A.        Share Capital

 

Not applicable.

 

B.        Memorandum and Articles of Association

 

Our purpose, as stated in Section B of our Articles of Incorporation, is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Marshall Islands Business

 

 

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Corporations Act. Our articles of incorporation and bylaws do not impose any limitations on the ownership rights of our shareholders.

 

Under our bylaws, annual shareholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Special meetings of the shareholders, unless otherwise prescribed by law, may be called for any purpose or purposes at any time by the board of directors. Notice of every annual and special meeting of shareholders shall be given at least 15 but not later than 60 days before such meeting to each shareholder of record entitled to vote thereat.

 

Directors. Our directors are elected by a plurality of the votes cast by shareholders entitled to vote. There is no provision for cumulative voting.

 

The board of directors must consist of at least one member. The board of directors may change the number of directors only by the vote of not less than 66 2/3% of the entire board. Each director shall be elected to serve until the third succeeding annual meeting of shareholders and 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. The board of directors has the authority to fix the amounts which shall be payable to the members of our board of directors for attendance at any meeting or for services rendered to us.

 

Dissenters’ Rights of Appraisal and Payment. Under the Business Corporation Act of the Republic of the Marshall Islands, or BCA, our shareholders have the right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. In the event of any further amendment of the articles, a shareholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting shareholder must follow the procedures set forth in the BCA to receive payment. In the event that, among other things, the institution of proceedings in the circuit court in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the dissenting we and any dissenting shareholder fail to agree on a price for the shares, the BCA procedures involve shareholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.

 

Shareholders’ Derivative Actions. Under the BCA, any of our shareholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the shareholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relate.

 

Anti-takeover Provisions of our Charter Documents. Several provisions of our articles of incorporation and by-laws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, that a shareholder may consider in its best interest and (2) the removal of incumbent officers and directors.

 

Business Combinations

 

The Company’s Amended and Restated Articles of Incorporation include provision which prohibit the Company from engaging in a business combination with an interested shareholder for a

 

 

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period of three years after the date of the transaction in which the person became an interested shareholder, unless:

 

·	prior to the date of the transaction that resulted in the shareholder becoming an interested shareholder, the Board approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder;

 

·	upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced;

 

·

at or subsequent to the date of the transaction that resulted in the shareholder becoming an interested shareholder, the business combination is approved by the Board and authorized at an annual or special meeting of shareholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested shareholder; and

 

·	the shareholder became an interested shareholder prior to the consummation of the initial public offering.

 

Blank Check Preferred Stock

 

Under the terms of our articles of incorporation, our board of directors has authority, without any further vote or action by our shareholders, to issue up to 20,000,000 shares of blank check preferred stock. Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

 

Classified Board of Directors

 

Our articles of incorporation provide for the division of our board of directors into three classes of directors, with each class as nearly equal in number as possible, serving staggered, three-year terms. Approximately one-third of our board of directors will be elected each year. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of our company. It could also delay shareholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for two years.

 

Election and Removal of Directors

 

Our articles of incorporation prohibit cumulative voting in the election of directors. Our by-laws require parties other than the board of directors to give advance written notice of nominations for the election of directors. Our articles of incorporation also provide that our directors may be removed only for cause and only upon the affirmative vote of the holders of at least 80% of the outstanding shares of our capital stock entitled to vote for those directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

 

Limited Actions by Shareholders

 

Our articles of incorporation and our by-laws provide that any action required or permitted to be taken by our shareholders must be effected at an annual or special meeting of shareholders or by the unanimous written consent of our shareholders. Our articles of incorporation and our by-laws provide that, subject to certain exceptions, only our board of directors may call special meetings of our shareholders and the business transacted at the special meeting is limited to the purposes stated in the notice. Accordingly, a shareholder may be prevented from calling a special meeting for shareholder

 

 

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consideration of a proposal over the opposition of our board of directors and shareholder consideration of a proposal may be delayed until the next annual meeting.

 

Super-majority Required for Certain Amendments to Our By-Laws

 

On February 28, 2007 we amended our by-laws to require that amendments to certain provisions of our by laws may be made when approved by 66 2/3% of the entire Board of Directors.  These provisions that require 66 2/3% vote of the Board of Directors to be amended are provisions governing: the nature of business to be transacted at our annual meetings of shareholders, the calling of special meetings by our Board of Directors, any amendment to change the number of directors constituting our Board of Directors, the method by which our Board of Directors is elected, the nomination procedures of our board of directors, removal of our board of directors and the filling of vacancies on our Board of Directors.

 

C.        Material Contracts

 

Long Term Debt

 

As of December 31, 2007 we had long term debt obligations under credit facilities with RBS, HSH, DVB Bank and ALPHA BANK. For a full description of our credit facilities see “Tabular Disclosure of Contractual Obligations – Long Term Debt” above.

 

Newbuildings

 

As of December 31, 2007 we had commitments under 6 shipbuilding contracts for the construction of 6 Handymax Product / Chemical tankers scheduled for delivery during the first six months of 2009. For a full description of our newbuildings see “Tabular Disclosure of Contractual Obligations – Newbuildings” above.

 

Office space lease

 

In January 2006, we entered into an agreement to lease office space in Athens, Greece, with an unrelated party. The agreement is for duration of twelve years beginning May 2006 with a lessee’s option for an extension of ten years. For a full description of the office space lease see “Tabular Disclosure of Contractual Obligations – Operating leases” above.

 

Sale and leaseback

 

As of December 31, 2007 we had commitments under sale and leaseback agreements for 11 out of the 23 of our vessels under management. In March and April of 2006, the subsidiaries of the Company sold and subsequently leasedback 13 vessels for a period of five to seven years. The Company guaranteed to the buyers of the vessels the payment of all sums owed by its subsidiaries under the sale and leaseback agreements and agreed to accept liability on behalf of its subsidiaries for the obligations of its subsidiaries to the buyers of its vessels. Financial undertakings of the Company are contained in the quadripartite deeds and the guarantees of these transactions. The quadripartite deeds and guarantees which are included as exhibits to this annual report contain restrictive covenants which state, among other things, that the Company agrees, as charter guarantor that it will at all times throughout the security period (as defined in the quadripartite deed) maintain a minimum amount of $20.0 million in its account with Fortis Bank commencing on the first drawdown date (as described in the quadripartite deeds) and December 15, 2006 and a minimum amount of $25.0 million in its account with Fortis Bank for the period between December 15, 2006 and the expiration of the guarantee. As guarantor, the Company is to further ensure that there are no encumbrances existing over the amounts it is to maintain in its account. Further, as guarantor the Company undertakes to maintain cash balances of at least $25.0 million, as amended in 2007, in bank

 

 

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accounts in its name or in the name of its subsidiaries (including the $25.0 million maintained with Fortis). The Company also undertakes to ensure that its net asset value at all time exceeds $125.0 million and that its book equity at all time exceeds $75.0 million, to endeavor that any excess cash flow from vessel operations will be paid into the Company’s account with Fortis and to provide details regarding the operating expenses and earnings of its vessels to Fortis at three month intervals.

 

For a full description of the sale and leaseback commitments see “Tabular Disclosure of Contractual Obligations – Lease payments under sale and leasebacks” above.

 

Stockholders Rights Agreement

 

We entered into a Stockholders Rights Agreement with Computershare Investor Services, LLC, as Rights Agent, as of August 19, 2005. Under this Agreement, we declared a dividend payable of one preferred share purchase right, or Right, to purchase one one-thousandth of the Company’s Series A Participating Cumulative Preferred Stock for each outstanding share of TOP Tankers common stock, par value $0.01 per share. The Right will separate from the common stock and become exercisable after (1) a person or group acquires ownership of 15% or more of the company's common stock or (2) the 10th business day (or such later date as determined by the company’s board of directors) after a person or group announces a tender or exchange offer which would result in that person or group holding 15% or more of the company's common stock. On the distribution date, each holder of a right will be entitled to purchase for $25 (the “Exercise Price”) a fraction (1/1000th) of one share of the company’s preferred stock which has similar economic terms as one share of common stock. If an acquiring person (an “Acquiring Person”) acquires more than 15% of the company's common stock then each holder of a right (except that acquiring person) will be entitled to buy at the exercise price, a number of shares of the company's common stock which has a market value of twice the exercise price. Any time after the date an Acquiring Person obtains more than 15% of the company's common stock and before that Acquiring Person acquires more than 50% of the company's outstanding common stock, the company may exchange each right owned by all other rights holders, in whole or in part, for one share of  the company's common stock. The rights expire on the earliest of (1) August 31, 2015 or (2) the exchange or redemption of the rights as described above. The company can redeem the rights at any time prior to a public announcement that a person has acquired ownership of 15% or more of the company's common stock. The terms of the rights and the Stockholder Rights Plan may be amended without the consent of the rights holders at any time on or prior to the Distribution Date. After the distribution date, the terms of the rights and the Stockholder Rights Plan may be amended to make changes, which do not adversely affect the rights of the rights holders (other than the Acquiring Person). The rights will not have any voting rights. The rights will have the benefit of certain customary anti-dilution protections

 

Sales Agreement with Deutsche Bank Securities.

 

We entered into a Sales Agreement with Deutsche Bank Securities Inc. on June 7, 2007, pursuant to which we agreed that from time to time we will issue and sell and agreed upon number of our shares of common stock through Deutsche Bank Securities Inc. who will act as agent and/or principal for us in the sale of these shares.

 

D.        Exchange controls

 

The Marshall Islands imposes no exchange controls on non-resident corporations.

 

E.        Tax Considerations

 

The following is a discussion of the material Marshall Islands and United States federal income tax considerations relevant to an investment decision by a U.S. Holder and a non U.S. Holder, each as defined below, with respect to the common stock. This discussion does not purport to deal with the tax

 

 

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consequences of owning common stock to all categories of investors, some of which, such as dealers in securities and investors whose functional currency is not the United States dollar, may be subject to special rules. You are encouraged to consult your own tax advisors concerning the overall tax consequences arising in your own particular situation under United States federal, state, local or foreign law of the ownership of common stock.

 

Marshall Islands Tax Considerations

 

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

 

United States Federal Income Tax Considerations

 

In the opinion of Seward & Kissel LLP, our United States counsel, the following are the material United States federal income tax consequences to us of our activities and to U.S. Holders and non U.S. Holders, each as defined below, of our common stock. The following discussion of United States federal income tax matters is based on the Internal Revenue Code of 1986, or the Code, judicial decisions, administrative pronouncements, and existing and proposed regulations issued by the United States Department of the Treasury, all of which are subject to change, possibly with retroactive effect. Treasury Regulations interpreting Code Section 883, became effective on January 1, 2005 for calendar year taxpayers such as ourselves and our subsidiaries. The discussion below is based, in part, on the description of our business as described in “Business” above and assumes that we conduct our business as described in that section. Except as otherwise noted, this discussion is based on the assumption that we will not maintain an office or other fixed place of business within the United States. References in the following discussion to “we” and “us” are to TOP SHIPS INC. and its subsidiaries on a consolidated basis.

 

United States Federal Income Taxation of Our Company

 

Taxation of Operating Income: In General

 

Unless exempt from United States federal income taxation under the rules discussed below, a foreign corporation is subject to United States federal income taxation in respect of any income that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or bareboat charter basis, from the participation in a pool, partnership, strategic alliance, joint operating agreement, code sharing arrangements or other joint venture it directly or indirectly owns or participates in that generates such income, or from the performance of services directly related to those uses, which we refer to as “shipping income,” to the extent that the shipping income is derived from sources within the United States. For these purposes, 50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States constitutes income from sources within the United States, which we refer to as “U.S.-source shipping income.”

 

Shipping income attributable to transportation that both begins and ends in the United States is considered to be 100% from sources within the United States. We are not permitted by law to engage in transportation that produces income which is considered to be 100% from sources within the United States.

 

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

 

 

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In the absence of exemption from tax under Section 883, our gross U.S. source shipping income would be subject to a 4% tax imposed without allowance for deductions as described below.

 

Exemption of Operating Income from United States Federal Income Taxation

 

Under Section 883 of the Code and the regulations thereunder, we will be exempt from United States federal income taxation on our U.S.-source shipping income if:

 

(1)	we are organized in a foreign country (our “country of organization”) that grants an “equivalent exemption” to corporations organized in the United States; and

 

(2)

either

 

(A)

more than 50% of the value of our stock is owned, directly or indirectly, by individuals who are “residents” of our country of organization or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States, which we refer to as the “50% Ownership Test,” or

 

(B)

our stock is “primarily and regularly traded on an established securities market” in our country of organization, in another country that grants an “equivalent exemption” to United States corporations, or in the United States, which we refer to as the “Publicly-Traded Test”.

 

The Marshall Islands, Cyprus and Liberia, the jurisdictions where our ship-owning subsidiaries are incorporated, each grant an “equivalent exemption” to United States corporations. Therefore, we will be exempt from United States federal income taxation with respect to our U.S.-source shipping income if either the 50% Ownership Test or the Publicly-Traded Test is met.

 

The regulations provide, in pertinent part, that stock of a foreign corporation will be considered to be “primarily traded” on an established securities market if the number of shares of each class of stock that are traded during any taxable year on all established securities markets in that country exceeds the number of shares in each such class that are traded during that year on established securities markets in any other single country. Our common stock, which is our sole class of issued and outstanding stock, is and we anticipate will continue to be “primarily traded” on the Nasdaq Global Select Market.

 

Under the regulations, our common stock will be considered to be “regularly traded” on an established securities market if one or more classes of our stock representing more than 50% of our outstanding shares, by total combined voting power of all classes of stock entitled to vote and total value, is listed on the market which we refer to as the listing threshold. Since our common stock, our sole class of stock, is listed on the Nasdaq Global Select Market, we will satisfy the listing requirement.

 

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

 

 

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

 

For purposes of being able to determine the persons who own 5% or more of our stock, or “5% Shareholders,” the regulations permit us to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with the United States Securities and Exchange Commission, or the “SEC,” as having a 5% or more beneficial interest in our common stock. The regulations further provide that an investment company identified on a SEC Schedule 13G or Schedule 13D filing which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5% shareholder for such purposes.

 

In the event the 5 Percent Override Rule is triggered, the regulations provide that the 5 Percent Override Rule will not apply if we can establish that among the closely-held group of 5% Shareholders, there are sufficient 5% Shareholders that are considered to be qualified shareholders for purposes of Section 883 to preclude non-qualified 5% Shareholders in the closely-held group from owning 50% or more of each class of our stock for more than half the number of days during such year.

 

We believe that we currently satisfy the Publicly-Traded Test and are not subject to the 5 percent override Rule and we will take this position for U.S. federal income tax reporting purposes.  However, there are factual circumstances beyond our control which could cause us to lose the benefit of this exemption.

 

Taxation in the Absence of Code Section 883 Exemption

 

To the extent the benefits of Code Section 883 are unavailable, our U.S. source shipping income, to the extent not considered to be “effectively connected” with the conduct of a U.S. trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions. Since under the sourcing rules described above, no more than 50% of our shipping income would be treated as being derived from U.S. sources, the maximum effective rate of U.S. federal income tax on our shipping income would never exceed 2% under the 4% gross basis tax regime.

 

To the extent the benefits of the Code Section 883 exemption are unavailable and our U.S. source shipping income is considered to be “effectively connected” with the conduct of a U.S. trade or business, as described below, any such “effectively connected” U.S. source shipping income, net of applicable deductions, would be subject to the U.S. federal corporate income tax currently imposed at rates of up to 35%. In addition, we may be subject to the 30% “branch profits” taxes on earnings effectively connected with the conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of its U.S. trade or business.

 

Our U.S. source shipping income would be considered “effectively connected” with the conduct of a U.S. trade or business only if:

 

·	We have, or are considered to have, a fixed place of business in the United States involved in the earning of shipping income; and

 

 

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

 

We do not have currently or intend to have, or permit circumstances that would result in having any vessel operating to the United States on a regularly scheduled basis. Based on the foregoing and on the expected mode of our shipping operations and other activities, we believe that none of our U.S. source shipping income will be “effectively connected” with the conduct of a U.S. trade or business.

 

United States Taxation of Gain on Sale of Vessels

 

Regardless of whether we qualify for exemption under Code Section 883, we will not be subject to United States federal income taxation with respect to gain realized on a sale of a vessel, provided the sale is considered to occur outside of the United States under United States federal income tax principles. In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside of the United States. It is expected that any sale of a vessel by us will be considered to occur outside of the United States.

 

United States Federal Income Taxation of U.S. Holders

 

As used herein, the term “U.S. Holder” means a beneficial owner of our common stock that

 

·

is a United States citizen or resident, United States corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States federal income taxation regardless of its source, or a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust,

 

·	owns the common stock as a capital asset, generally, for investment purposes, and

 

·	owns less than 10% of our common stock for United States federal income tax purposes.

 

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

 

Distributions

 

Subject to the discussion of passive foreign investment companies below, any distributions made by us with respect to our common stock to a U.S. Holder will generally constitute dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder's tax basis in his common stock on a dollar for dollar basis and thereafter as capital gain. Because we are not a United States corporation, U.S. Holders that are corporations will not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. Dividends paid with respect to our common stock will generally be treated as “passive category income” or, in the case of certain types of U.S. Holders, “general category income” for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes.

 

 

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Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate (a “U.S. Individual Holder”) should be treated as “qualified dividend income” that is taxable to such U.S. Individual Holders at preferential tax rates (through 2010) provided that (1) the common stock is readily tradable on an established securities market in the United States (such as the Nasdaq Global Select Market on which our stock is currently traded); (2) we are not a passive foreign investment company for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we are, have been or will be); and (3) the U.S. Individual Holder has owned the common stock for more than 60 days in the 121-day period beginning 60 days before the date on which the common stock becomes ex-dividend. Legislation has been recently introduced in the United States Congress, which if enacted in its present form, would preclude our dividends from qualifying for such preferential rates prospectively from the date of enactment. There is no assurance that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a U.S. Individual Holder. Any dividends paid by the Company which are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Individual Holder.

 

Special rules may apply to any “extraordinary dividend” generally, a dividend in an amount which is equal to or in excess of ten percent of a shareholder's adjusted basis (or, at the election of the U.S. Individual Holder, the stock's then fair market value) in a share of common stock paid by us. If we pay an “extraordinary dividend” on our common stock that is treated as “qualified dividend income,” then any loss derived by a U.S. Individual Holder from the sale or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend. 

 

Sale, Exchange or other Disposition of Common Stock

 

Assuming we do not constitute a passive foreign investment company for any taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder's tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder's holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital gain or loss will generally be treated as U.S.-source income or loss, as applicable, for U.S. foreign tax credit purposes. A U.S. Holder's ability to deduct capital losses is subject to certain limitations.

 

Passive Foreign Investment Company Status and Significant Tax Consequences

 

Special United States federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a passive foreign investment company for United States federal income tax purposes. In general, we will be treated as a passive foreign investment company with respect to a U.S. Holder if, for any taxable year in which such holder held our common stock, either

 

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

 

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

 

For purposes of determining whether we are a passive foreign investment company, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary corporations in which we own at least 25 percent of the value of the subsidiary's stock.

 

 

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Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income. By contrast, rental income would generally constitute “passive income” unless we were treated under specific rules as deriving our rental income in the active conduct of a trade or business.

 

Based on our current operations and future projections, we do not believe that we are, nor do we expect to become, a passive foreign investment company with respect to any taxable year. Although there is no legal authority directly on point, and we are not relying upon an opinion of counsel on this issue, our belief is based principally on the position that, for purposes of determining whether we are a passive foreign investment company, the gross income we derive or are deemed to derive from the time chartering and voyage chartering activities of our wholly-owned subsidiaries should constitute services income, rather than rental income. Correspondingly, such income should not constitute passive income, and the assets that we or our wholly-owned subsidiaries own and operate in connection with the production of such income, in particular, the vessels, should not constitute passive assets for purposes of determining whether we were a passive foreign investment company. We believe there is substantial legal authority supporting our position consisting of case law and Internal Revenue Service pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, in the absence of any legal authority specifically relating to the statutory provisions governing passive foreign investment companies, the Internal Revenue Service or a court could disagree with our position. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a passive foreign investment company with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future.

 

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

 

Taxation of U.S. Holders Making a Timely QEF Election

 

If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as an “Electing Holder,” the Electing Holder must report each year for United States federal income tax purposes his pro rata share of our ordinary earnings and our net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder. The Electing Holder's adjusted tax basis in the common stock will be increased to reflect taxed but undistributed earnings and profits. Distributions of earnings and profits that had been previously taxed will result in a corresponding reduction in the adjusted tax basis in the common stock and will not be taxed again once distributed. An Electing Holder would generally recognize capital gain or loss on the sale, exchange or other disposition of our common stock. A U.S. Holder would make a QEF election with respect to any year that our company is a passive foreign investment company by filing one copy of IRS Form 8621 with his United States federal income tax return and a second copy in accordance with the instructions to such form. If we were to be treated as a passive foreign investment company for any taxable year, we would provide each U.S. Holder with all necessary information in order to make the qualified electing fund election described below. It should be noted that if any of our subsidiaries is treated as a corporation for United States federal income tax purposes, a U.S. Holder must make a separate QEF election with respect to each such subsidiary.

 

Taxation of U.S. Holders Making a “Mark-to-Market” Election

 

Alternatively, if we were to be treated as a passive foreign investment company for any taxable year and, as we anticipate, our stock is treated as “marketable stock,” a U.S. Holder would be allowed to

 

 

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make a “mark-to-market” election with respect to our common stock, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the common stock at the end of the taxable year over such holder's adjusted tax basis in the common stock. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder's adjusted tax basis in the common stock over its fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder's tax basis in his common stock would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of our common stock would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the common stock would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included by the U.S. Holder. It should be noted that if any of our subsidiaries is treated as a corporation for United States federal income tax purposes, a U.S. Holder likely will not be able to make a mark-to-market election with respect to each such subsidiary.

 

Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election

 

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

 

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

 

·	the amount allocated to the current taxable year would be taxed as ordinary income; and

 

·

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

 

These penalties would not apply to a qualified pension, profit sharing or other retirement trust or other tax-exempt organization that did not borrow money or otherwise utilize leverage in connection with its acquisition of our common stock. If a Non-Electing Holder who is an individual dies while owning our common stock, such holders successor generally would not receive a step-up in tax basis with respect to such stock.

 

United States Federal Income Taxation of “Non-U.S. Holders”

 

A beneficial owner of common stock that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”

 

Dividends on Common Stock

 

Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax on dividends received from us with respect to our common stock, unless that income is

 

 

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effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States. If the Non-U.S. Holder is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income is taxable only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States.

 

Sale, Exchange or Other Disposition of Common Stock

 

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

 

·

the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States. If the Non-U.S. Holder is entitled to the benefits of an income tax treaty with respect to that gain, that gain is taxable only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder 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 during the taxable year of disposition and other conditions are met.

 

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

 

Backup Withholding and Information Reporting

 

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

 

·	fail to provide an accurate taxpayer identification number;

 

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

 

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

 

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

 

If you sell your common stock to or through a United States office or broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish an exemption. If you sell your common stock through a non-United States office of a non-United States broker and the sales proceeds are paid to you outside the United States then information reporting and backup withholding generally will not apply to that payment. However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made to you outside the United States, if you sell your common stock through a non-United States office of a broker

 

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that is a United States person or has some other contacts with the United States. Backup withholding tax is not an additional tax. Rather, you generally may obtain a refund of any amounts withheld under backup withholding rules that exceed your income tax liability by filing a refund claim with the Internal Revenue Service.

F.         Dividends and paying agents

 

Not applicable

 

G.         Statement by experts

 

Not applicable

 

H.        Documents on display.

 

We file annual reports and other information with the SEC. You may read and copy any document we file with the SEC at its public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this information by mail from the public reference section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings are also available to the public at the web site maintained by the SEC at http://www.sec.gov, as well as on our website at http://www.topships.org

 

I.          Subsidiary Information

 

Not Applicable

 

Incorporation by Reference

 

This Form 20-F is hereby incorporated by reference to the registration statement on Form F-3 filed on August 1, 2005 (Registration No. 333-127086).

 

 

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A.        Quantitative information about market risk

 

Interest Rate Fluctuation.  The international shipping industry is capital intensive, requiring significant amounts of investment. Much of this investment is provided in the form of long-term debt. Our debt usually contains interest rates that fluctuate with LIBOR. Increasing interest rates could adversely impact future earnings.

 

Our interest expense is affected by changes in the general level of interest rates. As an indication of the extent of our sensitivity to interest rate changes, the following table sets forth the sensitivity of all credit facilities in U.S. dollars to a 100 basis points increase in LIBOR on December 31 of each repayment year up to December 31, 2013. The interest we pay on our variable rate debt (which is based on LIBOR plus a margin) matched the interest that we receive on our interest rate swaps (which are also based on LIBOR plus a margin). So, in the sensitivity analysis, we exclude the interest expense impact attributable to the portion of the principal of our variable rate debts covered by an interest rate swap. The sensitivity to 100 basis points of interest rate change is calculated by applying 100 basis points to the portion of the Company’s outstanding variable rate indebtness, as of December 31, 2007, not covered by our interest rate swaps.

 

Interest Expense Sensitivity to 100 Basis Point Change in LIBOR
December 31, 2008			2,481,323
December 31, 2009			1,915,292
December 31, 2010			1,698,875
December 31, 2011			1,457,054
December 31, 2012			1,080,305
December 31, 2013			837,782

Foreign Exchange Rate Risk. We generate all of our revenues in U.S. dollars but incur approximately 10% of our expenses in currencies other than U.S. dollars. For accounting purposes, expenses incurred in other currencies are translated into U.S. dollars at the exchange rate prevailing on the date of each transaction. We constantly monitor the U.S Dollar exchange rate and we try to achieve more favorable exchange rates from the financial institutions we work with.

 

Inflation.  Although inflation has had a moderate impact on our trading fleet's operating and voyage expenses in recent years, management does not consider inflation to be a significant risk to operating or voyage costs in the current economic environment. However, in the event that inflation becomes a significant factor in the global economy, inflationary pressures would result in increased operating, voyage and financing costs.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 

 

Not Applicable.

 

 

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PART II

 

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

Neither we nor any of our subsidiaries have been subject to a material default in the payment of principal, interest, a sinking fund or purchase fund installment or any other material default that was not cured within 30 days. In addition, the payment of our dividends are not, and have not been in arrears or have not been subject to a material delinquency that was not cured within 30 days.

 

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Not Applicable.

ITEM 15.    CONTROLS AND PROCEDURES

 

a)         Evaluation of Disclosure Controls and procedures.

 

Management assessed the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this annual report (as of December 31, 2007).

 

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the evaluation date.

 

b)         Management’s annual report on internal controls over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) promulgated under the Securities Exchange Act of 1934.

 

Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

· Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Company’s management and directors; and

 

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

 

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

 

Our management with the participation of our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company used the control criteria framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) published in its report entitled Internal Control-Integrated Framework. As a result of its assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal controls over financial reporting are effective as of December 31, 2007.

c)	Report of Independent Registered Public Accounting Firm

 

Deloitte, Hadjipavlou, Sofianos and Cambanis S.A., or Deloitte., an independent registered public accounting firm, as auditors of our consolidated financial statements for the year ended December 31, 2007, has issued the following attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2007:

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Top Ships Inc.

    We have audited the internal control over financial reporting of Top Ships Inc. and subsidiaries (the "Company") as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “management’s annual report on internal controls over financial reporting” .  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

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

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

 

 

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    Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

    In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

    We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the years ended December 31, 2007 and 2006 of the Company and our report dated May 20, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's change in accounting policy for dry-docking costs in the fourth quarter of 2007.

/s/ Deloitte

Hadjipavlou, Sofianos & Cambanis S.A.

Athens, Greece

May 20, 2008

 

d)	Changes in internal control over financial reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report that have materially effected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 16.

ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT

We have established an audit committee comprised of three members which is responsible for reviewing our accounting controls and recommending to the board of directors the engagement of our outside auditors. Each member is an independent director under the corporate governance rules of the Nasdaq Global Select Market. The members of the audit committee are Messrs. Docherty, Gibbs and Thomas.  While the Company is exempt from the requirement to have an audit committee financial expert, both Mr. Thomas and Mr. Gibbs meet the qualifications of an audit committee financial expert.

 

ITEM 16B.   CODE OF ETHICS

 

 

The Company's Board of Directors has adopted a Corporate Code of Business Ethics and Conduct that applies to all employees, directors and officers, that complies with applicable guidelines issued by the SEC. The finalized Code of Ethics has been approved by the Board of Directors and was distributed to all employees, directors and officers. We will also provide any person a hard copy of our code of ethics free of charge upon written request. Shareholders may direct their requests to the attention of Mrs. Eirini Alexandropoulou at the Company’s registered address and phone numbers.

 

 

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ITEM 16C.    PRINCIPAL AUDITOR FEES AND SERVICES

Our principal auditors for the year ended December 31, 2007 were Deloitte, Hadjipavlou, Sofianos & Cambanis S.A. ("Deloitte"). For the 2007 audit, Deliotte audit fees were Euro 1,198,149. Additionally, Ernst and Young (Hellas) audit fees were Euro 149,908. Audit fees relate to regular audit services, audit of our internal controls, services required for follow-on common stock offerings and services related to SEC comments letters.

 

In November 2006, we announced the resignation of our former principal auditors, Ernst and Young (Hellas), Certified Auditors Accountants S.A., and in December 2006 we announced the appointment of Deloitte, Hadjipavlou, Sofianos & Cambanis S.A. (Deloitte) as our principal auditors for the year ended December 31, 2006. For the 2006 audit, Ernst and Young (Hellas) and Deloitte billed us audit fees of Euro 365,800 and Euro 400,000 respectively. Additionally, in 2006, Ernst and Young (Hellas) billed us audit-related fees of Euro 84,726.

 

Our audit committee pre-approves all audit, audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees prior to the engagement of the independent auditor with respect to such services.

 

ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

See Item 16A above.

 

ITEM 16E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

None.

 

 

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PART III

 

ITEM 17.      FINANCIAL STATEMENTS

 

Not Applicable.

 

ITEM 18.      FINANCIAL STATEMENTS

 

The following financial statements, together with the reports of Deloitte, Hadjipavlou, Sofianos & Cambanis S.A. and Ernst and Young (Hellas), Certified Auditors Accountants S.A., thereon, are filed as part of this report:

 

 

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TOP SHIPS INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
Reports of Independent Registered Public Accounting Firms		F-1 / F-2
Consolidated Balance Sheets as of December 31, 2006 and 2007		F-3
Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and 2007		F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2006 and 2007		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007		F-6
Notes to Consolidated Financial Statements		F-7

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of TOP SHIPS INC.

We have audited the accompanying consolidated balance sheets of Top Ships Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits. 

 

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

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

As discussed in Note 3 to the consolidated financial statements, in 2007 the Company changed its method of accounting for dry-docking costs and retrospectively adjusted the 2006 consolidated financial statements to reflect the change.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 20, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte

Hadjipavlou, Sofianos & Cambanis S.A.

Athens, Greece

May 20, 2008

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of TOP Tankers Inc.

We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of TOP Tankers Inc. for the year ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

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

In our opinion, the financial statements referred to above present fairly, in all material respects, consolidated  results of operations of TOP Tankers Inc. for the year ended December 31, 2005, and its cash flows for year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the financial statements, in 2007 the Company changed its method of accounting for Dry-docking costs.

 

 

/s/ Ernst & Young (Hellas) Certified Auditors Accountants S.A.

 

 

Athens, Greece

February 24, 2006

except for Notes 3 and 15, as to which the date is

April 30, 2008

 

F-2

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TOP SHIPS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2007
(Expressed in thousands of U.S. Dollars - except share and per share data)
		2006				2007
		(as adjusted)
		Note 3
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	29,992			$	26,012
Trade accounts receivable, net			27,187				15,184
Insurance claims			247				51
Inventories (Note 6)			6,460				7,958
Advances to various creditors			3,707				1,108
Prepayments and other (Note 7)			5,206				5,580
Vessel held for sale (Note 9)			-				46,268
Total current assets			72,799				102,161
FIXED ASSETS:
Advances for vessels acquisitions / under construction (Note 8)			28,683				66,026
Vessels, net (Notes 9, 10 and 11)			306,418				553,891
Other fixed assets, net (Note 5)			3,195				5,711
Total fixed assets			338,296				625,628
OTHER NON CURRENT ASSETS:
Long-term receivables (Note 14)			29,790				22,628
Restricted cash (Notes 11 and 14)			50,000				26,500
Total assets		$	490,885			$	776,917
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 11)		$	16,588			$	79,332
Debt related to vessel held for sale (Notes 11 and 23)			-				28,156
Current portion of financial instruments (Note 11)			-				6,105
Accounts payable			14,991				21,341
Accrued liabilities (Note 12)			12,161				11,906
Unearned revenue			1,676				6,450
Total current liabilities			45,416				153,290
FAIR VALUE OF BELOW MARKET TIME CHARTER (Note 10)			-				29,199
FINANCIAL INSTRUMENTS, net of current portion (Note 11)			3,384				10,683
LONG-TERM DEBT, net of current portion (Note 11)			201,464				331,396
DEFERRED GAIN ON SALE AND LEASEBACK OF VESSELS (Note 14)			79,423				40,941
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 20,000,000 shares authorized; none issued			-				-
Common stock, $0.01 par value; 100,000,000 shares authorized; 10,809,701 and 20,508,575 shares issued and outstanding at December 31, 2006 and 2007, respectively (Note 15)			108				205
Additional paid-in capital (Note 15)			116,971				216,150
Accumulated other comprehensive income (loss) (Note 16)			(6	)			4
Retained earnings / (Accumulated deficit)			44,125				(4,951	)
Total stockholders' equity			161,198				211,408
Total liabilities and stockholders' equity		$	490,885			$	776,917

 

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

 

 

 

 

F-3

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Consolidated Statements of Operations for the years ended December 31,

2005, 2006 and 2007

 

 

TOP SHIPS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of U.S. Dollars - except share and per share data)
		2005				2006				2007
		(as adjusted)				(as adjusted)
		Note 3				Note 3
REVENUES:
Revenues (Notes 1 and 10)		$	244,215			$	310,043			$	252,259
EXPENSES:
Voyage expenses (Note 18)			36,889				55,351				59,414
Charter hire expense (Note 14)			7,206				96,302				94,118
Amortization of deferred gain on sale and leaseback of vessels (Note 14)			(837	)			(8,110	)			(15,610	)
Other vessel operating expenses (Note 18)			47,315				66,082				67,914
Dry-docking costs			10,478				39,333				25,094
Depreciation (Note 9)			47,055				35,266				27,408
Sub-Manager fees (Note 1)			3,159				2,755				1,828
Other general and administrative expenses			20,659				20,261				22,996
Foreign currency (gains) / losses, net			(68	)			255				176
Gain on sale of vessels (Note 9)			(10,831	)			(12,667	)			(1,961	)
Operating income (loss)			83,190				15,215				(29,118	)
OTHER INCOME (EXPENSES):
Interest and finance costs (Notes 11 and 20)			(21,675	)			(26,442	)			(18,318	)
Fair value change of financial instruments (Note 11)			1,498				(2,733	)			(4,904	)
Interest income			1,774				3,022				3,248
Other, net			134				(67	)			16
Total other income (expenses), net			(18,269	)			(26,220	)			(19,958	)
Net Income (loss)		$	64,921			$	(11,005	)		$	(49,076	)
Earnings (loss) per share, basic and diluted (Note 17)		$	6.97			$	(1.16	)		$	(4.09	)
Weighted average common shares outstanding, basic			9,308,923				10,183,424				11,986,857
Weighted average common shares outstanding, diluted			9,310,670				10,183,424				11,986,857

 

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

 

 

 

F-4

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Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2006 and 2007

 

TOP SHIPS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007

(Expressed in thousands of U.S. Dollars - except share and per share data)

 

						Common Stock
		Comprehensive Income				# of Shares				Par Value				Additional Paid-in Capital				Accumulated Other Comprehensive Income (loss)				Retained Earnings / (Accumulated Deficit)				Total
BALANCE, December 31, 2004 (as reported)							9,276,997			$	93			$	294,425			$	(248	)		$	27,539			$	321,809
Cumulative effect of change in accounting principle for dry-docking costs							-				-				-				-				(6,748	)			(6,748	)
BALANCE, December 31, 2004 (as adjusted - Note 3)							9,276,997			$	93			$	294,425			$	(248	)		$	20,791			$	315,061
Net income (as adjusted - Note 3)		$	64,921				-				-				-				-				64,921				64,921
Dividends paid (US dollars 0.21 per share)			-				-				-				-				-				(5,844	)			(5,844	)
Dividends paid (US dollars 0.21 per share)			-				-				-				-				-				(5,897	)			(5,897	)
Dividends paid (US dollars 0.25 per share)			-				-				-				-				-				(7,020	)			(7,020	)
Dividends paid (US dollars 0.21 per share)			-				-				-				-				-				(5,898	)			(5,898	)
Issuance of restricted shares, net of forfeitures			-				83,216				1				3,477				-				-				3,478
Other comprehensive income
- Unrealized gain on cash flow hedges			1,517				-				-				-				1,517				-				1,517
- Reclassification of gains to earnings due to discontinuance of cash flow hedges			(1,171	)			-				-				-				(1,171	)			-				(1,171	)
Comprehensive income		$	65,267
BALANCE, December 31, 2005 (as adjusted - Note 3)							9,360,213			$	94			$	297,902			$	98			$	61,053			$	359,147
Net loss (as adjusted - Note 3)		$	(11,005	)			-				-				-				-				(11,005	)			(11,005	)
Dividends paid (US dollars 0.21 per share)			-				-				-				-				-				(5,923	)			(5,923	)
Dividends paid (US dollars 5.00 per share)			-				-				-				(141,028	)			-				-				(141,028	)
Dividends paid (US dollars 2.50 per share)			-				-				-				(70,515	)			-				-				(70,515	)
Issuance of restricted shares, net of forfeitures			-				147,034				1				3,709				-				-				3,710
Issuance of common stock			-				1,302,454				13				26,903				-				-				26,916
Other comprehensive income
- Accumulated unrecognized actuarial losses			-				-				-				-				(6	)			-				(6	)
- Reclassification of gains to earnings due to discontinuance of cash flow hedges			(98	)			-				-				-				(98	)			-				(98	)
Comprehensive loss		$	(11,103	)
BALANCE, December 31, 2006 (as adjusted - Note 3)							10,809,701			$	108			$	116,971			$	(6	)		$	44,125			$	161,198
Net loss		$	(49,076	)			-				-				-				-				(49,076	)			(49,076	)
Issuance of restricted shares, net of forfeitures			-				213,000				2				933				-				-				935
Issuance of common stock			-				9,485,874				95				98,246				-				-				98,341
Other comprehensive income
- Accumulated unrecognized actuarial gain			10				-				-				-				10				-				10
Comprehensive loss		$	(49,066	)
BALANCE, December 31, 2007							20,508,575			$	205			$	216,150			$	4			$	(4,951	)		$	211,408

 

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

 

 

F-5

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Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007

 

 

TOP SHIPS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of U.S. Dollars)
		2005				2006				2007
		(as adjusted)				(as adjusted)
		Note 3				Note 3
Cash Flows from (used in) Operating Activities:
Net income (loss)			64,921				(11,005	)			(49,076	)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation			47,055				35,594				28,043
Amortization and write off of deferred financing costs			1,407				4,534				2,081
Stock-based compensation expense			3,478				3,710				935
Change in fair value of financial instruments			(327	)			3,711				4,904
Amortization of deferred gain on sale and leaseback of vessels			(837	)			(8,110	)			(15,610	)
Amortization of fair value of below market time charter			-				-				(1,413	)
(Gain) / loss on sale of other fixed assets			-				(10	)			69
Gain on sale of vessels			(10,831	)			(12,667	)			(1,961	)
(Increase) Decrease in:
Trade accounts receivable			(19,556	)			12,340				12,003
Insurance claims			(160	)			11				(1,656	)
Inventories			(3,087	)			(152	)			(1,498	)
Due from related parties			219				-				-
Advances to various creditors			(1,230	)			(624	)			2,599
Prepayments and other			(15	)			(4,270	)			(374	)
Increase (Decrease) in:
Accounts payable			2,047				2,586				6,350
Accrued liabilities			9,531				(1,142	)			(1,460	)
Unearned revenue			2,058				(3,436	)			4,774
Net Cash from (used in) Operating Activities			94,673				21,070				(11,290	)
Cash Flows from (used in) Investing Activities:
Advances for vessels acquisition / under construction			-				(28,683	)			(37,343	)
Vessel acquisitions and improvements			(677,111	)			(18	)			(355,045	)
Insurance claims recoveries			-				-				1,852
Increase in restricted cash			-				(36,500	)			-
Decrease in restricted cash			-				-				23,500
Net proceeds from sale of vessels			153,085				599,176				51,975
Net proceeds from sale of fixed assets			-				255				74
Acquisition of other fixed assets			(833	)			(2,639	)			(3,295	)
Net Cash from (used in) Investing Activities			(524,859	)			531,591				(318,282	)
Cash Flows from (used in) Financing Activities:
Proceeds from long-term debt			472,549				20,000				316,851
Principal payments of long-term debt			(31,180	)			(19,119	)			(26,955	)
Prepayment of long-term debt			(68,853	)			(350,399	)			(65,582	)
Increase in restricted cash			(3,500	)			-				-
Derivative upfront receipt			-				-				8,500
Issuance of common stock, net of issuance costs			-				26,916				98,341
Payment of financing costs			(5,632	)			(63	)			(5,563	)
Dividends paid			(30,504	)			(217,466	)			-
Net Cash from (used in) Financing Activities			332,880				(540,131	)			325,592
Net increase (decrease) in cash and cash equivalents			(97,306	)			12,530				(3,980	)
Cash and cash equivalents at beginning of year			114,768				17,462				29,992
Cash and cash equivalents at end of year			17,462				29,992				26,012
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid			18,683				22,307				13,731
NON-CASH TRANSACTIONS
Fair value of below market time charter			-				-				30,612
Amounts owed for capital expenditures			-				-				1,215

 

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

 

F-6

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

1.	Basis of Presentation and General Information:

The accompanying consolidated financial statements include the accounts of Top Ships Inc. (formerly Top Tankers Inc and Ocean Holdings Inc.), (“TOP”) and its wholly-owned subsidiaries (collectively the “Company”). Ocean Holdings Inc. was formed on January 10, 2000, under the laws of Marshall Islands, was renamed to Top Tankers Inc. and Top Ships Inc. in May 2004 and December 2007 respectively, and is the sole owner of all outstanding shares of the following subsidiaries:

	(a)	TOP Tanker Management Inc., (the “Manager”) established on May 24, 2004, under the laws of Marshall Islands, is responsible for all of the chartering, operational and technical management of the Company’s fleet. The Company’s ship-owning subsidiaries have a management agreement with the Manager, under which management services are provided in exchange for a fixed monthly fee per vessel.
		The Manager has subcontracted the day to day technical management of the vessels to unaffiliated ship management companies, Unicom Management Services Ltd, V. Ships Management Limited, Hanseatic Shipping Company Ltd and Interorient Maritime Enterprises Inc. (collectively the “Sub-Managers”). The Sub-Managers provide day to day operational and technical services to the Company’s vessels at a fixed monthly fee per vessel. Such fees for the years ended December 31, 2005, 2006 and 2007 totaled $3,159, $2,755 and $1,828 respectively and are separately reflected in the accompanying consolidated statements of operations. At December 31, 2006 and 2007 the amount due to the Sub-Managers totaled $1,739 and $269 respectively and is included in Accounts Payable in the accompanying consolidated balance sheets.
	(b)	Top Bulker Management Inc, incorporated on April 7, 2005 under the laws of Marshall Islands, for the purpose to undertake in 2005 the management of a fleet of bulk carriers which have not been acquired.
	(c)	Top Tankers (U.K.) Limited, incorporated in England and Wales on January 12, 2005, as a representative office in London.
	(d)	Helidona Shipping Company Limited (“Helidona”), incorporated in the Marshall Islands in May 2003, owner of the 29,998 DWT (built in 1989), tanker vessel “Yapi”, which was sold in September 2005.
	(e)	Gramos Shipping Company Inc. (“Gramos”), incorporated in the Marshall Islands in January 2003, owner of the 45,720 DWT (built in 1992), tanker vessel “Faithful”, which was acquired in July 2003 from Vermio Shipping Company Limited, which is a subsidiary of TOP, incorporated in the Marshall Islands in December 2001, owner of vessel “Faithful” for the period from February 2002 to July 2003. The vessel was sold and leased back in March 2006.
	(f)	Rupel Shipping Company Inc. (“Rupel”), incorporated in the Marshall Islands in January 2003, owner of the 44,646 DWT (built in 1992) tanker vessel “Fearless”, which was sold in July 2005.
	(g)	Mytikas Shipping Company Ltd. (“Mytikas”), incorporated in the Marshall Islands in February 2004, owner of the 136,055 DWT (built in 1993) tanker vessel “Limitless”, which was acquired in March 2004, sold and leased back in April 2006 and reacquired in May 2007.
	(h)	Litochoro Shipping Company Ltd. (“Litochoro”), incorporated in the Marshall Islands in March 2004, owner of the 135,915 DWT (built in 1992) tanker vessel “Endless”, which was acquired in March 2004, sold and leased back in April 2006 and reacquired in May 2007.
	(i)	Falakro Shipping Company Ltd. (“Falakro”), incorporated in Liberia in July 2004, owner of the 47,076 DWT (built in 1991) tanker vessel “Doubtless”, which was acquired in August 2004 and sold and leased back in March 2006.

 

 

F-7

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

1.	Basis of Presentation and General Information - (continued):

	(j)	Pageon Shipping Company Ltd. (“Pageon”), incorporated in Cyprus in July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel “Vanguard”, which was acquired in August 2004 and sold and leased back in March 2006.
	(k)	Vardousia Shipping Company Ltd. (“Vardousia”), incorporated in Cyprus in July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel “Invincible”, which was acquired in August 2004, sold and leased back in September 2005 and sold by its new owners in July 2007.
	(l)	Psiloritis Shipping Company Ltd. (“Psiloritis”), incorporated in Liberia in July 2004, owner of the 47,084 DWT (built in 1991) tanker vessel “Victorious”, which was acquired in August 2004, sold and leased back in September 2005 and sold by its new owners in August 2007.
	(m)	Parnon Shipping Company Ltd. (“Parnon”), incorporated in Cyprus in July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel “Relentless”, which was acquired in August 2004 and sold and leased back in September 2005.
	(n)	Menalo Shipping Company Ltd. (“Menalo”), incorporated in Cyprus in July 2004, owner of the 47,084 DWT (built in 1991) tanker vessel “Restless”, which was acquired in August 2004, sold and leased back in August 2005 and sold by its new owners in September 2007.
	(o)	Pintos Shipping Company Ltd. (“Pintos”), incorporated in Cyprus in July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel “Sovereign”, which was acquired in August 2004 and sold and leased back in August 2005.
	(p)	Pylio Shipping Company Ltd. (“Pylio”), incorporated in Liberia in July 2004, owner of the 154,970 DWT (built in 1991) tanker vessel “Flawless”, which was acquired in September 2004 and sold and leased back in March 2006.
	(q)	Idi Shipping Company Ltd. (“Idi”), incorporated in Liberia in July 2004, owner of the 47,094 DWT (built in 1991) tanker vessel “Spotless”, which was acquired in September 2004 and sold and leased back in March 2006.
	(r)	Taygetus Shipping Company Ltd. (“Taygetus”), incorporated in Liberia in July 2004, owner of the 154,970 DWT (built in 1991) tanker vessel “Timeless”, which was acquired in September 2004 and sold and leased back in March 2006.
	(s)	Kalidromo Shipping Company Limited (“Kalidromo”), incorporated in the Marshall Islands in May 2003, owner of the 31,766 DWT (built in 1980) tanker vessel “Tireless”, which was sold in September 2004.
	(t)	Olympos Shipping Company Limited (“Olympos”), incorporated in the Marshall Islands in May 2003, owner of the 29,990 DWT (built in 1985), tanker vessel “Med Prologue” which was sold in December 2004 and Olympos Shipping Company Limited, which is a subsidiary of TOP, incorporated in British Cayman Islands in December 1999, former owner of the vessel.
	(u)	Kisavos Shipping Company Limited (“Kisavos”), incorporated in the Marshall Islands in November 2004, owner of the 154,970 DWT (built in 1991) tanker vessel “Priceless”, which was acquired in February 2005 and sold and leased back in March 2006.

 

 

F-8

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

1.	Basis of Presentation and General Information - (continued):

	(v)	Imitos Shipping Company Limited (“Imitos”), incorporated in the Marshall Islands in November 2004, owner of the 149,554 DWT (built in 1992) tanker vessel “Noiseless”, which was acquired in April 2005, sold and leased back in April 2006 and reacquired in May 2007.
	(w)	Parnis Shipping Company Limited (“Parnis”), incorporated in the Marshall Islands in November 2004, owner of the 149,599 DWT (built in 1992) tanker vessel “Stainless”, which was acquired in April 2005, sold and leased back in April 2006 and reacquired in May 2007.
	(x)	Parnasos Shipping Company Limited (“Parnasos”), incorporated in Liberia in November 2004, owner of the 154,970 DWT (built in 1992) tanker vessel “Faultless”, which was acquired in April 2005 and sold and leased back in April 2006.

	(y)	Vitsi Shipping Company Limited (“Vitsi”), incorporated in Liberia in November 2004, owner of the 154,970 DWT (built in 1991) tanker vessel “Stopless”, which was acquired in April 2005 and sold and leased back in March 2006.
	(z)	Giona Shipping Company Limited (“Giona”), incorporated in Marshall Islands in March 2005, owner of the 46,217 DWT (built in 1999) tanker vessel “Taintless”, which was acquired in March 2005 and sold in November 2006.
	(aa)	Lefka Shipping Company Limited (“Lefka”), incorporated in Marshall Islands in March 2005, owner of the 46,168 DWT (built in 1999) tanker vessel “Dauntless”, which was acquired in March 2005.
	(bb)	Agrafa Shipping Company Limited (“Agrafa”), incorporated in Marshall Islands in March 2005, owner of the 46,185 DWT (built in 1999) tanker vessel “Soundless”, which was acquired in April 2005 and sold in November 2006.
	(cc)	Agion Oros Shipping Company Limited (“Agion Oros”), incorporated in Marshall Islands in February 2005, owner of the 47,262 DWT (built in 1998) tanker vessel “Topless”, which was acquired in April 2005 and sold in December 2006.
	(dd)	Nedas Shipping Company Limited (“Nedas”), incorporated in Marshall Islands in April 2005, owner of the 150,038 DWT (built in 1993) tanker vessel “Stormless”, which was acquired in October 2005.
	(ee)	Ilisos Shipping Company Limited (“Ilisos”), incorporated in Marshall Islands in April 2005, owner of the 46,346 DWT (built in 2003) tanker vessel “Ioannis P.”, which was acquired in November 2005.
	(ff)	Sperhios Shipping Company Limited (“Sperhios”), incorporated in Marshall Islands in April 2005, owner of the 146,286 DWT (built in 1996) tanker vessel “Ellen P.”, which was acquired in November 2005.
	(gg)	Ardas Shipping Company Limited (“Ardas”), incorporated in Marshall Islands in April 2005, owner of the 147,048 DWT (built in 1993) tanker vessel “Errorless”, which was acquired in November 2005 and sold in April 2007.
	(hh)	Kifisos Shipping Company Limited (“Kifisos”), incorporated in Marshall Islands in April 2005, owner of the 147,048 DWT (built in 1994) tanker vessel “Edgeless”, which was acquired in December 2005.
	(ii)	Noir Shipping S.A. (“Noir”), incorporated in Marshall Islands in June 2007, owner of the 73,506 DWT (built in 1995) drybulk vessel “Bertram”, which was acquired in November 2007.

 

 

F-9

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

1.	Basis of Presentation and General Information - (continued):

	(jj)	Amalfi Shipping Company Limited (“Amalfi”), incorporated in Marshall Islands in July 2007, owner of the 45,526 DWT (built in 2000) drybulk vessel “Amalfi”, which was acquired in December 2007.
	(kk)	Jeke Shipping Company Limited (“Jeke”), incorporated in Liberia in July 2007, owner of the 51,200 DWT (built in 2002) drybulk vessel “Voc Gallant”, which was acquired in February 2008 (Note 23).
	(ll)	Japan I Shipping Company Limited (“Japan I”), incorporated in Liberia in August 2007, to be the owner of the 75,928 DWT (built in 2001) drybulk vessel “Pepito”, which was acquired in  March 2008 (Note 23).
	(mm)	Japan II Shipping Company Limited (“Japan II”), incorporated in Liberia in August 2007, to be the owner of the 75,933 DWT (built in 2000) drybulk vessel “Astrale”, which is expected to be acquired late April 2008.
	(nn)	Japan III Shipping Company Limited (“Japan III”), incorporated in Liberia in August 2007, owner of the 75,681 DWT (built in 2000) drybulk vessel “Cyclades”, which was acquired in December 2007.

		The Company is an international provider of worldwide seaborne crude oil and petroleum products transportation services and of drybulk transportation services, through the ownership and operation of the vessels mentioned above.
		On December 31, 2007, seven vessels were operating under voyage charters, fourteen vessels under long-term time charters, with an average duration of over 24 months and two vessels, one of which was operating under long-term time charter, were undergoing their special survey. Nine out of fifteen time charters include profit sharing agreements, which are settled on a calendar quarter basis.
		The Revenues in the accompanying consolidated statements of income are analyzed as follows:

	Revenues		Year Ended December 31,
			2005	2006	2007
	Voyage revenues		115,079	158,558	128,663
	Time Charter revenues		129,136	151,485	123,596
	Total		244,215	310,043	252,259

Future minimum time-charter receipts, based on vessels committed to non-cancellable time charter contracts, as of December 31, 2007, will be $102,930, $66,671 and $14,939 during 2008, 2009 and 2010, respectively.

2.	Significant Accounting Policies:
	(a)	Principles of Consolidation: The accompanying consolidated financial statements have been prepared in accordance with U.S generally accepted accounting principles (“US GAAP”) and include the accounts and operating results of Top Ships Inc. and its wholly-owned subsidiaries referred to in Note 1. All significant intercompany balances and transactions have been eliminated in consolidation.

 

 

F-10

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):

	(b)	Use of Estimates: The preparation of consolidated financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	(c)	Other Comprehensive Income (Loss): The Company follows the provisions of Statement of Financial Accounting Standards “Statement of Comprehensive Income” (SFAS 130), which requires separate presentation of certain transactions, which are recorded directly as components of stockholders’ equity.
	(d)	Foreign Currency Translation: The Company’s functional currency is the U.S. Dollar because all vessels operate in international shipping markets, and therefore primarily transact business in U.S. Dollars. The Company’s books of accounts are maintained in U.S. Dollars. Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the balance sheet dates, monetary assets and liabilities, which are denominated in other currencies, are translated to reflect the year-end exchange rates. Resulting gains or losses are reflected separately in the accompanying consolidated statements of operations.
	(e)	Cash and Cash Equivalents: The Company considers highly liquid investments such as time deposits and certificates of deposit with an original maturity of three months or less to be cash equivalents.
	(f)	Restricted Cash: In relation to the sale and leaseback transactions, the Company should maintain during the bareboat charter period consolidated cash balances of at least $25,000, which will be included in restricted cash along with all other potential cash restrictions imposed by the loan agreements (Notes 11 and 14).
	(g)	Trade Accounts Receivable, net: The amount shown as Trade Accounts Receivable, net at each balance sheet date, includes estimated recoveries from charterers for hire, freight and demurrage billings, net of a provision for doubtful accounts. At each balance sheet date, all potentially uncollectible accounts are assessed individually, combined with the application of a historical recoverability ratio, for purposes of determining the appropriate provision for doubtful accounts. Provision for doubtful accounts at December 31, 2006 and 2007 totalled $283 and $801, and is summarized as follows:

		Provision for doubtful accounts
	Balance, December 31, 2004	132
	—Additions	337
	—Reversals / write-offs	(153)
	Balance, December 31, 2005	316
	—Additions	508
	—Reversals / write-offs	(541)
	Balance, December 31, 2006	283
	—Additions	1,302
	— Reversals / write-offs	(784)
	Balance, December 31, 2007	801

 

 

F-11

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):
	(h)	Insurance Claims: Insurance claims, relating mainly to crew medical expenses and hull and machinery incidents are recorded upon collection or agreement with the relevant party of the collectible amount.
	(i)	Inventories: Inventories consist of bunkers, lubricants and consumable stores which are stated at the lower of cost or market. Cost, which consists of the purchase price, is determined by the first in, first out method.
	(j)	Vessel Cost:  Vessels are stated at cost, which consists of the contract price, pre-delivery costs incurred during the construction of newbuildings, capitalized interest and any material expenses incurred upon acquisition (improvements and delivery costs). Subsequent expenditures for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. Repairs and maintenance are charged to expense as incurred and are included in Other vessel operating expenses in the accompanying consolidated statements of operations.
	(k)	Impairment of Long-Lived Assets: Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company evaluates the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset. In this respect, management regularly reviews the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Company’s vessels. The review for impairment of each vessel’s carrying amount as of December 31, 2006 and 2007, did not result in an indication that the carrying amounts are not recoverable.
	(l)	Assets Held for Sale: It is the Company’s policy to dispose of vessels when suitable opportunities occur and not necessarily to keep them until the end of their useful life. The Company classifies vessels as being held for sale when: management has committed to a plan to sell the vessels; the vessels are available for immediate sale in their present condition; an active program to locate a buyer and other actions required to complete the plan to sell the vessels have been initiated; the sale of the vessels is probable, and transfer of the asset is expected to qualify for recognition as a completed sale within one year; the vessels are being actively marketed for sale at a price that is reasonable in relation to their current fair value and actions required to complete the plan to sell indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Long-lived assets classified as held for sale are measured at the lower of their carrying amount or fair value less cost to sell. These vessels are not depreciated once they meet the criteria to be classified as held for sale. At December 31, 2007, the tanker vessel M/T Noiseless was classified as held for sale and its carrying amount of $46,268 is separately reflected in the 2007 accompanying consolidated balance sheet.
	(m)	Vessel Depreciation: Depreciation is calculated using the straight-line method over the estimated useful life of the vessels, after deducting the estimated salvage value. Each vessel’s salvage value is equal to the product of its lightweight tonnage and estimated scrap rate. Management estimates the useful life of the Company’s vessels to be 25 years from the date of initial delivery from the shipyard. Second hand vessels are depreciated from the date of their acquisition through their remaining estimated useful life. When regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted at the date such regulations are adopted.

 

 

F-12

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):

(n)

Other Fixed Assets, Net: Other fixed assets, net consists of furniture, office equipment, cars and leasehold improvements, stated at cost, which consists of the purchase / contract price less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the assets, while leasehold improvements are depreciated over the lease term, as presented below:

	Description	Useful Life (years)
	Leasehold improvements	12
	Cars	6
	Office equipment	5
	Furniture and fittings	5
	Computer equipment	3

	(o)	Accounting for Dry-Docking Costs: All dry-docking costs are accounted for under the direct expense method, under which they are expensed as incurred and included in Other vessel operating expenses in the consolidated statement of operations.
	(p)	Sale and Leaseback Transactions: The gains on sale of vessel sale and leaseback transactions are deferred and amortized to income over the lease period.
	(q)	Financing Costs: Fees incurred and paid to the lenders for obtaining new loans or refinancing existing ones are recorded as a contra to debt and such fees are amortized to interest expense over the life of the related debt using the effective interest method. Unamortized fees relating to loans repaid or refinanced are expensed when a repayment or refinancing is made and charged to interest and finance costs.
	(r)	Pension and Retirement Benefit Obligations—Crew:  The ship-owning companies included in the consolidation, employ the crew on board, under short-term contracts (usually up to nine months) and accordingly, they are not liable for any pension or post retirement benefits.
	(s)	Staff leaving Indemnities – Administrative personnel: The Company’s employees are entitled to termination payments in the event of dismissal or retirement with the amount of payment varying in relation to the employee’s compensation, length of service and manner of termination (dismissed or retired). Employees who resign, or are dismissed with cause are not entitled to termination payments. The Company’s liability on an actuarially determined basis, at December 31, 2006 and 2007 amounted to $190 and $288, respectively.
	(t)	Accounting for Revenue and Expenses: Revenues are generated from voyage and time charter agreements. Time charter revenues are recorded over the term of the charter as service is provided. Profit sharing represents the excess between an agreed daily base rate and the actual rate generated by the vessel every quarter, if any, and is settled and recorded on a quarterly basis. Under a voyage charter the revenues, including demurrages and associated voyage costs, with the exception of port expenses which are recorded as incurred, are recognized on a proportionate performance method over the duration of the voyage. A voyage is deemed to commence upon the latest between the completion of discharge of the vessel’s previous cargo and the charter party date of the current voyage and is deemed to end upon the completion of discharge of the current cargo. Demurrage income represents payments by the charterer to the Company when loading or discharging time exceeded the stipulated time in the voyage charter. Vessel operating expenses are accounted for on the accrual basis. Unearned revenue represents cash received prior to year-end related to revenue applicable to periods after December 31 of each year.

 

 

F-13

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):

When vessels are acquired with time charters attached and the rates on such charters are below market on the acquisition date, the Company allocates the total cost between the vessel and the fair value of below market time charter based on the relative fair values of the vessel and the liability acquired. The fair value of the attached time charter is computed as the present value of the difference between the contractual amount to be received over the term of the time charter and management’s estimates of the market time charter rate at the time of acquisition. The fair value of below market time charter is amortized over the remaining period of the time charter as an increase to revenues.

	(u)	Stock Incentive Plan: All share-based compensation provided to employees and to non-employee directors, for their services as directors, is included in Other general and administrative expenses in the consolidated income statements. The shares that do not contain any future service vesting conditions are considered vested shares and recognized in full on the grant date. The shares that contain a time-based service vesting condition are considered non-vested shares on the grant date and recognized over the vesting period. The shares, vested and non-vested are measured at fair value, which is equal to the market value of the Company’s common stock on the grant date.
	(v)	Earnings per Share: Basic earnings per share are computed by dividing net income by the weighted average number of common shares deemed outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised.
	(w)	Related Parties: The Company considers as related parties the affiliates of the Company; entities for which investments are accounted for by the equity method; principal owners of the Company; its management; members of the immediate families of principal owners of the Company; and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. An Affiliate is a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or has common control with the Company. Control is the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an enterprise through ownership, by contract and otherwise. Immediate Family is family members whom a principal owner or a member of management might control or influence or by whom they might be controlled or influenced because of the family relationship. Management is the persons who are responsible for achieving the objectives of the Company and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management normally includes members of the board of directors, the CEO, CFO, Vice President in charge of principal business functions and other persons who perform similar policy making functions. Persons without formal titles may also be members of management. Principal owners are owners of record or known beneficial owners of more than 10% of the voting interests of the Company.

 

 

F-14

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):
	(x)	Derivatives: Derivative instrument (including certain derivative instruments embedded in other contracts) are recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivatives’ fair value recognized currently in earnings unless specific hedge accounting criteria are met.
		During 2005, 2006 and 2007, the Company engaged in interest rate swap agreements in order to hedge the exposure of interest rate fluctuations associated with the cash flows on a portion of the Company’s variable rate borrowings (Note 11). In addition, during 2007, the Company entered into an interest rate derivative product, which is marked to market through earnings (Note 11). The main description of the product is as follows: a portfolio of six systematic FX trading strategies, providing comprehensive and highly diversified currency exposure. Each strategy is underpinned by a clear macro rationale but is fully systematic –a “transparent box”. Investors can tailor their portfolio with carry and non-carry strategies. Excess returns exceed those of many other asset classes with low correlation to other asset classes. In addition, it improved the Company’s short term liquidity by $8,500. The Company wanted to invest into currency trading through a low volatility product and this product offers investors a unique opportunity to access systematic macro-driven currency trading strategies in both principal protected and non-principal protected format. Lastly, the product provides an opportunity for investors who cannot easily access FX markets, to transparently implement dynamic and innovative strategies.
		For swap agreements that are designated and qualified as cash flow hedges their fair value is included in financial instruments in the accompanying consolidated balance sheets with changes in the effective portion of the instruments’ fair value recorded in accumulated other comprehensive income (loss). The ineffective portion of the change in fair value of the derivative financial instruments is immediately recognized in the income statement. If the hedged item is a forecasted transaction that becomes probable of not occurring, then the derivative financial instrument no longer qualifies as an effective cash flow hedge from that date and, as a result, cumulative fair value changes that were previously recorded in accumulated other comprehensive income (loss) are immediately reclassified into earnings. In all other instances, when a derivative financial instrument ceases to qualify as an effective cash flow hedge but if it is still possible the hedged forecasted transaction may occur, hedge accounting ceases from that date and the instrument is prospectively marked to market through earnings, but previously recorded changes in fair value remain in accumulated other comprehensive income until the hedged item affects earnings or until it becomes probable that the hedged forecasted transaction will not occur.
		The Company monitors its positions, the credit ratings of counterparties and the level of contracts it enters into with any one party. The Company has a policy of entering into contracts with parties that meet stringent qualifications and, given the high level of credit quality of its derivative counterparty, the Company does not believe it is necessary to obtain collateral for such arrangements.

 

 

F-15

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):
	(y)	Consolidation of Variable Interest Entities: FASB Interpretation No. 46R addresses the consolidation of business enterprises (variable interest entities) to which the usual condition (ownership of a majority voting interest) of consolidation does not apply. The Interpretation focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests, a company’s exposure (variable interest) to the economic risks and potential rewards from the variable interest entity’s assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the value of the variable interest entity’s assets and liabilities. Variable interests may arise from financial instruments, service contracts, and other arrangements. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary would be required to include assets, liabilities, and the results of operations of the variable interest entity in its financial statements.

(z)

Recent Accounting Pronouncements:

		(i)	FSP No. AUG AIR-1: In September 2006, the FASB Staff issued FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” (“FSP No. AUG AIR-1”). FSP No. AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods, if no liability is required to be recorded for an asset retirement obligation based on a legal obligation for which the event obligating the entity has occurred. FSP No. AUG AIR-1 also requires disclosures regarding the method of accounting for planned major maintenance activities and the effects of implementing the FSP. The guidance in FSP No. AUG AIR-1 is effective for the Company as of January 1, 2007.
		ii)	FASB Statement No. 157: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 addresses standardizing the measurement of fair value for companies that are required to use a fair value measure of recognition for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date”. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The Company will adopt SFAS 157 effective January 1, 2008. In February 2008, the FASB issued FASB Staff Position (“FSP”) FASB 157-2 “Effective Date of FASB Statement No. 157” (“FSP FASB 157-2”). FSP FASB 157-2, which was effective upon issuance, delays the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items recognized or disclosed at fair value at least once a year, to fiscal years beginning after November 15, 2008. FSP FASB 157-2 also covers interim periods within the fiscal years for items within the scope of this FSP. The adoption of this statement is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.
		iii)	FASB Statement No. 159: In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Earlier adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company will adopt SFAS 159 effective January 1, 2008. The adoption of this statement is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.

 

 

F-16

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

2.	Significant Accounting Policies - (continued):

		iv)	FASB Statement No. 141R: In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements on how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the entity acquired. In addition, SFAS 141R provides guidance on the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase as well as what information to disclose to enable users of the financial statements to evaluate the nature and financial impact of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal year 2009. The Company is currently evaluating the potential impact, if any, of the adoption of this statement on its financial condition or results of operations.
		v)	FASB Statement No. 160: In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes principles and requirements on how to treat the portion of equity in a subsidiary that is not attributable directly or indirectly to a parent. This is commonly known as a minority interest. The objective of SFAS 160 is to improve relevance, comparability, and transparency concerning ownership interests in subsidiaries held by parties other than the parent by providing disclosures that clearly identify between interests of the parent and interest of the noncontrolling owners and the related impacts on the consolidated statement of operations and the consolidated statement of financial position. SFAS 160 also provides guidance on disclosures related to changes in the parent’s ownership interest and deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal year 2009. The Company is currently evaluating the potential impact, if any, of the adoption of this statement on its financial condition or results of operations.
		vi)	FASB Statement No. 161: In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the effect that this statement may have on future financial statements.

(aa)

Reclassification of Prior Year Balances: Certain amounts in the 2005 and 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation. The reclassification had no impact on the results of operations of the Company. Fair Value Change of Financial Instruments for the years ended December 31, 2005 and 2006 has been presented on a separate line in the consolidated statements of operations to conform to the current year presentation. Fair Value Change of Financial Instruments was previously reported within Interest and Finance Costs.

 

 

F-17

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

3.	Change in Accounting Principle for Dry-docking Costs:
	Change in Accounting Principle for Dry-docking Costs: The Company has historically accounted for dry-docking costs that qualified as “Planned Major Maintenance Activities” (“PMMA”) using the deferral method. Beginning with the fourth quarter of 2007 the Company changed its accounting policy for PMMA from the deferral method, under which the Company amortized dry-docking costs over the estimated period of benefit between dry-dockings, to the direct expense method, under which the Company expenses all dry-docking costs as incurred. The Company believes that the direct expense method is preferable as it eliminates the significant amount of time and subjectivity involved to determine which costs and activities related to dry-docking qualify as PMMA under the deferral method. The Company reflected this change as a change in accounting principle from an accepted accounting principle to a preferable accounting principle in accordance with Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. The new accounting principle is applied retrospectively to all periods presented. When the accounting principle was retrospectively applied, net income for the year ended December 31, 2005 and 2006 decreased by $3,763 and $26,146, or $0.41 and $2.57 per share, respectively.
	The following financial statement line items were affected by the change in accounting principle.

 

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2007
(Expressed in thousands of U.S. Dollars)
		December 31, 2006												December 31, 2007
		As reported under the deferral method				As computed under the direct expense method				Effect of change				As reported under the direct expense method				As computed under the deferral method (a)				Effect of change
Deferred charges, net		$	31,850			$	-			$	(31,850	)		$	-			$	42,525			$	42,525
Total assets		$	522,735			$	490,885			$	(31,850	)		$	776,917			$	819,442			$	42,525
Accrued liabilities		$	7,354			$	12,161			$	4,807			$	-			$	-			$	-
Total current liabilities		$	40,609			$	45,416			$	4,807			$	-			$	-			$	-
Retained earnings / (Accumulated deficit)		$	80,782			$	44,125			$	(36,657	)		$	(4,951	)		$	37,574			$	42,525
Total stockholders' equity		$	197,855			$	161,198			$	(36,657	)		$	211,408			$	253,933			$	42,525
Total liabilities and stockholders' equity		$	522,735			$	490,885			$	(31,850	)		$	776,917			$	819,442			$	42,525

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007

(Expressed in thousands of U.S. Dollars)

 

		2005												2006												2007
		As reported under the deferral method				As computed under the direct expense method				Effect of change				As reported under the deferral method				As computed under the direct expense method				Effect of change				As reported under the direct expense method				As computed under the deferral method (a)				Effect of change
Dry-docking costs		$	-			$	10,478			$	10,478			$	-			$	39,333			$	39,333			$	25,094			$	-			$	(25,094	)
Amortization of dry-docking costs		$	5,999			$	-			$	(5,999	)		$	13,187			$	-			$	(13,187	)		$	-			$	19,226			$	19,226
Gain on sale of vessels		$	(10,115	)		$	(10,831	)		$	(716	)		$	-			$	-			$	-			$	-			$	-			$	-
Operating income (loss)		$	86,953			$	83,190			$	(3,763	)		$	41,361			$	15,215			$	(26,146	)		$	(29,118	)		$	(23,250	)		$	5,868
Net Income (loss)		$	68,684			$	64,921			$	(3,763	)		$	15,141			$	(11,005	)		$	(26,146	)		$	(49,076	)		$	(43,208	)		$	5,868
Earnings (loss) per share, basic and diluted		$	7.38			$	6.97			$	(0.41	)		$	1.41			$	(1.16	)		$	(2.57	)		$	(4.09	)		$	(3.60	)		$	0.49

3.	Change in Accounting Principle for Dry-Docking Costs – (continued):

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007

(Expressed in thousands of U.S. Dollars)

 

		2005												2006												2007
		As reported under the deferral method				As computed under the direct expense method				Effect of change				As reported under the deferral method				As computed under the direct expense method				Effect of change				As reported under the direct expense method				As computed under the deferral method (a)				Effect of change
Net income (loss)		$	68,684			$	64,921			$	(3,763	)		$	15,141			$	(11,005	)		$	(26,146	)		$	(49,076	)		$	(43,208	)		$	5,868
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of dry-docking costs		$	5,999			$	-			$	(5,999	)		$	13,187			$	-			$	(13,187	)		$	-			$	19,226			$	19,226
(Gain) on sale of vessels		$	(10,115	)		$	(10,831	)		$	(716	)		$	-			$	-			$	-			$	-			$	-			$	-
Payments for dry-docking		$	(10,478	)		$	-			$	10,478			$	(34,526	)		$	-			$	34,526			$	-			$	(29,901	)		$	(29,901	)
Accrued liabilities		$	-			$	-			$	-			$	(5,949	)		$	(1,142	)		$	4,807			$	(1,460	)		$	3,347			$	4,807

(a)

The amounts disclosed under the deferral method for the year ended and at December 31, 2007 are based on the estimated effect of not changing the dry-docking accounting method to the direct expense method for this period. Accordingly, these estimated period amounts have not been previously reported, but are being disclosed in accordance with the requirements of SFAS No. 154.

 

 

F-18

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

4.	Segment Reporting:
	The Company reports financial information and evaluates its operations by charter revenues and not by the length of ship employment for its customers, i.e., spot or time charters. The Company does not have discrete financial information to evaluate the operating results for each such type of charter. Although revenue can be identified for these types of charters, management cannot and does not identify expenses, profitability or other financial information for these charters. As a result, management, including the chief operating decision maker, reviews operating results solely by revenue per day and operating results of the fleet. Furthermore, when the Company charters a vessel to a charterer, the charterer is free to trade the vessel worldwide and, as a result, the disclosure of geographic information is impracticable. The Company’s acquisition of drybulk vessels in 2007 has resulted in the Company determining that it operates under two reportable segments, as a provider of international seaborne transportation services, carrying petroleum products and crude oil (Tanker Fleet) and, drybulk commodities for the steel, electric utility, construction and agri-food industries (Drybulk Fleet). The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
	The following table present results for these segments for the year ended December 31, 2007:

Year ended December 31, 2007		Tanker Fleet				Drybulk Fleet				Unallocated (1)				Total
REVENUES:
Revenues			248,944				1,902				1,413				252,259
EXPENSES:
Voyage expenses			59,253				161				-				59,414
Charter hire expense			94,118				-				-				94,118
Amortization of deferred gain on sale and leaseback of vessels			(15,610	)			-				-				(15,610	)
Other vessel operating expenses			67,225				689				-				67,914
Dry-docking costs			25,094				-				-				25,094
Depreciation			26,560				848				-				27,408
Sub-Manager fees			1,821				7				-				1,828
Other general and administrative expenses			22,729				267				-				22,996
Foreign currency (gains) / losses, net			-				-				176				176
Gain on sale of vessels			(1,961	)			-				-				(1,961	)
Operating income (loss)			(30,285	)			(70	)			1,237				(29,118	)

 

(1) Unallocated amounts relate to the drybulk vessels' amortization of the fair value of below market time charter contracts acquired of $1,413 less the foreign currency losses, net of $176. These amounts are unallocated as they are not included in the financial information used by the chief operating decision maker to allocate the Company’s resources.

During 2007, 33% of the Company’s revenues derived from time charter agreements. During 2005, 2006 and 2007 two charterers, relating only to the Tanker Fleet, individually accounted for more than 10% of the Company’s revenues as follows:

	Charterer		Year Ended December 31,
			2005	2006	2007
	A		20%	11%	-
	B		32%	29%	23%
	C		-	-	10%

 

 

F-19

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

4.	Segment Reporting – (continued):
	A reconciliation of segment assets to amounts presented in the consolidated balance sheets is as follows:

 

As of December 31, 2007		Tanker Fleet				Drybulk Fleet				Unallocated (1)				Total
Accounts receivable trade, net			14,867				317				-				15,184
Vessel held for sale			46,268				-				-				46,268
Vessels, net			355,228				198,663				-				553,891
Total assets			504,147				223,186				49,584				776,917
Year ended December 31, 2007
Expenditures for vessels			187,360				167,685				-				355,045

 

(1) Unallocated mainly relates to cash and cash equivalents (including restricted cash) of $41,566 and other fixed assets of $5,711, which are not allocated to individual segments.

 

5.	Transactions with Related Parties:
	Pyramis Technical Co. S.A.: On July 9, 2004, the Company entered into an agreement to lease office space in Athens, Greece from Pyramis Technical Co. SA, which is wholly owned by the father of the Company’s Chief Executive Officer. The agreement was for duration of six years beginning July 2004 with a lessee’s option for an extension of four years. The monthly rental was Euro 39,000 and effective January 1, 2006 was adjusted for inflation to Euro 40,365. Other general and administrative expenses for the years ended December 31, 2005 and 2006 include $586 and $705, respectively of rentals paid to Pyramis Technical Co. S.A. In January 2006 the Company entered into an agreement to lease office space in Athens, Greece, with an unrelated party. The change in office location, due to necessary refurbishments, took place in October 2006; therefore, the Company paid to Pyramis Technical Co. S.A the October rent plus four-month rentals as termination compensation. In April and August 2006, the Company entered into an agreement with Pyramis Technical Co. S.A. for the renovation of the new premises. The total contracted cost totaled Euro 2,499,360, of which Euro 2,855,436 (including the applicable VAT) or $3,767 was paid up to December 31, 2007. The amount of $3,872 related to renovation works, discussed above, is included in Other fixed assets, net, in the accompanying 2007 consolidated balance sheet and is depreciated over the lease period, which is 12 years.
6.	Inventories:
	The amounts shown in the accompanying consolidated balance sheets are analyzed as follows:

			December 31,
			2006		2007
	Bunkers		4,624		5,723
	Lubricants		1,319		1,839
	Consumable stores		517		396
			6,460		7,958

 

 

F-20

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

7.	Prepayments and Other:
	The amounts shown in the accompanying consolidated balance sheets are analyzed as follows:

			December 31,
			2006		2007
	Prepaid expenses		3,874		3,013
	Other receivables		1,332		2,567
			5,206		5,580

8.	Advances for Vessels Acquisitions / under Construction:
	In October 2006, the Company entered into an agreement for the construction of six handymax Product / Chemical tankers. The total contract price is $285,380 and is payable in five installments as follows: 15% is payable upon arrangement of the Refund Guarantee, 15% is payable upon commencement of steel cutting, 20% is payable upon keel laying, 20% is payable upon launching and 30% upon delivery of the vessel. The vessels’ construction is partially financed from long-term bank financing discussed in Note 11. The first installment for four of the six vessels of $28,638 was paid in December 2006. In January 2007, the first installment for the remaining two vessels of $14,169 was paid and is also included in Advances for vessels acquisitions / under construction, in the accompanying consolidated balance sheets. The vessels are expected to be delivered during the first six months of 2009.
	During July 2007, the Company entered into an agreement to acquire one 2002 built super handymax, or supramax, drybulk vessel of 51,200 dwt, built in China from unrelated third party. The vessel will be chartered back to the sellers for a period of 18 months at a daily net rate of $25,650 on a bareboat basis. The purchase price of the vessel is $54,500, of which the Company paid in July 2007 a deposit of $5,450 and the remaining $49,050 upon delivery of the vessel on February 1, 2008 (Note 23).
	During August 2007, the Company entered into agreements to acquire two drybulk vessels from unrelated third parties as follows: i) one 2001 built panamax vessel of 75,928 dwt, built in Japan, ii) one 2000 built panamax vessel of 75,933 dwt, built in Japan. The vessels are scheduled to be delivered to the Company between February 2008 and March 2008 and to enter into time charter contracts. The aggregate purchase price of the vessels is $148,000, of which the Company paid in August 2007 a deposit totaling in aggregate $14,800 and the remaining $133,200 will be paid upon delivery of the vessels, which is expected in March 2008.
	The Advances for vessels acquisitions / under construction as of December 31, 2006 and 2007 are analyzed as follows:

		Construction installments		Acquisitions		Capitalized interest		Capitalized costs		Total
Balance, December 31, 2006		28,638		-		34		11		28,683
- Additions		14,169		20,250		2,661		263		37,343
Balance, December 31, 2007		42,807		20,250		2,695		274		66,026

 

 

F-21

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

9.	Vessels, net:
	The amounts in the accompanying consolidated balance sheets are analyzed as follows:

		Vessel Cost	Accumulated Depreciation	Net Book Value
	Balance, December 31, 2005	936,391	(49,637)	886,754
	—Acquisitions	18	—	18
	—Disposals	(605,085)	59,997	(545,088)
	—Depreciation	—	(35,266)	(35,266)
	Balance, December 31, 2006	331,324	(24,906)	306,418
	—Vessel held for sale	(48,582)	2,314	(46,268)
	—Acquisitions	371,162	-	371,162
	—Disposals	(55,638)	5,625	(50,013)
	—Depreciation	-	(27,408)	(27,408)
	Balance, December 31, 2007	598,266	(44,375)	553,891

	In July and September 2005, vessels Fearless and Yapi were sold for an aggregate price of $38,348. These sales, after the related sale expenses of $5,968 resulted in a gain of $10,831, which is separately reflected in the accompanying 2005 consolidated statement of income.
	In August and September 2005, the Company sold the Restless, Sovereign, Relentless, Invincible and Victorious for an aggregate price of $120,705, net of related sales expenses of $5,545, and entered simultaneously into bareboat charter agreements to leaseback the vessels for a period of seven years (Note 14).
	In March and April 2006, the Company sold the Flawless, Timeless, Priceless, Stopless, Doubtless, Vanguard, Faithful, Spotless, Limitless, Endless, Faultless, Noiseless and Stainless for an aggregate price of $529,616, net of related sales expenses of $20,384, and entered simultaneously into bareboat charter agreements to leaseback the vessels for periods of five to seven years (Note 14). According to the terms of the agreements, 10% of the gross aggregate sales price, $55,000, has been withheld by the purchaser and will be paid to the Company not later than three months after the end of bareboat charter period or upon the resale of the vessels by the purchaser, if earlier.
	In November and December 2006, vessels Taintless, Soundless and Topless were sold for an aggregate price of $127,450. These sales, after the related sale expenses of $2,890 resulted in a gain of $12,667, which is separately reflected in the accompanying 2006 consolidated statement of operations.
	On March 30, 2007, the Company entered into an agreement to sell the vessel Errorless to an unrelated party for consideration of $52,500. The gain from the sale of $1,961 was recognized upon the delivery of the vessel to the buyer, on April 30, 2007.
	Based on the Memoranda of Agreement dated May 23, 2007, on May 31, 2007, the Company re-acquired four Suezmax tankers that it sold in 2006 in a sale and leaseback transaction and terminated the respective bareboat charters. The four Suezmax tankers are Limitless (DWT 136,055 built 1993), Endless (DWT 135,915 built 1992), Noiseless (DWT 149,554 built 1992) and Stainless (DWT 149,599 built 1992). The re-acquisition price was $208,000 and was partially financed by the early redemption of the seller’s credit of $20,640, associated with the 2006 sales and leaseback transactions. The then unamortized deferred gain of the four vessels of $36,350 was applied against the vessels’ purchase price (Note 14).

 

 

 

F-22

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

9.	Vessels, net – (continued):
	Based on the Memorandum of Agreement dated July 5, 2007, on November 12, 2007, the Company acquired the drybulk vessel Bertram, one 1995 built panamax vessel of 73,506 dwt, built in South Korea. The vessel will be time-chartered for a period of 24-26 months at a daily net rate of approximately $29,700. The total acquisition cost was $46,146.
	Based on the Memorandum of Agreement dated July 9, 2007, on December 28, 2007, the Company acquired the drybulk vessel Amalfi, one 2000 built handymax vessel of 45,526 dwt, built in Philippines. The vessel will be time-chartered for a period of 14-16 months at a daily net rate of approximately $22,000. The total acquisition cost was $47,976.
	Based on the Memorandum of Agreement dated August 7, 2007, on December 19, 2007, the Company acquired the drybulk vessel Cyclades, one 2000 built panamax vessel of 75,681 dwt, built in Japan. The total acquisition cost was $74,776.
	On December 6, 2007, the Company entered into an agreement to sell the vessel Noiseless to an unrelated party for a consideration of $48,000. The gain from the sale of approximately $580 was recognized upon the delivery of the vessel to the buyer, on January 30, 2008 (Note 23).
	All Company’s vessels, having a total carrying value of $552,993 at December 31, 2007, have been provided as collateral to secure the loans discussed in Note 11.

10.	Fair Value Of Below Market Time Charter:
	On November 12, and December 28, 2007, the Company acquired the drybulk vessels M/V Bertram and M/V Amalfi respectively with an attached time charter contract. As a result, the purchase price of the vessels was allocated between vessel cost and the fair value of the time charter contracts, totaling in aggregate $30,612, which is reflected in Fair Value of Below Market Time Charter on the accompanying 2007 consolidated balance sheet. The liability is amortized to revenues over the remaining period of the time charter contracts on a straight-line basis. For the year ended December 31, 2007, the amortization of the fair value of the time charter contracts totaled $1,413 and is included in Revenues in the accompanying 2007 consolidated statement of operations.

 

 

F-23

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

11.	Long-term Debt:
	The amounts in the accompanying consolidated balance sheets are analyzed as follows:

			December 31,
	Borrower(s)		2006		2007
(a)	The Company		218,052		194,367
(b)	Mytikas		-		27,863
(c)	Litochoro		-		27,863
(d)	Imitos		-		27,863
(e)	Parnis		-		27,863
(f)	Noir		-		27,826
(g)	Amalfi		-		57,490
(h)	Japan III		-		47,749
	Total		218,052		438,884
	Less- current portion		(16,588)		(107,488)
	Long-term portion		201,464		331,396

	(a) The Company:
	At December 31, 2007 and 2006, the Company had a revolving credit facility outstanding of $93,000 and $83,000, respectively, maturing in October 2015 and a loan outstanding of $102,920 and $137,000, respectively, maturing in December 2013, excluding unamortized financing fees of $1,553 and $1,948, respectively.
	Revolving Credit Facility: In January 2007, $10,000 was drawn down from the revolving credit facility to partially finance the construction of two vessels (Note 8). As of December 31, 2007, the undrawn amount amounted to $65,000. Commitment fees of $232, related to the undrawn amount are included in Interest and Finance Costs in the 2007 accompanying consolidated statement of operations. The revolving credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 0.85%). The applicable interest rate as of December 31, 2007 is 5.94%.
	Loan: The loan of $102,920 was drawn down in 2005 and originally amounted to $154,000. It was obtained to partially finance the acquisitions of the vessels Stormless, Ellen P., Errorless and Edgeless. The loan consisted of 2 tranches of $130,000 (Tranche A) and $24,000 (Tranche B). The Company paid a 1% fee of $1,540 upon signing the agreement. In April 2007, following the sale of Errorless (Note 9), $22,000 was prepaid ($5,500 against Tranche A and $16,500 as a full prepayment of Tranche B). The loan bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 0.8%). The applicable interest rate as of December 31, 2007 is 5.77%.
	In October 2007, the Company, through its wholly owned subsidiary Japan I, entered into a $50,000 bank loan agreement, which will bear interest at LIBOR plus a margin, in order to partially finance the acquisition cost of the drybulk vessel Pepito. The loan is subject to a fee of $175 payable on draw down, which was made in March 2008 and coincided with the delivery of the vessel.

 

 

F-24

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

11.	Long-term Debt – (continued):
	(b), (c), (d), (e) Mytikas – Litochoro – Imitos – Parnis: At December 31, 2007, Mytikas, Litochoro, Imitos and Parnis had in total a loan outstanding of $112,625, maturing in May 2012, excluding unamortized financing fees of $1,173.
	Loan: The loan of $112,625 was drawn down on May 30, 2007 (originally amounted to $147,500), to partially finance the re-acquisition of vessels Limitless, Endless, Noiseless and Stainless. The credit facility was subject to a 1% arrangement fee paid on the initial drawdown date. In December 2007, from the proceeds of the offering (Note 15), $20,000 was prepaid. In January 2008, $28,156 was prepaid due to sale of Noiseless (Note 23). The credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 1.25%). The applicable interest rate as of December 31, 2007 is 6.16%.
	(f) Noir: At December 31, 2007, Noir had a loan outstanding of $28,110, maturing in November 2014, excluding unamortized financing fees of $284.
	Loan: The loan of $28,110, (which is part of the $95,000 loan that was concluded to partially finance the acquisition cost of the drybulk vessels Bertram, Amalfi and Voc Gallant) was drawn down on November 9, 2007 (originally amounted to $29,671), to partially finance the acquisition cost of the drybulk vessel Bertram. In December 2007, from the proceeds of the offering (Note 15), $1,561 was prepaid. The credit facility was subject to a 1% arrangement fee paid in 2007. The credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 1.00%). The applicable interest rate as of December 31, 2007 is 5.87%.
	Loan: In November 2007, Noir, Jeke and Amalfi concluded a bank loan (originally amounted to $35,000) to partially finance the acquisition cost of three drybulk vessels, Bertram, Voc Gallant and Amalfi respectively, to cover the arrangement fees and for general corporate purposes. The loan was subject to a fee of $1,000 which was paid on the first drawdown. On November 9, 2007, the amount of $12,929, which was part of the $35,000 bank loan discussed above, was drawn to partially finance the acquisition of Bertram, delivered on November 12, 2007, and to cover the arrangement fees. On November 30, 2007, the amount of $7,500, which was part of the $35,000 bank loan discussed above, was drawn to partially finance the loan installment of Mytikas, Litochoro, Imitos and Parnis, discussed above and to cover the arrangement fees of $225. In December 2007, from the proceeds of the offering (Note 15), the drawn amount of $20,429 was fully prepaid.

 

 

F-25

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

11.	Long-term Debt – (continued):
	(g) Amalfi: At December 31, 2007, Amalfi had in total loans outstanding of $59,658, maturing in December 2014, less unamortized financing fees of $2,168.
	Loan: A loan of $28,658, (which is part of the $95,000 loan that was concluded to partially finance the acquisition cost of the drybulk vessels Bertram, Amalfi and Voc Gallant) was drawn down on December 27, 2007 (originally amounted to $30,250), to partially finance the acquisition cost of the drybulk vessel Amalfi. From the proceeds of the offering (Note 15), $1,592 was prepaid and the actual amount drawn was $28,658. The credit facility was subject to a 1% arrangement fee paid in 2007. The credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 1.00%). The applicable interest rate as of December 31, 2007 is 5.86%.
	Loan: A loan of $31,000, (which relates to the $35,000 loan, discussed under Noir above, as amended) to partially finance the acquisition cost of the drybulk vessels Cyclades and Amalfi. The loan was subject to a fee of $1,500, paid on the first drawdown. On December 21, 2007, the amount of $19,000 was drawn to refinance part of the acquisition cost of the drybulk vessel Cyclades. On December 27, 2007, the amount of $12,000 was drawn to partially finance the acquisition cost of the drybulk vessel Amalfi. The loan is payable in one installment latest by June 30, 2008. The credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 3.00%). The applicable interest rate as of December 31, 2007 is 7.88%.
	(h) Japan III: At December 31, 2007, Japan III had a loan outstanding of $48,000, maturing in December 2015, excluding unamortized financing fees of $251.
	Loan: The loan of $48,000 was drawn down on December 17, 2007 to partially finance the acquisition cost of the drybulk vessel Cyclades. The loan is subject to a fee of 0.50% on the loan amount, half of the fee was paid in November 2007 and the other half was paid in January 2008. The credit facility bears interest at LIBOR plus a margin (as of December 31, 2007 the margin was 1.30%). The applicable interest rate as of December 31, 2007 is 6.46%.
	Loans Securities: The loans are secured as follows:
	· First priority mortgages over the Company’s vessels; · Second priority mortgages over the Bertram and Amalfi; · Assignments of insurance and earnings of the mortgaged vessels; · Corporate guarantee of the TOP Ships Inc; · Pledge over the earnings accounts of the vessels.

 

 

F-26

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

11.	Long-term Debt – (continued):
	Debt Covenants: The loans contain financial covenants, calculated on a consolidated basis, requiring the Company to ensure that the aggregate market value of the mortgaged vessels at all times exceed 130% of the aggregate outstanding principal amounts under the loans, to ensure that total assets minus total debt will not at any time be less than $250,000. The net assets value of the Company’s vessels (owned and those covered by bareboat charter agreements) at all times should exceed $125,000 and book equity at all times should exceed $100,000. Furthermore, the Company must maintain liquid funds which at any time be not less than the higher of $10,000 or $500 per vessel. As a result, the minimum liquid funds required under the loan covenants of $12,000 and $10,000 on a consolidated basis, as of December 31, 2006 and 2007, respectively, are included in restricted cash in the accompanying consolidated balance sheets. The Company should maintain consolidated cash balances of at least $ 25,000, as amended in September 2007, including the minimum liquid funds discussed above. In addition, the $95,000 loan discussed above requires $750 per vessel to be maintained throughout the tenor of the credit facility. Consequently, as of December 31, 2007 the amount of $1,500 for vessels Bertram and Amalfi are also included in restricted cash.
	Restricted cash represents an investment; accordingly, a balance on deposit in a restricted cash account should be deemed the equivalent of an investment whose return of principal requires the satisfaction of conditions rather than a mere withdrawal demand. Therefore, deposits and withdrawals of principal balances in restricted cash accounts represent the creation or return of investment, which generally should be presented as investing activities in the statement of cash flows. However, if restricted cash is maintained as a condition of debt financing, it is appropriate to present changes in such restricted cash as a financing activity in the statement of cash flows. In connection with its debt financings in 2004 and 2005, the lending banks required the Company to maintain liquid funds in an amount equal to the higher of $10,000 or $500 per vessel, as discussed above. The Company presented the gross proceeds from its bank loans as cash inflow from financing activities. Because the requirement to maintain liquid funds was a covenant under the 2004 and 2005 debt financings, the cash outflow associated with maintenance of such liquid funds is presented as a financing activity.
	The Company is permitted to pay dividends under the loans so long as it is not in default of a loan covenant or if such dividend payment would not result in a default of a loan covenant. In addition, the loan agreement discussed above under (b), (c), (d) and (e) prohibit the payment of dividends from the borrowing subsidiaries to their equity holders. Furthermore, the loan agreement of $95,000 under (f) and (g), discussed above, prohibit the payment of dividends from the borrowing subsidiaries to the Company in excess of 70% of their net income.
	As of December 31, 2007, the Company was not in compliance with one of its financial covenants, (the Adjusted EBITDA covenant, as defined by each bank) under the loans of $93,000, $102,920, $28,110 and $28,658, discussed above, but has obtained waivers up to and including December 31, 2008, at which point the Company expects to be in compliance with this same financial covenant. No assurance can be given with respect to future compliance with covenants. If the Company is not in compliance with certain covenants under its debt or derivative agreements and acceptable waivers are not obtained, the Company would be in default and the banks could exercise their remedy rights including, but not limited to, accelerating the outstanding indebtedness and taking possession of the underlying collateral securing the indebtedness. In the event this was to occur, there can be no assurance that the Company will be able to continue as a going concern.
	Interest Expense: Interest expense for the years ended December 31, 2005, 2006 and 2007, amounted to $19,700, $20,750 and $15,362 respectively and is included in interest and finance costs in the accompanying consolidated statements of operations (Note 20).

 

 

 

F-27

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

 

11.	Long-term Debt – (continued):
	The weighted average interest rates, excluding swaps (iii), (iv), (v) and (vi) mentioned below, for 2006 and 2007 were 5.32% and 6.12%, respectively.
	Scheduled Principal Repayments: The annual principal payments required to be made after December 31, 2007, are as follows:

	Year ending December 31,		Amount
	2008		107,488
	2009		41,888
	2010		34,367
	2011		43,768
	2012		57,545
	2013 and thereafter		159,257
			444,313
	Excluding unamortized financing fees		(5,429)
			438,884

Interest Rate Swaps: The fair value of the interest rate swaps in the accompanying consolidated balance sheets are analyzed as follows:

SWAP	Notional Amount	Period	Effective Date	Interest Rate Payable	Fair Value - Asset (Liability)
					December 31,
					2006	2007
(i)	$28,555	4 years	June 30, 2005	4.66%	$283	($240)
(ii)	$37,385	5 years	January 30, 2006	4.80%	$273	($779)
(iii)	$10,000	7 years	September 30, 2006	4.23%	($569)	($514)
(iv)	$10,000	7 years	September 30, 2006	4.11%	($514)	($461)
(v)	$50,000	6 years	September 28, 2007	4.45%	($2,383)	($3,530)
(vi)	$10,000	7 years	July 3, 2006	4.76%	($474)	($588)
					($3,384)	($6,112)

	In October 2007, the Company entered into the following interest rate swap restructuring. Under this agreement, the Company entered into an overlay swap effectively reversing the existing swap and entered into a new swap (swap (v)), in direct continuation. Under the terms of the new swap, the Company paid on December 31, 2007 a fixed interest rate of 4.45% and received a fixed interest rate of 5.25% for a notional amount of $50,000. The interest rate that the Company will pay for the remaining six-years period is subject to the difference between the 10-year swap rate and the 2-year swap rate, as well as the level of the six-months USD LIBOR. The interest rate that the Company will pay is capped at 9.00%.
	Interest Rate Derivative Product: In November 2007, the Company entered into an interest rate derivative product. Under this agreement, the Company received an upfront payment of $8,500 and will pay five annual interest payments on a notional amount of $85,000. Based on the cumulative performance of a portfolio of systematic foreign exchange trading strategies, the interest payments will have a minimum floor at 0.00% and a cap at 7.50%. As of December 31, 2007, the fair value of this product was a liability of $10,676.

 

 

F-28

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

11.	Long-term Debt – (continued):
	As of December 31, 2006 and 2007, the financial instruments’ fair values are liabilities of $3,384 and $16,788, respectively, of which $0 and $6,105 and $3,384 and $10,683 represent their current and long-term portion, respectively. As of December 31, 2007, the Company was not in compliance with one of its financial covenants (the Adjusted EBITDA covenant as defined by the bank), under one of its swap agreements (swap (v)) but has obtained a waiver up to and including December 31, 2008. In April 2008, the Company mutually agreed with the bank for the termination of this swap. The Company is in the process of restructuring all or part of the then outstanding liability of approximately $7,500, which was initially scheduled to be repaid up to September 30, 2008. Consequently its fair value is included in current portion of financial instruments. The 2006 and 2007 fair value change on these agreements was separately reflected in the accompanying consolidated statements of operations.
12.	Accrued Liabilities:
	The amounts in the accompanying consolidated balance sheets are analyzed as follows:

		December 31,
		2006	2007
	Interest on long-term debt	630	2,261
	Vessels’ operating and voyage expenses	10,262	6,935
	General and administrative expenses	1,269	2,710
	Total	12,161	11,906

 

 

F-29

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

13.	Commitments and Contingencies:
	As at December 31, 2007 the Company had under construction six handymax Product / Chemical tankers scheduled for delivery between January and June 2009, at a total cost of $285,380. The remaining expected payments as of December 31, 2007 are $128,421 in 2008 and $114,152 in 2009.
	In March and April 2006, the Company entered into Sale and Leaseback agreements for 13 vessels for a period of five to seven years. According to the terms of the transactions, 10% of the gross aggregate sales price, $55,000, has been withheld by the purchaser to serve as security for the due and punctual performance and observance of all the terms and conditions of the Company under the agreements. Following the re-acquisition of the four vessels (Note 9), 10% of the unpaid sales price of $20,640, was used to partially finance the re-acquisition. Consequently the amount that is currently withheld by the purchaser is $34,360. Not later than three months after the end of the bareboat charter period or upon the resale of the vessels by the purchaser, if earlier, $26,360 out of the $34,360 will become payable to the Company. According to the agreement with one of the owners-lessors for four vessels, the owner-lessor may forfeit a payment of up to $8,000, or may be required to pay up to $16,000, based on the residual value of these four vessels.
	In December 2006, the Company and certain of its executive officers and directors were named as defendants in various class action securities complaints brought in the United States District Court, Southern District of New York ("the Court"), alleging violations of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, which have since been consolidated under the caption "In Re: Top Tankers, Inc. Securities Litigation," case no. 06-cv-13761 ("Putative Class Action Suits"). On or about January 11, 2007, the Company was also named as a nominal defendant in a derivative suit (the "Derivative Suit") in an action captioned Schwartz v. Jackson, et al., 07-cv-00246 (JSR). On or about June 19, 2007, the plaintiff in the Derivative Suit submitted a Notice of Voluntary Discontinuance Without Prejudice (the "Notice of Discontinuance") in which the plaintiff voluntarily discontinued the Derivative Suit against all defendants without prejudice. In that Notice of Discontinuance, the plaintiff remarked that (1) no defendant has been served in the action and (2) that neither plaintiff nor her counsel received any consideration for the discontinuance.
	On December 18, 2007, the Court denied the motion to dismiss brought by the Company in connection with the Putative Class Action. The Court's decision also directed that the parties engage in limited discovery on certain specific issues, which discovery was to be completed by January 31, 2008. On January 3, 2008, the Company and the Individual Defendants filed their Answer and Affirmative Defenses to Plaintiff's Corrected and Amended Consolidated Class Action Complaint. On or about January 18, 2008, the parties reached a settlement agreement in principle whereby the plaintiff, on behalf of members of the Class who do not opt out, would dismiss all claims against the Company with prejudice in exchange for a settlement payment of $1,200. After being notified of the settlement agreement in principle, the Court held a conference with the parties on February 14, 2008 during which the basic terms of the settlement were disclosed to the Court. On April 25, 2008, plaintiff filed the motion for preliminary approval of the proposed settlement with the Court. On April 28, 2008, the Court entered an order preliminarily approving the proposed settlement and directing that notice be given to all potential members of the Class of the proposed settlement. The Court has ordered a hearing on July 31, 2008 to determine whether the settlement should be approved.  The settlement will be funded by the Directors and Officers' insurance carriers.

	Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary course of the shipping business. In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers relating to the operations of the Company’s vessels. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements.
	The Company accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably estimate the probable exposure. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. A minimum of up to $1 billion of the liabilities associated with the individual vessels actions, mainly for sea pollution, are covered by the Protection and Indemnity (P&I) Club insurance.

 

 

F-30

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

14.	Sale and Leaseback of Vessels:
	The Company entered into sales and leaseback transactions in 2005 and 2006 as follows:
	(a)	In 2005, the Company sold the vessels Restless, Sovereign, Relentless, Invincible and Victorious and realized a total gain of $17,159. The Company entered into bareboat charter agreements to leaseback the same five vessels for a period of seven years. The charter back agreements are accounted for as operating leases and the gain on the sale was deferred and is being amortized to income over the seven-year lease period. Based on the Memoranda of Agreement dated April 24, 2007 and July 19, 2007, the owner and lessor of the Invincible, Victorious and Restless agreed to sell the vessels to a third party. The Company and the lessor mutually agreed to terminate the bareboat charters. The termination of the bareboat charters became effective upon the vessels’ delivery to their new owners, on July 11, 2007, August 27, 2007 and September 17, 2007, respectively. The unamortized deferred gain as of that date of $8,021 was recorded in full and is included in the 2007 Amortization of deferred gain on sale and leaseback of vessels;
	(b)	In 2006, the Company sold the vessels Flawless, Timeless, Priceless, Stopless, Doubtless, Vanguard, Faithful, Spotless, Limitless, Endless, Stainless, Faultless and Noiseless to three unrelated parties (buyers/lessors) for $550,000; of which 90% or $495,000 was received upon closing of the sale. Simultaneous with the sale of the vessels, the Company entered into bareboat charter agreements to leaseback the same vessels for a period of five to seven years with no lease renewal option. Another unrelated party assumed in June 2006 the rights and obligations of one of the buyers/lessors through a novation agreement with no other changes to the terms and conditions of the agreements.
		The obligations of the Company under the respective bareboat charter agreements were secured by the unpaid sales price representing 10% of the total sales price or $55,000. The unpaid sales price is payable to the Company within three months after the expiration of the individual bareboat charter agreements or termination of the agreements, if earlier. The collection of the unpaid sales price is secured by a second priority mortgage on the corresponding vessels with the Company having no recourse to the owners or investors of the buyers/lessors.
		In addition, the agreements allow the buyers/lessors to sell the vessels covered by the bareboat charter agreements.  In respect of the agreements with one of the buyers/lessors, in the event of the sale of the vessels prior to the termination of the bareboat charter agreements corresponding to four vessels, the corresponding unpaid sales price, up to a maximum amount of $2,000 for each vessel, shall be used to cover any shortfall between the net sales proceeds and the sum of the: (i) outstanding amount under financing obtained by the buyer in connection with the acquisition of the vessel, and (ii) the principal amount of the investment made by the investors of the buyer/lessor.
		The bareboat charter agreements are accounted for as operating leases and the gain on the sale of $41,420 was deferred and is being amortized to income over the lease period. The deferred gain was calculated by deducting from the sales price the carrying amount of the vessels, the expenses related to the sale and the unpaid sales price (which is treated as a residual value guarantee and will be recognized in income upon collection).

 

 

F-31

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

14.	Sale and Leaseback of Vessels – (continued):
		Following the re-acquisition of vessels Limitless, Endless, Noiseless and Stainless, on May 31, 2007, as discussed in Note 9, the 10% unpaid sales price of $20,640 was used to partially finance the re-acquisition. The related bareboat charter agreements were terminated and the then unamortized deferred gain of $36,350 was recorded contra to the purchase price of the vessels.
	The amortization of the deferred gain on sale and leaseback of vessels of $837, $8,110 and $15,610 for the years ended December 31, 2005, 2006 and 2007, respectively, is separately reflected in the accompanying consolidated statements of operations. During the years ended December 31, 2005, 2006 and 2007, lease payments relating to the bareboat charters of the vessels were $7,206, $96,302 and $94,118, respectively and are separately reflected as Charter hire expense in the accompanying consolidated statements of operations.
	The Company’s future minimum lease payments required to be made after December 31, 2007, related to the foregoing bareboat charter agreements, are as follows:

	Year ending December 31,		Amount
	2008		72,022
	2009		71,999
	2010		71,999
	2011		28,298
	2012		14,032
	2013		2,205
			260,555

	The sale and leaseback transactions entered into in 2006 contain financial covenants, calculated on a consolidated basis, requiring the Company to ensure that the net assets value of the Company’s vessels (owned and those covered by bareboat charter agreements) at all times exceed $125,000 and book equity at all times exceed $75,000. Furthermore, a minimum amount of $20,000 through December 15, 2006 and $25,000 thereafter and until the final date of the bareboat charters, shall be maintained on deposit by the Company. During the bareboat charter period, the Company will maintain consolidated cash balances of at least $25,000, as amended in September 2007, including the $20,000 / $25,000, mentioned above. The $25,000 required to be maintained is included in restricted cash in the consolidated balance sheet at December 31, 2007.
	As disclosed above, a portion of the sales price (representing 10% of the gross aggregate sales price) in the amount of $34,360, following the re-acquisition of the four vessels discussed above and the related settlement of the 10% unpaid sales price of $20,640, has been withheld by the buyers/lessors and will be paid to the Company not later than three months after the end of bareboat charter period or upon the resale of the vessels, if earlier. Consequently, such unpaid sales price was recorded as a receivable at its discounted value. The discount will be accreted through deferred gain on sale and leaseback of vessels over the period of the bareboat charter agreements or through the date of the resale of the vessels, if earlier. As of December 31, 2007 the present value of the unpaid sales price was $22,628.
	Furthermore, the Company has agreed with the lessors through a separate performance guarantee deeds that it irrevocably and unconditionally guarantees the prompt and punctual payment of all sums payable by the Company to the lessors under or pursuant to the agreements. The term of the performance guarantees covers the period of the leases.

 

 

F-32

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

15.	Common Stock and Additional Paid-In Capital:
	On May 10, May 27, 2004, July 22, 2005, December 17, 2007 and March 20, 2008, the Company’s Articles of Incorporation were amended. Under the amended articles of incorporation the Company was renamed to TOP Ships Inc. and currently, its authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share and 20,000,000 preferred shares with par value of $0.01. The Board of Directors shall have the authority to establish such series of preferred stock and with such designations, preferences and relative, participating, optional or special rights and qualifications, limitations or restrictions as shall be stated in the resolutions providing for the issue of such preferred stock.
	From April until July 2006 and from June until July 2007, the Company conducted at-the market sales of shares. A total of 1,302,454 and 1,435,874 shares of common stock, respectively, at par value of $0.01 were issued and sold at the market. The net proceeds to the Company totaled $26,916 and $29,370 in 2006 and 2007 respectively.
	On December 5, 2007, the Company completed a follow on public offering in the United States under the United States Securities Act of 1933, as amended. In this respect, 8,050,000 shares of common stock at par value of $0.01 were issued for $9.00 per share. The net proceeds to the Company totaled $68,971.
	Reverse Stock Split: On March 20, 2008, the Company effected a 1-for-3 reverse stock split of its common stock. There was no change in the number of authorized common shares of the Company. All share and per share amounts in these financial statements have been retroactively restated to reflect this stock split. As a result of the reverse stock split, the number of outstanding shares as of March 20, 2008 was decreased to 20,705,380, while the par value of the Company’s common shares remained unchanged at $0.01 per share.
	As a result of the change in number of common shares assumed to be outstanding through March 20, 2008 and the change in accounting principle for dry-docking costs, earnings per common share for the years ended December 31, 2005, 2006 are restated as follows:

		Year ended December 31,
Earnings (loss) per share, basic and diluted		2005				2006				2007
Earnings (loss) per share before reverse stock split and change in accounting principle		$	2.46			$	0.47			$	(1.36	)
Change in accounting principle impact		$	(0.41	)		$	(2.57	)			-
Earnings (loss) per share, as adjusted for 2005 and 2006		$	2.05			$	(2.10	)		$	(1.36	)
Reverse stock split impact		$	4.92			$	0.94			$	(2.73	)
Earnings (loss) per share, as restated for 2005 and 2006		$	6.97			$	(1.16	)		$	(4.09	)

 

 

F-33

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

16.	Stock Incentive Plan:
	On July 1, 2005, January 3, 2006 and July 6, 2006 (the “grant dates”) the Company granted restricted shares pursuant to the Company’s 2005 Stock Incentive Plan (“the Plan”), which was adopted in April 2005 to provide certain key persons (the “Participants”), on whose initiatives and efforts the successful conduct of the Company’s business depends, and who are responsible for the management, growth and protection of the Company’s business, with incentives to: (a) enter into and remain in the service of the Company, a Company’s subsidiary, or Company’s joint venture, (b) acquire a proprietary interest in the success of the Company, (c) maximize their performance, and (d) enhance the long-term performance of the Company (whether directly or indirectly) through enhancing the long-term performance of a Company subsidiary or Company joint venture. A total of 2,000,000 shares of common stock were reserved for issuance under the Plan, which is administered by the Company’s Board of Directors. The granted shares have no exercise price and constitute a bonus in nature.
	The Company’s Board of Directors administers the Plan and, on July 1, 2005, identified 45 key persons (including the Company’s CEO and other 8 officers and independent members of the Board) to whom shares of restricted common stock of the Company (the “Shares”) were granted. For this purpose 83,283 new shares were granted, out of which 63,333 shares were granted to the Company’s CEO, 16,100 shares to 8 officers and independent members of the Board and the remaining 3,850 shares were granted to 36 employees. From the total of 19,950 shares granted to officers, independent members of the Board and employees, 416 shares were forfeited prior to the vesting date.
	On January 3, 2006, the Company’s Board of Directors identified 29 key persons (including the Company’s CEO and other 8 officers and independent members of the Board) to whom shares of restricted common stock of the Company (the “Shares”) were granted. For this purpose 41,666 new shares were granted, out of which 26,666 shares were granted to the Company’s CEO, 12,666 shares to 8 officers and independent members of the Board and the remaining 2,334 shares were granted to 20 employees. From the total of 15,000 shares granted to officers, independent members of the Board and employees, 366 shares were forfeited prior to the vesting date.
	On July 6, 2006, the Company’s Board of Directors identified 60 key persons (including the Company’s CEO and other 8 officers and independent members of the Board) to whom shares of restricted common stock of the Company (the “Shares”) were granted. For this purpose 106,666 new shares were granted, out of which 73,750 shares were granted to the Company’s CEO, 22,666 shares to 8 officers and independent members of the Board and the remaining 10,250 shares were granted to 51 employees. From the total of 32,916 shares granted to officers, independent members of the Board and employees, 916 shares were forfeited prior to the vesting date.
	The “Restricted Stock Agreements” were signed between the Company and the Participants on the respective grant dates. Under these agreements, the Participants have the right to receive dividends and the right to vote the Shares, subject to the following restrictions:

i.

Grants to Company’s CEO. The Company’s CEO shall not sell, assign, exchange, transfer, pledge, hypothecate or otherwise dispose of or encumber any of the Shares other than to a company, which is wholly owned by the Company’s CEO. The restrictions lapse on the earlier of (i) one year from the grant date or (ii) termination of the Company’s CEO employment with the Company for any reason.

 

 

F-34

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

16.	Stock Incentive Plan – (continued):

ii.

Grants to Other Participants. The Participants (officers, independent members of the Board and Company’s employees) shall not sell, assign, exchange, transfer, pledge, hypothecate or otherwise dispose of or encumber any of the Shares. The restrictions lapse on one year from the grant date conditioned upon the Participant’s continued employment with the Company from the date of the agreement (i.e. July 1, 2005, January 3, 2006, or July 6, 2006) until the date the restrictions lapse (the “restricted period”).

	As the shares granted to the Company’s CEO do not contain any future service vesting conditions, all such shares are considered vested shares on the grant date.
	On the other hand, in the event another Participant’s employment with the Company terminates for any reason before the end of the restricted period, that Participant shall forfeit all rights to all Shares that have not yet vested as of such date of termination. Dividends earned during the restricted period will not be returned to the Company, even if the unvested shares are ultimately forfeited. As these Shares granted to other Participants contain a time-based service vesting condition, such shares are considered non-vested shares on the grant date.
	On July 11, 2007, the Company granted 213,333 restricted shares pursuant to the Plan. Of the 213,333 new shares granted, 113,333 shares were granted to 6 Directors and the remaining 100,000 shares were granted to 2 officers and employees.
	The shares will vest proportionally over a period of 4 years in equal installments. The following provisions apply for the following categories: i) Executive Directors: In case of change of control or termination of employment contract shares will immediately vest, with the exception of voluntary resignation or termination of employment for cause, where the shares will be forfeited; ii) Non-executive Directors: In case of change of control or cease to be a director shares will immediately vest, with the exception of voluntary resignation or cease to be a director for cause, where the shares will be forfeited; iii) Officers and employees: In case of change of control or termination of employment shares will immediately vest, with the exception of voluntary resignation or termination of employment for cause, where the shares will be forfeited.
	The fair value of each share on the grant date was $23.97. The fair value of the non-vested shares granted amounted to $5,114 and will be recognized as compensation in the consolidated income statements over the four-year vesting period quarterly in sixteen equal installments.

 

 

F-35

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

16.	Stock Incentive Plan – (continued):
	A summary of the status of the Company’s vested and non-vested shares as of December 31, 2007 and movement during the years ended December 31, 2005, 2006 and 2007, is presented below:

 

		Number of non-vested shares				Weighted average grant date fair value per non- vested share
As at January 1, 2005			--				--
Granted			19,950			$	47.46
Forfeited			(66	)		$	47.46
As at December 31, 2005			19,884			$	47.46
Granted			47,916			$	24.78
Vested			(19,534	)		$	38.13
Forfeited			(1,300	)		$	31.92
As at December 31, 2006			46,966			$	28.62
Granted			213,333			$	23.97
Vested			(46,634	)		$	24.78
Forfeited			(332	)		$	18.69
As at December 31, 2007			213,333			$	23.97

 

		Number of vested shares
As at January 1, 2005			--
Granted			63,333
As at December 31, 2005			63,333
Granted			100,416
Non-vested shares granted in 2005, vested during 2006			19,534
As at December 31, 2006			183,283
Non-vested shares granted in 2006, vested during 2007			46,634
As at December 31, 2007			229,917

Effective January 1, 2005, the Company adopted FASB Statement 123(R), Accounting for Stock Based Compensation (“Statement 123(R)”) to account for share-based payments. As the Company did not have share-based compensation arrangements prior to the date of adoption, all share-based compensation provided to employees (and those provided to non-employee directors for their services as directors) is recognized in accordance with the provisions of Statement 123(R) and classified as Other general and administrative expenses in the consolidated income statement.

 

 

F-36

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

16.	Stock Incentive Plan – (continued):
	The fair value of each share granted on July 1, 2005, January 3, 2006, July 6, 2006 and July 11, 2007 were $47.46, $38.13, $18.69 and $23.97, respectively, which are equal to the market value of the Company’s common stock on those dates. The grant date fair values of the vested shares granted to the CEO amounted to $3,006, $1,017, $1,378 and $0, respectively and were recognized in full as compensation in the third quarter of 2005, in the first quarter of 2006 and in the third quarter of 2006, respectively, on the grant dates. The grant date fair values of the non-vested shares granted to the remaining Participants, net of forfeitures, amounted to $927, $558, $598 and $5,114, respectively and were recognized ratably as compensation in the consolidated income statements over the vesting period, of which $472, $1,315 and $935 was recognized in the years ended December 31, 2005, 2006 and 2007, respectively. As of December 31, 2007, the total unrecognized compensation cost related to non-vested share awards is $4,475, which is expected to be recognized by June 30, 2011.
	The dividends declared on shares granted under the Plan are recognized in the consolidated financial statements as a charge to retained earnings, except for the dividends declared on non-vested shares that are forfeited or expected to be forfeited before the end of the vesting period. In that case, dividends declared on such shares are recognized as additional compensation in the consolidated income statement.
	Due to the low historical employee turnover, the Company’s management assumes that none of the non-vested shares will be forfeited before the end of the vesting period.
	The amount of dividends on the granted shares, recognized as a charge to retained earnings, is presented in the following table:

Type of Shares granted	Quarterly Dividend per share	Special   Dividend per share	Total Dividends
			Paid in year ended December 31, 2005
Vested	0.63	0.75	127
Non-vested	0.63	0.75	40

 

Type of Shares granted	Quarterly Dividend per share	Special   Dividend per share	Total Dividends
			Paid in year ended December 31, 2006
Vested	0.63	22.50	2,082
Non-vested	0.63	22.50	807

No dividends were paid in the year ended December 31, 2007.

 

 

F-37

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

17.	Earnings Per Common Share:
	All shares issued (including non-vested shares issued under the Company's Incentive Plan) are the Company's common stock and have equal rights to vote and participate in dividends. However, for the purposes of calculating basic earnings per share, such non-vested shares are not considered outstanding until the time-based vesting restriction has lapsed. Furthermore, dividends declared during the year for non-vested shares are deducted from net income as reported for purposes of calculating net income available to common shareholders for the computation of basic earnings per share.
	For purposes of calculating diluted earnings per share, dividends declared during the year for non-vested shares are not deducted from net income as reported since such calculation assumes non-vested shares were fully vested from the grant date. However, the denominator of the diluted earnings per share calculation includes the incremental shares assumed issued under the treasury stock method weighted for the period the non-vested shares were outstanding.
	The components of the calculation of basic and diluted earnings per share for the years ended December 31, 2005, 2006 and 2007 are as follows:

		Year Ended December 31,
		2005				2006				2007
Net Income (loss) as reported:		$	64,921			$	(11,005	)		$	(49,076	)
Less: Dividends declared during the year for non-vested shares			(40	)			(807	)			-
Net income (loss) available to common shareholders		$	64,881			$	(11,812	)		$	(49,076	)
Weighted average common shares outstanding, basic			9,308,923				10,183,424				11,986,857
Add: Dilutive effect of non-vested shares			1,747				-				-
Weighted average common shares outstanding, diluted			9,310,670				10,183,424				11,986,857
Earnings (loss) per share, basic and diluted		$	6.97			$	(1.16	)		$	(4.09	)

 

 

F-38

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

18.	Voyage and Other Vessel Operating Expenses:
	The amounts in the accompanying consolidated statements of operations are analyzed as follows:

	Voyage Expenses		Year Ended December 31,
			2005	2006	2007
	Port charges		9,271	11,265	15,473
	Bunkers		19,893	33,937	36,867
	Commissions		7,725	10,149	7,074
	Total		36,889	55,351	59,414

	Other Vessel Operating Expenses		Year Ended December 31,
			2005	2006	2007
	Crew wages and related costs		18,119	26,919	27,721
	Insurance		6,561	7,000	6,191
	Repairs and maintenance		11,449	16,330	18,758
	Spares and consumable stores		10,992	15,668	15,177
	Taxes (Note 21)		194	165	67
	Total		47,315	66,082	67,914

	In February 2007, a ballast tanks cleaning process was performed on the Faultless. The vessel resumed operations in March 2007. The Company incurred $2,505 in expenses associated with the cleaning process, which are included in Other vessel operating and voyage expenses for the year ended December 31, 2007. These expenses have been partially offset by $1,852 of insurance recoveries.
	In December 2007, the main engine of M/T Faultless was reported to have broken down and the vessel was blacked out. Consequently, salvage operations have been performed to the vessel, cost of which approximates $3,000. As of December 31, 2007, $1,288 relating to the salvage services is included in Other vessel operating expenses.
19.	Leases:
	In January 2006, the Manager entered into an agreement to lease office space in Athens, Greece, with an unrelated party. The office is located at 1, Vasilisis Sofias & Megalou Alexandrou Street, 151 24 Maroussi, Athens, Greece. The agreement is for duration of twelve years beginning May 2006 with a lessee’s option for an extension of ten years. The monthly rent is Euro 120,000 adjusted annually for inflation increase plus 1%. Other general and administrative expenses for the years ended December 31, 2006 and 2007 include $1,272 and $2,097, respectively, of office rentals. In November 2007, the agreement was amended and the new monthly rent starting February 2008 will be Euro 116,010, with all other terms remaining unchanged. The minimum rentals payable under non-cancelable operating leases for each of the years ending December 31, 2008 through May 1, 2018 before any adjustment for inflation (approximately 3% annually) and annual increase (1%), translated using the exchange rate of $/Euro at December 31, 2007 are:

 

 

F-39

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

19.	Leases – (continued):

Year		Amount
2008		2,140
2009		2,127
2010		2,127
2011		2,127
2012		2,127
2013 and thereafter		11,344
		21,992

	In February 2007, Top Tankers (U.K) Limited entered into a lease agreement for office space in London. The agreement was for duration of 9 months ending November 2007. The monthly lease was Great Britain Pounds (“GBP”) 5,300, payable monthly in advance. In May 2007, Top Tankers (U.K) Limited entered into a new lease agreement for office space in London. The previous lease agreement was early terminated and therefore the lease was payable up to August 2007. The new lease agreement is valid from June 2007 and shall continue until either party shall give to the other one calendar month written notice. The new annual lease is Great Britain Pounds (“GBP”) 20,000, payable quarterly in advance. Other general and administrative expenses for the years ended December 31, 2005, 2006 and 2007 include $173, $175 and $129, respectively, of office rentals.
20.	Interest and Finance Costs:
	The amounts in the accompanying consolidated statements of operations are analyzed as follows:

		Year Ended December 31,
		2005				2006				2007
Interest on long-term debt (Note 11)			19,700				20,784				18,023
Less: Capitalized interest (Note 8)			-				(34	)			(2,661	)
Bank charges			568				1,158				875
Amortization and write-off of financing fees			1,407				4,534				2,081
Total			21,675				26,442				18,318

21.	Income Taxes:
	Marshall Islands, Cyprus and Liberia do not impose a tax on international shipping income. Under the laws of Marshall Islands, Cyprus and Liberia, the countries of the companies’ incorporation and vessels’ registration, the companies are subject to registration and tonnage taxes, which have been included in vessels’ operating expenses in the accompanying consolidated statements of operations.
	Pursuant to the United States Internal Revenue Code of 1986, as amended (the “Code”), U.S. source income from the international operations of ships is generally exempt from U.S. tax if the company operating the ships meets both of the following requirements, (a) the Company is organized in a foreign country that grants an equivalent exception to corporations organized in the United States and (b) either (i) more than 50% of the value of the Company’s stock is owned, directly or indirectly, by individuals who are “residents” of the Company’s country of organization or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States (50% Ownership Test) or (ii) the Company’s stock is “primarily and regularly traded on an established securities market” in its country of organization, in another country that grants an “equivalent exemption” to United States corporations, or in the United States (Publicly-Traded Test).

 

 

F-40

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

21.	Income Taxes – (continued):
	Under the regulations, a Company’s stock will be considered to be “regularly traded” on an established securities market if (i) one or more classes of its stock representing more than 50 percent of its outstanding shares, by voting power and value, is listed on the market and is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year; and (ii) the aggregate number of shares of stock traded during the taxable year is at least 10% of the average number of shares of the stock outstanding during the taxable year.
	The Marshall Islands, Cyprus and Liberia, the jurisdictions where the Company and its ship-owning subsidiaries are incorporated, grant an "equivalent exemption" to United States corporations. Therefore, the Company is exempt from United States federal income taxation with respect to U.S.-source shipping income if either the 50% Ownership Test or the Publicly-Traded Test is met. The Company believes that for periods prior to its initial public offering in July 2004, it satisfied the 50% Ownership Test. The Company also believes that for periods subsequent to its initial public offering, it satisfies the Publicly-Traded Test on the basis that more than 50% of the value of its stock is primarily and regularly traded on the Nasdaq National Market and, therefore, the Company and its subsidiaries are entitled to exemption from U.S. federal income tax, in respect of their U.S. source shipping income.
22.	Financial Instruments:
	The principal financial assets of the Company consist of cash on hand and at banks and accounts receivable due from charterers. The principal financial liabilities of the Company consist of long-term bank loans, accounts payable due to suppliers, interest rate swap agreements and an interest rate derivative product.

	(a)	Interest rate risk: The Company’s interest rates and long-term loan repayment terms are described in Note 11.
	(b)	Concentration of Credit risk: Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and trade accounts receivable. The Company places its temporary cash investments, consisting mostly of deposits, with high credit qualified financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions with which it places its temporary cash investments. The Company limits its credit risk with accounts receivable by performing ongoing credit evaluations of its customers’ financial condition and generally does not require collateral for its accounts receivable.
	(c)	Fair value: The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to the short-term nature of these financial instruments. The fair value of long-term bank loans discussed in Note 11 bearing interest at variable interest rates approximates the recorded value. The carrying value of the interest rate swap agreements and the interest rate derivative product represents their fair value as the fair value estimates the amount the Company would have paid, had the interest rate swap agreements and the interest rate derivative product been terminated on the balance sheet date.

 

 

F-41

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

23.	Subsequent Events:
	(a)	Sale of Vessels: i) on December 6, 2007, the Company entered into an agreement to sell the vessel M/T Noiseless to an unrelated party for a consideration of $48,000, resulting in a gain of approximately $580, which was recognized upon the delivery of the vessel to the buyer, on January 30, 2008. Following the sale of the vessel the then outstanding loan amount of $28,156 was fully repaid, ii) based on the Memorandum of Agreement dated January 31, 2008, the Company agreed to sell the vessel M/T Stainless to an unrelated party for a consideration of $46,000. On January 31, 2008 the vessel entered into a bareboat charter with the buyer until July 31, 2008 (the vessel’s delivery date), at a daily bareboat hire of $20. All bareboat hire payments made up to the vessel’s delivery date will be deducted from the purchase price. According to the terms of the bareboat charter the Company collected in advance an amount of $2,500 from the buyers as a security of their obligation to purchase the vessel, ii) on April 1, 2008, the Company entered into an agreement to sell the vessel M/V Bertram to an unrelated party for a consideration of $46,500. The vessel was delivered to its new onwers, on April 16, 2008. Following the sale of the vessel the then outstanding loan amount of $26,535 was fully repaid.
	(b)	Vessels acquisitions: i) on February 1, 2008, the Company took delivery of the drybulk vessel Voc Gallant. The acquisition cost of $54,500 was partially financed through long-term bank loan of $33,232, maturing in February 2015. The loan which was originally amounted $35,078 and was part of the $95,000 loan discussed in Note 11(f) and (g), was partially prepaid by $1,846. The credit facility was subject to a 1% arrangement fee paid in 2007. The credit facility bears interest at LIBOR plus a margin. The vessel will be chartered back to sellers for a period of eighteen months at a daily net rate of $25,650 on bareboat basis, ii) on March 7, 2008, the Company took delivery of the drybulk vessel Pepito. The acquisition cost of $74,000 was partially financed through long-term bank loan of $50,000, maturing in March 2015 (Note 11 (a)), iii) on May 1, 2008, the Company took delivery of the drybulk vessel Astrale. The acquisition cost of $74,000 was partially financed through long-term bank loan of $48,000, maturing in April 2013, for which the Company paid an arrangement fee of $600.
	(c)	Restricted shares: On January 22, 2008, the Company granted 197,560 restricted shares pursuant to the Company’s Incentive Plan (“the Plan”), discussed in Note 16. All the 197,560 new shares were granted to 2 officers and employees. The shares will vest proportionally over a period of 4 years in equal installments with the following provisions: In case of change of control or termination of employment shares will immediately vest, with the exception of voluntary resignation or termination of employment for cause, where the shares will be forfeited. The fair value of each share on the grant date was $6.69. The fair value of the non-vested shares granted amounted to $1,322 and will be recognized as compensation in the consolidated income statements over the four-year vesting period.
	(d)	Advances for vessels under construction: In March and May 2008, the Company paid the second installment of $28,488, for the construction of four vessels, of which $20,000 was drawn down from the revolving credit facility discussed in Note 11(a). Following the first drawdown in March 2008, the Company restructured the revolving credit facility by amending the revolver limit from $65,000 to $30,000. The amended revolving credit facility is currently payable in twenty equal quarterly installments, starting on November 30, 2008, plus a balloon installment payable together with the last installment.
	(e)	Bareboat charter termination: Based on the Memorandum of Agreement dated March 6, 2008, the owner and lessor of M/T Faultless agreed to sell the vessel to a third party. The Company and the lessor mutually agreed to terminate the bareboat charter. The Company had sold the vessel in 2006 in a sale and lease-back transaction. The termination of the bareboat charter became effective upon the vessel’s delivery to its new owners, on March 31, 2008.

 

 

F-42

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TOP SHIPS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2007

(Expressed in thousands of United States Dollars – except share and per share data, unless otherwise stated)

23.	Subsequent Events – (continued):
	(f)	Short-term loan: In March 2008, the Company entered into an agreement with a finance firm to borrow the amount of Euros 3,280,000 for a period of three months for working capital purposes. The loan bears interest at Euribor plus 700 basis points and was repayable in either cash or stock of the Company.  In April 2008, this loan was repaid by the issuance of unregistered common shares, as part of the private placement discussed in Note 23(g).
	(g)	Private placement: In April 2008, the Company privately placed 7.3 million common unregistered shares for aggregate proceeds of approximately $51,000 with various investors. The 7.3 million shares were sold for $7.00 per share, which represents a discount of 15.5 percent based on the closing share price of $8.28 on April 23, 2008. The facility under (f) above was repaid with unregistered shares of the Company, and is included in this private placement. Following the private placement, the Company prepaid in May 2008, $15,500 from the bridge loan discussed below.
	(h)	Bridge loan maturity extension: In April 2008, the Company agreed to extend the maturity of its $31,000 bridge loan until September 30, 2008, for which the Company paid a fee of $450.
	(i)	Interest rate swap: In March 2008, the Company entered into an interest rate swap agreement for a notional amortizing amount of $26,239 for a five year period. Based on this agreement, the Company will pay a fixed rate of the three-month U.S. Dollar Libor multiplied with the factor 0.95 per annum if the three month U.S. Dollar Libor is between 1.50% and 4.84%. In case the U.S. Dollar Libor is lower than 1.50% or higher 4.84%, the Company will pay a fixed rate of 4.60% per annum for that period.

 

 

F-43

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ITEM 19.                      EXHIBITS

Number	Description of Exhibits
1.1	Amended and Restated Articles of Incorporation of TOP SHIPS INC. (1)
1.2	Amendment to Amended and Restated Articles of Incorporation of TOP SHIPS INC. (2)
1.3	Amended and Restated By-Laws of the Company, as adopted on February 28, 2007 (3)
4.1	TOP SHIPS INC. 2005 Stock Option Plan (4)
4.2	Loan Agreement between the Company and the Royal Bank of Scotland plc dated August 10, 2004 and supplemented September 30, 2004 (5)
4.3	Loan Agreement between the Company and DVB Bank dated March 10, 2005(6).
4.4	Credit Facility between the Company and the Royal Bank of Scotland dated November 1, 2005 (7)
4.4.1	Supplement to credit facility between the Company and the Royal Bank of Scotland dated December 21, 2006 (8)
4.5	Credit Facility between the Company and HSH NORDBANK, AG, dated November 7, 2005(9)
4.6	Sales Agreement between the Company and Cantor Fitzgerald & Co. dated April 13, 2006(10)
4.7	Shareholder Rights Agreement with Computershare Investor Services, LLC, as Rights Agent as of August 19, 2005 (11)
4.8	Memorandum of Agreement by and between Kisavos Shipping Company Limited and Komarf Hope 27 Shipping Company dated March 9, 2006 relating to the purchase and sale of the M/T Priceless (12)
4.9	Charter party by and between Kisavos Shipping Company Limited and Komarf Hope 27  Shipping Company in relation to the M/T Priceless, dated March 9, 2006 (13)
4.10	Quadripartite Agreement by and among the Company, Kisavos Shipping Company Limited, Komarf Hope 27 Shipping Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Priceless (14)
4.11	Guarantee given by the Company to Komarf Hope 27 Shipping Co. dated March 15, 2006 in connection with the charter party relating to the M/T Priceless (15)
4.12	Memorandum of Agreement by and between Taygetus Shipping Company Limited and Komarf Hope 28 Shipping Co. dated March 9, 2006 relating to the purchase and sale of the M/T Timeless (16)

 

 

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4.13	Charter party by and between Taygetus Shipping Company Limited and Komarf Hope 28 Shipping Co. in relation to the Timeless, dated March 9, 2006 (17)
4.14	Quadripartite Agreement by and among the Company, Taygetus Shipping Company Limited, Komarf Hope 28 Shipping Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Timeless (18)
4.15	Guarantee given by the Company to Komarf Hope 28 Shipping Co., dated March 15, 2006 in connection with the charter party relating to the M/T Timeless (19)
4.16	Memorandum of Agreement by and between Pylio Shipping Company Limited and Komarf Hope 29. Shipping Co. dated March 9, 2006 relating to the purchase and sale of the M/T Flawless (20)
4.17	Charter party by and between Pylio Shipping Company Limited and Komarf Hope 29 Shipping Co. in relation to the M/T Flawless, dated March 9, 2006 (21)
4.18	Quadripartite Agreement by and among the Company, Pylio Shipping Company Limited, Komarf Hope 29 Shipping Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Flawless  (22)
4.19	Guarantee given by the Company to Komarf Hope 29 Shipping Co., dated March 15, 2006 in connection with the charter party relating to the M/T Flawless (23)
4.20	Memorandum of Agreement by and between Vitsi Shipping Company Limited and Komarf Hope 30 Shipping Co. dated March 9, 2006 relating to the purchase and sale of the M/T Stopless (24)
4.21	Charter party by and between Vitsi Shipping Company Limited and Komarf Hope 30 Shipping Co. in relation to the Stopless, dated March 9, 2006 (25)
4.22	Quadripartite Agreement by and among the Company, Vitsi Shipping Company Limited, Komarf Hope 30 Shipping Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Stopless (26)
4.23	Guarantee given by the Company to Komarf Hope 30 Shipping Co., dated March 15, 2006 in connection with the charter party relating to the M/T Stopless (27)
4.24	Memorandum of Agreement by and between Parnasos Shipping Company Limited Partankers III AS, dated March 4, 2006 relating to the purchase and sale of the M/T Faultless (28)
4.25	Charter party by and between Parnasos Shipping Company Limited and Partankers III AS, in relation to the M/T Faultless, dated April 4, 2006 (29)
4.26	Memorandum of Agreement by and between Imitos Shipping Company Limited Partankers III AS, dated March 4, 2006 relating to the purchase and sale of the M/T Noiseless (30)
4.27	Charter party by and between Imitos Shipping Company Limited and Partankers III AS, in relation to the M/T Noiseless, dated April 4, 2006 (31)

 

 

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4.28	Memorandum of Agreement by and between Parnis Shipping Company Limited Partankers III AS, dated March 4, 2006 relating to the purchase and sale of the M/T Stainless (32)
4.29	Charter party by and between Parnis Shipping Company Limited and Partankers III AS, in relation to the M/T Stainless, dated April 4, 2006 (33)
4.30	Memorandum of Agreement by and between Mytikas Shipping Company Limited and Partankers III AS dated April 4, 2006 relating to the purchase and sale of the M/T Limitless (34)
4.31	Charter party by and between Mytkas Shipping Company Limited and Partankers III AS  in relation to the M/T Limitless, dated April 4, 2006 (35)
4.32	Memorandum of Agreement by and between Litochoro Shipping Company Limited and Partankers III AS dated April 4, 2006 relating to the purchase and sale of the M/T Endless (36)
4.33	Charter party by and between Litochoro Shipping Company Limited and Partankers III AS in relation to the M/T Endless, dated April 4, 2006 (37)
4.34	Guarantee given by the Company to Partankers III AS in connection with the charter parties relating to the M/T Faultless, M/T Stainless, M/T Noiseless, M/V Limitless, M/V Endless dated April 4, 2006 (38)
4.35	Memorandum of Agreement by and between Idi Shipping Company Limited and Kemp Maritime S.A. dated March 14, 2006 relating to the purchase and sale of the M/T Spotless (39)
4.36	Charter party by and between Idi Shipping Company Limited and Kemp Maritime S.A. in relation to the M/T Spotless, dated March 14, 2006 (40)
4.37	Quadripartite Agreement by and among the Company, Idi Shipping Company Limited, Kemp Maritime S.A. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Spotless (41)
4.38	Second Priority Quadripartite Agreement by and among the Company, Idi Shipping Company Limited, Kemp Maritime S.A. and Mass Capital Investments B.V. dated March 15, 2006 relating to the M/T Spotless (42)
4.39	Guarantee given by the Company to Kemp Maritime S.A. dated March 14, 2006 in connection with the charter party relating to the M/T Spotless (43)
4.40	Memorandum of Agreement by and between Falarko Shipping Company Limited and Tucker Navigation Co. dated March 14, 2006 relating to the purchase and sale of the M/T Doubtless (44)
4.41	Charter party by and between Falarko Shipping Company Limited and Tucker Navigation Co. in relation to the M/T Doubtless, dated March 14, 2006 (45)

 

 

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4.42	Quadripartite Agreement by and among the Company, Falarko Shipping Company Limited, Tucker Navigation Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Doubtless (46)
4.43	Second Priority Quadripartite Agreement by and among the Company, Falarko Shipping Company Limited, Tucker Navigation Co. and Mass Capital Investments B.V. dated March 15, 2006 relating to the M/T Doubtless (47)
4.44	Guarantee given by the Company to Tucker Navigation Co. dated March 14, 2006 in connection with the charter party relating to the M/T Doubtless (48)
4.45	Memorandum of Agreement by and between Pageon Shipping Company Limited and Comoros Shipping Limited dated March 14, 2006 relating to the purchase and sale of the M/T Vanguard (49)
4.46	Charter party by and between Pageon Shipping Company Limited and Comoros Shipping Limited. in relation to the M/T Vanguard, dated March 14, 2006 (50)
4.47	Quadripartite Agreement by and among the Company, Pageaon Shipping Company Limited, Comoros Shipping Limited and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Vanguard (51)
4.48	Second Priority Quadripartite Agreement by and among the Company, Pageon Shipping Company Limited, Comoros Shipping Limited and Mass Capital Investments B.V. dated March 15, 2006 relating to the M/V Vanguard (52)
4.49	Guarantee given by the Company to Comoros Shipping Limited. dated March 14, 2006 in connection with the charter party relating to the M/V Vanguard (53)
4.50	Memorandum of Agreement by and between Gramos Shipping Company Limited and Starcraft Marine Co. dated March 14, 2006 relating to the purchase and sale of the M/T Faithful (54)
4.51	Charter party by and between Gramos Shipping Company Limited and Starcraft Marine Co. in relation to the M/T Faithful, dated March 14, 2006 (55)
4.52	Quadripartite Agreement by and among the Company, Gramos Shipping Company Limited, Starcraft Marine Co. and Fortis Bank (Nederland) N.V. dated March 15, 2006 relating to the M/T Faithful (56)
4.53	Second Priority Quadripartite Agreement by and among the Company, Gramos Shipping Company Limited Starcraft Marine Co. and Mass Capital Investments B.V. dated March 15, 2006 relating to the M/T Faithful (57)
4.54	Guarantee given by the Company to Starcraft Marine Co. dated March 14, 2006 in connection with the charter party relating to the M/T Faithful (58)
4.55	Supplemental Agreement relating to the Memorandum of Agreement dated March 14, 2006 relating to the M/V Spotless made by and among Idi Shipping Company Limited, Kemp Maritime S.A. and ICON Spotless LLC dated June 16, 2006 (59)

 

 

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4.56	Addendum No. 1 to charter party by and between Idi Shipping Company Limited and Kemp Maritime S.A. in relation to the M.V. Spotless, dated March 14, 2006 dated June 16, 2006 (60)
4.57	Quadripartite Agreement by and among the Company, Idi Shipping Company ICON Spotless LLC and Fortis Bank (Nederland) N.V. dated June 16, 2006 relating to the M/T Spotless (61)
4.58	Guarantee given by the Company to ICON Spotless LLC dated June 13, 2006 in connection with the charter party relating to the M/T Spotless (62)
4.59	Supplemental Agreement relating to the Memorandum of Agreement dated March 14, 2006 relating to the M/V Doubtless made by and among Falarko Shipping Company Limited, Tucker Navigation Co. and ICON Spotless LLC dated June 16, 2006 (63)
4.60	Addendum No. 1 to charter party by and between Falarko Shipping Company Limited and Tucker Navigation Co. in relation to the M.V. Doubtless, dated March 14, 2006 dated June 16, 2006 (64)
4.61	Quadripartite Agreement by and among the Company, Falarko Shipping Company ICON Spotless LLC and Fortis Bank (Nederland) N.V. dated June 16, 2006 relating to the M/T Doubtless (65)
4.62	Guarantee given by the Company to ICON Spotless LLC dated June 13, 2006 in connection with the charter party relating to the M/T Doubtless (66)
4.63	Supplemental Agreement relating to the Memorandum of Agreement dated March 14, 2006 relating to the M/V Vanguard made by and among Pageon Shipping Company Limited, Comoros Shipping Limited and Isomar Marine Company Limited dated June 16, 2006 (67)
4.64	Addendum No. 1 to charter party by and between Pageon Shipping Company Limited and Comoros Shipping Limited in relation to the M.V. Vanguard, dated March 14, 2006 dated June 16, 2006 (68)
4.65	Quadripartite Agreement by and among the Company, Pageon Shipping Company Isomar Marine Company Limited and Fortis Bank (Nederland) N.V. dated June 16, 2006 relating to the M/T Doubtless (69)
4.66	Guarantee given by the Company to Isomar Shipping Company Limited dated June 13, 2006 in connection with the charter party relating to the M/T Vanguard (70)
4.67	Supplemental Agreement relating to the Memorandum of Agreement dated March 14, 2006 relating to the M/V Faithful made by and among Gramos Shipping Company Limited, Starcraft Marine Co. and ICON Faithful LLC dated June 16, 2006 (71)
4.68	Addendum No. 1 to charter party by and between Gramos Shipping Company Limited and Starcraft Marine Co. in relation to the M.V. Faithful, dated March 14, 2006 dated June 16, 2006 (72)
4.69	Quadripartite Agreement by and among the Company, Gramos Shipping Company ICON Faithful LLC and Fortis Bank (Nederland) N.V. dated June 16, 2006 relating to the M/T Faithful (73)

 

 

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4.70	Guarantee given by the Company to ICON Faithful LLC dated June 13, 2006 in connection with the charter party relating to the M/T Faithful (74)
4.71	Sales Agreement with Deutsche Bank Securities relating to issuing and selling an agreed upon number of shares of common stock through Deutsch Bank Securities. (75)
8.1	List of subsidiaries of the Company
12.1	Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Executive Officer
12.2	Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Financial Officer
13.1	Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1	Consent of Independent Registered Public Accounting Firm
15.2	Consent of Independent Registered Public Accounting Firm

_________________________

 

(1)	Incorporated by reference from Exhibit 3.1 to the company’s Registration Statement on Form F-1, filed on October 18, 2004 (File No. 333-119806).

 

(2)	Incorporated by reference from Exhibit 1.2 to the company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(3)	Incorporated by reference from our 6-K filed on March 9, 2007

 

(4)	Incorporated by reference from Exhibit 4.1 to the Company’s Annual Report on Form 20-F, filed on April 13, 2006 (File No. 000-50859)

 

(5)	Incorporated by reference from Exhibit 10.1 to the Company's Registration Statement on Form F-1, filed on November 12, 2004 (File No. 333-119806).

 

(6)	Incorporated by reference from Exhibit 4.3 to the Company’s Annual Report on Form 20-F, filed on April 13, 2006 (File No. 000-50859)

 

(7)	Incorporated by reference from Exhibit 4.4 to the Company’s Annual Report on Form 20-F, filed on April 13, 2006 (File No. 000-50859)

 

(8)	Incorporated by reference from Exhibit 4.4.1 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(9)	Incorporated by reference from Exhibit 4.5 to the Company’s Annual Report on Form 20-F, filed on April 13, 2006 (File No. 000-50859)

 

(10)	Incorporated by reference from Exhibit 4.6 to the Company’s Annual Report on Form 20-F, filed on April 13, 2006 (File No. 000-50859)

 

 

 

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(11)	Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8A (File No. 000-50859).

 

(12)	Incorporated by reference from Exhibit 4.8 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(13)	Incorporated by reference from Exhibit 4.9 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(14)	Incorporated by reference from Exhibit 4.10 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(15)	Incorporated by reference from Exhibit 4.11 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(16)	Incorporated by reference from Exhibit 4.12 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(17)	Incorporated by reference from Exhibit 4.13 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(18)	Incorporated by reference from Exhibit 4.14 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(19)	Incorporated by reference from Exhibit 4.15 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(20)	Incorporated by reference from Exhibit 4.16 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(21)	Incorporated by reference from Exhibit 4.17 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(22)	Incorporated by reference from Exhibit 4.18 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(23)	Incorporated by reference from Exhibit 4.19 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(24)	Incorporated by reference from Exhibit 4.20 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(25)	Incorporated by reference from Exhibit 4.21 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(26)	Incorporated by reference from Exhibit 4.22 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(27)	Incorporated by reference from Exhibit 4.23 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

 

 

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(28)	Incorporated by reference from Exhibit 4.24 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(29)	Incorporated by reference from Exhibit 4.25 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(30)	Incorporated by reference from Exhibit 4.26 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(31)	Incorporated by reference from Exhibit 4.27 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(32)	Incorporated by reference from Exhibit 4.28 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(33)	Incorporated by reference from Exhibit 4.29 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(34)	Incorporated by reference from Exhibit 4.30 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(35)	Incorporated by reference from Exhibit 4.31 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(36)	Incorporated by reference from Exhibit 4.32 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(37)	Incorporated by reference from Exhibit 4.33 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(38)	Incorporated by reference from Exhibit 4.34 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(39)	Incorporated by reference from Exhibit 4.35 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(40)	Incorporated by reference from Exhibit 4.36 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(41)	Incorporated by reference from Exhibit 4.37 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(42)	Incorporated by reference from Exhibit 4.38 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(43)	Incorporated by reference from Exhibit 4.39 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(44)	Incorporated by reference from Exhibit 4.40 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

 

 

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(45)	Incorporated by reference from Exhibit 4.41 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(46)	Incorporated by reference from Exhibit 4.42 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(47)	Incorporated by reference from Exhibit 4.43 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(48)	Incorporated by reference from Exhibit 4.44 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(49)	Incorporated by reference from Exhibit 4.45 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(50)	Incorporated by reference from Exhibit 4.46 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(51)	Incorporated by reference from Exhibit 4.47 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(52)	Incorporated by reference from Exhibit 4.48 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(53)	Incorporated by reference from Exhibit 4.49 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(54)	Incorporated by reference from Exhibit 4.50 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(55)	Incorporated by reference from Exhibit 4.51 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(56)	Incorporated by reference from Exhibit 4.52 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(57)	Incorporated by reference from Exhibit 4.53 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(58)	Incorporated by reference from Exhibit 4.54 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(59)	Incorporated by reference from Exhibit 4.55 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(60)	Incorporated by reference from Exhibit 4.56 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(61)	Incorporated by reference from Exhibit 4.57 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

 

 

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(62)	Incorporated by reference from Exhibit 4.58 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(63)	Incorporated by reference from Exhibit 4.59 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(64)	Incorporated by reference from Exhibit 4.60 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(65)	Incorporated by reference from Exhibit 4.61 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(66)	Incorporated by reference from Exhibit 4.62 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(67)	Incorporated by reference from Exhibit 4.63 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(68)	Incorporated by reference from Exhibit 4.64 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(69)	Incorporated by reference from Exhibit 4.65 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(70)	Incorporated by reference from Exhibit 4.66 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(71)	Incorporated by reference from Exhibit 4.67 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(72)	Incorporated by reference from Exhibit 4.68 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(73)	Incorporated by reference from Exhibit 4.69 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(74)	Incorporated by reference from Exhibit 4.70 to the Company’s Annual Report on Form 20-F, filed on April 20, 2007 (File No. 000-50859)

 

(75)	Incorporated by reference from our 6-K filed on June 13, 2007

 

 

 

 

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SIGNATURES

 

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration statement on its behalf.

 

			TOP SHIPS INC.
			By:	/s/  Evangelos Pistiolis
				Name: Evangelos Pistiolis Title:   Chief Executive Officer
May 21, 2008