United states

F-17

DIANA SHIPPING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

(Expressed in thousands of U.S. Dollars – except share, per share data and scrap rates, unless otherwise stated)

3.	Investment in Diana Containerships Inc.

On January 18, 2011, the Company, which owned 54.6% of the share capital of Diana Containerships, spun off 2,667,015 shares, or 80% of its ownership in Diana Containerships, through a distribution of shares to its stockholders, recording a dividend of $36,981. Diana Containerships was de-consolidated from the Company's consolidated financial statements as its ownership decreased to about 11%. On June 15, 2011, in a public offering of Diana Containerships, the Company invested an additional amount of $20,000 in a concurrent private offering; however, the Company's ownership percentage has been diluted since then, as a result of increases in the issued share capital of Diana Containerships. Since the spin off, the Company, on the basis of the significant influence exercised over Diana Containerships through its shareholding, its common executive Board, until March 1, 2013 through Diana Shipping Services and since May 2013 through a loan agreement (Note 4(e)), accounts for its investment in Diana Containerships under the equity method according to ASC 323 "Investments – Equity Method and Joint Ventures".

As at December 31, 2013 and 2012, the Company owned 9.51% and 10.4%, respectively, of the share capital of Diana Containerships Inc., and its investment of $15,640 for 2013 and $24,734 for 2012 is separately reflected in Investment in Diana Containerships Inc., in the accompanying consolidated balance sheets. As at December 31, 2013, the market value of the investment was $13,501 based on Diana Containerships closing price on Nasdaq of $4.05.
For 2013, 2012, and 2011, the investment in Diana Containerships resulted in a loss of $6,094, $1,773, and a gain of $1,207, respectively, which are separately presented in Gain/(loss) from investment in Diana Containerships Inc. in the accompanying consolidated statements of operations. Also during 2013, 2012, and 2011, the Company received dividends from Diana Containerships amounting to $4,000, $2,835, and $100, respectively. In addition, at December 31, 2013 and 2012, dividends declared but not received of $0 and $1,000, respectively, are included in Prepaid expenses and other assets in the respective accompanying consolidated balance sheets.

4.	Transactions with Related Parties

(a)

Altair Travel Agency S.A. ("Altair"): The Company uses the services of an affiliated travel agent, Altair, which is controlled by the Company's CEO and Chairman. Travel expenses for 2013, 2012, and 2011, amounted to $2,640, $2,957, and $1,799, respectively, and are included in Vessels, Advances for vessels under construction and acquisitions and other vessel costs, Due from related parties, Vessel operating expenses and General and administrative expenses in the accompanying consolidated financial statements. At December 31, 2013 and 2012, an amount of $196 and $192, respectively, was payable to Altair and is included in Due to related parties in the accompanying consolidated balance sheets.

(b)

Diana Containerships Inc. ("Diana Containerships"): Until February 28, 2013, DSS received from Diana Containerships management fees of $15 per month for each vessel in operation and $20 per month for each laid-up vessel, 1% commissions on the gross hire and freight earned by each vessel and $10 per month for administrative fees pursuant to management and administrative services agreements between Diana Containerships, its vessel owning companies and DSS, which were terminated on March 1, 2013. For 2013, 2012, and 2011, revenues derived from the agreements with Diana Containerships amounted to $447, $2,447, and $1,117, respectively, and they are separately presented as Other revenues in the accompanying consolidated statements of operations. As at December 31, 2013 and 2012, there was an amount of $0 and $613, respectively, due from Diana Containerships and its vessels, relating to these management agreements, and is included in Due from related parties in the related accompanying consolidated balance sheet.

F-18

DIANA SHIPPING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

(Expressed in thousands of U.S. Dollars – except share, per share data and scrap rates, unless otherwise stated)

On May 20, 2013, the Company's Independent Committee of the Board of Directors and the Board of Directors approved to provide to Eluk Shipping Company Inc., a subsidiary of Diana Containerships, an unsecured loan of up to $50,000 to be used for general corporate purposes and working capital, which was drawn on August 20, 2013. The loan matures on the fourth anniversary of the draw down date, or on August 20, 2017, bears interest at LIBOR plus a margin of 5% per annum. The loan also bears a back-end fee equal to 1.25% per annum on the outstanding amount, receivable on the repayment date of such amount. The unsecured loan is guaranteed by Diana Containerships, and Diana Containerships and its subsidiaries may not incur additional indebtedness during the term of the loan without the prior consent of the Company.
As at December 31, 2013, there was an amount of $86 of interest and $50,233 of loan and fees due from Diana Containerships, separately presented in Due from related parties, current and non-current, respectively, in the related accompanying consolidated balance sheet.
For the period from the drawdown of the loan on August 20, 2013 to December 31, 2013, income from interest and fees amounted to $1,196 and is included in Interest and other income in the 2013 consolidated statement of operations.

(c)

Diana Enterprises Inc. ("Diana Enterprises"): Diana Enterprises is a company controlled by the Company's CEO and Chairman, and has entered into an agreement with DSS to provide brokerage services through DSS to DSI for an annual fee of $2,384 up to March 1, 2013 when the agreement was terminated and a monthly fee of $208 effective from March 1, 2013 until March 31, 2014, payable quarterly in advance. For 2013, 2012, and 2011, brokerage fees amounted to $2,481, $2,384 and $1,704, respectively, and are included in General and administrative expenses in the accompanying consolidated statements of operations. At December 31, 2013, there was an amount of $25 due to Diana Enterprises included in Due to related parties, in the accompanying balance sheet, while at December 31, 2012 there was no amount due to or from Diana Enterprises. Until March 1, 2013, DSS had an agreement with Diana Enterprises to provide brokerage services to Diana Containerships, which was terminated when DSS ceased from being the management company of the Diana Containerships' group.

5. Advances for Vessels under Construction and Acquisitions and Other Vessel Costs
The amounts in the accompanying consolidated balance sheets include payments to sellers of vessels or, in the case of vessels under construction, to the shipyards and other costs as analyzed below:

		December 31, 2013				December 31, 2012
Pre-delivery installments		$	37,810			$	8,700
Advances for vessel acquisitions			-				2,650
Capitalized interest and finance costs			624				100
Other related costs			428				52
Total		$	38,862			$	11,502

F-19

DIANA SHIPPING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

(Expressed in thousands of U.S. Dollars – except share, per share data and scrap rates, unless otherwise stated)

The movement of the account during 2013 and 2012 was as follows:

		December 31, 2013				December 31, 2012
Beginning balance		$	11,502			$	63,440
- Advances for vessels under construction and other vessel costs			30,053				68,549
- Advances for vessel acquisitions and other vessel costs			23,983				31,827
- Transferred to vessel cost (Note 6)			(26,676	)			(152,314	)
Ending balance		$	38,862			$	11,502