent, DVB Bank AG, Fortis Bank S.A./N.V., or Fortis, and NIBC Bank N.V., as swap providers, and DVB, as security agent, and (ii) a $90.0 million long-term bank loan, or Loan B, with DVB, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ) and Allied Irish Banks, p.l.c., as lenders, DVB, as agent and security agent, and DVB Bank AG, as swap provider, both dated as of June 30, 2008. Loan A and Loan B will be used to, respectively, refinance the existing indebtednesses of (a) Shinyo Loyalty Limited, Shinyo Navigator Limited, Shinyo Dream Limited, Shinyo Kannika Limited and Shinyo Ocean Limited (which will be referred to as the double hull collateral owners) under their respective loan facilities in the outstanding balances of up to of $62.0 million, $82.9 million, $65.0 million, $86.8 million and $86.8 million, respectively, and (b) Shinyo Jubilee Limited, Shinyo Mariner Limited, Shinyo Alliance Limited and Shinyo Sawako Limited (which will be referred to as the single hull collateral owners) under their respective loan facilities in the outstanding balances of up to of $82.9 million, $39.0 million, $32.7 million and $32.0 million, respectively. In addition, both Loan A and Loan B will be used to refinance certain inter-company loans of the SPVs.
Loan A bears an annual interest rate of LIBOR plus a margin equal to:
| • | 1.35%, if the loan to value ratio is less than 0.5; |
| • | 1.50%, if the loan to value ratio is between 0.5 and 0.65; or |
| • | 1.65% if the loan to value ratio is greater than 0.65. |
Loan B bears an annual interest rate of LIBOR plus a margin equal to:
| • | 1.75%, if the loan to value ratio is less than 0.5; |
| • | 2.25%, if the loan to value ratio is between 0.5 and 0.7; or |
| • | 2.75% if the loan to value ratio is greater than 0.7. |
The loan to value ratio is $325.0 million in the case of Loan A, and $90.0 million in the case of Loan B, in each case, less a cash reserve amount of $625,000, divided by the aggregate fair market values of:
| • | in the case of Loan A, the vessels Shinyo Splendor, Shinyo Navigator, C Dream, Shinyo Kannika and Shinyo Ocean and other vessels to be subsequently acquired by the double hull collateral owners, which will be referred to as the double hull collateral vessels; or |
| • | in the case of Loan B, the vessels Shinyo Jubilee, Shinyo Mariner, Shinyo Alliance and Shinyo Sawako and other vessels to be subsequently acquired by the single hull collateral owners, which will be referred to as the single hull collateral vessels. |
In addition, the interest rate on overdue sums under Loan A and Loan B is equal to the applicable rate described above plus 2%.
Pursuant to the Loan A agreement, Energy Merger must, within three months of the final drawdown date, enter into interest rate swaps to swap its floating rate interest payment obligations for fixed rate obligations in respect of a notional amount of no less than 50% of the amount under Loan A. Under the terms of the Loan B agreement, Energy Merger may enter into a swap to swap its floating interest rate under Loan B to a fixed
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interest rate in respect of a notional amount of up to the full amount of Loan B. For additional information regarding Energy Merger’s interest rate swaps, see “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Fluctuation”.
Loan A is comprised of the following vessel tranches, or double hull vessel tranches:
| • | Shinyo Splendor tranche, which is the lower of $51.0 million and 70% of the fair market value of the vessel Shinyo Splendor; |
| • | Shinyo Navigator tranche, which is the lower of $70.0 million and 70% of the fair market value of the vessel Shinyo Navigator; |
| • | C Dream tranche, which is the lower of $58.0 million and 70% of the fair market value of the vessel C Dream; |
| • | Shinyo Kannika tranche, which is the lower of $73.0 million and 70% of the fair market value of the vessel Shinyo Kannika; and |
| • | Shinyo Ocean tranche, which is the lower of $73.0 million and 70% of the fair market value of the vessel Shinyo Ocean, |
Loan B is comprised of the following vessel tranches, or single hull vessel tranches:
| • | Shinyo Jubilee tranche, which is the lower of $15.0 million and 60% of the fair market value of the vessel Shinyo Jubilee; |
| • | Shinyo Mariner tranche, which is the lower of $24.0 million and 60% of the fair market value of the vessel Shinyo Mariner; |
| • | Shinyo Alliance tranche, which is the lower of $24.0 million and 60% of the fair market value of the vessel Shinyo Alliance; |
| • | Shinyo Sawako tranche, which is the lower of $27.0 million and 60% of the fair market value of the vessel Shinyo Sawako, |
in each case, the fair market value of the relevant single or double hull collateral vessel is calculated on or immediately prior to the drawdown date of such tranche.
Energy Merger may draw down on Loan A and Loan B in up to five and four drawings, respectively, each comprising one or more vessel tranches, prior to the availability termination date of June 30, 2008, which date may be extended to July 31, 2008 upon written notice to the agent of the bank loans.
The double hull vessel tranches will be repaid in 36 consecutive quarterly installments, other than the Shinyo Splendor tranche which will be repaid in 29 consecutive quarterly installments. The single hull vessel tranches will be repaid in ten consecutive quarterly installments, other than the Shinyo Jubilee tranche which will be repaid in six consecutive quarterly installments. The first installment for all vessel tranches will be September 30, 2008 and subsequent installments will fall at consecutive intervals of three months thereafter. Notwithstanding the foregoing, the final repayment date will be no later than December 31, 2010 in the case of a single hull vessel tranche, and no later than the earlier of June 30, 2017 and nine years after the draw date of that vessel tranche in the case of a double hull vessel tranche.
Loan A and Loan B will be repayable in quarterly installments with principal repayments for the term of the loans scheduled through maturity as follows:
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|
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|
|||||||||
| Year |
Loan A
(Double-Hulls) |
Loan B
(Single Hulls) |
Loan A and
Loan B Combined |
|||||||||
| 2008 | $ | 9,300,000 | $ | 11,000,000 | $ | 20,300,000 | ||||||
| 2009 | 21,300,000 | 31,000,000 | 52,300,000 | |||||||||
| 2010 | 27,250,000 | 48,000,000 | 75,250,000 | |||||||||
| 2011 | 32,000,000 | — | 32,000,000 | |||||||||
| 2012 | 34,150,000 | — | 34,150,000 | |||||||||
| 2013 | 35,900,000 | — | 35,900,000 | |||||||||
| 2014 | 37,800,000 | — | 37,800,000 | |||||||||
| 2015 | 38,580,000 | — | 38,580,000 | |||||||||
| 2016 | 32,260,000 | — | 32,260,000 | |||||||||
| 2017 | 56,460,000 | — | 56,460,000 | |||||||||
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Energy Merger may prepay all amounts owing under Loan A and Loan B subject to the payment by it of any break costs incurred by the lender(s) in respect of such prepayment. In connection with the term loan facility, Energy Merger will be committed to pay an advisory fee in relation to the financing to DVB of $1,122,500 and an arrangement fee to DVB, Fortis and NIBC of 0.85% of the loan amounts and a commitment fee of 0.25% per annum on the committed but un-drawn portion of the loans.
Subject to permitted liens, Energy Merger’s obligations under Loan A and Loan B are secured by guarantees and indemnities to be provided by the single or double hull collateral owners, as the case may be, as well as a first priority security interest in:
| • | the single or double hull collateral vessels, as the case may be; |
| • | all earnings, insurance and requisition compensation received in respect of the single or double hull collateral vessels, as the case may be; |
| • | all existing and future charters relating to the single or double hull collateral vessels, as the case may be; and |
| • | the earnings and retention accounts to be opened by each of the single and double hull collateral owners. |
In addition to the foregoing, Energy Merger’s obligations under Loan B will be secured by guarantees and indemnities to be provided by the double hull collateral owners, as well as a second priority security interest in:
| • | the double hull collateral vessels; |
| • | all earnings, insurance and requisition compensation received in respect of the double hull collateral vessels; |
| • | all existing and future charters relating to the double hull collateral vessels; and |
| • | the earnings and retention accounts to be opened by each of the double hull collateral owners. |
Pursuant to the terms of Loan A and Loan B, if at any time the fair market value and the value of any additional security of any collateral vessel are less than 125% of the outstanding balance under the relevant vessel tranche (which percentage will be referred to as the security percentage, or, if the charter of the relevant collateral vessel will expire in less than twelve months, the security percentage for such vessel tranche will be at least 140% in the case of Loan A, and at least 160%, in the case of Loan B), Energy Merger will be required to:
| • | as additional security under Loan A or Loan B, as the case may be, pay a cash deposit in the amount of the shortfall; |
| • | provide other non-cash additional security in the amount and form reasonably acceptable to the security agent; or |
| • | prepay some of the debt such that the relevant security percentage is met. |
Loan A and Loan B require Energy Merger to comply with certain covenants, including, but not limited to, the following:
| • | maintain minimum available cash of $15.0 million comprising any amounts credited to the earnings accounts (excluding projected drydocking costs), free cash and the undrawn amounts of working capital facilities; |
| • | maintain a minimum of $100.0 million in Energy Merger’s paid up capital plus capital reserves plus unappropriated profits or losses from revaluation of all vessels owned by Energy Merger and its subsidiaries; |
| • | maintain an amount of total liabilities divided by the fair market value of all vessels owned by Energy Merger and its subsidiaries of not more than 0.75; |
| • | maintain a ratio of EBITDA (earnings before interest, tax, depreciation and amortization) to interest expense of at least 2.25:1; |
| • | restrictions on the incurrence of additional indebtedness; |
| • | restrictions on Energy Merger’s ability to amend or terminate its management agreement with the Manager; |
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| • | restrictions on Energy Merger’s ability to sell any of its vessels; |
| • | a requirement that a replacement charter agreement of a duration of at least twelve months be procured within 60 days of the early termination of any of the SPVs’ existing charter agreements; and |
| • | a requirement that Energy Merger procure that the shareholders of Energy Merger’s Manager maintain, directly or indirectly a shareholding of no less than 25% of the Energy Merger (excepting any dilution of such shareholding resulting from the raising of additional equity by the Borrower). |
Energy Merger’s term loan facility will prevent it from declaring dividends if any event of default, as defined in the credit agreement, occurs or would result from such declaration. Each of the following will be an event of default under the credit agreement:
| • | the failure to pay principal, interest, fees, expenses or other amounts when due; |
| • | breach of certain financial covenants, including those which require Energy Merger to maintain a minimum cash balance; |
| • | the failure of any representation or warranty to be materially correct; |
| • | the occurrence of a material adverse change (as defined in the credit agreement); |
| • | the failure of the security documents or guarantees to be effective; and |
| • | bankruptcy or insolvency events. |
Business Combination Private Placement
Under the Share Purchase Agreement, Vanship has agreed to purchase up to 5,000,000 units from Energy Merger at a purchase price of $10.00 per unit, but only to the extent necessary to secure the acquisition financing. Each unit will consist of one share of Energy Merger’s common stock and one warrant to purchase one share of Energy Merger’s common stock at an exercise price of $8.00 per warrant. The proceeds from such private placement, if any, are expected to be retained by Energy Merger, and not contributed to the SPVs.
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THE MERGER AGREEMENT
The summary of the material terms of the Merger Agreement below and elsewhere in this joint proxy statement/prospectus is qualified in its entirety by reference to the Merger Agreement, a form of which is attached to this joint proxy statement/prospectus as Appendix B. This summary may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read carefully the Merger Agreement in its entirety.
Structure and Effective Time of Merger
At the effective time of the Redomiciliation Merger, Energy Infrastructure will merge with and into Energy Merger, the separate corporate existence of Energy Infrastructure will cease and Energy Merger will be the surviving corporation. The effective time of the Redomiciliation Merger will occur as promptly as possible after the satisfaction or waiver of all conditions to closing in the Merger Agreement by filing a certificate of merger or similar document with the Secretary of State of the State of Delaware and the Registrar of Corporations of the Republic of the Marshall Islands. We will seek to complete the Redomiciliation Merger in the first half of 2008. However, we cannot assure you when, or if, all the conditions to completion of the Redomiciliation Merger will be satisfied or waived.
Merger Consideration
Pursuant to the Share Purchase Agreement, each outstanding share of Energy Infrastructure common stock, par value $0.0001 per share, will be automatically converted into one share of Energy Merger common stock, par value $0.0001 per share, and each outstanding warrant of Energy Infrastructure will be assumed by Energy Merger with the same terms and restrictions except that each will be exercisable for common stock of Energy Merger.
Articles of Incorporation; Bylaws
The articles of incorporation and bylaws of Energy Merger in effect immediately prior to the Redomiciliation Merger will be the articles of incorporation and bylaws of the surviving corporation.
Directors and Officers
The board of directors of Energy Merger consists of Mr. George Sagredos, as Chairman, and Mr. Marios Pantazopoulos. Upon completion of the Redomiciliation Merger, Mr. George Sagredos will resign his position and the board of directors will consist of Mr. Pantazopoulos, as a Class A director, Captain C.A.J. Vanderperre and Mr. Fred Cheng, as Class C directors, Mr. Christoph Widmer, as a Class B director, and five independent directors to be nominated by Vanship. Captain C.A.J. Vanderperre will serve as Chairman of the board of directors.
Mr. George Sagredos serves as the President of Energy Merger and Mr. Marios Pantazopoulos serves as the Chief Financial Officer, Treasurer and Secretary of Energy Merger. Upon completion of the Redomiciliation Merger, Mr. Fred Cheng will serve as the President and Chief Executive Officer and Mr. Christoph Widmer will initially serve as the Chief Financial Officer of Energy Merger.
Representations and Warranties
In the Share Purchase Agreement, the parties have made customary representations and warranties about themselves concerning various business, legal, financial, regulatory and other pertinent matters. Under certain definitive, pre-determined circumstances, each of the parties may decline to complete the Redomiciliation Merger if the inaccuracy of the other party’s representations and warranties has a material adverse effect on the other party.
Conditions to the Redomiciliation Merger
The completion of the Redomiciliation Merger is subject to (i) Energy Infrastructure obtaining the requisite approval of its stockholders; and (ii) the satisfaction or waiver of all conditions precedent to the performance of the obligations of each of the parties to the Share Purchase Agreement (other than consummation of the Redomiciliation Merger). We expect to complete the Redomiciliation Merger in July of 2008, but we cannot be certain when or if the conditions will be satisfied or, if permissible, waived. We believe that the
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only material uncertainty which exists with respect to the conditions to the completion of the Redomiciliation Merger is obtaining the requisite vote of Energy Infrastructure stockholders. Currently, no condition precedent to the completion of the Redomiciliation Merger has been satisfied.
Termination of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the effective time of the Redomiciliation Merger whether before or after stockholder approval by mutual consent in writing of Energy Infrastructure and Energy Merger or unilaterally by one party to the Merger Agreement if the other party to the Merger Agreement materially breaches one of its material representation and warranties or fails to comply with a material condition in the Merger Agreement.
Effect of Termination
In the event of termination of the Merger Agreement by either Energy Infrastructure or Energy Merger, the Merger Agreement will become void and there shall be no further obligation on the part of either Energy Merger or Energy Infrastructure. No party shall be relieved from liability for any breach of the Merger Agreement.
Expenses
Whether or not the Redomiciliation Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereunder shall be paid by Energy Infrastructure, except as otherwise specifically provided for in the Merger Agreement.
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INFORMATION CONCERNING THE SPVS
General
Energy Merger has entered into the Share Purchase Agreement pursuant to which it has agreed to purchase all of the outstanding shares of nine special purpose vehicles, or SPVs, from Vanship Holdings Limited, or Vanship. Each of the SPVs is a company limited by shares and incorporated in Hong Kong. Each SPV owns one very large crude carrier, or VLCC.
Each of the SPVs, other than Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited is a wholly-owned subsidiary of Vanship. Each of Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited is indirectly owned 50% by Vanship and 50% by Clipper Group Invest Ltd., or Clipper, through a joint venture between Vanship and Clipper. Vanship has entered into an agreement with the joint venture vehicle to purchase all of the outstanding share capital of Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited immediately prior to the consummation of the Business Combination.
The Fleet
The vessels owned by the SPVs, or the fleet, is comprised of five double hull VLCCs and four single hull VLCCs. These VLCCs transport crude oil principally from the Middle East to Asia. The vessels have a combined cargo carrying capacity of 2,519,213 deadweight tons and are expected to have an average age of approximately 12.9 years at the time of completion of the Business Combination. All of the VLCCs owned by the SPVs are Hong Kong-flagged and it is intended that they will remain Hong Kong flagged following completion of the Business Combination.
Set forth below is summary information concerning the fleet.
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| Vessel Name | Name of Owner | Hull Design |
Capacity
(dwt) |
Year Built
and Class |
Year of
Acquisition |
Yard | ||||||||||||||||||
| Shinyo Alliance | Shinyo Alliance Limited | Single | 248,034 |
1991
Class NK |
2002 |
Mitsubishi Heavy
Industries, Nagasaki, Japan |
||||||||||||||||||
| C. Dream | Shinyo Dream Limited | Double | 298,570 |
2000
ABS |
2007 | Kyushu Hitachi Zosen Corp. of Tamana-Gun, Kumamoto, Japan | ||||||||||||||||||
| Shinyo Kannika | Shinyo Kannika Limited | Double | 287,175 |
2001
ABS |
2004 |
Ishikawajima Harima
Heavy Industries Co. Ltd – Kure Shipyard, Japan |
||||||||||||||||||
| Shinyo Ocean | Shinyo Ocean Limited | Double | 281,395 |
2001
ABS |
2007 |
Ihi Kure, Hiroshima,
Japan |
||||||||||||||||||
| Shinyo Jubilee | Shinyo Jubilee Limited | Single | 250,192 |
1988
Class NK |
2005 |
Ishikawajima Harima
Heavy Industries Co. Ltd – Kure Shipyard, Japan |
||||||||||||||||||
| Shinyo Splendor | Shinyo Loyalty Limited | Double | 306,474 |
1993
DNV |
2004 | NKK Tsu Works Japan | ||||||||||||||||||
| Shinyo Mariner | Shinyo Mariner Limited | Single | 271,208 |
1991
Class NK |
2005 |
NKK Corporation, Tsu
Works, Tsu City, Mie Pref., Japan |
||||||||||||||||||
| Shinyo Navigator | Shinyo Navigator Limited | Double | 300,549 |
1996
Lloyds Register |
2006 | Hyundai Heavy Industries, Korea | ||||||||||||||||||
| Shinyo Sawako | Shinyo Sawako Limited | Single | 275,616 |
1995
DNV |
2006 |
Hitachi Zosen, Ariake
Works |
||||||||||||||||||
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Charter Arrangements
The following summary of the material terms of the charter agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the charter agreements. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information, you should read the entire charter agreement for each vessel filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part.
Time Charters
All of the vessels in the fleet other than the Shinyo Jubilee are committed under time charter agreements with international companies. Pursuant to these agreements, the SPVs provide a vessel to these companies, or charterers, at a fixed, per-day charter hire rate for a specified term. Under the agreements, the vessel owner is responsible for paying operating costs. The charterers, in addition to the daily charter hire, are generally responsible for the cost of all fuels with respect to the vessels (with certain exceptions, including during off-hire periods), port charges, costs related to towage, pilotage, mooring expenses at loading and discharging facilities and certain operating expenses. The charterers are not obligated to pay the applicable vessel owner charterhire for off-hire days, which include days a vessel is out-of-service due to, among other things, repairs or drydockings. Under the time charter agreements, the vessel owner is generally required, among other things, to keep the related vessels seaworthy, to crew and maintain the vessels and to comply with applicable regulations. The vessel owners are also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance coverage. Univan performs these duties for the SPVs as described below.
The charter agreements under which Shinyo Kannika and Shinyo Ocean operate, and under which C. Dream is expected to operate beginning in the first half of 2009, include a profit sharing component that gives the applicable vessel owner the opportunity to earn additional hire when spot rates are high relative to the daily time charter hire rate. The profit sharing arrangements for Shinyo Kannika and Shinyo Ocean provide that the vessel owner receives 50% of daily income (referenced to the Baltic International Trading Route Index, or BITR) in excess of $44,000 and $43,500, respectively. The profit sharing component for C. Dream, which will not commence until delivery of the vessel to the charterer in the first half of 2009, provides that the vessel owner receives 50% of net average daily time charter earnings between $30,001 and $40,000 and 40% of net average daily time charter earnings above $40,000.
The charter periods are typically, at the charterer’s option, subject to (1) extension or reduction by between 15 and 90 days at the end of the final charter period and (2) extension by any amount of time during the charter period that the vessel is off-hire. A vessel is generally considered to be “off-hire” during any period that it is out-of-service due to damage to or breakdown of the vessel or its equipment or a default or deficiency of its crew. Under certain circumstances the charters may terminate prior to their scheduled termination dates. The terms of the charter agreements vary as to which events or occurrences will cause a charter to terminate or give the charterer the option to terminate the charter, but these generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, the failure of the related vessel to meet specified performance criteria, off-hire of the vessel for a specified number of days or war or hostilities breaking out between certain specified countries.
Consecutive Voyage Charter
The vessel Shinyo Jubilee operates under a consecutive voyage charter agreement. Under the consecutive voyage charter agreement, the vessel owner is paid freight (per ton of crude oil) on the basis of moving crude oil from a loading port to a discharge port for multiple voyages through September 2009. Under this consecutive voyage charter, each voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo. The freight rate is based on a fixed Worldscale rate. The vessel owner is responsible for paying both operating costs and voyage costs and the charterer is generally responsible for any delay at the loading or discharging ports. Under the consecutive voyage charter agreement, the vessel owner is generally required, among other things, to keep the related vessel seaworthy, to crew and maintain the vessel and to comply with applicable regulations. The vessel owner is also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance cover. Univan performs these duties for Shinyo Jubilee Limited under the ship management agreements described below.
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Pooling Arrangements
In the past, Shinyo Kannika Limited has operated in a pool. Under a pool arrangement, several owners 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. These pools are managed and operated by third party pool administrators. The pool administrator of each pool has the responsibility for the commercial management of the participating vessels, including marketing, chartering, operating and bunker (fuel oil) purchasing for the vessels. The pool participants remain responsible for all other costs including the financing, insurance, manning and technical management of their vessels. The earnings of all of the vessels are aggregated, or pooled, and divided according to the relative performance capabilities of each vessel and the actual earning days each vessel was available during the period.
Set forth below is summary information concerning the charters as of December 31, 2007.
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| Type of Vessel |
Daily Time Charter
Hire Rate* |
Type | Charter Expiry | |||
| Shinyo Splendor | $39,500 | Time Charter | May 2014 (1) | |||
| Shinyo Kannika | $39,000 | Time Charter | February 2017 (2) | |||
| Shinyo Navigator | $43,800 | Time Charter | December 2016 | |||
| Shinyo Ocean | $38,500 | Time Charter | January 2017 (3) | |||
| C. Dream | $28,900 | Time Charter | March 2009 (4) | |||
| C. Dream | $30,000 | Time Charter | March 2019 (4) (5) | |||
| Shinyo Alliance | $29,800 | Time Charter | October 2010 | |||
| Shinyo Jubilee | $32,000 |
Consecutive Voyage
Charter |
September 2009 (6) | |||
| Shinyo Mariner | $32,800 | Time Charter | June 2010 (7) | |||
| Shinyo Sawako | $39,088 | Time Charter | December 2011 |
| * | Gross time charter rate and estimated net time charter equivalent (“TCE”) for consecutive voyage charter. |
| (1) | Charterer has the option to extend time charter for an additional 3 years at $39,000 per day. |
| (2) | Subject to profit sharing provision in which income (referenced to the BITR) in excess of $44,000 per day is split equally between SPV and charterer. |
| (3) | Subject to profit sharing provision in which income (referenced to BITR3) in excess of $43,500 per day is split equally between the SPV and charterer. |
| (4) | Second time charter starts after expiry of first charter. |
| (5) | Subject to profit sharing provision in which actual annual net average daily time charter earnings between $30,001 and $40,000 are split equally between the SPV and charterer, and actual annual net average daily time charter earnings in excess of $40,000 are split 40% to SPV and 60% to charterer. |
| (6) | Estimated Time Charter Equivalent, or TCE. Time charter equivalent is a measure of the average daily revenue performance of a vessel on a per voyage basis. Vanship’s method of calculating TCE is consistent with industry standards and is determined by dividing net voyage revenue by voyage days for the relevant time period. Net voyage revenue are voyage revenue minus voyage expenses. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. |
| (7) | Charterers have the option to extend time charter for an additional 2 years at $31,800 per day. |
In addition to the general terms of the charter agreements summarized above, the charter agreement for the vessel Shinyo Ocean includes a mutual sale provision whereby either party can request the sale of the vessel provided that a price can be obtained that is at least $3 million greater than the value of the vessel as specified in the charter agreement. In such case, the net proceeds from the sale of the vessel in excess of the vessel’s value will be split in equal parts between the vessel owner and the charterer.
The nine vessels in the fleet are expected to have an average remaining charter life of approximately 5.7 years upon completion of the Business Combination. The SPVs will continue to be party to the charter agreements subsequent to the consummation of the Business Combination.
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Commercial Management of the Fleet
Vanship is responsible for the commercial management of each of the vessels in the fleet. Commercial management entails responsibility for chartering the vessels, book-keeping, record keeping, procuring the services of a technical manager and other administrative functions. Subsequent to the Business Combination, commercial management of the fleet will be undertaken by the Manager. See “Information Concerning Energy Merger — Management of the Fleet.”
Technical Management of the Fleet
Univan is responsible for all technical management of the vessels held by the SPVs through contractual and subcontract relationships with the SPVs and affiliates of Univan. These responsibilities include crewing, maintenance, repair, capital expenditures, drydocking, payment of vessel taxes and other vessel operating activities. As compensation for these services, the SPVs pay the technical manager an amount equal to the vessel operating expenses and a monthly management fee of $9,500 per vessel. Budgeted vessel operating expenses are payable by each SPV monthly in advance. It is expected that the ship management agreements pursuant to which Univan provides technical management of the vessels will be terminated prior to completion of the Business Combination. Subsequent to the Business Combination, it is expected than Univan will continue to provide the technical management of the vessels in the fleet by virtue of its procurement as technical manager by Energy Merger’s Manager. See “Information concerning Energy Merger — Management of the Fleet.”
Insurance
The vessels held by the SPVs are covered by hull and machinery insurance, protection and indemnity insurance and war risk insurance in amounts that are in line with standard industry practice.
About Vanship
Vanship is a leading tanker shipping company with a focus on the Asian market. Vanship was established in September 2001 as a holding company and is registered in the Republic of Liberia. It operates from Hong Kong in both the tanker and dry bulk segments of the shipping industry. Mr. Fred Cheng and Captain Charles Arthur Joseph Vanderperre are the directors and co-founders of Vanship. Following the Business Combination, Vanship intends to own and charter vessels in the dry bulk shipping industry in addition to holding its equity interest in Energy Merger and in the contracts to acquire newbuilding VLCCs referred to under the heading “The Share Purchase Agreement — Option Agreement.” The dry bulk shipping industry refers to the seaborne transportation of significant commodities, such as steel and lumber. Vanship does not currently own or charter any dry bulk carriers but has contracts to acquire approximately 20 such vessels, both on its own and through joint ventures, with delivery of these vessels anticipated between 2009 and 2011. Vanship anticipates that it will enter into a management agreement with Energy Merger’s Manager to manage its fleet and that the Manager will receive management fees at market rates from Vanship in exchange for such services.
About Univan
Univan is an established technical ship management company that provides ship management services for affiliated companies, such as Vanship, as well as third parties. Univan has been in operation for more than 30 years and presently manages in excess of 50 vessels, including oil tankers, products tankers, chemical tankers, container vessels and dry bulk carriers. Univan is based in Hong Kong with crewing offices in Mumbai, Calcutta, Kochi, Delhi, Chennai, Manila, training offices in Mumbai and Kochi and an agency office in Singapore. Univan is based in Hong Kong and has approximately 150 land-based administrative employees and manages 52 vessels on which over 1,100 seafarers are employed. Univan is managed and controlled by Captain Vanderperre. From January 2006 to May 2008, Univan was jointly owned by entities controlled by Captain Vanderperre and Clipper Group Invest, Ltd, and since such time full ownership of Univan has reverted to Captain Vanderperre’s entities.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS OF THE SPVS
The following discussion of the financial condition and results of operations of each of the SPVs should be read in conjunction with the financial statements of the SPVs, related notes, and other information included elsewhere in this joint proxy statement/prospectus.
Overview
Energy Merger has entered into a definitive agreement to acquire nine special purpose vehicles, or SPVs, from Vanship. Each of the SPVs is a company limited by shares and incorporated in Hong Kong and each SPV owns one very large crude carrier, or VLCC. The SPVs that Energy Merger has agreed to acquire are Shinyo Alliance Limited, Shinyo Loyalty Limited, Shinyo Kannika Limited, Shinyo Navigator Limited, Shinyo Ocean Limited, Shinyo Dream Limited, Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited.
Each of the SPVs, other than Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited is a wholly-owned subsidiary of Vanship. Each of Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited is owned by Van-Clipper Holding Co. Ltd., or Van-Clipper, a joint venture vehicle owned 50% by Vanship and 50% by Clipper Group Invest Ltd.. Vanship has entered into an agreement with Van-Clipper to purchase all of the outstanding share capital of Shinyo Jubilee Limited, Shinyo Mariner Limited and Shinyo Sawako Limited immediately prior to the consummation of the Business Combination.
The VLCCs owned by the SPVs, or the fleet, transport crude oil principally from the Middle East to Asia. Vanship provides commercial management of the fleet and has procured medium to long-term period charters for each of the vessels in the fleet. Technical management of the vessels in the fleet is provided by Univan through contractual and subcontract relationships with the SPVs.
Factors Affecting the Historical Results of Operations of the SPVs
The principal factors that have affected the results of operations and financial position of the SPVs include:
| • | the charter revenue paid to the SPVs under their charter agreements; |
| • | the amount of revenue from profit sharing arrangements, if any, that the SPVs receive under their charter agreements and the spot markets as they relate to these arrangements; |
| • | fees under the ship management agreements; |
| • | operating expenses of vessels; |
| • | voyage expenses as it relates to those vessels not operating under time charter agreements; |
| • | depreciation; |
| • | administrative and other expenses; |
| • | interest expense; |
| • | the SPVs’ insurance premiums and vessel taxes; |
| • | seasonal variations in demand for crude oil with respect to any vessels that become engaged in the spot charter market or that are subject to longer term charters that contain market related profit sharing arrangements; |
| • | the number of offhire days during which the SPVs are not entitled, under their charter arrangements, to receive either the fixed charter rate or profit share and additional offhire days due to drydocking; |
| • | required capital expenditures; and |
| • | any cash reserves established by Vanship or the individual SPVs. |
The SPVs derive their revenues from their medium and long-term period charters with the charterers. Eight of the vessels in the fleet are time chartered to the charterers under the charters agreements and the
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ninth vessel operates under a consecutive voyage charter. Under a time charter, the charterer pays substantially all of the voyage expenses, but the vessel owner pays the vessel operating expenses. Under a consecutive voyage charter the vessel owner pays both operating costs and voyage costs. Vessel operating expenses are the direct costs associated with running a vessel and include crew costs, vessel supplies, repairs and maintenance, drydockings, lubricating oils and insurance. Voyage expenses are fuel costs and port charges. See “Information Concerning the SPVs — Charter Arrangements” for more information regarding the charters. Several of the vessels in the fleet have operated in the spot market and pool trade prior to the dates that the vessels were delivered to their current charterers. In the case of a spot market charter, the vessel owner pays both the voyage expenses and the vessel operating expenses.
The time charter agreements that Shinyo Kannika Limited and Shinyo Ocean Limited have entered into include a profit sharing arrangement with the respective charterers. The ability of Shinyo Kannika Limited and Shinyo Ocean Limited to earn charter hire revenue under the profit sharing arrangements of their charters has depended on market conditions in the tanker industry, which has historically been highly cyclical, experiencing volatility in profitability, vessel values and freight rates. In particular, freight and charter rates are strongly influenced by the supply of tankers and the demand for oil transportation services.
The expenses of the SPVs consist primarily of fees and operating expenses under their ship management agreements, depreciation, administrative expenses and interest expense.
The technical management of the vessels in the fleet is provided by Univan under ship management agreements under which Univan is responsible for all technical management of the vessels in the fleet, including crewing, maintenance, repair, drydockings, vessel taxes, insurance and other vessel operating and voyage expenses. Under these agreements each SPV pays the technical manager an amount equal to the vessel’s operating expenses and a monthly management fee of $9,500 per vessel. See “Information Concerning the SPVs” for more information regarding the ship management agreements.
Depreciation is the periodic cost charged to the income of each SPV representing the allocation of the cost of the vessel over the period of its estimated useful life. Depreciation on each vessel is calculated based on the straight-line basis over the estimated useful life of the vessel, after taking into account its estimated residual value, from date of acquisition. A vessel’s residual value is equal to the product of its lightweight tonnage and estimated scrap rate per ton.
Commissions are fees payable under a charter agreement to the parties that brokered the transaction between a vessel owner and a charterer. Commissions are generally expressed in percentages of revenue fixed at the time the charter agreement is entered into and may vary with the trade in which the vessel operates. The percentages usually vary and generally increase or decrease in any given period in proportion to the operating revenue received by a vessel owner during the same period.
Administrative expenses of each SPV include salaries and other employee related costs, office rents, legal and professional fees, audit fees and other general administrative expenses.
The interest expense of each SPV represents interest expense under individual credit agreements entered into by each SPV and related party loans, as described below, that were used to finance the acquisition of the vessels held by the SPVs. The amount of interest expense is determined by the principal amount of each loan and prevailing interest rates. Except for Shinyo Navigator Limited, none of the SPVs have entered into interest rate swaps or other derivative instruments.
The charterers pay the SPVs basic time charter hire revenue monthly in advance and charter hire with respect to profit share on Shinyo Kannika Limited and Shinyo Ocean Limited, if any, quarterly and bi-annually in arrears. The SPVs pay the technical manager of each vessel the ship management fees and budgeted vessel operating expenses monthly in advance. The SPVs pay interest under their credit agreements quarterly in arrears. Inflation has had a moderate impact on the vessel operating expenses and corporate overhead. The SPVs incur certain vessel operating expenses and general and administrative expenses in currencies other than the U.S. dollar. This difference could lead to fluctuations in the SPVs’ vessel operating expenses, which would affect their financial results. Expenses incurred in foreign currencies increase when the
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value of the U.S. dollar falls, which would reduce the SPVs’ profitability. However, management of the SPVs believes that foreign exchange fluctuations have not had a significant effect on the results of operations presented below.
Due to the medium to long term charter agreements under which the vessels held by the SPVs operate, there may be circumstances in which management of the SPVs deems it advantageous to terminate a charter agreement prior to its expiration. For instance, in January 2004 Shinyo Loyalty Limited entered into a charter agreement with Euronav pursuant to which Shinyo Loyalty was entitled to a fixed daily charter rate of $27,250. Prevailing market rates for time charters subsequently increased and in March 2007 Shinyo Loyalty terminated its agreement with Euronav and entered into its current time charter agreement with Sinochem, pursuant to which Shinyo Loyalty is entitled to a fixed daily charter rate of $39,500. Shinyo Loyalty paid a termination payment of $20.8 million to Euronav due to the early termination of the Euronav charter agreement and incurred a termination charge in the amount of $20.8 million. The termination payment was a negotiated amount and was not established pursuant to the terms of the original charter agreement. Management of the SPVs may make similar decisions in the future with respect to the trade off between incurring an immediate termination charge and potentially realizing increased revenue over future periods. Such termination charges may have a significant impact on the results of operations of an SPV and the benefits realized from such a decision, if any benefits materialize at all, will be realized incrementally over future reporting periods.
Working Capital Deficits and Liquidity of the SPVs
All of the SPVs other than Shinyo Jubilee Limited and Shinyo Kannika Limited had working capital deficits as of December 31, 2007. A working capital deficit means that current liabilities exceed current assets. Current liabilities are those which will fall due for payment within one year. Current assets are assets that are expected to be converted to cash or otherwise utilized within one year and, therefore, may be used to pay current liabilities as they become due in that period. We expect that for accounting purposes the majority of the SPVs will continue to show a working capital deficit upon and subsequent to completion of the Business Combination. However, we believe that the reflection of a working capital deficit under US GAAP does not accurately reflect the liquidity of the SPVs under their existing medium to long term charter agreements and we expect that each of the SPVs will have sufficient liquidity month-to-month to pay expenses as they become due.
The charter hire revenue of the SPVs that operate under time charter agreements is paid monthly in advance and has in the past generally been sufficient to provide the cash flow necessary to fund the planned operations of the SPVs and satisfy the debt obligations of each SPV as such obligations become due. Although the charter hire income is relatively predictable, such income is only recorded as revenue (and classified as a current asset) over the term of the charter as the service is provided. In general, the most significant current liability for each SPV is its current portion of long term debt, which is the portion of any long term loan payable within one year. Because at any given time an SPV will recognize the portion of long term debt payable within one year as a current liability, but it will not recognize charter hire income as revenue until the related service is provided, the SPVs generally will show a working capital deficit. See “Risk Factors — Risks Relating to Energy Merger — The majority of the SPVs have working capital deficits, which means that their current assets on December 31, 2007 were not sufficient to satisfy their current liabilities as at that date.”
Charter hire revenue could be insufficient to fund an SPV’s operations for a number of reasons, including, but not limited to, unbudgeted periods of off-hire, loss of a customer, early termination of a charter agreement, delay in receipt of charter hire, increases in operating expenses or increases in the interest rate on an SPV’s floating rate debt. Management of each of the SPVs, except for Shinyo Kannika Limited and Shinyo Jubilee Limited, has managed potential liquidity risk by obtaining a letter of support from the applicable owner of each SPV, confirming its intention to provide continuing and unlimited financial support to such SPV, so as to enable such SPV to meet its liabilities as and when they fall due. These letters of support will be terminated upon the completion of the Business Combination and the SPVs will no longer be in a position to benefit from the financial backing of their applicable owners. There can be no assurance that Energy Merger will have sufficient financial strength to provide a comparable level of financial support to the SPVs subsequent to the Business Combination.
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Critical Accounting Policies
The accounting policies of the SPVs are more fully described in the section “Summary of Significant Accounting Policies” in the notes of each of the SPV financial statements included elsewhere in this joint proxy statement/prospectus. As disclosed in such section, the preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic and industry conditions, present and expected conditions in the financial markets, and in some cases, the credit worthiness of counterparties to contracts. Management of the SPVs regularly reevaluates these significant factors and make adjustments where facts and circumstances dictate. The following is a discussion of the accounting policies that management of the SPVs has applied and that it considers to involve a higher degree of judgment in their application.
Revenue Recognition
Eight of the vessels held by the SPVs operate under time charter agreements and the ninth vessel operates under a consecutive voyage charter agreement. In the past, the vessels have operated in the spot market and under pool trade arrangements. Revenues are recognized when the collectibility has been reasonably assured and voyage related and vessel operating costs are expensed as incurred.
Time charter revenues are recorded over the term of the charter as the service is provided. In addition, time charter agreements may include profit sharing arrangements pursuant to which the vessel owner is entitled to share profits generated from any sub-charter entered into by the charterer. Profit-sharing revenues are calculated at an agreed percentage of the excess of sub-charter rates over an agreed amount and recorded over the term of the sub-charter agreement.
The SPVs follow Method 5 of Emerging Issues Task Force Issue No. 91-9, “Revenue and Expenses Recognition for Freight Services in Process” in accounting for voyage charter revenues. Voyage charter revenues are recognized based on the percentage of completion of the voyage at the balance sheet date. Under the voyage charter agreement, the term of the arrangement includes the transition period required for the vessel to travel from the port where the previous cargo was discharged to the next port to pick up the current cargo. The length of transition period is determined and agreed between the vessel owner and charterer for each voyage. A voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo.
Revenues from a pool trade arrangement are accounted for on an accruals basis. The net income of a pool trade arrangement is shared among all participants based on the points awarded to each participant which are dependent on the age, design and other performance characteristics of the vessel of each participant. Shipping revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent basis in accordance with an agreed-upon formula. For vessels operating in pools or on time charters, shipping revenues are substantially the same as time charter equivalent revenues.
Vessel Lives and Impairment
The vessels owned by the SPVs are secondhand vessels and the useful lives of these vessels vary from 8 to 22 years. The carrying values of these vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter rates and vessel values have been cyclical. The SPVs record impairment losses only when events occur that cause us to believe that future cash flows for any individual vessel will be less than its carrying value. The carrying amounts of vessels held and used by the SPVs are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel level since separately identifiable cash flow information for each vessel is available.
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In developing estimates of future cash flows, management of the SPVs must make assumptions about future charter rates, ship operating expenses and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. Although management of the SPVs believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective.
Management of the SPVs has evaluated the impact of the revisions to MARPOL Regulation 13G that became effective April 5, 2005 and the EU regulations that went into force on October 21, 2003 on the economic lives assigned to the fleet. Because four of the SPVs own single-hull vessels, the revised regulations may affect these four SPVs. Several Asian countries within which the SPVs operate have chosen to follow IMO guidelines for extension into 2015, significantly reducing the risk that these four SPVs will not be able to employ these vessels. However, following the spill of 10,800 tonnes of crude oil in South Korea in November 2007 by the single-hulled VLCC “Hebei Spirit”, there have been a number of announcements by South Korean government officials and refiners that suggest that South Korea may modify its policy towards single-hull vessels. If the economic lives assigned to the tankers prove to be too long because of new regulations or other future events, higher depreciation expense and impairment losses could result in future periods related to a reduction in the useful lives of any affected vessels. See “Risk Factors — Energy Merger’s fleet will include four single hull tankers which may be unable to trade in many markets after 2010, thereby adversely affecting Energy Merger’s overall financial position”.
Drydocking
The vessels held by the SPVs are required to be drydocked approximately every 30 to 60 months for major overhauls that cannot be performed while the vessels are operating. Management of the SPVs capitalizes the costs associated with the drydocks that are incurred to recertify that the vessels are completely seaworthy and to improve the efficiency of the vessels. The capitalized drydocking costs are depreciated on a straight-line basis over the period of 30 months and 60 months for intermediate drydocking and special survey drydocking, respectively. The useful lives of the capitalized drydocking costs are determined based on regulatory requirements of the jurisdiction in which the vessels are registered. Any change in regulatory requirements would result in a change in the useful lives and would affect the results of operations of the SPVs. In addition, the anticipated date of drydocking may be changed from the scheduled date based on availability of shipyards. Any change of the drydocking date prior to the scheduled date would result in write-off of the undepreciated carrying amount of drydocking costs and decrease the net income for the period. The management of the SPVs do not anticipate any significant changes in regulatory requirements or the next scheduled drydocking dates. Accordingly, drydocking costs are not expected to have a material impact on the results of operations. We believe that SPVs’ accounting policy for drydocking costs is consistent with US GAAP guidelines and the SPVs’ policy of capitalization reflects the economics and market values of the vessels.
Certain of the SPVs have historical write offs of capitalized drydocking costs in respect of previous drydock as a result of the performance of current drydock prior to the scheduled date. Shinyo Alliance Limited and Shinyo Jubilee Limited wrote off capitalized drydocking costs of $24,789 and $281,670, respectively, during the years ended December 31, 2006 and December 31, 2007, respectively.
The approximate increase in write-off of drydocking costs of the SPVs in the aggregate for the year ended December 31, 2007 was $733,778 had the drydocks been performed three months earlier than the scheduled date.
Off-Balance Sheet Arrangements
None of the SPVs have any off-balance sheet arrangements.
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SHINYO ALLIANCE LIMITED
Shinyo Alliance Limited was incorporated on August 3, 2001 and acquired the vessel Shinyo Alliance on May 17, 2002.
From July 28, 2002 to August 30, 2005, Shinyo Alliance Limited received time charter revenue pursuant to a time charter agreement with Formosa Petrochemical Corporation or Formosa, under which Shinyo Alliance Limited was paid a daily charter rate of $16,600 between July 2002 and July 2004 and a daily charter rate of $21,000 from July 2004 up to August 2005. Pursuant to the time charter agreement, a commission of 2.5% of time charter revenue earned is charged by the broker.
From August 31, 2005 to October 17, 2005, the vessel Shinyo Alliance operated under voyage charter. From October 17, 2005 to October 16, 2010, Shinyo Alliance Limited received time charter revenue pursuant to a time charter agreement with Formosa, under which Shinyo Alliance Limited was paid a daily charter rate of $29,800. In addition to its operating revenue, Shinyo Alliance Limited received interest income from its bank deposits as well as from loans made to certain related parties.
Results of Operations
The discussion below compares results of operations of Shinyo Alliance Limited for the year ended December 31, 2007 to the year ended December 31, 2006 and for the year ended December 31, 2006 to the year ended December 31, 2005.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenue
Shinyo Alliance Limited’s operating revenue was $7.6 million for the year ended December 31, 2006, compared to $10.9 million for the year ended December 31, 2007. The company’s vessel was under drydocking for approximately 110 days in 2006, which led to lower on-hire days in 2006 than in 2007. Shinyo Alliance was on-hire for 255 days and 365 days during the years ended December 31, 2006 and 2007, respectively.
Operating Expenses
Shinyo Alliance Limited’s operating expenses were $4.1 million for the year ended December 31, 2006, compared to $4.8 million for the year ended December 31, 2007. The increase in operating expenses was primarily a result of increased depreciation expenses.
Vessel operating expenses. Shinyo Alliance Limited’s vessel operating expenses for the years ended December 31, 2006 and 2007 maintained at similar level of $2.2 million and $2.3 million, respectively. Vessel operating expenses mainly consist of crew costs, lubricating oil and repair and maintenance expenses.
Depreciation expense. Shinyo Alliance Limited’s depreciation expense was $1.7 million for the year ended December 31, 2006, compared to $2.3 million for the year ended December 31, 2007. The increase in depreciation expense was attributable to a higher depreciation of capitalized drydocking costs after the completion of a special survey drydocking in 2006.
Write-off of drydocking costs. Shinyo Alliance Limited wrote off drydocking costs of $24,789 for the year ended December 31, 2006, compared to nil for the year ended December 31, 2007 because the drydocking in 2006 was performed prior to the scheduled date and undepreciated capitalized drydocking costs from the prior drydocking costs were written-off at such time.
Management fee. Shinyo Alliance Limited’s management fee remained unchanged at $114,000 for the years ended December 31, 2006 and 2007.
Commission. The amount of commission payable by Shinyo Alliance Limited is proportional to revenue earned in the same period. Shinyo Alliance Limited’s commission was $25,194 for the year ended December 31, 2006, compared to $36,500 for the year ended December 31, 2007, which was in line with the increase in operating revenue earned during the same period.
Administrative expenses. Shinyo Alliance Limited’s administrative expenses were $45,561 and $64,482 for the years ended December 31, 2006 and 2007, respectively.
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Other Income (Expenses), Net
Shinyo Alliance Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Alliance Limited earned interest income of $2.0 million and $1.9 million for the years ended December 31, 2006 and 2007, respectively, from its bank deposits as well as from loans to Shinyo Kannika Limited, Shinyo Alliance II Limited and Vanship. Shinyo Alliance Limited’s interest expense decreased from $2.7 million for the year ended December 31, 2006 to $2.5 million for the year ended December 31, 2007, primarily attributable to a decreased interest rate on its credit facility and a lower level of principal amount outstanding under its credit facility after the making of scheduled loan repayments.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Shinyo Alliance Limited’s operating revenue was $7.6 million for the year ended December 31, 2006, compared to $9.4 million for the year ended December 31, 2005. The decrease in operating revenue was primarily caused by a prolonged 110-day drydocking in 2006 to undergo repairs, maintenance and upgrade work required in order to maintain the vessel’s “in class” certification by its classification society. In 2005, the company had 365 on-hire days, as opposed to 255 on-hire days in 2006.
Operating Expenses
Shinyo Alliance Limited’s operating expenses were $4.1 million for the year ended December 31, 2006, compared to $4.6 million for the year ended December 31, 2005. The operating expenses decreased largely because Shinyo Alliance Limited had no voyage expenses in 2006.
Vessel operating expenses. Shinyo Alliance Limited’s vessel operating expenses were $2.2 million for the year ended December 31, 2006, compared to $1.8 million for the year ended December 31, 2005. The increase in vessel operating expenses was attributable to an increase in expenses associated with crew, lubricating oils and insurance.
Voyage expenses. Shinyo Alliance Limited’s voyage expenses were nil for the year ended December 31, 2006, compared to $814,939 for the year ended December 31, 2005. Shinyo Alliance Limited incurred no voyage expenses in 2006 given that, under a time charter agreement, the charterer is responsible for substantially all of the voyage expenses, and Shinyo Alliance Limited operates under time charter since October 17, 2005.
Depreciation expense. Shinyo Alliance Limited’s depreciation expense was $1.7 million for the year ended December 31, 2006, compared to $1.5 million for the year ended December 31, 2005. The increase in depreciation expense was primarily a result of higher drydocking depreciation expense in 2006.
Write-off of drydocking costs. Shinyo Alliance Limited wrote off drydocking costs of $24,789 for the year ended December 31, 2006, compared to nil for the year ended December 31, 2005 because the drydocking in 2006 was performed prior to the scheduled date and any undepreciated capitalized drydocking costs from the prior drydocking were written-off at such time.
Management fee. Shinyo Alliance Limited’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2005 and 2006.
Commissions. Shinyo Alliance Limited’s commissions were $25,194 for the year ended December 31, 2006, compared to $211,202 for the year ended December 31, 2005. The decrease in commissions was primarily a result of a lower commission rate payable under the new time charter dated September 28, 2005.
Administrative expenses. Shinyo Alliance Limited’s administrative expenses were $45,561 for the year ended December 31, 2006, compared to $70,839 for the year ended December 31, 2005. The decrease in administrative expenses was primarily as a result of reduced legal expenses in 2006. In 2005, Shinyo Alliance Limited incurred legal expenses in connection with the entering into of a bank loan.
Other Income (Expenses), Net
Shinyo Alliance Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Alliance Limited earned interest income of $2.0 million for the year ended December 31, 2006, compared to $1.0 million for the year ended December 31, 2005, primarily as a result of additional
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loans to Vanship in 2006 as well as the fact that there were more days in year 2006 than in year 2005 during which loans were owed to Shinyo Alliance Limited by its related parties.
Shinyo Alliance Limited’s interest expense increased from $2.1 million for the year ended December 31, 2005 to $2.7 million for the year ended December 31, 2006, primarily as a result of a refinancing in 2005 whereby Shinyo Alliance Limited obtained a new loan and repaid the existing loan. The new loan has a higher principal amount as well as a higher interest rate, which resulted in higher interest expense in 2006.
Liquidity and Capital Resources
In 2002, Shinyo Alliance Limited secured a $12,275,000 loan to finance the acquisition of the vessel Shinyo Alliance. In 2004, the company refinanced and repaid the loan secured in 2002 and obtained a new financing of $19.0 million. Pursuant to an agreement dated July 14, 2005, Shinyo Alliance Limited refinanced and repaid the loan obtained in 2005 and obtained a new loan in the amount of $32.7 million from DVB Group Merchant Bank (Asia) Ltd. or DVB Group. The new loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 1.15% per annum (reduced from 1.5% per annum with effect from May 1, 2006) and is guaranteed by Vanship and Shinyo Kannika Limited. The new loan will be repaid upon closing of the Business Combination. Shinyo Alliance Limited also obtained a $13,117,467 financing from Vanship at an interest rate of six-month LIBOR plus 2.39%. The shareholder loan matures on December 31, 2012 and may not be repaid unless and until the bank loan is repaid in full. Shinyo Alliance Limited has received a letter of support from Vanship that confirms Vanship’s intention to provide continuing financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
Since 2004, Shinyo Alliance Limited has provided loans to certain related parties, including loans to Vanship, Shinyo Kannika Limited and Shinyo Alliance II Limited in the amounts of $13,117,467, $13,117,467 and $16,550,000 and charging interests at rates of LIBOR plus 2.39%, LIBOR plus 1.15% and LIBOR plus 1.5% per annum, respectively. The loans to Shinyo Kannika Limited and Shinyo Alliance II Limited were fully repaid on July 4, 2006 and February 26, 2007, respectively, and the loan to Vanship matures on December 31, 2012.
Working capital is current assets minus current liabilities including the current portion of long-term debt. As of December 31, 2007, Shinyo Alliance Limited’s working capital was a deficit of $3.4 million, decreasing by $1.4 million compared to the working capital deficit as of December 31, 2006. Shinyo Alliance Limited’s working capital was a deficit of $4.8 million as of December 31, 2006 versus a deficit of $18.2 million as of December 31, 2005.
Net cash from operating activities. For the year ended December 31, 2007, Shinyo Alliance Limited’s net cash from operating activities was $5.8 million, an increase of $4.4 million from the year ended December 31, 2006. This increase is primarily due to increase in revenue. Shinyo Alliance Limited’s net cash from operating activities was $1.4 million for the year ended December 31, 2006, a decrease of $4.3 million from $5.7 million in the year ended December 31, 2005. This decrease is primarily attributable to a reduction in revenue because the vessel Shinyo Alliance was under drydocking for 110 days during the year ended December 31, 2006.
Net cash from (used in) investing activities. For the year ended December 31, 2007, Shinyo Alliance Limited’s net cash used in investing activities was $41,985, a decrease from net cash from investing activities of $6.0 million during the year ended December 31, 2006. This decrease is primarily due to the repayment of loans made to related parties in year 2006, with no equivalent repayments in 2007. Shinyo Alliance Limited’s net cash from investing activities was $6.0 million in the year ended December 31, 2006, an increase of $22.8 million from the year ended December 31, 2005, when net cash used in investing activities was $16.8 million. The increase is primarily attributable to collections on loans made to related parties.
Net cash from (used in) financing activities. For the year ended December 31, 2007, Shinyo Alliance Limited’s net cash used in financing activities was $6.0 million, an increase of $0.5 million from the year ended December 31, 2006. This increase was primarily due to the repayment of a bank loan. Shinyo Alliances Limited’s net cash used in financing activities was $5.5 million in the year ended December 31, 2006, a
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decrease of $17.1 million from the year ended December 31, 2005 when net cash from financing activities was $11.6 million. The decrease is primarily attributable to borrowings in 2005.
Indebtedness and Contractual Obligations
Shinyo Alliance Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than 1
Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
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| Long-Term Bank Loan | $ | 18,600,000 | $ | 6,350,000 | $ | 12,250,000 | $ | 0 | $ | 0 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 1,072,351 | $ | 626,659 | $ | 445,692 | $ | 0 | $ | 0 | ||||||||||
| Long-Term Loan from Related Party | $ | 13,117,467 | 0 | 0 | 13,117,467 | $ | 0 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 3,389,553 | $ | 677,911 | $ | 1,355,821 | $ | 1,355,821 | $ | 0 | ||||||||||
| Ship Management Obligations (3) | $ | 19,000 | $ | 19,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 36,198,371 | $ | 7,673,570 | $ | 14,051,513 | $ | 14,473,288 | $ | 0 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% per annum and a margin of 1.15%. |
| (2) | Assuming a LIBOR of 2.78% per annum and a margin of 2.39%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon two months’ notice. |
SHINYO LOYALTY LIMITED
Shinyo Loyalty Limited was incorporated on September 8, 2003 and acquired the vessel Shinyo Splendor on January 23, 2004. Shinyo Loyalty Limited began receiving time charter revenue on January 23, 2004, pursuant to a time charter agreement dated January 14, 2004 with Euronav N.V., or Euronav, and a charter agreement dated March 28, 2007 with Sinochem International Oil (London) Co, Ltd. or Sinochem. Under the charter agreement with Sinochem, Shinyo Loyalty Limited is paid a daily charter rate of $39,500 (and $39,000 per day for the optional three-year extension period). Commission is charged by Sinochem and a third party broker at 2.5% and 1.25% on time charter revenue, respectively. In addition to its operating revenue, Shinyo Loyalty Limited has earned interest income from bank deposits.
Recent Developments
Sinochem International Oil Company (Beijing ), the corporate parent of Sinochem, has requested that the charter agreement under which the vessel Shinyo Splendor operates be amended to change the charterer from Sinochem to Blue Light Chartering Inc., or Blue Light. Management of Shinyo Loyalty Limited has indicated its agreement to this request and expects to enter into a formal agreement to novate the charter agreement to Blue Light in the near future. Both Sinochem and Blue Light are wholly-owned subsidiaries of Sinochem International Oil Company (Beijing ) and, other than the change of charterer, the terms of the charter agreement will remain unchanged upon the effectiveness of such novation.
Results of Operations
The discussion below compares results of operations of Shinyo Loyalty Limited for the year ended December 31, 2007 to the year ended December 31, 2006 and for the year ended December 31, 2006 to the year ended December 31, 2005.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenue
Shinyo Loyalty Limited’s operating revenue was $11.8 million for the year ended December 31, 2006, compared to $13.2 million for the year ended December 31, 2007. The increase in operating revenue was primarily a result of the higher charter rate earned under the Sinochem charter agreement, which was effective on May 18, 2007.
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Operating Expenses
Shinyo Loyalty Limited’s operating expenses were $5.8 million for the year ended December 31, 2006, compared to $27.6 million for the year ended December 31, 2007. The increase in operating expenses was primarily due to a payment of $20.8 million to Euronav in respect of the early termination of the Euronav charter. Upon the settlement of the termination charge to Euronav, there was no contingent obligation to Shinyo Loyalty Limited associated with the termination.
Vessel operating expenses. Shinyo Loyalty Limited’s vessel operating expenses were $2.3 million for the year ended December 31, 2006, compared to $2.9 million for the year ended December 31, 2007. The increase in vessel operating expenses was primarily a result of increased crew costs, lubricating oil expenses and bunker consumption in 2007.
Depreciation expense. Shinyo Loyalty Limited’s depreciation expenses were $3.2 million for the year ended December 31, 2006, compared to $3.3 million for the year ended December 31, 2007. The increase in depreciation expenses was primarily a result of an increase in the depreciation of capitalized drydocking costs in 2007.
Management fee. Shinyo Loyalty Limited’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2006 and 2007.
Commission. Shinyo Loyalty Limited’s commission was $99,029 for the year ended December 31, 2006, compared to $373,137 for the year ended December 31, 2007. The increase in commission was primarily due to a higher commission rate under the Sinochem charter.
Administrative expenses. Shinyo Loyalty Limited’s administrative expenses were $59,289 for the year ended December 31, 2006, compared to $89,372 for the year ended December 31, 2007. The increase in administrative expenses was primarily a result of higher legal expenses.
Termination Charge. Shinyo Loyalty Limited incurred a $20.8 million termination charge for the year ended December 31, 2007 due to a termination payment resulting from Shinyo Loyalty Limited’s termination of a charter agreement with Euronav. Shinyo Loyalty Limited terminated the charter agreement with Euronav and entered into its current charter agreement with Sinochem in order to benefit from a higher fixed daily charter rate under the Sinochem charter agreement. The Euronav charter agreement provided for a fixed daily rate of $27,250, as compared to a fixed daily rate of $39,500 under its existing agreement with Sinochem.
Other Income (Expenses), Net
Shinyo Loyalty Limited’s other income (expenses) primarily consists of interest income, interest expense and write-off of deferred loan costs. Shinyo Loyalty Limited earned interest income of $224,955 for the year ended December 31, 2007, compared to $137,590 for the year ended December 31, 2006, primarily as a result of additional deposits in its bank account. Shinyo Loyalty Limited’s interest expense increased from $2.0 million for the year ended December 31, 2006 to $3.2 million for the year ended December 31, 2007, primarily due to an increase in its outstanding debt obligation in 2007 resulting from a refinancing transaction in May 2007 whereby the company repaid a $52.0 million loan and obtained a new loan in the amount of $62.0 million. Shinyo Loyalty Limited wrote off deferred loan costs during the year ended December 31, 2007 of $245,376 as a result of the refinancing in May 2007. The non-cash charge represents the balance of unamortized deferred financing costs incurred as a result of the previous credit facility.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Shinyo Loyalty Limited’s operating revenue was $11.8 million for the year ended December 31, 2006, compared to $11.6 million for the year ended December 31, 2005. The increase in operating revenue was primarily as a result of the profit sharing arrangement with Euronav as Euronav had sub-chartered Shinyo Splendor to a sub-charterer.
Operating Expenses
Shinyo Loyalty Limited’s operating expenses were $5.8 million for the year ended December 31, 2006, compared to $5.3 million for the year ended December 31, 2005. The increase in operating expenses was primarily a result of increased vessel operating expenses.
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Vessel operating expenses. Shinyo Loyalty Limited’s vessel operating expenses were $2.3 million for the year ended December 31, 2006, compared to $2.0 million for the year ended December 31, 2005. The increase in vessel operating expenses was primarily as a result of increased crew costs, lubricating oil and spare parts expenses. During the year ended December 31, 2006, the average oil price increase resulted in higher lubricating oil expenses. In addition, the increase in average salary for crews during the year ended December 31, 2006 resulted in higher crew costs.
Depreciation expense. Shinyo Loyalty Limited’s depreciation expenses were $3.2 million for the year ended December 31, 2006, compared to $3.1 million for the year ended December 31, 2005. The increase in depreciation expenses was primarily a result of increased depreciation of capitalized drydocking costs.
Management fee. Shinyo Loyalty Limited’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2005 and 2006.
Commission. Shinyo Loyalty Limited’s commission was $99,424 and $99,029 for the years ended December 31, 2005 and 2006, respectively.
Administrative expenses. Shinyo Loyalty Limited’s administrative expenses were $59,289 for the year ended December 31, 2006, compared to $48,081 for the year ended December 31, 2005.
Other Income (Expenses), Net
Shinyo Loyalty Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Loyalty Limited earned interest income of $137,590 for the year ended December 31, 2006, compared to $88,075 for the year ended December 31, 2005, primarily as a result of higher average cash balances and higher interest rates on deposits earned during 2006 compared to 2005. Shinyo Loyalty Limited’s interest expense decreased from $2.3 million for the year ended December 31, 2005 to $2.0 million for the year ended December 31, 2006, primarily due to a lower principal amount outstanding under its credit facility in 2006.
Liquidity and Capital Resources
To finance the purchase of its vessel, Shinyo Loyalty Limited secured a $52.0 million financing in 2004. Pursuant to a loan agreement dated May 16, 2007, the company repaid and refinanced its existing credit facility and obtained a new bank loan in the amount of $62.0 million from DVB Group Merchant Bank (Asia) Ltd, Credit Suisse and Deutsche Schiffsbank Aktiengesellschaft. The new loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 0.8% to LIBOR plus 1.62% per annum and is guaranteed by Vanship. The new loan will be repaid upon closing of the Business Combination. The company also obtained a loan from Vanship in the amount of $3.0 million at a rate of 5% per annum. The shareholder loan matures on January 13, 2012 and can only be repaid if the bank loan is satisfied in full. Shinyo Loyalty Limited has received a letter of support from Vanship that confirms its intention to provide continuing financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
As of December 31, 2007, Shinyo Loyalty Limited’s working capital was a deficit of $4.6 million, decreasing by $3.4 million compared to the working capital as of December 31, 2006. Shinyo Loyalty Limited’s working capital was a deficit of $1.2 million as of December 31, 2006, increasing from a deficit of $2.7 million as of December 31, 2005.
Net cash from (used in) operating activities. For the year ended December 31, 2007, Shinyo Loyalty Limited’s net cash used in operating activities was $11.8 million, a decrease of $18.5 million from the year ended December 31, 2006. This decrease is primarily due to the termination payment resulting from Shinyo Loyalty Limited’s termination of a charter agreement with Euronav. Shinyo Loyalty Limited’s net cash from operating activities was $6.7 million in the year ended December 31, 2006, a decrease of $2.2 million from $8.9 million in the year ended December 31, 2005. The decrease is primarily attributable to changes in trade accounts receivables.
Net cash from (used in) investing activities. For the year ended December 31, 2007, Shinyo Loyalty Limited’s net cash used in investing activities was $1.7 million, compared to the net cash from investing
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activities of $22,430 for the year ended December 31, 2006. This increase in net cash used in investing activities was primarily due to an increase in restricted cash. Shinyo Loyalty Limited’s net cash from investing activities was $22,430 in the year ended December 31, 2006, compared to net cash from investing activities of $32,276 the year ended December 31, 2005. The change is primarily attributable to the cash used for expenditures relating to drydocking.
Net cash from (used in) financing activities. For the year ended December 31, 2007, Shinyo Loyalty Limited’s net cash from financing activities was $14.1 million, an increase of $20.3 million from net cash used in financing activities of $6.2 million for the year ended December 31, 2006. This increase was primarily due to cash received from long-term bank borrowings, partially off-set by repayment of bank loans. Shinyo Loyalty Limited’s net cash used in financing activities was $6.2 million in the year ended December 31, 2006, a decrease of $1.5 million from $7.7 million in the year ended December 31, 2005. The decrease was primarily attributable to lower amounts of bank loan repayment.
Indebtedness and Contractual Obligations
Shinyo Loyalty Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years |
More Than
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Total | |||||||||||||||
| Long-Term Bank Loan | $ | 58,500,000 | $ | 7,000,000 | $ | 14,650,000 | $ | 16,550,000 | $ | 20,300,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 8,457,932 | $ | 2,096,629 | $ | 3,383,283 | $ | 2,208,887 | $ | 769,133 | ||||||||||
| Long-Term Loan from Related Party | $ | 3,000,000 | 0 | 0 | $ | 3,000,000 | 0 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 605,000 | $ | 150,000 | $ | 300,000 | $ | 155,000 | 0 | |||||||||||
| Ship Management Obligations (3) | $ | 57,000 | $ | 57,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 70,619,932 | $ | 9,303,629 | $ | 18,333,283 | $ | 21,913,887 | $ | 21,069,133 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 0.96%. |
| (2) | Assuming a fixed rate of 5%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon six months’ notice. |
SHINYO KANNIKA LIMITED
Shinyo Kannika Limited was incorporated on September 27, 2004 and acquired the vessel Shinyo Kannika on November 16, 2004. From November 16, 2004 to December 27, 2004, Shinyo Kannika operated under voyage charter. Under a pool trade charter agreement with Tankers International L.L.C., Shinyo Kannika Limited received pool trade earnings from December 27, 2004 until February 17, 2007. On August 28, 2006, Shinyo Kannika Limited entered into a time charter agreement with Dalian Ocean Shipping Company, or Dalian, pursuant to which Shinyo Kannika Limited is paid a daily charter rate of $39,000 starting from February 17, 2007, subject to a profit sharing arrangement in which income in excess of $44,000 is split equally between Shinyo Kannika Limited and Dalian. Commission to Dalian and a third party broker is charged at 1.25% each on time charter revenue. In addition to its operating revenue, Shinyo Kannika Limited has earned interest income on funds held in a bank account as well as loans made to its affiliates.
Recent Developments
The profit sharing arrangement under the charter agreement pursuant to which the vessel Shinyo Kannika operates is referenced to the Baltic International Trading Route Index. Due to recent increases in the Baltic International Trading Route Index, the charter rates for VLCCs in the spot market has increased significantly in the three months period ended March 31, 2008. This increase resulted in increased profit sharing revenue earned by the vessel Shinyo Kannika in the three months ended March 31, 2008.
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Results of Operations
The discussion below compares results of operations of Shinyo Kannika Limited for the year ended December 31, 2007 to the year ended December 31, 2006 and for the year ended December 31, 2006 to the year ended December 31, 2005.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenue
Shinyo Kannika Limited’s operating revenue was $22.8 million for the year ended December 31, 2006, compared to $16.7 million for the year ended December 31, 2007. The difference in operating revenue was due to the higher charter rates the company earned from pool trade in 2006 relative to the charter rates received by the company in 2007 under the time charter agreement.
Operating Expenses
Shinyo Kannika Limited’s operating expenses were $6.2 million for the year ended December 31, 2006, compared to $6.8 million for the year ended December 31, 2007. The increase in operating expenses was primarily caused by an increase in vessel operating expenses and commission.
Vessel operating expenses. Shinyo Kannika Limited’s vessel operating expenses were $2.1 million for the year ended December 31, 2006, compared to $2.3 million for the year ended December 31, 2007. The increase in vessel operating expenses was primarily attributable to an increase in crew costs due to an increase in average salary and lubricating oils expenses as a result of an increase in average oil price during 2007.
Depreciation expense. Shinyo Kannika Limited’s depreciation expenses remained unchanged at $3.9 million for each of the years ended December 31, 2006 and December 31, 2007.
Management fee. Shinyo Kannika Limited’s management fees for each of the years ended December 31, 2006 and December 31, 2007 remained unchanged at $114,000.
Commission. Shinyo Kannika Limited’s commission was nil for the year ended December 31, 2006, compared to $302,559 for the year ended December 31, 2007. Commission was required to be paid in 2007 pursuant to the terms of the time charter agreement. However, no commission was required to be paid under the pool trade arrangement.
Administrative expenses. Shinyo Kannika Limited’s administrative expenses were $95,669 for the year ended December 31, 2006, compared to $85,058 for the year ended December 31, 2007.
Other Income (Expenses), Net
Shinyo Kannika Limited’s other income (expenses) primarily consists of interest income, interest expense and write-off of deferred loan costs. Shinyo Kannika Limited earned interest income of $2.8 million for the year ended December 31, 2007, compared to $726,085 for the year ended December 31, 2006, primarily as a result of higher cash balances in the bank account as well as interest received from a loan to Shinyo Ocean Limited.
Shinyo Kannika Limited’s interest expense increased from $4.9 million for the year ended December 31, 2006 to $6.4 million for the year ended December 31, 2007, primarily as a result of a loan provided by Vanship to the company in 2006 with respect to which interest in the amounts of $1,290,760 and $1,328,819 were incurred by the company in 2006 and 2007, respectively. Also contributing to the increase in interest expense, was a refinancing in January 2007 under which the company obtained a new $86.8 million loan and repaid and refinanced its previous two loans totaling $87.0 million.
Shinyo Kannika Limited wrote off deferred loan costs during the year ended December 31, 2007 of $427,736 as a result of a refinancing in January 2007. The non-cash charge represents the balance of the unamortized deferred financing costs incurred under the previous credit facilities.
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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Shinyo Kannika Limited’s operating revenue was $22.8 million for the year ended December 31, 2006, compared to $21.7 million for the year ended December 31, 2005. The increase in operating revenue was primarily a result of higher pool trade earnings in 2006.
Operating Expenses
Shinyo Kannika Limited’s operating expenses were $6.2 million for the year ended December 31, 2006, compared to $6.0 million for the year ended December 31, 2005. The increase in operating expenses was primarily a result of increased vessel operating expenses and depreciation expense.
Vessel operating expenses. Shinyo Kannika Limited’s vessel operating expenses were $2.1 million for the year ended December 31, 2006, compared to $2.0 million for the year ended December 31, 2005. The increase in vessel operating expenses was primarily a result of higher costs relating to crew, lubricating oils and repair and maintenance.
Depreciation expense. Shinyo Kannika Limited’s depreciation expenses were $3.9 million for the year ended December 31, 2006, compared to $3.8 million for the year ended December 31, 2005. The increase in expenses was primarily a result of increased depreciation of capitalized drydocking costs in 2006.
Management fee. Shinyo Kannika Limited’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2006 and 2007.
Administrative expenses. Shinyo Kannika Limited’s administrative expenses were $95,669 for the year ended December 31, 2006, compared to $64,323 for the year ended December 31, 2005.
Other Income (Expenses), Net
Shinyo Kannika Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Kannika Limited earned interest income of $726,085 for the year ended December 31, 2006, compared to $129,791 for the year ended December 31, 2005, primarily as a result of the additional $8,882,533 financing provided by the company to Vanship and increased bank deposits. Shinyo Kannika Limited’s interest expense increased from $4.3 million for the year ended December 31, 2005 to $4.9 million for the year ended December 31, 2006, primarily as a result of additional bank borrowings.
Liquidity and Capital Resources
To fund its acquisition of the vessel Shinyo Kannika, Shinyo Kannika Limited obtained a $65 million syndicated bank loan in 2004. In 2006, the company secured an additional bank loan in the amount of $22 million for the purpose of financing the general working capital of Vanship and its subsidiaries. Pursuant to an agreement dated January 4, 2007, Shinyo Kannika Limited refinanced and repaid the previous two loans and obtained a new loan in the amount of $86.8 million from DVB Group Merchant Bank (Asia) Ltd, Credit Suisse and Deutsche Schiffsbank AG. The new loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 0.975% per annum and is guaranteed by Vanship. The new loan will be repaid upon closing of the Business Combination. The company also received loans on September 27, 2004 and November 15, 2004 from Vanship and Shinyo Alliance Limited in the amounts of $16,450,000 and $13,117,467 with interest charged at six-month LIBOR plus 2.39% and LIBOR plus 1.15% per annum, respectively. The loan from Vanship matures on December 31, 2012 and may not be repaid until the bank loan is repaid in full. The loan granted by Shinyo Alliance Limited was fully repaid on June 30, 2006.
As of December 31, 2007, Shinyo Kannika Limited’s working capital was $7.0 million, increasing by $2.0 million compared to working capital as of December 31, 2006 due to an increase in cash. Shinyo Kannika Limited’s working capital was $5.0 million as of December 31, 2006, increasing from $2.3 million as of December 31, 2005 due to an increase in cash.
Net cash from operating activities. For the year ended December 31, 2007, Shinyo Kannika Limited’s net cash from operating activities was $10.3 million, a decrease of $5.8 million from the year ended December 31, 2006. This decrease is primarily due to a reduction of net income. Shinyo Kannika Limited’s net cash from operating activities was $16.1 million for the year ended December 31, 2006, a decrease of $4.6 million
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from $20.7 million in the year ended December 31, 2005. The decrease is primarily attributable to a change in trade accounts receivables as a result of the receipt of freight in the amount of $8.8 million in 2005 for one spot voyage in 2004 and also as a result of lower charter rates received by Shinyo Kannika Limited in 2006 compared to 2005.
Net cash used in investing activities. For the year ended December 31, 2007, Shinyo Kannika Limited’s net cash used in investing activities was $25.3 million, compared to $8.8 million for the year ended December 31, 2006. This change was primarily due to a related party loan to Shinyo Ocean Limited. Shinyo Kannika Limited’s net cash used in investing activities was $8.8 million in the year ended December 31, 2006, an increase of $6.8 million from net cash used in investing activities of $2.0 million in the year ended December 31, 2005. The increase is primarily attributable to the cash used to make related party loans.
Net cash from (used in) financing activities. For the year ended December 31, 2007, Shinyo Kannika Limited’s net cash from financing activities was $17.8 million, an increase of $19.6 million from net cash used in financing activities of $1.8 million for the year ended December 31, 2006. This increase is primarily due to cash received from long-term bank borrowings, partially off-set by repayment of bank loans in 2007. Shinyo Kannika Limited’s net cash used in financing activities was $1.8 million in the year ended December 31, 2006, a decrease of $15.0 million from $16.8 million in the year ended December 31, 2005. The decrease is primarily attributable to repayment of bank loans and loans to related parties in 2005.
Indebtedness and Contractual Obligations
Shinyo Kannika Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Contractual Obligations | Total |
Less Than
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1 – 3 Years | 3 – 5 Years |
More Than
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| Long-Term Bank Loan | $ | 80,600,000 | $ | 6,500,000 | $ | 13,000,000 | $ | 13,400,000 | $ | 47,700,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 17,173,908 | $ | 2,955,144 | $ | 5,156,471 | $ | 4,171,053 | $ | 4,891,240 | ||||||||||
| Long-Term Loan from Related Party | $ | 16,450,000 | 0 | 0 | 16,450,000 | $ | 0 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 4,250,680 | $ | 850,136 | $ | 1,700,272 | $ | 1,700,272 | $ | 0 | ||||||||||
| Ship Management Obligations (3) | $ | 57,000 | $ | 57,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 118,531,588 | $ | 10,362,280 | $ | 19,856,743 | $ | 35,721,325 | $ | 52,591,240 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% per annum and a margin of 0.975%. |
| (2) | Assuming a LIBOR of 2.78% per annum and a margin of 2.39%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon six months’ notice. |
SHINYO NAVIGATOR LIMITED
Shinyo Navigator Limited was incorporated on September 21, 2006 and acquired the vessel Shinyo Navigator on December 14, 2006. Shinyo Navigator Limited began receiving time charter revenue on December 18, 2006 pursuant to a time charter agreement with Dalian under which Shinyo Navigator Limited is paid a daily charter rate of $43,800. Commission to Dalian and to a third party broker is calculated at 1.25% each on time charter revenue. In addition to its operating revenue, Shinyo Navigator Limited earned interest income with respect to funds deposited in its bank account.
The discussion below compares results of operations of Shinyo Navigator Limited for the period from September 21, 2006 to December 31, 2006 to the year ended December 31, 2007. Because Shinyo Navigator Limited was incorporated on September 21, 2006 and did not begin chartering the vessel Shinyo Navigator until December 18, 2006, its results of operations for the two periods are not directly comparable.
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Recent Developments
Due to a decrease in LIBOR interest rates in the period from January 1, 2008 to March 31, 2008, the fair value of the interest rate swap that Shinyo Navigator Limited entered into in January 2007 decreased significantly as compared to that as of December 31, 2007. The decrease in fair value of the interest rate swap has led to an increase in Shinyo Navigator Limited’s liabilities and expense as shown on Shinyo Navigator Limited’s balance sheet and statement of operations, respectively, as of and for the three months period ended March 31, 2008.
Year Ended December 31, 2007 Compared to the Period from September 21, 2006 to December 31, 2006
Operating Revenue
Shinyo Navigator Limited received operating revenue of $604,744 in the period from September 21, 2006 to December 31, 2006, compared to $15.5 million for the year ended December 31, 2007. Since the company did not begin chartering its vessel until December 18, 2006, the company earned minimal income for the period from September 21, 2006 to December 31, 2006 compared to the year ended December 31, 2007.
Operating Expenses
Shinyo Navigator Limited’s operating expenses were $630,240 in the period from September 21, 2006 to December 31, 2006 compared to $9.1 million for the year ended December 31, 2007. Given that the vessel Shinyo Navigator was not purchased until December 14, 2006, the company incurred minimal costs or expenses from September 21, 2006 to December 31, 2006 compared to the year ended December 31, 2007.
Vessel operating expenses . Shinyo Navigator Limited’s vessel operating expenses were $306,120 for the period from September 21, 2006 to December 31, 2006 compared to $2.8 million for the year ended December 31, 2007. The increase in vessel operating expenses was primarily a result of a full year of operation in 2007 compared to 18 days in 2006.
Depreciation expense . Shinyo Navigator Limited’s depreciation expenses were $264,726 for the period from September 21, 2006 to December 31, 2006 compared to $5.8 million for the year ended December 31, 2007. The increase in depreciation expenses was primarily a result of a full year of operation in 2007 compared to 18 days in 2006.
Management fee . Shinyo Navigator Limited’s management fee was $5,516 for the period from September 21, 2006 to December 31, 2006 compared to $114,000 for the year ended December 31, 2007. The increase in management fee was primarily a result of a full year of operation in 2007 compared to 18 days in 2006.
Administrative expenses . Shinyo Navigator Limited’s administrative expenses were $38,759 for the period from September 21, 2006 to December 31, 2006 compared to $74,962 for the year ended December 31, 2007. The increase in administrative expenses was primarily a result of a full year of operation in 2007 compared to 18 days in 2006.
Other Income (Expenses), Net
Shinyo Navigator Limited’s other income (expenses) primarily consists of interest income, interest expenses and changes in fair value of derivatives. Shinyo Navigator Limited’s interest income was $146,831 in the period from September 21, 2006 to December 31, 2006 compared to $120,917 for the year ended December 31, 2007, primarily resulting from less funds deposited by the company with its bank in 2007. Shinyo Navigator Limited’s interest expense increased from $483,534 in the period from September 21, 2006 to December 31, 2006 to $5.9 million for the year ended December 31, 2007, primarily as a result of a $82,875,000 bank loan obtained by the company on December 12, 2006. Shinyo Navigator Limited’s changes in fair value of derivatives was nil in the period from September 21, 2006 to December 31, 2006 compared to a negative change in fair value of $2.2 million for the year ended December 31, 2007 as a result of the change in fair value of an interest rate swap that the company entered into in January 2007 to limit its exposure to interest rate fluctuations arising from the company’s long term bank loan used to finance the acquisition of the vessel Shinyo Navigator. The interest rate swap is not qualified as a hedge for accounting purposes.
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Liquidity and Capital Resources
Shinyo Navigator Limited financed the acquisition of the vessel Shinyo Navigator with a $82,875,000 secured loan pursuant to a loan agreement dated December 12, 2006 from HSH Nordbank AG, Hong Kong Branch. The loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 1% per annum and is guaranteed by Vanship. The loan will be repaid in full upon closing of the Business Combination. The company has entered into an interest rate swap with HSN Nordbank AG to limit its exposure to interest rate fluctuations arising from this loan. The company also obtained a loan from Vanship in the amount of $15,158,279 at a rate of 6.5% per annum. The shareholder loan has a maturity date of December 31, 2016 and is not repayable until the bank loan is satisfied in full. Shinyo Navigator Limited has received a letter of support from Vanship that confirms its intention to provide continuing financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
Shinyo Navigator Limited’s working capital was a deficit of $9.8 million as of December 31, 2007 as compared to a deficit of $7.0 million as of December 31, 2006.
Net cash from operating activities . Shinyo Navigator Limited’s net cash from operating activities was $8.6 million for the year ended December 31, 2007, compared to $316,810 as of December 31, 2006. The change was primarily attributable to the commencement of operations on December 14, 2006.
Net cash used in investing activities . For the year ended December 31, 2007, Shinyo Navigator Limited’s net cash used in investing activities was $2.0 million, compared to $87.8 million for the year ended December 31, 2006, which reflected the purchase of the vessel Shinyo Navigator.
Net cash from (used in) financing activities . Shinyo Navigator Limited’s Shinyo Navigator Limited’s net cash from financing activities in the period from September 21, 2006 to December 31, 2006 was $87.9 million, compared to net cash used in financing activities of $6.8 million for the year ended December 31, 2007. The change was primarily attributable to the receipt of a bank loan and related party loan in 2006 to finance the purchase of the vessel Shinyo Navigator.
Indebtedness and Contractual Obligations
Shinyo Navigator Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 75,875,000 | $ | 7,500,000 | $ | 16,500,000 | $ | 19,000,000 | $ | 32,875,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 13,506,569 | $ | 2,800,120 | $ | 4,697,208 | $ | 3,339,066 | $ | 2,670,175 | ||||||||||
| Long-Term Loan from Related Party | $ | 15,379,422 | 0 | 0 | 0 | $ | 15,379,422 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 7,153,277 | $ | 794,809 | $ | 1,589,617 | $ | 1,589,617 | $ | 3,179,234 | ||||||||||
| Ship Management Obligations (3) | $ | 57,000 | $ | 57,000 | 0 | 0 | 0 | |||||||||||||
| Interest Rate Swap Contract (4) | $ | 7,753,770 | $ | 1,607,476 | $ | 2,696,545 | $ | 1,916,871 | $ | 1,532,878 | ||||||||||
| Total | $ | 119,725,038 | $ | 12,759,405 | $ | 25,483,370 | $ | 25,845,554 | $ | 55,636,709 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 1.0%. |
| (2) | Assuming a LIBOR of 2.78% per annum and a margin of 2.39%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon six months’ notice. |
| (4) | Interest swap at 5.95% less interest payments on bank loan. |
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SHINYO OCEAN LIMITED
Shinyo Ocean Limited was incorporated on December 28, 2006 and acquired the vessel Shinyo Ocean on January 9, 2007. Shinyo Ocean Limited began receiving time charter revenue on January 10, 2007 pursuant to a time charter agreement with Formosa under which the company is paid a daily charter rate of $38,500, subject to profit sharing arrangement in which income in excess of $43,500 is split between the company and the charterer. Commission is charged by Formosa at $100 per day of hire. In addition to its operating revenue, Shinyo Ocean Limited has earned interest income from bank deposits.
The discussion below compares results of operations of Shinyo Ocean Limited for the period from December 28, 2006 to December 31, 2006 to the year ended December 31, 2007. Because Shinyo Ocean Limited was incorporated on December 28, 2006 and did not begin chartering its vessel until January 10, 2007, its results of operations for the two periods are not directly comparable.
Recent Developments
The profit sharing arrangement under the charter agreement pursuant to which the vessel Shinyo Ocean operates is referenced to the Baltic International Trading Route Index. Due to recent increases in the Baltic International Trading Route Index, the charter rates for VLCCs in the spot market has increased significantly in the three months period ended March 31, 2008. This increase resulted in increased profit sharing revenue earned by the vessel Shinyo Ocean in the three months ended March 31, 2008.
Year Ended December 31, 2007 Compared to the Period from December 28, 2006 to December 31, 2006
Operating Revenue
Shinyo Ocean Limited did not earn any operating revenue in the period from December 28, 2006 to December 31, 2006, compared to $15.1 million in the year ended December, 2007. The increase in revenue was primarily due to the fact that the company did not begin chartering its vessel until January 10, 2007.
Operating Expenses
Shinyo Ocean Limited’s operating expenses were $1,039 in the period from December 28, 2006 to December 31, 2006 compared to $7.5 million in the year ended December 31, 2007. The increase in operating expenses was primarily a result of the fact that the company did not acquire the vessel Shinyo Ocean until January 9, 2007.
Vessel operating expenses . Shinyo Ocean Limited’s vessel operating expenses were nil for the period from December 28, 2006 to December 31, 2006, compared to $2.4 million for the year ended December 31, 2007. Because the company did not acquire the vessel Shinyo Ocean until January 9, 2007, the company incurred no vessel operating expenses in 2006.
Depreciation expense . Shinyo Ocean Limited’s depreciation expenses were nil for the period from December 28, 2006 to December 31, 2006, compared to $4.9 million for the year ended December 31, 2007. Because the company did not acquire the vessel Shinyo Ocean until January 9, 2007, the company incurred no vessel operating expenses in 2006.
Management fee . Shinyo Ocean Limited’s management fee was nil for the period from December 28, 2006 to December 31, 2006, compared to $111,548 for the year ended December 31, 2007. Because the company did not acquire the vessel Shinyo Ocean until January 9, 2007, the company incurred no management fee in 2006.
Commission . Commission payable by Shinyo Ocean Limited is determined based on the revenue earned during the same period. Shinyo Ocean Limited’s commission increased from nil for the period from December 28, 2006 to December 31, 2006 to $35,560 for the year December 31, 2007, which was in line with its increase in revenue during the same period.
Administrative expenses . Shinyo Ocean Limited’s administrative expenses were $1,039 for the period from December 28, 2006 to December 31, 2006, compared to $65,869 for the year ended December 31, 2007. Because the company did not acquire the vessel Shinyo Ocean until January 9, 2007, the company incurred minimal administrative expenses in 2006.
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Other Income (Expenses), Net
Shinyo Ocean Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Ocean Limited did not earn any interest income in the period from December 28, 2006 to December 31, 2006 compared to $145,334 in the year ended December 31, 2007 from bank deposits. Shinyo Ocean Limited’s interest expense increased from $14,400 in the period from December 28, 2006 to December 31, 2006 to $6.9 million in the year ended December 31, 2007. The increase in interest expense was due to the fact that a $86.8 million bank loan was obtained by the company on January 8, 2007 to finance the acquisition of the vessel Shinyo Ocean.
Liquidity and Capital Resources
Shinyo Ocean Limited financed the acquisition of the vessel Shinyo Ocean with an $86.8 million secured loan pursuant to a loan agreement, dated January 4, 2007, from DVB Group Merchant Bank (Asia) Ltd., Credit Suisse and Deutsche Schiffsbank AG. The loan is guaranteed by Vanship and is repayable in quarterly installments and bears interest at a rate of LIBOR plus 0.98% per annum. The loan will be repaid upon closing of the Business Combination. The company also obtained loans from Vanship in the amount of $11.1 million on December 28, 2006 and from Shinyo Kannika Limited in the amount of $14.1 million on January 8, 2007 and in the amount of $11.1 million on January 10, 2007. The loans from Vanship and Shinyo Kannika bear interest at six-month LIBOR plus 3.98% per annum and three-month LIBOR plus 0.98%, respectively. The loan from Vanship was fully repaid on January 9, 2007, while the Shinyo Kannika loan matures on December 31, 2017. Shinyo Ocean Limited has received a letter of support from Vanship that confirms its intention to provide continued financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
Shinyo Ocean Limited’s working capital was a deficit of $5.7 million as of December 31, 2007 and was a deficit of $0.3 million as of December 31, 2006.
Net cash from operating activities . Shinyo Ocean Limited’s net cash from operating activities was $7.9 million for the year ended December 31, 2007, compared to nil for the period from December 28, 2006 to December 31, 2006. This increase is primarily attributable to the commencement of operations in 2007.
Net cash from (used in) investing activities . Shinyo Ocean Limited’s net cash from investing activities was nil for the period from December 28, 2006 to December 31, 2006, compared to net cash used in investing activities of $102.8 million for the year ended December 31, 2007, corresponding to the cash used to purchase the vessel Shinyo Ocean.
Net cash from financing activities . Shinyo Ocean Limited’s net cash from financing activities was nil for the period from December 28, 2006 to December 31, 2006, compared to $96.2 million for the year ended December 31, 2007, corresponding to the bank loan and related party borrowing made to purchase the vessel Shinyo Ocean.
Indebtedness and Contractual Obligations
Shinyo Ocean Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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|||||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 82,075,000 | $ | 6,525,000 | $ | 13,275,000 | $ | 13,450,000 | $ | 48,825,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 17,530,590 | $ | 2,991,232 | $ | 5,217,941 | $ | 4,215,311 | $ | 5,106,106 | ||||||||||
| Long-Term Loan from Related Party | $ | 25,200,000 | 0 | 0 | 0 | $ | 25,200,000 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 8,597,824 | $ | 946,260 | $ | 1,892,520 | $ | 1,892,520 | $ | 3,866,524 | ||||||||||
| Ship Management Obligations (3) | $ | 59,452 | $ | 59,452 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 133,462,866 | $ | 10,521,944 | $ | 20,385,461 | $ | 19,557,831 | $ | 82,997,630 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 0.975%. |
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| (2) | Assuming a LIBOR of 2.78% and a margin of 0.975%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon six months’ notice. |
ELITE STRATEGIC LIMITED
Elite Strategic Limited, or Elite Strategic, was incorporated on December 3, 2002 and acquired the vessel C. Dream in February 2003. The company is owned 50% by Vanship and 50% by SK Shipping Company Limited, or SK Shipping, through a joint venture between the two entities. Elite Strategic entered into a time charter agreement with SK Shipping pursuant to which Elite Strategic was paid a daily charter rate of $19,680 from January 21, 2003 to January 21, 2006 and $22,000 from January 21, 2006 to January 20, 2016.
On September 7, 2007, Elite Strategic sold the vessel C. Dream and its operation to Shinyo Dream Limited, a company controlled by Vanship.
Results of Operations
The discussion below includes a comparison of results of operations of Elite Strategic for the period from January 1, 2007 to September 6, 2007 to the year ended December 31, 2006, and the year ended December 31, 2006 to the year ended December 31, 2005. Because Elite Strategic sold the vessel C. Dream and its operation to Shinyo Dream Limited on September 7, 2007, its results of operations for the period from January 1, 2007 to September 6, 2007 to the year ended December 31, 2006 are not directly comparable.
The Period from January 1, 2007 to September 6, 2007 Compared to the Year Ended December 31, 2006
Operating Revenue
Elite Strategic’s operating revenue was $8.0 million for the year ended December 31, 2006, compared to $5.5 million in the period from January 1, 2007 to September 6, 2007. The decrease in operating revenue was principally caused by the decrease in on-hire days in 2007. Because the vessel C. Dream was sold to Shinyo Dream Limited in 2007, the vessel C. Dream had 365 on-hire days in 2006 compared to 249 on-hire days in the period from January 1, 2007 to September 6, 2007.
Operating Expenses
Elite Strategic’s operating expenses were $5.0 million for the year ended December 31, 2006, compared to $3.6 million in the period from January 1, 2007 to September 6, 2007. The decrease in operating expenses was primarily a result of a lower number of operational days in the period from January 1, 2007 to September 6, 2007 compared to the year ended December 31, 2006.
Vessel operating expenses . Elite Strategic’s vessel operating expenses were $2.1 million for the year ended December 31, 2006, compared to $1.6 million in the period from January 1, 2007 to September 6, 2007. The decrease in vessel operating expenses was primarily a result of a lower number of operational days in the period from January 1, 2007 to September 6, 2007 compared to the year ended December 31, 2006.
Depreciation expense . Elite Strategic’s depreciation expenses were $2.6 million for the year ended December 31, 2006, compared to $1.8 million in the period from January 1, 2007 to September 6, 2007. The decrease in depreciation expenses was primarily as a result of a lower number of days that Elite Strategic owned the vessel C. Dream in the period from January 1, 2007 to September 6, 2007 compared to the year ended December 31, 2006.
Management fee . Elite Strategic’s management fee decreased from $114,000 for the year ended December 31, 2006, to $97,217 in the period from January 1, 2007 to September 6, 2007. The decrease in management fees was primarily as a result of a lower number of days that Elite Strategic owned the vessel C. Dream in the period from January 1, 2007 to September 6, 2007 compared to the year ended December 31, 2006.
Commission . Elite Strategic’s commission was $125,040 for the year ended December 31, 2006, compared to $87,323 in the period from January 1, 2007 to September 6, 2007. The decrease in commission was primarily as a result of lower revenue in 2007.
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Administrative expenses . Elite Strategic’s administrative expenses were $46,657 for the year ended December 31, 2006, compared to $38,445 in the period from January 1, 2007 to September 6, 2007. The decrease in administrative expenses was primarily as a result of a lower number of operational days in the period from January 1, 2007 to September 6, 2007 compared to the year ended December 31, 2006.
Other Income (Expenses), Net
Elite Strategic’s other income (expenses) primarily consists of interest income and interest expense. Elite Strategic earned interest income of $85,487 in the period from January 1, 2007 to September 6, 2007, compared to $108,363 for the year ended December 31, 2006 from its bank deposits. The decrease was primarily a result of the fact that the 2006 financial statements cover a period of twelve months whereas the 2007 financial statements were based on a period of approximately eight months. Elite Strategic’s interest expense decreased from $2.4 million for the year ended December 31, 2006 to $1.5 million in the period from January 1, 2007 to September 6, 2007, primarily attributable to a lower debt balance in 2007 as well as the fact that the 2006 financial statements cover a period of twelve months whereas the 2007 financial statements were based on a period of approximately eight months.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Elite Strategic’s operating revenue was $8.0 million for the year ended December 31, 2006, compared to $6.9 million for the year ended December 31, 2005. The increase in operating revenue was primarily caused by an increase in charter hire rate from $19,680 to $22,200 beginning January 21, 2006.
Operating Expenses
Elite Strategic’s operating expenses were $5.0 million for the year ended December 31, 2006, compared to $4.7 million for the year ended December 31, 2005. The total operating expenses increased due to higher vessel operating expenses.
Vessel operating expenses . Elite Strategic’s vessel operating expenses were $2.1 million for the year ended December 31, 2006, compared to $1.9 million for the year ended December 31, 2005. The increase in vessel operating expenses was attributable to an increase in costs and expenses associated with crew due to an increase in average salary and lubricating oils as a result of increased average oil price in 2006.
Depreciation expense . Elite Strategic’s depreciation and amortization expense was $2.6 million for the year ended December 31, 2006, compared to $2.5 million for the year ended December 31, 2005. The increase in expense was primarily a result of higher drydocking depreciation expense in 2006.
Management fee . Elite Strategic’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2005 and 2006.
Commissions . Elite Strategic’s commissions were $125,040 for the year ended December 31, 2006, compared to $118,077 for the year ended December 31, 2005. The increase in commissions was primarily as a result of higher revenue in 2005, which increased the amount of commission payable by the company.
Administrative expenses . Elite Strategic’s administrative expenses were $46,657 for the year ended December 31, 2006, compared to $39,200 for the year ended December 31, 2005.
Other Income (Expenses), Net
Elite Strategic’s other income (expenses) primarily consists of interest income and interest expense. Elite Strategic earned interest income of $108,363 for the year ended December 31, 2006, compared to $65,692 for the year ended December 31, 2005, primarily as a result of higher bank deposits. Elite Strategic’s interest expense increased from $1.7 million for the year ended December 31, 2005 to $2.4 million for the year ended December 31, 2006, primarily as a result of higher interest rates.
Liquidity and Capital Resources
In 2003, Elite Strategic obtained a financing in the amount of $45.0 million from DVB Group Merchant Bank (Asia) Ltd. or DVB Group to finance the acquisition of C. Dream. The loan was repayable in quarterly installments, and bore interest at a rate of LIBOR plus 1.5% per annum and is guaranteed by Vanship and Mr. Fred Cheng. Elite Strategic also had share capital of $15 million from Vanship and SK Shipping.
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As of September 6, 2007, Elite Strategic’s cash and cash equivalents decreased to $1.0 million compared to $2.0 million as of December 31, 2006. This decrease was primarily attributable to the decrease in operating revenue. Elite Strategic’s working capital was a deficit of $2.0 million as of September 6, 2007 and as of December 31, 2006. As of December 31, 2006, Elite Strategic’s cash and cash equivalents increased to $2.0 million from $1.4 million as of December 31, 2005. This increase was primarily due to cashflow from operating activities.
Net cash from operating activities. Elite Strategic’s net cash from operating activities was $1.1 million for the period from January 1, 2007 to September 6, 2007, a decrease of $2.9 million compared to $4.0 million for the year ended December 31, 2006. This decrease was primarily due to more on-hire days in 2006 than in 2007. Elite Strategic’s net cash from operating activities was $4.0 million for the year ended December 31, 2006, an increase of $1.4 million from $2.6 for the year ended December 31, 2005. This increase was primarily attributable to increase in revenue in 2006.
Net cash from (used in) investing activities. Elite Strategic’s net cash from investing activities was $0.4 million for the period from January 1, 2007 to September 6, 2007, an increase of $0.6 million for the year ended December 31, 2006, when net cash used in investing activities was $0.2 million. This increase was primarily attributable to a decrease in restricted cash. Elite Strategic’s net cash used in investing activities was $0.2 million for the year ended December 31, 2006, an increase of $0.19 million from $0.01 million for the year ended December 31, 2005. This increase was primarily attributable to an increase in restricted cash.
Net cash used in financing activities. Elite Strategic’s net cash used in financing activities was $2.6 million for the period from January 1, 2007 to September 6, 2007, a decrease of $0.6 million from the year ended December 31, 2006 of $3.2 million. The decrease was primarily attributable to lower repayments of the company’s bank loan. Elite Strategic’s net cash used in financing activities was $3.2 million for the year ended December 31, 2006, compared to the year ended December 31, 2005 of $3.0 million.
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SHINYO DREAM LIMITED
Shinyo Dream Limited was incorporated on July 20, 2007. On September 7, 2007, Shinyo Dream Limited acquired the vessel C. Dream and its operation from Elite Strategic Limited, an entity 50% controlled by Vanship, Shinyo Dream Limited’s immediate holding company.
Shinyo Dream Limited began receiving time charter revenue on September 7, 2007 pursuant to a time charter agreement with The Sanko Steamship Co., Ltd under which Shinyo Dream Limited is paid a daily charter rate of $28,900. Commission of 2% is charged on time charter revenue. In addition to its operating revenue, Shinyo Dream Limited earned interest income from funds deposited with its bank.
Results of Operations
Because Shinyo Dream Limited was incorporated on July 20, 2007 and did not begin chartering the vessel C. Dream until September 7, 2007, there were no financial statements prepared for the year 2006 against which the financial performance in 2007 may be compared. However, the discussion below highlights the significant components of revenues and expenses and other significant economic events or transactions that materially affected its operations.
Operating Revenue
Shinyo Dream Limited’s operating revenue was $4.9 million in the period from July 20, 2007 to December 31, 2007. Commencing on September 7, 2007, Shinyo Dream Limited derived time charter revenue from the vessel C. Dream and the vessel had 116 on-hire days from July 20, 2007 to December 31, 2007.
Operating Expenses
Shinyo Dream Limited’s operating expenses were $2.0 million in the period from July 20, 2007 to December 31, 2007.
Vessel operating expenses . Shinyo Dream Limited’s vessel operating expenses of $672,923 in the period from July 20, 2007 to December 31, 2007 consists of expenses relating to crew wages, insurance expenses, lubricating oil, stores, spare parts and other operating expenses.
Depreciation expenses . Shinyo Dream Limited’s depreciation expenses were $1.1 million in the period from July 20, 2007 to December 31, 2007.
Management fee . Shinyo Dream Limited’s management fee was $36,100 in the period from July 20, 2007 to December 31, 2007.
Commission . Shinyo Dream Limited’s commission was $66,839 in the period from July 20, 2007 to December 31, 2007. The amount of commission payable by the company is proportional to revenue earned in the same period.
Administrative expenses . Shinyo Dream Limited’s administrative expenses were $47,190 in the period from July 20, 2007 to December 31, 2007.
Other Income (Expenses), Net
Shinyo Dream Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Dream Limited earned interest income of $65,744 in the period from July 20, 2007 to December 31, 2007 from bank deposits. Shinyo Dream Limited incurred interest expenses of $1.9 million in the period from July 20, 2007 to December 31, 2007 in connection with its bank loan and related party loan from Vanship.
Liquidity and Capital Resources
Shinyo Dream Limited financed the acquisition of the vessel C. Dream with a $65.0 million secured loan pursuant to a loan agreement, dated September 5, 2007, from DVB Group Merchant Bank (Asia) Ltd., BNP Paribas, Credit Suisse and Deutsche Schiffsbank AG. The loan is guaranteed by Vanship and is repayable in quarterly installments and bears interest at a rate of LIBOR plus 0.95% per annum. The loan will be repaid upon closing of the Business Combination. The company also obtained a $23.0 million loan from Vanship that
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charges interest at six-month LIBOR plus 2.39% per annum. The shareholder loan has a maturity date of December 31, 2017 and is not repayable unless the bank loan is repaid in full. Shinyo Dream Limited has received a letter of support from Vanship that confirms its intention to provide continuing financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
Shinyo Dream Limited’s cash and cash equivalents was $1.8 million as of December 31, 2007. Working capital is current assets minus current liabilities including the current portion of long-term debt. Shinyo Dream Limited’s working capital was a deficit of $7.7 million as of December 31, 2007.
Net cash from operating activities . Shinyo Dream Limited’s net cash from operating activities was $2.0 million in the period from July 20, 2007 to December 31, 2007, deriving from the charter hire revenue earned from the chartering of the vessel C. Dream.
Net cash used in investing activities . Shinyo Dream Limited’s net cash used in investing activities was $68.7 million in the period from July 20, 2007 to December 31, 2007, corresponding to the cash used to purchase the vessel C. Dream.
Net cash from financing activities . Shinyo Dream Limited’s net cash from financing activities was $68.5 million, corresponding to proceeds from borrowings from banks and related parties.
Indebtedness and Contractual Obligations
Shinyo Dream Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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|||||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 64,000,000 | $ | 3,300,000 | $ | 6,900,000 | $ | 7,800,000 | $ | 46,000,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 16,971,798 | $ | 2,373,556 | $ | 4,368,458 | $ | 3,814,896 | $ | 6,414,888 | ||||||||||
| Long-Term Loan from Related Party | $ | 23,000,000 | 0 | 0 | 0 | $ | 23,000,000 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 11,886,400 | $ | 1,188,640 | $ | 2,377,280 | $ | 2,377,280 | $ | 5,943,200 | ||||||||||
| Ship Management Obligations (3) | $ | 135,533 | $ | 135,533 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 115,993,731 | $ | 6,997,729 | $ | 13,645,738 | $ | 13,992,176 | $ | 81,358,088 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 0.95%. |
| (2) | Assuming a LIBOR of 2.78% and a margin of 2.39%. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon six months’ notice. |
SHINYO JUBILEE LIMITED
Shinyo Jubilee Limited was incorporated on September 8, 2003 and acquired the vessel Shinyo Jubilee on January 19, 2005. From March 2005 to October 2005, Shinyo Jubilee operated in the spot market. In October 2005, Shinyo Jubilee Limited entered into a continuous voyage charter with S-Oil Corporation pursuant to which Shinyo Jubilee Limited is paid a freight rate on the basis of moving a quantity of crude oil from a loading port to port of discharge. In addition to its operating revenue, Shinyo Jubilee Limited has earned income from funds deposited in its bank account.
Recent Developments
The market price of the bunker fuel that is consumed by VLCCs increased significantly in the second quarter of 2008 as compared with the market price of bunker fuel in each of the periods discussed below. Under the consecutive voyage charter agreement pursuant to which the vessel Shinyo Jubilee operates, the vessel owner is responsible for paying the cost of the bunker fuel necessary to operate the vessel. Accordingly,
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the increase in the price of bunker fuel is expected to have an adverse impact on Shinyo Jubilee Limited’s results of operations in the six month period ended on June 30, 2008. Primarily due to the increase in the price of bunker fuel, management estimates the average time charter equivalent earnings of the vessel Shinyo Jubilee as approximately $26,000 per day in June 2008, as compared to an average of $32,500 for full first half of 2008.
Results of Operations
The discussion below compares results of operations of Shinyo Jubilee Limited for the year ended December 31, 2007 to the year ended December 31, 2006, and for the year ended December 31, 2006 to the year ended December 31, 2005.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenue
Shinyo Jubilee Limited’s operating revenue was $20.3 million for the year ended December 31, 2006, compared to $17.9 million for the year ended December 31, 2007. The decrease in operating revenue was primarily a result of the vessel Shinyo Jubilee being drydocked for 79 days in 2007.
Operating Expenses
Shinyo Jubilee Limited’s operating expenses were $14.4 million for the year ended December 31, 2006, compared to $13.2 million for the year ended December 31, 2007. The decrease in operating expenses was primarily a result of a reduction of voyage expenses.
Vessel operating expenses . Shinyo Jubilee Limited’s vessel operating expenses were $2.0 million for the year ended December 31, 2006, compared to $2.1 million for the year ended December 31, 2007.
Voyage expenses . Shinyo Jubilee Limited’s voyage expenses were $7.9 million for the year ended December 31, 2006, compared to $6.5 million for the year ended December 31, 2007. The decrease in voyage expenses primarily resulted from lower operating days due to the vessel Shinyo Jubilee being drydocked for 79 days in 2007.
Depreciation expense . Shinyo Jubilee Limited’s depreciation expenses for each of the years ended December 31, 2006 and December 31, 2007 remained unchanged at $3.6 million.
Write-off of drydocking costs . Shinyo Jubilee Limited’s write-off of drydocking costs was nil for the year ended December 31, 2006, compared to $281,670 for the year ended December 31, 2007 because the drydocking in year 2007 was performed prior to the scheduled date and undepreciated capitalized drydocking costs from the prior drydocking were written off at such time.
Commission . Shinyo Jubilee Limited’s commission was $736,432 for the year ended December 31, 2006, compared to $636,937 for the year ended December 31, 2007. The slight decrease in commission was primarily attributable to a reduction in revenue in 2007 compared to 2006, which resulted in a lower commission expense.
Management fee . Shinyo Jubilee Limited’s management fee for each of the years ended December 31, 2006 and December 31, 2007 remained unchanged at $114,000.
Administrative expenses . Shinyo Jubilee Limited’s administrative expenses were $65,966 for the year ended December 31, 2006, compared to $56,689 for the year ended December 31, 2007.
Other Income (Expenses), Net
Shinyo Jubilee Limited’s other income (expenses) primarily consists of interest income, interest expense and write-off of deferred loan costs. Shinyo Jubilee Limited earned interest income of $420,451 for the year ended December 31, 2007, compared to $117,205 for the year ended December 31, 2006, primarily as a result of higher cash balances in its deposit account. Shinyo Jubilee Limited’s interest expense decreased from $1.7 million for the year ended December 31, 2006 to $1.6 million for the year ended December 31, 2007, primarily due to a lower level of principal amount outstanding under its credit facility after the making of scheduled loan repayments.
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On June 2, 2006, Shinyo Jubilee Limited refinanced and repaid its existing loan arrangement and obtained a new loan of $15.0 million. Upon consummation of the refinancing, the unamortized deferred financing costs associated with the existing credit facility were written off as a non-cash charge in 2006. This write-off is reflected in the company’s write-off of deferred loan costs in the amount of $65,307 for the year ended December 31, 2006, compared to nil for the year ended December 31, 2007.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Shinyo Jubilee Limited’s operating revenue was $20.3 million for the year ended December 31, 2006, compared to $16.3 million for the year ended December 31, 2005. The increase in operating revenue was primarily due to a higher number of vessel operating days in 2006 than in 2005. Shinyo Jubilee was on-hire for 365 days in 2006 compared to 329 days in 2005.
Operating Expenses
Shinyo Jubilee Limited’s operating expenses were $14.4 million for the year ended December 31, 2006, compared to $10.9 million for the year ended December 31, 2005. The increase in operating expenses in 2006, including the increase in each of the following expenses, was primarily the result of a higher number of operational days in 2006 than in 2005.
Vessel operating expenses . Shinyo Jubilee Limited’s vessel operating expenses were $2.0 million for the year ended December 31, 2006, compared to $1.4 million for the year ended December 31, 2005.
Voyage expenses . Shinyo Jubilee Limited’s voyage expenses were $7.9 million for the year ended December 31, 2006, compared to $5.8 million for the year ended December 31, 2005.
Depreciation expense . Shinyo Jubilee Limited’s depreciation expenses were $3.6 million for the year ended December 31, 2006, compared to $2.9 million for the year ended December 31, 2005.
Management fee . Shinyo Jubilee Limited’s management fee was $114,000 for the year ended December 31, 2006, compared to $108,484 for the year ended December 31, 2005.
Commission . Shinyo Jubilee Limited’s commission was $736,432 for the year ended December 31, 2006, compared to $600,917 for the year ended December 31, 2005.
Administrative expenses . Shinyo Jubilee Limited’s administrative expenses were $65,966 for the year ended December 31, 2006, compared to $75,728 for the year ended December 31, 2005.
Other Income (Expenses), Net
Shinyo Jubilee Limited’s other income (expenses) primarily consists of interest income, interest expense, write-off of deferred loan costs and other income. Shinyo Jubilee Limited earned interest income of $117,205 for the year ended December 31, 2006, compared to $77,990 for the year ended December 31, 2005, primarily as a result of higher cash balances in its bank account. Shinyo Jubilee Limited’s interest expense was $1.7 million for each of the years ended December 31, 2005 and 2006. Shinyo Jubilee Limited’s write-off of deferred loan costs increased from nil for the year ended December 31, 2005 to $65,307 for the year ended December 31, 2006, primarily due to the write-off in connection with the refinancing on June 2, 2006. Shinyo Jubilee Limited received other income of $2,047 for the year ended December 31, 2005, compared to $2,286 for the year ended December 31, 2006.
Liquidity and Capital Resources
In 2005, Shinyo Jubilee Limited financed the acquisition of Shinyo Jubilee through a $21.0 million secured loan. Pursuant to an agreement dated June 2, 2006, the company refinanced and repaid the existing loan arrangement and obtained a new loan in the amount of $15.0 million from HSH Nordbank AG, Nordea Bank Danmark A/S and DVB Group Merchant Bank (Asia) Ltd. The new loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 1% per annum and is guaranteed by Vanship and Clipper. The new loan will be repaid upon closing of the Business Combination. Shinyo Jubilee Limited also received a $14,031,100 loan from Van-Clipper with interest charged at 5% per annum. The shareholder loan matures on December 15, 2012 and is not repayable by the company until and unless the bank loan is repaid in full.
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Working capital is current assets minus current liabilities including the current portion of long-term debt. As of December 31, 2007, Shinyo Jubilee Limited’s working capital was $5.0 million, increasing by $1.7 million compared to the working capital as of December 31, 2006. Shinyo Jubilee Limited’s working capital was $3.3 million as of December 31, 2006, an increase of $8.4 million from the deficit of $5.1 million as of December 31, 2005.
Net cash from operating activities . For the year ended December 31, 2007, Shinyo Jubilee Limited’s net cash from operating activities was $6.6 million, an increase of $0.6 million from the year ended December 31, 2006. This increase was primarily due to an increase in accrued liabilities and other payables in 2007. Shinyo Jubilee Limited’s net cash from operating activities was $6.0 million in the year ended December 31, 2006, an increase of $0.6 million from $5.4 million in the year ended December 31, 2005. The increase is primarily attributable to improved operating results.
Net cash from (used in) investing activities . For the year ended December 31, 2007, Shinyo Jubilee Limited’s net cash used in investing activities was $0.6 million, an increase of $1.2 million from the year ended December 31, 2006. This increase was primarily due to an increase in restricted cash. Shinyo Jubilee Limited’s net cash from investing activities was $0.6 million in the year ended December 31, 2006, an increase of $31.4 million from net cash used in investing activities of $30.8 million in the year ended December 31, 2005. This increase was primarily attributable to the cash used in the purchase of the vessel Shinyo Jubilee in 2005.
Net cash from (used in) financing activities . For the year ended December 31, 2007, Shinyo Jubilee Limited’s net cash used in financing activities was $2.1 million, a decrease of $2.0 million from the year ended December 31, 2006. This decrease was primarily due to the repayment of a bank loan with a lower amount of new financing. The company used its cash on hand to pay an amount of $1.5 million representing the difference between the balance outstanding under the old bank loan at the time of refinancing and the amount of the new financing. Shinyo Jubilee Limited’s net cash used in financing activities was $4.1 million in the year ended December 31, 2006, a decrease of $30.8 million from $26.7 million of net cash from financing activities in the year ended December 31, 2005. The decrease was primarily attributable to cash received from the proceeds of a related party loan in 2005, with no equivalent loan in 2006.
Indebtedness and Contractual Obligations
Shinyo Jubilee Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 11,820,000 | $ | 2,120,000 | $ | 4,240,000 | $ | 5,460,000 | $ | 0 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 1,155,499 | $ | 415,762 | $ | 587,778 | $ | 151,959 | $ | 0 | ||||||||||
| Long-Term Loan from Related Party | $ | 14,031,100 | 0 | 0 | 14,031,100 | $ | 0 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 3,486,339 | $ | 701,555 | $ | 1,403,110 | $ | 1,381,674 | $ | 0 | ||||||||||
| Ship Management Obligations (3) | $ | 19,000 | $ | 19,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 30,511,938 | $ | 3,256,317 | $ | 6,230,888 | $ | 21,024,733 | $ | 0 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% per annum and a margin of 1.0%. |
| (2) | Assuming a fixed rate of 5% per annum. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon two months’ notice. |
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SHINYO MARINER LIMTED
Shinyo Mariner Limited was incorporated on December 22, 2004 and acquired the vessel Shinyo Mariner on March 11, 2005. Shinyo Mariner Limited began receiving time charter revenue on March 11, 2005. The company had one spot voyage from December 2006 to January 2007. Pursuant to a time charter agreement with Dalian dated January 18, 2007, Shinyo Mariner Limited is paid a daily charter rate of $32,800 (and $31,800 per day for the optional two-year extension period). Commission is charged by Dalian and a third party broker at 1.25% each on time charter revenue. In addition to its operating revenue, Shinyo Mariner Limited has earned interest income from its bank deposits.
Results of Operations
The discussion below compares results of operations of Shinyo Mariner Limited for the year ended December 31, 2007 to the year ended December 31, 2006 and for the year ended December 31, 2006 to the year ended December 31, 2005. Because Shinyo Mariner was acquired on March 11, 2005 and Shinyo Mariner Limited did not begin chartering such vessel until March 11, 2005, the results of operations of Shinyo Mariner Limited for the years ended December 31, 2005 and 2006 are not directly comparable.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenue
Shinyo Mariner Limited’s operating revenue was $8.9 million for the year ended December 31, 2006, compared to $12.2 million for the year ended December 31, 2007. The increase in operating revenue was principally caused by an increase in on-hire days in 2007. Due to a vessel drydocking in 2006, Shinyo Mariner had 195 on-hire days in 2006 compared to 363 on-hire days in 2007.
Operating Expenses
Shinyo Mariner Limited’s operating expenses were $7.9 million for the year ended December 31, 2006, compared to $8.9 million for the year ended December 31, 2007. The increase in operating expenses was primarily as a result of higher depreciation expenses and commission in 2007.
Vessel operating expenses . Shinyo Mariner Limited’s vessel operating expenses were $2.2 million for the year ended December 31, 2006, compared to $2.1 million for the year ended December 31, 2007. The decrease in vessel operating expenses was primarily as a result of a decrease in commercial expenses. In March 2007 Shinyo Mariner Limited received a claim from Euronav pursuant to which Euronav sought monetary damages on termination of a time charter agreement of $2.3 million relating to bunkers remaining on board, return of profit share, and speed and consumption claim. Shinyo Mariner Limited paid a damages amount of $529,777 to Euronav that was reflected under its vessel operating expenses for the year ended December 31, 2006. For the remaining claims, no provision has been made since the amount cannot be reasonably estimated as the claims are in preliminary stages. However, Shinyo Mariner Limited estimated that the exposure to the remaining claims ranges from nil to $1,748,002 as of December 31, 2007.
Voyage expenses . Shinyo Mariner Limited’s voyage expenses were $589,432 for the year ended December 31, 2006, compared to $593,328 for the year ended December 31, 2007. The voyage expenses were incurred in relation to one spot voyage for the period from December 8, 2006 to January 30, 2007.
Depreciation expense . Shinyo Mariner Limited’s depreciation expenses were $4.6 million for the year ended December 31, 2006, compared to $5.5 million for the year ended December 31, 2007. The increase in depreciation expenses was primarily a result of increased depreciation expense from capitalized drydocking costs.
Management fee . Shinyo Mariner Limited’s management fee remained unchanged at $114,000 for each of the years ended December 31, 2006 and 2007.
Commission . Shinyo Mariner Limited’s commission was $288,603 for the year ended December 31, 2006, compared to $474,916 for the year ended December 31, 2007. The increase in commission was primarily a result of higher vessel revenue in 2007.
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Administrative expenses . Shinyo Mariner Limited’s administrative expenses were $55,937 for the year ended December 31, 2006, compared to $81,469 for the year ended December 31, 2007. The increase in administrative expenses was primarily as a result of an increase in expenses in respect of the vessel Shinyo Mariner relating to communication, entertainment and victualling for charterers’ account that are not recoverable by Shinyo Mariner Limited.
Other Income (Expenses), Net
Shinyo Mariner Limited’s other income (expenses) primarily consists of interest income, interest expense and write-off of deferred loan costs. Shinyo Mariner Limited earned interest income of $46,403 for the year ended December 31, 2007, compared to $158,870 for the year ended December 31, 2006, primarily as a result of a larger balance of cash deposits maintained as of December 31, 2006. Shinyo Mariner Limited’s interest expense decreased from $3.1 million for the year ended December 31, 2006 to $2.9 million for the year ended December 31, 2007, primarily attributable to a lower principal amount outstanding in 2007 after making scheduled bank loan repayments. Shinyo Mariner Limited’s write-off of deferred loan costs decreased from $129,212 for the year ended December 31, 2006 to nil for the year ended December 31, 2007. The write-off of deferred loan costs in 2006 was the result of a refinancing transaction in 2006 whereby the company refinanced and repaid its existing loan with a new loan of $39 million at which point unamortized deferred financing costs associated with the refinanced loan were written off as a non-cash charge in 2006.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Shinyo Mariner Limited’s operating revenue was $8.9 million for the year ended December 31, 2006, compared to $11.5 million for the year ended December 31, 2005. The decrease in operating revenue was primarily caused by a prolonged 170-day drydocking in 2006 to undergo repairs, maintenance and upgrade work required in order to maintain the vessel’s “in class” certification by its classification society. In 2005, the company had 295 on-hire days, as opposed to 195 on-hire days in 2006.
Operating Expenses
Shinyo Mariner Limited’s operating expenses were $7.9 million for the year ended December 31, 2006, compared to $5.8 million for the year ended December 31, 2005. The increase in operating expenses was primarily as a result of increased vessel operating expenses, voyage expenses and depreciation expenses, and Shinyo Mariner was not acquired until March 11, 2005.
Vessel operating expenses . Shinyo Mariner Limited’s vessel operating expenses were $2.2 million for the year ended December 31, 2006, compared to $1.5 million for the year ended December 31, 2005. The increase in vessel operating expenses was principally due to the fact that Shinyo Mariner was not acquired until March 11, 2005, and therefore had lower vessel operating expenses in 2005.
Voyage expenses . Shinyo Mariner Limited’s voyage expenses were $589,432 for the year ended December 31, 2006, compared to nil for the year ended December 31, 2005. The increase in voyage expenses was primarily a result of one spot voyage of the company’s vessel in 2006. The company had no voyage expenses in 2005 since the company operated under a time charter arrangement in 2005.
Depreciation expense . Shinyo Mariner Limited’s depreciation expenses were $4.6 million for the year ended December 31, 2006, compared to $3.7 million for the year ended December 31, 2005. The increase in depreciation expenses was primarily a result of full year operation and higher drydocking depreciation expense in 2006.
Management fee . Shinyo Mariner Limited’s management fee was $114,000 for the year ended December 31, 2006, compared to $91,935 for the year ended December 31, 2005. The company had a lower management fee in 2005 because the company owned the vessel for less than 10 months in 2005, thereby reducing the fee paid with respect to the management of its vessel.
Commission . Shinyo Mariner Limited’s commission was $288,603 for the year ended December 31, 2006, compared to $383,230 for the year ended December 31, 2005. The company paid a lower commission in 2006 because the vessel earned less revenue in 2006 due to dry-docking.
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Administrative expenses . Shinyo Mariner Limited’s administrative expenses were $55,937 for the year ended December 31, 2006, compared to $79,071 for the year ended December 31, 2005. The decrease in administrative expenses was primarily a result of reduced legal and professional fees.
Other Income (Expenses), Net
Shinyo Mariner Limited’s other income (expenses) primarily consists of interest income, interest expense and write-off of deferred loan costs. Shinyo Mariner Limited earned interest income of $158,870 for the year ended December 31, 2006, compared to $54,069 for the year ended December 31, 2005, primarily as a result of increased bank deposits. Shinyo Mariner Limited’s interest expense increased from $2.3 million for the year ended December 31, 2005 to $3.1 million for the year ended December 31, 2006, primarily as a result of debt outstanding for more days in 2006 than in 2005. Shinyo Mariner Limited wrote off deferred loan costs during the year ended December 31, 2006 of $129,212 as a result of a refinancing in 2006. The non-cash charge represents the balance of unamortized deferred financing costs incurred as a result of the previous credit facilities.
Liquidity and Capital Resources
To fund the acquisition of its vessel, Shinyo Mariner Limited entered into a $45.0 million loan facility in March 2005. Pursuant to an agreement dated June 2, 2006, the company refinanced and repaid the $45.0 million loan and obtained a new loan in the amount of $39.0 million from HSH Nordbank AG, Nordea Bank Danmark A/S and DVB Group Merchant Bank (Asia) Ltd. The new loan is repayable in quarterly installments, bears interest at a rate of LIBOR plus 1% per annum and is guaranteed by Vanship and Clipper. The new loan will be repaid upon closing of the Business Combination. The company also obtained a $9.5 million loan in 2005 and an additional $2.5 million loan in 2006 from Van-Clipper that bears interest at 5% per annum. The shareholder loan matures on December 15, 2012 and may not be repaid unless and until the bank loan is repaid in full. Shinyo Mariner Limited has received a letter of support from Van-Clipper that confirms Van-Clipper’s intention to provide continuing financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
As of December 31, 2007, Shinyo Mariner Limited’s working capital was a deficit of $9.3 million, increasing by $1.3 million compared to the working capital as of December 31, 2006. Shinyo Mariner Limited’s working capital was a deficit of $10.6 million as of December 31, 2006, decreasing from $5.3 million as December 31, 2005.
Net cash from operating activities . For the year ended December 31, 2007, Shinyo Mariner Limited’s net cash from operating activities was $5.1 million, an increase of $4.3 million from the year ended December 31, 2006. This increase was primarily due to an increase in net income in 2007. Shinyo Mariner Limited’s net cash from operating activities was $0.8 million in the year ended December 31, 2006, decreasing from $7.9 million in the year ended December 31, 2005. The decrease was primarily attributable to reduction of net income.
Net cash from (used in) investing activities . For the year ended December 31, 2007, Shinyo Mariner Limited’s net cash used in investing activities was $0.8 million, a decrease of $1.6 million from the year ended December 31, 2006. This decrease was primarily due to an increase in restricted cash. Shinyo Mariner Limited’s net cash from investing activities was $0.8 million in the year ended December 31, 2006, an increase of $54.4 million from $53.6 million of net cash used in the year ended December 31, 2005. The increase was primarily attributable to the cash used to purchase the vessel Shinyo Mariner in 2005 with no equivalent investment in 2006.
Net cash from (used in) financing activities . For the year ended December 31, 2007, Shinyo Mariner Limited’s net cash used in financing activities was $3.9 million, an increase of $1.2 million from $2.7 million for the year ended December 31, 2006. This increase was primarily due to loan repayments for the year ended December 31, 2007, partially offset by cash received from a related party loan. Shinyo Mariner Limited’s net cash used in financing activities was $2.7 million in the year ended December 31, 2006, a change of $49.8 million from net cash from financing activities of $47.1 million in the year ended December 31, 2005. The change was primarily attributable to the bank loan and related party loan obtained by the company in 2005 to finance the purchase of the vessel.
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Indebtedness and Contractual Obligations
Shinyo Mariner Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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|||||||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
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| Long-Term Bank Loan | $ | 28,200,000 | $ | 7,200,000 | $ | 14,400,000 | $ | 6,600,000 | $ | 0 | ||||||||||
|
Interest Payments on Bank
Loan (1) |
$ | 2,215,186 | $ | 954,293 | $ | 1,080,765 | $ | 180,128 | $ | 0 | ||||||||||
| Long-Term Loan from Related Party | $ | 18,500,000 | 0 | 0 | 18,500,000 | $ | 0 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 4,596,736 | $ | 925,000 | $ | 1,850,000 | $ | 1,821,736 | $ | 0 | ||||||||||
| Ship Management Obligations (3) | $ | 19,000 | $ | 19,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 53,530,921 | $ | 9,098,293 | $ | 17,330,765 | $ | 27,101,864 | $ | 0 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 1.0%. |
| (2) | Assuming a fixed rate of 5% per annum. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon two months’ notice. |
SHINYO SAWAKO LIMITED
Shinyo Sawako Limited was incorporated on March 2, 2006 and acquired the vessel Shinyo Sawako from a third party on March 9, 2006. From March 2006 to December 2006, Shinyo Sawako operated in the spot market earning revenue through voyage charters. Shinyo Sawako Limited began receiving time charter revenue in December 2006 pursuant to a time charter agreement with Dalian under which Shinyo Sawako Limited is paid a daily charter rate of $39,088. Commission to Dalian and a third party broker is charged at 1.25% each on time charter revenue. In addition to its operating revenue, Shinyo Sawako Limited earned interest income for funds deposited in its bank account.
Results of Operations
The discussion below compares results of operations of Shinyo Sawako Limited for the period from March 2, 2006 to December 31, 2006 to the year ended December 31, 2007. Because Shinyo Sawako Limited was incorporated on March 2, 2006 and did not begin chartering the vessel Shinyo Sawako until March 9, 2006, its results of operations for the two periods are not directly comparable.
Year Ended December 31, 2007 Compared to the Period from March 2, 2006 to December 31, 2006
Operating Revenue
Shinyo Sawako Limited earned operating revenue of $20.0 million in the period from March 9, 2006 to December 31, 2006, compared to $13.5 million in the year ended December, 2007. The decrease in revenue was primarily due to the lower charter rates earned by the company since December 2006 under its time charter, compared to the higher rates for voyage charters earned by the company during the period from March 2006 to December 2006.
Operating Expenses
Shinyo Sawako Limited’s operating expenses were $12.0 million in the period from March 2, 2006 to December 31, 2006 compared to $8.3 million in the year ended December 31, 2007. The decrease in operating expenses was primarily a result of higher voyage expenses in 2006 as a result of operating under a voyage charter in such period.
Vessel operating expenses . Shinyo Sawako Limited’s vessel operating expenses were $1.8 million for the period from March 2, 2006 to December 31, 2006, compared to $3.3 million for the year ended December 31, 2007. The company did not begin chartering its vessel until March 2006, accordingly, the company
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had a lower number of vessel operating days in 2006 compared to 2007, resulting in lower vessel operating expenses in 2006. During the period from March 2, 2006 to December 31, 2006, the vessel Shinyo Sawako was on-hire for 298 days, compared to 347 days for the year ended December 31, 2007.
Voyage expenses . Shinyo Sawako Limited’s voyage expenses were $5.6 million for the period from March 2, 2006 to December 31, 2006, compared to nil for the year ended December 31, 2007. Shinyo Sawako Limited had no voyage expenses for the year ended December 31, 2007 given that, under a time charter agreement, the charterer is responsible for substantially all of the voyage-related expenses.
Depreciation expense . Shinyo Sawako Limited’s depreciation expenses were $3.5 million for the period from March 2, 2006 to December 31, 2006, compared to $4.3 million for the year ended December 31, 2007, primarily as a result of full year of depreciation in 2007.
Management fee . Shinyo Sawako Limited’s management fee was $92,548 for the period from March 2, 2006 to December 31, 2006, compared to $114,000 for the year ended December 31, 2007, primarily as a result of full year of operation in 2007.
Commission . Commission payable by Shinyo Sawako Limited is determined based on the revenue earned during the same period. Shinyo Sawako Limited’s commission decreased from $945,120 for the period from March 2, 2006 to December 31, 2006 to $505,055 for the year ended December 31, 2007, which was in line with its decrease in revenue during the same period.
Administrative expenses . Shinyo Sawako Limited’s administrative expenses were $53,538 for the period from March 2, 2006 to December 31, 2006, compared to $78,148 for the year ended December 31, 2007, primarily as a result of a higher number of vessel operating days in 2007 than in 2006.
Other Income (Expenses), Net
Shinyo Sawako Limited’s other income (expenses) primarily consists of interest income and interest expense. Shinyo Sawako Limited received interest income of $263,034 in the period from March 2, 2006 to December 31, 2006 compared to $364,743 in the year ended December 31, 2007, in each case from bank deposits. Shinyo Sawako Limited’s interest expense increased from $2.6 million in the period from March 2, 2006 to December 31, 2006 to $2.7 million in the year ended December 31, 2007. The increases in interest income and the interest expense were due to the fact that the 2007 financial statements cover a period of twelve months whereas the 2006 financial statements were based on a shorter period from inception on March 2, 2006.
Liquidity and Capital Resources
Shinyo Sawako Limited financed the acquisition of the vessel Shinyo Sawako with a $32.0 million secured loan pursuant to a loan agreement, dated June 2, 2006, with HSH Nordbank AG, Nordea Bank Danmark A/S and DVB Group Merchant Bank (Asia) Ltd. The loan is repayable in quarterly installments and bears interest at a rate of LIBOR plus 1.00% per annum and is guaranteed by Vanship and Clipper. The loan will be repaid upon closing of the Business Combination. Shinyo Sawako Limited also received a $54,125,000 loan on March 3, 2006 from Van-Clipper at an interest rate of 5% per annum. Shinyo Sawako Limited has received a letter of support from Van-Clipper that confirms Van-Clipper’s intention to provide continuing and unlimited financial support to the company so as to enable the company to meet its liabilities when they fall due. This letter of support will be withdrawn upon completion of the Business Combination.
Working capital is current assets minus current liabilities including the current portion of long-term debt. Shinyo Sawako Limited’s working capital was a deficit of $3.4 million as of December 31, 2007 versus a deficit of $1.2 million as of December 31, 2006.
Net cash from operating activities . Shinyo Sawako Limited’s net cash from operating activities was $10.1 million for the year ended December 31, 2007, a decrease of $0.4 million versus $10.5 million in the period from March 2, 2006 to December 31, 2006. The change was primarily attributable to a decrease in net income.
Net cash used in investing activities . Shinyo Sawako Limited did not use any cash for investing activities for the year ended December 31, 2007 compared to $53.9 million used in the period from March 2, 2006 to December 31, 2006, which reflected the purchase of the vessel Shinyo Sawako.
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Net cash from (used in) financing activities . Shinyo Sawako Limited used $9.1 million in financing activities for the year ended December 31, 2007 compared to $49.1 million of net cash from financing activities in the period from March 2, 2006 to December 31, 2006. During 2006, a bank loan and loan from related party were obtained to finance the purchase of the vessel Shinyo Sawako and this resulted in a large cash inflow from financing activities in 2006.
Indebtedness and Contractual Obligations
Shinyo Sawako Limited’s long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2007.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3 Years | 3 – 5 Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 23,450,000 | $ | 5,700,000 | $ | 11,400,000 | $ | 4,225,000 | $ | 2,125,000 | ||||||||||
| Interest Payments on Bank Loan (1) | $ | 2,095,499 | $ | 798,597 | $ | 941,837 | $ | 297,178 | $ | 57,887 | ||||||||||
| Long-Term Loan from Related Party | $ | 16,670,391 | 0 | 0 | 0 | $ | 16,670,391 | |||||||||||||
| Interest Payments on Loan from Related Party (2) | $ | 5,420,193 | $ | 833,520 | $ | 1,667,039 | $ | 1,667,039 | $ | 1,252,595 | ||||||||||
| Ship Management Obligations (3) | $ | 19,000 | $ | 19,000 | 0 | 0 | 0 | |||||||||||||
| Total | $ | 47,655,083 | $ | 7,351,117 | $ | 14,008,876 | $ | 6,189,217 | $ | 20,105,873 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% per annum and a margin of 1.0%. |
| (2) | Assuming a fixed rate of 5.0% per annum. |
| (3) | Based on a management fee of $9,500 per month pursuant to a management contract terminable by the company upon two months’ notice. |
Quantitative and Qualitative Disclosure About Market Risk
The SPVs are exposed to market risk arising from changes in interest rates, primarily resulting from the floating rates of their borrowings. Except for Shinyo Navigator Limited, none of the SPVs have entered into interest rate swaps to manage such interest rate risk.
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INFORMATION CONCERNING ENERGY INFRASTRUCTURE
General: Initial Public Offering
Energy Infrastructure is a Business Combination Company TM , or BCC TM , which is a blank check company formed to acquire, through a merger, capital stock exchange, asset acquisition or similar business combination, one or more businesses that support the process of bringing energy, in the form of crude oil, natural and liquefied petroleum gas, and refined and specialized products (such as petrochemicals), from production to final consumption throughout the world. On July 21, 2006, Energy Infrastructure consummated its initial public offering of 20,250,000 units with each unit consisting of one share of its common stock and one warrant. Each warrant entitles the holder to purchase one share of Energy Infrastructure common stock at an exercise price of $8.00 per share. The units sold in Energy Infrastructure’s initial public offering were sold at an offering price of $10.00 per unit, generating gross proceeds of $202,500,000. Prior to the closing of Energy Infrastructure’s initial public offering, Energy Corp., a company formed under the laws of the Cayman Islands and controlled by Energy Infrastructure’s President and Chief Operating Officer purchased an aggregate of 825,398 units at a price of $10.00 per unit in a private placement, for aggregate gross proceeds of $8,253,980. On August 31, 2006 the underwriters of Energy Infrastructure’s initial public offering exercised their over allotment option to purchase an additional 675,000 units, generating an additional $6,750,000 in gross proceeds. This resulted in a total of $209,250,000 in net proceeds, including certain deferred offering costs and deferred placement fees being held in the Trust Account. The net proceeds deposited into the Trust Account remain on deposit in the Trust Account earning interest. As of March 31, 2008, there was $217,799,903 held in the Trust Account, consisting of $8,549,903 accrued interest. Pursuant to the Trust Agreement between Continental Stock Transfer & Trust Company and us, we are entitled to draw up to $3,430,111 of interest earned on the proceeds held in the Trust Account to fund our working capital requirements. Through March 31, 2008, we drew an aggregate of $2,881,775 of interest earned through such date for working capital requirements.
Fair Market Value of Target Business
Pursuant to the terms of Energy Infrastructure’s initial public offering, the initial target business that Energy Infrastructure acquires must have a fair market value equal to at least 80% of the amount in the Trust Account (exclusive of the underwriters’ contingent compensation and Maxim Group LLC’s contingent placement fees being held in the Trust Account) at the time of the Business Combination, determined by Energy Infrastructure’s board of directors based on standards generally accepted by the financial community, such as actual and potential sales, earnings, cash flow and book value. Energy Infrastructure is not required to obtain an opinion from an investment banking firm as to fair market value if its board independently determines that the target business has sufficient fair market value, however, it has obtained a fairness opinion from New Century Capital Partners, an investment banking firm.
Liquidation If No Business Combination
If Energy Infrastructure does not complete a business combination with a target business by July 21, 2008, Energy Infrastructure will be dissolved as a part of a plan of dissolution and liquidation in accordance with the applicable provisions of General Corporation Law of the State of Delaware, or DGCL, and will distribute to holders of shares that were initially issued in its initial public offering, in proportion to their respective equity interests, sums in the Trust Account, inclusive of any interest, plus any remaining available assets. In the event Energy Infrastructure seeks stockholder approval for a plan of dissolution and distribution and does not obtain such approval, it will nonetheless continue to pursue stockholder approval for its dissolution. Pursuant to the terms of Energy Infrastructure’s amended and restated certificate of incorporation, its directors have agreed to dissolve after July 21, 2008 (assuming that there has been no business combination consummated), and Energy Infrastructure’s powers following the expiration of the permitted time period for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up its affairs, including liquidation. The funds held in the Trust Account may not be distributed except upon Energy Infrastructure’s dissolution and, unless and until such approval is obtained from Energy Infrastructure’s stockholders, the funds held in the Trust Account will not be released. Consequently, holders of a majority of Energy Infrastructure’s outstanding stock must approve its dissolution in order to receive the funds held in the Trust Account and the funds will not be available for any other corporate purpose (although they may be subject to creditor’s claims as discussed elsewhere in this joint proxy
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statement/prospectus). Immediately upon the approval by Energy Infrastructure’s stockholders of a plan of dissolution and distribution, Energy Infrastructure will liquidate the Trust Account to the holders of shares that were initially issued in its initial public offering (subject to any provision for unpaid claims against Energy Infrastructure which it is advised must or should be withheld). Stockholders of Energy Infrastructure who acquired their shares prior to Energy Infrastructure’s initial public offering have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them prior to the initial public offering. There will be no distribution from the Trust Account with respect to Energy Infrastructure’s warrants.
Under the DGCL, Energy Infrastructure stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. Energy Infrastructure has not obtained waivers of claims against the Trust Account from any of its current creditors. As of March 31, 2008, claims by third parties against Energy Infrastructure amounted to $856,044 and Energy Infrastructure had resources of $280,007 outside the Trust Account to satisfy such claims. In the event of liquidation, if working capital funds are insufficient to satisfy third party claims, creditors may bring a cause of action under Delaware law. The DGCL provides for limitations on the potential liability of stockholders if Energy Infrastructure winds up its affairs in compliance with either Section 280 or Section 281(b) of that statute following a dissolution. If Energy Infrastructure complies with either procedure, the DGCL (i) limits the potential liability of each stockholder for claims against Energy Infrastructure to the lesser of the stockholder’s pro-rata share of the claim or the amount distributed to the stockholder in liquidation and (ii) limits the aggregate liability of any stockholder for all claims against Energy Infrastructure to the amount distributed to the stockholder in dissolution. If Energy Infrastructure were to comply with Section 280 instead of Section 281(b), the DGCL also would operate to extinguish the potential liability of its stockholders for any claims against Energy Infrastructure, unless litigation with respect to such claim has been commenced prior to the expiration of the statutory winding-up period under Delaware law (generally three years). In addition, compliance with Section 280 could potentially operate to bar certain claims if the claimant does not take specified actions within certain time frames specified in the statute.
In connection with our initial public offering, our initial stockholders each entered into a letter agreement whereby our initial stockholders agreed to indemnify Energy Infrastructure against any loss, liability, claims, damage and expense whatsoever (including, but not limited to, any and all legal and other expenses reasonably incurred in investigating, preparing or defending against any litigation, whether pending or threatened, or any claim whatsoever) for which Energy Infrastructure may become subject as a result of any claim by any vendor that is owed money by Energy Infrastructure for services rendered or products sold but only to the extent necessary to ensure that such loss, liability, claim, damage or expense does not reduce the initial $209,250,000 in the Trust Account. Energy Infrastructure’s officers and directors have not provided personal guarantees for outstanding payment obligations of Energy Infrastructure. However, pursuant to this letter agreement, Energy Infrastructure may seek indemnity from the initial stockholders to the extent amounts in the Trust Account are not sufficient to fund the Energy Infrastructure’s liabilities and expenses.
Even though compliance with Section 280 of the DGCL would provide additional protections to both Energy Infrastructure’s directors and stockholders from potential liability for third party claims against Energy Infrastructure, it is Energy Infrastructure’s intention to make liquidating distributions to its stockholders as soon as reasonably possible following any dissolution and, therefore, it does not expect that its board of directors will elect to comply with the more complex procedures of Section 280. Because Energy Infrastructure will most likely not be complying with Section 280, it will seek stockholder approval to comply with Section 281(b) of the DGCL, requiring it to adopt a plan of dissolution that will provide for its payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against Energy Infrastructure within the subsequent ten years. As such, Energy Infrastructure’s stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution. Because Energy Infrastructure is a blank check company, rather than an operating company, and its operations have been limited to searching for prospective target businesses to acquire, the only other claims likely to arise would be from its vendors (such as accountants, lawyers, investment bankers, etc.). Energy Infrastructure has not entered into arrangements with any significant creditors to waive any right, title, interest or claim of any kind in or to any monies held in the Trust Account.
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Energy Infrastructure expects that all costs associated with the implementation and completion of its plan of dissolution and liquidation, which it currently estimates to be approximately $60,000 to $85,000, will be funded by any funds not held in the Trust Account. There currently are not, and may not at that time, be sufficient funds for such purpose, in which event Energy Infrastructure would have to seek funding or other accommodation to complete the dissolution and liquidation.
Energy Infrastructure currently believes that any plan of dissolution and distribution would proceed in the following manner:
| • | its board of directors will, consistent with its obligations described in its charter to dissolve, prior to the passing of such deadline, convene and adopt a specific plan of dissolution and distribution, which it will then vote to recommend to its stockholders; at such time it will also cause to be prepared a preliminary proxy statement setting out such plan of dissolution and distribution and the board’s recommendation of such plan; |
| • | upon such deadline, it would file the preliminary proxy statement with the SEC; |
| • | if the SEC does not review the preliminary proxy statement, then approximately ten days following the passing of such deadline, Energy Infrastructure will mail the proxy statement to its stockholders, and approximately 30 days following the passing of such deadline it will convene a meeting of its stockholders at which they will either approve or reject the plan of dissolution and distribution; and |
| • | if the SEC does review the preliminary proxy statement, Energy Infrastructure estimates that it will receive its comments approximately 30 days following the passing of such deadline. It will mail the proxy statements to its stockholders following the conclusion of the comment and review process (the length of which cannot be predicted with certainty), and it will convene a meeting of its stockholders at which it will either approve or reject its plan of dissolution and distribution. |
In the event Energy Infrastructure seeks stockholder approval for a plan of dissolution and distribution and does not obtain such approval, it will nonetheless continue to pursue stockholder approval for its dissolution. Pursuant to the terms of its charter, its powers following the expiration of the permitted time period for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up its affairs, including liquidation. The funds held in the Trust Account may not be distributed except upon Energy Infrastructure’s dissolution (subject to third party claims as aforesaid) and, unless and until such approval is obtained from its stockholders, the funds held in its Trust Account will not be released (subject to such claims). Consequently, holders of a majority of Energy Infrastructure’s outstanding stock must approve its dissolution in order to receive the funds held in the Trust Account and the funds will not be available for any other corporate purpose (although they may be subject to such claims). In addition, if Energy Infrastructure seeks approval from its stockholders to consummate a business combination within 90 days of July 21, 2008, the date by which it is required to consummate a business combination, the proxy statement related to such business combination will also seek stockholder approval for its board’s recommended plan of distribution and dissolution, in the event its stockholders do not approve such business combination. If no proxy statement seeking the approval of its stockholders for a business combination has been filed 30 days prior to July 21, 2008, Energy Infrastructure’s board will, prior to such date, convene, adopt and recommend to its stockholders a plan of dissolution and distribution and on such date file a proxy statement with the SEC seeking stockholder approval for such plan. Immediately upon the approval by Energy Infrastructure’s stockholders of its plan of dissolution and distribution, Energy Infrastructure will liquidate the Trust Account to the holders of its shares initially purchased in its initial public offering.
Property
Energy Infrastructure maintains its executive offices at Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899 and its telephone number is (302) 656-1771. We sublease these premises from Wilmington Trust SP Services, Inc., a Delaware corporation, or Wilmington Trust. Wilmington Trust provides Energy Infrastructure with certain administrative, technology and secretarial services, as well as the use of certain limited office space at this location at an annual cost of $10,000 pursuant to an agreement between Energy Infrastructure and Wilmington Trust.
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Employees
Energy Infrastructure does not have any full time employees. Energy Infrastructure has four officers, two of whom are also members of its board of directors. These individuals are not obligated to contribute any specific number of hours per week and since Energy Infrastructure’s initial public offering, have devoted such time as they deem necessary to Energy Infrastructure’s affairs. The amount of time they devote in any time period varies based on the availability of suitable target businesses to investigate.
Legal Proceedings
Energy Infrastructure is not currently a party to any litigation, and is not aware of any threatened litigation that would have a material adverse effect on its business.
Directors and Executive Officers
Mr. Andreas Theotokis serves as Chairman of the board. Mr. Arie Silverberg serves as Chief Executive Officer and director. Mr. George Sagredos serves as Chief Operating Officer, President and director. Mr. Marios Pantazopoulos serves as Chief Financial Officer and director. Messrs. Jonathan Kollek, David Wong, Peter Blumen, Maximos Kremos and Philippe Meyer each serve as directors.
For further information concerning the senior executive officers and directors of Energy Infrastructure, please read “Information Concerning Energy Merger Directors and Executive Officers.”
Executive Compensation
Except for $14,064,154 of stock-based compensation (in the form of stock options issued to Mr. Sagredos, our President and Chief Operation Officer, and Mr. Theotokis, our Chairman of the Board of Directors, which options will be cancelled upon consummation of the Business Combination) and 1,000,000 units of Energy Merger to be issued to George Sagredos by Energy Merger prior to consummation of the Business Combination, no executive officer has received any cash compensation for services rendered and no compensation of any kind, including finder’s and consulting fees, will be paid to any of Energy Infrastructure’s officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with the Redomiciliation Merger. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on Energy Infrastructure’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. h2Energy Infrastructure Principal Stockholders
The following table sets forth, as of March 31, 2008, certain information regarding beneficial ownership of Energy Infrastructure’s common stock by each person who is known by Energy Infrastructure to beneficially own more than 5% of its common stock. The table also identifies the stock ownership of each of Energy Infrastructure’s directors, each of its officers, and all directors and officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or redemption of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
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| Name and Address of Beneficial Owner (1) |
Amount and Nature of
Beneficial Ownership (2) (3) |
Percentage of Outstanding Common Stock | ||||||
| Arie Silverberg | 526,885 | 1.94 | % | |||||
| Marios Pantazopoulos (4) | 490,003 | 1.80 | % | |||||
| George Sagredos (5) (6) | 4,418,753 | 16.23 | % | |||||
| Andreas Theotokis (6) (7) | 4,418,753 | 16.23 | % | |||||
| Jonathan Kollek | 526,885 | 1.94 | % | |||||
| David Wong | 131,721 | * | ||||||
| Maximos Kremos | 0 | * | ||||||
| Peter Blumen | 0 | * | ||||||
| Energy Corp. (8) | 4,418,753 | 16.23 | % | |||||
| Sapling, LLC | 1,802,108 | 6.62 | % | |||||
| Acqua Wellington North American Equities, Ltd. | 1,378,520 | 5.06 | % | |||||
| All directors and executive officers as a group (8 individuals) (4) | 6,094,247 | 22.39 | % | |||||
| * | less than one (1%) percent |
| (1) | Unless otherwise indicated, the business address of each of the individuals is Suite 1300, 1105 North Market Street, Wilmington, Delaware 19899. |
| (2) | Does not include shares of common stock issuable upon exercise of warrants that are not exercisable in the next 60 days. |
| (3) | Energy Infrastructure’s existing officers and directors have agreed to surrender to us for cancellation up to an aggregate of 270,000 shares in the event, and to the extent, stockholders exercise their right to redeem their shares for cash upon a business combination. The share amounts do not reflect any surrender of shares. See “Background and Reasons for the Business Combination and the Redomiciliation Merger — Interest of Energy Infrastructure Directors and Officers in the Business Combination.” |
| (4) | Does not include 1,000,000 shares of Energy Merger common stock underlying units (giving effect to the exercise of the warrants included in such units) which will be issued to Mr. Sagredos upon completion of the Business Combination, which he has agreed to assign and transfer to Mr. Pantazopoulos. |
| (5) | Reflects shares of common stock owned by Energy Corp., a corporation organized under the laws of the Cayman Islands, which is wholly-owned by Energy Star Trust, a Cayman Islands trust. Each of Mr. Sagredos and Mr. Theotokis, as co-enforcers and beneficiaries of Energy Star Trust, has voting and dispositive control over such shares owned by Energy Corp. |
| (6) | Does not include (i) 2,688,750 shares of our common stock underlying options issued to Mr. Sagredos, or his assignees, which options will be terminated upon the completion of the Business Combination, or (ii) up to 537,000 shares of common stock underlying units that will be issued upon the consummation of the Business Combination upon conversion of loans made by an off-shore entity controlled by Mr. Sagredos into units (giving effect to the exercise of warrants included in such units), or (iii) 2,000,000 shares of Energy Merger common stock underlying units (giving effect to the exercise of warrants included in such units) to be issued to Mr. Sagredos, or his assignees upon consummation of the Business Combination, 1,000,000 of which he has agreed to assign and transfer to Mr. Pantazopoulos (giving effect to the exercise of warrants included in such units). See the section entitled, “Certain Relationships and Related Transactions.” |
| (7) | Does not include the issuance of up to 896,250 shares of our common stock underlying options issued to Mr. Theotokis, or his assignees, which options will be terminated upon the consummation of the Business Combination. |
| (8) | The address of Energy Corp. is c/o Genesis Trust & Corporate Services Ltd., P.O. Box 448, Georgetown, Grand Cayman KYI-1106, Cayman Islands. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION OF ENERGY INFRASTRUCTURE
Overview
We were formed on August 11, 2005 to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses that supports the process of bringing energy, in the form of crude oil, natural and liquefied petroleum gas, and refined and specialized products (such as petrochemicals), from production to final consumption throughout the world. Our initial business combination must be with a target business or businesses whose fair market value is at least equal to 80% of the amount in the Trust Account (excluding any funds held for the benefit of the underwriters and Maxim Group LLC) at the time of such acquisition. We intend to utilize cash derived from the proceeds of our recently completed initial public offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination.
Results of Operations
Three-month Periods Ended March 31, 2008 and March 31, 2007
We incurred a net loss of $2,340,058 for the three-month period ended March 31, 2008. The net loss consisted of $3,302,946 of operating expenses and $19,066 of interest expense, reduced by interest income of $881,954. Operating expenses of $3,302,946 consisted of consulting and professional fees of $191,337, stock-based compensation of $2,909,825, insurance expense of $32,000, travel expense of $3,207, Delaware franchise fees of $41,250 and other operating costs of $25,327.
During the three-month period ended March 31, 2007, we incurred a net loss of $1,565,997. The net loss consisted of $3,316,275 of operating expenses and $26,943 of interest expense, reduced by interest income of $1,777,221. Operating expenses of $3,316,275 consisted of consulting and professional fees of $280,450, stock-based compensation of $2,909,825, insurance expense of $37,813, travel expense of $24,805, Delaware franchise fees of $41,250 and other operating costs of $22,132.
The trust account earned interest of $1,276,742 during the three months ended March 31, 2008, including $380,694 of interest income attributable to common stock subject to possible redemption and $14,095 of interest income attributed to deferred underwriters’ fees included in the trust account. For the three months ended March 31, 2007, the trust account earned interest of $1,795,834, including $19,826 of interest income attributable to deferred underwriters’ fees included in the trust account.
Total interest income earned on the trust account decreased from $1,795,834, for the three-month period ended March 31, 2007, to $1,276,742 for the three-month period ended March 31, 2008 due to a decrease in the coupon rate from 3.458%, during the three-month period ended March 31, 2007, to 2.76% during the three-month period ended March 31, 2008, as a result of market conditions. Due to permissible withdrawals of interest from the trust account for debt service and working capital purposes, no interest income was attributable to common stock subject to possible redemption during the three-month ended March 31, 2007.
Until we enter into a business combination, we will not generate operating revenues.
Years Ended December 31, 2007 and December 31, 2006 and the Period from August 11, 2005 (Inception) to December 31, 2005
For the year ended December 31, 2007 we incurred a net loss of $6,704,000. The net loss consisted of $12,971,706 of operating expenses and $101,762 of interest expense. Operating expenses of $12,971,706 consisted of consulting and professional fees of $696,577, stock-based compensation of $11,639,300, insurance expense of $144,469, office expense of $74,050, travel expense of $222,950, state franchise tax of $163,707 and other operating costs of $30,653. During this period, Energy Infrastructure earned interest income of $6,369,468.
For the year ended December 31, 2006 we incurred a net loss of $2,841,301. The net loss consisted of $5,924,945 of operating expenses and $55,899 of interest expense. Operating expenses of $5,924,945 consisted of consulting and professional fees of $171,301, stock-based compensation of $5,334,679, insurance expense of $44,115, office expense of $48,812, travel expense of $151,676, state franchise tax of $167,250 and other operating costs of $7,112. During this period, Energy Infrastructure earned interest income of $3,139,543.
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The increase in net loss and operating expenses for the year ended December 31, 2007 as compared to the year ended December 31, 2006, reflects a full year of expenditures by the Company in pursuit of a business combination, as compared to only five months of such expenditures in 2006.
The increase in interest income from $3,139,543 for the year ended December 31, 2006 to $6,369,468 for the year ended December 31, 2007 is a result of the Trust Account being funded for a full year in 2007 as opposed to approximately five months in 2006, following the Company’s initial public offering, which closed on July 21, 2006.
For the period from inception (August 11, 2005) to December 31, 2005 we incurred formation costs of $910 and interest expense of $2,750. During this period the Company earned $1,781 of interest income.
Liquidity and Capital Resources
On July 17, 2006, we sold 825,398 units in a Regulation S private placement to Energy Corp., a corporation formed under the laws of the Cayman Islands, which is controlled by our President and Chief Operating Officer. On July 21, 2006, we consummated our initial public offering of 20,250,000 units. Each unit in the private placement and the public offering consists of one share of common stock and one redeemable common stock purchase warrant. The common stock and warrants included in the units began to trade separately on October 4, 2006, and trading in the units ceased on such date. Each warrant entitles the holder to purchase from us one share of our common stock at an exercise price of $8.00. Prior to the closing of the initial public offering Robert Ventures Limited, an off-shore company controlled by the our President and Chief Operating Officer made a convertible loan to us in the principal amount of $2,550,000 and our President and Chief Operating Officer made a term loan to us in the principal amount of $475,000.
On July 21, 2006, the closing date of our public offering, $202,500,000 was placed in the Trust Account at Lehman Brothers’ Inc. maintained by Continental Stock Transfer & Trust Company, New York, New York, as trustee. This amount includes the net proceeds of the private placement and our public offering, the $2,550,000 convertible loan and the $475,000 term loan, $2,107,540 of contingent underwriting compensation and placement fees, to be paid to the underwriters and Maxim Group LLC, respectively, if and only if, a business combination is consummated, and $412,699 in deferred placement fees to be paid to Maxim Group LLC in connection with the Private Placement. The funds in the Trust Account will be invested until the earlier of (i) the consummation of Energy Infrastructure’s first business combination or (ii) the liquidation of the Trust Account as part of a plan of dissolution and liquidation approved by Energy Infrastructure’s stockholders.
On August 31, 2006, the underwriters of our public offering exercised their option to purchase an additional 675,000 units to cover over-allotments. An additional $6,750,000 was placed in the Trust Account, bringing the total amount in the Trust Account to $209,250,000. This additional amount includes $6,615,000, representing the net proceeds of the over-allotment and an additional convertible loan made to us by Robert Ventures Limited in the amount of $135,000.
We will use substantially all of the net proceeds of our private placement and initial public offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the Trust Account, as well as any other net proceeds not expended, will be used to finance the operations of the target business. We have agreed with Maxim Group, LLC, the representative of the underwriters, that up to $3,430,111 of the interest earned on the proceeds being held in the trust account for our benefit (net of taxes payable) will be released to us upon our request, and in such intervals and in such amounts as we desire and are available to fund our working capital. We believe that the working capital available to us, in addition to the funds available to us outside of the trust account will be sufficient to either complete a business combination or liquidate. Over this time, we have estimated that the $3,430,111 shall be allocated approximately as follows: $1,017,412 for working capital and reserves (including finders’ fees, consulting fees or other similar compensation, potential deposits, down payments, franchise taxes or funding of a “no-shop” provision with respect to a particular business combination and the costs of dissolution, if any); $7,500 per month in connection with a consulting agreement we entered into on October 16, 2006; $800,000 for legal, accounting and other expenses attendant to the structuring and negotiation of a business combination; $250,000 with respect to legal and accounting fees relating to our SEC reporting obligations; $620,000 for due
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diligence, identification and research of prospective target business and reimbursement of out of pocket due diligence expenses to management; $150,000 for director and officer liability insurance premiums; and $412,699 for placement fees to Maxim Group LLC related to the Regulation S private placement. In addition, additional interest earned on the proceeds held in trust will be allocated (i) to make quarterly interest payments aggregating approximately $215,000 on the $2,550,000 convertible loan and the $135,000 convertible loan and (ii) to repay the $475,000 term loan. Accrued interest shall also be applied to repay the principal of the convertible loans on the earlier of our dissolution and liquidation or a business combination to the extent such loans have not been converted.
In March 2008, Energy EIAC Capital Ltd., an off-shore company controlled by George Sagredos, our President and Chief Operating Officer, loaned $500,000 to us in the form of a note payable. Such loan bears interest at a per annum interest rate equivalent to the per annum interest rate applied to the funds held in the Trust Account during the same period that such loan is outstanding (average 2.76% during the three months ended March 31, 2008). We are obligated to repay the principal and accrued interest on such loan following the earlier of (i) the consummation of a Business Combination or (ii) the dissolution and liquidation of Energy Infrastructure.
In May 2008 and June 2008, Sanibel Intertrade Corp., an off-shore company controlled by George Sagredos loaned an aggregate of $400,000 to us in the form of notes payable. Such loans bear interest at a per annum interest rate equivalent to the per annum interest rate applied to the funds held in the Trust Account during the same period that such loan is outstanding. We are obligated to repay the principal and accrued interest on such loans following the earlier of (i) the consummation of a Business Combination or (ii) the dissolution and liquidation of Energy Infrastructure.
In addition to the above described allocation of interest accrued on the trust account, at March 31, 2008 we had funds aggregating $11,003 held outside of the trust account.
Pursuant to amendments to the Underwriting Agreement effective as of September 30, 2006 and December 26, 2006, Maxim Group LLC, as representative of the underwriters, agreed to waive Energy Infrastructure’s obligation to pay the underwriters deferred compensation of $500,000. In connection with such amendments, we recorded a credit to additional paid in capital in the amount of $500,000 during the fiscal year ended December 31, 2006.
Pursuant to Energy Infrastructure’s certificate of incorporation, holders of shares purchased in the Energy Infrastructure’s initial public offering (other than the Energy Infrastructure’s initial stockholders) may vote against the business combination and demand that Energy Infrastructure redeem their shares for a cash payment of $10.00 per share, plus a portion of the interest earned not previously released to it (net of taxes payable), as of the record date. Energy Infrastructure will not consummate the business combination if holders of 6,525,119 or more shares exercise these redemption rights. If holders of the maximum permissible number of shares elect redemption without Energy Infrastructure being required to abandon the business combination, Energy Infrastructure may not have funds available to proceed with the business combination unless it is able to obtain additional capital. Assuming that Energy Infrastructure’s stockholders approve the Business Combination, Energy Merger intends to sell such number of shares of its common stock equal to the number of shares of Energy Infrastructure’s common stock that are redeemed upon completion of the business combination. The proceeds of such sale would be used to fund redemptions of common stock by Energy Infrastructure’s stockholders. There can be no assurance that Energy Merger will be able to successfully complete such sale. To the extent such sale is not completed and Energy Infrastructure has insufficient funds to complete the business combination, the business combination will not occur, and it is likely that Energy Infrastructure will be required to dissolve and liquidate.
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Contractual Obligations
At March 31, 2008 Energy Infrastructure had the following contractual obligations.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligation | Total | Less Than 1 Year |
1 – 3
Years |
3 – 5
Years |
More Than 5 Years | |||||||||||||||
| Amounts due to underwriter | $ | 2,545,750 | $ | 2,545,750 | $ | — | $ | — | $ | — | ||||||||||
| Principal and interest due on notes payable to shareholder | 3,221,252 | 3,221,252 | — | — | — | |||||||||||||||
| Redeemable common stock | 66,156,138 | 66,156,138 | ||||||||||||||||||
| Total | $ | 71,923,140 | $ | 71,923,140 | $ | — | $ | — | $ | — | ||||||||||
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
INFORMATION CONCERNING ENERGY MERGER
General
Energy Infrastructure Merger Corporation, a wholly-owned subsidiary of Energy Infrastructure Acquisition Corp., was formed on November 30, 2007 under the laws of the Republic of the Marshall Islands. Upon completion of the Business Combination, Energy Merger will own a fleet of nine very large crude carriers, or VLCCs. We refer collectively to these nine VLCCs as the initial fleet.
Upon the completion of Business Combination, Captain Charles Arthur Joseph Vanderperre will serve as Energy Merger’s Chairman and Mr. Fred Cheng will serve as a director and Chief Executive Officer of Energy Merger. Captain Vanderperre and Mr. Cheng are the co-founders and directors of Vanship and co-founders of the Manager. Captain Vanderperre controls the Manager and founded and actively manages its affiliate, Univan. Upon completion of the Business Combination, Energy Merger is expected to be the only Asian based public shipping company listed on a U.S. securities exchange. Energy Merger believes that its location in Asia and the experience of its management team in Asian shipping markets is expected to provide it with broad access to a diverse customer base with established major Asian multi-national corporations.
The initial fleet has a combined cargo-carrying capacity of 2,519,213 deadweight tons and is expected to have an average age of approximately 12.9 years upon completion of the Business Combination. The initial fleet consists of five modern double hull VLCCs that are expected to have an average age of approximately 9.5 years and four single hull VLCCs that are expected to have an average age of approximately 16.7 years upon completion of the Business Combination. All of the vessels in the initial fleet operate under period charter agreements with established major Asian multi-national corporations, including Sinochem Corporation, DOSCO (subsidiary of the Chinese state-owned COSCO), Formosa Petrochemical Corp., S-Oil Corporation and Sanko Line. Upon completion of the Business Combination, the average remaining charter duration for the vessels in the initial fleet is expected to be approximately 5.7 years, consisting of approximately 8.5 years remaining on average for the double hull vessels and approximately 2.2 years remaining on average for the single hull vessels. Because all of the vessels in the initial fleet operate under period charter agreements, Energy Merger’s exposure to downturns in the market while these charter agreements are in effect is significantly diminished. Additionally, the charter agreements under which the Shinyo Kannika and the Shinyo Ocean operate have a profit sharing component that provides the opportunity for additional revenue when spot market rates are robust. The vessel C. Dream is expected to also have a profit sharing component in its charter agreement commencing in the first half of 2009.
Competitive Strengths
Energy Merger believes that its management, its fleet, and the long-standing relationships of its future management team with Asian multi-national corporations will provide a number of competitive strengths that will help position it as a leading owner and operator of VLCCs, including:
Based in Asia, listed on a U.S. exchange . Energy Merger believes that being based in Asia will allow it to benefit from the continued growth in China, India and Southeast Asia. Energy Merger believes that its
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ability to do business with large Asian multi-national corporations should be enhanced because of its close proximity to their principals and senior executives. Furthermore, Asia accounts for a significant portion of global demand and the majority of incremental growth in demand for crude oil. As the only Asian based shipping company listed on a U.S. exchange, Energy Merger should have direct access to the U.S. capital markets, the largest capital pool worldwide.
Management and Board with global expertise . Energy Merger believes that upon completion of the Business Combination, the global shipping industry experience of its Chairman, its Chief Executive Officer and the other members of its board of directors will position it well to execute its growth strategy. Captain Vanderperre and Mr. Cheng have experience in all facets of the wet and dry shipping industry, including, owning, operating, technical and third party ship management, chartering in the spot and period markets, new and secondhand market sales and purchases and capital raising.
Established customer relationships . The individuals who will comprise Energy Merger’s management team and directors upon completion of the Business Combination have long-term relationships with Asian multi-national corporations, charterers, sales and purchase brokers and other vessel owners.
Stable cash flows supported by long-term charters . The charter agreements under which the vessels in the initial fleet will operate have strong base rates, which provide stable and transparent cash flows. The profit sharing components in the charter agreements under which two of the vessels in the initial fleet operate, and under which a third vessel is expected to operate beginning in the first half of 2009, provide potential upside from the fixed base rate when spot market conditions are robust. Energy Merger believes that these profit sharing arrangements will enable stockholders to benefit from upturns in the market while having lower risk from downside movements because of the fixed rates associated with the charters.
Focused fleet profile . Energy Merger intends to focus on VLCC tankers, a segment it believes incorporates the greatest shipping market opportunity to exploit the growing demand for energy in Southeast Asia and India. The initial fleet will primarily service the Asian market but will have access to global trading routes in order to service charterers’ needs. Because the initial fleet only includes VLCCs, Energy Merger believes that there is significant potential to increase revenue and lower costs. Operating a homogenous fleet provides the opportunity to exploit economies of scale, facilitating cost reduction and enhancing operational efficiencies, including scheduling flexibility, employee training and other operational efficiencies.
Strong technical management . The day-to-day management of the initial fleet will be handled by the Manager, a company controlled and actively managed by Captain Vanderperre. Energy Merger expects that the Manager will subcontract technical management of the vessels in the initial fleet to its affiliate, Univan. Univan currently manages in excess of 50 vessels, including the vessels in Energy Merger’s initial fleet. Energy Merger believes that outsourcing the day-to-day management of the initial fleet to the Manager will result in operational cost savings due to the economies of scale, while also reducing corporate headcount and overhead expenses. See “ — Energy Merger’s Manager and Management Agreement.”
Strategy
Energy Merger’s primary strategy is to maximize value to its stockholders by pursuing the following strategies:
Strategically expand the fleet via the newbuilding and secondary sale and purchase market . Energy Merger intends to grow its fleet through timely and selective acquisitions of additional vessels in a manner that is accretive to earnings. It will actively monitor the newbuilding and secondary sale and purchase markets, or S&P market, and may pursue the acquisition of one or more VLCCs at any one time.
Leverage long-term relationships with Asian multi-national corporations for future charters . Captain Vanderperre and Mr. Cheng have established relationships with Energy Merger’s charterers over the last seven years, and have had relationships with some of these companies for over 25 years. Three of the five charterers of the vessels in the initial fleet, or their parent companies, are rated investment grade and none of the charterers of the vessels held by the SPVs has ever defaulted on a charter agreement with Vanship or any of its subsidiaries. As Energy Merger pursues acquisition opportunities in the future, it intends to leverage its existing relationships in order to facilitate long-term charters with favorable rates for its vessels when Energy Merger deems it prudent based on prevailing market conditions.
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Focus on longer-term charters to high quality charters . All of the vessels in the initial fleet are chartered out to established Asian multi-national corporations, and are expected to have an average remaining charter duration of approximately 5.7 years at the time of completion of the Business Combination. Energy Merger believes that these charters will provide it with stable cash flows. In the future, Energy Merger may choose to pursue various market opportunities for its vessels which will enable it to capitalize on favorable market conditions, including entering into short-term time and voyage charters, pool arrangements, bareboat charters and profit sharing agreements allowing for additional cash flows in times of robust spot rates.
Modernize the fleet — single-hull to double-hull . Energy Merger’s initial fleet will consist of nine VLCCs of which four will be single-hull vessels. Energy Merger intends to modernize the fleet and divest itself of its single-hull vessels in an opportunistic fashion that allows it to maximize earnings and profit from the sale of these vessels and facilitate the acquisition of additional double-hull VLCCs in the future. Modernizing the fleet to primarily incorporate double-hull VLCCs is expected to enable Energy Merger to continue to attract high quality charterers at robust rates. Of the four single-hull vessels in Energy Merger’s initial fleet, Energy Merger’s future management team believes that the vessel Shinyo Sawako, built in 1995, is the only vessel suitable for conversion to double-hull and will consider such conversion when it is advantageous to do so in terms of securing further employment. Management intends to continue chartering the vessels Shinyo Alliance and Shinyo Mariner, both built in 1991, until 2015 or as long as they can be profitably employed and then sell both vessels for scrap or for conversion to other uses. Management currently intends to sell the vessel Shinyo Jubilee, built in 1988, upon the termination of its current charter in September 2009. All proceeds from the sale of any of Energy Merger's vessels will be required to be applied to pre-pay Energy Merger’s debt under its term loan facility.
Corporate Structure
Energy Merger will be a holding company that will own its vessels through separate wholly-owned subsidiaries. Energy Merger will appoint the Manager to provide technical, administrative and strategic services necessary to support its business. Energy Merger’s Chief Executive Officer and Chief Financial Officer, initially expected to be Mr. Fred Cheng and Mr. Christoph Widmer, respectively, will be made available to Energy Merger by the Manager to manage Energy Merger’s day-to-day operations and all aspects of its financial control. The Manager will provide a variety of ship management services, including purchasing, crewing, vessel maintenance, insurance procurement and claims handling, inspections, and ensuring compliance with flag, class and other statutory requirements. Energy Merger expects that the Manager will subcontract the technical management of the vessels in the initial fleet to its affiliate, Univan. Both the Manager and Univan were founded by and are controlled by Captain Vanderperre. See “ — Energy Merger’s Manager and Management Agreement.”
The Fleet
Set forth below is summary information concerning the initial fleet.
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| Vessel Name | Name of Owner |
Hull
Design |
Capacity (Dwt) | Year Built and Class | Year of Acquisition | Yard | ||||||||||||||||||
| Shinyo Alliance |
Shinyo Alliance
Limited |
Single | 248,034 |
1991
Class NK |
2002 |
Mitsubishi Heavy
Industries, Nagasaki, Japan |
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| C. Dream |
Shinyo Dream
Limited |
Double | 298,570 |
2000
ABS |
2007 |
Kyushu Hitachi
Zosen Corp. of Tamana-Gun, Kumamoto, Japan |
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| Shinyo Kannika |
Shinyo Kannika
Limited |
Double | 287,175 |
2001
ABS |
2004 |
Ishikawajima Harima Heavy
Industries Co. Ltd – Kure Shipyard, Japan |
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| Shinyo Ocean |
Shinyo Ocean
Limited |
Double | 281,395 |
2001
ABS |
2007 |
Ihi Kure,
Hiroshima, Japan |
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| Vessel Name | Name of Owner |
Hull
Design |
Capacity (Dwt) | Year Built and Class | Year of Acquisition | Yard | ||||||||||||||||||
| Shinyo Jubilee |
Shinyo Jubilee
Limited |
Single | 250,192 |
1988
Class NK |
2005 |
Ishikawajima Harima Heavy
Industries Co. Ltd – Kure Shipyard, Japan |
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| Shinyo Splendor |
Shinyo Loyalty
Limited |
Double | 306,474 |
1993
DNV |
2004 |
NKK Tsu Works
Japan |
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| Shinyo Mariner | Shinyo Mariner Limited | Single | 271,208 |
1991
Class NK |
2005 |
NKK Corporation,
Tsu Works, Tsu City, Mie Pref., Japan |
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| Shinyo Navigator | Shinyo Navigator Limited | Double | 300,549 |
1996
Lloyds Register |
2006 |
Hyundai Heavy
Industries, Korea |
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| Shinyo Sawako |
Shinyo Sawako
Limited |
Single | 275,616 |
1995
DNV |
2006 |
Hitachi Zosen,
Ariake Works |
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Charter Arrangements
The following summary of the material terms of the charter agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the charter agreements. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information, you should read the entire charter agreement for each vessel filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part.
Time Charters
All of the vessels in the fleet other than the Shinyo Jubilee are committed under time charter agreements with international companies. Pursuant to these agreements, the SPVs provide a vessel to these companies, or charterers, at a fixed, per-day charter hire rate for a specified term. Under the agreements, the vessel owner is responsible for paying operating costs. The charterers, in addition to the daily charter hire, are generally responsible for the cost of all fuels with respect to the vessels (with certain exceptions, including during off-hire periods), port charges, costs related to towage, pilotage, mooring expenses at loading and discharging facilities and certain operating expenses. The charterers are not obligated to pay the applicable vessel owner charterhire for off-hire days, which include days a vessel is out-of-service due to, among other things, repairs or drydockings. Under the time charter agreements, the vessel owner is generally required, among other things, to keep the related vessels seaworthy, to crew and maintain the vessels and to comply with applicable regulations. The vessel owners are also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance cover. Univan is expected to perform these duties for the SPVs as described below.
The charter agreements under which Shinyo Kannika and Shinyo Ocean operate, and under which C. Dream is expected to operate beginning in the first half of 2009, include a profit sharing component that gives the applicable vessel owner the opportunity to earn additional hire when spot rates are high relative to the daily time charter hire rate. The profit sharing arrangements for Shinyo Kannika and Shinyo Ocean provide that the vessel owner receives 50% of daily income (referenced to the Baltic International Trading Route Index, or BITR) in excess of $44,000 and $43,500, respectively. The profit sharing component for C. Dream, which is expected to commence upon delivery of the vessel to the charterer in the first half of 2009, provides that the vessel owner receives 50% of net average daily time charter earnings between $30,001 and $40,000 and 40% of net average daily time charter earnings above $40,000.
The charter periods are typically, at the charterer’s option, subject to (1) extension or reduction by between 15 and 90 days at the end of the final charter period and (2) extension by any amount of time during the charter period that the vessel is off-hire. A vessel is generally considered to be “off-hire” during any period that it is out-of-service due to damage to or breakdown of the vessel or its equipment or a default or deficiency of its crew. Under certain circumstances the charters may terminate prior to their scheduled termination dates. The terms of the charter agreements vary as to which events or occurrences will cause a charter
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to terminate or give the charterer the option to terminate the charter, but these generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, the failure of the related vessel to meet specified performance criteria, off-hire of the vessel for a specified number of days or war or hostilities breaking out between certain specified countries.
Consecutive Voyage Charter
The vessel Shinyo Jubilee operates under a consecutive voyage charter agreement. Under the consecutive voyage charter agreement, the vessel owner is paid freight (per ton of crude oil) on the basis of moving crude oil from a loading port to a discharge port for multiple voyages through September 2009. Under this consecutive voyage charter, each voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo. The freight rate is based on a fixed Worldscale rate. The vessel owner is responsible for paying both operating costs and voyage costs and the charterer is generally responsible for any delay at the loading or discharging ports. Under the consecutive voyage charter agreement, the vessel owner is generally required, among other things, to keep the related vessel seaworthy, to crew and maintain the vessel and to comply with applicable regulations. The vessel owner is also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance cover. The Manager is expected to perform these duties for Shinyo Jubilee Limited as described below.
Set forth below is summary information concerning the charters as of December 31, 2007.
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| Type of Vessel |
Daily Time Charter
Hire Rate* |
Type | Charter Expiry | |||||||||
| Shinyo Splendor | $ | 39,500 | Time Charter | May 2014 (1) | ||||||||
| Shinyo Kannika | $ | 39,000 | Time Charter | February 2017 (2) | ||||||||
| Shinyo Navigator | $ | 43,800 | Time Charter | December 2016 | ||||||||
| Shinyo Ocean | $ | 38,500 | Time Charter | January 2017 (3) | ||||||||
| C. Dream | $ | 28,900 | Time Charter | March 2009 (4) | ||||||||
| C. Dream | $ | 30,000 | Time Charter | March 2019 (4)(5) | ||||||||
| Shinyo Alliance | $ | 29,800 | Time Charter | October 2010 | ||||||||
| Shinyo Jubilee | $ | 32,000 |
Consecutive
Voyage Charter |
September 2009 (6) | ||||||||
| Shinyo Mariner | $ | 32,800 | Time Charter | June 2010 (7) | ||||||||
| Shinyo Sawako | $ | 39,088 | Time Charter | December 2011 | ||||||||
| * | Gross time charter rate and estimated net time charter equivalent (“TCE”) for consecutive voyage charter. |
| (1) | Charterer has the option to extend time charter for an additional 3 years at $39,000 per day. |
| (2) | Subject to profit sharing provision in which income (referenced to the BITR) in excess of $44,000 per day is split equally between SPV and charterer. |
| (3) | Subject to profit sharing provision in which income (referenced to BITR3) in excess of $43,500 per day is split equally between the SPV and charterer. |
| (4) | Second time charter starts after expiry of first charter. |
| (5) | Subject to profit sharing provision in which actual annual net average daily time charter earnings between $30,001 and $40,000 are split equally between the SPV and charterer, and actual annual net average daily time charter earnings in excess of $40,000 are split 40% to SPV and 60% to charterer. |
| (6) | Estimated Time Charter Equivalent, or TCE. Time charter equivalent is a measure of the average daily revenue performance of a vessel on a per voyage basis. Vanship’s method of calculating TCE is consistent with industry standards and is determined by dividing net voyage revenue by voyage days for the relevant time period. Net voyage revenue are voyage revenue minus voyage expenses. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. |
| (7) | Charterers have the option to extend time charter for an additional 2 years at $31,800 per day. |
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In addition to the general terms of the charter agreements summarized above, the charter agreement for the vessel Shinyo Ocean includes a mutual sale provision whereby either party can request the sale of the vessel provided that a price can be obtained that is at least $3 million greater than the value of the vessel as specified in the charter agreement. In such case, the net proceeds from the sale of the vessel in excess of the vessel’s value will be split in equal parts between the vessel owner and the charterer.
Energy Merger’s Customers
All of the vessels in the initial fleet operate under period charter agreements with established major Asian multi-national corporations. In the year 2008, Energy Merger expects to receive all of its operating revenue from the following five customers: DOSCO (47% of expected revenue), Formosa Petrochemical Corp. (22% of expected revenue), Sinochem Corporation (11% of expected revenue), S-Oil Corporation (10% of expected revenue) and Sanko Line (9% of expected revenue).
Directors and Executive Officers
Set forth below are the names, ages and positions of Energy Merger’s directors and executive officers immediately following the effective date of the Redomiciliation Merger. The board of directors is elected annually on a staggered basis, and each director elected holds office until his successor shall have been duly elected and qualified, except in the event of his death, resignation, removal or the earlier termination of his term of office. Officers are elected from time to time by vote of Energy Merger’s board of directors and hold office until a successor is elected.
Energy Merger’s directors and executive officers are as follows:
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| Name | Age | Position | ||||||
| Captain Vanderperre | 86 | Chairman of the board of directors and Class C Director | ||||||
| Fred Cheng | 56 | Chief Executive Officer and Class C Director | ||||||
| Christoph Widmer | 41 | President, Chief Financial Officer and Class B Director | ||||||
| David A. Lawson | 64 |
Class B Director (Independent director and
member of the Audit Committee) |
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| Shigeru Matsui | 68 | Class A Director (Independent director) | ||||||
| Marios Pantazopoulos | 41 | Class A Director | ||||||
| Mark Pawley | 43 |
Class C Director (Independent director and
Chair of the Audit Committee) |
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| Rod Teeple | 43 |
Class B Director (Independent director and
member of the Audit Committee) |
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Captain Charles Arthur Joseph Vanderperre will be Energy Merger’s Chairman of the board of directors upon completion of the Business Combination and will also serve as the Chairman of board of directors of the Manager. Captain Vanderperre is the founder and Chairman of Univan, a leading global ship management firm with over 50 vessels under management. Univan will provide technical ship management to the vessels in Energy Merger’s fleet. Captain Vanderperre is also a director of Vanship, which he co-founded in 2001. Prior to founding the pre-cursor of Univan in 1973, Captain Vanderperre held a number of positions in the shipping industry including serving as managing director of Wallem Ship Management, Manager of Transportation and Supply for Esso Belgium, and as Master on board vessels operated by Compagnie Maritime Belge and Esso Tankers. Captain Vanderperre’s career in the shipping industry commenced as a cadet in 1938.
Fred Cheng will be Energy Merger’s Chief Executive Officer, a member of Energy Merger’s board of directors and the Chief Executive Officer of the Manager upon completion of the Business Combination. Mr. Cheng has over 35 years experience in the shipping industry with a primary focus on the Asian shipping markets. Mr. Cheng has served as the Managing Director of Shinyo Maritime Corporation, which holds Mr. Cheng’s interest in Vanship. Mr. Cheng has been a director of Vanship since in 2001 and is a co-founder of Vanship. Prior to founding Shinyo and Vanship, Mr. Cheng served from 1978 to 1999 as the Managing Director of Golden Ocean Group, a shipping company which he founded in 1978. Under Mr. Cheng’s leadership, Golden Ocean grew into a leading tanker and dry bulk company but it was adversely affected by the Asian financial crisis in 1997 and was eventually sold under Chapter 11 protection to Frontline, Ltd. From 1973 to
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1978, Mr. Cheng worked with his family shipping company where he began his career in the shipping industry. Mr. Cheng received his B.S. in Mechanical Engineering from Cornell University in 1973.
Christoph Widmer will initially serve as President and Chief Financial Officer of Energy Merger, will be a member of Energy Merger’s board of directors and the President and Chief Operating Officer of the Manager upon completion of the Business Combination. Mr. Widmer has 15 years of experience in the investment banking industry with Credit Suisse. From 2005 to 2007, Mr. Widmer was Co-Head of Credit Suisse’s business serving private equity clients across Asia (excluding Japan) and was responsible for marketing, origination and execution of financial advisory, equity and debt financing transactions. From 2004 to 2005, Mr. Widmer was a Director in Credit Suisse’s Global Industrials Group in Asia (excluding Japan), focusing on industrial and services companies including companies in the transportation sector. Prior to relocating to Hong Kong in 2004, Mr. Widmer was Vice President, Finance and Administration and Chief Financial Officer and a member of the board of directors of Horizon Lines LLC, a U.S. container shipping company based in Charlotte, North Carolina. From 2000 to 2003, Mr. Widmer was a Director in Credit Suisse’s Mergers & Acquisitions Group in New York with a primary focus on the transportation and logistics sectors. From 1991 to 2000, he was an investment banker at Credit Suisse in London, New York and Zurich. From 1989 to 1991, Mr. Widmer served in the Swiss Army, completing his service as a Lieutenant. Mr. Widmer received his B.A. in Politics, Philosophy and Economics from Merton College, Oxford University in 1989.
Dr. David A. Lawson, III will be a member of Energy Merger’s board of directors and will serve on its audit committee upon completion of the Business Combination. Dr Lawson is a senior partner of Bonnard Lawson, a Swiss law firm established by him in 1998. He has over 30 years’ experience in private legal practice and as a corporate counsel, specializing in international litigation and in domestic and international commercial arbitration. Dr Lawson has also represented shipping companies, ship owners, ship management companies and shipping agents on all aspects of shipping and transportation of goods, including the acquisition and financing of vessels, and the advising on agreements of affreightment, time and voyage charter party agreements and crewing and ship management contracts. In addition, Dr Lawson has experience as counsel in resolving shipping disputes, including maritime arbitrations and charter party disputes. Prior to founding Bonnard Lawson, Dr Lawson practiced law in Geneva at Mégévand Grosjean & Revaz, Baker & McKenzie, the Etude Jacquemoud and Inter Maritime Group. Dr Lawson has also managed the law departments of various affiliates of Exxon Corporation. Dr Lawson has published extensively in the areas of international ethical studies relating to cross-border law practice and international commercial arbitration. Dr Lawson’s educational background includes a Doctor of Philosophy in Law from Magdalen College, University of Oxford, a Diploma in Private International Law from The Hague Academy in The Netherlands as well as a Juris Doctor from Golden Gate University in San Francisco.
Shigeru Matsui will be a member of Energy Merger’s board of directors upon completion of the Business Combination. Mr. Matsui has over 43 years experience in the shipping industry and is currently a project ship broker who specializes in tanker chartering for period business, sale and purchase business for second hand tankers as well as newbuilding contracting. Mr. Matsui established Matsui & Company, Ltd. in 1971, a ship brokerage in Tokyo, of which he currently serves as the President and Chief Executive Officer. Mr. Matsui also serves as the managing director of The Japan Shipping Exchange, Inc. and as a director for The Japanese Shipbrokers Association. He has also acted as a maritime arbitrator for The Japanese Shipbrokers Association and is currently a vice chairman of its Maritime Arbitration Committee. In addition, Mr. Matsui served as a director for TK Advisory Board from 1992 to 2007 and as a non-executive director for Golden Ocean Group from 1993 to 2000, a company founded by Mr. Cheng in 1978. Prior to founding Matsui & Company, Ltd., Mr. Matsui served as a tanker chartering broker for Shipbrokers Matsui & Company. Mr. Matsui received his B.A. in English Law from Meiji University in Tokyo.
Marios Pantazopoulos has been Energy Infrastructure’s chief financial officer since inception and a director since December 2005. Since September 2006 he has been the General Manager of LMZ Transoil Shipping Enterprises S.A., an Athens-based ship management company. Between 1998 and 2005, he was the chief financial officer of Oceanbulk Maritime SA, an Athens-based ship management company that is part of the Oceanbulk Group of affiliated companies. At Oceanbulk, Mr. Pantazopoulos was responsible for Oceanbulk’s banking relationships including financing and private wealth management. He facilitated bilateral and syndicated loans with the world’s ten largest shipping banks and also arranged access to private equity in the
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US capital markets. During his tenure at Oceanbulk, his responsibilities also included assessing non-shipping projects, coordinating auditing procedures, reporting to stockholders and supervising Oceanbulk’s financial operations. Before joining Oceanbulk, Mr. Pantazopoulos served from 1991 to 1998, as an assistant director for the project finance and shipping department of Hambros Bank Plc, a UK merchant bank, which was acquired in 1998 by Société Générale. At Hambros, Mr. Pantazopoulos was primarily responsible for managing the bank’s shipping loan portfolio in Greece as well as providing other investment banking services such as mergers and acquisitions, private finance initiative projects, structured leases, treasury products and private wealth management. Mr. Pantazopoulos was part of the Hambros Bank’s team for the privatization of Hellenic Shipyards SA and was a board member at Alpha Trust SA, a private fund management company in Greece. Mr. Pantazopoulos received his BSc in Economics from Athens University of Economics & Business in 1988, and his MSc in Shipping Trade & Finance from City University Business School in London, UK, in 1991.
Mark Pawley will be a member of Energy Merger’s board of directors and the chair of its audit committee upon completion of the Business Combination. Mr. Pawley has over 20 years of experience in the financial services industry. Since August 2007, he has been the Chief Executive officer, Executive Director and Founding Partner of Oxley Capital, a Singapore-based private investment company. He currently serves as the Executive Director of Eighth Wonder International Limited, CREIM Limited and BCC Capital. Mr. Pawley was also an Executive Director of Ninja Investments Limited from 2007 to 2008 and Coole Investments Limited in 2008. Mr. Pawley has held various executive positions at Credit Suisse in London and Singapore. From 2002 to 2005, Mr. Pawley served as Chief Operating Officer of Asia Pacific Investment Banking and served on the Asia Pacific Executive Management Committee. In this capacity, his responsibilities included overseeing regional offices in Singapore, Jakarta, Kuala Lumpur, Bangkok, Manila, Shanghai, Beijing, Hong Kong, Taipei, Seoul, Sydney and Melbourne, all internal administration and business strategy as well as supervising the finance and controlling function headed by the Chief Financial Officer. From 2002 to 2007, Mr. Pawley served as Head of the Real Estate, Gaming and Lodging and Financial Sponsors Coverage Industry Groups. In this capacity, his responsibilities included providing investment banking services including financial advisory, capital raising and lending throughout Asia. From 2000 to 2007, Mr. Pawley served on the Asia Pacific Investment Banking Committee. Mr. Pawley had also served as Chief Operating Officer of Credit Suisse's Global Emerging Markets Coverage Group, responsible for all internal administration and business strategy. In addition, Mr. Pawley was a business consultant to UBS, a universal bank, in London and Zurich. Mr. Pawley has also served as a management consultant with Metapraxis Ltd, a consulting firm, as well as a product manager at a division of Barclays Bank in the UK. Previously, Mr. Pawley held various positions at National Westminster Bank, a UK commercial and investment banking firm. Mr. Pawley received his BA (Honors) in Economics from Essex University in 1986.
Rod Teeple will be a member of Energy Merger’s board of directors and will serve on its audit committee upon completion of the Business Combination. Mr. Teeple is currently the Managing Director and member of the investment committee at ClearLake Advisors, L.L.C., an alternative investment boutique with expertise in hedge funds and private equity. Prior to joining ClearLake, Mr. Teeple had over 10 years of corporate advisory and investment banking experience. From 2004 to 2006, Mr. Teeple was a Vice President with Credit Suisse in Hong Kong where he focused on transportation and infrastructure companies in Asia. From 2002 to 2004, Mr. Teeple was a Vice President with Credit Suisse based in California where he advised leading global companies in North America, Europe and Asia. Previously, Mr. Teeple was a Senior Associate at Robertson Stephens in San Francisco where he led numerous transactions with communications hardware and software as well as internet infrastructure companies. In addition, Mr. Teeple was an Associate at DLJ in Houston where he executed transactions in the energy industry. Mr. Teeple was also an Associate with A.T. Kearney in California. Mr. Teeple served over six years as an officer in the United States Navy where he was a SEAL Platoon Commander. He has an MBA from the Anderson School at UCLA and an AB with honors from Harvard College where he studied economics.
Energy Merger’s board of directors is divided into three classes with only one class of directors being elected in each year and following the initial term for each such class, each class will serve a three-year term. The term of office of the Class A directors, consisting of Mr. Pantazopoulos and Mr. Matsui, will expire at Energy Merger’s 2009 annual meeting of stockholders. The term of office of the Class B directors, consisting
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of Mr. Widmer, Mr. Lawson and Mr. Teeple will expire at the 2010 annual meeting. The term of office of the Class C directors, consisting of Captain Vanderperre, Mr. Cheng and Mr. Pawley, will expire at the 2011 annual meeting.
The one vacancy for a Class A director on Energy Merger’s board of directors will be filled subsequent to the Business Combination. In accordance with Energy Merger’s corporate governance policies, recommendations for individuals to fill this vacancy will be made by a majority of Energy Merger’s independent directors. Pursuant to Energy Merger’s amended and restated articles of incorporation as are expected to be in effect upon completion of the Business Combination, the vacancy will then be filled by the affirmative vote of not less than six of Energy Merger’s existing directors.
Director Independence
Energy Merger’s securities are expected to be listed on the American Stock Exchange. Energy Merger has evaluated whether the directors who will be elected to its board immediately prior to completion of the Business Combination will be “independent directors” within the meaning of the rules of the American Stock Exchange. Such rules provide generally that a director will not qualify as an “independent director” unless the board of directors of the listed company affirmatively determines that the director has no material relationship with the listed company that would interfere with the exercise of independent judgment. In addition, such rules generally provide that a director will not qualify as an “independent director” if: (i) the director is, or in the past three years has been, employed by the listed company; (ii) the director has an immediate family member who is, or in the past three years has been, an executive officer of the listed company; (iii) the director or a member of the director’s immediate family has received payments from the listed company of more than $100,000 during the current or any of the past three years, other than for (among other things) service as a director and payments arising solely from investments in securities of the listed company; (iv) the director or a member of the director’s immediate family is a current partner of the independent auditors of the listed company or is, or in the past three years, has been, employed by such auditors in a professional capacity and worked on the audit of the listed company; (v) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of the executive officers of the listed company serves on the compensation committee; or (vi) the director or a member of the director’s immediate family is a partner in, or a controlling stockholder or an executive officer of, an entity that makes payments to or receive payments from the listed company in an amount which, in any fiscal year during the past three years, exceeds the greater of $200,000 or 5% of the other entity’s consolidated gross revenue.
The corporate governance rules of the American Stock Exchange generally require that a listed company have a sufficient number of independent directors on its board such that a majority of the directors are independent directors. Energy Merger’s board of directors has determined that four of the eight directors who will serve on its board immediately prior to completion of the Business Combination will be “independent directors” within the meaning of such rules. It is the board’s intention to fill its one vacancy with an additional independent director. Until such time as Energy Merger’s board is composed of a majority of independent directors, it intends to take advantage of an exemption to the listing standards of the American Stock Exchange that allows foreign private issuers to follow “home country practice” in certain corporate governance matters. Energy Merger’s Marshall Islands counsel has provided a letter to the American Stock Exchange certifying that under Marshall Islands law, Energy Merger is not required to have a majority of independent directors serving on its board of directors.
Audit Committee
Energy Merger’s board of directors will establish an Audit Committee immediately prior to completion of the Business Combination, which will have powers and perform the functions customarily performed by such a committee (including those required of such a committee under the rules of the American Stock Exchange and the Securities and Exchange Commission). Energy Merger’s Audit Committee will be composed of Mr. Lawson, Mr. Pawley and Mr. Teeple. Energy Merger’s Audit Committee will be responsible for meeting with its independent registered public accounting firm regarding, among other matters, audits and adequacy of its accounting and control systems. The Audit Committee must be composed of at least three directors who comply with the independence rules of the American Stock Exchange and The Sarbanes-Oxley Act of 2002
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and at least one of whom is an “audit committee financial expert” as defined under Item 401 of Regulation S-K of the Exchange Act. Energy Merger will adopt a charter for its Audit Committee immediately prior to completion of the Business Combination. Energy Merger’s board of directors expects that Mr. Pawley will qualify as an “audit committee financial expert.”
Code of Conduct and Ethics
Immediately prior to completion of the Business Combination, Energy Merger will adopt a code of conduct and ethics applicable to its directors and officers in accordance with applicable federal securities laws and the rules of the American Stock Exchange.
Compensation of Directors and Executive Officers
For the period ended December 31, 2007, no executives or directors of Energy Merger had received any compensation from Energy Merger. After the consummation of the Business Combination, Energy Merger expects to compensate each of its directors, other than those directors who are employed by or otherwise affiliated with Energy Merger’s Manager, in accordance with market standards that are customary for publicly traded companies in the tanker segment of the shipping industry.
Energy Merger has not had any employees since inception and does not contemplate hiring employees subsequent to the Business Combination. Upon consummation of the Business Combination, the Manager, a newly formed ship management company, will enter into a management agreement with Energy Merger under which the Manager will be responsible for substantially all of Energy Merger’s operations. Energy Merger’s Chief Executive Officer and Chief Financial Officer, initially expected to be Mr. Fred Cheng and Mr. Christoph Widmer, respectively, will be made available to Energy Merger by the Manager to manage Energy Merger’s day-to-day operations and all aspects of its financial control. Because Energy Merger’s management agreement will provide that its Manager assumes principal responsibility for managing its affairs, Energy Merger’s executive officers will not receive a salary or bonus from Energy Merger for serving as its executive officers. However, in their capacities as officers or employees of Energy Merger, they will devote such portion of their time to Energy Merger’s affairs as is required for the performance of the duties of Energy Merger’s Manager under the management agreement. Because the services performed by Energy Merger’s executive officers will not be performed exclusively for Energy Merger, its executive officers and Manager are unable to segregate and identify that portion of the compensation that will be awarded to, earned by or paid to Energy Merger’s executive officers by the Manager that relates solely to their services to Energy Merger.
Energy Merger’s Manager and Management Agreement
General
The Manager and certain of its affiliates will provide the commercial, administrative, technical and crew management services necessary to support Energy Merger’s business. The Manager is a newly formed ship management company co-founded by Captain Vanderperre, who will be the Chairman of Energy Merger’s board of directors following the Business Combination, and Mr. Cheng, who will be a director and Chief Executive Officer of Energy Merger following the Business Combination. The Manager is controlled by Captain Vanderperre. Captain Vanderperre and Mr. Cheng are also the co-founders and directors of Vanship, the company from which Energy Merger will acquire its initial fleet. Captain Vanderperre is the founder of Univan, an affiliate of the Manager and the company which we expect will provide technical management of the fleet.
The staff of the Manager and its affiliated companies have skills in all aspects of ship management, insurance, budget management, safety and environment, commercial management and human resource management. A number of such staff also have sea-going experience, having served aboard vessels at a senior rank.
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Management Agreement
The following summary of the material terms of the management agreement and technical services agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the respective agreements. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information, you should read the entire form of management agreement (including the form of technical services agreement attached as an exhibit thereto) filed as an exhibit to the registration statement of which this joint proxy statement/prospectus forms a part.
Energy Merger expects to enter into a management agreement with the Manager upon the closing of the Business Combination. Under the management agreement, substantially all aspects of Energy Merger’s operations, including the commercial management of the vessels in Energy Merger’s fleet and the procurement and supervision of technical services, will be performed by the Manager and its affiliated companies, as an independent contractor, under the supervision of Energy Merger’s board of directors. Energy Merger’s Chief Executive Officer, expected to be Mr. Fred Cheng, and Energy Merger’s President and Chief Financial Officer, initially expected to be Mr. Christoph Widmer, will be made available to Energy Merger by the Manager to manage Energy Merger’s day-to-day operations and all aspects of its financial control. The Manager will be required to exercise all due care, skill and diligence in carrying out its duties, except that the Manager may have regard to its overall responsibility in relation to all vessels entrusted to its management. The Manager will be responsible for and will indemnify Energy Merger for loss, damage or expense resulting from fraud, gross negligence or willful misconduct in performing its duties or for any material and continuing breach of the agreement by the Manager.
Under the management agreement, the Manager will be responsible for providing Energy Merger with substantially all of the commercial and administrative services which it is likely to require to carry on its business, including the following:
| • | strategic services , which include chartering Energy Merger’s vessels, managing Energy Merger’s relationships with its charterers, locating, purchasing and selling Energy Merger’s vessels, providing general strategic planning services and implementing corporate strategy, providing business development services, developing acquisition and divestiture strategies, working closely on the integration of any acquired business, negotiating pre- and post-delivery financing for vessels, arranging the provision of tax planning, leasing or other tax savings initiatives, corporate planning and such other services consistent with the foregoing as Energy Merger may reasonably identify from time to time. |
| • | commercial management services , which include administering Energy Merger’s charter agreements, monitoring the payment to Energy Merger or the SPVs of charter hire and other moneys to which it may be entitled, furnishing voyage instructions to the crew of Energy Merger’s vessels, arranging scheduling of Energy Merger’s vessels and carrying out communications with the parties involved with the receiving and handling of Energy Merger’s vessels at loading and discharging ports. |
| • | administrative services , which include the maintenance of Energy Merger’s corporate books and records, the administration of its payroll services, the assistance with the preparation of its tax returns (and arranging payment by Energy Merger of all of Energy Merger’s taxes) and financial statements, assistance with corporate and regulatory compliance matters not related to Energy Merger’s vessels, procuring legal and accounting services (including the preparation of all necessary budgets for submission to Energy Merger’s board of directors), assistance in complying with the U.S. and other relevant securities laws (including compliance with the Sarbanes-Oxley Act of 2002), making recommendations to Energy Merger for the appointment of advisors and experts, development and monitoring of internal controls over financial reporting, disclosure controls and information technology, assistance with all regulatory and reporting functions and obligations, furnishing any reports or financial information that might reasonably be requested by Energy Merger and other non-vessel related administrative services (including all annual, quarterly, current and other reports Energy Merger is required to file with the SEC pursuant to the Exchange Act), assistance with office space, providing legal and financial compliance services, overseeing banking services (including the opening, closing, operation and management of all of Energy Merger’s accounts including making any deposits and withdrawals reasonably necessary for the management of Energy Merger’s business |
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| and day-to-day operations), providing all administrative services required for subsequent debt and equity financings and attending to all other administrative matters necessary to ensure the professional management of Energy Merger’s business. |
| • | supervisory services , which include the procurement of a technical manager to provide technical services, the supervision of the technical manager in its provision of such services and other usual and customary services with respect to each vessel and its crew. |
| • | pre-delivery services , which include overseeing and supervising, or procuring a third party to oversee and supervise, the design and construction of any newbuilding vessels prior to delivery to Energy Merger and liaising, or procuring a third party to liaise, with the shipbuilder, applicable classification society, suppliers and other service providers to ensure that newbuildings are being constructed in accordance with the relevant shipbuilding contract and classification society requirements. |
In exchange for the services provided to Energy Merger under the management agreement, Energy Merger will pay the Manager the following fees:
| • | a monthly administrative services fee, payable monthly in advance as follows: |
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| For the period beginning the date of completion of the Business Combination and ending June 30, 2009 | $25,000 per month | |
| For the twelve months ending June 30, 2010 | $50,000 per month | |
| For the twelve months ending June 30, 2011 | $75,000 per month |
| • | a management services fee of $3,500 per day per each vessel acquired by Energy Merger after the date of the Business Combination, payable monthly in advance; |
| • | a commission fee equal to 1.25% calculated on the gross freight, demurrage, charter hire, profit share and ballast bonus obtained for the employment of each vessel on contracts or charter parties entered into with respect to such vessels during the term of the management agreement, or for the employment of any vessels purchased by Energy Merger after completion of the Business Combination (including each vessel subject to the Option Agreement described under “The Share Purchase Agreement — Option Agreement”); and |
| • | a commission equal to 1.00% calculated on the price set forth in the memorandum of agreement of any vessel bought or sold for or on behalf of Energy Merger or any of its subsidiaries (including the vessels subject to the Option Agreement described under “The Share Purchase Agreement — Option Agreement”); and |
| • | such additional fees or other compensation to be agreed between Energy Merger and the Company with respect to any pre-delivery services that may be provided to Energy Merger in the future. |
The administrative services fee and management services fee are subject to adjustment annually beginning in July 2011, with such adjustments to be mutually agreed between Energy Merger and the Manager, or decided by an independent arbitrator in the event that Energy Merger and the Manager are unable to reach agreement with respect to such adjustments.
Subject to the termination rights described below, the initial term of the management agreement will expire on December 31, 2028. If not terminated, the management agreement shall automatically renew for a five-year period and shall thereafter be extended in additional five-year increments if neither the Manager nor Energy Merger provides notice of termination prior to the six month period immediately preceding the end of the respective term. The management agreement provides that the determination of Energy Merger as to whether to terminate the agreement at the end of any respective term shall be made by the affirmative vote of at least two-thirds of Energy Merger’s independent directors.
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Energy Merger may also terminate the management agreement under any of the following circumstances:
| • | if at any time the Manager materially breaches the management agreement and the matter is unresolved after a 90-day dispute resolution; |
| • | if at any time (1) the Manager has been convicted of, or has entered into a plea bargain or plea of nolo contendre or settlement admitting guilt for a crime, which conviction, plea or settlement is demonstrably and materially injurious to Energy Merger and (2) the holders of a majority of Energy Merger’s outstanding shares of common stock elect to terminate the management agreement; |
| • | if at any time the Manager experiences certain bankruptcy or insolvency events; |
| • | if any person or persons other than Captain Charles Arthur Joseph Vanderperre, Mr. Fred Cheng, or Mr. Christoph Widmer, any trust established for the benefit, in whole or in part, of any of the foregoing individuals, or any affiliate of any of the foregoing individuals or trusts obtain a majority of the voting control of the Manager and Energy Merger does not consent to the change of control, which consent shall not be unreasonably withheld; or |
| • | if the Manager sells, leases, transfers, conveys or otherwise disposes, in one or a series of related transactions, of all or substantially all of its assets to any person or persons other than Captain Charles Arthur Joseph Vanderperre, Mr. Fred Cheng, or Mr. Christoph Widmer, any trust established for the benefit, in whole or in part, of any of the foregoing individuals, or any affiliate of any of the foregoing individuals or trusts without the consent of Energy Merger, which consent shall not be unreasonably withheld. |
The Manager can terminate the agreement prior to the end of its term if at any time Energy Merger materially breaches the agreement and the matter is unresolved after a 90-day dispute resolution or in the event of a change of control of Energy Merger. A change of control of Energy Merger means the occurrence of any of the following:
| • | the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of Energy Merger’s assets without the prior written consent of the Manager, which consent may be arbitrarily withheld; |
| • | if at any time Energy Merger experiences certain bankruptcy or insolvency events; |
| • | the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person, other than certain owners and affiliates of the Manager, becomes the beneficial owner, directly or indirectly, of more than a majority of Energy Merger’s voting shares, measured by voting power rather than number of shares, unless the Manager shall have consented to such transaction; |
| • | Energy Merger consolidates with, or merges with or into, any person, or any such person consolidates with, or merges with or into, Energy Merger, in any such event pursuant to a transaction in which any of Energy Merger’s outstanding common shares are converted into or exchanged for cash, securities or other property, or receive a payment of cash securities or other property other than any such transaction where Energy Merger’s shares of common stock are outstanding immediately prior to such transaction are converted into or exchanged for voting stock of the surviving or transferee person constituting a majority of the outstanding shares of such voting stock of such surviving or transferee person immediately after giving effect to such issuance; and |
| • | the first day on which a majority of the members of Energy Merger’s board of directors are neither (i) a member of Energy Merger’s board of directors immediately following completion of the Business Combination, or (ii) was nominated for election or elected to Energy Merger’s board of directors with the approval of at least 67% of the directors then in office who were either directors immediately after the completion of the Business Combination or whose nomination or election was previously so approved. |
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The Manager may subcontract or delegate any of its duties and obligations under the management to any of its affiliates without the consent of Energy Merger and may subcontract or delegate any of its duties and obligations to non-affiliates with the consent of Energy Merger.
The management agreement contemplates that the Manager will initially nominate Univan Ship Management International Limited, or Univan International, as technical manager, with technical management subcontracted from Univan International to Univan. Univan International and Univan are subsidiaries of Univan Group Holdings Limited, an entity owned and controlled by Captain Vanderperre. We expect that each SPV will enter into a technical services agreement with Univan International upon or immediately prior to the closing of the Business Combination. The services to be provided to the SPVs under the technical services agreements include the following:
| • | technical services , which include managing day-to-day vessel operations, arranging and supervising general vessel maintenance, ensuring regulatory compliance and compliance with the law of the flag of each vessel and of the places where the vessel trades, ensuring classification society compliance, supervising the maintenance and general efficiency of vessels, arranging for and supervising normally scheduled drydocking and general and routine repairs, arranging insurance for vessels (including marine hull and machinery insurance, protection and indemnity insurance and war risks), purchasing stores, supplies, spares, lubricating oil and equipment for vessels, appointing supervisors and technical consultants and providing technical support and shoreside support, and attending to all other technical matters necessary to run Energy Merger’s business; and |
| • | crew management services , which include the recruiting, training, managing, supervising, transportation, and insurance of the crew, ensuring that the applicable laws of the flag of the vessels and all places where the vessels trade are satisfied in respect of manning levels, rank, qualification and certification of the crew and employment regulations, and performing any other function in connection with the crew as may be requested by Energy Merger. |
Under the technical management agreements, each SPV will be required to pay Univan International an amount equal to the vessel operating expenses and a monthly management fee of $9,500 per vessel. The technical management agreements may be terminated by either party with twelve months prior notice and the monthly management fee will be subject to re-negotiation between the Manager and Energy Merger annually. In addition, Univan International will be entitled to retain all normal or customary commissions, discounts and rebates arising out of the performance of services for the SPVs. Budgeted vessel operating expenses will be payable by each SPV monthly in advance.
Equity Incentive Plan
Subsequent to the Business Combination, Energy Merger may adopt an equity incentive plan in order to provide the board of directors a mechanism for incentivizing the Manager and key employees of the Manager. We expect that if adopted, the board of directors would reserve approximately 4,000,000 shares of Energy Merger’s common stock for awards under such plan. The rules of the American Stock Exchange generally require shareholder approval of an equity incentive plan but Energy Merger may seek to take advantage of any exemptions available to it as a foreign private issuer to adopt and grant awards under an equity incentive plan without obtaining shareholder approval.
Properties
Energy Merger expects to lease office space in Hong Kong.
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, 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
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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. Competition is also affected by the availability of other size vessels to compete in the trades in which Energy Merger will engage.
Environmental and Other Regulations
Government regulations significantly affect the ownership and operation of Energy Merger’s vessels. The vessels will be subject to international conventions, national, state and local laws and regulations in force in the countries in which Energy Merger’s vessels may operate or are registered.
A variety of governmental and private entities will subject Energy Merger’s vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administration (country of registry) and charterers. Certain of these entities will require Energy Merger to obtain permits, licenses and certificates for the operation of its vessels. Failure to maintain necessary permits or approvals could cause Energy Merger to incur substantial costs or temporarily suspend operation of one or more of its vessels.
Energy Merger believes that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the shipping industry. Increasing environmental concerns have created a demand for vessels that conform to stricter environmental standards. Energy Merger will be required to maintain operating standards for all of its vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with United States and international regulations. Energy Merger believes that the operation of its vessels will be in substantial compliance with applicable environmental laws and regulations applicable to Energy Merger.
International Maritime Organization
The United Nations’ International Maritime Organization, or IMO, has negotiated international conventions that impose liability for oil pollution in international waters and a signatory’s territorial waters. One of the more important of these conventions is the International Convention for the Prevention of Pollution from Ships (MARPOL 1973/1978). In September 1997, the IMO adopted Annex VI to MARPOL 1973/1978 to address air pollution from ships. Annex VI was ratified in May 2004, and became effective in May 2005. Annex VI set limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. The IMO adopted various amendments to Annexes I and II to this convention in 2004 which became effective as of January 1, 2007. The fleet of vessels we will acquire has conformed to these regulations. Additional or new conventions, laws and regulations may be adopted that could adversely affect Energy Merger’s ability to operate its vessels.
The operation of Energy Merger’s vessels will also be affected by the requirements set forth in the ISM Code. The ISM Code requires shipowners and entities who have assumed the responsibility for operation of a vessel such as the Manager or bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner or management company to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports. Each of Energy Merger’s vessels is expected to be ISM Code-certified. If any vessel does not maintain its ISM certification, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on its financial condition and results of operations.
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The United States Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone.
Under OPA, vessel owners, operators, charterers and management companies are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels, including bunkers (fuel).
OPA limits the liability of responsible parties to $1,200 per gross tonne or $10,000,000 in the case of a vessel greater than 3,000 gross tonnes or $2,000,000 in the case of a vessel of 3,000 tonnes or less. This limit applies to tank vessels and does 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 wilful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities. A tank vessel under OPA is one constructed or adapted to carry, or that carries oil or hazardous material in bulk as cargo or cargo residue.
Energy Merger expects to maintain for each of its vessel’s pollution liability coverage insurance in the amount of $1 billion per incident. If the damages from a catastrophic pollution liability incident exceed its insurance coverage, it could have a material adverse effect on Energy Merger’s financial condition and results of operations.
OPA requires owners and operators of vessels to establish and maintain with the United States Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under the OPA. In December 1994, the Coast Guard implemented regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton, which includes the OPA limitation on liability of $1,200 per gross ton and the U.S. Comprehensive Environmental Response, Compensation, and Liability Act liability limit of $300 per gross ton. Under the regulations, vessel owners and operators may evidence their financial responsibility by showing proof of insurance, surety bond, self-insurance, or guaranty. Under OPA, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum liability under OPA.
OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states, which have enacted such legislation, have not yet issued implementing regulations defining vessels owners’ responsibilities under these laws. Energy Merger intends to comply in the future, with all applicable state regulations in the ports where its vessels call.
Other Environmental Initiatives
The European Union is considering legislation that will affect the operation of vessels and the liability of owners for oil pollution. It is difficult to predict what legislation, if any, may be promulgated by the European Union or any other country or authority.
Many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969, or the 1969 Convention, and the Convention for the Establishment of an International Fund for Oil Pollution of 1971, or the 1971 Fund Convention. The 1971 Fund Convention was replaced by the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage of 1992, or the 1992 Fund Convention, on May 24, 2002. Under the 1992 Fund Convention, as was the case with the 1971 Fund Convention, oil receivers in countries that are party to the 1992 Fund Convention are liable for the payment of supplementary compensation. Under these conventions, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. Many of the countries that have ratified these conventions and the 1992 Protocol to the 1969 Convention have increased the liability limits. In October 2000, amendments were adopted and came into force on
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November 1, 2003 which further increased the liability limits. The liability limits in the countries that have ratified these changes are tied to a unit of account (Special Drawing Rights, or SDRs), which varies according to a basket of currencies. On December 31, 2007 it was 1 SDR = $1.58025. For vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total enclosed spaces within a vessel), liability is limited to 4.610 million units of account (approximately $7.285 million as at December 31, 2007) plus 6.31 units of account (approximately $10 as at December 31, 2007) for each additional gross ton over 5,000. For vessels over 140,000 gross tons, liability is limited to 89.770 million units of account (approximately $142 million as at December 31, 2007). The right to limit liability is forfeited under the 1969 Convention where the spill is caused by the owner’s actual fault or privity and, under the 1992 Protocol, where the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the 1969 Convention has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to the 1969 Convention.
In May 2003, the IMO adopted a Protocol to the 1992 Fund Convention (the Supplementary Fund Protocol). The Supplementary Fund Protocol provides for the establishment of a fund to supplement the compensation available under the 1992 Fund Convention and as was the case with the 1992 Fund Convention, will be funded by oil receivers. The Supplementary Fund Protocol is optional and participation is open to all states that are parties to the 1992 Fund Convention. The total amount of compensation payable for any one incident will be limited to a combined total of $750 million SDRs ($1.185 billion as at December 31, 2007) including the amount of compensation paid under the existing 1969 Convention and 1992 Fund Convention. The Supplementary Fund Protocol entered into force on March 3, 2005.
To ease the burden on oil receivers under the Supplementary Fund Protocol, voluntary agreements have been reached among tanker owners indemnified through members of the International Group of P&I Clubs. Energy Merger is expected to be a member of P&I Clubs which themselves are parts of the International Group. Under the Tanker Oil Pollution Indemnification Agreement 2006, or TOPIA, ship owners of larger tankers indemnify the supplementary fund for 50% of the compensation it pays under the Supplementary Fund Protocol caused by tankers in states that have adopted the Supplementary Fund Protocol. The scheme is established by a legally binding agreement between the owners of tankers which are insured against oil pollution risks by P&I Clubs in the International Group. In all but a relatively small number of cases, ships of this description will automatically be entered into TOPIA as a condition of club cover.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives by United States authorities 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 subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea, or 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 newly created 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 align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures provided such vessels have on board, by July 1, 2004, a valid International Ship Security Certificate that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. Energy Merger’s vessels will be in compliance with the various
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security measures addressed by the MTSA, SOLAS and the ISPS Code. Energy Merger does not believe these additional requirements will have a material financial impact on its operations.
Inspection by Classification Societies
Every seagoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:
Annual Surveys : For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.
Intermediate Surveys : Extended annual surveys are referred to as intermediate surveys and typically are conducted approximately two and one-half years after commissioning and each class renewal. The hull portion of the survey will be conducted while the vessel is in drydock unless the vessel is less than 15 years of age and regulatory approvals, if required, have been obtained to inspect the hull while afloat rather than in drydock. In any event the vessel must be drydocked at least once in each five-year period.
Class Renewal Surveys : Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one-year grace period for completion of the special survey. 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 hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.
At an owner’s application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years.
The vessels in Energy Merger’s fleet that are more than fifteen year old will be required to be drydocked every 24 to 36 months. Vessels that are less than fifteen years old will be required to be drydocked at least every five years. These drydockings are required for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the ship owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies. Energy Merger’s vessels are expected to be certified as being “in class” by a classification society that is a member of the International Association of Classification Societies.
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The following table shows the schedule pursuant to which the vessels in Energy Merger’s fleet are anticipated to undergo intermediate and special surveys, based on the age of the related vessel.
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| Survey Number | Type of Survey | Age of Vessel (in Years) | Estimated Number of Days | |||||||||
| 1 | Intermediate | (1) | 2.50 | 3 | ||||||||
| 2 | Special Survey | (2) | 5.00 | 25 | ||||||||
| 3 | Intermediate | (1) | 7.50 | 3 | ||||||||
| 4 | Special Survey | (2) | 10.00 | 25 | ||||||||
| 5 | Intermediate | (1) | 12.50 | 3 | ||||||||
| 6 | Special Survey | (2) | 15.00 | 25 | ||||||||
| 7 | Intermediate | (2) | 17.50 | 3 | ||||||||
| 8 | Special Survey | (2) | 20.00 | 25 | ||||||||
| 9 | Intermediate | (2) | 22.50 | |||||||||
| 10 | Special Survey | (2) | 25.00 | 25 | ||||||||
| 11 | Intermediate | (2) | 27.50 | 3 | ||||||||
| 12 | Special Survey | (2) | 30.00 | 25 | ||||||||
| (1) | Survey may be conducted in-water. |
| (2) | Survey must be conducted during drydock. |
The following table sets forth the next scheduled intermediate survey or special survey for each of the vessels that we will acquire. The ability to meet this schedule will depend on our ability to generate sufficient cash flows from operations.
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| Vessel | Date | Maintenance Type | ||||||
| C. Dream | September 2008 | Intermediate Survey (In water) | ||||||
| Shinyo Splendor | October 2008 | Special Survey (Drydocking) | ||||||
| Shinyo Navigator | January 2009 | Intermediate Survey (In water) | ||||||
| Shinyo Ocean | May 2009 | Intermediate Survey (In water) | ||||||
| Shinyo Kannika | June 2009 | Intermediate Survey (In water) | ||||||
| Shinyo Alliance | August 2009 | Intermediate Survey (Drydocking) | ||||||
| Shinyo Mariner | August 2009 | Intermediate Survey (Drydocking) | ||||||
| Shinyo Sawako | March 2010 | Special Survey (Drydocking) | ||||||
| Shinyo Jubilee | October 2010 | Intermediate Survey (Drydocking) | ||||||
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of 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 Energy Merger believes that its expected 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 it will always be able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
Energy Merger expects to obtain 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 from $200,000 to $250,000.
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Energy Merger plans to arrange, as necessary, increased value insurance for its vessels. With the increased value insurance, in case of total loss of the vessel, Energy Merger 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 which are not recoverable in full by the hull and machinery policies by reason of under insurance. Energy Merger expects to maintain loss of hire insurance for certain of 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 expected to be provided by mutual protection and indemnity associations, or P&I Associations, which will cover Energy Merger’s third-party liabilities in connection with its shipping activities. 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.
Energy Merger’s protection and indemnity insurance coverage for pollution is expected to be $1 billion per vessel per incident. The 13 P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Each of Energy Merger’s vessels will be entered with P&I Associations of the International Group. Under the International Group reinsurance program, each P&I club in the International Group is responsible for the first $7.0 million of every claim. In every claim the amount in excess of $7.0 million and up to $50.0 million is shared by the clubs under a pooling agreement. In every claim the amount in excess of $50.0 million is reinsured by the International Group under the General Excess of Loss Reinsurance Contract. This policy currently provides an additional $3.0 billion of coverage. Claims which exceed this amount are pooled by way of “overspill” calls. As a member of a P&I Association, which is a member of the International Group, Energy Merger 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 based on gross tonnage entered. Members have a liability to pay supplementary calls which might be levied by the board of directors of the club if the estimated total calls are insufficient to cover amounts paid out by the club.
Legal Proceedings
Neither Energy Merger nor any of the SPVs are currently a party to any material lawsuit that they respectively believe, if adversely determined, would have a material adverse effect on its financial position, results of operations or liquidity.
The crew of a Chinese fishing vessel, Lu Rong Yu 2178, has alleged that on the evening of April 11, 2008 the vessel Shinyo Sawako collided with the fishing vessel’s sister vessel, Lu Rong Yu 2177, resulting in the sinking of the Lu Rong Yu 2177. Of the crew of 18 on the Lu Rong Yu 2177, two were rescued, three have been confirmed dead and 13 others are missing. Although the Shinyo Sawako passed through the vicinity of the reported collision position, the crew of the Shinyo Sawako have stated to the vessel’s managers that the Shinyo Sawako was not involved in the collision. Furthermore, a survey of the Shinyo Sawako carried out on April 13 and 14, 2008, by representatives of the owners, their insurers, the vessel’s classification society and the Chinese fishing vessel interests, did not reveal obvious signs of damage that would be expected to result from a heavy collision. The vessel’s classification society has certified the vessel as fully seaworthy.
An investigation of the incident is being carried out by the Hong Kong Marine Department, as Hong Kong is the Shinyo Sawako’s flag state. Univan Ship Management Limited, as manager of the Shinyo Sawako, is contesting the allegations that the Shinyo Sawako was involved in the collision. In the event that it is determined that the Shinyo Sawako was in fact involved in this incident, management of Shinyo Sawako Limited does not expect that any resulting claims made against the company would have a material adverse effect on its financial position, results of operations or liquidity. Moreover management of Shinyo Sawako Limited expects that any liability the company may have would be sufficiently covered by insurance.
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Exchange Controls
Under Marshall Island 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 Energy Merger’s shares.
Energy Merger Principal Stockholders
Energy Merger was formed under the laws of the Republic of the Marshall Islands on November 30, 2007. Energy Merger is a wholly-owned subsidiary of Energy Infrastructure. Concurrently with the Business Combination, Energy Merger will issue (i) 13,500,000 shares of common stock to Vanship in respect of the stock consideration portion of the aggregate purchase price for the SPVs, (ii) 1,000,000 units to Mr. George Sagredos (or any assignee), Energy Infrastructure’s Chief Operating Officer, President and a director, and (iii) 268,500 units to a company controlled by Mr. Sagredos upon the conversion of loans aggregating $2,685,000. Vanship has agreed to purchase up to an additional 5,000,000 units of Energy Merger in connection with the Business Combination. See The “Share Purchase Agreement.”
The following table presents, as of the date of the proposed Business Combination, certain information regarding (1) the beneficial owners of more than 5% of Energy Merger’s common stock and (2) the total amount of common stock beneficially owned by all of Energy Merger’s directors and executive officers as a group, based on the share ownership of Energy Infrastructure as of March 31, 2008, in each case assuming the purchase by Vanship of 5,000,000 units in the Business Combination Private Placement.
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Shares Beneficially Owned
Following the Redomiciliation Merger Assuming No Stockholders Redeem |
Shares Beneficially Owned
Following Redomiciliation Merger if 1,087,520 Shares are Redeemed |
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| Name and Address of Beneficial Owner | Number | Percentage | Number | Percentage | ||||||||||||
| Captain Charles Arthur Joseph Vanderperre (1) (2) | 23,925,000 | 50.9 | % | 23,925,000 | 52.1 | % | ||||||||||
| Mr. Fred Cheng (1) (2) | 23,925,000 | 50.9 | % | 23,925,000 | 52.1 | % | ||||||||||
| Mr. Christoph Widmer (1) | 0 | * | 0 | * | ||||||||||||
| Vanship Holdings Limited (2) (3) | 23,925,000 | 50.9 | % | 23,925,000 | 52.1 | % | ||||||||||
| Georges Sagredos (4) (5) | 5,955,753 | 12.5 | % | 5,955,753 | 12.8 | % | ||||||||||
| Andreas Theotokis (5) | 4,418,753 | 9.4 | % | 4,418,753 | 9.6 | % | ||||||||||
| Energy Corp. (5) (6) | 4,418,753 | 9.4 | % | 4,418,753 | 9.6 | % | ||||||||||
| Marios Pantazopoulos (7) | 1,490,003 | 3.1 | % | 1,490,003 | 3.2 | % | ||||||||||
| * | Less than one percent (1%). |
| (1) | The business address of each of Captain Vanderperre, Mr. Cheng and Mr. Widmer is Suite 801, 8th Floor, Asian House, 1 Hennessy Road, Wanchai, Hong Kong. |
| (2) | Consists of (i) 13,500,000 shares of common stock, (ii) 425,000 shares underlying warrants and (iii) 10,000,000 shares of common stock underlying units (giving effect to the exercise of warrants included in such units) owned by Vanship Holdings Limited. Captain Vanderperre and Mr. Cheng, constituting the board of directors of Vanship Holdings Limited, have shared voting power and shared investment power over the shares owned by Vanship Holdings Limited. |
| (3) | The registered address of Vanship Holdings Limited is 80 Broad Street, Monrovia, Liberia. |
| (4) | Gives effect to (ii) the issuance of 1,000,000 units to George Sagredos and the assignment and transfer of 500,000 of such units from Mr. Sagredos to Mr. Pantazopoulos (giving effect to the exercise of warrants included in such units) and (ii) the issuance of 268,500 units to Robert Ventures, Ltd., a company controlled by George Sagredos (giving effect to the exercise of warrants included in such units) upon the conversion of the loans, in both cases, upon the completion of the Business Combination. |
| (5) | Includes 4,418,753 shares of common stock owned by Energy Corp., a corporation organized under the laws of the Cayman Islands, which is wholly-owned by Energy Star Trust, a Cayman Islands trust. Each of Mr. Sagredos and Mr. Theotokis, as co-enforcers and beneficiaries of Energy Star Trust, has voting and dispositive control over such shares owned by Energy Corp. |
| (6) | The address of Energy Corp. is c/o Walkers SPV Limited, Walker House, PO Box 908GT, Mary Street, George Town, Grand Cayman, Cayman Islands. |
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| (7) | Gives effect to the assignment and transfer of 500,000 units from Mr. Sagredos to Marios Pantazopoulos (giving effect to the exercise of warrants included in such units). |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION OF ENERGY MERGER
Energy Merger was incorporated on November 30, 2007 and has no operating history. The following discussion is intended to help you understand how acquisition of the shares of the SPVs will affect Energy Merger’s business and results of operations subsequent to the completion of the Business Combination.
Overview
Energy Infrastructure intends to merge with and into its wholly-owned subsidiary, Energy Merger, with Energy Merger as the surviving corporation. Following the Redomiciliation Merger, Energy Infrastructure will cease to exist and Energy Merger will become the surviving entity and will be governed by the laws of the Republic of the Marshall Islands.
Energy Merger has entered into a Share Purchase Agreement pursuant to which it has agreed to purchase all of the outstanding shares of nine special purpose vehicles, or SPVs, from Vanship Holdings Limited, or Vanship, a global shipping company carrying on business from Hong Kong. Each SPV owns one very large crude carrier, or VLCC. The aggregate purchase price for the SPVs is $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger. In addition to such purchase price, Energy Merger will be obligated to effect the transfer of 425,000 warrants of Energy Merger from one of Energy Infrastructure’s initial stockholders to Vanship upon completion of the Business Combination and Vanship may receive an additional 3,000,000 shares of Energy Merger common stock following each of the first and second anniversaries of the Business Combination (6,000,000 shares in the aggregate), subject to certain annual earnings criteria of the vessels in Energy Merger’s initial fleet, all as more particularly described in this joint proxy statement/ prospectus.
Management
Pursuant to the terms of a management agreement to be entered into between Energy Merger and the Manager, upon completion of the Business Combination, substantially all aspects of Energy Merger’s operations will be performed by the Manager, under the supervision of Energy Merger’s board of directors. Energy Merger’s Chief Executive Officer and Chief Financial Officer, initially expected to be Mr. Fred Cheng and Mr. Christoph Widmer, respectively, will be made available to Energy Merger by the Manager to manage Energy Merger’s day-to-day operations and all aspects of its financial control.
Charters
Energy Merger will derive its revenue from the medium and long term period charters entered into between the SPVs and charterers. All of the vessels owned by the SPVs are chartered out to international companies, with an average remaining charter duration of approximately 5.7 years upon completion of the Business Combination. Energy Merger believes that these charters will provide it with stable cash flows. For a description of the charter arrangements under with the vessels in Energy Merger’s initial fleet will operate, see “Information Concerning the SPVs — Charter Arrangements.”
Factors Affecting Energy Merger’s Future Results of Operations
The principal factors that are expected to affect Energy Merger’s results of operations, cash flows and stockholders’ return on investment include:
| • | the charter revenue paid to the SPVs under their charter agreements; |
| • | the amount of revenue from profit sharing arrangements, if any, that the SPVs receive under their charter agreements and the spot markets as they relate to these arrangements; |
| • | fees paid to the Manager; |
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| • | vessel operating expenses; |
| • | depreciation; |
| • | interest expense; |
| • | the SPVs’ insurance premiums and vessel taxes; |
| • | the number of offhire days during which the SPVs are not entitled, under their charter arrangements, to receive either the fixed charter rate or profit share and additional offhire days due to drydocking; |
| • | seasonal variations in demand for crude oil with respect to any vessels that become engaged in the spot charter market or that are subject to longer term charters that contain market related profit sharing arrangements; |
| • | required capital expenditures; and |
| • | any cash reserves that will be required under Energy Merger’s credit facility. |
As of the date of this joint proxy statement/prospectus Energy Merger has no revenue and is not expected to produce revenue until after the Redomiciliation Merger and Business Combination, predominantly from the operations of the SPVs. Energy Merger’s revenue will be reduced by depreciation expenses and other expenses, and the management fees payable to, and the reimbursements of all reasonable costs and expenses incurred by, the Manager.
Due to the medium to long term charter agreements under which Energy Merger’s vessels will operate, there may be circumstances in which management of Energy Merger deems it advantageous to terminate a charter agreement prior to its expiration. For instance, in January 2004 Shinyo Loyalty Limited entered into a charter agreement with Euronav pursuant to which Shinyo Loyalty was entitled to a fixed daily charter rate of $27,250. Prevailing market rates for time charters subsequently increased and in March 2007 Shinyo Loyalty terminated its agreement with Euronav and entered into its current time charter agreement with Sinochem, pursuant to which Shinyo Loyalty is entitled to a fixed daily charter rate of $39,500. Shinyo Loyalty paid a termination payment of $20.8 million to Euronav due to the early termination of the Euronav charter agreement and incurred a termination charge in the amount of $20.8 million. The termination payment was a negotiated amount and was not established pursuant to the terms of the original charter agreement. Management of Energy Merger may make similar decisions in the future with respect to the trade off between incurring an immediate termination charge and potentially realizing increased revenue over future periods. Such termination charges may have a significant impact on the results of operations of Energy Merger and the benefits realized from such a decision, if any benefits materialize at all, will be realized incrementally over future reporting periods.
Revenue
Voyage Revenue. Revenue for our vessels operating under time charters and consecutive voyage charters, which we refer to collectively as period charters, are expected to be driven primarily by the number of vessels in our fleet, the duration of the charter agreements and the amount of daily charter rates, time charter equivalent and profit share, that our vessels earn under charter agreements, which, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and disposals, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in drydock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels, levels of supply and demand in the seaborne transportation market and other factors affecting spot market charter rates for vessels.
Vessels operating on period charters for a certain period of time provide more predictable cash flows over that period of time, but can yield lower profit margins than vessels operating in the spot charter market during periods characterized by favorable market conditions. Vessels operating in the spot charter market generate revenue that are less predictable but may enable us to capture increased profit margins during periods of improvements in charter rates. However, when our vessels operate in the spot market, we will be exposed to
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the risk of declining charter rates, which may have a materially adverse impact on our financial performance. Future spot market rates may be higher or lower than the rates at which we employ our vessels on period charters.
Time Charter Equivalent (TCE) . We use daily time charter equivalent, or daily TCE, to measure the performance of a vessel under a consecutive voyage charter. Daily TCE revenue is voyage revenue minus voyage expenses divided by the number of voyage days during the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by a charterer under a time charter, as well as commissions. We believe that the daily TCE neutralizes the variability created by the operating costs and voyage costs associated with the employment of vessels on consecutive voyage charters and presents a more accurate representation of the revenue generated by our vessels.
Profit Share . The charter agreements under which two of the vessels in our initial fleet will operate, and under which a third vessel is expected to begin operating in the first half of 2009, include a profit sharing component. The profit sharing arrangements generally allocate a percentage of daily revenue above the fixed charter rate to the vessel owner. Under these arrangements, the daily voyage revenue is generally referenced to the then current spot market rate. Accordingly, when the spot market is high relative to the fixed charter rate, the vessel owner may earn additional revenue, or profit share, under the charter agreement.
Management Fees
We will pay fees to the Manager in exchange for providing the management services in amounts that will be determined prior to completion of the Business Combination.
Vessel Operating Expenses
Pursuant to the terms of the management agreement, Energy Merger will reimburse all reasonable costs and expenses incurred by our Manager in connection with the provision of management services, including vessel operating expenses. Vessel operating expenses include crew wages and related costs, the cost of insurance and vessel registry, expenses relating to repairs and maintenance, the costs of spares and consumable stores, lubricating oil, tonnage taxes, regulatory fees, technical management fees and other miscellaneous expenses. Factors beyond Energy Merger’s control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for crew wages and insurance, may cause these expenses to increase. The technical vessel manager will establish an operating expense budget for each vessel and perform the day-to-day management of the vessels. Our Manager will monitor the performance of the technical vessel manager by comparing actual vessel operating expenses with the operating expense budget for each vessel. Energy Merger will be responsible for the costs of any deviations from the budgeted amounts.
Depreciation
Depreciation is the periodic cost charged to income representing the allocation of the cost of the vessel over the period of its useful life and is calculated based on a straight-line basis over the estimated useful life of the vessel, after taking into account its estimated residual value, from date of acquisition. A vessel’s residual value is equal to the product of its lightweight tonnage and estimated scrap rate per ton. Management generally will estimate the useful life of Energy Merger’s vessels to be 25 years from the date the vessel was originally delivered from the shipyard, or a useful life extending no later than the year 2015 with respect to single-hull vessels. The useful life of each vessel is evaluated on a regular basis to account for changes in circumstances, including changes in regulatory restrictions. If regulations place limitations over the ability of a vessel to operate, its useful life is adjusted to end at the date such regulations become effective.
General and Administrative Expenses
We will reimburse our Manager for all reasonable general and administrative expenses incurred by it in carrying out its management responsibilities, including expenses incurred in providing administrative, accounting and legal and securities compliance services. Energy Merger expects general and administrative expenses to reflect the costs associated with running a public company, including fees to the independent members of our board of director, costs associated with investor relations, listing fees, fees to our registrar and transfer agent and increased legal and accounting costs related to compliance with the Sarbanes-Oxley Act of 2002.
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Interest Expense
Energy Merger’s interest expense will initially represent interest expense under its credit facility. The amount of interest expense will be determined by the principal amount of the loans outstanding and prevailing interest rates. Energy Merger will defer financing fees and expenses incurred upon entering into its credit facility and will amortize them to interest and financing costs over the term of the underlying obligation.
Results of Operations
Energy Merger was incorporated on November 30, 2007 and has no operating history.
Liquidity and Capital Resources
Energy Merger’s short and medium term liquidity requirements will relate to servicing its debt and funding its working capital requirements. Sources of liquidity will include cash balances, restricted cash balances, short-term investments and receipts from its charter agreements. We believe that Energy Merger’s cash flow from its charter agreements will be sufficient to fund its anticipated debt service and working capital requirements in the short term.
In the medium term, Energy Merger’s scheduled debt repayments in the year 2010 are expected to increase by approximately 44% over the amount of debt scheduled for repayment in 2009. This increase is primarily due to a requirement imposed by Energy Merger’s lenders that the debt secured by Energy Merger’s single-hull vessels be repaid by the end of the year 2010, after which the single-hull vessels are expected to become unable to trade in many markets due to the anticipated phase-out of trading by single-hull tankers. In addition, Energy Merger’s future management team has indicated its current intentions to sell the single-hulled Shinyo Jubilee at the termination of its existing charter agreement in September 2009. Although the proceeds of any such sale would be used to prepay Energy Merger’s debt and thus decrease the amount of debt repayments due in 2010, Energy Merger would experience an approximate 11% reduction in its aggregate charter hire revenue upon termination of the charter and sale of the vessel. Although we believe that Energy Merger’s cash flow from its charter agreements will be sufficient to fund its anticipated debt service and working capital requirements in the medium term, the proposed sale of the vessel Shinyo Jubilee and scheduled debt repayments will significantly reduce or eliminate the amount of cash available for payment of dividends in the year 2010.
Energy Merger’s long term liquidity requirements include funding the equity portion of investments in new vessels and repayment of long term debt balances. The VLCCs that Energy Merger will rely on for generating income are depreciating assets with fixed useful lives. In the long term, Energy Merger will need to acquire replacement vessels as its existing vessels reach the end of their useful lives in order to sustain its operations. To the extent that Energy Merger decides to acquire additional vessels, it will consider additional borrowings and equity and debt issuances. In addition, Energy Merger may use the proceeds, if any, from the exercise of outstanding warrants to prepay debt, fund the acquisition of additional vessels, or finance the conversion of the single-hulled Shinyo Sawako to double-hull in order to extend its useful life.
All of the SPVs other than Shinyo Jubilee Limited and Shinyo Kannika Limited had working capital deficits as of December 31, 2007. A working capital deficit means that current liabilities exceed current assets. Current liabilities are those which will fall due for payment within one year. Current assets are assets that are expected to be converted to cash or otherwise utilized within one year and, therefore, may be used to pay current liabilities as they become due in that period. We expect that for accounting purposes the majority of the SPVs will continue to show a working capital deficit upon and subsequent to completion of the Business Combination. However, we believe that the reflection of a working capital deficit under U.S. GAAP does not accurately reflect the liquidity of the SPVs under their existing medium to long term charter agreements and we expect that each of the SPVs will have sufficient liquidity month-to-month to pay expenses as they become due.
The charter hire revenue of the SPVs that operate under time charter agreements is paid monthly in advance and is generally sufficient to provide the cash flow necessary to fund the planned operations of the SPVs and satisfy the debt obligations of each SPV as such obligations become due. Although the charter hire income is relatively predictable, such income is only recorded as revenue (and classified as a current asset) over the term of the charter as the service is provided. In general, the most significant current liability for
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each SPV is its current portion of long term debt, which is the portion of any long term loan payable within one year. Because at any given time an SPV will recognize the portion of long term debt payable within one year as a current liability, but it will not recognize charter hire income as revenue until the related service is provided, the SPVs generally will show a working capital deficit.
Charter hire revenue could be insufficient to fund an SPV’s operations for a number of reasons, including, but not limited to, unbudgeted periods of off-hire, loss of a customer, early termination of a charter agreement, delay in receipt of charter hire, increases in operating expenses or increases in the interest rate on an SPV’s floating rate debt. Management of each of the SPVs prior to the Business Combination, except for Shinyo Kannika Limited and Shinyo Jubilee Limited, has managed potential liquidity risk by obtaining a letter of support from the applicable owner of each SPV, confirming its intention to provide continuing and unlimited financial support to such SPV, so as to enable such SPV to meet its liabilities as and when they fall due. These letters of support will be terminated upon the completion of the Business Combination and the SPVs will no longer be in a position to benefit from the financial backing of their applicable current owners. There can be no assurance that we will have sufficient financial strength to provide a comparable level of financial support to the SPVs subsequent to the Business Combination.
In the event that an SPV’s charter hire revenue is not sufficient to fund its planned operations, we would seek the consent of our lenders to use up to $15,000,000 that is required to be held as a cash reserve under our term loan facility to fund its planned operations. In the event that our lenders were to refuse consent to our use of such funds or in the event that such funds are insufficient to permit one or more SPVs to fund its operations, we may be required to seek to raise additional capital, restructure or refinance our debt, sell tankers or other assets or reduce or delay capital investments. See “Risk Factors — Risks Relating to Energy Merger — The majority of the SPVs have working capital deficits, which means that their current assets on December 31, 2007 were not sufficient to satisfy their current liabilities as at that date.”
Energy Merger has entered into a $415.0 million term loan facility with DVB Merchant Bank (Asia) Ltd, Fortis Bank S.A./N.V., Singapore Branch, NIBC Bank Ltd, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ), Allied Irish Banks, p.l.c., Bayerische Hypo- und Vereinsbank AG, Singapore Branch, and The Governor and Company of the Bank of Ireland. Drawdown of the loan is subject to the approval of the Redomiciliation Merger and the Business Combination and certain other conditions, and the loan will be secured by, among other things, first and second mortgages on the VLCCs. Funds obtained under the financing will be used to refinance outstanding secured debt of the SPVs. See “Acquisition Financing.”
Energy Merger intends to draw down $415,000,000, or such lesser amount as may be available for draw down at the time of the Business Combination, under the credit facility on the effective date of the Business Combination to refinance the existing debt of the SPVs. Energy Merger’s credit facility will be repayable in quarterly installments with principal repayments for the term of the credit facility scheduled through its maturity as follows:
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| Year |
Loan A
(Double-Hulls) |
Loan B
(Single Hulls) |
Loan A and Loan B Combined | |||||||||
| 2008 | $ | 9,300,000 | $ | 11,000,000 | $ | 20,300,000 | ||||||
| 2009 | 21,300,000 | 31,000,000 | 52,300,000 | |||||||||
| 2010 | 27,250,000 | 48,000,000 | 75,250,000 | |||||||||
| 2011 | 32,000,000 | — | 32,000,000 | |||||||||
| 2012 | 34,150,000 | — | 34,150,000 | |||||||||
| 2013 | 35,900,000 | — | 35,900,000 | |||||||||
| 2014 | 37,800,000 | — | 37,800,000 | |||||||||
| 2015 | 38,580,000 | — | 38,580,000 | |||||||||
| 2016 | 32,260,000 | — | 32,260,000 | |||||||||
| 2017 | 56,460,000 | — | 56,460,000 | |||||||||
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Servicing the debt under the credit facility will restrict the amount of funds available for other purposes, such as the payment of dividends and the acquisition of additional vessels. In order to free up cash for other purposes, Energy Merger may in the future seek to extend the principal payments on its indebtedness over the useful life of its vessels by refinancing its debt, but there can be no assurance that it will be able to do so.
Energy Merger’s obligations under the credit facility will be secured by a first priority security interest in all nine vessels in its fleet. In addition, the lenders will have a first priority security interest in all earnings from and insurances on Energy Merger’s vessels and all existing and future charters relating to Energy Merger’s vessels. Energy Merger’s obligations under the credit facility will also be guaranteed by each of the SPVs.
The terms and conditions of Energy Merger’s credit facility will require it to comply with certain covenants. We believe that these terms and conditions are consistent with loan facilities incurred by other shipping companies. These covenants include, but are not limited to, the following:
| • | a requirement to maintain certain ratios with respect to vessel market values to the outstanding loan amount under the credit facility, with an obligation to prepay a portion of the loan or provide additional security if these ratios are not met; |
| • | a requirement to maintain a ratio of EBITDA (earnings before interest, tax, depreciation and amortisation) to interest expense of 2.25:1; |
| • | a requirement to maintain minimum available cash of $15 million; |
| • | restrictions on the incurrence of additional indebtedness; |
| • | restrictions on Energy Merger’s ability to amend or terminate its management agreement with the Manager or have a technical manager other than Univan provide technical management to the vessels in Energy Merger’s fleet; |
| • | restrictions on Energy Merger’s ability to sell any of its vessels and a requirement that any proceeds from the sale of a vessel be used to prepay debt under the credit facility; and |
| • | a requirement that a replacement charter agreement of a duration of at least twelve months be procured within 60 days of the early termination of any of the SPVs’ existing charter agreements and a requirement to prepay a portion of the outstanding debt if such replacement charter is not procured within such 60 day period. |
Energy Merger’s credit facility will prevent it from declaring dividends in any event of default, as defined in the credit agreement, occurs or would result from such declaration. Each of the following will be an event of default under the credit agreement:
| • | the failure to pay principal, interest, fees, expenses or other amounts when due; |
| • | breach of certain financial covenants, including those which require Energy Merger to maintain a minimum cash balance; |
| • | the failure of any representation or warranty to be materially correct; |
| • | the occurrence of a material adverse change (as defined in the credit agreement); |
| • | the failure of the security documents or guarantees to be effective; and |
| • | bankruptcy or insolvency events. |
Capital Expenditures
The aggregate purchase price for the shares of the SPV is $778,000,000, consisting of $643,000,000 in cash (reduced by the aggregate amount of net indebtedness of the SPVs at the time of the completion of the Business Combination and subject to other closing adjustments) and 13,500,000 shares of common stock of Energy Merger. We expect to refinance $415,000,000 of indebtedness of the SPVs by drawing down our credit facility and will therefore require $228,000,000 of cash to complete the Business Combination. The source of funds to complete the acquisition will be funds in the Trust Account and any funds raised in the Business
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Combination Private Placement. However, in the event that holders of Energy Infrastructure common stock vote against the Business Combination Proposal and exercise their redemption rights, such funds may not be sufficient to complete the Business Combination. Accordingly, Energy Infrastructure may not have funds available to proceed with the Business Combination unless it is able to obtain additional equity financing. In the event that Energy Infrastructure stockholders approve the Business Combination but Energy Infrastructure does not have sufficient funds to complete the Business Combination, Energy Infrastructure currently intends to raise capital through additional debt or equity financing. See “Risk Factors — Risks Related to Energy Infrastructure — Energy Infrastructure may not have sufficient funds to complete the Business Combination.”
Off-balance Sheet Arrangements
As of the date of this joint proxy statement/prospectus, Energy Merger does not have any off-balance sheet arrangements.
Critical Accounting Policies
Following the Business Combination, management expects to make certain estimates and judgments in connection with the preparation of Energy Merger’s financial statements, which will be prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, that affect the reported amount of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities at the date of Energy Merger’s financial statements. Actual results may differ from these estimates under different assumptions or conditions.
The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic and industry conditions, present and expected conditions in the financial markets. Management of Energy Merger will regularly reevaluate these significant factors and make adjustments where facts and circumstances dictate. The following is a discussion of the accounting policies that management of Energy Merger considers to involve a higher degree of judgment in their application.
Revenue Recognition
Eight of the vessels in our initial fleet will initially operate under time charter agreements and the ninth vessel will initially operate under a consecutive voyage charter agreement. In the future, the vessels may operate in the spot market or under pool trade arrangements. Revenues are recognized when the collectibility has been reasonably assured and voyage related and vessel operating costs are expensed as incurred.
Time charter revenues are recorded over the term of the charter as the service is provided. In addition, time charter agreements may include profit sharing arrangements pursuant to which the vessel owner is entitled to share profits generated from any sub-charter entered into by the charterer. Profit-sharing revenues are calculated at an agreed percentage of the excess of sub-charter rates over an agreed amount and recorded over the term of the sub-charter agreement.
The Company follows EITF 91-9 in accounting for voyage charter revenues. Voyage charter revenues are recognized based on the percentage of completion of the voyage at the balance sheet date. A voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo.
Revenues from a pool trade arrangement are accounted for on an accrual basis. The net income of a pool trade arrangement is shared among all participants based on the points awarded to each participant which are dependent on the age, design and other performance characteristics of the vessel of each participant. Shipping revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent basis in accordance with an agreed-upon formula. For vessels operating in pools or on time charters, shipping revenues are substantially the same as time charter equivalent revenues.
Vessel Lives and Impairment
The vessels owned by the SPVs that Energy Merger will acquire are secondhand vessels and the useful lives of these vessels vary from 8 to 22 years. The carrying values of these vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter rates and vessel values have
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been cyclical. The SPVs record impairment losses only when events occur that cause us to believe that future cash flows for any individual vessel will be less than its carrying value. The carrying amounts of vessels held and used by the SPVs are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel level since separately identifiable cash flow information for each vessel is available.
In developing estimates of future cash flows, management of the SPVs must make assumptions about future charter rates, ship operating expenses and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. Although management of the SPVs believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective.
Management of the SPVs has evaluated the impact of the revisions to MARPOL Regulation 13G that became effective April 5, 2005 and the EU regulations that went into force on October 21, 2003 on the economic lives assigned to the fleet. Because four of the SPVs own single-hull vessels, the revised regulations may affect these four SPVs. Several Asian countries within which the SPVs operate have chosen to follow IMO guidelines for extension into 2015, significantly reducing the risk that these four SPVs will not be able to employ these vessels. However, following the spill of 10,800 tonnes of crude oil in South Korea in November 2007 by the single-hulled VLCC “Hebei Spirit”, there have been a number of announcements by South Korean government officials and refiners that suggest that South Korea may modify its policy towards single-hull vessels. If the economic lives assigned to the tankers prove to be too long because of new regulations or other future events, higher depreciation expense and impairment losses could result in future periods related to a reduction in the useful lives of any affected vessels. See “Risk Factors — Energy Merger’s fleet will include four single hull tankers which may be unable to trade in many markets after 2010, thereby adversely affecting Energy Merger’s overall financial position.”
The table below sets forth Energy Merger’s estimated depreciation expense for each of the periods from July 1, 2008 to December 31, 2008, the one year period ended 2009 and the one year period ended 2010, and as adjusted to reflect the estimated depreciation expense that it would incur for such periods if the useful life of each of its single hull vessels were reduced to such vessel’s anniversary date in the year 2010.
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|
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| Estimated Depreciation Expense | Estimated Depreciation Expense (as adjusted) | |||||||||||||||||||
|
July 1 to
December 31, 2008 |
Year
Ended 2009 |
Year
Ended 2010 |
July 1 to
December 31, 2008 |
Year
Ended 2009 |
Year
Ended 2010 |
|||||||||||||||
| $8,511,339 | $ | 17,022,677 | $ | 17,022,677 | $ | 28,299,008 | $ | 56,598,016 | $ | 26,861,847 | ||||||||||
Drydocking
The vessels held by the SPVs are required to be drydocked approximately every 30 to 60 months for major overhauls that cannot be performed while the vessels are operating. Management of the SPVs capitalizes the costs associated with the drydocks that are incurred to recertify that the vessels are completely seaworthy and to improve the efficiency of the vessels. The capitalized drydocking costs are depreciated on a straight-line basis over the period of 30 months and 60 months for intermediate drydocking and special survey drydocking, respectively. The useful lives of the capitalized drydocking costs are determined based on regulatory requirements of the jurisdiction in which the vessels are registered. Any change in regulatory requirements would result in a change in the useful lives and would affect the results of operations of the SPVs. In addition, the anticipated date of drydocking may be changed from the scheduled date based on availability of shipyards. Any change of the drydocking date prior to the scheduled date would result in write-off of the undepreciated carrying amount of drydocking costs and decrease the net income for the period. The management of the SPVs do not anticipate any significant changes in regulatory requirements or the next scheduled drydocking dates. Accordingly, drydocking costs are not expected to have a material
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impact on the results of the operations. We believe that SPVs’ accounting policy for drydocking costs is consistent with US GAAP guidelines and the SPVs’ policy of capitalization reflects the economics and market values of the vessels.
Certain of the SPVs have historical write offs of capitalized drydocking costs in respect of previous drydock as a result of the performance of current drydock prior to the scheduled date. Shinyo Alliance Limited and Shinyo Jubilee Limited wrote off capitalized drydocking costs of $24,789 and $281,670, respectively, during the years ended December 31, 2006 and December 31, 2007, respectively.
The approximate increase in write-off of drydocking costs of the SPVs in the aggregate for the year ended December 31, 2007 was $733,778 had the drydocks been performed three months earlier than the scheduled date.
Quantitative and Qualitative Disclosure of Market Risk
Interest Rate Fluctuation
Energy Merger’s term loan facility provides that Loan A will bear interest at LIBOR plus a margin of 1.35% to 1.65% depending on the ratio of the aggregate drawdown to the charter free fair market value of the double hull vessels, while Loan B will bear interest at LIBOR plus a margin of 1.75% to 2.75% depending on the ratio of the aggregate drawdown to the charter free fair market value of the single hull vessels.
Increasing interest rates could adversely affect Energy Merger’s future profitability. Assuming that $415,000,000 is drawn down on June 30, 2008, a 1% increase in LIBOR would result in an increase in interest expense of approximately $2,095,172 for the year ended December 31, 2008. Pursuant to the term sheet, Energy Merger intends to limit its exposure to interest rate fluctuations under its credit facility by entering into interest rate swaps.
The following table sets forth the sensitivity of our credit facility to a 1% increase in LIBOR for the period beginning June 30, 2008 through December 31, 2008 and the following five years on an annual basis.
|
|
|
|||
| Year | Amount | |||
| 2008 | $ | 2,095,172 | ||
| 2009 | $ | 3,843,018 | ||
| 2010 | $ | 3,306,694 | ||
| 2011 | $ | 2,589,983 | ||
| 2012 | $ | 2,261,677 | ||
| 2013 | $ | 1,903,353 | ||
Foreign Exchange Rate Risk
Energy Merger will generate all its revenue in U.S. dollars but its Manager will incur certain vessel operating expenses and general and administrative expenses in currencies other than the U.S. dollar. This difference could lead to fluctuations in Energy Merger’s vessel operating expenses, which would affect its financial results. Expenses incurred in foreign currencies increase when the value of the U.S. dollar falls, which would reduce Energy Merger’s profitability. Energy Merger’s management does not believe that foreign exchange fluctuations will have a significant impact on Energy Merger’s results of operations.
Inflation
Management of Energy Merger does not consider inflation to be a significant risk to direct expenses in the current and foreseeable economic environment.
Indebtedness and Contractual Obligations
As of December 31, 2007, Energy Merger’s pro forma long-term indebtedness and other known contractual obligations are summarized below, assuming the closing of the Redomiciliation Merger and Business Combination occurred on, and that the long-term bank loan was drawn down by Energy Merger on, June 30, 2008.
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| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total |
Less Than
1 Year |
1 – 3
Years |
3 – 5
Years |
More Than
5 Years |
|||||||||||||||
| Long-Term Bank Loan | $ | 415,000,000 | $ | 20,300,000 | $ | 127,550,000 | $ | 66,150,000 | $ | 201,000,000 | ||||||||||
| Interest Payments on Bank Loan | ||||||||||||||||||||
| Loan A (1) | $ | 77,607,561 | $ | 7,058,695 | $ | 25,744,753 | $ | 20,765,104 | $ | 24,039,009 | ||||||||||
| Loan B (2) | $ | 7,950,055 | $ | 2,243,101 | $ | 5,706,954 | $ | 0 | $ | 0 | ||||||||||
| Management Fees payable to the Manager | $ | 17,442,000 | $ | 414,000 | $ | 1,728,000 | $ | 1,800,000 | $ | 13,500,000 | ||||||||||
| Total | $ | 517,999,616 | $ | 30,015,796 | $ | 160,729,707 | $ | 88,715,104 | $ | 238,539,009 | ||||||||||
| (1) | Assuming a LIBOR of 2.78% and a margin of 1.50%. |
| (2) | Assuming a LIBOR of 2.78% and a margin of 2.25%. |
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THE OIL TANKER INDUSTRY
The information and data in this section relating to the international maritime transportation industry have been provided by Clarkson Research Services Ltd (“CRS”), a UK-based company providing research and statistics to the shipping industry. CRS based its analysis on information drawn from published and private industry sectors. These include CRS’ databases, the BP Statistical Review of World Energy, IEA Monthly Oil Market Reports, the U.S. the Shipping Intelligence Network and the Oil & Tanker Trades Outlook. Data is taken from the most recently available published sources and these sources do revise figures and forecasts over time.
CRS has advised us that (1) some industry data included in this discussion is based on estimates or subjective judgments in circumstances where data for actual market transactions either does not exist or is not publicly available, (2) the published information of other maritime data collection experts may differ from this data, and (3) while CRS has taken reasonable care in the compilation of the industry statistical data and believe them to be correct, data collection is subject to limited audit and validation procedures.
Overview
For a number of decades oil has been one of the world’s most important energy sources. In 2006, the consumption of oil accounted for approximately 36% of world energy consumption. Oil demand has grown by 1.6% per year (compound annual growth rate, or CAGR) between 1999 and 2007, from approximately 75.8 million barrels per day, or bpd, to an expected 85.7 million bpd. This has primarily been the result of global economic growth. Some of the fastest demand growth in recent years has been recorded in China, India and the United States. However, an economic downturn could reduce the demand for oil and refined petroleum products, and also potentially affect tanker demand. Long-term growth in oil demand may also be reduced by a switching away from oil and/or a drive for increased efficiency in the use of oil as a result of environmental concerns and/or high oil prices.
The chart below illustrates the growth in oil demand in recent years, and the seasonality of changes:
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-LINEP152.JPG)
Crude oil tankers transport crude oil from points of production to points of consumption, typically oil refineries. Customers include oil companies, oil traders, large oil consumers, refiners, government agencies and storage facility operators.
Product tankers can carry both crude and petroleum products, including crude oil, fuel oil and vacuum gas oil (often referred to as “dirty products”) and gas oil, gasoline, jet fuel, kerosene and naphtha (often referred to as “clean products”). They typically have cargo handling systems that are designed to transport several different refined products simultaneously and have coated (e.g. epoxy) cargo tanks which (a) assist in tank cleaning between voyages involving different cargoes and (b) protect the steel from corrosive cargoes.
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Trading patterns are sensitive both to major geographical events and to small shifts, imbalances and disruptions at all stages from wellhead production through refining to end use. Seaborne trading distances are also influenced by infrastructural factors, such as the availability of pipelines and canal “shortcuts.” Although oil can also be delivered by pipeline or rail, the vast majority of worldwide crude and refined petroleum products transportation has been conducted by tankers because transport by sea is typically the only or most cost-effective method.
While there are a range of companies owning ships to meet their own seaborne transportation requirements, such as oil majors, the chartering of vessels for a specified period of time or to carry a specific cargo, or cargoes, is an integral part of the market for seaborne transportation, and the charter market is highly competitive. At present, the majority of independent operators charter tankers for single voyages at fluctuating rates based on existing tanker supply and demand. Competition is based primarily on the offered charter rate, the location, technical specification and quality of the vessel and the reputation of the vessel’s manager. Typically, charter party agreements are based on standard industry terms, which are used to streamline the negotiation and documentation processes.
Tanker charterhire and vessel values are strongly influenced by the supply of, and demand for tanker capacity. Supply and demand in the tanker market have been closely matched over the past five years. As a result of this tight supply and demand balance, charter rates for tankers have been volatile and have reached historically high levels, with geopolitical events that influence seaborne trading patterns, congestion and climatic events each having a visible influence on the freight markets.
The seaborne transportation of crude oil, refined petroleum products and edible oils is subject to regulatory measures focused on increasing safety and providing greater protection for the marine environment at global and local levels. Recent international regulations ratified or awaiting approval include the United Nations’ International Maritime Organization (IMO) amended regulations in 2003 to accelerate the phase-out of tankers without double-hulls, limiting the transportation of fuel oil to double-hull vessels, and a limitation of the vessels that can be used for transportation of vegetable and other edible oils following a reclassification of chemical cargoes. As a result, oil companies acting as charterers, terminal operators, shippers and receivers are becoming increasingly selective with respect to the vessels they might accept, inspecting and vetting both vessels and shipping companies on a periodic basis.
In late 2007 and early 2008 a number of single hull tankers were either undergoing conversion or scheduled to carry out conversion to the dry cargo and offshore markets. Most of these vessels will undergo these conversions several years ahead of their phase out timetable under IMO regulations. It is difficult to accurately quantify the number of conversions that will take place but it could significantly limit the growth of the tanker fleet in 2008. Continued conversion activity will depend on a number of factors, including the market conditions in the tanker and dry cargo markets and the attitude of dry cargo charterers to converted ships.
Tanker Vessel Types
The global oil tanker fleet is generally divided into five major categories of vessels, based on carrying capacity. In order to benefit from economies of scale, tanker charterers transporting crude oil will typically charter the largest possible vessel, taking into consideration port and canal size restrictions and optimal cargo lot sizes. The five categories are shown in the table below.
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Tanker Vessel Types
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|
|
|
||
| Class of Tankers | Cargo Capacity (Dwt) | Typical Use | ||
|
Ultra Large Crude Carriers (“ULCCs”)
Very Large Crude Carriers (“VLCCs”) |
>320,000
200,000 – 319,999 |
Long-haul crude oil transportations from the Middle East Gulf and West Africa to Northern Europe, to the Far East and to the U.S. Gulf. | ||
| Suezmax | 120,000 – 199,999 | Medium-haul of crude oil from the Middle East and West Africa to the United States and Europe. | ||
| Aframax | 80,000 – 119,999 | Short- to medium-haul of crude oil and refined petroleum products from the North Sea or West Africa to Europe or the East Coast of the United States, from the Middle East Gulf to the Pacific Rim and on regional trade routes in the North Sea, the Caribbean, the Mediterranean and the Indo-Pacific Basin. | ||
| Panamax | 60,000 – 79,999 | Short- to medium-haul of crude oil and refined petroleum products worldwide, mostly on regional trade routes. | ||
| Handymax | 40,000 – 59,999 | Short-haul of mostly refined petroleum products | ||
| Handysize | 10,000 – 39,999 | worldwide, usually on local or regional trade routes. |
Source: Clarkson Research, January 2008
Oil Tanker Demand
Demand for oil tankers is dictated by world oil demand and trade, which 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 USA and China.
Tanker demand is a product of (a) the amount of cargo transported in tankers, multiplied by (b) the distance over which this cargo is transported. The distance over which oil is transported is the more variable element of the tonne-mile demand equation. It is determined by seaborne trading and distribution patterns, which are principally influenced by the locations of production and the optimal economic distribution of the production to destinations for consumption. Seaborne trading patterns are also periodically influenced by geo-political events that divert tankers from normal trading patterns, as well as by inter-regional oil trading activity created by oil supply and demand imbalances. Overall, both long haul and short haul production (as defined on the graph below) has increased since 1993, as can be seen in the graph below. Falling production in some mature short haul oil fields, such as the North Sea and South East Asia, has been offset by the increasing production capacity of the former Soviet Union. Long haul production increases have largely been driven by Saudi Arabia, which has the greatest spare production capacity and greatest proven reserves, and Iraq as the country recovers from war and domestic problems. The level of exports from the Middle East has historically had a strong effect on demand for tankers, particularly for VLCC.
Major consumers, including the United States, Europe and China, have been forced to diversify their supply as regional fields’ mature, resulting in continued growth in demand for long haul and short haul oil. In 2003 and 2004, global oil demand grew strongly, with, according to IEA statistics, particularly strong performances in 2003 (up 1.6m bpd), 2004 (up 3.0m bpd) and 2005 (up 1.7m bpd), and slightly more moderate demand growth in 2006 (up 1m bpd). The IEA have projected oil demand growth of 1.0m bpd to 85.7m bpd in 2007 and growth of 2.1m bpd to 87.8m bpd in 2008. Forecasting agencies have been revising downwards
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their oil demand figures as a result of worries over the impact of the credit crunch and related concerns surrounding the U.S. economy, the high oil price and the possibility of this impacting economic growth and oil demand, subdued demand in the EU thought to be due to a milder than expected winter in 2007 and environmental concerns, and because of lower than expected demand in OECD Pacific nations.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-BARP155.JPG)
Demand has been particularly propelled by a number of factors. Firstly, a resilient American economy which has performed strongly since the beginning of 2004. Between 2002 and 2007, U.S. oil demand is estimated to have grown by almost 0.7 million bpd, to 20.8 million bpd. In early 2008 however, there are increasing concerns about the state of the U.S. economy. Secondly, spectacular growth in China, which has surprised the market with its ever-increasing appetite for oil. Between 2002 and 2007, Chinese oil demand is estimated to have grown from 5.0m bpd to 7.5m bpd. Thirdly, to a lesser extent, this has also been true for India, where economic growth has expanded oil demand by 0.4 million bpd to 2.8m bpd over the same period. Finally the Middle East has seen a growth of 1.4m bpd demand between 2002 and 2007 to 6.6m bpd.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-LINEP155.JPG)
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It is estimated that USA, China and India together account ed for almost 36% of global oil demand in 2007. The combined demand from these three countries alone is responsible for 45% of the total demand growth between 2002 and 2007. The majority of this demand growth has been imported by sea. Over this period however, the Middle East accounted for 17% of demand growth none of which was imported by sea of course.
The growth in demand for oil and the changing location of supply is helping to change the structure of the tanker market. Between 2002 and 2006, around 85% of new production was located in three regions; the former Soviet Union, the Arabian Gulf and West Africa (together these three regions already produce over 43% of global supply). This has meant that the average distance between producing and consuming regions will have changed. An increasing reliance on oil from the Middle East and West Africa is, in many cases, likely to increase the average haul distance.
The graph below shows the proportion of VLCC spot fixtures delivering to each area in 2007. It can be seen that the majority vessels, 57.1% by dwt, discharge in the Far East (defined as Japan, Korea, China, Taiwan, Philippines, Thailand and Malaysia). The majority of these vessels load in the Arabian Gulf. North America is the second largest destination area, and the third largest destination area is the Near East, which includes the Arabian Gulf Nations, Iran, Pakistan and India. These cargoes are all from the Arabian Gulf.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-PIEP156.JPG)
As shown in the following graph, total seaborne oil trade has increased from 1.6 billion tonnes in 1990 to an estimated 2.7 billion tonnes in 2007. Tonnage of oil shipped is primarily a function of global oil consumption, which is driven by economic activity as well as the long-term impact of oil prices on the location and related volume of oil production. Tonnage of oil shipped is also influenced by transportation alternatives (such as pipelines) and the output of refineries.
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![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-BARP157.JPG)
Over the past five years seaborne trade in crude oil has grown at an average rate of 3.2% per annum, and seaborne trade in refined petroleum products has grown at 6.3% per annum. These figures indicate that in general terms demand for world tanker tonnage is growing at a faster rate than global demand for oil, which implies that a larger proportion of global oil demand is being transported internationally by sea. The graph below compares annual percentage growth in crude tanker tonne miles and annual percentage growth in total world oil demand.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-BAR2P157.JPG)
Oil Tanker Supply
The effective supply of oil tanker capacity is determined by the size of the existing fleet, the rate of deliveries of new buildings, and scrapping, as well as casualties, the number of combined carriers carrying oil, the number used as storage vessels and the amount of tonnage in lay-up. The carrying capacity of the international tanker fleet is a critical determinant in pricing for tanker transportation services.
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World Crude Oil and Product Tanker Fleet By Vessel Size
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| Fleet | % Share of Dwt | Average Age (Years) |
% Double Hull
(by Dwt) |
No. | Orderbook Million Dwt | % of Fleet | ||||||||||||||||||||||||||||||
| Class | Size (Dwt) | Number | Million Dwt | |||||||||||||||||||||||||||||||||
| ULCC/ VLCC | 200,000 & above | 504 | 148.3 | 38.5 | % | 9.8 | 72.4 | % | 177 | 54.3 | 36.6 | % | ||||||||||||||||||||||||
| Suezmax | 120,000 – 199,999 | 361 | 54.7 | 14.2 | % | 9.6 | 84.2 | % | 141 | 22.2 | 40.7 | % | ||||||||||||||||||||||||
| Aframax | 80,000 – 119,999 | 742 | 76.2 | 19.8 | % | 9.9 | 84.6 | % | 292 | 32.1 | 42.1 | % | ||||||||||||||||||||||||
| Panamax | 60,000 – 79,999 | 342 | 24.0 | 6.2 | % | 9.3 | 81.6 | % | 129 | 9.5 | 39.5 | % | ||||||||||||||||||||||||
| Handymax | 40,000 – 59,999 | 853 | 39.4 | 10.2 | % | 9.2 | 83.8 | % | 533 | 25.5 | 64.9 | % | ||||||||||||||||||||||||
| Handysize | 10,000 – 39,999 | 1,776 | 42.8 | 11.1 | % | 13.8 | 64.2 | % | 694 | 13.9 | 32.5 | % | ||||||||||||||||||||||||
| Total | 4,578 | 385.4 | 100.0 | % | 11.2 | 77.3 | % | 1,966 | 157.5 | 40.9 | % | |||||||||||||||||||||||||
Source: Clarkson Research, OTTO January 2008.
Note: Includes ships above 10,000 dwt only.
The world tanker fleet (of 10,000 dwt and above) expanded from 275.4 million dwt at the beginning of 1996 to 385.4 million dwt at the start of 2008. That constituted a 40% expansion in 12 years. VLCCs are the largest sector by carrying capacity, making up 38.5% of the fleet in dwt terms.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-BARP158.JPG)
The level of newbuilding orders is a function primarily of newbuilding prices in relation to current and anticipated charter market conditions. The orderbook indicates the number of confirmed shipbuilding contracts for newbuilding vessels that are scheduled to be delivered into the market and is an indicator of how the global supply of vessels will develop over the next few years. At the start of January 2008, the world tanker orderbook for vessels above 10,000 dwt was 157.5 million dwt, equivalent to a historically high 40.9% of the existing fleet. This is expected to lead to strong fleet growth, particularly in 2009, which may put downward pressure on charter rates. The tanker orderbook already currently contains vessels on order for delivery in 2012.
World Crude Oil and Product Tanker Orderbook By Vessel Size
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| Orderbook (M. Dwt) | Orderbook as % of Fleet | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Class | Size (Dwt) | 2008 | 2009 | 2010 | 2011 | 2012 | Total | 2008 | 2009 | 2010 | 2011 | 2012 | Total | |||||||||||||||||||||||||||||||||||||||
| ULCC/ VLCC | 200,000 & above | 11.6 | 20.7 | 15.0 | 5.8 | 1.2 | 54.3 | 7.8 | % | 13.9 | % | 10.1 | % | 3.9 | % | 0.8 | % | 36.6% | ||||||||||||||||||||||||||||||||||
| Suezmax | 120,000-199,999 | 3.3 | 9.3 | 7.4 | 2.2 | 22.2 | 6.0 | % | 17.0 | % | 13.6 | % | 4.0 | % | 0.0 | % | 40.7% | |||||||||||||||||||||||||||||||||||
| Aframax | 80,000-119,999 | 8.5 | 11.4 | 9.2 | 3.0 | 32.1 | 11.2 | % | 15.0 | % | 12.1 | % | 3.9 | % | 0.0 | % | 42.1% | |||||||||||||||||||||||||||||||||||
| Panamax | 60,000-79,999 | 3.1 | 3.7 | 1.4 | 1.3 | 9.5 | 13.0 | % | 15.3 | % | 5.9 | % | 5.3 | % | 0.0 | % | 39.5% | |||||||||||||||||||||||||||||||||||
| Handymax | 40,000-59,999 | 8.5 | 8.4 | 6.3 | 2.2 | 0.2 | 25.5 | 21.6 | % | 21.3 | % | 16.0 | % | 5.5 | % | 0.5 | % | 64.9% | ||||||||||||||||||||||||||||||||||
| Handysize | 10,000-39,999 | 5.5 | 4.2 | 3.2 | 0.8 | 0.1 | 13.9 | 12.8 | % | 9.9 | % | 7.5 | % | 1.9 | % | 0.2 | % | 32.5% | ||||||||||||||||||||||||||||||||||
| Total | 40.5 | 57.7 | 42.6 | 15.2 | 1.5 | 157.5 | 10.5 | % | 15.0 | % | 11.0 | % | 4.0 | % | 0.4 | % | 40.9% | |||||||||||||||||||||||||||||||||||
Source: Clarkson Research, January 2008.
Note: Includes ships above 10,000 dwt only.
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At any point in time, the level of scrapping activity is a function primarily of scrapping prices in relation to current and prospective charter market conditions, as well as operating, repair and survey costs, which are in turn sometimes determined by industry regulations. Insurance companies and customers rely on the survey and classification regime to provide reasonable assurance of a tanker’s seaworthiness and tankers must be certified as “in-class” in order to continue to trade. Because the costs of maintaining a tanker in-class rise substantially as the age of the tanker increases, tanker owners often conclude that it is more economical to scrap a tanker that has exhausted its anticipated useful life than to upgrade it to maintain it in-class. Scrapping levels are also affected by industry regulations (see “Regulatory Environment” below).
Tanker demolition (above 10,000 dwt) averaged 16.6 million dwt between 2000 and 2003 but fell to 8.0 million dwt in 2004 and 4.0 million dwt in 2005 with a buoyant market encouraging owners to prolong the life of their elderly vessels. Despite record high scrap prices in 2006, demolition fell to 3.0m dwt. In 2007 very limited scrapping activity was seen as freight rates were at historically high levels. Only 3.0m dwt of tankers were sold for scrap with an average age of 28.8 years. However, a further 5.1m dwt of tankers were converted to other uses during 2007.
Regulatory Environment
Governmental authorities and international conventions have historically regulated the oil and refined petroleum products transportation industry and since 1990 the emphasis on environmental protection has increased. Legislation and regulations such as the United States Oil Pollution Act of 1990 (OPA 90), IMO protocols and classification society procedures demand higher-quality vessel construction, maintenance, repair and operations. This development has accelerated in recent years in the wake of several high-profile accidents involving 1970s-built ships of single-hull construction, including the “Erika” in 1999 and the “Prestige” in November 2002. A summary of selected regulations pertaining to the operation of tankers is shown in the table below.
Summary of Selected Shipping Regulations
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| Regulation | Introduced/ Modified | Features | ||
| OPA 90 | 1989 | Single-hull tankers banned by 2010 in the U.S. | ||
| Double sided and double bottom tankers banned by 2015. | ||||
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IMO MARPOL
Regulation 13G |
1992 | Single-hull tankers banned from trading by their 25 th anniversary. | ||
| All single-hull tankers fitted with segregated ballast tanks may continue trading to their 30 th anniversary, provided they have had selected inspections. | ||||
| New buildings must be double-hull. | ||||
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IMO MARPOL
Regulation 13G |
2001 | Phase-out of pre-MARPOL tankers by 2007. Remaining single-hull tankers phased-out by 2015. | ||
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IMO MARPOL
Regulation 13G & 13H |
2003 | Phase-out of pre-MARPOL tankers by 2005. Remaining single-hull tankers phased-out by 2010 or 2015, depending on port and flag states. | ||
| Single-hull tankers over 15 years of age subject to Conditional Assessment Scheme. | ||||
| Single-hull tankers banned from carrying heavy oil grades by 2005, or 2008 for tankers between 600 – 5,000 dwt. | ||||
| EU 417/2002 | 1999 | 25 year old single-hull tankers to cease trading by 2007 unless they apply hydrostatic balance methods or segregated ballast tanks. | ||
| Single-hull tankers fitted with segregated ballast tanks phased-out by 2015. |
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| Regulation | Introduced/ Modified | Features | ||
| EU 1723/2003 | 2003 | Pre-MARPOL single-hull tankers banned after 2005. Remaining single-hull tankers banned after 2010. | ||
| Single-hull tankers banned from carrying heavy oil grades by 2003. | ||||
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MARPOL Annex II,
International Bulk Chemical Code (IBC) |
2004 | Since January 1, 2007, vegetable oils which were previously categorized as being unrestricted will now be required to be carried in IMO II chemical tankers, or certain IMO III tankers that meet the environmental protection requirements of an IMO II tanker with regard to hull type (double hull) and cargo tank location. |
Source: Clarkson Research, December 2007.
The increasing focus on safety and protection of the environment has led oil companies as charterers, terminal operators, flag states, shippers and receivers to become increasingly selective with respect to the vessels they charter, vetting both vessels and shipping companies on a periodic basis or not allowing these vessels into port. This vetting can include, but is not limited to, hull type, crewing, age and owner. Although these vetting procedures and increased regulations raise the operating cost and potential liabilities for tanker vessel owners and operators, they strengthen the relative competitive position of shipowners with higher quality tanker fleets and operations. Analysis of chartering in the entire market, shows that the level of single-hulled tonnage chartered by oil majors has dropped significantly in recent years.
The table below shows estimates of the number of UL/VLCC tankers due to be phased out under IMO Regulation 13G through 2010, alongside the current orderbook for delivery through 2010. The analysis assumes that the IMO phase-out program will be followed and that flag and port states will not allow extensions for single-hull vessels beyond 2010.
VLCC Tanker Phase-Out and Orderbook (Assuming 2010 Phase-out)
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| Phase-Out | Orderbook | |||||||||||||||
| No | m dwt | No | m dwt | |||||||||||||
| Pre 2008 | 1 | 0.23 | — | — | ||||||||||||
| 2008 | 1 | 0.29 | 38 | 11.59 | ||||||||||||
| 2009 | 2 | 0.62 | 67 | 20.67 | ||||||||||||
| 2010 | 140 | 37.90 | 49 | 15.00 | ||||||||||||
| 2011 | 1 | 0.23 | 19 | 5.80 | ||||||||||||
| 2012 | — | — | 4 | 1.20 | ||||||||||||
| Total Phase-Out | 145 | 39.27 | 177 | 54.25 | ||||||||||||
| Total Fleet | 504 | 148.30 | ||||||||||||||
| % of Fleet* | 26.5 | % | 36.6 | % | ||||||||||||
As of 1st January 2008.
Phase-out figures based on CRS estimates of IMO Reg 13G Phase-Out, February 1 2007. It assumes phase-out of all single-hull vessels at the 2010 deadline (although some vessels will benefit from possible extensions granted by flag and port states). Assumes double bottomed and double sided vessels will trade to 25 years. Assumes average demolition ages of 30 years for other vessels.
Vessels may continue to trade coastally.
Source: Clarkson Research Services Ltd
A number of countries or regions have announced that they will not allow the extended trading of non-double hull ships beyond 2010. These include the United States, European Union and Australia. Other countries, such as Japan, China and Singapore have indicated they will adopt a more flexible policy towards extensions. It is therefore possible that a significant proportion of single-hull ships will continue to trade
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beyond 2010, increasing the global supply of tanker capacity and putting downward pressure on rates. In addition, tankers may continue to trade in coastal domestic waters. Political decisions or oil spill incidents may change this flexible attitude. After the 1993 built, single hulled VLCC “Hebei Spirit” spilt 10,800 tonnes of crude in South Korea in November 2007, there have been a number of announcements by South Korean government officials and refiners that suggest they will modify their policy towards single hull vessels. See “Risk Factors — Risks Related to Energy Merger’s Industry — Energy Merger’s fleet will include four single hull tankers which may be unable to trade in many markets after 2010, thereby adversely affecting Energy Merger’s overall financial position.”
In addition to the above analysis a number of single hull tankers, the majority of which are VLCC, were either undergoing conversion or scheduled to carry out conversion to the dry bulk or offshore vessels. Most of these vessels will undergo these conversions several years ahead of their phase out timetable under IMO regulations. It is difficult to accurately quantify the number of conversions that will take place but it could significantly limit the growth of the tanker fleet in 2008.
Types of Employment
The charter market is highly competitive. Competition is based primarily on availability, the offered charter rate, the location and technical specification of the vessel and the reputation of the vessel and its manager. Typically, the agreed terms are based on standard industry charter parties prepared to streamline the negotiation and documentation processes. The most common types of employment structures for a tanker are:
| • | Spot market: The vessel earns income for each individual voyage based on the cargo carried and owner pays for bunkers and port charges. Earnings are dependent on prevailing market conditions, which can be highly volatile. Idle time between voyages is possible depending on the availability of cargo and position of the vessel. |
| • | Contract of affreightment: Contracts of affreightment are agreements by vessel owners/operators to carry quantities of a specific cargo on a particular route or routes over a given period of time using ships chosen by the vessel owners/operators within specified restrictions. Contracts of affreightment function as a long-term series of spot charters, except that the owner is not required to use a specific vessel to transport the cargo, but instead may use any vessel at its disposal. |
| • | Time charter: A time charter is a contract for the hire of a vessel for a certain period of time, with the vessel owner being responsible for providing the crew and paying operating costs, while the charterer is responsible for fuel and other voyage costs. A time charter is comparable to an operating lease. Some time charters also have profit sharing arrangements, the details of which vary from charter to charter. |
| • | Bareboat charter: The ship owner charters the vessel to another company (the charterer) for a pre-agreed period and daily rate. The charterer is responsible for operating the vessel and for payment of the charter rates. A bareboat charter is comparable to a finance lease. |
| • | Pool employment: The vessel is part of a fleet of similar vessels, brought together by their owners in order to exploit efficiencies and benefit from a profit sharing mechanism. The operator of the pool sources different cargo shipment contracts and directs the vessels in an efficient way to service these contractual obligations. Pools can benefit from profit and loss sharing effects and the benefits of potentially less idle time through coordination of vessel movements, but vessels sailing in a pool will also be vulnerable to adverse market conditions. |
The type of employment arrangement is determined by customer requirements for operational involvement and range of services, along with current market conditions.
Charter Rates & Asset Values
Seaborne crude oil and oil products transportation is a mature industry. The two main types of oil tanker operators are independent operators, both publicly listed and private companies, that charter out their vessels for voyage or time charter use and major oil companies (including state owned companies). At present, the majority of independent operators hire their tankers for one voyage at a time in the form of a spot charter at fluctuating rates based on existing tanker supply and demand. Oil tanker charter hire rates are sensitive to
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changes in demand for and supply of vessel capacity and consequently volatile. Pricing of oil transportation services occurs in a highly competitive global tanker charter market.
In recent years the tanker market has seen a much closer demand-supply balance than before. The slow removal of the large oversupply of tankers evident in the 1980s, combined with resurgent oil demand, led to the conditions experienced between 2004 and 2007 when the fine demand-supply balance led to increasing volatility and generally higher freight rates. During this period, there were a series of significant spikes in tanker rates; at the beginning of 2004, the summer/autumn of 2004, the autumn of 2005, the summer of 2006 and again in the winter of 2007. Various factors have contributed to these spikes: strong underlying economic and oil demand growth, strong seasonal demand, low stocks, strong Chinese and U.S. demand, congestion, hurricanes, geopolitical events such as the Venezuelan shut down and bullish owner sentiment.
The following graph shows the historical development of VLCC spot earnings (for an early 1990s-built vessel).
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-LINEP162.JPG)
Average timecharter equivalent earnings as calculated by Clarkson Research using the assumptions for VLCCs described in Shipping Intelligence Weekly. Data to January 2008. There is no guarantee that rates are sustainable and rates move up and down significantly.
The following table shows the historical development of VLCC spot earnings (for modern VLCCs). For a longer term analysis of the historical VLCC spot rates, please see graph above.
Historical VLCC Spot Earnings (for Modern VLCCs)
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| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 38,335 | 35,659 | 21,096 | 55,440 | 38,829 | 23,293 | 52,453 | 96,036 | 60,627 | 63,073 | 57,147 | 58,935 | 91,611 | |||||||||||||||||||||||||||||||||||||||
| Cumulative Average Earnings/Day/VLCC | 38,335 | 36,997 | 31,697 | 37,633 | 37,872 | 35,442 | 37,872 | 45,143 | 46,863 | 48,484 | 49,272 | |||||||||||||||||||||||||||||||||||||||||
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| 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years | 7 Years | 8 Years | 9 Years | 10 Years | 11 Years | ||||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 57,147 | 60,110 | 60,282 | 69,349 | 65,983 | 58,890 | 56,032 | 55,958 | 52,093 | 50,425 | 49,165 | |||||||||||||||||||||||||||||||||||||||||
Source: Clarkson Research Services Limited May 2008
Note: Average Earnings of the main routes for Modern VLCCs.
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Average timecharter equivalent earnings as calculated by Clarkson Research using the assumptions for VLCCs described in Shipping Intelligence Weekly. There is no guarantee that rates are sustainable and rates move up and down significantly.
The following table shows the historical development of VLCC spot earnings for Ras Tanura / Chiba (for an early 1990s-built vessel).
Historical VLCC Tanker Earnings for Ras Tanura / Chiba (for 1990s-built VLCC
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| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 36,202 | 32,432 | 18,200 | 51,734 | 32,069 | 20,803 | 49,691 | 89,757 | 54,463 | 55,720 | 56,307 | 51,790 | 91,553 | |||||||||||||||||||||||||||||||||||||||
| Cumulative Average Earnings/Day/VLCC | 36,202 | 34,317 | 28,944 | 34,642 | 34,127 | 31,907 | 34,447 | 41,361 | 42,817 | 44,107 | 45,216 | |||||||||||||||||||||||||||||||||||||||||
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| 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years | 7 Years | 8 Years | 9 Years | 10 Years | 11 Years | ||||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 56,307 | 56,013 | 55,496 | 64,184 | 61,297 | 54,569 | 51,364 | 51,410 | 47,728 | 46,175 | 44,695 | |||||||||||||||||||||||||||||||||||||||||
Source: Clarkson Research May 2008
Note: Ras Tanura / Chiba VLCC Average Earnings for a 1990s-built VLCC
Average timecharter equivalent earnings as calculated by Clarkson Research using the assumptions for VLCCs described in Shipping Intelligence Weekly. There is no guarantee that rates are sustainable and rates move up and down significantly.
The following table shows the historical development of VLCC spot earnings for Ras Tanura / Chiba (for a modern VLCC).
Historical VLCC Spot Earnings Ras Tanura / Chiba (for a Modern VLCC
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| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 40,979 | 36,819 | 20,190 | 58,190 | 35,951 | 22,804 | 55,684 | 101,633 | 60,660 | 61,759 | 61,726 | 57,250 | 101,242 | |||||||||||||||||||||||||||||||||||||||
| Cumulative Average Earnings/Day/VLCC | 40,979 | 38,899 | 32,663 | 39,044 | 38,426 | 35,822 | 38,659 | 46,531 | 48,101 | 49,467 | 50,581 | |||||||||||||||||||||||||||||||||||||||||
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| 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years | 7 Years | 8 Years | 9 Years | 10 Years | 11 Years | ||||||||||||||||||||||||||||||||||||||||||
| Average Earnings/Day/VLCC | 61,726 | 61,742 | 61,382 | 71,589 | 68,420 | 60,842 | 57,296 | 57,407 | 53,281 | 51,609 | 49,937 | |||||||||||||||||||||||||||||||||||||||||
Source: Clarkson Research May 2008
Note: Ras Tanura / Chiba Average Earnings Modern VLCC
Average timecharter equivalent earnings as calculated by Clarkson Research using the assumptions for VLCCs described in Shipping Intelligence Weekly. There is no guarantee that rates are sustainable and rates move up and down significantly.
Traditionally tanker timecharter activity has been low, especially when a high proportion of the tanker fleet was owned by the oil majors. More recently the oil companies have sought to spread the risk from carrying crude oil by engaging independent tanker owners. The average number of 1 year, 3 year and 5 year timecharters from 1993 to 2007 is around 164/year. However, between 1993 and 1998 the average was 124/year, and mainly the one year timecharter variety. Since then the three year variety has become popular, and the average number of three year time charters per year since 1998 is 49/year. Independent owners seek to lock in revenue during times of high freight rates by arranging timecharters, and this can be seen from the increase in 3 and 5 year time charters in 2006 in the graph below. Otherwise the independent owner prefers
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the flexibility of the spot market, to take advantage of any short term spike in spot rates and for the asset play opportunities. The Clarkson tanker fixture database has also noted an increasing number of VLCCs being taken on timecharter for longer-terms.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-BARP163.JPG)
The table and graph below show the movements in various time charter rates for VLCC tankers:
Estimated Owner’s 1-Year and 3-Year Time Charter Rates
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| VLCC Tanker Rates | ||||||||||||||||
| 300,000 D/H | 280,000 S/H | |||||||||||||||
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1-Year
$/Day |
3-Year
$/Day |
1-Year
$/Day |
3-Year
$/Day |
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| Av 2001 | 41,104 | 39,260 | 35,577 | |||||||||||||
| Av 2002 | 25,704 | 27,251 | 24,323 | 25,824 | ||||||||||||
| Av 2003 | 34,133 | 30,097 | 31,494 | 27,070 | ||||||||||||
| Av 2004 | 55,019 | 41,690 | 48,923 | 34,465 | ||||||||||||
| Av 2005 | 58,771 | 47,271 | 47,688 | 37,625 | ||||||||||||
| Av 2006 | 58,310 | 47,219 | 48,238 | 38,621 | ||||||||||||
| Av 2007 | 55,240 | 48,290 | 42,050 | 36,781 | ||||||||||||
| Dec-06 | 56,000 | 48,000 | 45,400 | 38,000 | ||||||||||||
| Jan-07 | 54,375 | 46,875 | 43,625 | 38,000 | ||||||||||||
| Feb-07 | 51,500 | 44,750 | 41,000 | 37,000 | ||||||||||||
| Mar-07 | 50,000 | 44,400 | 41,000 | 37,000 | ||||||||||||
| Apr-07 | 50,000 | 45,000 | 41,000 | 37,000 | ||||||||||||
| May-07 | 58,625 | 47,500 | 41,375 | 37,000 | ||||||||||||
| Jun-07 | 60,500 | 49,500 | 42,500 | 37,000 | ||||||||||||
| Jul-07 | 57,500 | 51,500 | 42,500 | 37,000 | ||||||||||||
| Aug-07 | 56,000 | 51,500 | 41,600 | 37,000 | ||||||||||||
| Sep-07 | 51,750 | 49,875 | 40,250 | 36,375 | ||||||||||||
| Oct-07 | 51,500 | 49,500 | 40,000 | 36,000 | ||||||||||||
| Nov-07 | 50,500 | 48,200 | 40,000 | 36,000 | ||||||||||||
| Dec-07 | 70,625 | 50,875 | 49,750 | 36,000 | ||||||||||||
Source: Clarkson Research Services Ltd, January 1, 2008
186
The vessels used in these timecharter estimates are the two standard modern vessels in this market sector. Clarkson brokers estimate timecharter rates each week for these standard vessels, which is informed by transactions and ongoing negotiations associated with vessels of similar size. There is often a bid offer spread between owners and charters and the above reflects published owners prices.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-LINEP164.JPG)
The vessels used in these timecharter estimates are the two standard modern vessels in this market sector. Clarkson brokers estimate timecharter rates each week for these standard vessels, which is informed by transactions and ongoing negotiations associated with vessels of similar size. There is often a bid offer spread between owners and charters and the above reflects published owners prices.
Like vessel earnings, oil tanker asset values have also fluctuated over time. The second hand sale and purchase market for tankers is relatively liquid, with tankers changing hands between owners on a regular basis. Oil tanker second hand prices are influenced by potential earnings and as a result of trends in the supply of and demand for tanker capacity. The following graph shows the historical development of 5 year old second hand and newbuilding standard VLCC prices.
![[GRAPHIC MISSING]](http://content.edgar-online.com/edgar_conv_img/2008/07/14/0001144204-08-039918_V117166_CHRT-LINE2P164.JPG)
187
Newbuilding prices assume “European spec.”, 10/10/10/70% payments and “first class competitive yards” quotations.
There is a relationship between changes in asset values and the tanker charter market. A reduction in charter rates caused by a decrease in demand for and / or an increase in the supply of tanker vessels would reduce vessel prices, although there can be a lag in the change in vessel prices. The secondhand market is composed of two sectors: the market for vessels changing hands between owners and the market for the demolition of ships, with demolition breakers competing for vessels ready to be sold for scrap. The newbuilding market for ships is made up of owners looking to place contracts for new vessels, and the shipyards building them. Newbuilding prices increased significantly between 2003 and 2007, primarily as a result of increased tanker demand for new tonnage in response to increased demand for oil, higher charter rates, regulations requiring the phase-out of single-hull tankers, constrained shipyard capacity and rising steel prices (which contributed to a strong increase in shipyard costs). In addition, as a result of strong demand for other types of vessels, shipyard capacity, especially for large vessels, has been booked several years in advance, further contributing to the increased prices of newbuildings. In the medium term, shipbuilding capacity is growing strongly and may lead to weakening prices in a period of weaker shipbuilding demand.
Recent developments in the newbuilding and secondhand prices of standard VLCC tankers are shown below. From July to December 2007, four vessels sales have been publicly reported in the “modern” (2000-built or younger) VLCC sector. Prices have varied between $137.5 million (in July 2007 for a 2002-built vessel) and $122 million (in December for a 2000 built vessel). In the fourth quarter of 2007, five 1990s built single hull VLCC sales were publicly reported. Prices varied between $32 million and $58.1 million. A number of these single hull vessels were reportedly sold for conversion and a correction in the dry cargo market could lead to this demand declining and decreasing single hull values.
Estimated Tanker Newbuilding and Secondhand Prices ($ in Millions)
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| Start Year: | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||
| 300,000 dwt D/H newbuilding | 70.0 | 65.5 | 79.0 | 120.0 | 122.0 | 130.0 | 146.0 | |||||||||||||||||||||
| 300,000 dwt D/H Resale | — | — | — | — | 140.0 | 138.0 | 155.0 | |||||||||||||||||||||
| 300,000 dwt D/H 5-year-old vessel | 58.0 | 60.0 | 72.0 | 110.0 | 120.0 | 117.0 | 138.0 | |||||||||||||||||||||
| 250,000 dwt S/H 15-year old vessel | 18.0 | 17.0 | 24.0 | 48.0 | 37.0 | 39.0 | 59.0 | |||||||||||||||||||||
Source: Clarkson Research Services Ltd
Dates shown refer to contracting date for a newbuild. Vessel typically would not be delivered for another 30 – 36 months. NB prices relate to a theoretically “standard” vessel which assumes “European spec”, 10/10/10/70% payments and “first class competitive yards” quotations.
Based on broker estimates and actual sales assuming charter free, willing buyer/willing seller at the point in time indicated in the table. There is no guarantee that the prices are sustainable and readers should be aware that prices may move up and down significantly. Longer term trends are shown in the graph below.
188
DIVIDEND POLICY OF ENERGY MERGER
Under the Share Purchase Agreement and subject to its ability to do so under applicable law, Energy Merger has agreed to pay dividends of $1.54 per share to Energy Merger’s public stockholders by the end of the first year following the consummation of the Business Combination. Vanship has agreed, and it is a condition to the closing of the Business Combination that Energy Merger insiders shall have agreed, to waive any right to receive dividend payments in the one-year period immediately following the consummation of the Business Combination in order to facilitate the payment of these dividends. Dividends of $1.54 per share in the first year following the Business Combination should not be viewed as indicative of any dividend payments that Energy Merger will make in the future and there can be no assurances that Energy Merger will have the cash available for distribution of these dividends. See “Risk Factors — Risks Relating to Energy Merger’s Common Stock — Investors should not rely on an investment in Energy Merger if they require dividend income. It is not certain that Energy Merger will pay a dividend and the return on an investment in Energy Merger, if any, may come solely from appreciation of its common stock, which is also not assured.”
The payment of dividends following the Business Combination will be in the discretion of Energy Merger’s board of directors and will depend on market conditions and Energy’s Merger’s business strategy in any given period. The timing and amount of dividend payments will be dependent upon Energy Merger’s earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in its credit facility, the provisions of Marshall Islands law affecting the payment of distributions to stockholders and other factors. Energy Merger’s ability to pay dividends will be limited by the amount of cash it can generate from operations, primarily the charter hire, net of commissions, received by Energy Merger under the charters for its vessels during the preceding calendar quarter, less expenses for that quarter, consisting primarily of vessel operating expenses (including management fees), general and administrative expenses, debt service, maintenance expenses and the establishment of any reserves as well as additional factors unrelated to its profitability. These reserves may cover, among other things, future dry-docking, repairs, claims, liabilities and other obligations, interest expense and debt amortization, acquisitions of additional assets and working capital.
Because Energy Merger is a holding company with no material assets other than the shares of its subsidiaries which will directly own the vessels in Energy Merger’s fleet, Energy Merger’s ability to pay dividends will depend on the earnings and cash flow of its subsidiaries and their ability to pay dividends to Energy Merger. Energy Merger cannot assure you that, after the expiration or earlier termination of its charters, Energy Merger will have any sources of income from which dividends may be paid. If there is a substantial decline in the charter market, this would negatively affect Energy Merger’s earnings and limit its ability to pay dividends. In particular, Energy Merger’s ability to pay dividends is subject to its ability to satisfy certain financial covenants that may be contained in the credit facility that Energy Merger expects to enter into.
189
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Anticipated Accounting Treatment
The Business Combination will be accounted for as a “reverse merger” since, immediately following completion of the transaction, the stockholder of the SPVs immediately prior to the Business Combination will have effective control of Energy Infrastructure through its approximately 39% stockholder interest in the combined entity, assuming no stockholder redemptions (40% in the event of maximum stockholder redemptions) and control of a majority of the board of directors and all of the senior executive positions. For accounting purposes, the SPVs (through Energy Merger, a newly-formed holding company) will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of the SPVs, i.e., the issuance of stock by the SPVs (through Energy Merger) for the stock of Energy Infrastructure and a cash dividend equal to the cash portion of the consideration. Accordingly, the combined assets, liabilities and results of operations of the SPVs will become the historical financial statements of Energy Infrastructure, and Energy Infrastructure’s assets, liabilities and results of operations will be consolidated with the SPVs beginning on the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction, except that the concurrent acquisition of the 50% equity interest in the three of the SPVs currently held by a third party will result in the step-up of the proportionate share of assets and liabilities acquired to reflect consideration paid.
The following unaudited pro forma condensed combined financial information has been prepared assuming that the business combination has occurred at the beginning of the applicable period for pro forma statements of operations data and at the respective date for pro forma balance sheet data. Two different levels of approval of the acquisition by Energy Infrastructure’s stockholders are presented, as follows:
| • | Assuming No Redemption of Shares: This presentation assumes that no stockholders exercised their redemption rights; and |
| • | Assuming Redemption of 1,087,520 Shares (5%): This presentation assumes that holders of 1,087,520 shares of Energy Infrastructure’s outstanding common stock exercise their redemption rights. |
The unaudited pro forma condensed combined information is for illustrative purposes only. You should not rely on the unaudited pro forma condensed combined balance sheet as being indicative of the historical financial position that would have been achieved had the Business Combination been consummated as of this date. See “Risk Factors — Risks Relating to Energy Merger — The historical financial and operating data of the SPVs and the pro forma combined financial information of Energy Merger may not be representative of Energy Merger’s future results because Energy Merger has no operating history as a stand-alone entity or as a publicly traded company.”
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Energy Infrastructure Acquisition Corp. and SPVs to Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 2008
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Aggregate SPV's to Be Acquired
(Note E) |
Energy
Infrastructure Acquisition Corp. |
Pro Forma
Adjustments and Eliminations |
Pro Forma Combined Companies (With No Stock Redemption) |
Additional Pro Forma
Adjustments for Redemption of 1,087,520 Shares of Common Stock |
Pro Forma Combined
Companies (With Maximum Stock Redemption) (Note F) |
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| Debit | Credit | Debit | Credit | |||||||||||||||||||||||||||||||||
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ASSETS
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Current assets
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| Cash and cash equivalents | $ | 32,855,956 | $ | 11,003 | 217,799,903 (1) | 2,545,750 (2) | $ | 12,036,280 | 10,875,200 (18) | $ | 1,013,664 | |||||||||||||||||||||||||
| 50,000,000 (7) | 9,974,036 (31) | 108,752 (34) | 256,168 (19) | |||||||||||||||||||||||||||||||||
| 410,340,000 (12) | 156,314,204 (26) | |||||||||||||||||||||||||||||||||||
| 41,250 (3) | ||||||||||||||||||||||||||||||||||||
| 536,252 (17) | ||||||||||||||||||||||||||||||||||||
| 430,165,000 (21) | ||||||||||||||||||||||||||||||||||||
| 95,541 | (23) | 4,880,693 (28) | ||||||||||||||||||||||||||||||||||
| 94,198,938 (24) | ||||||||||||||||||||||||||||||||||||
| 410,000 (35) | ||||||||||||||||||||||||||||||||||||
| Restricted cash | 5,083,541 | — | 5,083,541 (23) | — | — | |||||||||||||||||||||||||||||||
| Money market funds — held in trust | — | 217,799,903 | 217,799,903 (1) | — | — | |||||||||||||||||||||||||||||||
| Trade accounts receivable | 7,664,560 | — | 7,664,560 | 7,664,560 | ||||||||||||||||||||||||||||||||
| Prepayments and other receivables | 943,995 | 90,582 | 1,034,577 | 1,034,577 | ||||||||||||||||||||||||||||||||
| Supplies | 1,032,201 | — | 1,032,201 | 1,032,201 | ||||||||||||||||||||||||||||||||
| Amounts due from related parties | 2,124,835 | — | 1,654,178 (5) | — | — | |||||||||||||||||||||||||||||||
| 470,657 (29) | ||||||||||||||||||||||||||||||||||||
| Total current assets | 49,705,088 | 217,901,488 | 21,767,618 | 10,745,002 | ||||||||||||||||||||||||||||||||
| Restricted cash | 10,012,000 | — | 4,988,000 (23) | 15,000,000 | 15,000,000 | |||||||||||||||||||||||||||||||
| Loans to related parties | 57,700,000 | — | 32,500,000 (5) | — | — | |||||||||||||||||||||||||||||||
| 25,200,000 (29) | ||||||||||||||||||||||||||||||||||||
| Deferred loan costs | 1,160,960 | — | 4,660,000 (12) | 1,160,960 (22) | 5,070,000 | 5,070,000 | ||||||||||||||||||||||||||||||
| 410,000 | (35) | |||||||||||||||||||||||||||||||||||
| Vessels, net | 531,829,515 | — | 12,634,620 (25) | 544,464,135 | 544,464,135 | |||||||||||||||||||||||||||||||
| Intangible assets | — | — | 709,923 (25) | 709,923 | 709,923 | |||||||||||||||||||||||||||||||
| Deferred acquisition costs | — | 1,845,227 | 4,809,773 | (15) | 10,875,000 (32) | — | — | |||||||||||||||||||||||||||||
| 4,220,000 (16) | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 650,407,563 | $ | 219,746,715 | $ | 587,011,676 | $ | 575,989,060 | ||||||||||||||||||||||||||||
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LIABILITIES
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Current liabilities
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| Current portion of long—term bank loan | $ | 52,545,000 | $ | — | 52,545,000 (21) | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Current portion of credit facility | — | — | 40,600,000 (12) | 40,600,000 | 40,600,000 | |||||||||||||||||||||||||||||||
| Amounts due to related parties | 8,125,393 | — | 7,654,736 | (5) | — | — | ||||||||||||||||||||||||||||||
| 470,657 | (29) | |||||||||||||||||||||||||||||||||||
| Amount due to Vanship | — | — | 94,198,938 (24) | 94,198,938 (5) | — | — | ||||||||||||||||||||||||||||||
| Accrued liabilities and other payables | 10,088,076 | 282,100 | 41,250 | (3) | 10,328,926 | 10,328,926 | ||||||||||||||||||||||||||||||
| Accrued acquisition costs | — | 944,263 | 9,974,036 | (31) | 4,809,773 (15) | — | — | |||||||||||||||||||||||||||||
| 4,220,000 (16) | ||||||||||||||||||||||||||||||||||||
| Amounts due to underwriter | — | 2,545,750 | 2,545,750 | (2) | — | — | ||||||||||||||||||||||||||||||
| Deferred interest on funds held in trust | — | 1,537,009 | 1,537,009 (4) | — | — | |||||||||||||||||||||||||||||||
| Accrued interest payable to shareholder | — | 36,252 | 36,252 (17) | — | — | |||||||||||||||||||||||||||||||
| Note payable to stockholder | — | 500,000 | 500,000 | (17) | — | — | ||||||||||||||||||||||||||||||
| Convertible loans payable to shareholder | — | 2,685,000 | 2,685,000 | (6) | — | — | ||||||||||||||||||||||||||||||
| Deferred revenue | 4,945,342 | — | 20,249 | (25) | 4,965,591 | 4,965,591 | ||||||||||||||||||||||||||||||
| Derivative financial instruments | 4,880,693 | — | 4,880,693 | (28) | — | — | ||||||||||||||||||||||||||||||
| Total current liabilities | 80,584,504 | 8,530,374 | 55,894,517 | 55,894,517 | ||||||||||||||||||||||||||||||||
191
Energy Infrastructure Acquisition Corp. and SPVs to Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 2008
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Aggregate SPV's to Be Acquired
(Note E) |
Energy
Infrastructure Acquisition Corp. |
Pro Forma
Adjustments and Eliminations |
Pro Forma Combined Companies (With No Stock Redemption) |
Additional Pro Forma
Adjustments for Redemption of 1,087,520 Shares of Common Stock |
Pro Forma Combined
Companies (With Maximum Stock Redemption) (Note F) |
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| Debit | Credit | Debit | Credit | |||||||||||||||||||||||||||||
| Long—term bank loan, excluding current portion | 377,620,000 | — | 377,620,000 (21) | — | — | |||||||||||||||||||||||||||
| Credit facility, excluding current portion | — | — | 374,400,000 | (12) | 374,400,000 | 374,400,000 | ||||||||||||||||||||||||||
| Loans from related parties | 145,898,380 | — | 120,698,380 (5) | — | — | |||||||||||||||||||||||||||
| 25,200,000 (29) | ||||||||||||||||||||||||||||||||
| Deferred loan income | 320,327 | — | 320,327 | (22) | — | — | ||||||||||||||||||||||||||
| Total liabilities | 604,423,211 | 8,530,374 | 430,294,517 | 430,294,517 | ||||||||||||||||||||||||||||
| Common stock subject to possible redemption | — | 64,619,129 | 64,619,129 (4) | — | — | |||||||||||||||||||||||||||
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Shareholders' equity
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| Preferred stock, $0.0001 par value | — | — | 0 (33) | 0 | 0 | |||||||||||||||||||||||||||
| Common stock, $0.0001 par value | — | 2,722 | 27 (6) | 4,699 | 109 | (18) | 4,586 | |||||||||||||||||||||||||
| 500 (7) | 5 (20) | |||||||||||||||||||||||||||||||
| 100 (11) | ||||||||||||||||||||||||||||||||
| 1,350 (13) | ||||||||||||||||||||||||||||||||
| Ordinary shares | 39 | — | 39 (27) | — | — | |||||||||||||||||||||||||||
| Paid—in capital in excess of par | — | 158,481,728 | 7,780,000 | (36) | 64,619,129 (4) | 93,270,019 | 10,766,339 (18) | 5 (20) | 82,503,684 | |||||||||||||||||||||||
| 156,314,204 (26) | 2,684,973 (6) | 108,752 (18) | 108,752 (34) | |||||||||||||||||||||||||||||
| — | 50,299,500 (7) | |||||||||||||||||||||||||||||||
| 110,500 | (8) | 110,500 (8) | ||||||||||||||||||||||||||||||
| 110,500 | (9) | 110,500 (9) | ||||||||||||||||||||||||||||||
| 0 (33) | 15,034,096 (10) | |||||||||||||||||||||||||||||||
| 18,298,722 (27) | 10,059,900 (11) | |||||||||||||||||||||||||||||||
| 1,350 (13) | 12,634,620 (25) | |||||||||||||||||||||||||||||||
| 35,444,325 (14) | 689,674 (25) | |||||||||||||||||||||||||||||||
| 10,875,000 (32) | 7,780,000 (36) | |||||||||||||||||||||||||||||||
| 300,000 | (7) | |||||||||||||||||||||||||||||||
| Retained earnings (accumulated deficit) | 64,283,074 | (11,887,238 | ) | 840,633 | (22) | 1,537,009 (4) | 63,442,441 | 256,168 (19) | 63,186,273 | |||||||||||||||||||||||
| 10,060,000 (11) | 35,444,325 (14) | |||||||||||||||||||||||||||||||
| 15,034,096 (10) | ||||||||||||||||||||||||||||||||
| Deemed distribution | (18,298,761 | ) | 18,298,761 (27) | — | — | |||||||||||||||||||||||||||
| Total shareholders' equity | 45,984,352 | 146,597,212 | 156,717,159 | 145,694,543 | ||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 650,407,563 | $ | 219,746,715 | $ | 587,011,676 | $ | 575,989,060 | ||||||||||||||||||||||||
Pro Forma Adjustments and Eliminations:
| (1) | To liquidate investments held in trust. |
| (2) | To pay deferred underwriters' compensation charged to capital at time of initial public offering but contingently payable until the consumation of a business combination of $2,413,215, plus interest accrued thereon of $132,535. |
| (3) | To record payment of accrued Delaware franchise taxes to facilitate reincorporation to Marshall Islands. |
| (4) | To eliminate common stock subject to redemption and related deferred interest on the assumption that all shareholders approve of the proposed Business Combination. |
| (5) | To aggregate amounts due from and due to Vanship entities not being acquired. See payment recorded at entry (24) below. |
| (6) | To record conversion of Sagredos convertible loans into 268,500 units, each unit consisting of one share of common stock and one common stock purchase warrant, at a conversion price of $10.00 per unit. |
| (7) | To record Vanship purchase of up to 5,000,000 units, each unit consisting of one share of common stock and one common stock purchase warrant, at a purchase price of $10.00 per unit. (Valued at market price |
192
| per unit at closing date, see note A below). Vanship has verbally indicated to Energy Infrastructure its intention to purchase all 5,000,000 units upon completion of the Business Combination, provided that the loan commitment from Energy Merger’s future lenders does not increase from the current $415 million amount. If developments in the credit market were to permit the borrowing of additional funds, Vanship would reconsider the purchase of all 5,000,000 units. |
| (8) | To record the surrender of 425,000 warrants held by Energy Corp., a company controlled by Sagredos. (Valued at market price per warrant, see note A below). The warrants were originally issued by the Company in a non-compensatory transaction. |
| (9) | To record the transfer of 425,000 warrants to Vanship. (Valued at market price per warrant, see note A below). As the warrants are considered to be a cost of the reverse merger, they will be accounted for as a direct charge to additional paid-in capital. |
| (10) | To record the termination of options held by Sagredos and Theotokis to purchase 3,585,000 shares of common stock at unamortized fair value. The fair value at date of issue was $34,917,900, less accumulated amortization of $19,883,804. The unamortized fair value of such options will be charged to operations at closing. The charge has not been reflected in the pro forma statement of operations since it is a non-recurring expense associated with compensation to Energy's former CEO, and is payable upon the closing of the Business Combination. |
| (11) | To record issuance of 1,000,000 units, each unit consisting of one share of common stock and one common stock purchase warrant, to Sagredos. (Valued at market price per unit, see note A below, times 1,000,000 units). The fair value of such services will be charged to operations at closing. The charge has not been reflected in the pro forma statement of operations since it is a non-recurring expense. |
| (12) | To record drawdown on credit facility of $415,000,000, including loan origination costs of $4,660,000. Per the facility agreement, the first four quarterly installments are to be $10,150,000 each. Energy has entered into (i) a $325.0 million long-term bank loan, or Loan A, with DVB Group Merchant Bank (Asia) Ltd, or DVB, Fortis Bank S.A./N.V., Singapore Branch, and NIBC Bank Ltd, or NIBC, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ), Allied Irish Banks, p.l.c., Bayerische Hypo- und Vereinsbank AG, Singapore Branch, and The Governor and Company of the Bank of Ireland, as lenders, DVB, Fortis Bank S.A./N.V., Singapore Branch, and NIBC, as mandated lead arrangers and bookrunners, DVB, as agent, DVB Bank AG, Fortis Bank S.A./N.V., or Fortis, and NIBC Bank N.V., as swap providers, and DVB, as security agent, and (ii) a $90.0 million long-term bank loan, or Loan B, with DVB, Deutsche Schiffsbank Aktiengesellschaft, Skandinaviska Enskilda Banken AB (publ) and Allied Irish Banks, p.l.c., as lenders, DVB, as agent and security agent, and DVB Bank AG, as swap provider, both dated as of June 30, 2008. |
| (13) | To record issuance of 13,500,000 shares of common stock to Vanship in reverse merger transaction. |
| (14) | To eliminate historical accumulated deficit of accounting acquiree. |
| (15) | To accrue balance of EIAC estimated direct costs for the preparation and negotiation of the agreement related to Business Combination based upon engagement letters, actual invoices and/or currently updated fee estimates as follows: |
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| Investment banking fees | $ | 4,250,000 | ||
| Legal fees | 1,125,000 | |||
| Fairness opinion fees | 200,000 | |||
| Due diligence fees | 240,000 | |||
| Valuation fees | 60,000 | |||
| Accounting fees | 780,000 | |||
| Total estmated costs | 6,655,000 | |||
| Less costs incurred to-date | (1,845,227 | ) | ||
| Balance to accrue | $ | 4,809,773 | ||
Total estimated costs do not include contingent underwriters fees of approximately $2,400,000 that are payable upon consummation of the Business Combination as these costs were incurred in connection with Energy's initial public offering and have already been provided for on Energy's books.
193
| (16) | To accrue Vanship estimated direct costs for the preparation and negotiation of the agreement related to Business Combination based upon engagement letters, actual invoices and/or currently updated fee estimates as follows: |
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| Legal fees | $ | 2,640,000 | ||
| Accounting fees | 650,000 | |||
| Filing fees | 750,000 | |||
| Miscellaneous costs | 180,000 | |||
| Total estmated costs | $ | 4,220,000 | ||
| (17) | To record payment of principal and accrued interest due to Sagredos on shareholder loans. |
| (18) | To record redemption of 1,087,520 shares (5%) of Energy Infrastructure Acquisition Corp. shares of common stock issued in the Company's initial public offering and private placement consumated immediately prior to the initial public offering, at March 31, 2008 redemption value of $10 per share, of which $0.10 per share represents a portion of the underwriter's contingent fee which the underwriter's have agreed to forego for each share redeemed and which is included in amounts due to underwriter and has already been charged to additional paid-in capital, plus a portion of the interest earned on the trusts. (See note F below). |
| (19) | To record the payment to redeeming shareholders of interest earned on the trust account attributed to the redeeming shareholders. |
| (20) | To record the surrender and cancellation of 45,000 shares of common stock held by Energy Infrastructure management in order to offset the resulting dilution to nonredeeming shareholders, assuming full redemption of 1,087,520 shares. (The 45,000 shares cancellable at the 1,087,520 share redemption level is a proration of the 270,000 shares cancellable at the 6,525,118 redemption level). (See note F below) |
| (21) | To record repayment of existing long-term bank debt financing. |
| (22) | To record write-off of deferred loan charges and credits related to existing long-term debt financing to be repaid. |
| (23) | To establish restricted cash balance pursuant to new credit facility loan covenants at $15,000,000. The excess of the aggregate of the SPV's existing restricted cash balance over the required restricted cash balance pursuant to the new loan facility is transferred to cash and cash equivalents. |
| (24) | To record repayment of debt to related parties. |
194
| (25) | To adjust the carrying value of three SPV's to be acquired to reflect the acquisition of the remaining 50% joint venture interest, concurrently with the Business Combination as follows: |
|
|
|
|
|
|
||||||||||||
|
Shinyo
Jubilee |
Shinyo
Mariner |
Shinyo
Sawako |
Total | |||||||||||||
| Fair value of the vessel — (50%) | $ | 20,000,000 | $ | 28,250,000 | $ | 31,250,000 | $ | 79,500,000 | ||||||||
| Intangible assets (deferred revenue) — (50%) | — | (1,148,413 | ) | 1,838,087 | 689,674 | |||||||||||
| Fair value of net assets acquired | 20,000,000 | 27,101,587 | 33,088,087 | 80,189,674 | ||||||||||||
| Cash consideration | (19,000,000 | ) | (25,000,000 | ) | (30,000,000 | ) | (74,000,000 | ) | ||||||||
| Negative goodwill | 1,000,000 | 2,101,587 | 3,088,087 | 6,189,674 | ||||||||||||
| Less : vessel | (1,000,000 | ) | (2,101,587 | ) | (3,088,087 | ) | (6,189,674 | ) | ||||||||
| Adjusted cost of vessel — (50%) | 19,000,000 | 26,148,413 | 28,161,913 | 73,310,326 | ||||||||||||
| Carrying amount of vessel — (50%) | (14,260,296 | ) | (24,156,554 | ) | (22,258,856 | ) | (60,675,706 | ) | ||||||||
| Vessel, net | $ | 4,739,704 | $ | 1,991,859 | $ | 5,903,057 | $ | 12,634,620 | ||||||||
|
Amortization of intangible assets (deferred revenue):
|
||||||||||||||||
| Intangible assets (deferred revenue) | $ | — | $ | (1,148,413 | ) | $ | 1,838,087 | |||||||||
| Amortization period (in months) | 27 | 45 | ||||||||||||||
|
Intangible assets (deferred revenue):
|
||||||||||||||||
| Current portion | $ | — | $ | (510,406 | ) | $ | 490,157 | $ | (20,249 | ) | ||||||
| Non—current portion | — | (638,007 | ) | 1,347,930 | 709,923 | |||||||||||
| Total | $ | — | $ | (1,148,413 | ) | $ | 1,838,087 | $ | 689,674 | |||||||
Deferred revenue represents the liability arising from a below market value time charter assumed upon acquisition of a vessel under the existing charter, while intangible assets represent an asset arising from an above market value time charter acquired upon acquisition of a vessel under an existing charter. The fair value of net assets acquired includes vessels and intangible assets and deferred revenue in respect of charters attached to these vessels. The allocation of fair value represents management's current best estimate, and may be subject to change when the valuation for purchase accounting is complete.
195
| (26) | To record cash settlement paid to Vanship as follows: |
|
|
|
|
||||||
| Total consideration per the Agreement | $ | 778,000,000 | ||||||
|
Plus net working capital of SPV's to be acquired:
|
||||||||
| Cash and restricted cash | $ | 47,951,497 | ||||||
| Receivables and prepayments | 8,608,555 | |||||||
| Supplies | 1,032,201 | |||||||
| Less accrued liabilities and other payables | (10,088,076 | ) | ||||||
| Less deferred revenue | (4,945,342 | ) | 42,558,835 | |||||
|
Less value attributed to non-cash consideration:
|
||||||||
| Common stock, see (13) above | (135,000,000 | ) | ||||||
| Preferred stock, see (33) below | (0 | ) | ||||||
| Total cash consideration | 685,558,835 | |||||||
|
Less debt assumed and paid by Energy:
|
||||||||
| Related parties, see (24) above | (94,198,938 | ) | ||||||
| Settlement of derivative, see (28) below | (4,880,693 | ) | ||||||
| Long-term bank debt, see (21) above | (430,165,000 | ) | ||||||
| Net cash paid to Vanship | $ | 156,314,204 | ||||||
| (27) | To eliminate deemed distribution and ordinary shares of SPV's against paid-in capital in excess of par. |
| (28) | To record payment in settlement of derivative financial instrument upon repayment of existing related long-term bank debt financing. |
| (29) | To eliminate intercorporate SPV receivables and payables for advances, loans and related interest. |
| (30) | Not used. |
| (31) | To record payment of EIAC and Vanship costs related to Business Combination. |
| (32) | To record charge-off of costs related to Business Combination. |
| (33) | To record issuance of one share of preferred stock to Vanship in reverse merger transaction. See Note (H) below. |
| (34) | To reverse portion of deferred underwriters' fee forfeited to redeeming shareholders ($0.10 per share times 1,087,520 shares). (See note F below). |
| (35) | To record legal fees paid to lenders outside counsel as additional loan origination costs. |
| (36) | To record investment banking fees to be paid directly by Vanship which will not to be reimbursed or funded by the Company. As the transaction is being recorded as a reverse merger, such costs are reflected only in additional paid-in capital. |
196
Pro Forma Notes:
| (A) | The current market prices of Energy Infrastructure Acquisition Corp. common stock and common stock purchase warrants utilized in above calculations were as follows as of July 3, 2008: |
|
|
|
|||
| Market price per share of common stock (AMEX EII) | $ | 9.80 | ||
| Market price per common stock warrant (AMEX EII.WS) | 0.26 | |||
| Total market price per unit | $ | 10.06 | ||
| (B) | The above pro forma balance sheet does not provide for costs, if any, as a result of the Company's redomiciliation. See “MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS” elsewhere in the merger proxy. |
| (C) | Not used. |
| (D) | Pro forma entries are recorded to the extent they are a direct result of the Business Combination and are factually supportable, regardless of whether or not they have continuing future impact or are non-recurring. |
| (E) | The column entitled “Aggregate SPV's To Be Acquired” represents the sum of the historical financial information of each respective SPV, and does not purport to represent the the financial position of the SPV's presented on a combined or consolidated basis under U.S. GAAP. |
| (F) | “Maximum Stock Redemption” is calculated as the approximate number of common shares that can be redeemed by the Company utilizing the available cash resources provided in the Business Combination. The number of shares redeemed of 1,087,520 was determined to be 5% of the shares issued in the Company's initial public offering and the private placement consumated immediately prior to the initial public offering. |
| (G) | Vanship will be eligible to earn an additional 3,000,000 shares of common stock in each of the first and second 12-month periods following the merger (up to a total of 6,000,000 shares in the aggregate) based on the achievement of at least $75,000,000 of EBITDA (as defined) associated with the purchased vessels on an annual basis. Upon issuance, the shares will be recorded as an adjustment to the accounting acquiree's basis in the reverse merger transaction, and will be included in the calculations of earnings per share from such date. |
| (H) | One share of special preferred voting stock will be issued to Vanship in connection with the Business Combination. The special voting preferred stock will have voting and economic rights equivalent to one share of common stock except that the holder of the special voting preferred stock will be entitled to nominate and elect three of Energy Merger's nine directors. In addition, for so long as any shares of special voting preferred stock are outstanding, the consent of the three directors elected by the holders of special voting preferred stock will be required for the authorization or issuance of any additional shares of preferred stock of Energy. The one share of special voting preferred stock will be convertible into one share of common stock at the option of the holder. |
197
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2008
|
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|
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||||||||||||||||||||||||
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||||||||||||||||||||||||
| Aggregate SPV's to Be Acquired (Note A) |
Energy
Infrastructure Acquisition Corp. |
Pro Forma Adjustments
and Eliminations |
Pro Forma Combined Companies (With No Stock Redemption) |
Additional Pro Forma
Adjustments for Redemption of1,087,520 Shares of Common Stock |
Pro Forma Combined Companies (With
Maximum Stock Redemption) (Note F) |
|||||||||||||||||||||||||||
| Debit | Credit | Debit | Credit | |||||||||||||||||||||||||||||
|
Operating revenue
|
||||||||||||||||||||||||||||||||
| Revenue | $ | 36,709,595 | $ | — | 5,062 | (9) | $ | 36,714,657 | $ | 36,714,657 | ||||||||||||||||||||||
|
Operating expenses
|
||||||||||||||||||||||||||||||||
| Vessel operating expenses | 5,476,168 | — | 5,476,168 | 5,476,168 | ||||||||||||||||||||||||||||
| Voyage expenses | 2,695,601 | — | 2,695,601 | 2,695,601 | ||||||||||||||||||||||||||||
| Depreciation expenses | 9,523,083 | — | 495,677 | (9) | 10,018,760 | 10,018,760 | ||||||||||||||||||||||||||
| Management fee | 256,500 | — | 256,500 | 256,500 | ||||||||||||||||||||||||||||
| Commission | 845,386 | — | 845,386 | 845,386 | ||||||||||||||||||||||||||||
| Share-based compensation | — | 2,909,825 | 2,909,825 | (8) | — | — | ||||||||||||||||||||||||||
| General and administrative expenses | 138,834 | 293,121 | 1,025,000 (5) | 431,955 | (5) | 1,025,000 | 1,025,000 | |||||||||||||||||||||||||
| Total operating expenses | 18,935,572 | 3,202,946 | 20,317,415 | 20,317,415 | ||||||||||||||||||||||||||||
| Operating income (loss) | 17,774,023 | (3,202,946 | ) | 16,397,243 | 16,397,243 | |||||||||||||||||||||||||||
|
Other income (expense)
|
||||||||||||||||||||||||||||||||
| Interest income | 1,333,452 | 881,954 | 881,954 | (3) | 937,795 | 937,795 | ||||||||||||||||||||||||||
| 395,657 | (6) | |||||||||||||||||||||||||||||||
| Interest expense | (8,825,225 | ) | (19,066 | ) | 143,056 | (1) | 8,448,634 | (4) | (4,762,681 | ) | (4,762,681 | ) | ||||||||||||||||||||
| 4,619,625 (2) | 395,657 | (6) | ||||||||||||||||||||||||||||||
| Write-off of deferred loan costs | — | — | — | — | ||||||||||||||||||||||||||||
| Changes in fair value of derivatives | (2,649,905 | ) | — | (2,649,905 | ) | (2,649,905 | ) | |||||||||||||||||||||||||
| Other, net | 110,829 | — | 110,829 | 110,829 | ||||||||||||||||||||||||||||
| Total other income (expense) | (10,030,849) | 862,888 | (6,363,962 | ) | (6,363,962 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 7,743,174 | $ | (2,340,058 | ) | $ | 10,033,281 | $ | 10,033,281 | |||||||||||||||||||||||
|
Net income per common share –
|
||||||||||||||||||||||||||||||||
| Basic | $ | 0.21 | $ | 0.22 | ||||||||||||||||||||||||||||
| Diluted | $ | 0.19 | $ | 0.20 | ||||||||||||||||||||||||||||
|
Weighted average number of common shares outstanding (Notes C and G) —
|
||||||||||||||||||||||||||||||||
| Basic | 46,990,247 | 45,857,727 | ||||||||||||||||||||||||||||||
| Diluted | 52,136,575 | 51,004,055 | ||||||||||||||||||||||||||||||
| Cash dividends paid per common share (Note B) | $ | 0.29 | $ | 0.29 | ||||||||||||||||||||||||||||
Pro Forma Adjustments and Eliminations:
| (1) | To record amortization of deferred loan origination costs based on provisions of the loan agreements ($4,650,000 / 108 mo × 3 mo + $10,000 / 12 mo × 3 mo + $410,000 / 108 × 3 mo). |
| (2) | To record interest expense on the credit facility assuming it had been in place from the beginning of the period presented. Pursuant to the facility, interest is calculated based upon the 3 month LIBOR rate, plus |
198
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2008
| an applicable margin, as defined in the agreement. The 3 month LIBOR rate (2.79% per annum at July 6, 2008), plus an applicable margin of 1.5% for double hull (2.25% for single hull) is utilized in the calculation. |
| (3) | To eliminate interest income earned on funds held in trust. |
| (4) | To eliminate, effective January 1, 2008, interest expense on indebtedness to be repaid pursuant to the agreements, exclusive of loan fee amortization. |
|
|
|
|||
| SPV's to be acquired | $ | 8,825,225 | ||
| Less interest on intercorporate SPV debt, See (6) below | (395,657 | ) | ||
| 8,429,568 | ||||
| Energy Infrastructure Acquisition Corp. | 19,066 | |||
| $ | 8,448,634 | |||
| (5) | To eliminate historical general and administrative expenses and to provide for the forecasted expenses of the parent public company based upon contracts, engagement letters, actual invoices and/or currently updated fee estimates as follows: |
|
|
|
|||
| Management fees | $ | 600,000 | ||
| Sarbanes-Oxley implementation, documentation and testing | 1,000,000 | |||
| Financial audit fees | 500,000 | |||
| Public company legal fees | 450,000 | |||
| Sarbanes-Oxley audit fees | 400,000 | |||
| Directors fees and expenses | 460,000 | |||
| Directors and officers liability insurance | 150,000 | |||
| Other public company related fees | 120,000 | |||
| Accounting advisory | 100,000 | |||
| Public and investor relations | 100,000 | |||
| Prospectus liability insurance | 50,000 | |||
| Travel and other | 170,000 | |||
| Total estmated general and administrative expenses per annum | $ | 4,100,000 | ||
| Total estmated general and administrative expenses per quarter | $ | 1,025,000 | ||
Under the management agreement, substantially all aspects of Energy Merger’s operations, including the commercial management of the vessels in Energy Merger’s fleet and the procurement and supervision of technical services, will be performed by the Manager and its affiliated companies, as an independent contractor, under the supervision of Energy Merger’s board of directors. Energy Merger’s Chief Executive Officer and its President and Chief Financial Officer will be made available to Energy Merger by the Manager to manage Energy Merger’s day-to-day operations and all aspects of its financial control. In exchange for the services provided to Energy Merger under the management agreement, Energy Merger will pay the Manager a monthly administrative services fee of $25,000 per month through June 30, 2009, $50,000 per month for the twelve months ending June 30, 2010, and $75,000 per month for the twelve months ending June 30, 2011 [($25,000 × 12 mo + $50,000 × 12 mo + $75,000 × 12 mo) / 3 yrs = $600,000 per annum]. In addition, Energy Merger will pay the Manager a management services feeof $3,500 per day per vessel acquired by Energy Merger following the Business Combination and commissions on charters obtained and sale and purchase transactions consummated following the Business Combination. Because the management services fees and commissions will not apply to the vessels to be acquired in the Business Combination, or to the charter agreements under which such vessels currently operate, only the administrative services fee has been included herein. For additional information, see “INFORMATION CONCERING ENERGY MERGER — Energy Merger’s Manager and Management Agreement” elsewhere in the merger proxy.
199
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2008
| (6) | To eliminate intercorporate SPV interest income and expense on intercorporate SPV loan. |
| (7) | Not used |
| (8) | To eliminate, effective January 1, 2008, the expense of terminated share-based compensation arrangements of Energy Infrastructure. |
| (9) | To adjust depreciation expense and revenue of three SPV’s to reflect the acquisition of the remaining 50% joint venture interest, concurrently with the Business Combination as follows: |
|
|
|
|
|
|
||||||||||||
|
Shinyo
Jubilee |
Shinyo
Mariner |
Shinyo Sawako | Total | |||||||||||||
|
Incremental depreciation expense:
|
||||||||||||||||
| Incremental cost of vessel (see pro forma condensed combined balance sheet adjustment (25)) | $ | 4,739,704 | $ | 1,991,859 | $ | 5,903,057 | $ | 12,634,620 | ||||||||
| Remaining useful life (in months) | 59 | 93 | 93 | |||||||||||||
| Incremental depreciation (3 months) | $ | 241,002 | $ | 64,254 | $ | 190,421 | $ | 495,677 | ||||||||
|
Incremental amortization of intangible assts (deferred revenue):
|
||||||||||||||||
| Incremental intangible assets (deferred revenue) (see pro forma condensed combined balance sheet adjustment (25)) | $ | — | $ | (1,148,413 | ) | $ | 1,838,087 | $ | 689,674 | |||||||
| Amortization period (in months) | — | 27 | 45 | |||||||||||||
| Incremental amortization (3 months) | $ | — | $ | (127,601 | ) | $ | 122,539 | $ | (5,062 | ) | ||||||
Pro Forma Notes:
| (A) | The column entitled “Aggregate SPV's To Be Acquired” represents the sum of the historical financial information of each respective SPV, and does not purport to represent the the financial position of the SPV's presented on a combined or consolidated basis under U.S. GAAP. |
| (B) | The cash dividends paid per common share is the amount required under the share purchase agreement, however, such dividend may not be able to be paid if sufficient cash is not available or if the lenders under the credit facility place restrictions on the payment of dividends. The Energy Infrastructure insiders have agreed to waive dividends declared with respect to common shares held by them. |
| (C) | Although the purchase of 5,000,000 units by Vanship and the issuance of 1,000,000 units to Sagredos are directly attributable to the Business Combination, such transactions are not expected to have a continuing impact on the post-transaction financial statements, and therefore have not been included in the unaudited pro forma condensed combined statements of operations presented herein, other than in the calculation of weighted average number of common shares outstanding. |
| (D) | Pro forma entries are recorded to the extent they are a direct result of the Business Combination and are expected to have continuing future impact. |
| (E) | No consideration has been given to the earn-out shares potentially issuable in the unaudited pro forma condensed combined statements of operations presented herein. |
| (F) | “Maximum Stock Redemption” is calculated as the approximate number of common shares that can be redeemed by the Company utilizing the available cash resources provided in the Business Combination. The number of shares redeemed of 1,087,520 was determined to be 5% of the shares issued in the Company’s initial public offering and the private placement consumated immediately prior to the initial public offering. |
200
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2008
| (G) | As the transaction is being accounted for as a reverse merger, the calculation of weighted average shares outstanding for basic and diluted earnings per share assumes that the shares issued in conjunction with the Business Combination have been outstanding for the entire period. If the maximum numbers of shares are redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period. Basic and diluted weighted average number of common shares outstanding is calculated as follows: |
|
|
|
|
|
|||||||||
|
Pro forma Balance Sheet
Adjustment No. |
Shares With No Stock Redemption |
Shares With Maximum Stock
Redemption |
||||||||||
| Actual number of common shares outstanding | 27,221,747 | 27,221,747 | ||||||||||
|
Pro forma shares to be issued:
|
||||||||||||
| Shares issued from conversion of Segredos convertible loan | (6 | ) | 268,500 | 268,500 | ||||||||
| Shares in units purchased by Vanship | (7 | ) | 5,000,000 | 5,000,000 | ||||||||
| Shares in units issued to Sagredos | (11 | ) | 1,000,000 | 1,000,000 | ||||||||
| Shares issued to Vanship in reverse merger transaction | (13 | ) | 13,500,000 | 13,500,000 | ||||||||
| Shares redeemed by public shareholders | (18 | ) | — | (1,087,520 | ) | |||||||
| Shares surrendered and cancelled | (20 | ) | — | (45,000 | ) | |||||||
| Pro forma weighted average number of common shares outstanding — Basic | 46,990,247 | 45,857,727 | ||||||||||
|
Common stock equivalents:
|
||||||||||||
|
Shares issuable from actual “in the money” warrants outstanding:
|
||||||||||||
| From Private Placement warrants | 825,398 | 825,398 | ||||||||||
| From Public Offering warrants | 20,925,000 | 20,925,000 | ||||||||||
| Shares issuable from pro forma `in the money` warrants: | ||||||||||||
| From conversion of Segredos convertible loan warrants | (6 | ) | 268,500 | 268,500 | ||||||||
| From warrants in units purchased by Vanship | (7 | ) | 5,000,000 | 5,000,000 | ||||||||
| From warrants in units issued to Sagredos | (11 | ) | 1,000,000 | 1,000,000 | ||||||||
| Total shares issuable | 28,018,898 | 28,018,898 | ||||||||||
| Less number of shares available `on the market` pursuant to the treasury stock method | (22,872,570) | (22,872,570 | ) | |||||||||
| Number of “new” shares to be issued pursuant to the treasury stock method | 5,146,328 | 5,146,328 | ||||||||||
| Pro forma weighted average number of common shares outstanding — Diluted | 52,136,575 | 51,004,055 | ||||||||||
201
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended March 31, 2008
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2007
|
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||||||||||||||||||||||||
| Aggregate SPV's to Be Acquired (Note A) |
Energy
Infra- structure Acquisition Corp. |
Pro FormaAdjustments
and Eliminations |
Pro Forma Combined Companies (With No Stock Redemption) |
Additional Pro Forma Adjustments for Redemption of 1,087,520 Shares of
Common Stock |
Pro Forma Combined Companies (With Maximum Stock Redemption) (Note F) | |||||||||||||||||||||||||||
| Debit | Credit | Debit | Credit | |||||||||||||||||||||||||||||
|
Operating revenue
|
||||||||||||||||||||||||||||||||
| Revenue | $ | 125,333,278 | $ | — | 21,548 | (9) | $ | 125,354,826 | $ | 125,354,826 | ||||||||||||||||||||||
|
Operating expenses
|
||||||||||||||||||||||||||||||||
| Vessel operating expenses | 22,572,283 | — | 22,572,283 | 22,572,283 | ||||||||||||||||||||||||||||
| Voyage expenses | 7,047,758 | — | 7,047,758 | 7,047,758 | ||||||||||||||||||||||||||||
| Depreciation expenses | 36,465,691 | — | 1,667,843 (9) | 38,133,534 | 38,133,534 | |||||||||||||||||||||||||||
| Write-off of drydocking costs | 281,670 | — | 281,670 | 281,670 | ||||||||||||||||||||||||||||
| Management fee | 1,042,865 | — | 1,042,865 | 1,042,865 | ||||||||||||||||||||||||||||
| Commission | 2,908,530 | — | 2,908,530 | 2,908,530 | ||||||||||||||||||||||||||||
| Share-based compensation | — | 11,639,300 | 11,639,300 (8) | — | — | |||||||||||||||||||||||||||
| General and administrative expenses | 681,684 | 1,332,406 | 4,100,000 (5) | 2,014,090 (5) | 4,100,000 | 4,100,000 | ||||||||||||||||||||||||||
| Termination charges | 20,783,562 | — | 20,783,562 | 20,783,562 | ||||||||||||||||||||||||||||
| Total operating expenses | 91,784,043 | 12,971,706 | 96,870,202 | 96,870,202 | ||||||||||||||||||||||||||||
| Operating income (loss) | 33,549,235 | (12,971,706 | ) | 28,484,624 | 28,484,624 | |||||||||||||||||||||||||||
|
Other income (expense)
|
||||||||||||||||||||||||||||||||
| Interest income | 6,150,971 | 6,369,468 | 6,369,468 (3) | 4,584,438 | 4,584,438 | |||||||||||||||||||||||||||
| 1,566,533 (6) | ||||||||||||||||||||||||||||||||
| Interest expense | (35,402,900 | ) | (101,762 | ) | 572,222 (1) | 33,938,129 (4) | (18,335,695 | ) | (18,335,695 | ) | ||||||||||||||||||||||
| 17,763,473 (2) | 1,566,533 (6) | |||||||||||||||||||||||||||||||
| Writeoff of deferred loan costs | (673,112 | ) | — | (673,112 | ) | (673,112 | ) | |||||||||||||||||||||||||
| Changes in fair value of derivatives | (2,230,788 | ) | — | (2,230,788 | ) | (2,230,788 | ) | |||||||||||||||||||||||||
| Other, net | (48,304 | ) | — |
|
(48,304 | ) | (48,304 | ) | ||||||||||||||||||||||||
| Total other income (expense) | (32,204,133 | ) | 6,267,706 | (16,703,461 | ) | (16,703,461 | ) | |||||||||||||||||||||||||
| Net income (loss) | $ | 1,345,102 | $ | (6,704,000 | ) | $ | 11,781,163 | $ | 11,781,163 | |||||||||||||||||||||||
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Net income per common share
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||||||||||||||||||||||||||||||||
| Basic | $ | 0.25 | $ | 0.26 | ||||||||||||||||||||||||||||
| Diluted | $ | 0.23 | $ | 0.23 | ||||||||||||||||||||||||||||
| Weighted average number of common shares outstanding (Notes C and G) | ||||||||||||||||||||||||||||||||
| Basic | 46,990,247 | 45,857,727 | ||||||||||||||||||||||||||||||
| Diluted | 52,136,575 | 51,004,055 | ||||||||||||||||||||||||||||||
| Cash dividends paid per common share (Note B) | $ | 1.16 | $ | 1.16 | ||||||||||||||||||||||||||||
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Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2007
Pro Forma Adjustments and Eliminations:
| (1) | To record amortization of deferred loan origination costs based on provisions of the loan agreements ($4,650,000 / 108 mo X 12 mo + $10,000 / 12 mo X 12 mo + $410,000 / 108 X 12 mo). |
| (2) | To record interest expense on the credit facility assuming it had been in place from the beginning of the period presented. Pursuant to the facility, interest is calculated based upon the 3 month LIBOR rate, plus an applicable margin, as defined in the agreement. The 3 month LIBOR rate (2.79% per annum at July 6, 2008), plus an applicable margin of 1.5% for double hull (2.25% for single hull) is utilized in the calculation. |
| (3) | To eliminate interest income earned on funds held in trust. |
| (4) | To eliminate, effective January 1, 2007, interest expense on indebtedness to be repaid pursuant to the agreements, exclusive of loan fee amortization. |
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|
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| SPV's to be acquired | $ | 35,402,900 | ||
| Less interest on intercorporate SPV debt, See (6) below | (1,566,533 | ) | ||
| 33,836,367 | ||||
| Energy Infrastructure Acquisition Corp. | 101,762 | |||
| $ | 33,938,129 | |||
| (5) | To eliminate historical general and administrative expenses and to provide for the forecasted expenses of the parent public company based upon contracts, engagement letters, actual invoices and/or currently updated fee estimates as follows: |
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| Management fees | $ | 600,000 | ||
| Sarbanes-Oxley implementation, documentation and testing | 1,000,000 | |||
| Financial audit fees | 500,000 | |||
| Public company legal fees | 450,000 | |||
| Sarbanes-Oxley audit fees | 400,000 | |||
| Directors fees and expenses | 460,000 | |||
| Directors and officers liability insurance | 150,000 | |||
| Other public company related fees | 120,000 | |||
| Accounting advisory | 100,000 | |||
| Public and investor relations | 100,000 | |||
| Prospectus liability insurance | 50,000 | |||
| Travel and other | 170,000 | |||
| Total estmated general and administrative expenses per annum | $ | 4,100,000 | ||
Under the management agreement, substantially all aspects of Energy Merger's operations, including the commercial management of the vessels in Energy Merger's fleet and the procurement and supervision of technical services, will be performed by the Manager and its affiliated companies, as an independent contractor, under the supervision of Energy Merger's board of directors. Energy Merger's Chief Executive Officer and its President and Chief Financial Officer will be made available to Energy Merger by the Manager to manage Energy Merger's day-to-day operations and all aspects of its financial control. In exchange for the services provided to Energy Merger under the management agreement, Energy Merger will pay the Manager a monthly administrative services fee of $25,000 per month through June 30, 2009, $50,000 per month for the twelve months ending June 30, 2010, and $75,000 per month for the twelve months ending June 30, 2011 [($25,000 × 12 mo + $50,000 × 12 mo + $75,000×12 mo) / 3 yrs = $600,000 per annum]. In addition, Energy Merger will pay the Manager a management services feeof $3,500 per day per vessel acquired by Energy Merger following the Business Combination and commissions on charters obtained and sale and purchase transactions consummated following the Business Combination.
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Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2007
Because the management services fees and commissions will not apply to the vessels to be acquired in the Business Combination, or to the charter agreements under which such vessels currently operate, only the administrative services fee has been included herein. For additional information, see “INFORMATION CONCERING ENERGY MERGER — Energy Merger's Manager and Management Agreement” elsewhere in the merger proxy.
| (6) | To eliminate intercorporate SPV interest income and expense on intercorporate SPV loan. |
| (7) | Not used |
| (8) | To eliminate, effective January 1, 2007, the expense of terminated share-based compensation arrangements of Energy Infrastructure. |
| (9) | To adjust depreciation expense and revenue of three SPV's to reflect the acquisition of the remaining 50% joint venture interest, concurrently with the Business Combination as follows: |
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Shinyo
Jubilee |
Shinyo
Mariner |
Shinyo Sawako | Total | |||||||||||||
| Incremental depreciation expense: | ||||||||||||||||
| Incremental cost of vessel | $ | 4,305,839 | $ | 1,404,886 | $ | 5,270,753 | $ | 10,981,478 | ||||||||
| Remaining useful life (in months) | 62 | 96 | 96 | |||||||||||||
| Incremental annual depreciation | $ | 833,388 | $ | 175,611 | $ | 658,844 | $ | 1,667,843 | ||||||||
|
Incremental amortization of intangible assts (deferred revenue):
|
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| Incremental intangible asset (deferred revenue) | $ | — | $ | (1,251,787) | $ | 1,916,667 | $ | 664,880 | ||||||||
| Amortization period (in months) | — | 30 | 48 | |||||||||||||
| Incremental annual amortization | $ | — | $ | (500,715 | ) | $ | 479,167 | $ | (21,548 | ) | ||||||
Pro Forma Notes:
| (A) | The column entitled “Aggregate SPV's To Be Acquired” represents the sum of the historical financial information of each respective SPV, and does not purport to represent the the financial position of the SPV's presented on a combined or consolidated basis under U.S. GAAP. |
| (B) | The cash dividends paid per common share is the amount required under the share purchase agreement, however, such dividend may not be able to be paid if sufficient cash is not available or if the lenders under the credit facility place restrictions on the payment of dividends. The Energy Infrastructure insiders have agreed to waive dividends declared with respect to common shares held by them. |
| (C) | Although the purchase of 5,000,000 units by Vanship and the issuance of 1,000,000 units to Sagredos are directly attributable to the Business Combination, such transactions are not expected to have a continuing impact on the post-transaction financial statements, and therefore have not been included in the unaudited pro forma condensed combined statements of operations presented herein, other than in the calculation of weighted average number of common shares outstanding. |
| (D) | Pro forma entries are recorded to the extent they are a direct result of the Business Combination and are expected to have continuing future impact. |
| (E) | No consideration has been given to the earn-out shares potentially issuable in the unaudited pro forma condensed combined statements of operations presented herein. |
| (F) | “Maximum Stock Redemption” is calculated as the approximate number of common shares that can be redeemed by the Company utilizing the available cash resources provided in the Business Combination. |
204
Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2007
| The number of shares redeemed of 1,087,520 was determined to be 5% of the shares issued in the Company's initial public offering and the private placement consumated immediately prior to the initial public offering. |
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Energy Infrastructure Acquisition Corp. and SPV's To Be Acquired
(to Be Known as Van Asia Tankers Corporation)
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2007
| (G) | As the transaction is being accounted for as a reverse merger, the calculation of weighted average shares outstanding for basic and diluted earnings per share assumes that the shares issued in conjunction with the Business Combination have been outstanding for the entire period. If the maximum numbers of shares are redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period. Basic and diluted weighted average number of common shares outstanding is calculated as follows: |
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| Pro Forma Balance Sheet | Shares with No Stock Redemption |
Shares with Maximum Stock
Redemption |
||||||||||
| Actual number of common shares outstanding | 27,221,747 | 27,221,747 | ||||||||||
| Pro forma shares to be issued: | ||||||||||||
| Shares issued from conversion of Segredos convertible loan | (6 | ) | 268,500 | 268,500 | ||||||||
| Shares in units purchased by Vanship | (7 | ) | 5,000,000 | 5,000,000 | ||||||||
| Shares in units issued to Sagredos | (11 | ) | 1,000,000 | 1,000,000 | ||||||||
| Shares issued to Vanship in reverse merger transaction | (13 | ) | 13,500,000 | 13,500,000 | ||||||||
| Shares redeemed by public shareholders | (18 | ) | — | (1,087,520 | ) | |||||||
| Shares surrendered and cancelled | (20 | ) | — | (45,000 | ) | |||||||
| Pro forma weighted average number of common shares outstanding – Basic | 46,990,247 | 45,857,727 | ||||||||||
|
Common stock equivalents:
|
||||||||||||
| Shares issuable from actual “in the money” warrants outstanding: | ||||||||||||
| From Private Placement warrants | 825,398 | 825,398 | ||||||||||
| From Public Offering warrants | 20,925,000 | 20,925,000 | ||||||||||
| Shares issuable from pro forma “in the money” warrants: | ||||||||||||
| From conversion of Segredos convertible loan warrants | (6 | ) | 268,500 | 268,500 | ||||||||
| From warrants in units purchased by Vanship | (7 | ) | 5,000,000 | 5,000,000 | ||||||||
| From warrants in units issued to Sagredos | (11 | ) | 1,000,000 | 1,000,000 | ||||||||
| Total shares issuable | 28,018,898 | 28,018,898 | ||||||||||
| Less number of shares available “on the market” pursuant to the treasury stock method | (22,872,570) | (22,872,570 | ) | |||||||||
| Numbe r of “new” shares to be issued pursuant to the treasury stock method | 5,146,328 | 5,146,328 | ||||||||||
| Pro forma weighted average number of common shares outstanding – Diluted | 52,136,575 | 51,004,055 | ||||||||||
206
STATEMENT OF FORECASTED RESULTS OF OPERATIONS AND CASH AVAILABLE FOR
DIVIDENDS, RESERVES AND EXTRAORDINARY EXPENSES
All of the information set forth below is for illustrative purposes only. The underlying assumptions may prove to be incorrect. Actual results will almost certainly differ, and the variations may be material. The information set forth below has not been prepared in accordance with United States generally accepted accounting principles. Energy Merger may have materially lower revenues, set aside substantial reserves or incur a material amount of extraordinary expenses. You should not assume or conclude that we will pay any dividends in any period.
Energy Merger does not as a matter of course make public projections as to future sales, earnings, or other results. However, the management of Energy Merger has prepared the prospective financial information set forth below to present the forecasted cash available for dividends, reserves, and extraordinary expenses during Energy Merger’s first full operating year. These financial forecasts have been prepared by the management of Energy Infrastructure and Energy Infrastructure has not received an opinion or any other form of assurance on it from any independent registered public accounting firm and the forecast has not been prepared in accordance with generally accepted accounting principles. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If Energy Merger does not achieve the forecasted results, Energy Merger may not be able to operate profitably, successfully implement its business strategy to expand its fleet or pay dividends to its stockholders in which event the market price of Energy Merger’s common shares may decline materially. This information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this joint proxy statement/ prospectus are cautioned not to place undue reliance on the prospective financial information.
You should not rely upon this prospective financial information as necessarily indicative of Energy Merger’s future results and we caution you not to place undue reliance on this forecasted financial information. Neither Energy Merger’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.
Under the Share Purchase Agreement and subject to its ability to do so under applicable law, Energy Merger has agreed to pay dividends of $1.54 per share to Energy Merger’s public stockholders by the end of the first year following the consummation of the Business Combination. Vanship has agreed, and it is a condition to the closing of the Business Combination that Energy Merger insiders shall have agreed, to waive any right to receive dividend payments in the one-year period immediately following the consummation of the Business Combination in order to facilitate the payment of these dividends. These dividend waivers will be made by stockholders holding approximately 55% of Energy Merger’s common stock (on an undiluted basis) in the first year following the Business Combination and accordingly, annual dividends of $1.54 per share should not be considered indicative of any dividend payments subsequent to the first anniversary of the Business Combination. Energy Merger intends to source the aforesaid dividend payments from Energy Merger’s revenues from vessel operations. Energy Merger has prepared the forecasted financial information to present the cash that it expects to have available by the end of the first year following the consummation of the Business Combination, which is referred to herein as Energy Merger’s first full operating year, for:
| • | dividends; |
| • | expenses and reserves for vessel upgrades, repairs and drydocking; |
| • | expenses and reserves for further vessel acquisitions; |
| • | principal payments on the new credit facility; |
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| • | reserves required by lenders under Energy Merger’s loan agreements; and |
| • | reserves as Energy Merger’s board of directors may from time to time determine are required for contingent and other liabilities and general corporate purposes. |
Energy Merger calls these items “dividends, reserves and extraordinary expenses.”
The actual results achieved during Energy Merger’s first full operating year will vary from those set forth in the forecasted financial information, and those variations may be material. In addition, investors should not assume that the forecasted available cash for Energy Merger’s first full operating year may be extrapolated to any other period. As disclosed under “Risk Factors,” Energy Merger’s business and operations are subject to substantial risks which increase the uncertainty inherent in the forecasted financial information. Many of the factors disclosed under “Risk Factors” could cause actual results to differ materially from those expressed in the forecasted financial information. The forecasted financial information assumes the successful implementation of Energy Merger’s business strategy. No assurance can be given that Energy Merger’s business strategy will be effective or that the benefits of Energy Merger’s business strategy will be realized during its first full operating year, if ever.
The forecasted financial information should be read together with the information contained in “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations of the SPVs” and Energy Merger’s financial statements contained herein.
The following table contains information based on assumptions regarding the fleet and the charter rates earned by the vessels during the first full year of Energy Merger’s operations. As of the date of this joint proxy statement/prospectus, all of the vessels in the fleet other than the Shinyo Jubilee are committed under time charter agreements with international companies. Pursuant to these agreements, the SPVs provide a vessel to these companies, or charterers, at a fixed, per-day charter hire rate for a specified term. Under the agreements, the vessel owner is responsible for paying operating costs. The charterers, in addition to the daily charter hire, are generally responsible for the cost of all fuels with respect to the vessels (with certain exceptions, including during off-hire periods), port charges, costs related to towage, pilotage, mooring expenses at loading and discharging facilities and certain operating expenses. The charterers are not obligated to pay the applicable vessel owner charterhire for off-hire days, which include days a vessel is out-of-service due to, among other things, repairs or drydockings. Under the time charter agreements, the vessel owner is generally required, among other things, to keep the related vessels seaworthy, to crew and maintain the vessels and to comply with applicable regulations. The vessel owners are also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance coverage.
The vessel Shinyo Jubilee operates under a consecutive voyage charter agreement. Under the consecutive voyage charter agreement, the vessel owner is paid freight (per ton of crude oil) on the basis of moving crude oil from a loading port to a discharge port for multiple voyages through September 2009. The freight rate is based on a fixed Worldscale rate. The vessel owner is responsible for paying both operating costs and voyage costs and the charterer is generally responsible for any delay at the loading or discharging ports. Under the consecutive voyage charter agreement, the vessel owner is generally required, among other things, to keep the related vessel seaworthy, to crew and maintain the vessel and to comply with applicable regulations. The vessel owner is also required to provide protection and indemnity, hull and machinery, war risk and oil pollution insurance cover.
The charter rates provided in the following table are based on these charters. However there can be no assurance that each of Energy Merger’s charterers will fully perform under the respective charters or that Energy Merger will actually receive the amounts anticipated. As a result, there can be no assurance that the vessels in the fleet will earn daily charter rates during Energy Merger’s first full year of operations that are equal to those provided in the table below.
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| Vessel Name |
Net Daily Charter
Base Rate (1) |
Net Daily
Profit Share (2) |
Total Daily
Net Charter Revenue |
Total
Number of On-hire Days (3) |
Net Annual
Charter Revenue |
Net Annual
Profit Share Revenue |
Total
Annual Net Revenue |
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| Shinyo Alliance | $ | 29,700 | $ | — | $ | 29,700 | 360 | $ | 10,692,000 | $ | 10,692,000 | |||||||||||||||||
|
C. Dream
Current Charter concludes March 2009 |
28,322 | — | 28,322 | 267 | 7,570,000 | 7,570,000 | ||||||||||||||||||||||
| Charter commencing March 2009 (4) | 29,250 | 12,480 | (5) | 41,730 | 90 | 2,624,000 | $ | 1,119,000 | 3,743,000 | |||||||||||||||||||
| Shinyo Kannika | 38,025 | 7,556 | (6) | 45,581 | 357 | 13,575,000 | 2,697,000 | 16,272,000 | ||||||||||||||||||||
| Shinyo Ocean | 38,400 | 8,000 | (7) | 46,400 | 357 | 13,709,000 | 2,856,000 | 16,565,000 | ||||||||||||||||||||
| Shinyo Jubilee | 35,000 | (8) | — | 35,000 | 360 | 12,600,000 | 12,600,000 | |||||||||||||||||||||
| Shinyo Splendor | 38,019 | — | 38,019 | 335 | 12,736,000 | 12,736,000 | ||||||||||||||||||||||
| Shinyo Mariner | 31,980 | — | 31,980 | 360 | 11,513,000 | 11,513,000 | ||||||||||||||||||||||
| Shinyo Navigator | 42,705 | — | 42,705 | 357 | 15,246,000 | 15,246,000 | ||||||||||||||||||||||
| Shinyo Sawako | 38,111 | — | 38,111 | 360 | 13,720,000 | 13,720,000 | ||||||||||||||||||||||
| Total | 120,658,000 | |||||||||||||||||||||||||||
| (1) | Net Daily Charter Base Rates are net of broker commission fees. Broker commissions are fees payable under a charter agreement to the parties that brokered the transaction between a vessel owner and a charterer. |
| (2) | Net Daily Profit Share is net of commission fees and assumes a daily average spot rate of $59,500, such figure being derived from the average Ras Tanura Chiba VLCC Average Weekly Earnings for Modern Tankers over the period beginning January 4, 2002 and ending December 14, 2007 as tracked and reported by Clarksons Research Services Limited. |
| (3) | Total Number of On-hire Days is based on 360 operating days per calendar year of expected operations, less three days of off-hire for intermediate surveys for C. Dream, Shinyo Kannika, Shinyo Navigator and Shinyo Ocean and 25 days of off-hire for a special survey for Shinyo Splendor. The average number of projected on-hire days per vessel in Energy Merger’s first full operating year is 356, as compared with a historical average of 348 per vessel from the later of January 1, 2004 and the date of delivery of each vessel to December 31, 2007. Nevertheless, management believes that 356 projected days of on-hire per vessel is a reasonable projection on the basis that the vessels Shinyo Alliance and Shinyo Mariner underwent substantially prolonged drydockings in 2006, and management does not anticipate similarly prolonged drydockings for any of the vessels in Energy Merger’s first full operating year. The projections relating to the number of on-hire days of each of the vessels are inherently uncertain and can be affected by, among other things, the time a vessel spends in drydocking for repairs, maintenance or inspection, equipment breakdowns or delays due to accidents, crewing strikes, certain vessel detentions or similar problems as well as our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew. See “Risk Factors — Risks Related to Energy Merger — Energy Merger may face unexpected maintenance costs, which could adversely affect its cash flow and financial condition.” |
| (4) | Second time charter has been entered into and starts after expiry of first charter. |
| (5) | Subject to profit sharing provision in which actual annual net average daily time charter earnings between $30,001 and $40,000 are split equally between the SPV and charterer, and actual annual net average daily time charter earnings in excess of $40,000 are split 40% to SPV and 60% to charterer. |
| (6) | Subject to profit sharing provision in which income (referenced to the BITR) in excess of $44,000 per day is split equally between SPV and charterer. |
| (7) | Subject to profit sharing provision in which income (referenced to BITR3) in excess of $43,500 per day is split equally between the SPV and charterer. |
209
| (8) | Estimated Time Charter Equivalent, or TCE. Time charter equivalent is a measure of the average daily revenue performance of a vessel on a per voyage basis. Vanship’s method of calculating TCE is consistent with industry standards and is determined by dividing net voyage revenue by voyage days for the relevant time period. Net voyage revenues are voyage revenues minus voyage expenses. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. The vessel Shinyo Jubilee earned an average TCE of approximately $26,000 per day in June 2008, as compared to an average of $32,500 in the full first half of 2008. The estimated TCE of $35,000 per day in Energy Merger's first full operating year is based on the assumption that the Worldscale flat rate on which the charter hire that the vessel earns is based will be increased on January 1, 2009 from its current rate of 16.36 to a rate of approximately 23.07 to factor in the recent increase in the market price of bunker fuel. Worldscale flat rates are adjusted annually to reflect the increase in voyage costs such as bunker fuel, port charges and agency fees. We anticipate that of the items that are considered in determining such adjustment, the market price of bunker fuel will demand the most substantial increase to reflect actual increases in prices. We have based our estimate of the adjusted Worldscale flat rates on the percentage increase reflected by the current market price for bunker fuel as compared with the market price at the end of 2007. However, a substantial and sustained decrease in the market price of bunker fuel in the second half of 2008 would prevent an adjustment of Worldscale flat rates to fully reflect the price increases in the first half of 2008. |
We expect that Energy Merger’s expenses during the first full operating year will consist of:
| • | Interest expense on Energy Merger’s credit facility of $17,972,958. Energy Merger has assumed that: |
| • | Energy Merger will draw-down $325,000,000 under Loan A and $90,000,000 under Loan B of its term loan facility at the closing of the Business Combination and will make quarterly principal payments on Loan A in the amount of $4,650,000 and quarterly principal payments on Loan B in the amount of $5,500,000; |
| • | LIBOR will remain constant at 2.78% during Energy Merger’s first full operating year; |
| • | The margin on Loan A will be 1.50% and the margin on Loan B will be 2.25% throughout Energy Merger’s first full operating year; |
Based on these assumptions, Energy Merger will have gross interest expense of $13,801,900 on Loan A and $4,171,058 on Loan B in its first full operating year, calculated as follows:
Loan A
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Principal Amount
Outstanding |
Libor Plus Applicable Margin | Quarterly Interest Expense | ||||||||||
| First Operating Quarter | $ | 325,000,000 | 4.28 | % | $ | 3,554,778 | ||||||
| Second Operating Quarter | 320,350,000 | 4.28 | % | 3,503,917 | ||||||||
| Third Operating Quarter | 315,700,000 | 4.28 | % | 3,377,990 | ||||||||
| Fourth Operating Quarter | 311,050,000 | 4.28 | % | 3,365,215 | ||||||||
| Total: | $13,801,900 | |||||||||||
Loan B
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Principal Amount
Outstanding |
Libor plus Applicable Margin | Quarterly Interest Expense | ||||||||||
| First Operating Quarter | $ | 90,000,000 | 5.03 | % | $ | 1,156,900 | ||||||
| Second Operating Quarter | 84,500,000 | 5.03 | % | 1,086,201 | ||||||||
| Third Operating Quarter | 79,000,000 | 5.03 | % | 993,425 | ||||||||
| Fourth Operating Quarter | 73,500,000 | 5.03 | % | 934,532 | ||||||||
| Total: | $4,171,058 | |||||||||||
210
We have assumed, based on estimates prepared by management of Energy Merger, that Energy Merger will receive approximately $2,443,000 interest income on its cash balances in its first full operating year, resulting in net interest expense of $15,529,958.
Energy Merger does not expect to incur ordinary cash expenses other than those listed above, which Energy Merger calls its ordinary cash expenses. Energy Merger may, however, have unanticipated extraordinary cash expenses, which could include major vessel repairs and drydocking costs that are not covered by its management agreements, vessel upgrades or modifications that are required by new laws or regulations, other capital improvements, costs of claims and related litigation expenses or contingent liabilities.
Energy Merger will generate all its revenue in U.S. dollars but its Manager will incur certain vessel operating and general and administrative expenses in currencies other than the U.S. dollar. This difference could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to other currencies. Expenses incurred in foreign currencies against which the U.S. dollar falls in value can increase, which would result in a decrease in Energy Merger’s net income.
The table below sets forth the amount of cash that would be available during the first full year of operations to Energy Merger for dividends, reserves and extraordinary expenses in the aggregate based on the assumptions listed below. This amount is an estimate, as revenues and expenses may change in the future.
Energy Merger’s assumptions for the first full operating year include the following:
| • | Energy Infrastructure stockholders approve and authorize the Redomiciliation Merger and no stockholders exercise redemption rights. |
| • | The aggregate purchase price of the vessels in the fleet is $778,000,000. |
| • | Energy Merger will borrow $415,000,000 under its credit facility (refinance the existing debt of the SPVs). |
| • | Energy Merger will incur general and administrative expense, including directors’ fees, office rent, travel, communications, insurance, legal, auditing and investor relations and professional expenses of $4.12 million. |
| • | The issuance of 1,000,000 units to Energy Infrastructure’s President and Chief-Operating Officer (or any assignee thereof) in exchange for the cancellation of options to purchase an aggregate 2,688,750 shares of common stock, the issuance of 5,000,000 units to Vanship in connection with the Business Combination Private Placement and the issuance of 268,500 units upon the conversion of convertible loans aggregating $2,685,000. |
| • | Estimated average vessel operating expenses for the fleet of $6,548 per vessel per calendar day which includes management fees for all of the vessels payable to Energy Merger Management’s technical manager. Univan, as the technical manager of the vessels has budgeted daily operating expense for each of the vessels in the initial fleet for fiscal year 2008. The estimated per vessel operating expense of $6,548 per day is an average of the budgeted operating expense of the vessels in the fleet, based on the fiscal year 2008 budgets and assuming a 5% increase in expenses in fiscal year 2009. |
| • | Energy Merger will calculate depreciation on the vessels on the straight-line method over the estimated useful life of each vessel, after taking into account its estimated residual value, from date of acquisition. Each vessel’s useful life is estimated as 25 years from the date originally delivered from the shipyard, or a useful life extending no later than the year 2015 with respect to single-hull vessels. Amortization comprises costs associated with drydocking of Energy Merger’s vessels. Energy Merger will capitalize the costs associated with drydockings as they occur and amortizes these costs on a straight line basis. |
| • | Scheduled in-water intermediate surveys for the C. Dream, Shinyo Kannika, Shinyo Navigator, Shinyo Ocean and dry docking and special survey for the Shinyo Splendor will cost $2,851,000 in aggregate based on estimates provided by the vessels’ technical manager, Univan. Univan has estimated that intermediate surveys for C. Dream, Shinyo Kannika, Shinyo Navigator and Shinyo Ocean |
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| will cost $247,000, $278,000, $247,000 and $221,000, respectively, and that the special survey for Shinyo Splendor will cost $1,858,000. These estimates are based on historical costs that Univan has incurred in ship yards for similar types of maintenance. Estimated maintenance expenses are inherently uncertain and an estimated expense of $2,851,000 is based on the assumption that none of the vessels in Energy Merger’s fleet will require any unscheduled or unanticipated maintenance. See “Risk Factors — Risks Related to Energy Merger — Energy Merger may face unexpected maintenance costs, which could adversely affect its cash flow and financial condition.” |
| • | Energy Merger’s first full operating year consists of 365 days and each of the vessels in the fleet will be owned by Energy Merger for 365 days. |
| • | Each of the vessels in the fleet upon delivery to Energy Merger will earn charter revenue and additional hire pursuant to applicable profit share provisions described in the table above, for the number of days set forth in the table above and Energy Merger’s charterers will timely pay charter hire when due. |
| • | Energy Merger will not receive any insurance proceeds or other income. |
| • | Energy Merger will not purchase or sell any vessels and none of the vessels will suffer a total loss or constructive total loss or suffer any reduced hire or unscheduled off-hire time. |
| • | Energy Merger will have no other cash expenses or liabilities other than its estimated ordinary cash expenses. |
| • | Energy Merger will qualify for the exemption available under Section 883 under the Code and will therefore not pay any U.S. federal income taxes. |
| • | Energy Merger will not incur any additional indebtedness. |
Other than management fees, interest expenses on Energy Merger’s credit facility and directors’ fees, which will be fixed for Energy Merger’s first full operating year, none of Energy Merger’s fees or expenses are fixed.
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STATEMENT OF FORECASTED RESULTS OF OPERATIONS AND CASH AVAILABLE
FOR DIVIDENDS, RESERVES AND EXTRAORDINARY EXPENSES DURING
ENERGY MERGER’S FIRST FULL OPERATING YEAR
(Unaudited)
|
|
|
|||
| First Full Operating Year | ||||
| (In Thousands of U.S. Dollars) | ||||
| Net Revenue | $ | 120,658 | ||
| Less: Operating expenses | (21,507 | ) | ||
| Less: General and administrative expenses (1) | (4,120 | ) | ||
| Less: Depreciation & Amortization | (37,313 | ) | ||
| Less: Net interest expense | (15,530 | ) | ||
| Net Income | $ | 42,188 | ||
|
Adjustments to reconcile net income to Estimated EBITDA:
|
||||
|
Add:
|
||||
| Depreciation & Amortization | 37,313 | |||
| Interest expense | 15,530 | |||
| ESTIMATED EBITDA (2) | $ | 95,031 | ||
|
Adjustments to reconcile estimated EBITDA to estimated cash available for distribution:
|
||||
|
Less:
|
||||
| Net interest expense | (15,530 | ) | ||
| Maintenance capital expenses | (2,851 | ) | ||
| Required debt Amortization | (40,600 | ) | ||
|
Plus:
|
||||
| Beginning unrestricted cash balance (3) | 14,591 | |||
| Accrual to reflect accounting for management fee on the straight-line basis | $ | 300 | ||
| Forecasted Available Cash for Distribution | $50,941 | |||
| Dividends to publicly held common shares outstanding (4)(5) | $ | 32,536 | ||
| Ending Unrestricted Cash Balance | $18,405 | |||
| Total Ending Cash Balance Including Restricted Cash (6) | $33,405 | |||
| (1) | Energy Merger’s future management team has estimated that it will incur general and administrative expense for its first full operating year of $4.12 million. Of this $4.12 million, $600,000 is the administrative fee that Energy Merger expects to incur to its Manager in its first full year of operations (including an adjustment of $300,000 to reflect accounting for the management agreement on a straight-line basis) and $2.65 million is based on estimates from third party service providers in relation to fees and other expenses in connection with implementation of internal controls over financial reporting and compliance with Section 404 of the U.S. Sarbanes-Oxley Act of 2002, accounting advisory and audit related fees, legal fees related to compliance with U.S. securities laws, and director and officer liability insurance premiums. The remaining $870,000 is based on management estimates and encompasses director fees, expenses in connection with meetings of the board of directors, expenses related to business travel for Energy Merger’s officers, fees related to public relations and investor relations as well as other miscellaneous expenses expected to be incurred by Energy Merger in its first full operating year. The $870,000 estimate for these fees is based on certain assumptions, including the assumptions that (i) Energy Merger will pay an annual retainer of $30,000 to six members of its board of directors and additional retainers to members of any committees of Energy Merger’s board of directors as well as to chairmen of any committees of Energy Merger’s board of directors, (ii) Energy Merger will hold four board meetings in Hong Kong and reimburse six of its directors for travel and accommodation in connection with such meetings, (iii) Energy Merger will incur approximately $100,000 business related travel |
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| expense related to travel by its officers in connection with fulfillment of their duties to Energy Merger, and (iv) Energy Merger will hold an annual meeting in the United States in the first half of 2009. The estimate of $4.12 million general and administrative expense is based on the additional assumptions that Energy Merger will be able to obtain third party services at the rates estimated by third party service providers, that the scope of work to be provided by any third party service provider does not exceed that contemplated by such estimates, that the Manager will provide management services to Energy Merger pursuant to and upon the terms set forth in Energy Merger’s management agreement and that Energy Merger will incur no general or administrative expenses in excess of those estimated and budgeted by Energy Merger’s future management team. None of the budgeted expenses are based on existing contractual arrangements with third parties and actual fees paid to third parties may vary widely from estimates provided by third party service providers. In addition, none of the individuals who will serve on Energy Merger’s future management team have experience managing a publicly traded operating company and such individuals may not have anticipated all expenses involved in managing Energy Merger in its first full operating year. |
| (2) | EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA is not a recognized measure under U.S. GAAP, but is a measure that management believes is highly correlated to cash and useful for the purpose of reconciling expected cash earnings to cash available for distribution. Additionally, EBITDA will be used as a supplemental financing measure by management and by external users of our financial statements, such as investors. Due to the expectation that Energy Merger’s anticipated capitalization will include approximately 70% debt, management believes that EBITDA is useful to stockholders as a way to evaluate Energy Merger’s ability to service its debt, meet working capital requirements and undertake capital expenditures. |
EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Therefore, EBITDA as presented above may not be comparable to similarly titled measures of other companies.
| (3) | Does not include $15,000,000 that Energy Merger will be required to maintain as a cash reserve pursuant to the covenants under its credit facility. The beginning unrestricted cash balance of $14,591,000 assumes that (i) no Energy Infrastructure shareholders exercise their redemption rights in connection with the Business Combination or, in the event of redemptions, that Energy Merger sells a number of shares of its common stock to the public pursuant to this joint proxy statement/prospectus equal to the number of shares that are redeemed, (ii) Energy Infrastructure has $220,000,000 cash available in the Trust Account to fund the acquisition of the SPVs, (iii) Vanship purchases $50,000,000 of units in the Business Combination Private Placement, (iv) Energy Merger draws down $415,000,000 under its term loan facility, (v) Vanship is obligated to compensate Energy Merger $3,181,000 pursuant to the closing adjustments contemplated by the Share Purchase Agreement (based on financial statement as of March 31, 2008), and (vi) Energy Infrastructure incurs $15,590,000 in transaction related expenses in connection with the Business Combination. Based on these assumptions, the beginning unrestricted cash balance is calculated as follows: |
|
|
|
|||
| In Thousands of US$ | ||||
| Cash held in Trust Account | $ | 220,000 | ||
| Proceeds from term loan | 415,000 | |||
| Proceeds from Business Combination Private Placement | 50,000 | |||
| Cash portion of acquisition price | (643,000 | ) | ||
| Settlement with Vanship pursuant to closing adjustments | 3,181 | |||
| Transaction related expenses payable by Energy Merger | (15,590 | ) | ||
| Restricted working capital pursuant to term loan facility | (15,000 | ) | ||
| Remaining cash | $ | 14,591 | ||
|
(4) |
Energy Merger cannot assure you that it will have available cash in the amounts presented above or at all, or that the lenders under its credit facility will not place restrictions on the payment of dividends. |
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| (5) | Represents 20,925,000 shares that were purchased in Energy Infrastructure’s initial public offering (including shares purchased pursuant to the exercise of the underwriters’ over-allotment option) plus 202,500 shares to be released to Maxim upon closing of the Business Combination as compensation for its role as financial advisor to Energy Infrastructure, multiplied by the dividend of $1.54 per share during the first operating year in accordance with the dividend policy of Energy Merger. Vanship has agreed, and it is a condition to the closing of the Business Combination, that Energy Merger insiders will waive any right to receive dividend payments in the one-year period immediately following the consummation of the Business Combination in order to facilitate the payment of these dividends to Energy Merger’s public stockholders. |
| (6) | Includes $15,000,000 that Energy Merger will be required to maintain as a cash reserve pursuant to the covenants under its credit facility. |
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CAPITALIZATION OF ENERGY INFRASTRUCTURE
The following table sets forth the capitalization of Energy Infrastructure Acquisition Corp. as of March 31, 2008:
| • | on an actual basis; |
| • | on an as adjusted basis giving effect to the Business Combination. |
| • | on an as further adjusted basis giving effect to the Business Combination and the redemption of 1,087,520 common shares subject to possible redemption. |
There have been no significant adjustments to Energy Infrastructure Aquisition Corp.'s capitalization since March 31, 2008, as so adjusted. You should read this capitalization table together with “Management's Discussion and Analysis of Financial Condition and Results of Operations”, the financial statements and related notes, and the unaudited pro forma condensed combined financial statements and related notes, all appearing elsewhere in this joint proxy statement/prospectus.
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|
|||||||||
| As of March 31, 2008 | ||||||||||||
| (in thousands) | ||||||||||||
| Actual | As Adjusted |
As Further
Adjusted |
||||||||||
|
Debt:
|
||||||||||||
| Note payable to stockholder | $ | 500 | $ | — | $ | — | ||||||
| Convertible loans payable to stockholder | 2,685 | — | — | |||||||||
|
Long-term acquisition financing, including current
portion of $40,600,000 |
— | 415,000 | 415,000 | |||||||||
| Total debt | 3,185 | 415,000 | 415,000 | |||||||||
| Common stock subject to possible redemption | 64,619 | — | — | |||||||||
|
Stockholders' equity:
|
||||||||||||
|
Preferred stock, $0.0001 par value; 1,000,000 shares
authorized, none issued |
||||||||||||
| Common stock, $0.0001 par value, authorized - 89,000,000 shares; issued and outstanding - 27,221,747 shares, inclusive of shares subject to possible redemption actual, 46,990,247 shares, as adjusted, and 45,857,727 shares, as further adjusted | 3 | 5 | 5 | |||||||||
| Paid-in capital in excess of par | 158,482 | 93,270 | 82,504 | |||||||||
|
Retained earnings (deficit accumulated during the
development stage) |
(11,887 | ) | 63,442 | 63,186 | ||||||||
| Total stockholders' equity | 146,598 | 156,717 | 145,695 | |||||||||
| Total capitalization | $ | 214,402 | $ | 571,717 | $ | 560,695 | ||||||
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RELATED PARTY TRANSACTIONS
Transactions in Connection with the Founding and Initial Public Offering of Energy Infrastructure
Private Placements . On December 30, 2005, Energy Infrastructure issued an aggregate of 5,831,349 shares of Energy Infrastructure’s common stock in a private transaction to the individuals set forth below for $25,000 in cash, at a purchase price of $0.004 per share, as follows:
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|
|
|
||
| Name | Number of Shares (1) | Relationship to Us | ||
| Arie Silverberg | 583,134 | Chief Executive Officer and Director | ||
| Marios Pantazopoulos | 145,784 | Chief Financial Officer and Director | ||
| George Sagredos | 2,332,541 | Chief Operating Officer, President and Director | ||
| Andreas Theotokis | 2,040,972 | Chairman of the Board of Directors and Director | ||
| Jonathan Kollek | 583,134 | Director | ||
| David Wong | 145,784 | Director |
| (1) | All such numbers give retroactive effect to a 0.4739219-for-1 stock dividend effective as of April 21, 2006. |
In June 2006, Mr. Sagredos transferred 397,778 of his shares to Marios Pantazopoulos for nominal consideration.
Each of Messrs. Sagredos and Theotokis subsequently transferred the shares owned by them to Energy Corp., a corporation formed under the laws of the Cayman Islands.
On July 18, 2006 an aggregate of 562,500 shares were surrendered for cancellation by certain of Energy Infrastructure’s stockholders.
The holders of the majority of these shares are entitled to make up to two demands that we register these shares. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before July 18, 2009. In addition, these stockholders have certain “piggy-back” registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements.
Energy Corp., a corporation formed under the laws of the Cayman Islands, which is controlled by Energy Infrastructure’s President and Chief Operating Officer, purchased 825,398 units from Energy Infrastructure at a purchase price of $10.00 per unit in a private placement in accordance with Regulation S under the Securities Act of 1933. Mr. Sagredos originally agreed to purchase the 825,398 units from Energy Infrastructure in January 2006 pursuant to the terms of a subscription agreement, and subsequently assigned such rights to Energy Corp. in June 2006, which assumed such obligations pursuant to the terms of an Assignment and Assumption Agreement.
The holders of such units subscribed for in the Regulation S private placement have been granted demand and “piggy-back” registration rights with respect to the 825,398 shares, the 825,398 warrants and the 825,398 shares underlying the warrants at any time commencing on the date we announce that we have entered into a letter of intent with respect to a proposed a business combination. The demand registration may be exercised by the holders of a majority of such units. We will bear the expenses incurred in connection with the filing of any such registration statements.
Because the units sold in the Regulation S private placement were originally issued pursuant to an exemption from the registration requirements under the federal securities laws, the holders of the warrants purchased in the Regulation S private placement may be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current.
The units purchased in the Regulation S private placement contain restrictions prohibiting their transfer until the earlier of a business combination or Energy Infrastructure’s liquidation. In addition, the holders of
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such units will agree to vote the shares of common stock included in such units in favor of a business combination brought to the stockholders for their approval, and to waive their respective rights to participate in any liquidation distribution occurring upon Energy Infrastructure’s failure to consummate a business combination.
Stockholder Loans . On October 6, 2005, Mr. Sagredos advanced a total of $300,000 to Energy Infrastructure to cover expenses related to Energy Infrastructure’s public offering, which loan, plus accrued interest, was repaid from the proceeds of the public offering. Mr. Sagredos made an additional loan to Energy Infrastructure in the amount of $475,000, four days prior to the effective date of the public offering. Such loan bears interest at a per annum interest rate equivalent to the per annum interest rate applied to funds held in the Trust Account during the same period that such loan is outstanding, and principal and accrued interest is to be repaid from interest accrued on the Trust Account. Such loan has been repaid in full from the Trust Account.
In addition, four days prior to the effective date of the public offering, Robert Ventures Limited, a corporation formed under the laws of the British Virgin Islands controlled by George Sagredos loaned Energy Infrastructure an additional $2,550,000 in the form of a convertible loan. An additional loan in the amount of $135,000 was made by Robert Ventures Limited prior to the exercise of the over-allotment option. Such loans amounting to $2,685,000 in the aggregate bear interest at a per annum rate equivalent to the per annum interest rate applied to the funds held in the Trust Account during the quarterly period covered by such interest payment. We became obligated to make quarterly interest payments on such loans on the expiration of the first full quarter after the date that we had drawn down at least $1 million in accrued interest on the Trust Account to fund Energy Infrastructure’s working capital requirements. Such loans are due the earlier of Energy Infrastructure’s liquidation or the consummation of a business combination. Quarterly interest payments and the repayment of principal (if not earlier converted) will be made from interest accrued on the Trust Account. In addition, the principal of the convertible loan is convertible into units at a conversion price of $10.00 per unit, subject to adjustment, commencing two business days following Energy Infrastructure’s filing of a preliminary proxy statement with respect to a business combination. These securities have the same registration rights as the units to be sold in the Regulation S private placement. Pursuant to the terms of the Share Purchase Agreement, Mr. Sagredos has agreed to convert the convertible loans into 268,500 units concurrent with the completion of the Business Combination.
In March 2008, Energy EIAC Capital Ltd., an off-shore company controlled by George Sagredos, Energy Infrastructure’s President and Chief Operating Officer, loaned $500,000 to Energy Infrastructure in the form of a note payable. Such loan bears interest at a per annum interest rate equivalent to the per annum interest rate applied to the funds held in the Trust Account during the same period that such loan is outstanding (average 2.76% during the three months ended March 31, 2008). Energy Infrastructure is obligated to repay the principal and accrued interest on such loan following the earlier of (i) the consummation of a Business Combination or (ii) the dissolution and liquidation of Energy Infrastructure. In May 2008 and June 2008, Sanibel Intertrade Corp., an off-shore company controlled by George Sagredos loaned an aggregate of $400,000 to Energy Infrastructure in the form of notes payable. Such loans bear interest at a per annum interest rate equivalent to the per annum interest rate applied to the funds held in the Trust Account during the same period that such loan is outstanding. Energy Infrastructure is obligated to repay the principal and accrued interest on such loans following the earlier of (i) the consummation of a Business Combination or (ii) the dissolution and liquidation of Energy Infrastructure.
In the event the Business Combination is not completed, the repayment of the convertible loans is subordinate to the public stockholders receiving a minimum of $10.00 per share, subject to any valid claims by Energy Infrastructure’s creditors which are not covered by amounts in the Trust Account or indemnities provided by Energy Infrastructure’s officers and directors, in the event of Energy Infrastructure’s liquidation and dissolution.
Options . Energy Infrastructure granted Mr. Sagredos, Energy Infrastructure’s President and Chief Operating Officer and a director, concurrent with the closing of Energy Infrastructure’s public offering, options to purchase an aggregate of 2,688,750 shares of Energy Infrastructure’s common stock. The options will vest in four quarterly installments with 672,187 options vesting on each of the first three installments, and the remaining 672,189 options vesting on the final installment. The first installment shall vest on the date of expiration of the three-month period immediately following the consummation of a business combination. We granted
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Mr. Theotokis, Energy Infrastructure’s Chairman of the board of directors, concurrent with the closing of Energy Infrastructure’s public offering, assignable options to purchase an aggregate of 896,250 shares of Energy Infrastructure’s common stock. The options will vest in four quarterly installments with 224,062 options vesting on each of the first three installments and the remaining 224,064 options vesting on the final installment. The first installment shall vest on the date of expiration of the three-month period immediately following the consummation of a business combination. Each of the options, which is assignable, is exercisable for a five-year period from the date of vesting at an exercise price of $.01 per share, and contains cashless exercise provisions. In the event of a stock dividend, recapitalization, reorganization merger or consolidation, or certain other events, the exercise price and number of underlying shares of common stock may be adjusted. The shares of common stock underlying the options will be subject to a six-month holding period from the date of issuance. The vesting of the options following the consummation of the business combination is contingent upon each of Messrs. Sagredos and Theotokis remaining as an officer of Energy Infrastructure on each applicable quarterly vesting date. However, options that have already vested shall continue for their five-year term regardless of whether Mr. Sagredos continues to be an officer and/or director of Energy Infrastructure. When such shares are issued, we have agreed to use Energy Infrastructure’s best efforts to register such shares under the Securities Act of 1933. We will bear the expenses incurred in connection with the filing of any such registration statements.
All of the above-described options to purchase an aggregate of 3,585,000 shares of Energy Infrastructure common stock will be tendered for cancellation concurrent with the completion of the Business Combination.
Transactions in Connection with the Business Combination
Expenses . Energy Infrastructure will reimburse its officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on Energy Infrastructure’s behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by Energy Infrastructure, which will be reviewed only by Energy Infrastructure’s board or a court of competent jurisdiction if such reimbursement is challenged.
Other than reimbursable out-of-pocket expenses payable to Energy Infrastructure’s officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of Energy Infrastructure’s existing stockholders, officers or directors who owned Energy Infrastructure’s common stock prior to the public offering, or to any of their respective affiliates for services rendered to Energy Infrastructure prior to or with respect to the business combination.
Options . In connection with the Business Combination, the options to purchase an aggregate of 2,688,750 shares of Energy Infrastructure’s common stock granted to Mr. Sagredos and the options to purchase an aggregate of 896,250 shares of Energy Infrastructure’s common stock granted to Mr. Theotokis will be tendered for cancellation.
Upon consummation of the Business Combination, Mr. Sagredos (or his assignees) shall receive 1,000,000 units of Energy Merger. Mr. Sagredos has agreed to transfer 500,000 of such units to Marios Pantazopoulos, Energy Infrastructure’s chief financial officer and a director, and a director of Energy Merger.
Vanship Warrants . Under the Share Purchase Agreement, Energy Merger has agreed to effect the transfer of 425,000 warrants to purchase Energy Infrastructure common stock from one of Energy Infrastructure’s initial stockholders. Each warrant will be exercisable for one share of Energy Merger common stock with an exercise price of $8.00 per share. It is expected that these warrants will be transferred to Vanship by Robert Ventures Limited, an off-shore company controlled by Mr. George Sagredos.
Vanship Registration Rights . Under the Share Purchase Agreement, Energy Merger has agreed, with some limited exceptions, to include (i) the 13,500,000 shares of Energy Merger’s common stock comprising the stock consideration portion of the aggregate purchase price for the SPVs, and (ii) the shares of Energy Merger’s common stock underlying the 425,000 warrants that Mr. George Sagredos will transfer to Vanship in Energy Merger’s registration statement of which this joint proxy statement/prospectus is a part. We refer to these securities, collectively with the 6,000,000 shares of Energy Merger’s common stock that Vanship is eligible to earn in the two year period following the Business Combination based on certain revenue targets as
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the Registrable Securities. Energy Merger has also granted Vanship (on behalf of itself or its affiliates that hold Registrable Securities) the right, under certain definitive, pre-determined circumstances and subject to certain restrictions, including lock-up and market stand-off restrictions, to require Energy Merger to register the Registrable Securities under the Securities Act of 1933, as amended, in the future. Under the Share Purchase Agreement, Vanship also has the right to require Energy Merger to make available shelf registration statements permitting sales of shares into the market from time to time over an extended period. Vanship will have the ability to exercise certain piggyback registration rights 180 days following the effective date of the Business Combination. In addition, in connection with the Business Combination Private Placement, Energy Merger will grant to Vanship certain demand and piggyback registration rights with respect to up to 5,000,000 units.
Business Combination Private Placement . Under the Share Purchase Agreement, Vanship has agreed to purchase up to 5,000,000 units from Energy Merger at a purchase price of $10.00 per unit, but only to the extent necessary to secure the acquisition financing described under the heading “Acquisition Financing.” Each unit will consist of one share of Energy Merger’s common stock and one warrant to purchase one share of Energy Merger’s common stock at an exercise price of $8.00 per warrant. The proceeds from such private placement, if any, are expected to be retained by Energy Merger and not contributed to the SPVs.
Transactions in Connection with Energy Merger
Management Agreement . Upon the closing of the Business Combination, Energy Merger expects to enter into a management agreement with the Manager, pursuant to which the Manager will provide the strategic, commercial, administrative, technical and crew management services necessary to support Energy Merger’s business. It is expected that the Manager will subcontract technical management of the vessels in Energy Merger’s fleet to its affiliate, Univan. Both the Manager and Univan were founded and are controlled by Captain C.A.J. Vanderperre. Captain Vanderperre will be the Chairman of Energy Merger’s board of directors upon completion of the Business Combination. He is also the Chairman and a co-founder of Vanship, the company from which Energy Merger will acquire its initial fleet.
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DESCRIPTION OF ENERGY INFRASTRUCTURE SECURITIES
Given below is a summary of the material features of Energy Infrastructure’s securities. This summary is not a complete discussion of the certificate of incorporation and bylaws of Energy Infrastructure that create the rights of its stockholders. You are urged to read carefully this joint proxy statement/prospectus. We also refer you to Energy Infrastructure’s certificate of incorporation and bylaws, which have been filed as exhibits to SEC reports filed by Energy Infrastructure. Please see “Where You Can Find Additional Information.”
General
Energy Infrastructure is authorized to issue 89,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001. As of the date of this joint proxy statement/prospectus, 27,221,747 shares of common stock are outstanding, held by nine record holders. No shares of preferred stock are currently outstanding.
Common Stock
Energy Infrastructure stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for the Business Combination, Energy Corp. has agreed to vote an aggregate of 825,398 shares of Energy Infrastructure common stock acquired by them in the Private Placement and any shares of Energy Infrastructure common stock they may acquire in the future in favor of the Business Combination and thereby waive redemption rights with respect to such shares. All of Energy Infrastructure’s officers and directors have agreed to vote an aggregate of 5,268,849 shares of Energy Infrastructure common stock issued to them prior to our initial public offering in accordance with the vote of the holders of a majority of the shares issued in our initial public offering. Additionally, our officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders.
Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
If Energy Infrastructure is forced to liquidate prior to a business combination, our public stockholders are entitled to share ratably in the Trust Account, inclusive of any interest (net of taxes payable), and any net assets remaining available for distribution to them after payment of liabilities. Our officers and directors have agreed to waive their rights to share in any distribution with respect to common stock owned by them if we are forced to liquidate.
Our stockholders have no redemption, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock redeemed for cash equal to their pro rata share of the Trust Account if they vote against the Redomiciliation Merger, elect to exercise redemption rights and the Redomiciliation Merger is approved and completed. A stockholder who exercises redemption rights will continue to own any warrants to acquire Energy Infrastructure common stock owned by such stockholder as such warrants will remain outstanding and unaffected by the exercise of redemption rights.
There are no limitations on the right of non-residents of Delaware to hold or vote Energy Infrastructure’s common shares.
Preferred Stock
Energy Infrastructure’s certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement entered into in connection with our initial public offering prohibits Energy Infrastructure, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the Trust
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Account, or which votes as a class with the common stock on a business combination. The preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of Energy Infrastructure.
Warrants
We have 21,750,398 warrants issued and outstanding and Energy Merger may issue up to an additional 6,000,000 warrants (as part of units) upon completion of the Business Combination. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $8.00 per share, subject to adjustment as discussed below, at any time commencing on the completion of a business combination. Following the effectiveness of the Business Combination, our warrants will become exercisable. The warrants will expire on July 17, 2010 at 5:00 p.m., New York City time.
We may call the warrants for redemption
| • | in whole and not in part; |
| • | at a price of $0.0001 per warrant at any time after the warrants become exercisable, subject to the right of each warrant holder to exercise his or her warrant prior to the date scheduled for redemption; |
| • | upon not less than 30 days’ prior written notice of redemption to each warrant holder; and |
| • | if, and only if, the reported last sale price of the common stock equals or exceeds $14.25 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. |
We have established this criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made.
The warrants are issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Energy Infrastructure. You should review a copy of the warrant agreement, which has been filed as an exhibit to SEC reports filed by Energy Infrastructure, for a complete description of the terms and conditions applicable to the warrants.
The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain definitive, pre-determined circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their exercise price.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to Energy Infrastructure, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. The warrants may be
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deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
Dividends
We are a blank check company and therefore we have not paid any dividends on our common stock. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future, if the Redomiciliation Merger is not approved. Please read “Dividend Policy of Energy Merger.”
Transfer Agent and Warrant Agent
The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
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DESCRIPTION OF ENERGY MERGER SECURITIES
Energy Infrastructure stockholders who receive shares of Energy Merger in the merger will become stockholders of Energy Merger. Energy Merger is a corporation organized under the laws of the Republic of the Marshall Islands and is subject to the provisions of Marshall Islands law. Given below is a summary of the material features of Energy Merger’s securities as provided in Energy Merger amended and restated articles of incorporation, as are anticipated to be in effect upon the completion of the Business Combination. This summary is not a complete discussion of the amended and restated articles of incorporation and bylaws of Energy Merger that create the rights of its stockholders. You are urged to read carefully the form of amended and restated articles of incorporation and bylaws of Energy Merger which have been filed as exhibits to Energy Merger’s registration statement on Form F-1/F-4. Please see “Where You Can Find Additional Information.”
General
Energy Merger is authorized to issue 119,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001, of which one share is designated special voting preferred stock. As of the date of this joint proxy statement/prospectus, 100 shares of common stock are outstanding. No shares of preferred stock are currently outstanding but it is anticipated that one share of special preferred voting stock will be issued to Vanship upon completion of the Business Combination.
Common Stock
Upon consummation of the Business Combination, after giving effect to the issuance of 13,500,000 shares to Vanship in the Business Combination, the issuance of 1,000,000, units to Energy Infrastructure’s President and Chief Operating Officer (or any assignee thereof), the issuance of 5,000,000 units to Vanship in connection with the Business Combination Private Placement and the issuance of 268,500 units upon the conversion of convertible loans aggregating $2,685,000, Energy Merger will have outstanding 46,990,247 shares of common stock, assuming that no stockholders vote against the Business Combination and exercise redemption rights. In addition, Energy Merger will have 28,018,890 shares of common stock reserved for issuance upon the exercise of the warrants. Under certain definitive, pre-determined circumstances, in the future, Energy Merger may issue up to an additional 6,000,000 shares of common stock to Vanship. See “Share Purchase Agreement — Purchase Price.”
Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by Energy Merger’s board of directors out of funds legally available for dividends. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of Energy Merger’s securities. All outstanding shares of common stock are, and the shares to be issued in the Redomiciliation Merger when issued will be, fully paid and non-assessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any shares of preferred stock which Energy Merger may issue in the future.
There are no limitations on the right of non-residents of the Republic of the Marshall Islands to hold or vote Energy Merger’s common shares.
Preferred Stock
Energy Merger will be authorized to issue up to 999,999 shares of blank check preferred stock. The rights, designations and preferences of the preferred stock can be determined, and the shares can be issued, upon the authority of Energy Merger’s board of directors, without any further vote or action by Energy Merger’s stockholders.
Energy Merger’s amended and restated articles of incorporation authorize one share of special voting preferred stock. The special voting preferred stock will have voting and economic rights equivalent to one share of common stock except that the holder of the special voting preferred stock will be entitled to nominate and elect three of Energy Merger’s nine directors. In addition, for so long as any shares of special voting preferred stock are outstanding, the consent of the three directors elected by the holders of special voting
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preferred stock will be required for the authorization or issuance of any additional shares of preferred stock of Energy Merger. The one share of special voting preferred stock will be convertible into one share of common stock at the option of the holder and is expected to be issued to Vanship upon completion of the Business Combination.
Warrants
Upon consummation of the Business Combination, each outstanding Energy Infrastructure warrant will be assumed by Energy Merger with the same terms and restrictions except that each will be exercisable for common stock of Energy Merger. For a description of the terms and restrictions, please read “Description of Energy Infrastructure Securities Warrants.”
Conflicts of Interest
Article Ninth of Energy Merger’s articles of incorporation addresses actual and potential conflicts of interest that may arise as a result of Vanship’s equity holding in Energy Merger and certain individuals serving as officers and directors of both Vanship (including its other subsidiaries) and Energy Merger. Generally, Vanship is entitled to engage in the same or similar business as Energy Merger and Energy Merger will not have any right to business opportunities known to or pursued by Vanship or its affiliates. Furthermore, Vanship will not have a duty to present business opportunities to Energy Merger. Similarly, directors and officers of both Vanship (including its other subsidiaries) and Energy Merger will not have a duty to present business opportunities to Energy Merger, unless they are expressly offered in writing to an individual solely in his capacity as a director or officer of Energy Merger. These provisions terminate upon (1) Vanship ceasing to control 10% of Energy Merger’s common stock voting power and (2) no person serving as a director or officer of both Vanship (including its other subsidiaries) and Energy Merger. A two-thirds majority vote of both the board of directors and stockholders of Energy Merger is necessary to amend Article Ninth of the Energy Merger articles of incorporation.
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COMPARISON OF ENERGY INFRASTRUCTURE
AND ENERGY MERGER STOCKHOLDER RIGHTS
In the Redomiciliation Merger, each share of Energy Infrastructure common stock, par value $0.0001 per share, will be converted into one share of Energy Merger common stock, par value $0.0001 per share, and each warrant to purchase shares of Energy Infrastructure will be assumed by Energy Merger and will contain the same terms and provisions except that each will be exercisable for shares of Energy Merger. Energy Infrastructure is a Delaware corporation. The rights of its stockholders derive from Energy Infrastructure’s certificate of incorporation and bylaws and from the DGCL. Energy Merger is a Marshall Islands corporation. The rights of its stockholders derive from Energy Merger’s articles of incorporation and bylaws and from the BCA.
The following is a comparison setting forth the material differences of the rights of Energy Infrastructure stockholders and Energy Merger stockholders. Certain significant differences in the rights of Energy Infrastructure stockholders and those of Energy Merger stockholders arise from differing provisions of Energy Infrastructure’s and Energy Merger’s respective governing corporate instruments. The following summary does not purport to be a complete statement of the provisions affecting, and differences between, the rights of Energy Infrastructure stockholders and those of Energy Merger stockholders. This summary is qualified in its entirety by reference to the DGCL and the BCA and to the respective governing corporate instruments of Energy Infrastructure and Energy Merger, to which stockholders are referred.
Objects and Purposes
Energy Infrastructure. The purposes and powers of Energy Infrastructure are set forth in the third paragraph of Energy Infrastructure’s certificate of incorporation. These purposes include any lawful act or activity for which corporations may be organized under the DGCL. Pursuant to Energy Infrastructure’s amended and restated certificate of incorporation, Energy Infrastructure will dissolve and liquidate its trust account to its public stockholders if it does not complete a business combination within 18 months after the consummation of its initial public offering (or within 24 months after the consummation of its initial public offering if certain extension criteria are satisfied).
Energy Merger. The purposes and powers of Energy Merger are set forth in the third paragraph of Energy Merger’s articles of incorporation. The purpose of Energy Merger is to engage in any lawful act or activity relating to the business of owning or operating tanker ships and other types vessels used as a means of conveyance and transportation by water, any other lawful act or activity customarily conducted in conjunction with waterborne shipping.
Authorized Capital Stock
Energy Infrastructure. Energy Infrastructure is authorized to issue 89,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001. As of the date of joint proxy statement/prospectus, 27,221,747 shares of common stock are outstanding and there are nine record holders. No shares of preferred stock are currently outstanding.
Energy Merger. Energy Merger will be authorized to issue 119,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001, of which one share will be designated special voting preferred stock. As of the date of this joint proxy statement/prospectus, 100 shares of common stock are outstanding. No shares of preferred stock are currently outstanding but one share of special voting preferred stock is expected to be issued to Vanship in connection with the Business Combination Private Placement.
Board of Directors
Energy Infrastructure. Under the DGCL, the certificate of incorporation, an initial bylaw or a bylaw adopted by the stockholders of a Delaware corporation may create a classified board with staggered terms. A maximum of three classes of directors is allowed with members of one class elected each year for a maximum term of three years. There is no statutory requirement as to the number of directors in each class or that the number in each class be equal.
Energy Infrastructure’s bylaws provide that its board of directors shall consist of not less than one nor more than nine members as designated from time to time by resolution of the board. Energy Infrastructure’s
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board of directors currently has five members. Directors are elected by the affirmative vote of a majority of the shares represented at the annual meeting of stockholders. Energy Infrastructure’s 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.
Energy Infrastructure’s certificate of incorporation and bylaws do not provide for cumulative voting for the election of directors. If any vacancy occurs in the membership of the board of directors, it may be filled by a vote of the majority of the remaining directors then in office although less than a quorum, or by a sole remaining director and each director so chosen shall hold office until the next annual meeting and until such director’s successor shall be duly elected and shall qualify, or until such director’s earlier resignation, removal from office, death or incapacity.
Energy Merger. The board of directors of Energy Merger is divided into three classes that are as nearly equal in number as possible. Class A Directors initially serve until the 2009 annual meeting of stockholders, Class B Directors initially serve until the 2010 annual meeting of stockholders, and Class C Directors initially serve until the 2011 annual meeting of stockholders. At each annual meeting of stockholders after the foregoing initial terms, the directors of each class are elected for terms of three years.
Pursuant to its bylaws, the board of directors of Energy Merger may, in the absence of an independent quorum, from time to time, in its discretion, fix amounts which shall be payable to members of the board of directors for attendance at the meetings of the board or committee thereof and for services rendered to Energy Merger.
The Share Purchase Agreement provides that, so long as Vanship owns at least 25% of the outstanding common stock of Energy Merger, Vanship will have the right to appoint one Class A, one Class B and one Class C director of Energy Merger. To give effect to this right, Energy Merger intends to amend its articles of incorporation immediately prior to the completion of the Business Combination to authorize one share of special voting preferred stock. This share is expected to be issued to Vanship in connection with the Business Combination Private Placement. The special voting preferred stock will have voting and economic rights equivalent to one share of common stock except that the holder of the special voting preferred stock will be entitled to nominate and elect three of Energy Merger’s nine directors, and the consent of those three directors will be required for the authorization or issuance of any additional shares of preferred stock of Energy Merger. The one share of special voting preferred stock will be convertible into one share of common stock at the option of the holder. Simultaneously with the issuance of the special voting preferred stock, Energy Merger and Vanship will enter into an agreement whereby Vanship will agree to tender the special voting preferred stock to Energy Merger for conversion to common stock at such time as Vanship, together with its affiliates, owns less than 25% of the outstanding capital stock of Energy Merger.
Special Meetings of Stockholders
Energy Infrastructure. Energy Infrastructure’s bylaws provide that a Special Meeting of stockholders may be called by a majority of the entire board of directors, or the Chief Executive Officer, and shall be called by the Secretary at the request in writing of stockholders holding not less than a majority of all of the outstanding stock of Energy Infrastructure entitled to vote at such meeting.
Energy Merger. A special meeting of Energy Merger’s stockholders may be called at any time by the affirmative vote of sixty-six and two-thirds percent (66 2/3%) or more of the members of the entire board of directors, or the Chief Executive Officer, and shall be called by the Secretary at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote.
Mergers, Share Exchanges and Sales of Assets
Energy Infrastructure. The DGCL generally requires a majority vote of the outstanding shares of the corporation entitled to vote to effectuate a merger. The certificate of incorporation of a Delaware corporation may provide for a greater vote. In addition, the vote of stockholders of the surviving corporation on a plan of merger is not required under certain definitive, pre-determined circumstances.
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Energy Infrastructure’s certificate of incorporation provides that, in connection with a business combination, such as a merger, each outstanding share of common stock shall be entitled to one vote per share of common stock.
Energy Merger. The Marshall Islands Business Corporations Act, or the BCA, provides that a merger in which the Marshall Islands corporation is not the surviving corporation requires the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Marshall Islands corporation entitled to vote thereon. The BCA further provides that a sale, lease, exchange or other disposition of all or substantially all the assets of the Marshall Islands corporation, if not made in the usual or regular course of the business actually conducted by such Marshall Islands corporation, requires the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of capital stock of the Marshall Islands corporation entitled to vote thereon, unless any class of shares is entitled to vote thereon as a class, in which event such authorization shall require the affirmative vote of the holders of a majority of the shares of each class of shares entitled to vote as a class thereon and of the total shares entitled to vote thereon.
Anti-takeover Provisions
Energy Infrastructure. Several provisions of Energy Infrastructure’s certificate of incorporation and bylaws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen Energy Infrastructure’s vulnerability to a hostile change of control and enhance the ability of the board of directors to maximize stockholder value in connection with any unsolicited offer to acquire Energy Infrastructure. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of Energy Infrastructure by means of a tender offer, a proxy contest or otherwise, that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.
Energy Infrastructure’s certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Energy Infrastructure’s board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of its company or the removal of its management.
Energy Infrastructure’s certificate of incorporation provides for a board of directors serving staggered, three-year terms. Energy Infrastructure’s board of directors currently has five members. The classified board provision could discourage a third party from making a tender offer for Energy Infrastructure’s shares or attempting to obtain control of the company. It could also delay stockholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for up to three years.
Energy Infrastructure’s certificate of incorporation and bylaws prohibit cumulative voting in the election of directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.
Energy Infrastructure’s bylaws provide that a special meeting of stockholders may be called by a majority of the entire board of directors, or the Chief Executive Officer, and shall be called by the Secretary at the request in writing of stockholders holding not less than a majority of all of the outstanding stock of Energy Infrastructure entitled to vote at such meeting. These provisions could prevent stockholders representing less than a majority of the outstanding stock of Energy Infrastructure from forcing the board of directors to call a special meeting which could discourage, delay or prevent a change of control of the company or the removal of management.
The DGCL contains provisions which prohibit corporations from engaging in a business combination with an interested stockholder for a period of three years after the time of the transaction in which the person became an interested stockholder, unless: (1) prior to the time of the transaction that resulted in a stockholder becoming an interested stockholder, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares); or (3) at or subsequent to the date of the transaction that resulted in the stockholder
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becoming an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
For purposes of these provisions, a “business combination” includes mergers, consolidations, exchanges, asset sales, leases and other transactions resulting in a financial benefit to the interested stockholder and an “interested stockholder” is any person or entity that beneficially owns 30% or more of our outstanding voting stock and any person or entity affiliated with or controlling or controlled by that person or entity.
Energy Merger. Several provisions of Energy Merger’s articles of incorporation and bylaws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen Energy Merger’s vulnerability to a hostile change of control and enhance the ability of the board of directors to maximize stockholder value in connection with any unsolicited offer to acquire Energy Merger. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of Energy Merger by means of a tender offer, a proxy contest or otherwise, that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.
Energy Merger’s articles of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Energy Merger’s board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of the company or the removal of management.
Energy Merger’s articles of incorporation provides for a board of directors serving staggered, three-year terms. The classified board provision could discourage a third party from making a tender offer for Energy Merger’s shares or attempting to obtain control of the company. It could also delay stockholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for up to three years.
Energy Merger’s articles of incorporation and bylaws do not provide for cumulative voting in the election of directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.
Energy Merger’s bylaws provide that stockholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of stockholders must provide timely notice of their proposal in writing to the corporate secretary. Generally, to be timely, a stockholder’s notice must be received at Energy Merger’s principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. Energy Merger’s bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may impede a stockholder’s ability to bring matters before an annual meeting of stockholders or make nominations for directors at an annual meeting of stockholders.
Supermajority Provisions
The BCA generally provides that the affirmative vote of a majority of the outstanding shares entitled to vote at a meeting of stockholders is required to amend a corporation’s articles of incorporation, unless the articles of incorporation requires a greater percentage. Energy Merger’s articles of incorporation provide that the following provisions in the articles of incorporation may be amended only by an affirmative vote of 66 2/3% or more of the outstanding shares of Energy Merger’s capital stock entitled to vote generally in the election of directors:
| • | the board of directors shall be divided into three classes; |
| • | the directors are authorized to make, alter, amend, change or repeal the bylaws by vote not less than 66 2/3% of the entire board of directors; and |
| • | the stockholders are authorized to alter, amend or repeal our bylaws by an affirmative vote of 66 2/3% or more of the outstanding shares of Energy Merger’s capital stock entitled to vote generally in the election of directors. |
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Transfer Agent
The registrar and transfer agent for Energy Merger common stock and warrant agent for warrants exercisable for shares of Energy Merger is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
Listing
Energy Infrastructure’s common stock and warrants currently trade on the American Stock Exchange under the symbols “EII” and “EII.WS”, respectively. Energy Merger has applied to list its common shares and warrants on the American Stock Exchange under the symbols “VAN” and “VAN.WS”, respectively.
Dividends
Energy Infrastructure. The DGCL allows the board of directors of a Delaware corporation to authorize a corporation to declare and pay dividends and other distributions to its stockholders, subject to any restrictions contained in the certificate of incorporation, either out of surplus, or, if there is no surplus, out of net profits for the current or preceding fiscal year in which the dividend is declared. However, a distribution out of net profits is not permitted if a corporation’s capital is less than the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, until the deficiency has been repaired.
Energy Merger. Marshall Islands law generally prohibits the payment of dividends if the company is insolvent or would be rendered insolvent upon the payment of such dividends and dividends may be declared and paid out of surplus only; but in the case there is no surplus, dividends may be declared or paid out of net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. Declaration and payment of any dividend is subject to the discretion of Energy Merger’s board of directors. The timing and amount of dividend payments will be dependent upon Energy Merger’s earnings, financial condition, cash requirements and availability, restrictions in Energy Merger’s loan agreements, the provisions of Marshall Islands law affecting the payment of distributions to stockholders and other factors. The payment of dividends is not guaranteed or assured, and may be discontinued at any time at the discretion of Energy Merger’s board of directors. Because Energy Merger is a holding company with no material assets other than the stock of its subsidiaries, Energy Merger’s ability to pay dividends will depend on the earnings and cash flow of its subsidiaries and their ability to pay dividends to Energy Merger. If there is a substantial decline in the charter market, Energy Merger’s earnings would be negatively affected, thus limiting its ability to pay dividends.
Indemnification of Directors and Officers and Limitation of Liability
Energy Infrastructure. The DGCL classifies indemnification as either mandatory indemnification or permissive indemnification. A Delaware corporation is required to indemnify a present or former director or officer against expenses actually and reasonably incurred in an action that the person successfully defended on the merits or otherwise.
Under the DGCL, in non-derivative third-party proceedings, a corporation may indemnify any director, officer, employee or agent who is or is threatened to be made a party to the proceeding against expenses, judgments and settlements actually and reasonably incurred in connection with a civil proceeding, provided such person acted in good faith and in a manner the person reasonably believed to be in the best interests of and not opposed to the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Further, in actions brought on behalf of the corporation, any director, officer, employee or agent who is or is threatened to be made a party can be indemnified for expenses actually and reasonably incurred in connection with the defense or settlement of the action if the person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interests of the corporation; however, indemnification is not permitted with respect to any claims in which such person has been adjudged liable to the corporation unless the appropriate court determines such person is entitled to indemnity for expenses.
Unless ordered by a court, the corporation must authorize permissive indemnification for existing directors or officers in each case by: (i) a majority vote of the disinterested directors even though less than a quorum; (ii) a committee of disinterested directors, designated by a majority vote of such directors even
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though less than a quorum; (iii) independent legal counsel in a written opinion; or (iv) the stockholders. The statutory rights regarding indemnification are non-exclusive; consequently, a corporation can indemnify a litigant in circumstances not defined by the DGCL under any bylaw, agreement or otherwise, subject to public policy limitations.
Under the DGCL, a Delaware corporation’s certificate of incorporation may eliminate director liability for monetary damages for breach of fiduciary duty except: (i) an act or omission not in good faith or that involves intentional misconduct or knowing violation of the law; (ii) a breach of the duty of loyalty; (iii) improper personal benefits; or (iv) certain unlawful distributions.
Energy Infrastructure’s certificate of incorporation and bylaws provide that any director, officer, employee or agent shall be indemnified to the fullest extent authorized or permissible under Delaware law, provided that such person acted in good faith and in a manner which he believed to be in, or not opposed to, the best interests of Energy Infrastructure, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In order to be indemnified, such indemnification must be ordered by a court or it must be decided by a majority vote of a quorum of the whole Energy Infrastructure board of directors that such person met the applicable standard of conduct set forth in this paragraph.
Energy Infrastructure’s certificate of incorporation provides that a director shall not be personally liable to the corporation or its stock holders for monetary damages for breach of fiduciary duty as a director; provided however, that nothing in the certificate of incorporation shall eliminate or limit the liability of any director (i) for breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.
Energy Merger. Energy Merger’s bylaws provide that any person who is or was a director or officer of Energy Merger, or is or was serving at the request of Energy Merger as a director or officer of another corporation, partnership, joint venture, trust or other enterprises shall be entitled to be indemnified by Energy Merger upon the same terms, under the same conditions, and to the same extent as authorized by Section 60 of the BCA, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Energy Merger, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, Energy Infrastructure and Energy Merger have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
Amendments to Certificate of Incorporation and Bylaws
Under the DGCL, under the following circumstances, a class of stockholders has the right to vote separately on an amendment to a Delaware corporation’s certificate of incorporation even if the certificate does not include such a right: (i) increasing or decreasing the aggregate number of authorized shares of the class (the right to a class vote under this circumstance may be eliminated by a provision in the certificate); (ii) increasing or decreasing the par value of the shares of the class; or (iii) changing the powers, preferences, or special rights of the shares of the class in a way that would affect them adversely. Approval by outstanding shares entitled generally to vote is also required. Under the DGCL, a corporation’s certificate of incorporation also may require, for action by the board or by the holders of any class or series of voting securities, the vote of a greater number or proportion than is required by the DGCL.
The BCA provides that notwithstanding any provisions in the articles of incorporation, the holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, and in addition to the authorization of an amendment by a vote of the holders of a majority of all outstanding shares entitled to vote thereon, the amendment shall be authorized by a vote of the holders of a majority of all outstanding shares of the class if the amendment would increase or decrease the aggregate number of authorized shares of such class, or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special
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rights of one or more series of any class so as to affect them adversely, but shall not affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for purposes of this section.
Energy Infrastructure. Energy Infrastructure’s certificate of incorporation may be amended if a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment. Energy Infrastructure’s bylaws may be amended or repealed, and new bylaws may be adopted, either (i) by the affirmative vote of the holders of a majority of the outstanding stock of Energy Infrastructure, or (ii) by the affirmative vote of a majority of the board of directors of Energy Infrastructure.
Energy Merger. Generally, the BCA provides that amendment of Energy Merger’s articles of incorporation may be authorized by a vote of the holders of a majority of all outstanding shares entitled to vote thereon at a meeting of stockholders or by written consent of all stockholders entitled to vote thereon. Energy Merger’s bylaws may be amended by the affirmative vote of 66 2/3% of entire board of directors, or by the affirmative vote of the holders of 66 2/3% or more of the outstanding shares of stock entitled to vote thereon (considered for this purpose as one class).
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COMPARISON OF MARSHALL ISLANDS CORPORATE LAW TO DELAWARE CORPORATE LAW
Energy Merger’s corporate affairs are governed by Energy Merger’s amended and restated articles of incorporation, amended and restated bylaws and the Business Corporation Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. For example, the BCA allows the adoption of various anti-takeover measures such as stockholder rights plans. While the BCA also provides that it is to be interpreted according to the laws of the State of Delaware and other states with substantially similar legislative provisions, there have been few, if any, court cases interpreting the BCA in the Marshall Islands and we can not predict whether Marshall Islands courts would reach the same conclusions as United States courts. Thus, you may have more difficulty in protecting your interests in the face of actions by the management, directors or controlling stockholders than would stockholders of a corporation incorporated in a United States jurisdiction which has developed a substantial body of case law. The following table provides a comparison between the statutory provisions of the BCA and the DGCL relating to stockholders’ rights.
Delaware
Stockholder Meetings
| • | May be held at a time and place as designated in the bylaws |
| • | May be held within or outside the Marshall Islands |
| • | Notice: |
| • | Whenever stockholders are required to take action at a meeting, written notice shall state the place, date and hour of the meeting and indicate that it is being issued by or at the direction of the person calling the meeting |
| • | A copy of the notice of any meeting shall be given personally or sent by mail not less than 15 nor more than 60 days before the meeting |
| • | May be held at such time or place as designated in the certificate of incorporation or the bylaws, or if not so designated, as determined by the board of directors |
| • | May be held within or outside Delaware |
| • | Notice: |
| • | Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any, by which stockholders may be deemed to be present and vote at such meeting |
| • | Written notice shall be given not less than ten nor more than 60 days before the meeting |
Stockholder’s Voting Rights
| • | Any action required to be taken by meeting of stockholders may be taken without meeting if consent is in writing and is signed by all the stockholders entitled to vote |
| • | Any person authorized to vote may authorize another person or persons to act for him by proxy |
| • | Unless otherwise provided in the articles of incorporation, a majority of shares entitled to vote constitutes a quorum. In no event shall a quorum consist of fewer than one-third of the shares entitled to vote at a meeting |
| • | The articles of incorporation may provide for cumulative voting |
| • | Stockholders may act by written consent to elect directors |
| • | Any person authorized to vote may authorize another person or persons to act for him by proxy |
| • | For stock corporations, certificate of incorporation or bylaws may specify the number of members necessary to constitute a quorum but in no event shall a quorum consist of less than one-third of the shares entitled to vote at the meeting. In the absence of such specifications, a majority of shares entitled to vote at the meeting shall constitute a quorum |
| • | The certificate of incorporation may provide for cumulative voting |
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Delaware
Limits on Rights of Non-Resident or Foreign Stockholders to Hold or Exercise Voting Rights
| • | There are no limits on the rights of non-resident or foreign stockholders to hold or exercise voting rights. |
| • | There are no limits on the rights of non-resident or foreign stockholders to hold or exercise voting rights. |
Right to Inspect Corporate Books
| • | Any stockholder may during the usual hours of business inspect, for a purpose reasonably related to his interests as a stockholder, and make copies of extracts from the share register, books of account, and minutes of all proceedings. |
| • | The right of inspection may not be limited in the articles or bylaws. |
| • | Any stockholder, in person or through an agent, upon written demand under oath stating the purpose thereof, has the right during usual business hours to inspect for any proper purpose and make copies or extracts from the corporation’s stock ledger, a list of its stockholders, and books and records. |
Indemnification
| • | For actions not by or in the right of the corporation, a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened or pending action or proceeding by reason of the fact that he is or was a director or officer of the corporation against expenses (including attorneys’ fees), judgments and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. |
| • | For actions not by or in the right of the corporation, a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened or pending action or proceeding by reason of the fact that he is or was a director, officer, employee or agent of the corporation against expenses (including attorneys’ fees), judgments and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. |
Duties of Directors and Officers
| • | Directors and officers shall discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions. They may rely upon financial statements of the corporation represented to them to be correct by the president or the officer having charge of its books or accounts or by independent accountants. |
| • | Directors owe a duty of care and a duty of loyalty to the corporation and have a duty to act in good faith. |
Right To Dividends
| • | A corporation may declare and pay dividends in cash, stock or other property except when the company is insolvent or would be rendered insolvent upon payment of the dividend or when the declaration or payment would be contrary to any restrictions contained in the articles of incorporation. Dividends may be declared and paid out of surplus only, but if there is no surplus dividends may be paid out of the net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. |
| • | Directors may declare a dividend out of its surplus, or, if there’s no surplus, then generally out of its net profits for the year in which the dividend is declared and/or the preceding fiscal year. |
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Delaware
Bylaws
| • | Except as otherwise provided in the articles of incorporation, bylaws may be amended, repealed or adopted by a vote of stockholders. If so provided in the articles of incorporation or in a stockholder approved bylaw, bylaws may also be amended, repealed, or adopted by the board of directors, but any bylaw adopted by the board of directors may be amended or repealed by the stockholders. |
| • | After a corporation has received any payment for any of its stock, the power to adopt, amend, or repeal bylaws shall be in the stockholders entitled to vote; provided, however, any corporation may, in its certificate of incorporation, provide that bylaws may be adopted, amended or repealed by the board of directors. The fact that such power has been conferred upon the board of directors shall not divest the stockholders of the power nor limit their power to adopt, amend or repeal the bylaws. |
Removal of Directors
| • | Any or all of the directors may be removed for cause by a vote of the stockholders or if the articles of incorporation or bylaws so provide, by the board. If the articles of incorporation or bylaws so provide, directors may be removed without cause by vote of the stockholders. |
| • | Any or all directors on a board without staggered terms may be removed with or without cause by the affirmative vote of a majority of shares entitled to vote in the election of directors unless the certificate of incorporation otherwise provides. Directors on a board with staggered terms generally may only be removed for cause by the affirmative vote of a majority of shares entitled to vote in the election of directors. |
Directors
| • | Board must consist of at least one member. |
| • | Number of members can be changed by an amendment to the bylaws, by the stockholders, or by action of the board under the specific provisions of a bylaw. |
| • | If the board is authorized to change the number of directors, it can only do so by an absolute majority (majority of the entire board) |
| • | Unless a greater proportion is required by the articles of incorporation, a majority of the entire board, in person or by proxy, shall constitute a quorum for the transaction of business. The bylaws may lower the number required for a quorum to one-third the number of directors but no less. |
| • | Board must consist of at least one member. |
| • | Number of board members shall be fixed by the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number shall be made only by amendment of the certificate. |
| • | A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate or bylaws require a greater number. The bylaws may lower the number required for a quorum to one-third the number of directors but no less. |
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Delaware
Dissenter’s Rights of Appraisal
| • | Stockholders have a right to dissent from a merger or sale of all or substantially all assets not made in the usual course of business, and receive payment of the fair value of their shares. |
| • | A holder of any adversely affected shares who does not vote on or consent in writing to an amendment to the articles of incorporation has the right to dissent and to receive payment for such shares if the amendment: |
| • | Alters or abolishes any preferential right of any outstanding shares having preference; or |
| • | Creates, alters, or abolishes any provision or right in respect to the redemption of any outstanding shares; or |
| • | Alters or abolishes any preemptive right of such holder to acquire shares or other securities; or |
| • | Excludes or limits the right of such holder to vote on any matter, except as such right may be limited by the voting rights given to new shares then being authorized of any existing or new class. |
| • | Appraisal rights shall be available for the shares of any class or series of stock of a corporation in certain mergers or consolidations. |
Stockholder’s Derivative Actions
| • | An action may be brought in the right of a corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates or of a beneficial interest in such shares or certificates. It shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law. |
| • | Complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort. |
| • | Such action shall not be discontinued, compromised or settled, without the approval of the High Court of the Republic. |
| • | Attorney’s fees may be awarded if the action is successful. |
| • | Corporation may require a plaintiff bringing a derivative suit to give security for reasonable expenses if the plaintiff owns less than 5% of any class of stock and the shares have a value of less than $50,000. |
| • | In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which he complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law. |
Class Actions
| • | Rule 23 of Marshall Islands Rules of Civil Procedure allows for class action suits in the Marshall Islands and is modeled on the federal rule, F.R.C.P. Rule 23. |
| • | Rule 23 of the Delaware Chancery Court Rules allows for class action suits in Delaware and is modeled on the federal rule, F.R.C.P. Rule 23. |
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TAXATION
Material United States Federal Income Tax Considerations
General
In the opinion of Loeb & Loeb LLP, the following are the material U.S. federal income tax consequences of the Business Combination to Energy Merger, of the Redomiciliation Merger to Energy Infrastructure and the holders of our common stock and warrants (which we refer to collectively as our “securities”), and of owning common stock and warrants in Energy Merger following the Redomiciliation Merger and Business Combination. The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our securities that is for U.S. federal income tax purposes:
| • | an individual citizen or resident of the United States; |
| • | a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| • | a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a beneficial owner of our securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” This discussion does not consider the tax treatment of partnerships or other pass-through entities that hold our common stock or warrants, or of persons who hold our common stock or warrants, or will hold the common stock or warrants of Energy Merger, through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our securities (or the common stock or warrants of Energy Merger), the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
The U.S. federal income tax consequences applicable to Non-U.S. Holders of owning common stock and warrants in Energy Merger are described below under the heading “Tax Consequences to Non-U.S. Holders of Common Stock and Warrants of Energy Merger.”
This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to Energy Merger, Energy Infrastructure or any particular holder of our securities or of common stock and warrants of Energy Merger based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold our securities, and will acquire the common stock and warrants of Energy Merger as a result of owning our securities, and will own and hold such common stock and warrants, as capital assets within the meaning of Section 1221 of the Code. This discussion does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
| • | financial institutions or “financial services entities”; |
| • | broker-dealers; |
| • | taxpayers who have elected mark-to-market accounting; |
| • | tax-exempt entities; |
| • | governments or agencies or instrumentalities thereof; |
| • | insurance companies; |
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| • | regulated investment companies; |
| • | real estate investment trusts; |
| • | certain expatriates or former long-term residents of the United States; |
| • | persons that actually or constructively own 10% or more of our voting shares; |
| • | persons that hold our common stock or warrants as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or |
| • | persons whose functional currency is not the U.S. dollar. |
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws.
We have not sought, and will not seek, a ruling from the Internal Revenue Service, or the IRS, as to any U.S. federal income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld by a court.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ENERGY INFRASTRUCTURE, ENERGY MERGER OR TO ANY PARTICULAR HOLDER OF OUR SECURITIES OR OF THE COMMON STOCK OR WARRANTS OF ENERGY MERGER FOLLOWING THE REDOMICILIATION MERGER AND BUSINESS COMBINATION MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH HOLDER OF OUR SECURITIES IS ADVISED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE REDOMICILIATION MERGER AND THE BUSINESS COMBINATION, AND THE OWNERSHIP AND DISPOSITION OF OUR SECURITIES AND OF THE COMMON STOCK AND WARRANTS OF ENERGY MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.
Tax Consequences of the Business Combination to Energy Merger
Energy Merger should not recognize any gain or loss for U.S. federal income tax purposes as a result of the Business Combination.
Tax Consequences of the Redomiciliation Merger
Tax Consequences to U.S. Holders of Common Stock and Warrants
The Redomiciliation Merger is expected to qualify as a reorganization for U.S. federal income tax purposes under Section 368(a) of the Code. If the transaction qualifies as a reorganization, a U.S. Holder of our securities generally will not recognize gain or loss upon the exchange of our securities solely for common stock and warrants of Energy Merger pursuant to the Redomiciliation Merger. A U.S. Holder’s aggregate tax basis in the common stock and warrants of Energy Merger received in connection with the Redomiciliation Merger generally will be the same as the aggregate tax basis of our securities surrendered in the transaction (except to the extent of any tax basis allocated to a fractional share for which a cash payment is received in connection with the transaction). The holding period of the common stock and warrants in Energy Merger received in the Redomiciliation Merger generally will include the holding period of the securities of Energy Infrastructure surrendered in the Redomiciliation Merger. A stockholder of Energy Infrastructure who redeems its shares of common stock for cash (or receives cash in lieu of a fractional share of our common stock pursuant to the Redomiciliation Merger) generally will recognize gain or loss in an amount equal to the difference between the amount of cash received for such shares (or fractional share) and its adjusted tax basis in such shares (or fractional share).
Tax Consequences to Energy Infrastructure and Energy Merger
Section 7874(b) of the Code, or Section 7874(b), generally provides that a corporation organized outside the United States which acquires, directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if stockholders of the acquired corporation own at least 80%
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of either the voting power or the value of the stock of the acquiring corporation after the acquisition by reason of owning shares in the acquired corporation. If Section 7874(b) were to apply to the Redomiciliation Merger, Energy Merger, as the surviving entity, would be subject to U.S. federal income tax on its worldwide taxable income following the Redomiciliation Merger and Business Combination as if it were a domestic corporation, and Energy infrastructure would not recognize gain (or loss) as a result of the Redomiciliation Merger.
After the completion of the Business Combination, which will occur immediately after and as part of the same plan as the Redomiciliation Merger, it is expected that the former stockholders of Energy Infrastructure will own less than 80% of the shares of Energy Merger. Accordingly, it is not expected that Section 7874(b) will apply to treat Energy Merger as a domestic corporation for U.S. federal income tax purposes. However, due to the absence of full guidance on how the rules of Section 7874(b) will apply to the transactions contemplated by the Redomiciliation Merger and the Business Combination, this result is not entirely free from doubt. If, for example, the Redomiciliation Merger were viewed for purposes of Section 7874(b) as occurring prior to, and separate from, the Business Combination, the stock ownership threshold for applicability of Section 7874(b) generally would be satisfied because the stockholders of Energy Infrastructure, by reason of owning shares of Energy Infrastructure, would own all of the shares of Energy Merger immediately after the Redomiciliation Merger. Although normal step transaction tax principles and an example in the temporary regulations promulgated under Section 7874(b) support the view that the Redomiciliation Merger and the Business Combination should be viewed together for purposes of determining whether Section 7874(b) is applicable, because of the absence of guidance under Section 7874(b) directly on point, this result is not entirely certain. The balance of this discussion assumes that Section 7874(b) does not apply and that Energy Merger will be treated as a foreign corporation for U.S. federal income tax purposes.
Even if Section 7874(b) does not apply to a transaction, Section 7874(a) of the Code, or Section 7874(a) generally provides that where a corporation organized outside the United States acquires, directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States, the acquired corporation will be subject to U.S. federal income tax on its “inversion gain” without reduction by certain tax attributes, such as net operating losses, otherwise available to the acquired corporation if the stockholders of the acquired corporation own at least 60% (but less than 80%) of either the voting power or the value of the stock of the acquiring corporation after the acquisition by reason of owning shares in the acquired corporation. After the completion of the Redomiciliation Merger and the Business Combination, the former stockholders of Energy Infrastructure may own more than 60% of the shares of Energy Merger by reason of owning shares of Energy Infrastructure prior to the Redomiciliation Merger and the Business Combination. As a result, Section 7874(a) may apply to restrict Energy Infrastructure from using any net operating losses or other tax attributes that may otherwise be available to Energy Infrastructure to offset any inversion gain. For this purpose, inversion gain generally would include any gain recognized under Section 367 of the Code by reason of the transfer of the properties of Energy Infrastructure to Energy Merger pursuant to the Redomiciliation Merger.
Under Section 367 of the Code, Energy Infrastructure generally will recognize gain (but not loss) as a result of the Redomiciliation Merger equal to the difference between the fair market value of each asset of Energy Infrastructure over such asset’s adjusted tax basis at the time of the Redomiciliation Merger. Any such gain generally would be attributable to the appreciation in value of the non-cash assets of Energy Infrastructure (including its rights under the Share Purchase Agreement) at the time of the Redomiciliation Merger.
Tax Consequences to U.S. Holders of Common Stock and Warrants of Energy Merger
Taxation of Distributions Paid on Common Stock
Subject to the passive foreign investment company, or PFIC, rules discussed below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any dividend paid on the common stock of Energy Merger. A distribution on such common stock will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of current or accumulated earnings and profits of Energy Merger (as determined under U.S. federal income tax principles). Such dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Distributions in excess of such earnings and profits will be applied against and reduce the U.S. Holder’s basis in its common stock in Energy Merger and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such common stock.
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With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2011, dividends may be taxed at the lower rate applicable to long-term capital gains (see “Taxation on the Disposition of Common Stock and Warrants” below) provided that (1) the common stock of Energy Merger is readily tradable on an established securities market in the United States, (2) Energy Merger is not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. It is not clear whether a U.S. Holder’s holding period for its shares in Energy Merger would be suspended for purposes of clause (3) above for the period that such holder had a right to have its common stock in Energy Infrastructure redeemed by us. Under published IRS guidance, common stock is considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States only if it is listed on certain exchanges, which include the American Stock Exchange. We expect that the stock of Energy Merger will be listed on the American Stock Exchange. Nevertheless, U.S. Holders are advised to consult their own tax advisors regarding the availability of the lower capital gains tax rate for any dividends paid with respect to Energy Merger’s common stock.
Taxation on the Disposition of Common Stock and Warrants
Upon a sale or other taxable disposition of the common stock or warrants in Energy Merger, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the common stock or warrants. See “— Exercise or Lapse of a Warrant” below for a discussion regarding a U.S. Holder’s basis in the common stock acquired pursuant to the exercise of a warrant.
Capital gains recognized by U.S. Holders generally are subject to U.S. federal income tax at the same rate as ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum rate of 15% for taxable years beginning before January 1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the common stock or warrants exceeds one year. The deductibility of capital losses is subject to various limitations.
Exercise or Lapse of a Warrant
Subject to the discussion of the PFIC rules below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant to acquire common stock in Energy Merger. Common stock acquired pursuant to the exercise of a warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the warrant, increased by the amount paid to exercise the warrant. The holding period of such common stock generally would begin on the day after the date of exercise of the warrant. The terms of the warrants of Energy Merger that will be exchanged for the existing warrants of Energy Infrastructure generally provide for an adjustment to the number of shares of common stock for which the warrant may be exercised or to the exercise price of the warrants pursuant to certain anti-dilution provisions. Such adjustments may, under certain circumstances, result in constructive distributions that could be taxable to the U.S. Holder of the warrants. Conversely, the absence of an appropriate adjustment similarly may result in a constructive distribution that could be taxable to the U.S. Holders of the common stock in Energy Merger. See “—Taxation of Distributions Paid on Common Stock,” above. If a warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the warrant. U.S. Holders should consult their own tax advisors concerning the tax treatment of any warrants of Energy Merger that they hold and the effect of any adjustment provisions contained in such warrants.
Passive Foreign Investment Company Rules
A foreign corporation will be a passive foreign investment company, or PFIC, if at least 75% of its gross income in a taxable year, including its pro rata share of the gross income of any company in which it owns or is considered to own at least 25% of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any company in which it owns or is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the sale or other disposition of passive assets.
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Based on the expected composition of the assets and income of Energy Merger and its subsidiaries after the Redomiciliation Merger and the Business Combination, it is not anticipated that Energy Merger will be treated as a PFIC following the Redomiciliation Merger and the Business Combination. Although there is no legal authority directly on point, such position is based principally on the view that, for purposes of determining whether Energy Merger is a PFIC, the gross income Energy Merger derives or is deemed to derive from the time chartering and voyage chartering activities of its wholly-owned subsidiaries should constitute services income, rather than rental income. Accordingly, Energy Merger intends to take the position that such income does not constitute passive income, and that the assets owned and operated by Energy Merger or its wholly-owned subsidiaries in connection with the production of such income (in particular, the vessels) do not constitute passive assets under the PFIC rules. While there is analogous legal authority supporting this position consisting of case law and IRS pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes, in the absence of any direct legal authority specifically relating to the statutory provisions governing PFICs, the IRS or a court could disagree with such position. The actual PFIC status of Energy Merger for any taxable year will not be determinable until after the end of its taxable year, and accordingly there can be no assurance with respect to the status of Energy Merger as a PFIC for the current taxable year or any future taxable year.
If Energy Merger were a PFIC for any taxable year during which a U.S. Holder held its common stock or warrants, and the U.S. Holder did not make either a timely qualified electing fund, or QEF, election for the first taxable year of its holding period for the common stock or a mark-to-market election, as described below, such holder will be subject to special rules with respect to:
| • | any gain recognized by the U.S. Holder on the sale or other disposition of its common stock or warrants; and |
| • | any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the common stock of Energy Merger during the three preceding taxable years or, if shorter, such U.S. Holder’s holding period for the common stock). |
Under these rules,
| • | the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the common stock or warrants; |
| • | the amount allocated to the taxable year in which the U.S. Holder recognized the gain or received the excess distribution or any taxable year prior to the first taxable year in which Energy Merger was a PFIC will be taxed as ordinary income; |
| • | the amount allocated to other taxable years will be taxed at the highest tax rate in effect for that year applicable to the U.S. Holder; and |
| • | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year. |
In addition, if Energy Merger were a PFIC, a distribution to a U.S. Holder that is characterized as a dividend and is not an excess distribution would not be eligible for the reduced rate of tax applicable to certain dividends paid before 2011 to non-corporate U.S. Holders, as discussed above. Furthermore, if Energy Merger were a PFIC, a U.S. Holder who acquires its common stock or warrants from a deceased U.S. Holder who dies before January 1, 2010 generally will be denied the step-up of U.S. federal income tax basis in such stock or warrants to their fair market value at the date of the deceased holder’s death. Instead, such U.S. Holder would have a tax basis in such stock or warrants equal to the deceased holder’s tax basis, if lower.
In general, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its common stock in Energy Merger by making a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
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A U.S. Holder may not make a QEF election or, as described below, a mark-to-market election with respect to its warrants. As a result, if a U.S. Holder sells or otherwise disposes of a warrant to purchase common stock of Energy Merger (other than upon exercise of a warrant), any gain recognized generally will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above, if Energy Merger was a PFIC at any time during the period the U.S. Holder held the warrants.
If a U.S. Holder that exercises such warrants properly makes a QEF election with respect to the newly acquired common stock in Energy Merger (or has previously made a QEF election with respect to its common stock in Energy Merger), the QEF election will apply to the newly acquired common stock, but the adverse tax consequences relating to PFIC shares, adjusted to take into account the current income inclusions resulting from the QEF election, will continue to apply with respect to such newly acquired common stock (which generally will be deemed to have a holding period for the purposes of the PFIC rules that includes the period the U.S. Holder held the warrants), unless the U.S. Holder makes a purging election. The purging election creates a deemed sale of such stock at its fair market value. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will have a new basis and holding period in the common stock acquired upon the exercise of the warrants for purposes of the PFIC rules.
The QEF election is made on a stockholder-by-stockholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621 (Return by a Stockholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the tax year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from Energy Merger. There is no assurance, however, that Energy Merger will have timely knowledge of its status as a PFIC in the future or that Energy Merger will be willing or able to provide the information needed by a U.S. Holder to support a QEF election.
If a U.S. Holder has elected the application of the QEF rules to its common stock in Energy Merger, and the special tax and interest charge rules do not apply to such stock (because of a timely QEF election for the first tax year of the U.S. Holder’s holding period for such stock or a purge of the PFIC taint pursuant to a purging election), any gain recognized on the appreciation of such stock generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, a U.S. Holder that has made a QEF election is currently taxed on its pro rata share of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally will not be taxable as a dividend. The tax basis of a U.S. Holder’s shares will be increased by amounts that are included in income pursuant to the QEF election, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares in a PFIC with respect to which a QEF election was made.
Although a determination as to Energy Merger’s PFIC status will be made annually, an initial determination that it is a PFIC will generally apply for subsequent years to a U.S. Holder who held common stock or warrants of Energy Merger while it was a PFIC, whether or not it met the test for PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for the first tax year in which the U.S. Holder holds (or is deemed to hold) common stock in Energy Merger and for which it is determined to be a PFIC, however, will not be subject to the PFIC tax and interest charge rules (or the denial of basis step-up at death) discussed above in respect to such stock. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such stock for the tax years in which Energy Merger is not a PFIC. On the other hand, if the QEF election is not effective for each of the tax years in which Energy Merger is a PFIC and the U.S. Holder holds (or is deemed to hold) common stock in Energy Merger, the PFIC rules
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discussed above will continue to apply to such stock unless the holder makes a purging election and pays the tax and interest charge with respect to the gain inherent in such stock attributable to the pre-QEF election period.
Alternatively, if a U.S. Holder owns common stock in a PFIC that is treated as marketable stock, the U.S. Holder may make a mark-to-market election. If the U.S. Holder makes a valid mark-to-market election for the first tax year in which the U.S. Holder holds (or is deemed to hold) common stock in Energy Merger and for which it is determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of such common stock. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its common stock at the end of its taxable year over the adjusted basis in its common stock. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its common stock over the fair market value of its common stock at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in its common stock will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the common stock will be treated as ordinary income.
Currently, a mark-to-market election may not be made with respect to warrants. As a result, if a U.S. Holder exercises a warrant and properly makes a mark-to-market election with respect to the newly acquired common stock in Energy Merger (or has previously made a mark-to-market election in respect of its common stock in Energy Merger), the PFIC tax and interest charge rules generally will apply to any gain deemed recognized under the mark-to market rules for the first tax year for which such election applies in respect of such newly acquired stock (which generally will be deemed to have a holding period for purposes of the PFIC rules that includes the period the U.S. Holder held the warrants).
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission or on Nasdaq, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. While we expect that the common stock of Energy Merger will be regularly traded on the American Stock Exchange, U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to Energy Merger’s stock under their particular circumstances.
If Energy Merger is a PFIC and, at any time, has a non-U.S. subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if Energy Merger receives a distribution from, or disposes of all or part of its interest in, the lower-tier PFIC. There is no assurance that Energy Merger will have timely knowledge of the status of such subsidiary as a PFIC in the future or that Energy Merger will be willing or able to provide the information needed by a U.S. Holder to support a QEF election in respect of a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.
If a U.S. Holder owns (or is deemed to own) shares during any year in a PFIC, such holder may have to file an IRS Form 8621 (whether or not a QEF or mark-to-market election is made).
The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of common stock and warrants in Energy Merger should consult their own tax advisors concerning the application of the PFIC rules to such common stock and warrants under their particular circumstances.
Tax Consequences to Non-U.S. Holders of Common Stock and Warrants of Energy Merger
Dividends paid to a Non-U.S. Holder in respect of its common stock in Energy Merger generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
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In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of common stock or warrants in Energy Merger unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case, such gain from United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes will apply to distributions made on the common stock of Energy Merger within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of common stock or warrants of Energy Merger to or through a U.S. office of a broker by a non-corporate U.S. Holder. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances.
In addition, backup withholding of U.S. federal income tax, currently at a rate of 28%, generally will apply to distributions paid on the common stock of Energy Merger to a non-corporate U.S. Holder and the proceeds from sales and other dispositions of stock or warrants of Energy Merger by a non-corporate U.S. Holder, in each case who:
| • | fails to provide an accurate taxpayer identification number; |
| • | is notified by the IRS that backup withholding is required; or |
| • | in certain circumstances, fails to comply with applicable certification requirements. |
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Marshall Islands Taxation
Energy Merger is incorporated in the Marshall Islands. Under current Marshall Islands law, Energy Merger is not subject to tax on income or capital gains, no Marshall Islands withholding tax will be imposed upon payment of dividends by Energy Merger to its stockholders, and holders of common stock or warrants of Energy Merger that are not residents of or domiciled or carrying on any commercial activity in the Marshall Islands will not be subject to Marshall Islands tax on the sale or other disposition of such common stock or warrants.
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SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this joint proxy statement/prospectus, Energy Infrastructure has 27,221,747 shares of common stock outstanding. In respect of the stock consideration portion of the aggregate purchase price of the vessels in the SPVs, concurrently with the Redomiciliation Merger, Energy Merger will issue 13,500,000 shares of common stock to Vanship, up to 5,000,000 units to Vanship in connection with the Business Combination Private Placement, 1,000,000 units to Energy Infrastructure’s President and Chief Operating Officer (or any assignee thereof), and 268,500 units upon conversion of the outstanding convertible debt. Accordingly, immediately following the Redomiciliation Merger, Energy Merger will have up to 46,990,247 shares of common stock outstanding. Of these shares, 35,425,000 shares, including the shares of common stock being offered for resale in this joint proxy statement/prospectus will be freely tradable without restriction or further registration under the Securities Act, except for any shares held by an affiliate of Energy Merger within the meaning of Rule 144 under the Securities Act. All of the remaining 11,565,247 shares will be restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering.
The 13,500,000 shares of Energy Merger issued to Vanship in respect of the stock consideration and up to 5,000,000 units that Vanship may be obligated to purchase from Energy Merger in connection with the Business Combination are subject to a lock-up for (1) 180 days with respect to one-half of the shares comprising such securities; and (2) 365 days with respect to the remaining shares comprising such securities, in each case commencing upon the closing of the Business Combination. Mr. Sagredos (and any permitted assignee and/or transferee as permitted by the Share Purchase Agreement) will be subject to similar restrictions with respect to the 1,000,000 units issued to Mr. Sagredos in connection with the Business Combination for a period of 180 days commencing upon the closing of the Business Combination.
Rule 144
The availability of Rule 144 will vary depending on whether restricted shares are held by an affiliate or a non-affiliate. Under Rule 144 as in effect on the date of this prospectus, an affiliate who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following:
| • | 1% of the number of shares of common stock then outstanding, which after the Redomiciliation Merger will equal 407,218 shares; and |
| • | the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
However, the six month holding period increases to one year in the event we have not been a reporting company for at least 90 days. In addition, any sales by affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and the availability of current public information about us.
The volume limitation, manner of sale and notice provisions described above will not apply to sales by non-affiliates. For purposes of Rule 144, a non-affiliate is any person or entity who is not our affiliate at the time of sale and has not been our affiliate during the preceding three months. A non-affiliate who has beneficially owned restricted shares of our common stock for six months may rely on Rule 144 provided that certain public information regarding us is available. The six month holding period increases to one year in the event we have not been a reporting company for at least 90 days. However, a non-affiliate who has beneficially owned the restricted shares proposed to be sold for at least one year will not be subject to any restrictions under Rule 144 regardless of how long we have been a reporting company.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
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SEC Position on Rule 144 Sales
The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an “underwriter” under the Securities Act when reselling the securities of a blank check company. Accordingly, Rule 144 may not be available for the resale of those securities despite technical compliance with the requirements of Rule 144, in which event the resale transactions would need to be made through a registered offering.
Registration Rights
Holders of a majority of the aggregate of 5,268,849 shares of common stock issued to officers and directors of Energy Infrastructure prior to our initial public offering are entitled to make up to two demands that Energy Infrastructure registers these shares. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before the completion of the Business Combination. In addition, these stockholders have certain piggyback registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. Energy Infrastructure, and if the Redomiciliation Merger is approved, Energy Merger, as the successor to Energy Infrastructure, will bear the expenses incurred in connection with the filing of any such registration statements.
In connection with Energy Infrastructure’s initial public offering, Energy Infrastructure issued an aggregate of 825,398 units to Energy Corp., an off-shore company controlled by one of Energy Infrastructure’s officers. Energy Infrastructure has granted the holders of such units demand and piggyback registration rights with respect to the 825,398 shares, the 825,398 warrants and the 825,398 shares underlying the warrants at any time commencing on the date Energy Infrastructure publicly announces that it has entered into a letter of intent with respect to a proposed business combination. The demand registration may be exercised by the holders of a majority of such units. Energy Infrastructure announced its entry into the definitive agreement with respect to the acquisition of the vessels on December 3, 2007. In addition, Energy Infrastructure has granted the holders of such units certain registration rights commencing at the time Energy Infrastructure consummates its initial business combination with a target business. Energy Infrastructure, and if the Redomiciliation Merger is approved, Energy Merger, as the successor to Energy Infrastructure, will bear the expenses incurred in connection with the filing of any such registration statements.
Under the Share Purchase Agreement, Energy Merger has agreed, with some limited exceptions, to include (i) the 13,500,000 shares of Energy Merger’s common stock comprising the stock consideration portion of the aggregate purchase price for the SPVs, (ii) the shares of Energy Merger’s common stock underlying the 425,000 warrants that Mr. George Sagredos will transfer to Vanship, and (iii) the 1,000,000 units and underlying shares and warrants included in the units issued to Mr. Sagredos (or his assignees) in Energy Merger’s registration statement of which this joint proxy statement/prospectus is a part. We refer to these securities, collectively with the 6,000,000 shares of Energy Merger’s common stock that Vanship is eligible to earn in the two year period following the Business Combination based on certain revenue targets as the Registrable Securities. Energy Merger has also granted to the holders of such securities (on behalf of themselves or their affiliates that hold Registrable Securities) the right, under certain definitive, pre-determined circumstances and subject to certain restrictions, including lock-up and market stand-off restrictions, to require Energy Merger to register the Registrable Securities under the Securities Act of 1933, as amended, in the future. Under the Share Purchase Agreement, the holders of such securities also have the right to require Energy Merger to make available shelf registration statements permitting sales of shares into the market from time to time over an extended period. In addition, the holders of these securities will have the ability to exercise certain piggyback registration rights 180 days following the effective date of the Business Combination. In addition, in connection with the Business Combination Private Placement, Energy Merger will grant to Vanship certain demand and piggyback registration rights with respect to up to 5,000,000 units.
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SELLING STOCKHOLDER
The following table identifies the selling stockholders, the number and percentage of shares of common stock beneficially owned by the selling stockholders after the consummation of the Redomiciliation Merger, the number of shares of common stock that the selling stockholders may offer or sell, and the number and percentage of shares of common stock beneficially owned by the selling stockholders, assuming that the selling stockholders exercise all options and warrants then exercisable by them and that the selling stockholders sell all of the shares that may be sold by them. We have prepared this table based upon information furnished to Energy Infrastructure by or on behalf of the selling stockholders. As used in this joint proxy statement/prospectus, “the selling stockholders” refers to Vanship and Mr. George Sagredos, as the holders of record of the indicated securities, and includes the respective pledgees, assignees successors-in-interest, donees, transferees or others who may later hold the selling stockholders’ interests.
Vanship is currently a global shipping company carrying on business from Hong Kong. Energy Merger intends to purchase shares of nine SPVs each owning a vessel from Vanship upon the approval and consummation of the Business Combination.
In connection with the Business Combination, pursuant to the Share Purchase Agreement, Vanship has agreed that it will not directly or indirectly, offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, borrow or otherwise dispose of any of the registrable securities under the Share Purchase Agreement, or otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, any economic consequence of ownership of any of the registrable securities for a period of (1) 180 days with respect to one-half of such shares; and (2) 365 days with respect to the remaining shares, in each case commencing upon the issuance of such registrable securities. Notwithstanding the foregoing, Vanship and its vessel owning subsidiaries are permitted to transfer all or any portion of the stock consideration among themselves or any of its affiliates provided that such transfer would not require registration under the Securities Act. Mr. Sagredos (and any permitted assignee and/or transferee as permitted by the Share Purchase Agreement) will be subject to similar restrictions with respect to the 1,000,000 units issued to Mr. Sagredos in connection with the Business Combination for a period of 180 days commencing upon the closing of the Business Combination.