UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 20-F
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(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
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Commission file number -
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EUROSEAS LTD.
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(Exact name of Registrant as specified in its charter)
Euroseas Ltd.
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(Translation of Registrant's name into English)
Marshall Islands
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(Jurisdiction of incorporation or organization)
Aethrion Center, 40 Ag. Konstantinou Street, 151 24 Maroussi Greece
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common shares, $0.01 par value OTCBB
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
Common shares, $0.01 par value
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 36,781,159
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined by Rule 405 of the Securities Act.
[ ] Yes [X] No
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
[ ] Yes [X] No
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One)
Large accelerated filer Accelerated filer Non-accelerated filer
[ ] [ ] [X]
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Sections 12, 13 or 15(d) of the Securities Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court
[ ] Yes [ ] No
TABLE OF CONTENTS
Page
Forward-Looking Statements...................................................5
Part I
Item 1. Identity of Directors, Senior Management and Advisers............6
Item 2. Offer Statistics and Expected Timetable..........................6
Item 3. Key Information..................................................6
Item 4. Information on the Company......................................22
Item 4A. Unresolved Staff Comments.......................................30
Item 5. Operating and Financial Review and Prospects....................31
Item 6. Directors, Senior Management and Employees......................41
Item 7. Major Shareholders and Related Party Transactions...............46
Item 8. Financial information...........................................48
Item 9. The Offer and Listing...........................................50
Item 10. Additional Information..........................................51
Item 11. Quantitative and Qualitative Disclosures about Market
Risk......................................................58
Item 12. Description of Securities Other than Equity Securities..........59
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................59
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.......................................59
Item 15. Controls and Procedures.........................................59
Item 16A Audit Committee Financial Expert................................59
Item 16B Code of Ethics..................................................59
Item 16C Principal Accountant Fees and Services..........................59
Item 16D Exemptions from the Listing Standards for Audit
Committees................................................60
Item 16E Purchase of Equity Securities by the Issuer and
Affiliated Purchasers.....................................60
Part III
Item 17. Financial Statements............................................60
Item 18. Financial Statements............................................60
Item 19. Exhibits........................................................60
FORWARD-LOOKING STATEMENTS
Euroseas Ltd., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements made by us
or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe", "except," "anticipate," "intends," "estimate," "forecast," "project,"
"plan," "potential," "will," "may," "should," "expect" and similar expressions
identify forward-looking statements.
Please note in this annual report, "we," "us," "our," "Euroseas" and "the
Company," all refer to Euroseas Ltd. and its subsidiaries.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions, including fluctuations in charter hire rates and
vessel values, changes in demand in the drybulk shipping industry, changes in
the Company's operating expenses, including bunker prices, drydocking and
insurance costs, changes in governmental rules and regulations or actions taken
by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential
disruption of shipping routes due to accidents or political events, and other
important factors described from time to time in the reports filed by the
Company with the Securities and Exchange Commission (the "SEC").
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The following information shows selected historical financial data for
Euroseas. We derived this information from our audited financial statements for
the years ended December 31, 2002, 2003, 2004 and 2005 included in this annual
report. The information is only a summary and should be read in conjunction with
our historical financial statements and related notes, and our Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein. The historical results included below and elsewhere
in this annual report are not indicative of our future performance.
See next page for table of Euroseas Ltd. - Historical Selected Financials.
Euroseas Ltd. - Summary Historical Financials (1)
Year Ended December 31,
2002 2003 2004 2005
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(All amounts in U.S. dollars)
Voyage Revenues 15,291,761 25,951,023 45,718,006 44,523,401
Commissions (420,959) (906,017) (2,215,197) (2,388,349)
Voyage Expenses 531,936 436,935 370,345 670,551
Vessel Operating Expenses 7,164,271 8,775,730 8,906,252 8,610,279
Management Fees 1,469,690 1,722,800 1,972,252 1,911,856
Amortization and Depreciation (2) 4,053,049 4,757,933 3,461,678 4,208,252
Net Loss (Gain) on Sale of Vessel (2,315,477)
Other Income
Interest & Finance Cost (799,970) (793,257) (708,284) (1,495,871)
Derivative Gain (Loss) 27,029 (100,029)
Foreign Exchange Gain (Loss) 2,849 (690) (1,808) 538
Interest Income 6,238 36,384 187,069 460,457
Other Income (Expenses), Net (790,883) (757,563) (495,994) (1,134,905)
Equity In Earnings (Losses) 30,655 (167,433)
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Net Income for Period 891,628 8,426,612 30,611,765 25,178,454
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Balance Sheet Data 3,192,345 9,409,339 16,461,159 25,350,707
Current Assets
Vessels, Net Book Value 45,254,226 41,096,067 34,171,164 52,334,897
Deferred Assets 596,262 929,757 2,205,178 1,855,829
Investment in Associate 1,216,289 22,856
Current Liabilities including current portion of
Long Term Debt 10,878,488 8,481,773 13,764,846 18,414,877
Long Term Debt, including current portion 23,845,000 20,595,000 13,990,000 48,560,000
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Total Shareholders' Equity 21,285,634 27,486,246 31,112,655 26,996,556
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Other Financial Data
Net Cash provided by Operating activities
5,631,343 10,956,132 34,208,693 20,594,782
Net cash paid to (received from) related party (177,169) 482,778 (3,541,236) 7,638,780
Net Cash from investing activities (17,036,079) 214,832 6,756,242 (21,833,616)
Net Cash used in financing activities 12,247,355 (4,778,000) (33,567,500) 6,188,653
Earnings per share, basic and diluted 0.030 0.283 1.029 0.781
Cash Dividends / Return of Capital, declared
per common share 0.023 0.040 0.906 1.455
Weighted average number of shares
outstanding during period 29,754,166 29,754,166 29,754,166 32,218,427
Cash paid for common dividend / return of
capital, declared 687,500 1,200,000 26,962,500 46,875,223 (3)
Fleet Data (4)
Number of vessels 6.82 8.00 7.31 7.10
Calendar days 2490 2920 2677 2591
Available days 2448 2867 2554 2546
Voyage days 2440 2846 2542 2508
Utilization Rate (percent) 99.7% 99.3% 99.5% 98.5%
(In U.S. per day per vessel)
Average TCE rate 6,049 8,965 17,839 17,487
Operating Cost 2,877 3,005 3,327 3,322
Management Fee 590 590 737 738
G&A Expenses 0 0 0 162
Total Operating Expenses 3,467 3,595 4,064 4,222
(1) We have not included financial data for the year ended 2001 since we were
only formed in May 2005 and incurred significant expense in the preparation of
our consolidated financial statements for 2002, 2003, 2004 and 2005 in
connection with the filing of registration statements with the SEC for our
public offering. We believe that it would constitute "unreasonable effort or
expense" for us to include 2001 financials. The Company's predecessors (which
are the separate ship-owning entities that became wholly-owned by the Company
subsequent to its formation) prepared financial statements for the year ended
December 31, 2001 on a basis different from the financial statements included in
this annual report and the effort and cost involved in converting such financial
statements into a basis similar to those financial statements included herein
would be unreasonably burdensome.
(2) In 2004, the estimated scrap value of the vessels was increased from $170 to
$300 per light ton to better reflect market price developments in the scrap
metal market. The effect of this change in estimate was to reduce 2004
depreciation expense by $1,400,010 and increase 2004 net income by the same
amount. In addition, in 2004, the estimated useful life of the vessel m/v Ariel
was extended from 28 years to 30 years since the vessel performed drydocking in
the current year and it is not expected to be sold until year 2007. The m/v
Widar was sold in April 2004. Depreciation expenses for m/v Widar for the year
ended December 31, 2004 amounted to $136,384 compared to $409,149 in 2003.
(3) This amount reflects a dividend in the amount of $30,175,223 and a return of
capital in the amount of $16,700,000. The total payment to shareholders made in
2005 is in excess of previously retained earnings because the Company decided to
distribute to its original shareholders in advance of going public most of the
profits relating to the Company's operations up to that time and to recapitalize
the Company. This one-time dividend cannot be considered indicative of future
dividend payments and the Company refers you to the other sections in this
annual report for a clearer understanding of the Company's dividend policy.
(4) For the definition of calendar days, available days, voyage days and
utlilization rate see Item 5A-Operating Results.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Any investment in our stock involves a high degree of risk. You should
consider carefully the following factors, as well as the other information set
forth in this annual report, before making an investment in our common stock.
Some of the following risks relate principally to the industry in which we
operate and our business in general. Other risks relate to the securities market
for and ownership of our common stock. Any of the risk factors could
significantly and negatively affect our business, financial condition, operating
results and common stock price. The following risk factors describe the material
risks that are presently known to us.
Risk Factors Relating To Our Common Stock
There may not be a liquid market for our shares, which may cause our shares
to trade at lower prices and make it difficult to sell your shares.
Although our shares trade on the Over The Counter Bulletin Board, or OTCBB,
the trading volume is low. We cannot assure you that an active trading market
for our shares will develop or be sustained. We cannot predict at this time how
actively our shares will trade in the public market or whether the price of our
shares in the public market will reflect our actual financial performance.
The price of our shares may be volatile and less than you originally paid
for such shares.
The price of our shares may be volatile, and may fluctuate due to factors
such as:
o actual or anticipated fluctuations in quarterly and annual results;
o mergers and strategic alliances in the shipping industry;
o market conditions in the industry;
o changes in government regulation;
o fluctuations in our quarterly revenues and earnings and those of our
publicly held competitors;
o shortfalls in our operating results from levels forecasted by
securities analysts;
o announcements concerning us or our competitors; and
o the general state of the securities markets.
The international drybulk, containership and multipurpose shipping industries
have been highly unpredictable and volatile. The market for common shares of
companies in these industries may be equally volatile. Our shares may trade at
prices lower than you originally paid for such shares.
Our Articles of Incorporation and Bylaws contain anti-takeover provisions
that may discourage, delay or prevent (1) our merger or acquisition and/or (2)
the removal of incumbent directors and officers.
Our current Articles of Incorporation and Bylaws contain certain
anti-takeover provisions. These provisions include blank check preferred stock,
the prohibition of cumulative voting in the election of directors, a classified
board of directors, advance written notice for shareholder nominations for
directors, removal of directors only for cause, advance written notice of
shareholder proposals for the removal of directors and limitations on action by
shareholders. These provisions, either individually or in the aggregate, may
discourage, delay or prevent (1) our merger or acquisition 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 directors and officers.
Future sales of our common stock could cause the market price of our common
stock to decline.
Sales of a substantial number of shares of our common stock in the public
market, or the perception that these sales could occur, may depress the market
price for our common stock. These sales could also impair our ability to raise
additional capital through the sale of our equity securities in the future.
Pursuant to our F-1 registration statement, we registered for resale 7,026,993
shares of common stock, 1,756,743 shares of our common stock issuable upon the
exercise of warrants and 818,604 shares of our common stock issued to certain
affiliates of Cove Apparel, Inc., or Cove, in connection with the merger of Cove
with our wholly-owned subsidiary, Euroseas Acquisition Company Inc.
We have entered into a registration rights agreement with Friends
Investment Company Inc. ("Friends"), our largest stockholder, pursuant to which
we have granted Friends the right to require us to register under the Securities
Act of 1933, as amended, or the Securities Act, shares of our common stock held
by it. Under the registration rights agreement, Friends has the right to request
that we register the sale of shares held by it on its behalf and may require us
to make available shelf registration statements permitting sales of shares into
the market from time to time over an extended period. In addition, Friends has
the ability to exercise certain piggyback registration rights in connection with
registered offerings requested by stockholders or initiated by us. Registration
of such shares under the Securities Act would, except for shares purchased by
affiliates, result in such shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of such
registration. In addition, shares not registered pursuant to the registration
rights agreement may be resold pursuant to an exemption from the registration
requirements of the Securities Act, including the exemptions provided by Rule
144 and Regulation S under the Securities Act.
Industry Risk Factors
The cyclical nature of the shipping industry may lead to volatile changes
in freight rates which may reduce our revenues and net income.
We are an independent shipping company that operates in the drybulk,
containership and multipurpose shipping markets. Our profitability is dependent
upon the freight rates we are able to charge. The supply of and demand for
shipping capacity strongly influences freight rates. The demand for shipping
capacity is determined primarily by the demand for the type of commodities
carried and the distance that those commodities must be moved by sea. The demand
for commodities is affected by, among other things, world and regional economic
and political conditions (including developments in international trade,
fluctuations in industrial and agricultural production and armed conflicts),
environmental concerns, weather patterns, and changes in seaborne and other
transportation costs. The size of the existing fleet in a particular market, the
number of new vessel deliveries, the scrapping of older vessels and the number
of vessels out of active service (i.e., laid-up, drydocked, awaiting repairs or
otherwise not available for hire), determines the supply of shipping capacity,
which is measured by the amount of suitable tonnage available to carry cargo.
The cyclical nature of the shipping industry may lead to volatile changes in
freight rates which may reduce our revenues and net income.
In addition to the prevailing and anticipated freight rates, factors that
affect the rate of newbuilding, scrapping and laying-up include newbuilding
prices, secondhand vessel values in relation to scrap prices, costs of bunkers
and other operating costs, costs associated with classification society surveys,
normal maintenance and insurance coverage, the efficiency and age profile of the
existing fleet in the market and government and industry regulation of maritime
transportation practices, particularly environmental protection laws and
regulations. These factors influencing the supply of and demand for shipping
capacity are outside of our control, and we cannot predict the nature, timing
and degree of changes in industry conditions. Some of these factors may have a
negative impact on our revenues and net income.
The value of our vessels may fluctuate, adversely affecting our earnings,
liquidity and causing it us breach our secured credit agreements.
The market value of our vessels can fluctuate significantly. The market
value of our vessels may increase or decrease depending on the following
factors:
o general economic and market conditions affecting the shipping
industry;
o supply of drybulk, containership and multipurpose vessels;
o demand for drybulk, containership and multipurpose vessels;
o types and sizes of vessels;
o other modes of transportation;
o cost of newbuildings;
o new regulatory requirements from governments or self-regulated
organizations; and
o prevailing level of charter rates.
As vessels grow older, they generally decline in value. Due to the cyclical
nature of the drybulk and containership and multipurpose vessel markets, if for
any reason we sell vessels at a time when prices have fallen, we could incur a
loss and our business, results of operations, cash flow, financial condition and
ability to pay dividends could be adversely affected.
Due to the fact that the market value of our vessels may fluctuate
significantly, we may incur losses when we sell vessels, which may adversely
affect our earnings. In addition, any determination that a vessel's remaining
useful life and earnings requires an impairment of its value on our financial
statements could result in a charge against our earnings and a reduction in our
shareholders' equity. Any change in the assessed value of any of our vessels
might cause a violation of the covenants of each secured credit agreement which
in turn might restrict our cash and affect our liquidity. All of our credit
agreements provide for a minimum security maintenance ratio. If the assessed
value of our vessels declines below certain thresholds, we will be deemed to
have violated these covenants and may incur penalties for breach of our credit
agreements. For example, these penalties could require us to prepay the
shortfall between the assessed value of our vessels and the value such vessels
are required to maintain pursuant to the secured credit agreement, or to provide
additional security acceptable to the lenders in an amount at least equal to the
amount of any shortfall. Further, future loans that we may agree to may include
various other covenants, in addition to the vessel-related ones, that may
ultimately depend on the assessed values of our vessels. Such covenants include,
but are not limited to, maximum fleet leverage covenants and minimum fair net
worth covenants. If for any reason we sell our vessels at a time when prices
have fallen, the sale may be less than such vessel's carrying amount on our
financial statements, and we would incur a loss and a reduction in earnings.
Although charter rates in the international shipping industry reached
historic highs recently, future profitability will be dependent on the level of
charter rates and commodity prices.
Charter rates for the international shipping industry have reached record
highs during the past year; however, recently rates have declined. We anticipate
that the future demand for our drybulk carriers, containership and multipurpose
vessels and the charter rates of the corresponding markets will be dependent
upon continued economic growth in China, India and the world economy, seasonal
and regional changes in demand, and changes to the capacity of the world fleet.
The capacity of the world fleet seems likely to increase and there can be no
assurance that economic growth will continue. Adverse economic, political,
social or other developments could also have a material adverse effect on our
business and results of operations. If the number of new ships delivered exceeds
the number of vessels being scrapped and lost, vessel capacity will increase.
For instance, given that as of the end of 2005 the capacity of the worldwide
container vessel fleet was approximately 8.1 million teu, with approximately 4.4
million teu of additional capacity on order, the growing supply of container
vessels may exceed future demand, particularly in the short term. If the supply
of vessel capacity increases but the demand for vessel capacity does not
increase correspondingly, charter rates and vessel values could materially
decline.
The factors affecting the supply and demand for vessels are outside of our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable. Some of the factors that influence demand for vessel capacity
include:
o supply and demand for drybulk and containership commodities, and
separately for containerized cargo;
o global and regional economic conditions;
o the distance drybulk and containerized commodities are to be moved by
sea;
o changes in global production and manufacturing distribution patterns
of finished goods that utilize drybulk and other containerized
commodities; and
o changes in seaborne and other transportation patterns.
Some of the factors that influence the supply of vessel capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o changes in environmental and other regulations that may limit the
useful life of vessels; and
o the number of vessels that are laid up.
An economic slowdown in the Asia Pacific region could materially reduce the
amount and/or profitability of our business.
A significant number of the port calls made by our vessels involve the
loading or discharging of raw materials and semi-finished products in ports in
the Asia Pacific region. As a result, a negative change in economic conditions
in any Asia Pacific country, but particularly in China or India, may have an
adverse effect on our business, financial position and results of operations, as
well as our future prospects. In particular, in recent years, China has been one
of the world's fastest growing economies in terms of gross domestic product. We
cannot assure you that such growth will be sustained or that the Chinese economy
will not experience contraction in the future. Moreover, any slowdown in the
economies of the United States of America, the European Union or certain Asian
countries may adversely effect economic growth in China and elsewhere. Our
business, financial position and results of operations, as well as our future
prospects, will likely be materially and adversely affected by an economic
downturn in any of these countries.
We may become dependent on spot charters in the volatile shipping markets,
which can result in decreased revenues and/or profitability.
Although most of our vessels are currently under longer term time charters,
in the future, we may have more of these vessels and/or any newly acquired
vessels on spot charters. The spot charter market is highly competitive and
rates within this market are subject to volatile fluctuations, while longer-term
time charters provide income at pre-determined rates over more extended periods
of time. If we decide to spot charter our vessels, there can be no assurance
that we will be successful in keeping all our vessels fully employed in these
short-term markets or that future spot rates will be sufficient to enable our
vessels to be operated profitably. A significant decrease in charter rates could
affect the value of our fleet and could adversely affect our profitability and
cash flows with the result that our ability to pay debt service to our lenders
and dividends to our shareholders could be impaired.
We are subject to regulation and liability under environmental laws that
could require significant expenditures and affect our cash flows and net income.
Our business and the operation of our vessels are materially affected by
government regulation in the form of international conventions, national, state
and local laws and regulations in force in the jurisdictions in which the
vessels operate, as well as in the country or countries of their registration.
Because such conventions, laws, and regulations are often revised, we cannot
predict the ultimate cost of complying with such conventions, laws and
regulations or the impact thereof on the resale prices or useful lives of our
vessels. Additional conventions, laws and regulations may be adopted which could
limit our ability to do business or increase the cost of our doing business and
which may materially adversely affect our operations. We are required by various
governmental and quasi-governmental agencies to obtain certain permits, licenses
and certificates with respect to our operations.
The operation of our vessels is affected by the requirements set forth in
the International Maritime Organization's ("IMO's") International Management
Code for the Safe Operation of Ships and Pollution Prevention ("ISM Code"). The
ISM Code requires shipowners and bareboat charterers to develop and maintain an
extensive "Safety Management System" that includes the adoption of a safety and
environmental protection policy setting forth instructions and procedures for
safe operation and describing procedures for dealing with emergencies. The
failure of a shipowner or bareboat charterer to comply with the ISM Code may
subject such party to increased liability, may decrease available insurance
coverage for the affected vessels, and/or may result in a denial of access to,
or detention in, certain ports. Currently, each of our vessels and Eurobulk
Ltd., or Eurobulk, an affiliate and our ship management company, are ISM
Code-certified, however, there can be no assurance that such certification will
be maintained indefinitely.
Although the United States of America is not a party, many countries have
ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended (the "CLC"), and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended. Under these
conventions, a vessel's registered owner is strictly liable for pollution damage
caused on the territorial waters of a contracting state by discharge of
persistent oil, subject to certain complete defenses. Many of the countries that
have ratified the CLC have increased the liability limits through a 1992
Protocol to the CLC. The right to limit liability is also forfeited under the
CLC where the spill is caused by the owner's actual fault or privity and, under
the 1992 Protocol, where the spill is caused by the owner's intentional or
reckless conduct. Vessels trading to contracting states must provide evidence of
insurance covering the limited liability of the owner. In jurisdictions where
the CLC has not been adopted, various legislative schemes or common law govern,
and liability is imposed either on the basis of fault or in a manner similar to
the CLC.
The United States Oil Pollution Act of 1990 ("OPA") established an
extensive regulatory and liability regime for the protection and clean-up of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States of America or any of its territories and possessions
or whose vessels operate in waters of the United States of America, which
includes the territorial sea of the United States of America and its 200
nautical mile exclusive economic zone. OPA allows for potentially unlimited
liability without regard to fault of vessel owners, operators and bareboat
charterers for all containment and clean-up costs and other damages arising from
discharges or threatened discharges of oil from their vessels, including bunkers
(fuel), in the U.S. waters. OPA also expressly permits individual states to
impose their own liability regimes with regard to hazardous materials and oil
pollution materials occurring within their boundaries.
While we do not carry oil as cargo, we do carry fuel oil (bunkers) in our
drybulk carriers. We currently maintain, for each of our vessels, pollution
liability coverage insurance of $1 billion per incident. If the damages from a
catastrophic spill exceeded our insurance coverage, that would have a material
adverse affect on our financial condition.
Capital expenditures and other costs necessary to operate and maintain our
vessels may increase due to changes in governmental regulations, safety or other
equipment standards.
Changes in governmental regulations, safety or other equipment standards,
as well as compliance with standards imposed by maritime self-regulatory
organizations and customer requirements or competition, may require us to make
additional expenditures. In order to satisfy these requirements, we may, from
time to time, be required to take our vessels out of service for extended
periods of time, with corresponding losses of revenues. In the future, market
conditions may not justify these expenditures or enable us to operate some or
all of our vessels profitably during the remainder of their economic lives.
Increased inspection procedures and tighter import and export controls
could increase costs and disrupt our business.
International shipping is subject to various security and customs
inspection and related procedures in countries of origin and destination.
Inspection procedures can result in the seizure of contents of our vessels,
delays in the loading, offloading or delivery and the levying of customs duties,
fines or other penalties against us.
It is possible that changes to inspection procedures could impose
additional financial and legal obligations on us. Furthermore, changes to
inspection procedures could also impose additional costs and obligations on our
customers and may, in certain cases, render the shipment of certain types of
cargo uneconomical or impractical. Any such changes or developments may have a
material adverse effect on our business, financial condition and results of
operations.
Rising fuel prices may adversely affect our profits.
Fuel (bunkers) is a significant, if not the largest, operating expense for
many of our shipping operations when our vessels are under voyage charter. When
a vessel is operating under a time charter, these costs are paid by the
charterer. However fuel costs are taken into account by the charterer in
determining the amount of time charter hire and therefore fuel costs also
indirectly affect time charters. The price and supply of fuel is unpredictable
and fluctuates based on events outside our control, including geopolitical
developments, supply and demand for oil and gas, actions by OPEC and other oil
and gas producers, war and unrest in oil producing countries and regions,
regional production patterns and environmental concerns. Fuel prices have been
at historically high levels recently, but shipowners have not really felt the
effect of these high prices because the shipping markets have also been at high
levels. Any increase in the price of fuel may adversely affect our
profitability. Further, fuel may become much more expensive in future, which may
reduce the profitability and competitiveness of our business versus other forms
of transportation, such as truck or rail.
If our vessels fail to maintain their class certification and/or fail any
annual survey, intermediate survey, drydocking or special survey, that vessel
would be unable to carry cargo, thereby reducing our revenues and profitability
and violating certain loan covenants of our third-party indebtedness.
The hull and machinery of every commercial vessel must be classed by a
classification society authorized by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
the Safety of Life at Sea Convention ("SOLAS"). Our vessels are currently
classed with Lloyd's Register of Shipping, Bureau Veritas and Nippon Kaiji
Kyokai. ISM and International Ship and Port Facilities Security ("ISPS")
certification have been awarded by Bureau Veritas and the Panama Maritime
Authority to our vessels and Eurobulk.
A vessel must undergo annual surveys, intermediate surveys, drydockings and
special surveys. In lieu of a special survey, a vessel's machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Every vessel is also required to be
drydocked every two to three years for inspection of the underwater parts of
such vessel.
If any vessel does not maintain its class and/or fails any annual survey,
intermediate survey, drydocking or special survey, the vessel will be unable to
carry cargo between ports and will be unemployable and uninsurable which could
cause us to be in violation of certain covenants in our loan agreements. Any
such inability to carry cargo or be employed, or any such violation of
covenants, could have a material adverse impact on our financial condition and
results of operations. That status could cause us to be in violation of certain
covenants in our loan agreements.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that vessel
for unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arresting or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of funds to have the
arrest lifted which would have a material adverse effect on our financial
condition and results of operations.
In addition, in some jurisdictions, such as South Africa, under the "sister
ship" theory of liability, a claimant may arrest both the vessel which is
subject to the claimant's maritime lien and any "associated" vessel, which is
any vessel owned or controlled by the same owner. Claimants could try to assert
"sister ship" liability against one of our vessels for claims relating to
another of our vessels.
Governments could requisition our vessels during a period of war or
emergency, resulting in loss of earnings.
A government could requisition for title or seize our vessels. Requisition
for title occurs when a government takes control of a vessel and becomes the
owner. Also, a government could requisition our vessels for hire. Requisition
for hire occurs when a government takes control of a vessel and effectively
becomes the charterer at dictated charter rates. Generally, requisitions occur
during a period of war or emergency. Government requisition of one or more of
our vessels could have a material adverse effect on our financial condition and
results of operations.
World events outside our control may negatively affect our ability to
operate, thereby reducing our revenues and net income or our ability to obtain
additional financing, thereby restricting the implementation of our business
strategy.
Terrorist attacks such as the attacks on the United States of America on
September 11, 2001, on London, England on July 7, 2005, and the response to
these attacks, as well as the threat of future terrorist attacks, continue to
cause uncertainty in the world financial markets and may affect our business,
results of operations and financial condition. The continuing conflict in Iraq
may lead to additional acts of terrorism and armed conflict around the world,
which may contribute to further economic instability in the global financial
markets. These uncertainties could also have a material adverse effect on our
ability to obtain additional financing on terms acceptable to us or at all.
Terrorist attacks may also negatively affect our operations and financial
condition and directly impact its vessels or its customers. Future terrorist
attacks could result in increased volatility of the financial markets in the
United States of America and globally and could result in an economic recession
in the United States of America or the world. Any of these occurrences could
have a material adverse impact on our financial condition and costs.
Company Risk Factors
We depend entirely on Eurobulk to manage and charter our fleet.
We currently contract the commercial and technical management of our fleet,
including crewing, maintenance and repair, to Eurobulk, an affiliated company
with which we are under common control. The loss of Eurobulk's services or its
failure to perform its obligations to us could have a material adverse effect on
our financial condition and results of our operations. Although we may have
rights against Eurobulk if it defaults on its obligations to us, you will have
no recourse against Eurobulk. Further, we expect that we will need to seek
approval from our lenders to change Eurobulk as our ship manager.
Because Eurobulk is a privately held company, there is little or no
publicly available information about it and we may get very little advance
warning of operational or financial problems experienced by Eurobulk that may
adversely affect us.
The ability of Eurobulk to continue providing services for our benefit will
depend in part on its own financial strength. Circumstances beyond our control
could impair Eurobulk's financial strength. Because Eurobulk is privately held
it is unlikely that information about its financial strength would become public
unless Eurobulk began to default on its obligations. As a result, there may be
little advance warning of problems affecting Eurobulk, even though these
problems could have a material adverse effect on us.
We and our principal officers have affiliations with Eurobulk that could
create conflicts of interest detrimental to us.
Our principal officers are also principals, officers and employees of
Eurobulk, which is our ship management company. These responsibilities and
relationships could create conflicts of interest between us and Eurobulk.
Conflicts may also arise in connection with the chartering, purchase, sale and
operations of the vessels in our fleet versus drybulk carriers that may be
managed in the future by Eurobulk. Circumstances in any of these instances may
make one decision advantageous to us but detrimental to Eurobulk and vice versa.
Eurobulk does not presently manage any vessels other than those owned by
Euroseas. In the past, Eurobulk has managed vessels where the Pittas family was
a minority shareholder but never any where there was no Pittas family
participation at all. There have never been any conflicts of interest that were
resolved in a manner unfavorable to Euroseas or its predecessors. However, it is
possible that in the future Eurobulk may manage vessels which will not belong to
Euroseas and in which the Pittas family may have controlling, little or even no
power or participation and where such conflicts may arise. There can be no
assurance that Eurobulk will resolve all conflicts of interest in a manner
beneficial to us.
We are a holding company, and we depend on the ability of our subsidiaries
to distribute funds to us in order to satisfy our financial obligations or to
make dividend payments.
We are a holding company and our subsidiaries, which are all wholly-owned
by us either directly or indirectly, conduct all of our operations and own all
of our operating assets. We have no significant assets other than the equity
interests in our wholly-owned subsidiaries. As a result, our ability to make
dividend payments to you depends on our subsidiaries and their ability to
distribute funds to us. If we are unable to obtain funds from our subsidiaries,
we may be unable or our Board of Directors may exercise its discretion not to
pay dividends.
We may not be able to pay dividends.
Subject to the limitations discussed below, we currently intend to pay cash
dividends on a quarterly basis. However, we may incur other expenses or
liabilities that would reduce or eliminate the cash available for distribution
as dividends. Our loan agreements may also limit the amount of dividends we can
pay under some circumstances based on certain covenants included in the loan
agreements. Over the period January 1, 2002 to December 31, 2005, we paid
substantially all of our net income as dividends usually on an annual basis, but
quarterly since our private placement in August 2005, without having been
restricted by our loan agreements.
If we are not successful in acquiring additional vessels, any unused net
proceeds from our recent private placement offering may be used for other
corporate purposes or held pending investment in other vessels. Identifying and
acquiring vessels may take a significant amount time. The result may be that
proceeds of the offering are not invested in additional vessels, or are so
invested but only after some delay. In either case, we will not be able to earn
charterhire consistent with our current anticipations, and our profitability and
our ability to pay dividends will be affected.
In addition, the declaration and payment of dividends will be subject at
all times to the discretion of our Board of Directors. The timing and amount of
dividends will depend on our earnings, financial condition, cash requirements
and availability, restrictions in our loan agreements, growth strategy, the
provisions of Marshall Islands law affecting the payment of dividends and other
factors. Marshall Islands law generally prohibits the payment of dividends other
than from surplus or while a company is insolvent or would be rendered insolvent
upon the payment of such dividends. However, there can be no assurance that
dividends will be paid.
Companies affiliated with Eurobulk or our officers and directors may
acquire vessels that compete with our fleet.
Companies affiliated with Eurobulk or our officers and directors own
drybulk carriers and may acquire additional drybulk carriers in the future.
These vessels could be in competition with our fleet and other companies
affiliated with Eurobulk might be faced with conflicts of interest with respect
to their own interests and their obligations to us.
If we are unable to fund our capital expenditures, we may not be able to
continue to operate some of our vessels, which would have a material adverse
effect on our business and our ability to pay dividends.
In order to fund our capital expenditures, we may be required to incur
borrowings or raise capital through the sale of debt or equity securities. Our
ability to access the capital markets through future offerings may be limited by
our financial condition at the time of any such offering as well as by adverse
market conditions resulting from, among other things, general economic
conditions and contingencies and uncertainties that are beyond our control. Our
failure to obtain the funds for necessary future capital expenditures would
limit our ability to continue to operate some of our vessels and could have a
material adverse effect on our business, results of operations and financial
condition and our ability to pay dividends. Even if we are successful in
obtaining such funds through financings, the terms of such financings could
further limit our ability to pay dividends.
If we fail to manage our planned growth properly, we may not be able to
successfully expand our market share.
We intend to continue to grow our fleet. Our growth will depend on:
o locating and acquiring suitable vessels;
o identifying and consummating acquisitions or joint ventures;
o integrating any acquired business successfully with our existing
operations;
o enhancing our customer base;
o managing our expansion; and
o obtaining required financing.
Growing any business by acquisition presents numerous risks, such as
undisclosed liabilities and obligations and difficulty experienced in (1)
obtaining additional qualified personnel, (2) managing relationships with
customers and suppliers and (3) integrating newly acquired operations into
existing infrastructures. We cannot give any assurance that we will be
successful in executing our growth plans or that we will not incur significant
expenses and losses in connection with the execution of those growth plans.
A decline in the market value of our vessels could lead to a default under
our loan agreements and the loss of our vessels.
We have incurred secured debt under loan agreements for our vessels and
currently expect to incur additional secured debt in connection with our
acquisition of other vessels. If the market value of our fleet declines, we may
not be in compliance with certain provisions of our existing loan agreements and
we may not be able to refinance our debt or obtain additional financing. If we
are unable to pledge additional collateral, our lenders could accelerate our
debt and foreclose on our fleet.
Our existing loan agreements contain restrictive covenants that may limit
our liquidity and corporate activities.
Our existing loan agreements impose operating and financial restrictions on
us. These restrictions may limit our ability to:
o incur additional indebtedness;
o create liens on our assets;
o sell capital stock of our subsidiaries;
o make investments;
o engage in mergers or acquisitions;
o pay dividends;
o make capital expenditures;
o change the management of our vessels or terminate or materially amend
the management agreement relating to each vessel; and
o sell our vessels.
Therefore, we may need to seek permission from our lenders in order to
engage in some corporate actions. The lenders' interests may be different from
our interests, and we cannot guarantee that we will be able to obtain the
lenders' permission when needed. This may prevent us from taking actions that
are in our best interest.
Servicing future debt would limit funds available for other purposes.
To finance our fleet, we have incurred secured debt under loan agreements
for our vessels. We also currently expect to incur additional secured debt to
finance the acquisition of additional vessels. We must dedicate a portion of our
cash flow from operations to pay the principal and interest on our debt. These
payments limit funds otherwise available for working capital expenditures and
other purposes. As of May 31, 2006, we had total bank debt of approximately
$40.62 million. If we were unable to service our debt, it could have a material
adverse effect on our financial condition and results of operations.
A rise in interest rates could cause an increase in our costs and have a
material adverse effect on our financial condition and results of operations. We
have purchased, and may purchase in the future, vessels under loan agreements
that provide for periodic interest payments based on indices that fluctuate with
changes in market interest rates. If interest rates increase significantly, it
would increase our costs of financing our acquisition of vessels, which could
have a material adverse effect on our financial condition and results of
operations. Any increase in debt service would also reduce the funds available
to us to purchase other vessels.
Our ability to obtain additional debt financing may be dependent on the
performance of our then existing charters and the creditworthiness of our
charterers.
The actual or perceived credit quality of our charterers, and any defaults
by them, may materially affect our ability to obtain the additional debt
financing that we will require to purchase additional vessels or may
significantly increase our costs of obtaining such financing. Our inability to
obtain additional financing at all or at a higher than anticipated cost may
materially affect our results of operation and our ability to implement our
business strategy.
As we expand our business, we may need to upgrade our operations and
financial systems, and add more staff and crew. If we cannot upgrade these
systems or recruit suitable employees, our performance may be adversely
affected.
Our current operating and financial systems may not be adequate if we
expand the size of our fleet, and our attempts to improve those systems may be
ineffective. In addition, if we expand our fleet, we will have to rely on
Eurobulk to recruit suitable additional seafarers and shoreside administrative
and management personnel. We cannot assure you that Eurobulk will be able to
continue to hire suitable employees as we expand our fleet. If Eurobulk's
unaffiliated crewing agent encounters business or financial difficulties, we may
not be able to adequately staff our vessels. If we are unable to operate our
financial and operations systems effectively or to recruit suitable employees,
our performance may be materially adversely affected.
Because we obtain some of our insurance through protection and indemnity
associations, we may also be subject to calls in amounts based not only on our
own claim records, but also the claim records o f other members of the
protection and indemnity associations.
We may be subject to calls in amounts based not only on our claim records
but also the claim records of other members of the protection and indemnity
associations through which we receive insurance coverage for tort liability,
including pollution-related liability. Our payment of these calls could result
in significant expense to us, which could have a material adverse effect on our
business, results of operations, cash flows, financial condition and ability to
pay dividends.
Labor interruptions could disrupt our business.
Our vessels are manned by masters, officers and crews that are employed by
third parties. If not resolved in a timely and cost-effective manner, industrial
action or other labor unrest could prevent or hinder our operations from being
carried out normally and could have a material adverse effect on our business,
results of operations, cash flows, financial condition and ability to pay
dividends.
In the highly competitive international drybulk, containership and
multipurpose shipping industry, we may not be able to compete for charters with
new entrants or established companies with greater resources.
We employ our vessels in a highly competitive market that is capital
intensive and highly fragmented. Competition arises primarily from other vessel
owners, some of whom have substantially greater resources than us. Competition
for the transportation of drybulk and containership cargoes can be intense and
depends on price, location, size, age, condition and the acceptability of the
vessel and its managers to the charterers. Due in part to the highly fragmented
market, competitors with greater resources could operate larger fleets through
consolidations or acquisitions that may be able to offer better prices and
fleets.
We may be unable to attract and retain key management personnel and other
employees in the shipping industry, which may negatively affect the
effectiveness of our management and our results of operations.
Our success depends to a significant extent upon the abilities and efforts
of our management team. Our success will depend upon our ability to hire
additional employees and to retain key members of our management team. The loss
of any of these individuals could adversely affect our business prospects and
financial condition. Difficulty in hiring and retaining personnel could
adversely affect our results of operations. We do not currently intend to
maintain "key man" life insurance on any of our officers.
Risks involved with operating ocean going vessels could affect our business
and reputation, which may reduce our revenues.
The operation of an ocean-going vessel carries inherent risks. These risks
include, among others, the possibility of:
o crew strikes and/or boycotts;
o marine disaster;
o piracy;
o environmental accidents;
o cargo and property losses or damage; and
o business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions.
The involvement of any of the vessels in an environmental disaster may harm
our reputation as a safe and reliable vessel operator. Any of these
circumstances or events could increase our costs or lower our revenues.
Our vessels may suffer damage and it may face unexpected drydocking costs,
which could affect our cash flow and financial condition.
If our vessels suffer damage, they may need to be repaired at a drydocking
facility. The costs of drydock repairs are unpredictable and can be substantial.
We may have to pay drydocking costs that our insurance does not cover. The loss
of earnings while these vessels are being repaired and reconditioned, as well as
the actual cost of these repairs, would decrease our earnings.
Purchasing and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which could adversely
affect our earnings.
Although we inspect the secondhand vessels prior to purchase, this
inspection does not provide us with the same knowledge about their condition and
cost of any required (or anticipated) repairs that it would have had if these
vessels had been built for and operated exclusively by us. Generally, we do not
receive the benefit of warranties on secondhand vessels.
In general, the costs to maintain a vessel in good operating condition
increase with the age of the vessel. Older vessels are typically less fuel
efficient and more costly to maintain than more recently constructed vessels.
Cargo insurance rates increase with the age of a vessel, making older vessels
less desirable to charterers.
Governmental regulations, safety or other equipment standards related to
the age of vessels may require expenditures for alterations, or the addition of
new equipment, to our vessels and may restrict the type of activities in which
the vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives. If we sell vessels, we
are not certain that the price for which we sell them will equal their carrying
amount at that time.
We may not have adequate insurance to compensate us adequately for damage
to, or loss of, our vessels.
We procure hull and machinery insurance, protection and indemnity
insurance, which includes environmental damage and pollution insurance and war
risk insurance and freight, demurrage and defence insurance for our fleet. We do
not maintain insurance against loss of hire, which covers business interruptions
that result in the loss of use of a vessel. We can give no assurance that we are
adequately insured against all risks. We may not be able to obtain adequate
insurance coverage for our fleet in the future. The insurers may not pay
particular claims. Our insurance policies contain deductibles for which we will
be responsible and limitations and exclusions which may increase our costs or
lower our revenue. Moreover, we cannot assure that the insurers will not default
on any claims they are required to pay. If our insurance is not enough to cover
claims that may arise, it may have a material adverse effect on our financial
condition and results of operations.
Our operations outside the United States of America expose it to risks of
mining, terrorism and piracy that may interfere with the operation of our
vessels.
We are an international company and primarily conducts our operations
outside the United States of America. Changing economic, political and
governmental conditions in the countries where we are engaged in business or
where our vessels are registered affect our operations. In the past, political
conflicts, particularly in the Arabian Gulf, resulted in attacks on vessels,
mining of waterways and other efforts to disrupt shipping in the area. Acts of
terrorism and piracy have also affected vessels trading in regions such as the
South China Sea. The likelihood of future acts of terrorism may increase, and
our vessels may face higher risks of being attacked. We are not fully insured
against any of these risks. In addition, future hostilities or other political
instability in regions where our vessels trade could have a material adverse
effect on our trade patterns and adversely affect our operations and
performance.
Because the Republic of the Marshall Islands, where we are incorporated,
does not have a well-developed body of corporate law, shareholders may have
fewer rights and protections than under typical United States law, such as
Delaware, and shareholders may have difficulty in protecting their interest with
regard to actions taken by our Board of Directors.
Our corporate affairs are governed by our Articles of Incorporation and
Bylaws and by the Marshall Islands Business Corporations Act (the "BCA"). The
provisions of the BCA resemble provisions of the corporation laws of a number of
states in the United States of America. However, there have been few judicial
cases in the Republic of the Marshall Islands interpreting the BCA. The rights
and fiduciary responsibilities of directors under the law of the Republic of the
Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence
in certain jurisdictions in the United States of America. Shareholder rights may
differ as well. For example, under Marshall Islands law, a copy of the notice of
any meeting of the shareholders must be given not less than 15 days before the
meeting, whereas in Delaware such notice must be given not less than 10 days
before the meeting. Therefore, if immediate shareholder action is required, a
meeting may not be able to be convened as quickly as it can be convened under
Delaware law. Also, under Marshall Islands law, any action required to be taken
by a meeting of shareholders may only be taken without a meeting if consent is
in writing and is signed by all of the shareholders entitled to vote, whereas
under Delaware law action may be taken by consent if approved by the number of
shareholders that would be required to approve such action at a meeting.
Therefore, under Marshall Islands law, it may be more difficult for a company to
take certain actions without a meeting even if a majority of the shareholders
approve of such action. While the BCA does specifically incorporate the
non-statutory law, or judicial case law, of the State of Delaware and other
states with substantially similar legislative provisions, public shareholders
may have more difficulty in protecting their interests in the face of actions by
the management, directors or controlling shareholders than would shareholders of
a corporation incorporated in a jurisdiction in the United States of America.
Obligations associated with being a public company require significant
company resources and management attention.
We are subject to the reporting requirements of the Exchange Act, and the
other rules and regulations of the SEC, including the Sarbanes-Oxley Act of
2002. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and
determine the effectiveness of our internal control over financial reporting. If
we have a material weakness in our internal control over financial reporting, we
may not detect errors on a timely basis and our financial statements may be
materially misstated. We have to dedicate a significant amount of time and
resources to ensure compliance with these regulatory requirements. Our common
stock is listed on the OTCBB under the symbol ESEAF.OB and we are subject to the
rules and regulations of the OTCBB. We have applied to list our common stock on
the NASDAQ National Market and, if approved, will be subject to the listing
requirements of the NASDAQ National Market. We cannot assure you that such
listing will be obtained.
We work with our legal, accounting and financial advisors to identify any
areas in which changes should be made to our financial and management control
systems to manage our growth and our obligations as a public company. We
evaluate areas such as corporate governance, corporate control, internal audit,
disclosure controls and procedures and financial reporting and accounting
systems. We will make changes in any of these and other areas, including our
internal control over financial reporting, which we believe are necessary.
However, these and other measures we may take may not be sufficient to allow us
to satisfy our obligations as a public company on a timely and reliable basis.
In addition, compliance with reporting and other requirements applicable to
public companies will create additional costs for us and will require the time
and attention of management. Our limited management resources may exacerbate the
difficulties in complying with these reporting and other requirements while
focusing on executing our business strategy. We cannot predict or estimate the
amount of the additional costs we may incur, the timing of such costs or the
degree of impact that our management's attention to these matters will have on
our business.
Our historical financial and operating data may not be representative of
our future results because we are a recently formed company with no operating
history as a stand-alone entity or as a publicly traded company.
Our historical financial and operating data may not be representative of
our future results because we are a recently formed company with no operating
history as a stand-alone entity or as a publicly traded company. Our combined
financial statements included in this annual report have been carved out of the
consolidated financial statements of shipowning companies managed by Eurobulk
and majority owned by the Pittas family. Consistent with shipping industry
practice, we have not obtained, nor do we present in this annual report,
historical operating data for our vessels prior to their acquisition. Although
our results of operations, cash flows and financial condition reflected in we
have combined financial statements include all expenses allocable to our
business, due to factors such as the additional administrative and financial
obligations associated with operating as a publicly traded company, they may not
be indicative of the results of operations that we would have achieved had we
operated as a public entity for all periods presented or of future results that
we may achieve as a publicly traded company with our current holding company
structure.
We depend upon a few significant charterers for a large part of our
revenues. The loss of one or more of these charterers could adversely affect our
financial performance.
We have historically derived a significant part of our revenue from a small
number of charterers. Our top five customers accounted for approximately 65% of
our total revenues for 2005, 68% of our total revenues for 2004 and 54% of our
total revenues for 2003. If we lose any of these charterers, or if any of these
charterers significantly reduce its use of our services or was unable to make
charter payments to us, our results of operations, cash flows and financial
condition would be adversely affected.
Exposure to currency exchange rate fluctuations will result in fluctuations
in our cash flows and operating results.
We generate all our revenues in U.S. dollars, but our ship manager,
Eurobulk, incurs approximately 30% of vessel operating expenses and we incur
general and administrative expenses in currencies other than the U.S. dollar.
This difference could lead to fluctuations in our vessel operating expenses,
which would affect our financial results. Expenses incurred in foreign
currencies increase when the value of the U.S. dollar falls, which would reduce
our profitability. We do not currently engage in hedging transactions to
minimize our exposure to currency rate fluctuations, but we may do so in the
future.
U.S. tax authorities could treat us as a "passive foreign investment
company," which could have adverse U.S. federal income tax consequences to U.S.
holders.
A foreign corporation will be treated as a "passive foreign investment
company," or PFIC, for U.S. federal income tax purposes if either (1) at least
75% of its gross income for any taxable year consists of certain types of
"passive income" or (2) at least 50% of the average value of the corporation's
assets produce or are held for the production of those types of "passive
income." For purposes of these tests, "passive income" includes dividends,
interest, and gains from the sale or exchange of investment property and rents
and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income." U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income
derived by the PFIC, the distributions they receive from the PFIC and the gain,
if any, they derive from the sale or other disposition of their shares in the
PFIC.
Based on our proposed method of operation, we do not believe that we will
be a PFIC with respect to any taxable year. In this regard, we intend to treat
the gross income we derive or are deemed to derive from our time chartering
activities as services income, rather than rental income. Accordingly, we
believe that our income from our time chartering activities does not constitute
"passive income," and the assets that we own and operate in connection with the
production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules
addressing our proposed method of operation. Accordingly, no assurance can be
given that the U.S. Internal Revenue Service, or IRS, or a court of law will
accept our position, and there is a risk that the IRS or a court of law could
determine that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in
the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable
year, our U.S. shareholders will face adverse U.S. tax consequences. Under the
PFIC rules, unless those shareholders make an election available under the Code
(which election could itself have adverse consequences for such shareholders, as
discussed below under "Tax Considerations -- U.S. Federal Income Taxation of
U.S. Holders"), such shareholders would be liable to pay U.S. federal income tax
at the then prevailing income tax rates on ordinary income plus interest upon
excess distributions and upon any gain from the disposition of our common
shares, as if the excess distribution or gain had been recognized ratably over
the shareholder's holding period of our common shares. See "Tax Considerations
-- U.S. Federal Income Taxation of U.S. Holders" for a more comprehensive
discussion of the U.S. federal income tax consequences to U.S. shareholders if
we are treated as a PFIC.
We may have to pay tax on United States source income, which would reduce
our earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of
the gross shipping income of a vessel owning or chartering corporation, such as
ourselves and our subsidiaries, that is attributable to transportation that
begins or ends, but that does not both begin and end, in the United States may
be subject to a 4% United States federal income tax without allowance for
deduction, unless that corporation qualifies for exemption from tax under
section 883 of the Code and the applicable Treasury Regulations recently
promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory
tax exemption and we will take this position for United States federal income
tax return reporting purposes. However, there are factual circumstances beyond
our control that could cause us to lose the benefit of this tax exemption after
the offering and thereby become subject to United States federal income tax on
our United States source income. Due to the factual nature of the issues
involved, we can give no assurances on our tax-exempt status or that of any of
our subsidiaries.
If we or our subsidiaries are not entitled to exemption under Section 883
for any taxable year, we or our subsidiaries could be subject for those years to
an effective 2% United States federal income tax on the shipping income these
companies derive during the year that are attributable to the transport or
cargoes to or from the United States. The imposition of this taxation would have
a negative effect on our business and would result in decreased earnings
available for distribution to our shareholders.
Item 4. Information on the Company
A. History and development of the Company
We are Euroseas, a Marshall Islands company incorporated in May 2005. We
are a provider of international seaborne transportation services, carrying
various drybulk cargoes including, among others, iron ore, coal, grain, bauxite,
phosphate and fertilizers, as well as containerized cargoes. As of June 15,
2006, our fleet consisted of four drybulk carriers, comprised of one Panamax
drybulk carrier and three Handysize drybulk carriers, three feeder
containerships and one multipurpose vessel. The total cargo carrying capacity of
the four bulk carriers is 164,550 deadweight tons, or dwt, and of the three
containerships is 66,100 dwt and 4,636 twenty-foot equivalent units, or teu. Our
multipurpose vessel can carry 22,568 dwt and/or 950 teu. Six of our vessels were
acquired before January 1, 2004 and were controlled by the Pittas family
interests. On June 29, 2005, the shareholders of the six vessels (and of a
seventh vessel that has since been sold) transferred their shares in each of the
vessels to Euroseas in exchange for shares in Friends, a 100% owner of Euroseas
at that time. On November 25, 2005 we acquired our third containership. On April
27, 2006, we acquired our multipurpose vessel. We have signed an agreement to
sell m/v John P., one of our handysize bulkers (of 26,354 dwt), and we expect to
deliver it to the sellers approximately at the end of June 2006.
On August 25, 2005, we raised approximately $21 million in gross proceeds
from the private placement of our securities to a number of institutional and
accredited investors (the "Private Placement"). In the Private Placement, we
issued 7,026,993 shares of common stock at a price of $3.00 per share, as well
as warrants to purchase an additional 1,756,743 shares of common stock. The
warrants have a five year term and an exercise price of $3.60 per share. As a
condition to the Private Placement, we agreed to execute a merger agreement with
Cove, a public shell company, whereby Cove would merge with our wholly-owned
subsidiary, Euroseas Acquisition Company Inc. The merger was consummated on
March 27, 2006.
We registered for resale the shares issued in the Private Placement, the
shares underlying the warrants issued in the Private Placement as well as the
shares issued to certain Cove's shareholders in the merger. On February 3, 2006,
the SEC declared our registration statements effective. Our shares currently
trade on the OTCBB under the symbol ESEAF.OB. We have applied for listing in the
NASDAQ National Market.
Our executive offices are located at 40 Ag. Konstantinou Ave., 151 24,
Maroussi, Greece. Our telephone number is +30-210-6105110.
B. Business overview
Our fleet consists of: (i) drybulk carriers that transport iron ore, coal,
grain and other dry cargoes along worldwide shipping routes that currently have
a total capacity of 1.1 million dwt; (ii) containerships that transport
container boxes providing scheduled service between ports; and (iii)
multipurpose vessels that can carry either bulk cargoes or containers. Please
see information in the section "Our Fleet", below. During 2002, 2003, 2004 and
2005, we had a fleet utilization of 99.7%, 99.3%, 99.5% and 97.4%, respectively,
our vessels achieved daily time charter equivalent rates of $6,049, $8,965,
$17,839 and $17,643, respectively, and we generated revenues of $15.29 million,
$25.95 million, $45.72 million and $44.52 million, respectively.
Our business strategy is focused on providing consistent shareholder
returns by carefully selecting the timing and the structure of our investments
in drybulk and feeder containership vessels and by reliably, safely and
competitively operating the vessels we own, through our affiliate, Eurobulk.
Representing a continuous shipowning and management history that dates back to
the 19th century, we believe that one of our advantages in the industry is our
ability to select and safely operate drybulk and containership vessels of any
age. We continuously evaluate sale and purchase opportunities, as well as long
term employment opportunities for our vessels. Additionally, with the proceeds
from the Private Placement, we plan to expand our fleet to increase our revenues
and make our drybulk carrier, containership feeder and multipurpose fleet more
cost efficient and more attractive to our customers.
Our Fleet
As of June 29, 2006, the profile and deployment of our fleet is the following:
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Year
Name Type Dwt TEU Built Employment TCE Rate ($/day)
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Dry Bulk
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Baumarine
Pool - until
IRINI Panamax 69,734 1988 end 2008 $17,000 to $20,000 (*)
NIKOLAOS P. Handysize 34,750 1984 Spot
TC until
ARIEL Handysize 33,712 1977 Aug-06 $8,500
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Total Dry Bulk Vessels 3 138,196
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Container Carriers
TC until
ARTEMIS Handysize 29,693 2,098 1987 Dec-08 $19,000
TC until
YM QINGDAO I Handysize 18,253 1,269 1990 Mar-07 $11,900
TC until $16,000 until Nov-06,
KUO HSIUNG Handysize 18,154 1,269 1993 Nov-07 $12,000 until Nov-07
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Total Container 3 66,100 4,636
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Multipurpose Vessels
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
$8,850 until Dec-08,
TC until $9,950 until Dec-10,
TASMAN TRADER Multipurpose 22,568 950 1990 Mar-12 $9,000 until Mar-12
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Total Multipurpose Vessels 1 22,568 950
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
7 226,864 5,586
FLEET GRAND TOTAL
Vessels Sold or under
Contract for Sale in 2006
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
Handysize 26,354 1981 Spot
JOHN P. (**)
PANTELIS P. (***) Handysize 26,354 1981 Spot
----------------------------- --------------- --------- -------- ------- --------------- ------------------------
(*) The owning company of m/v Irini participates in 3 short funds (contracts of
affreightment to carry cargo) that provide an effective coverage of m/v Irini
for 102% in 2006, 77% in 2007 and 42% in 2008. The combination of the short
funds and pool employment secures the mentioned rate range for the greater part
of the next 2.5 years.
(**) We have signed a Memorandum of Agreement to sell the bulk carrier m/v John
P to be delivered to the buyers in late June/early July 2006.
(***) We signed a Memorandum of Agreement to sell the bulk carrier m/v Pantelis
P to be delivered to the buyers between May 15 and June 30, 2006 at our option.
The vessel was delivered to the buyers on May 31, 2006.
We plan to expand our fleet by investing in vessels in the drybulk,
containership and multipurpose segments by targeting mid-age vessels (i.e.,
10-20 years old) at the time of purchase. We also intend to take advantage of
the cyclical nature of the market by buying and selling ships when we believe
favorable opportunities exist.. We employ our vessels in the spot and time
charter market, through pool arrangements and under contracts of affreightment.
Presently, our three containerships, our multipurpose vessel and one of our
handysize bulkers are employed under time charters. Our other two handysize
bulkers are under voyage charters. Our panamax vessel, m/v Irini, is employed in
the Baumarine pool that is managed by Klaveness, a major global charterer in the
drybulk area, and also participates in three "short" funds (contracts to carry
cargo at agreed rates), minimizing its exposure to the spot market (covered at
102% in 2006, 77% for 2007 and 42% for 2008, approximately).
As of June 29, 2006, and assuming delivery to the buyers of m/v "John P" at
approximately June 30, 2006, 90% of our ship capacity days in 2006 accounting
for fixed spot employment in the first and second quarter of the year, and 58%
of our ship capacity days in 2007 are under time charter contracts or protected
from market fluctuations.
Management of Our Fleet
The operations of our vessels are managed by Eurobulk, an affiliated
company, under management contracts with each ship-owning company. Under our
management agreements, Eurobulk is responsible for providing us with commercial
management services, which include obtaining employment for our vessels and
managing our relationships with charterers, technical management services, which
include managing day-to-day vessel operations, performing general vessel
maintenance, ensuring regulatory and classification society compliance,
supervising the maintenance and general efficiency of vessels, arranging our
hire of qualified officers and crew, arranging and supervising dry docking and
repairs, arranging insurance for vessels, purchasing stores, supplies, spares
and new equipment for vessels, appointing supervisors and technical consultants
and providing technical support; and shoreside personnel who carry out the
management functions described above and certain accounting services.
In exchange for providing us with the services described above, we pay
Eurobulk 590 euros per vessel per day adjusted annually for inflation.
Our Competitive Strengths
We believe that we possess the following competitive strengths:
o Experienced Management Team. Our management team has significant experience
in operating drybulk carriers and expertise in all aspects of commercial,
technical, operational and financial areas of our business. Our main
shareholding family has over 100 years experience in shipping and enjoys a
well established reputation. The Pittas family roots in shipping go back
four generations to the 19th century. Nikolaos Pittas started the family
business more than 125 years ago and has been followed by his sons and his
grandsons, one of whom is Mr. John Pittas, a controlling shareholder of
Friends, the largest shareholder of Euroseas. Aristides J. Pittas, his son,
is the CEO, President, Chairman of the Board and a Director of Euroseas.
Aristides P. Pittas, his nephew, is the Vice-Chairman of the Board and a
Director of Euroseas. This experience enables management, among other
things, to identify suitable shipping opportunities and time its
investments in an efficient manner.
o Strong Customer Relationships. Through Eurobulk, our ship management
company, and Eurochart, our chartering broker, we have many
long-established customer relationships with major charterers and shipping
pools (Klaveness), and we believe we are well regarded within the
international shipping community.
o Profitable Operations to Date. The Pittas family, the principal owners of
Eurobulk and of our largest shareholder, has operated vessels over the past
125 years. The vessels have been operated through various partnerships and
different entities over these years. In 1995, the Pittas family separated
its interests from Oceanbulk Maritime S.A. and formed Eurobulk in order to
manage and operate its own vessels. Since the inception of Eurobulk, all
vessel acquisitions have been profitable and the group's results, on a
consolidated basis, have been profitable for each of the last five years.
This was achieved by carefully selecting secondhand vessels, competitively
commissioning and actively supervising cost-efficient shipyards to perform
repairs, reconditioning and systems upgrading work, together with a
proactive preventive maintenance program both ashore and at sea, and
employing professional, well-trained masters, officers and crews. We
believe that this combination allows us to minimize off-hire periods,
effectively manage insurance costs, and control overall operating expenses.
Our Customers
Our major charterer customers during the last three years include
Bulkhandling/Klaveness, Cheng Lie, Swiss Marine, Hamburg Bulk Carriers, and
Phoenix. We are a relationship driven company, and our top five customers in
2005 include four of our top five customers from 2004 (Cheng Lie, Swiss Marine,
HBC, Pancoast, and Phoenix). Our top five customers accounted for approximately
65% of our total revenues in 2005, 68% of our total revenues for 2004 and 54% of
our total revenues for 2003.
Year Ended December 31,
Charterer
2003 2004 2005
-----------------------------------------------------------------------------
A - - 26.85%
B 23.01% 11.50% 17.48%
C - 20.60% 12.32%
D 31.30% 12.20% -
E - 14.07% -
F - 10.52% -
G 10.55% - -
The Dry Cargo Industry
Dry cargo shipping refers to the transport of certain commodities by sea
between various ports in bulk or containerized form.
The drybulk commodities are often divided into two categories -- major
bulks and minor bulks. Major bulks include items such as coal, iron ore and
grains, while minor bulks include items such as aluminum, phosphate rock,
fertilizer raw materials, agricultural and mineral cargo, cement, forest
products and some steel products, including scrap.
There are four main classes of bulk carriers -- Handysize, Handymax,
Panamax and Capesize. These classes represent the sizes of the vessel carrying
the cargo in terms of deadweight ton ("dwt") capacity, which is defined as the
total weight including cargo that the vessel can carry when loaded to a defined
load line on the vessel. Handysize vessels are the smallest of the four
categories and include those vessels weighing up to 40,000 dwt. Handymax
carriers are those vessels that weigh between 40,000 and 55,000 dwt, while
Panamax vessels are those ranging from 55,000 dwt to 80,000 dwt. Vessels over
80,000 dwt are called Capesize vessels.
Drybulk carriers are ordinarily chartered either through a voyage charter
or a time charter, under a longer term contract of affreightment or in pools.
Under a voyage charter, the owner agrees to provide a vessel for the transport
of cargo between specific ports in return for the payment of an agreed freight
rate per ton of cargo or an agreed dollar lump sum amount. Voyage costs, such as
canal and port charges and bunker expenses, are the responsibility of the owner.
Under a time charter, the ship owner places the vessel at the disposal of a
charterer for a given period of time in return for a specified rate (either hire
per day or a specified rate per dwt capacity per month) with the voyage costs
being the responsibility of the charterer. In both voyage charters and time
charters, operating costs (such as repairs and maintenance, crew wages and
insurance premiums) are the responsibility of the ship owner. The duration of
time charters varies, depending on the evaluation of market trends by the ship
owner and by charterers. Occasionally, drybulk vessels are chartered on a
bareboat basis. Under a bareboat charter, operations of the vessels and all
operating costs are the responsibility of the charterer, while the owner only
pays the financing costs of the vessel. A contract of affreightment ("COA") is
another type of charter relationship where a charterer and a ship owner enter
into a written agreement pursuant to which identified cargo will be carried over
a specified period of time. COA's benefit charterers by providing them with
fixed transport costs for a commodity over an identified period of time. COA's
benefit ship owners by offering ascertainable revenue over that same period of
time and eliminating the uncertainty that would otherwise be caused by the
volatility of the charter market. A shipping pool is a collection of similar
vessel types under various ownerships, placed under the care of a single
commercial manager. The manager markets the vessels as a single fleet and
collects the earnings which are distributed to individual owners under a
pre-arranged weighing system by which each entered vessel receives its share.
Pools have the size and scope to combine voyage charters, time charters and
contracts of affreightment with freight forward agreements for hedging purposes,
to perform more efficient vessel scheduling thereby increasing fleet
utilization.
Containership shipping refers to the transport of containerized trade which
encompasses mainly the carriage of finished goods, but an increasing number of
other cargoes in container boxes. Containerized trade is the fastest growing
sector of seaborne trade. Containerships are further categorized by their size
measured in twenty-foot equivalent units (teu) and whether they have their own
gearing. The different categories of containerships are as follows. Post-panamax
vessels are vessels with carrying capacity of more than 4,000 teu. Panamax
vessels are vessels with carrying capacity from 3,000 to 4,000 teu. Sub-panamax
vessels are vessels with carrying capacity from 2,000 to 3,000 teu. Handysize
feeder containerships are vessels with carrying capacity from 1,000 to 2,000 teu
and are sometimes equipped with cargo loading and unloading gear. Finally,
Feeder containerships are vessels with carrying capacity from 500 to 1,000 teu
and are usually equipped with cargo loading and unloading gear. Containerships
are primarily employed in time charter contracts with liner companies, which in
turn employ them as part of the scheduled liner operations. Feeder containership
are put in liner schedules feeding containers to and from central regional ports
(hubs) where larger containerships provide cross ocean or longer haul service.
The length of the time charter contract can range from several months to years.
Our Competitors
We operate in markets that are highly competitive and based primarily on
supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation.
Eurobulk arranges our charters (whether spot charters, time charters or pools)
through the use of Eurochart, an affiliated brokering company who negotiates the
terms of the charters based on market conditions. We compete primarily with
other owners of drybulk carriers in the Handysize, Handymax and Panamax drybulk
carrier sectors and the feeder containership sector. Ownership of drybulk
carriers and feeder containerships is highly fragmented and is divided among
state controlled and independent bulk carrier owners. Some of our publicly owned
competitors include:
o Diana Shipping (NYSE: DSX) -- larger vessels (13).
o Dryships (Nasdaq: DRYS) -- larger vessels (27).
o Excel Maritime (NYSE: EXM) -- mix of vessels (17) primarily larger
size.
o Eagle Bulk Shipping (Nasdaq: EGLE) -- handymaxes (14).
Seasonality
Coal, iron ore and grains, which are the major bulks of the drybulk
shipping industry, are somewhat seasonal in nature. The energy markets primarily
affect the demand for coal, with increases during hot summer periods when air
conditioning and refrigeration require more electricity and towards the end of
the calendar year in anticipation of the forthcoming winter period. The demand
for iron ore tends to decline in the summer months because many of the major
steel users, such as automobile makers, reduce their level of production
significantly during the summer holidays. Grains are completely seasonal as they
are driven by the harvest within a climate zone. Because three of the five
largest grain producers (the United States of America, Canada and the European
Union) are located in the northern hemisphere and the other two (Argentina and
Australia) are located in the southern hemisphere, harvests occur throughout the
year and grains require drybulk shipping accordingly.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of
our vessels. The vessels are subject to international conventions and national,
state and local laws and regulations in force in the countries in which our
vessels may operate or are registered.
A variety of governmental and private entities subject our vessels to both
scheduled and unscheduled inspections. These entities include the local port
authorities (U.S. Coast Guard, harbor master or equivalent), classification
societies, flag state administration (country of registry) and charterers.
Certain of these entities require us to obtain permits, licenses and
certificates for the operation of its vessels. Failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend operation of one or more of its vessels.
We believe that the heightened level of environmental and quality concerns
among insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that will emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our vessels is in
substantial compliance with applicable environmental laws and regulations;
however, because such laws and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may limit our
ability to do business, increase our operating costs, force the early retirement
of our vessels, and/or affect their resale value, all of which could have a
material adverse effect on our financial condition and results of operations.
Environmental Regulation -- International Maritime Organization ("IMO")
The IMO has negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from ships. Annex VI
was ratified in May 2004, and became effective in May 2005. Annex VI sets limits
on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits
deliberate emissions of ozone depleting substances, such as chlorofluorocarbons.
Annex VI also includes a global cap on the sulfur content of fuel oil and allows
for special areas to be established with more stringent controls on sulfur
emissions. We had developed a plan to comply with the Annex VI regulations,
which became effective once Annex VI became effective. Additional or new
conventions, laws and regulations may be adopted that could adversely affect our
ability to operate our ships.
The operation of our vessels is also affected by the requirements set forth
in the ISM Code. The ISM Code requires shipowners and bareboat charterers to
develop and maintain an extensive "Safety Management System" that includes the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
dealing with emergencies. The failure of a shipowner or management company to
comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels, and may result
in a denial of access to, or detention in, certain ports. Currently, each of our
vessels is ISM Code-certified. However, there can be no assurance that such
certification will be maintained indefinitely.
Environmental Regulations -- The United States of America Oil Pollution Act
of 1990
OPA established an extensive regulatory and liability regime for the
protection and cleanup of the environment from oil spills. OPA affects all
owners and operators whose vessels trade in the United States of America, its
territories and possessions or whose vessels operate in waters of the United
States of America, which includes the United States' territorial sea of the
United States of America and its 200 nautical mile exclusive economic zone.
Under OPA, vessel owners, operators, charterers and management companies
are "responsible parties" and are jointly, severally and strictly liable (unless
the spill results solely from the act or omission of a third party, an act of
God or an act of war) for all containment and clean-up costs and other damages
arising from discharges or threatened discharges of oil from their vessels,
including bunkers (fuel).
OPA limits the liability of responsible parties for drybulk vessels that
are over 3,000 gross tons to the greater of $1,200 per gross ton or $10 million
(subject to possible adjustment for inflation). These limits of liability do not
apply if an incident was directly caused by violation of applicable United
States federal safety, construction or operating regulations or by a responsible
party's gross negligence or willful misconduct, or if the responsible party
fails or refuses to report the incident or to cooperate and assist in connection
with oil removal activities.
We currently maintain for each of our vessels pollution liability coverage
insurance in the amount of $1 billion per incident. If the damages from a
catastrophic pollution liability incident exceed our insurance coverage, the
payment of those damages may materially decrease our net income.
OPA requires owners and operators of vessels to establish and maintain with
the United States Coast Guard evidence of financial responsibility sufficient to
meet their potential liabilities under OPA. In December 1994, the Coast Guard
implemented regulations requiring evidence of financial responsibility in the
amount of $1,500 per gross ton, which includes the OPA limitation on liability
of $1,200 per gross ton and the U.S. Comprehensive Environmental Response,
Compensation, and Liability Act liability limit of $300 per gross ton. Under the
regulations, vessel owners and operators may evidence their financial
responsibility by showing proof of insurance, surety bond, self-insurance, or
guaranty.
OPA specifically permits individual states to impose their own liability
regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for oil spills. In some cases, states, which have enacted such
legislation, have not yet issued implementing regulations defining vessels
owners' responsibilities under these laws. We currently comply, and intends to
comply in the future, with all applicable state regulations in the ports where
our vessels call.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002 ("MTSA"), came into
effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States of America. Similarly, in December 2002, amendments to the
International Convention for the Safety of Life at Sea ("SOLAS") created a new
chapter of the convention dealing specifically with maritime security. The new
chapter went into effect in July 2004, and imposes various detailed security
obligations on vessels and port authorities, most of which are contained in the
newly created ISPS Code. Among the various requirements are:
o on-board installation of automatic information systems ("AIS"), to
enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international
maritime security standards, exempt non-U.S. vessels from MTSA vessel security
measures provided such vessels have on board, by July 1, 2004, a valid
International Ship Security Certificate ("ISSC") that attests to the vessel's
compliance with SOLAS security requirements and the ISPS Code. Our vessels are
in compliance with the various security measures addressed by the MTSA, SOLAS
and the ISPS Code. We do not believe these additional requirements will have a
material financial impact on our operations.
Inspection by Classification Societies
The hull and machinery of every commercial vessel must be classed by a
classification society authorized by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
SOLAS. Our vessels are currently classed with Lloyd's Register of Shipping,
Bureau Veritas and Nippon Kaiji Kyokai. ISM and International Ship and Port
Facilities Security ("ISPS") certification have been awarded by Bureau Veritas
and the Panama Maritime Authority to our vessels and Eurobulk, our ship
management company.
A vessel must undergo annual surveys, intermediate surveys, drydockings and
special surveys. In lieu of a special survey, a vessel's machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Every vessel is also required to be
drydocked every two to three years for inspection of the underwater parts of
such vessel. If any vessel does not maintain its class and/or fails any annual
survey, intermediate survey, drydocking or special survey, the vessel will be
unable to carry cargo between ports and will be unemployable and uninsurable
which could cause us to be in violation of certain covenants in our loan
agreements. Any such inability to carry cargo or be employed, or any such
violation of covenants, could have a material adverse impact on our financial
condition and results of operations.
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure,
physical damage, collision, property loss, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, there is always an inherent possibility of
marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
OPA, which imposes virtually unlimited liability upon owners, operators and
bareboat charterers of any vessel trading in the exclusive economic zone of the
United States of America for certain oil pollution accidents in the United
States of America, has made liability insurance more expensive for ship owners
and operators trading in the United States of America market. While we believe
that our present insurance coverage is adequate, not all risks can be insured,
and there can be no guarantee that any specific claim will be paid, or that we
will always be able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
We procure hull and machinery insurance, protection and indemnity insurance,
which includes environmental damage and pollution insurance and war risk
insurance and FD&D insurance for our fleet. We do not maintain insurance against
loss of hire, which covers business interruptions that result in the loss of use
of a vessel.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which covers our third-party
liabilities in connection with our shipping activities. This includes
third-party liability and other related expenses of injury or death of crew,
passengers and other third parties, loss or damage to cargo, claims arising from
collisions with other vessels, damage to other third-party property, pollution
arising from oil or other substances, and salvage, towing and other related
costs, including wreck removal. Protection and indemnity insurance is a form of
mutual indemnity insurance, extended by protection and indemnity mutual
associations, or "clubs."
Our current protection and indemnity insurance coverage for pollution is $1
billion per vessel per incident. The 14 P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. Our vessels are members of the UK Club. Each P&I Association has
capped its exposure to this pooling agreement at $4.5 billion. As a member of a
P&I Association, which is a member of the International Group, we are subject to
calls payable to the associations based on our claim records as well as the
claim records of all other members of the individual associations and members of
the pool of P&I Associations comprising the International Group.
C. Organizational structure
Euroseas is the sole owner of all outstanding shares of the subsidiaries listed
in Note 1 of our consolidated financial statements under Item 18 and in exhibit
8.1 to this annual report.
D. Property, plants and equipment
We do not own any real property. As part of the management services provided by
Eurobulk during the period in which we conducted business to date, we have
shared, at no additional cost, offices with Eurobulk. We do not have current
plans to lease or purchase office space, although we may do so in the future.
Our interests in our vessels are owned through our wholly-owned vessel owning
subsidiaries and these are our only material properties. Our vessels are subject
to mortgages. Specifically:
o Searoute Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the
Cyprus flag 33,712 dwt bulk carrier motor vessel Ariel, which was built in
1977 and acquired on March 5, 1993.
o Oceanopera Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of
the Cyprus flag 34,750 dwt bulk carrier motor vessel Nikolaos P, which was
built in 1984 and acquired on July 22, 1996.
o Oceanpride Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of
the Cyprus flag 26,354 dwt bulk carrier motor vessel John P, which was
built in 1981 and acquired on March 7, 1998.
o Alcinoe Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the Cyprus flag 26,354 dwt bulk carrier motor vessel Pantelis P, which was
built in 1981 and acquired on June 4, 1997.
o Alterwall Business Inc. incorporated in Panama on January 15, 2001, owner
of the Panama flag 18,253 dwt container carrier motor vessel HM Qingdao 1
(ex Kuo Jane), which was built in 1990 and acquired on February 16, 2001.
o Allendale Investment S.A. incorporated in Panama on January 22, 2002, owner
of the Panama flag 18,154 dwt container carrier motor vessel Kuo Hsiung,
which was built in 1993 and acquired on May 13, 2002.
o Diana Trading Ltd. incorporated in the Marshall Islands on September 25,
2002, owner of the Marshall Islands flag 69,734 dwt bulk carrier motor
vessel Irini, which was built in 1988 and acquired on October 15, 2002.
o Salina Shipholding Corp., incorporated in the Marshall Islands on October
20, 2005, owner of the Marshall Islands flag 29,693 dwt container carrier
motor vessel Artemis, which was built in 1987 and acquired on November 25,
2005.
o Xenia International Corp., incorporated in the Marshall Islands on April 6,
2006, owner of the Marshall Islands flag 22,568 dwt / 950 TEU multipurpose
motor vessel m/v Tasman Trader, which was built in 1990 and acquired on
April 27, 2006.
We have sold m/v John P and m/v Pantelis P in March and April 2006,
respectively; m/v Pantelis P was delivered to the buyers on May 31, 2006, while
m/v John P is to be delivered approximately at the end of June 2006.
As of December 31, 2005, our vessels m/v Ariel, m/v Nikolaos P, m/v John P and
m/v Pantelis P were collateral to a loan with an outstanding balance of
$9,500,000. As a result of the sale of m/v John P and m/v Pantelis P, an
additional repayment of $3,000,000 will be made to the lender. Our vessels, m/v
HM Quingdao 1 and m/v Kuso Hsiung were collateral to a loan with an outstanding
balance of $17,000,000; our vessel m/v Irini was collateral to two loans with an
aggregate balance of $6,560,000. Our vessel, m/v Artemis, was collateral to a
loan with an outstanding amount of $15,500,000.
Item 4A Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion should be read in conjunction with our financial
statements and footnotes thereto contained in this annual report. This
discussion contains forward-looking statements, which are based on our
assumptions about the future of our business. Our actual results will likely
differ materially from those contained in the forward-looking statements. Please
read "Forward-Looking Statements" for additional information regarding
forward-looking statements used in this annual report. Reference in the
following discussion to "our" and "us" refer to Euroseas, our subsidiaries and
the predecessor operations of Euroseas, except where the context otherwise
indicates or requires.
We are a provider of international seaborne transportation services for the
drybulk and containerized cargo markets. As of December 31, 2005, out fleet
consisted of eight vessels, comprised of five drybulk carriers and three
containerships with a total capacity of 190,904 deadweight tons, or dwt, and
4,636 twenty-foot equivalent units, or teu.
We actively manage the deployment of our fleet between spot market voyage
charters, which generally last from several days to several weeks, and time
charters, which can last up to several years. Some of our vessels may
participate in shipping pools, or, in some cases participate in contracts of
affreightment (please refer to the section "The Dry Cargo Industry" under Item
4B for a description of the above mentioned types of vessel employment). As of
December 31, 2005, one of our vessels participated in a shipping pool.
Vessels operating on time charters provide more predictable cash flows but
can yield lower profit margins than vessels operating in the spot market during
periods characterized by favorable market conditions. Vessels operating in the
spot market generate revenues that are less predictable but may enable us to
achieve increased profit margins during periods of high vessel rates although we
are exposed to the risk of declining vessel rates, which may have a materially
adverse impact on our financial performance. Vessels operating in pools benefit
from better scheduling, and thus increased utilization, and better access to
contracts of affreightment due to the larger commercial operation. We are
constantly evaluating opportunities to increase the number of our vessels
deployed on time charters or to participate in shipping pools (if available for
our vessels), however we only expect to enter into additional time charters or
shipping pools if we can obtain contract terms that satisfy our criteria.
Containerships are employed almost exclusively on time charter contracts. We
carefully evaluate the length and the rate of the time charter contract at the
time of fixing or renewing a contract considering market conditions, trends and
expectations.
We constantly evaluate secondhand vessel purchase opportunities to expand
our fleet accretive to our earnings and cash flow, as well as, sale
opportunities of certain of our vessels. Since December 31, 2005, we have
purchased one multipurpose ship (m/v Tasman Trader built in 1990) and sold two
of our drybulk vessels (m/v John P and m/v Pantelis P, both built in 1981) in
accordance with our strategy of renewing our fleet and expanding it utilizing
the funds we raised from our Private Placement in August 2005.
A. Operating results
Lack of Historical Operating Data for Vessels Before their Acquisition
Consistent with shipping industry practice, other than inspection of the
physical condition of the vessels and examinations of classification society
records, we do not conduct historical financial due diligence when we acquire
vessels. Accordingly, we do not obtain the historical operating data for the
vessels from the sellers because that information is not material to our
decision to make acquisitions, nor do we believe it would be helpful to
potential investors in our common shares in assessing our business or
profitability. Most vessels are sold under a standard agreement, which, among
other things, provides the buyer with the right to inspect the vessel and the
vessel's classification society records. The standard agreement does not give
the buyer the right to inspect, or receive copies of, the historical operating
data of the vessel. Prior to the delivery of a purchased vessel, the seller
typically removes from the vessel all records, including past financial records
and accounts related to the vessel. In addition, the technical management
agreement between the seller's technical manager and the seller is automatically
terminated and the vessel's trading certificates are revoked by its flag state
following a change in ownership.
Consistent with shipping industry practice, we treat the acquisition of a
vessel (whether acquired with or without charter) as the acquisition of an asset
rather than a business. Although vessels are generally acquired free of charter,
we may acquire vessels with a time charter. Where a vessel has been under a
voyage charter, the vessel is delivered to the buyer free of charter, and it is
rare in the shipping industry for the last charterer of the vessel in the hands
of the seller to continue as the first charterer of the vessel in the hands of
the buyer. In most cases, when a vessel is under time charter and the buyer
wishes to assume that charter, the vessel cannot be acquired without the
charterer's consent and the buyer's entering into a separate direct agreement
with the charterer to assume the charter. The purchase of a vessel itself does
not transfer the charter, because it is a separate service agreement between the
vessel owner and the charterer.
When we purchase a vessel and assume or renegotiate a related time charter,
we must take the following steps before the vessel will be ready to commence
operations:
o obtain the charterer's consent to us as the new owner;
o obtain the charterer's consent to a new technical manager;
o obtain the charterer's consent to a new flag for the vessel;
o arrange for a new crew for the vessel;
o replace all hired equipment on board, such as gas cylinders and
communication equipment;
o negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
o register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the flag
state;
o implement a new planned maintenance program for the vessel; and
o ensure that the new technical manager obtains new certificates for
compliance with the safety and vessel security regulations of the flag
state.
Factors Affecting Our Results of Operations
We believe that the important measures for analyzing trends in the results
of our operations consist of the following:
Calendar days. We define calendar days as the total number of days in a
period during which each vessel in our fleet was in our possession
including off-hire days associated with major repairs, drydockings or
special or intermediate surveys. Calendar days are an indicator of the size
of our fleet over a period and affect both the amount of revenues and the
amount of expenses that we record during that period.
Available days. We define available days as the total number of days in a
period during which each vessel in our fleet was in our possession net of
off-hire days associated with scheduled repairs, drydockings or special or
intermediate surveys. The shipping industry uses available days to measure
the number of days in a period during which vessels were available to
generate revenues.
Voyage days. We define voyage days as the total number of days in a period
during which each vessel in our fleet was in our possession net of off-hire
days associated with scheduled and unscheduled repairs, drydockings or
special or intermediate surveys or days waiting to find employment. The
shipping industry uses voyage days to measure the number of days in a
period during which vessels actually generate revenues.
Fleet utilization. We calculate fleet utilization by dividing the number of
our voyage days during a period by the number of our available days during
that period. The shipping industry uses fleet utilization to measure a
company's efficiency in finding suitable employment for its vessels and
minimizing the amount of days that its vessels are off-hire for reasons
such as unscheduled repairs or days waiting to find employment.
Spot Charter Rates. Spot charter rates are volatile and fluctuate on a
seasonal and year to year basis. The fluctuations are caused by imbalances
in the availability of cargoes for shipment and the number of vessels
available at any given time to transport these cargoes.
Time Charter Equivalent ("TCE"). A standard maritime industry performance
measure used to evaluate performance is the daily time charter equivalent,
or daily TCE. Daily TCE revenues are voyage revenues minus voyage expenses
divided by the number of voyage days during the relevant time period.
Voyage expenses primarily consist of port, canal and fuel costs that are
unique to a particular voyage, which would otherwise be paid by a charterer
under a time charter. We believe that the daily TCE neutralizes the
variability created by unique costs associated with particular voyages or
the employment of drybulk carriers on time charter or on the spot market
(containership are chartered on a time charter basis) and presents a more
accurate representation of the revenues generated by our vessels.
Basis of Presentation and General Information
We use the following measures to describe our financial performances:
Voyage revenues. Our voyage revenues are driven primarily by the number of
vessels in our fleet, the number of voyage days during which our vessels
generate revenues and the amount of daily charter hire that our vessels
earn under charters, which, in turn, are affected by a number of factors,
including our decisions relating to vessel acquisitions and disposals, the
amount of time that we spend positioning our vessels, the amount of time
that our vessels spend in drydock undergoing repairs, maintenance and
upgrade work, the age, condition and specifications of our vessels, levels
of supply and demand in the transportation market and other factors
affecting spot market charter rates in both the drybulk carrier and
containership markets.
Commissions. We pay commissions on all chartering arrangements of 1-1.25%
to Eurochart, one of our affiliates, plus additional commission of usually
up to 5% to other brokers involved in the transaction. These additional
commissions, as well as changes to charter rates will cause our commission
expenses to fluctuate from period to period. Eurochart also receives a fee
equal to 1% calculated as stated in the relevant memorandum of agreement
for any vessel bought or sold by them on our behalf.
Voyage expenses. Voyage expenses primarily consist of port, canal and fuel
costs that are unique to a particular voyage which would otherwise be paid
by the charterer under a time charter contract, as well as commissions.
Under time charters, the charterer pays voyage expenses whereas under spot
market voyage charters, we pay such expenses. The amounts of such voyage
expenses are driven by the mix of charters undertaken during the period.
Vessel Operating Expenses. Vessel operating expenses include crew wages and
related costs, the cost of insurance, expenses relating to repairs and
maintenance, the costs of spares and consumable stores, tonnage taxes and
other miscellaneous expenses. Our vessel operating expenses, which
generally represent fixed costs, have historically changed in line with the
size of our fleet. Other factors beyond our control, some of which may
affect the shipping industry in general (including, for instance,
developments relating to market prices for insurance or inflationary
increases) may also cause these expenses to increase.
Management fees. These are the fees that we pay to Eurobulk, our ship
manager and an affiliate, under our management agreement with Eurobulk for
the technical and commercial management that Eurobulk performs on our
behalf. The fee is 590 Euros per vessel per day and is payable monthly in
advance adjusted annually for inflation. Depreciation. We depreciate our
vessels on a straight-line basis with reference to the cost of the vessel,
age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel,
which is estimated to range from 25 to 30 years from the date of original
construction. Remaining useful lives of property are periodically reviewed
and revised to recognize changes in conditions, new regulations or other
reasons. Revisions of estimated lives are recognized over current and
future periods. During 2004, management changed its estimate of the scrap
value of its vessels.
Amortization of deferred drydocking costs. Our vessels are required to be
drydocked approximately every 30 to 60 months for major repairs and
maintenance that cannot be performed while the vessels are trading. We
capitalize the costs associated with drydockings as they occur and amortize
these costs on a straight-line basis over the period between drydockings.
Costs capitalized as part of the drydocking include actual costs incurred
at the drydock yard; cost of hiring riding crews to effect repairs on a
vessel and parts used in making such repairs that are reasonably made in
anticipation of reducing the duration or cost of the drydocking; cost of
travel, lodging and subsistence of our personnel sent to the drydocking
site to supervise; and the cost of hiring a third party to oversee a
drydocking. We believe that these criteria are consistent with industry
practice and that our policy of capitalization reflects the economics and
market values of the vessels. Commencing January 1, 2006, we revised our
policy to exclude the cost of hiring riding crews and the cost of parts
used by riding crews from amounts capitalized as drydocking cost. We have
not restated any historical financial statements because we determined that
the impact of such a revision is not material to our operating income and
net income for any periods presented.
Interest expense. We traditionally finance vessel acquisitions partly with
debt on which we incur interest expense. The interest rate we pay is
generally linked to the 3-month LIBOR rate, although from time to time we
utilize fixed rate loans or could use interest rate swaps to eliminate our
interest rate exposure. Interest due is expensed in the period is accrued.
Loan cost are amortized over the period of the loan; the un-amortized
portion is written-off if the loan is prepaid early.
General and administrative expenses. We will incur expenses consisting
mainly of executive compensation, professional fees, directors liability
insurance and reimbursement of our directors' and officers' travel-related
expenses. General and administrative expenses will increase following the
completion of our Private Placement and Euroseas becoming a public company
due to the duties typically associated with public companies. We acquire
executive services, our CEO, CFO and Secretary, through Eurobulk. In 2005,
executive compensation for such services to us as a public company was
$250,000 starting in July 2005, incremental to the management fee. On an
annualized basis, the compensation for executive services is estimated to
be approximately $500,000 adjusted annually for inflation.
In evaluating our financial condition, we focus on the above measures to
assess our historical operating performance and we use future estimates of
the same measures to assess our future financial performance. In addition,
we use the amount of cash at our disposal and our total indebtedness to
assess our short term liquidity needs and our ability to finance additional
acquisitions with available resources (see also discussion under "Captial
Expenditures" below). In assessing the future performance of our present
fleet, the greatest uncertainty relates to the spot market performance
which affects those of our vessels that are not employed under fixed time
charter contracts. Decisions about the acquisition of additional vessels or
possible sales of existing vessels are based on financial and operational
evaluation of such action and depend on the overall state of the drybulk,
containership and multipurpose vessel market, the availability of purchase
candidates, available employment and our general assessment of economic
prospects for the sectors in which we operate.
Results from Operations
Year ended December 31, 2005 compared year ended December 31, 2004.
Voyage revenues. Voyage revenues for the period were $44.52 million, down
2.6% compared to the same period in 2004 during which voyage revenues amounted
to $45.72 million. The decrease was primarily due to the lower charter rates our
vessels achieved, the fact that we operated on average fewer vessels compared to
the same period in 2004 (on average 7.10 vessels in 2005 versus 7.31 vessels in
2004) and the lower utilization rate of our available days (97.4% in 2005
compared to 99.5% in 2004). Our fleet of 7.10 vessels had throughout the period
38 unscheduled offhire days, primarily due to an unscheduled repair for m/v
Ariel, and, 45 days of scheduled off-hire for the drydocking of m/v Irini and
m/v John P, generating an average TCE rate per vessel of $17,643 per day
compared to $17,839 per day per vessel for the same period in 2004. The average
TCE rate our vessels achieve is a combination of the time charter rate earned by
our vessels under time charter contracts, which is not influenced by market
developments, and the TCE rate earned by our vessels employed in the spot market
which is influenced by market developments. Shipping markets weakened in the
second half of 2005 influencing a portion of the TCE earned by some of our
vessels.
Commissions. Commissions for the period were $2.39 million. At 5.36% of
voyage revenues, commissions were higher than in the same period in 2004. For
the year ended December 31, 2004 commissions amounted to $2.22 million, or 4.85%
of voyage revenues. The higher level of commissions in 2005 is due to the fact
that fewer vessels operated in pools (where commissions are paid by the pool
thus reducing the commissions paid by us).
Voyage expenses. Voyage expenses for the year were $0.67 million related to
expenses for certain voyage charters. For the year ended December 31, 2004
voyage expenses amounted to $0.37 million. Because our vessels are generally
chartered under time charter contracts, voyage expenses represent a small
fraction of voyage revenues; in 2005, we had more voyage charters than in 2004
which resulted in higher voyage expenses.
Vessel operating expenses. Vessel operating expenses were $8.61 million for
the period compared to $8.91 million for the same period in 2004. This
difference was due to the lower average number of vessels we operated in 2005,
specifically an average of 7.10 vessels in 2005 compared to 7.31 vessels in
2004. Daily vessel operating expenses per vessel were rather stable between the
two periods at $3,322 per day in 2005 compared to $3,327 per day in 2004.
Management fees. These are the fees we pay to Eurobulk under our management
agreement with it. As of December 31, 2005, Eurobulk charged us 590 Euros per
day per vessel totalling $1.91 million for the period, or $738 per day per
vessel. For the same period in 2004, management fees amounted to $1.97 million,
or $737 per day per vessel based on the same daily rate per vessel of 590 Euros.
The Euro exchange rate has been on average the same during 2005 and 2004. The
increase in the management fees paid in 2005 also resulted from an increase in
the average number of vessels we owned during the period; in 2005, we owned 7.38
vessels compared to an average of 7.10 vessels we owned during 2004.
Depreciation and amortization. Depreciation and amortization for the period
was $4.21 million. This consists of $2.66 million of depreciation and $1.55
million of amortization of deferred drydocking expenditures. Comparatively,
depreciation and amortization for the same period in 2004 amounted to $2.53
million and $0.93 respectively for a total of $3.46 million. Depreciation in
2005 is higher that in 2004 despite the lower average number of vessels because
the depreciation associated with m/v Artemis which was bought in November 2005
was higher than the corresponding depreciation of m/v Widar which was sold in
April 2004. Amortization for 2005 is higher than the same period in 2004 due to
the amortization of additional drydocking expenditures incurred in 2004 and
2005.
Gain or Loss from vessel sales. There were no vessel sales in the year
ended December 31, 2005. In 2004, m/v Widar was sold on April 24 for a gain of
$2.32 million.
Interest and finance costs, net. Interest and finance costs, net for the
period were $1.04 million. Of this amount, $1.50 million relates to interest
incurred and loan fees and expenses paid and deferred loan fees written-off
during the period, offset by $0.46 million of interest income during the period.
Comparatively, during the same period in 2004, net interest and finance costs
amounted to $0.52 million, comprised by $0.71 million of interest incurred and
loan fees and offset by $0.19 million of interest income. Interest incurred and
loan fees are higher in 2005 due to the higher loan amount outstanding as a
result of the new loans undertaken in May 2005 and December 2005.
Derivative and Foreign Exchange Gains or Losses. During the period, we had
a derivative loss of $0.10 million due to an interest rate swap on a notional
amount of $5 million, and foreign exchange gains of less than $0.01 million. In
the same period in 2004, there was a net derivative gain of $0.03 million (same
interest rate swap) and foreign exchange losses of less than $0.02 million.
Net income. As a result of the above, net income for the year ended on
December 31, 2005 was $25.18 million compared to $30.61 million for the same
period in 2004 representing a decrease of 17.7%.
For the year ended December 31, 2004 compared to the year ended December 31,
2003.
Voyage revenues. Voyage revenues for the year ended December 31, 2004 were
$45.72 million, up 76%, compared to $25.95 million for the year ended December
31, 2003. Results for 2004 reflect contributions from m/v Widar up to April 24,
as the vessel was sold on that day. Our fleet operated throughout the period,
with less than 12 unscheduled off-hire days and about 123 days of scheduled
drydocking resulting in an fleet utilization rate of 99.5% and averaging a TCE
rate per vessel of $17,839 per day; the corresponding fleet utilization and
average TCE equivalent for the year ended December 31, 2003 are 99.3% and $8,965
per vessel per day.
Commissions. Commissions in 2004 were $2.22 million and amounted to 4.85%
of voyage revenues. Commissions for 2003 were $0.91 million amounting to 3.49%
of voyage revenues. Commissions were higher as a percentage in 2004 than in 2003
due the fact that fewer vessels participated in shipping pools in 2004. Shipping
pools pay most commissions before distribution of profits, and, thus the
distribution to the pool participants is net of third party commissions (we paid
only commission to Eurochart for our pool derived revenues).
Voyage expenses. Voyage expenses in 2004 of $0.37 million relate to
expenses for certain voyage charters. Voyage expenses for 2003 were $0.44
million.
Vessel operating expenses. Vessel operating expenses in 2004 were $8.91
million reflecting the operation of an average of 7.31 vessels. Daily vessel
operating expenses per vessel were $3,327 per day, about 11% higher than daily
vessel operating expenses for 2003 which were $3,005 increase primarily due to
higher insurance costs of $98 per vessel per day, higher costs for spare parts
and consumable stores of $87 per vessel per day and an increase of $101 per
vessel per day for crew and related expenses. The total operating expenses in
2003 were $8.78 million reflecting the operation of 8 vessels for the full year.
Management fees. These are the fees we pay to Eurobulk under our management
agreement with it. Management fees in 2004 amounted to $1.97 million or $740 per
calendar day per vessel based on our contract rate of 590 euros per day and the
prevailing exchange rate of dollar to euro. In 2003, management fees amounted to
$1.72 million or $590 per calendar day per vessel. The difference of the fee on
a per day per vessel basis is primarily attributed to the fact that the
management fee was changed from $590 in 2003 to 590 euros per day per vessel in
2004, the different number of shipdays and the U.S. dollar to Euro exchange
rate.
Depreciation and amortization. Depreciation and amortization in 2004 was
$3.46 million. As the vessel m/v Widar was sold in April 2004, the depreciation
charge was reduced for the period after the sale of the vessel and amounted to
$2.53 million for the year. In 2004, we have revised upwards (from $170/ton to
$300/ton) our estimate of the scrap price per lightweight ton, and, the expected
life for m/v Ariel from 28 to 30 years (as it had gone through a special survey
and was not expected to be sold before 2007); as a result the depreciation
charge was lower by $1.40 million reflecting the above adjustments and,
consequently, net income for the period was $1.40 million higher or $0.05 per
share. Amortization of deferred drydock expenses for the period amounted to
$0.93 million, 55% higher than in 2003 due to additional drydocking expenditures
during 2003 and 2004. Depreciation for 2003 was $4.16 million while amortization
of deferred drydocking costs was $0.60 million.
Gain or loss on vessel sale. m/v Widar was sold on April 24, 2004 for a net
gain of $2.32 million. There were no vessel sales during 2003.
Interest and finance costs, net. Interest and finance costs, net in 2004
were $0.52 million. Of this amount, $0.71 million relates to interest incurred
and loan fees and expenses paid and deferred loan fees written-off during the
period offset by $0.19 million of interest income during the period. Net
interest expense for the period ended December 31, 2003 was $0.76 million
reflecting primarily lower interest income of $0.04 million and higher interest
incurred and loan fees of $0.79 million.
Derivative and Foreign Exchange Gains or Losses. During the year ended
December 31, 2004, we had a derivative gain due to an interest rate swap on a
notional amount of $5 million of $0.03 million, and, foreign exchange losses of
less than $0.01 million. In the year ended to December 31, 2003, there was no
derivative exposure and foreign exchange losses of less than $0.01 million.
Net income. Net income for the year ended December 31, 2004 was $30.61
million compared to $8.43 million for the year ended December 31, 2003, an
increase of 263%.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated condensed financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP. The preparation of those financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments
or uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies that involve a high degree of judgment
and the methods of their application.
Depreciation
We record the value of our vessels at their cost (which includes
acquisition costs directly attributable to the vessel and expenditures made to
prepare the vessel for its initial voyage) less accumulated depreciation. We
depreciate our vessels on a straight-line basis over their estimated useful
lives, estimated to range from 25 to 30 years from date of initial delivery from
the shipyard. We believe that the 25 to 30 year range of depreciable life is
consistent with that of other ship owners. One of our vessels has already
reached an age of 28 years and continues to be employed. Depreciation is based
on cost less the estimated residual scrap value. In 2004, the estimated scrap
value of the vessels was increased from $170 to $300 per LWT to better reflect
market price developments in the scrap metal market. An increase in the useful
life of the vessel or in the residual value would have the effect of decreasing
the annual depreciation charge and extending it into later periods. A decrease
in the useful life of the vessel or in the residual value would have the effect
of increasing the annual depreciation charge.
Deferred drydock costs
Our vessels are required to be drydocked approximately every 30 to 60
months for major repairs and maintenance that cannot be performed while the
vessels are trading. We capitalize the costs associated with drydockings as they
occur and amortize these costs on a straight-line basis over the period between
drydockings. Costs capitalized as part of the drydocking include actual costs
incurred at the drydock yard cost of hiring riding crews to perform specific
tasks determined by us in accordance with the requirements of the classification
society in connection with the drydocking and parts used in performing such
tasks, cost of travel, lodging and subsistence of our personnel sent to the
drydocking site to supervise and the cost of hiring a third party to oversee a
drydocking. We believe that these criteria are consistent with industry practice
and that our policy of capitalization reflects the economics and market values
of the vessels. Commencing January 1, 2006, we have revised our policy to
exclude the cost of hiring riding crews and the cost of parts used by riding
crews from amounts capitalized as drydocking cost. We have not restated any
historical financial statements because we determined that the impact of such a
revision is not material to our operating income and net income for any periods
presented.
Impairment of long-lived assets
We evaluate the carrying amounts and periods over which long-lived assets
are depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flows for each vessel and
compare it to the vessel carrying value. In the event that impairment occurred,
we would determine the fair value of the related asset and we record a charge to
operations calculated by comparing the asset's carrying value to the estimated
fair market value. We estimate fair market value primarily through the use of
third party valuations performed on an individual vessel basis.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46, "Consolidation of Variable Interest Entities," which clarified the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to address perceived weaknesses in accounting for entities commonly
known as special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities ("VIEs") only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN
46R"), which clarified certain complexities of FIN 46. FIN 46R is applicable for
financial statements issued for reporting periods that end after March 5, 2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard will not have a material impact on the financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually the
vesting period). SFAS No. 123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective for our fiscal year 2006.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("FAS 153"). This statement amends APB Opinion No. 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. Under SFAS No. 153, if a non-monetary exchange
of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS No. 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
FASB has issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and SFAS No. 3. The Statement applies to all
voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle.
SFAS No. 154 requires retrospective applications to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 previously required that most voluntary change
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No. 154 improves financial reporting because its requirements enhance the
consistency of financial information between periods. The Company is analyzing
the effect which this pronouncement will have on its financial condition,
statement of operations, and cash flows. This statement will be effective for
the Company on January 1, 2006. The Company does not believe that this
pronouncement will have and effect on it's financial condition, results of
operation or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments." This Statement amends SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and resolves issues addressed in Statement 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets."
SFAS No. 155 permits fair value re-measurement for any hybrid financial
instruments that contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS No.
155 also clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The Company has not completed the study of what effect SFAS No. 155
will have on its financial position and results of operations.
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB)
relating to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment" (Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143", which clarifies the term "conditional asset retirement
obligation" as used in SFAS No. 143 "Accounting for Asset Retirement
Obligations". Specifically, FIN 47 provides that an asset retirement obligation
is conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. Management is currently evaluating the effect
that adoption of FIN 47 will have on the Company's financial position and
results of operations.
B. Liquidity and Capital Resources
Historically, our sources of funds have been equity provided by our
shareholders, operating cash flows and long-term borrowings. Our principal use
of funds has been capital expenditures to establish and expand our fleet,
maintain the quality of our drybulk carriers, comply with international shipping
standards and environmental laws and regulations, fund working capital
requirements, make principal repayments on outstanding loan facilities, and pay
dividends. We expect to rely upon funds raised from our Private Placement,
operating cash flows, long term borrowings, as well as future offerings to
implement our growth plan and meet our liquidity needs going forward. In our
opinion our working capital is sufficient for our present requirements.
Cash Flows
As of December 31, 2005, we had a cash balance of $20.45 million, funds due
from related companies of $3.01 million and $1.08 million cash in restricted
retention accounts. Amounts due from related party represent net disbursements
and collections made by our fleet manager, Eurobulk, on behalf of the
ship-owning companies during the normal course of operations for which they have
the right of offset. Amounts due from related parties mainly consist of advances
to our fleet manager of funds to pay for all anticipated vessel expenses. The
amount of $3.01 million due from related parties as of December 31, 2005
therefore consists entirely of such deposits. As of March 31, 2006 the amount
due from related party was approximately $0.24 million. Interest earned on funds
deposited in related party accounts is credited to the account of the
ship-owning companies or Euroseas Working capital is current assets minus
current liabilities, including the current portion of long term debt. We have a
working capital surplus of $6.94 million including the current portion of long
term debt which was $14.43 million as of December 31, 2005. The working capital
surplus includes the un-invested portion of the funds from our Private Placement
which are estimated at about $12 million after expenses of $3.5 (paid and
accrued) and after the $5.50 million used for the purchase of m/v Artemis in
November 2005. All of the $46.88 million dividend declared/return of capital was
paid as of December 31, 2005. We consider our liquidity sufficient for our
operations.
Net cash from operating activities.
Our net cash from operating activities for 2005 was $20.59 million. This
represents the net amount of cash, after expenses, generated by chartering our
vessels. Eurobulk and another related party, on our behalf, collect our
chartering revenues and pay our chartering expenses. Net income for the period
was $25.18 million, which was reduced by amounts due from related parties of
$7.64 million. The increase in the amounts due from related companies is
primarily due to a payment of the amount due to related companies of $4.63
million as of December 31, 2004 and advances to our fleet manager of funds to
pay for all anticipated vessel expenses. In the same period in 2004, net cash
flow from operating activities was $34.21 million based on a contribution of net
income of $30.61 million.
Net cash from investing activities.
We purchased m/v Artemis for $20.82 million and we had to put in retention
accounts $1.01 million to satisfy requirements of our new loan facilities for a
total of funds used in investment activities of $21.83 million. During the same
period in 2004, cash flow from investing activities amounted to $6.76 million
contribution reflecting the sale of m/v Widar in April 2004.
Net cash used in financing activities.
In 2005, net cash provided by financing activities amounted to $6.19
million. This is mainly accounted by proceeds from our Private Placement and
share capital increases of $18.70 million and net proceeds from long term debt
of $34.57 offset by $46.88 million of dividend / return of capital and $0.21
million in loan arrangement fees paid. In 2004, net cash used in financing
activities amounted to $33.57 million reflecting dividend payments of $26.96
million and repayment of debt of $6.61 million.
Debt Financing
We operate in a capital intensive industry which requires significant
amounts of investment, and we fund a major portion of this investment through
long term debt. We maintain debt levels we consider prudent based on our market
expectations, cash flow, interest coverage and percentage of debt to capital.
During May 2005, we repaid loans of $1.40 million and refinanced another $8.89
million and drew down $37.70 million of new loans in addition to $3.70 million
of a continuing credit facility. On December 30, 2005, we drew $15.50 million of
a loan signed on December 28, 2005 to partly finance the acquisition of m/v
Artemis.
As of December 31, 2005, after considering the loan refinancing and new
loans discussed in the preceding paragraph, we had five outstanding loans with a
combined outstanding balance of $48.56 million. These loans have maturity dates
between 2008 and 2011. Our long-term debt as of December 31, 2005 comprises bank
loans granted to our vessel-owning subsidiaries. A description of our loans as
of December 31, 2005 is provided in Note 9 of our attached financial statements.
Our loans have various covenants which include restrictions to changes in
management and ownership of the vessels, distribution of dividends or any other
distribution of profits or assets, additional indebtedness and mortgaging of
vessels without lenders' consent, the sale of vessels, as well as minimum
requirements regarding the hull cover ratio and corporate liquidity. If we are
found to be in default of any covenants we might be required to provide
supplemental collateral to the lenders, usually in the form of restricted cash.
Increases in restricted cash required to satisfy loan covenants, would reduce
funds available for investment or working capital and could have a negative
impact on our operations. If we cannot correct any violated covenants, we might
be required to repay all or part of our loans, which, in turn, might require us
to sell one or more of our vessels under distressed conditions. We are not in
default of any credit facility covenant as of December 31, 2005.
Capital Expenditures
We make capital expenditures from time to time in connection with our
vessel acquisitions. Our two most recent vessel acquisitions consists of one
containership, m/v Artemis, which was delivered to us in November 2005, and one
multipurpose vessel, m/v Tasman Trader, which was delivered to us in April 2006.
We financed both of those purchases initially with 100% equity. We subsequently
arranged for a loan to partly finance the acquisition of m/v Artemis and we are
in the process to arrange for a loan to finance partly the acquisition of m/v
Tasman Trader to free funds for further acquisitions.
In March and April 2006, we signed agreements to sell m/v John P and m/v
Pantelis P. We delivered m/v Pantelis P on May 31, 2006, and we expect to
deliver m/v John P during June 2006. We will use part of the proceeds from the
sale of the above two vessels to repay a portion of the vessels' debt and
possibly for additional acquisitions.
Two of our vessels in our operating fleet underwent scheduled special
surveys in 2005, one vessel underwent special survey in 2006 and one additional
vessel is scheduled to undergo a special survey in 2006. This process of
recertification may require us to reposition these vessels from a discharge port
to shipyard facilities, which will reduce our operating days during the period.
The loss of earnings associated with the decrease in operating days, together
with the capital needs for repairs and upgrades, is expected to result in
increased cash flow needs. We expect to fund these expenditures with cash on
hand.
Dividends
On May 12, 2006, the Company announced the declaration of its third
consecutive dividend since its Private Placement in August 2005. This dividend
of $0.06 per common share was paid on or about June 16, 2006 to all shareholders
of record as of June 2, 2006. This follows the Company's prior dividend
declarations of $0.06 per common share on February 7, 2006 and of $0.07 per
share on November 2, 2005. The aggregate amount of all such dividends was
$7,193,462.
C. Research and development, patents and licenses, etc.
We incur from time to time expenditures relating to inspections for
acquiring new vessels that meet our standards. Such expenditures are
insignificant and they are expensed as they incur. D. Trend information
D. Trend Information
Our results of operations depend primarily on the charter hire rates that
we are able to realize. Charter hire rates paid for drybulk, containership and
multipurpose carriers are primarily a function of the underlying balance between
vessel supply and demand.
The demand for drybulk carrier, containership and multipurpose vessel
capacity is determined by the underlying demand for commodities transported in
these vessels, which in turn is influenced by trends in the global economy. One
of the main reasons for the resurgence in drybulk and containerized trade has
been the growth in imports by China of iron ore, coal and steel products during
the last five years and exports of finished goods. Demand for drybulk carrier
and containership capacity is also affected by the operating efficiency of the
global fleet, with port congestion, which has been a feature of the market in
2004 and the first half of 2005, absorbing additional tonnage especially in the
drybulk market.
The supply of drybulk carriers, containerships and multipurpose vessels is
dependent on the delivery of new vessels and the removal of vessels from the
global fleet, either through scrapping or loss. As of December 31, 2005, the
global drybulk carrier orderbook amounted to approximately 67 million dwt, or
about 19% of the existing fleet, with most vessels on the orderbook expected to
be delivered within 30 months. Containership orderbook (including multipurpose
vessels) amounted to approximately 9.6 million teu, or about 53% of the existing
fleet with most vessels, again, expected to be delivered within 30 months. The
level of scrapping activity is generally a function of scrapping prices in
relation to current and prospective charter market conditions, as well as
operating, repair and survey costs. The average age at which a vessel is
scrapped over the last five years has been 26 years. However, due to recent
strength in the drybulk and container shipping industry, the average age at
which the vessels are scrapped has increased; during 2004 and 2005, the majority
of the handysize and handymax bulkers and feedership containerships that were
scrapped were between 28-30 years old.
E. Off-balance Sheet Arrangements
As of December 31, 2005 we did not have any off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
Contractual Obligations and Commitments
Contractual obligations are set forth in the following table as of December 31,
2005:
Less Than One to
One Three Three to More Than
In U.S. dollars Total Year Years Five Years Five Years
--------------------------------------------------------------------------------------------------------------------
Bank debt $ 48,560,000 $ 14,430,000 $ 23,630,000 $ 8,600,000 $ 1,900,000
Interest Payment (1) $ 7,377,000 $ 2,766,000 $ 3,410,000 $ 1,141,000 $ 60,000
Management fees (2) $ 8,284,202 $ 2,041,825 $ 3,971,477 $ 2,270,900 -
----------
(1) Assuming the amortization of the loan described above and an estimated
average effective interest rate of about 6.68%, 7.70%, 7.40% and 7.25% for the
four periods, respectively, based on an underlying assumption for LIBOR of
5.50%.
(2) Refers to our obligation for management fees of 590 Euros per day per
vessel (approximately $738) for the eight vessels owned by Euroseas at December
31, 2005 and those acquired and sold in 2006 under our five-year management
contract, which expires on January 31, 2010. For years two to five we have
assumed no changes in the number of vessels, an inflation rate of 3.5% per year
and no changes in this US Dollar to Euro exchange rate (assumed approximately at
1.25 USD/Euro).
G. Safe Harbor
See section "Forward-Looking Statements" at the beginning of this annual report.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following sets forth the name and position of each of our directors and
executive officers.
Name Age Position
---- --- --------
Aristides J. Pittas 47 Chairman, President and CEO; Class A Director
Dr. Anastasios Aslidis 46 CFO and Treasurer; Class A Director
Aristides P. Pittas 54 Vice Chairman; Class A Director
Stephania Karmiri 38 Secretary
Panagiotis Kyriakopoulos 45 Class B Director
George Skarvelis 45 Class B Director
George Taniskidis 45 Class C Director
Gerald Turner 58 Class C Director
Aristides J. Pittas has been a member of our board of directors and our
Chairman and CEO since our inception on May 5, 2005. Since 1997, Mr. Pittas has
also been the President of Eurochart S.A., our affiliate. Eurochart is a
shipbroking company specializing in chartering and selling and purchasing ships.
Since 1997, Mr. Pittas has also been the President of Eurotrade, a ship
operating company and our affiliate. Since January 1995, Mr. Pittas has been the
President and Managing Director of Eurobulk, our affiliate. He resigned as
Managing Director in June 2005. Eurobulk is a ship management company that
provides ocean transportation services. From September 1991 to December 1994,
Mr. Pittas was the Vice President of Oceanbulk Maritime SA, a ship management
company. From March 1990 to August 1991, Mr. Pittas served both as the Assistant
to the General Manager and the Head of the Planning Department of Varnima
International SA, a shipping company operating tanker vessels. From June 1987
until February 1990, Mr. Pittas was the head of the Central Planning department
of Eleusis Shipyards S.A. From January 1987 to June 1987, Mr. Pittas served as
Assistant to the General Manger of Chios Navigation Shipping Company in London,
a company that provides ship management services. From December 1985 to January
1987, Mr. Pittas worked in the design department of Eleusis Shipyards S.A. where
he focused on shipbuilding and ship repair. Mr. Pittas has a B.Sc. in Marine
Engineering from University of Newcastle -- Upon-Tyne and a MSc in both Ocean
Systems Management and Navel Architecture and Marine Engineering from the
Massachusetts Institute of Technology.
Dr. Anastasios Aslidis has been our CFO and Treasurer and member of our
Board since September 2005. Priors to joining Euroseas, Dr. Aslidis was a
partner at Marsoft, an international consulting firm focusing on investment and
risk management in the maritime industry. Dr. Aslidis has more than 18 years of
experience in the maritime industry. Between 2003 and 2005, as part of his work
at Marsoft Inc., he worked on financial risk management methods for shipowners
and banks lending to the maritime industry, especially as pertaining to
compliance to the Basel II Capital Accords; he was, also, consultant to the
Board of Directors of shipping companies (public and private) advising in
strategy development, asset selection and investment timing. Between 1993 and
2003, as part of his work at Marsoft, he worked on various projects including
development of portfolio and risk management methods for shipowners,
establishment of investments funds and structuring private equity in the
maritime industry and business development for Marsoft's services. Between 1991
and 1993, Dr. Aslidis work on the economics of the offshore drilling industry.
Between 1989 and 1991, he worked on the development of a trading support system
for the drybulk shipping industry on behalf of a major European owner. Dr.
Aslidis holds a diploma in Naval Architecture and Marine Engineering from the
National Technical University of Athens (1983), M.S. in Ocean Systems Management
(1984) and Operations Research (1987) from MIT, and a Ph.D. in Ocean Systems
Management (1989) also from MIT.
Aristides P. Pittas has been a member of our board of directors since our
inception on May 5, 2005 and our Vice Chairman since September 1, 2005. Mr.
Pittas has been a shareholder in over 70 oceangoing vessels during the last 20
years. Since February 1989, Mr. Pittas has been the Vice President of Oceanbulk
Maritime SA, a ship management company. From November 1987 to February 1989, Mr.
Pittas was employed in the supply department of Drytank SA, a shipping company.
From November 1981 to June 1985, Mr. Pittas was employed at Trust Marine
Enterprises, a brokerage house as a S+P broker. From September 1979 to November
1981, Mr. Pittas worked at Gourdomichalis Maritime SA in the operation and
Freight Collection department. Mr. Pittas has a B.Sc in Economics from Athens
School of Economics.
Stephania Karmiri has been our Secretary since our inception on May 5,
2005. Since July 1995, Mrs. Karmiri has been executive secretary to Eurobulk,
our affiliate. Eurobulk is a ship management company that provides ocean
transportation services. At Eurobulk, Mrs. Karmiri has been responsible for
dealing with sale and purchase transactions, vessel registrations/deletions,
bank loans, supervision of office administration and office/vessel
telecommunication. From May 1992 to June 1995, she was secretary to the
technical department of Oceanbulk Maritime SA, a ship management company. From
1988 to 1992, Mrs. Karmiri served as assistant to brokers for Allied
Shipbrokers, a company that provides shipbroking services to sale and purchase
transactions. Mrs. Karmiri has taken assistant accountant and secretarial
courses from Didacta college.
Panagiotis Kyriakopoulos has been a member of our board of directors since
its inception. Since July 2002, he has been the C.E.O. of New Television S.A.,
one of the leading Mass Media Companies in Greece, running television and radio
stations. From July 1997 to July 2002 he was the C.E.O. of the Hellenic Post
Group, the Universal Postal Service Provider, having the largest retail network
in Greece for postal and financial services products. From March 1996 until July
1997, Mr. Kyriakopoulos was the General Manager of ATEMKE SA, one of the leading
construction companies in Greece listed on the Athens Stock Exchange. From
December 1986 to March 1996, he was the Managing Director of Globe Group of
Companies, a group active in the areas of shipowning and management, textiles
and food and distribution. The company was listed on the Athens Stock Exchange.
From June 1983 to December 1986, Mr. Kyriakopoulos was an assistant to the
Managing Director of Armada Marine S.A., a company active in international
trading and shipping, owning and managing a fleet of 12 vessels. Presently he is
a member of the Board of Directors of the Hellenic Post and General Secretary of
the Hellenic Private Television Owners Union. He has also been an investor in
the shipping industry for more than 20 years. Mr. Kyriakopoulos has a B.Sc.
degree in Marine Engineering from the University of Newcastle upon Tyne and a
MSc. degree in Naval Architecture and Marine Engineering with specialization in
Management from the Massachusetts Institute of Technology.
George Skarvelis has been a member of our board of directors since our
inception. He has been active in shipping since 1982. In 1992, he founded Marine
Spirit S.A., a ship management company. Between 1999 and 2003, Marine Spirit
acted as one of the crewing managers for Eurobulk. From 1986 until 1992, Mr.
Skarvelis was operations director at Markos S. Shipping Ltd. From 1982 until
1986, he worked with Glysca Compania Naviera, a management company of five
vessels. Over the years Mr. Skarvelis has been a shareholder in numerous ships.
He has a B.Sc. in economics from the Athens University Law School.
George Taniskidis has been a member of our board of directors since our
inception. He is the Chairman and Managing Director of NovaBank and a member of
the Board of Directors of BankEuropa (subsidiary bank of NovaBank in Turkey). He
is a member of the Executive Committee of the Hellenic Banks Association. From
2003 until 2005, he was a member of the Board of Directors of Visa International
Europe, elected by the Visa issuing banks of Cyprus, Malta, Portugal, Israel and
Greece. From 1990 to 1998, Mr. Taniskidis worked at XIOSBANK (until its
acquisition by Piraeus Bank in 1998) in various positions, with responsibility
for the bank's credit strategy and network. Mr. Taniskidis studied Law in the
National University of Athens and in the University of Pennsylvania Law School,
where he received a LL.M. After law school, he joined the law firm of Rogers &
Wells in New York, where he worked until 1989 and was also a member of the New
York State Bar Association. He is also a member of the Young Presidents
Organization.
Gerald Turner has been a member of our board of directors since our
inception. Since 1999, he has been the Chairman and Managing Director of AON
Turner Reinsurance Services. From 1987 to 1999, he was the Chairman and sole
owner of Turner Reinsurance services. From 1977 to 1987, he was the Managing
Director of E.W.Payne Hellas (member of the Sedgwik group).
Family Relationships
Aristides P. Pittas is the cousin of Aristides J. Pittas, our CEO.
B. Compensation
Executive Compensation
We have an executive services agreement with Eurobulk for the provision of
the services of our executives, Mr. Aristides J. Pittas, Mr. Anastasios Aslidis
and Mrs. Stephania Karmiri, for which we compensate Eurobulk $500,000 per year
adjusted annually for inflation. During 2005 we paid Eurobulk for the provision
of such services an aggregate of $250,000, reflecting commencement of the
provision of such services in July 2005.
Director Compensation
Our directors who are also our employees or have executive positions or
beneficially own greater than 10% of the outstanding common stock will receive
no compensation for serving on our Board or its committees.
Directors who are not our employees, do not have any executive position and
do not beneficially own greater than 10% of the outstanding common stock will
receive the following compensation: an annual retainer of $10,000, plus an
additional retainer of $5,000, if serving as Chairman of the Audit Committee.
All directors are reimbursed reasonable out-of-pocket expenses incurred in
attending meetings of our Board of Directors or any committee of our Board of
Directors.
C. Board Practices
The term of our Class A directors expired in 2005. The Class A directors
will continue to act as directors until the next annual meeting when elections
will take place. The term of our Class B directors expires in 2006 and the term
of our Class C directors expires in 2007.
Audit Committee
We currently have an audit committee comprised of three independent members
of our board of directors. The members of the Audit Committee are Mr. Panos
Kyriakopoulos (Chairman and financial expert), Mr. Gerald Turner and Mr. George
Taniskidis. Our Board decided not to set-up a compensation or nominations
committee, and instead, the entire Board performs those responsibilities.
Code of Ethics
We have adopted a code of ethics that complies with the applicable
guidelines issued by the SEC.
Corporate Governance
Our Company's corporate governance practices are in compliance with, and
are not prohibited by, the laws of the Republic of the Marshall Islands.
Therefore, we are exempt from many of NASDAQ's corporate governance practices
other than the requirements regarding the disclosure of a going concern audit
opinion, submission of a listing agreement, notification of material
non-compliance with NASDAQ corporate governance practices, and the establishment
and composition of an audit committee and a formal written audit committee
charter. The practices followed by us in lieu of NASDAQ's corporate governance
rules are described below.
o We are not required under Marshall Islands law to maintain a board of
directors with a majority of independent directors, and we cannot
guarantee that we will always in the future maintain a board of
directors with a majority of independent directors.
o In lieu of a compensation committee comprised of independent
directors, our board of directors will be responsible for establishing
the executive officers' compensation and benefits. Under Marshall
Islands law, compensation of the executive officers is not required to
be determined by an independent committee.
o In lieu of a nomination committee comprised of independent directors,
our board of directors will be responsible for identifying and
recommending potential candidates to become board members and
recommending directors for appointment to board committees.
Shareholders may also identify and recommend potential candidates to
become candidates to become board members in writing. No formal
written charter has been prepared or adopted because this process is
outlined in our bylaws.
o In lieu of obtaining an independent review of related party
transactions for conflicts of interests, consistent with Marshall
Islands law requirements, a related party transaction will be
permitted if: (i) the material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board and the Board in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the
disinterested directors, or, if the votes of the disinterested
directors are insufficient to constitute an act of the Board as
defined in Section 55 of the Marshall Islands Business Corporations
Act, by unanimous vote of the disinterested directors; or (ii) the
material facts as to his relationship or interest are disclosed and
the shareholders are entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by a simple
majority vote of the shareholders; or (iii) the contract or
transaction is fair as to the Company as of the time it is authorized,
approved or ratified, by the Board, a committee thereof or the
shareholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board or of a
committee which authorizes the contract or transaction.
o As a foreign private issuer, we are not required to solicit proxies or
provide proxy statements to NASDAQ pursuant to NASDAQ corporate
governance rules or Marshall Islands law. Consistent with Marshall
Islands law, we will notify our shareholders of meetings between 15
and 60 days before the meeting. This notification will contain, among
other things, information regarding business to be transacted at the
meeting. In addition, our bylaws provide that shareholders must give
us advance notice to properly introduce any business at a meeting of
the shareholders. Our bylaws also provide that shareholders may
designate in writing a proxy to act on their behalf.
o In lieu of holding regular meetings at which only independent
directors are present, our entire board of directors, a majority of
whom are independent, will hold regular meetings as is consistent with
the laws of the Republic of the Marshall Islands.
Other than as noted above, we are in full compliance with all other
applicable NASDAQ corporate governance standards.
D. Employees
We have no salaried employees, although we reimburse our fleet manager,
Eurobulk, for the salaries of our CEO, CFO and Secretary. Eurobulk also ensures
that all seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions, and that all our vessels
employ experienced and competent personnel. As of December 31, 2005, 65 officers
and 120 crew members served on board the vessels in our fleet.
E. Share Ownership
The following table sets forth certain information the ownership of our
common stock by each of our directors and executive officers, and all of our
directors and executive officers as a group.
Shares
Name of Beneficially Percent
Title of Class Beneficial Owner(1) Owned of Class
------------------------------------------------------------------------------------------
Common Stock Aristides J. Pittas(2) 714,100 1.89%
Common Stock George Skarvelis(3) 1,576,971 4.17%
Common Stock George Taniskidis(4) 29,754 *
Common Stock Gerald Turner (5) 422,509 1.12%
Common Stock Panagiotis Kyriakopoulos (6) 178,525 *%
Common Stock Aristides P. Pittas(7) 2,439,842 6.44%
Common Stock Anastasios Aslidis 0 *
Common Stock Stephania Karmiri(8) 5,951 *
Common Stock All directors and officers 5,367,652 14.18%
and 5% owners as a group
----------
* Indicates less than 1.0%.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a) of
the Exchange Act and generally includes voting or investment power with respect
to securities. Except as subject to community property laws, where applicable,
the person named above has sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by him/her.
(2) Includes 714,100 shares of common stock held of record by Friends, by virtue
of Mr. Pittas' ownership interest in Friends. Mr. Pittas disclaims beneficial
ownership except to the extent of his pecuniary interest.
(3) Includes 1,576,971 shares of common stock held of record by Friends, by
virtue of Mr. Skarvelis' ownership interest in Friends. Mr. Skarvelis disclaims
beneficial ownership except to the extent of his pecuniary interest.
(4) Includes 29,754 shares of common stock held of record by Friends, by virtue
of Mr. Taniskidis' ownership in Friends. Mr. Taniskidis disclaims beneficial
ownership except to the extent of his pecuniary interest.
(5) Includes 422,509 shares of common stock held of record by Friends, by virtue
of Mr. Turner's ownership interest in Friends. Mr. Turner disclaims beneficial
ownership except to the extent of his pecuniary interest.
(6) Includes 178,525 shares of common stock held of record by Friends, by virtue
of Mr. Kyriakopoulos' ownership in Friends. Mr. Kyriakopoulos disclaims
beneficial ownership except to the extent of his pecuniary interest.
(7) Includes 2,439,842 shares of common stock held of record by Friends, by
virtue of Mr. Pittas' ownership interest in Friends. Mr. Pittas disclaims
beneficial ownership except to the extent of his pecuniary interest.
(8) Includes 5,951 shares of common stock held of records by Friends, by virtue
of Mrs. Karmiri's ownership in Friends. Mrs. Karmiri disclaims beneficial
ownership except to the extent of her pecuniary interest.
All of the shares of our common stock have the same voting rights and are
entitled to one vote per share.
Equity Incentive Plan
We do not currently have any equity incentive plans. However, we expect to
adopt an equity incentive plan which will entitle our officers, key employees
and directors to receive options to acquire shares of our common stock,
restricted shares and stock appreciation rights.
Options
No options were granted during the fiscal year ended December 31, 2005.
There are currently no options outstanding to acquire any of our shares.
Item 7. Major Shareholders and Related Party Transactions
A. Major Stockholders
The following table sets forth certain information regarding the beneficial
ownership of our common stock by each person or entity known by it to be the
beneficial owner of more than 5% of the outstanding shares of our common stock,
each of our directors and executive officers, and all of our directors and
executive officers as a group. All of our stockholders, including the
stockholders listed in this table, are entitled to one vote for each share of
common stock held. To our knowledge, there has not been any change in ownership
by any stockholder listed in the table.
Shares
Name of Beneficially Percent
Title of Class Beneficial Owner(1) Owned of Class
--------------------------------------------------------------------------------
Common Stock Friends Investment
Company Inc.(2) 29,754,166 78.59%
Common Stock Aristides J. Pittas(3) 714,100 1.89%
Common Stock George Skarvelis(4) 1,576,971 4.17%
Common Stock George Taniskidis(5) 29,754 *
Common Stock Gerald Turner(6) 422,509 1.12%
Common Stock Panagiotis Kyriakopoulos(7) 178,525 *
Common Stock Aristides P. Pittas(8) 2,439,842 6.44%
Common Stock Anastasios Aslidis 0 *
Common Stock Stephania Karmiri(9) 5,951 *
Common Stock All directors and officers
and 5% owners as a group 29,754,166 78.59%
----------
* Indicates less than 1.0%.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a) of
the Exchange Act and generally includes voting or investment power with respect
to securities. Except as subject to community property laws, where applicable,
the person named above has sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by him/her.
(2) John Pittas has investment power and voting control over these securities.
(3) Includes 714,100 shares of common stock held of record by Friends, by virtue
of Mr. Pittas' ownership interest in Friends. Mr. Pittas disclaims beneficial
ownership except to the extent of his pecuniary interest.
(4) Includes 1,576,971 shares of common stock held of record by Friends, by
virtue of Mr. Skarvelis' ownership interest in Friends. Mr. Skarvelis disclaims
beneficial ownership except to the extent of his pecuniary interest.
(5) Includes 29,754 shares of common stock held of record by Friends, by virtue
of Mr. Taniskidis' ownership in Friends. Mr. Taniskidis disclaims beneficial
ownership except to the extent of his pecuniary interest.
(6) Includes 422,509 shares of common stock held of record by Friends, by virtue
of Mr. Turner's ownership interest in Friends. Mr. Turner disclaims beneficial
ownership except to the extent of his pecuniary interest.
(7) Includes 178,525 shares of common stock held of record by Friends, by virtue
of Mr. Kyriakopoulos' ownership in Friends. Mr. Kyriakopoulos disclaims
beneficial ownership except to the extent of his pecuniary interest.
(8) Includes 2,439,842 shares of common stock held of record by Friends, by
virtue of Mr. Pittas' ownership interest in Friends. Mr. Pittas disclaims
beneficial ownership except to the extent of his pecuniary interest.
(9) Includes 5,951 shares of common stock held of records by Friends, by virtue
of Mrs. Karmiri's ownership in Friends. Mrs. Karmiri disclaims beneficial
ownership except to the extent of her pecuniary interest.
B. Related Party Transactions
Each of our vessel owning subsidiaries has entered into a management
contract with Eurobulk, an affiliated company. Pursuant to the management
contracts, Eurobulk is responsible for all aspects of management and maintenance
for each of the vessels. Pursuant to the management agreements, we are obligated
to pay Eurobulk 590 Euros per vessel per day, adjusted annually for inflation,
to provide all ship operations management and oversight, including supervising
the crewing, supplying, maintaining and drydocking of vessels, commercial
management regarding identifying suitable vessel charter opportunities and
certain accounting services. These agreements were renewed on January 31, 2005
with an initial term of 5 years and will automatically be extended after the
initial period. Termination is not effective until 2 months following notice
having been delivered in writing by either party after the initial 5-year
period.
We receive chartering and S&P services from Eurochart S.A., an affiliate,
and pay a commission of 1 -- 1.25% on charter revenue and 1% on vessel purchase
or sale price. We will pay commissions to major charterers and their brokers as
well that usually range from 3.75% -- 5.00%. Since January 1, 2006, Eurochart
S.A. received (or, is entitled to receive when the vessel is delivered to
buyers) commissions of $107,750, $49,500 and $46,500 for the purchase of m/v
Tasman Trader, the sale of m/v John P and the sale of m/v Pantelis P,
respectively, corresponding to the 1% of the purchase or sale price as per the
above agreement (see also Item 8B).
More Maritime Agencies Inc. are crewing agents and Sentinel Marine Services
Inc. are insurance brokering companies and affiliates to whom we will pay a fee
of $50 per crew member/month and a commission on premium not exceeding 5%,
respectively.
We believe that the fees we pay to affiliated entities are no greater than
what we would pay to non-affiliated third parties and are standard industry
practice. However, there could be conflicts due to these affiliations.
Aristides J. Pittas, Euroseas' President, CEO and Chairman, has provided
personal guarantees for some of Euroseas' debts. Eurobulk has provided corporate
guarantees for such debts.
We have entered into a registration rights agreement with Friends, our
largest shareholder, pursuant to which we granted Friends the right, under
certain circumstances and subject to certain restrictions, including
restrictions included in the lock-up agreement to which Friends is a party, to
require us to register under the Securities Act shares of our common stock held
by Friends. Under the registration rights agreement, Friends has the right to
request us to register the sale of shares held by it on its behalf and may
require us to make available shelf registration statements permitting sales of
shares into the market from time to time over an extended period. In addition,
Friends has the ability to exercise certain piggyback registration rights in
connection with registered offerings initiated by us.
C. Interests of Experts and Counsel
Not Applicable.
Item 8. Financial information
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
To our knowledge, there are no material legal proceedings to which we are a
party or to which any of our properties are subject, other than routine
litigation incidental to our business. In our opinion, the disposition of these
lawsuits should not have a material impact on our consolidated results of
operations, financial position and cash flows
Dividend Policy
Our policy is to declare and pay quarterly dividends to shareholders from
our net profits each February, May, August and November in amounts the Board of
Directors may from time to time determine are appropriate. The timing and amount
of dividend payments will be dependent upon our earnings, financial condition,
cash requirement and availability, restrictions in its loan agreements, growth
strategy, the provisions of Marshall Islands law affecting the payment of
distributions to shareholders and other factors, such as the acquisition of
additional vessels. However, we do not believe that the acquisition of vessels
to our fleet will impact our dividend policy of paying quarterly dividends to
our shareholders out of our net profits. We believe that the addition of vessels
to our fleet in the future should enable us to pay a higher dividend per share
than we would otherwise be able to pay without additional vessels since such
additional vessels should increase our earnings. However, we cannot give any
current estimate of what dividends may be in the future since any such dividend
amounts will depend upon the amount of revenues those vessels are able to
generate and the costs incurred in operating such vessels. The payment of
dividends is not guaranteed or assured, and may be discontinued at any time at
the discretion of our Board of Directors. Because we are a holding company with
no material assets other than the stock of its subsidiaries, our ability to pay
dividends will depend on the earnings and cash flow of its subsidiaries and
their ability to pay dividends to us. If there is a substantial decline in the
drybulk, containership or multipurpose charter market, our earnings would be
negatively affected, thus limiting its ability to pay dividends. Marshall
Islands law generally prohibits the payment of dividends other than from surplus
or while a company is insolvent or would be rendered insolvent upon the payment
of such dividends. Dividends may be declared in conformity with applicable law
by, and at the discretion of, our Board of Directors at any regular or special
meeting. Dividends may be declared and paid in cash, stock or other property of
Euroseas.
Euroseas paid $687,500, $1,200,00, $26,962,500 and $46,875,223 (consisting
of $30,175,223 of dividends and $16,700,000 as return of capital) in 2002, 2003,
2004 and 2005, respectively. Over the period January 1, 2002 to June 30, 2005,
Euroseas paid substantially all of its net income as dividends. While Euroseas
has paid dividends on an annual basis during the time it has been a private
company, it intends to pay dividends on a quarterly basis since it has become a
public company. Since our Private Placement in August 2005, we declared and paid
dividends of $2,650,223 for the third quarter of 2005 and $2,271,620 for each of
the fourth quarter of 2005 and first quarter of 2006 (the last two dividend
payments were made in 2006).
B. Significant Changes
After December 31, 2005 the following significant events occurred:
(a) The SEC declared effective on February 3, 2006 the Company's registration
statement on Form F-4 that registered the 1,079,167 Euroseas common shares
issued to Cove shareholders. A definitive joint information statement/prospectus
describing the merger was mailed to Cove stockholders on or about February 8,
2006. The Cove common stock continued to trade on the OTCBB until the
consummation of the merger [see item (f) below].
(b) The SEC also declared effective on February 3, 2006 the Company's
registration statement on Form F-1 that registered the re-sale of the 7,026,993
Euroseas common shares and 1,756,743 Euroseas common shares issuable upon the
exercise of the warrants issued in connection with the Private Placement, as
well as 818,604 shares issued to certain Cove shareholders as part of the merger
with Cove.
(c) On February 7, 2006 the Board of Directors declared a cash dividend of $0.06
per Euroseas common share (i) payable on or about March 2, 2006 to the holders
of record of Euroseas common shares as of February 28, 2006, and (ii) payable to
Cove shareholders who were entitled to receive Euroseas common shares in
connection with the merger, with such payment being made only to the holders of
record of Cove common stock as of the effective date of the merger and such
dividend payment being made upon exchange of their Cove common shares for
Euroseas common shares [see item (f) below].
(d) The Company submitted on February 10, 2006 an application to list its common
shares on the OTCBB. On March 2, 2006, the Company received approval to list its
common stock on the OTCBB.
(e) On March 20, 2006, a subsidiary of the Company signed a Memorandum of
Agreement to sell m/v John P, a handysize bulk carrier of 26,354 dwt built in
1981 for $4.95 million. The vessel is to be delivered to the buyers in late June
/ early July 2006.
(f) On March 27, 2006, Euroseas consummated the merger with Cove and, as a
result, Cove merged into Euroseas Acquisition Company Inc., and the separate
corporate existence of Cove ceased. Cove stockholders received 0.102969 shares
of Euroseas common shares (or an aggregate of 1,079,167 Euroseas common shares)
and received dividends of $0.01339 for each share of Cove common stock owned (or
an aggregate of $140,334) related to dividends previously declared by Euroseas.
Euroseas Acquisition Company Inc. changed its name to Cove Apparel, Inc.
Following the merger, and following the exchange of all common stock of Cove
into Euroseas common shares, Euroseas has a total of 37,860,341 common shares
outstanding. Also, the common stock of Cove has been de-listed and no longer
trades on the OTCBB.
(g) On April 10, 2006, Xenia International Corp., a wholly-owned subsidiary of
the Company signed a Memorandum of Agreement to purchase m/v Tasman Trader, a
multipurpose dry cargo vessel of 22,568 dwt and 950 TEU built in 1990 for $10.78
million. The total cost of the vessel was $10.82 million. The vessel was
delivered on April 27, 2006. The acquisition was financed 100% with equity from
the Company's cash reserves. The Company intends to draw a loan to finance part
of the cost of the acquisition but has not entered into any agreement with any
bank.
(h) On April 11, 2006, a subsidiary of the Company agreed to sell m/v Pantelis
P, a handysize bulk carrier of 26,354 DWT built in 1981 for a gross price of
$4.65 million less 4% sales commissions. The vessel was delivered to the buyers
on May 31, 2006. As a result of the sale of m/v Pantelis P and of m/v John P,
the Company has agreed to make a $3,000,000 additional re-payment to the bank
financing the above ships (along with m/v Ariel and m/v Nikolaos) thereby
reducing the remaining repayments of the loan proportionally over the current
outstanding balance for this loan of $7,400,000. The revised loan repayment
schedule agreement has not been signed. $1,500,000 of the additional repayment
was made on May 31, 2006, following the delivery to the buyers of m/v Pantelis
P.
(i) On May 9, 2006, the Board of Directors declared a cash dividend of $0.06 per
Euroseas common share payable on or about June 16, 2006 to the holders of record
of Euroseas common shares as of June 2, 2006.
(j) On June 26, 2006, the Company was informed that a loan facility for an
amount not to exceed $8,250,000 to partly finance the purchase of m/v Tasman
Trader was approved by Fortis Bank. The facility is to be repaid in 23 equal
consecutive quarterly installments of $265,000 each, the first installment
commencing three months from drawdown. In addition, a final balloon payment of
$2,155,000 will be payable together with the 23rd and final installment. The
facility has similar covenants to the rest of the Company's loans. The Company
signed the loan facility on June 30, 2006.
Item 9. The Offer and Listing
A. Offer and Listing Details
The trading market for shares of our common stock is the OTCBB, on which
our shares trade under the symbol "ESEAF.OB". The following table sets forth the
high and low closing prices for shares of our common stock since our listing in
the OTCBB, as reported by the OTCBB.
Period High Low
---------------------------------------
2006................ 6.31 2.85
2nd quarter 2006.... 6.31 2.85
May 2006............ 6.31 3.25
June 2006........... 3.45 2.85
B. Plan of Distribution
Not Applicable.
C. Markets
The trading market for shares of our common stock is the OTCBB, on which
our shares trade under the symbol "ESEAF.OB". We have applied to list the shares
of our common stock on the NASDAQ National Market, but have not yet qualified
for listing.
D. Selling Shareholders
Not Applicable.
E. Dilution
Not Applicable.
F. Expenses of the Issue
Not Applicable.
Item 10. Additional Information
A. Share Capital
Not Applicable.
B. Memorandum and articles of association
We refer you to the Section of our F-1 Registration Statement (File No.
333-129145) entitled "Description of Euroseas Securities" and Exhibits 3.1 and
3.2 thereto as filed on October 20, 2005 with the SEC, incorporated by reference
herein.
C. Material Contracts
We have no material contracts, other than contracts entered into in the
ordinary course of business, to which the Company or any member of the group is
a party.
D. Exchange Controls
Under Marshall Islands law, there are currently no restrictions on the
export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to
non-resident holders of our shares.
E. Taxation
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, as defined below, with respect to the common stock. This discussion
does not purport to deal with the tax consequences of owning common stock to all
categories of investors, some of which, such as dealers in securities, investors
whose functional currency is not the United States dollar and investors that
own, actually or under applicable constructive ownership rules, 10% or more of
our common stock, may be subject to special rules. This discussion deals only
with holders who purchase common stock in connection with this offering and hold
the common stock as a capital asset. 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
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
stockholders.
United States Federal Income Tax Considerations
The following are the material United States federal income tax
consequences to us of our activities and to U.S. Holders, as defined below, of
our common stock. The following discussion of United States federal income tax
matters is based on the United States 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. This
discussion is based in part upon Treasury Regulations promulgated under Section
883 of the Code. 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. References in the following discussion to
"we" and "us" are to Euroseas 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 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.
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, we will be exempt from United States federal
income taxation on our U.S.-source shipping income if:
o we are organized in a foreign country (our "country of organization")
that grants an "equivalent exemption" to corporations organized in the
United States; and
either
o more than 50% of the value of our stock is owned, directly or
indirectly, by "qualified stockholders," 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
o 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, the jurisdiction where we and our ship-owning
subsidiaries are incorporated, grants 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 we satisfy either
the 50% Ownership Test or the Publicly-Traded Test.
We believe that we will satisfy the 50% Ownership Test. However, there can
be no assurance that we will be able satisfy the 50% Ownership Test in the
future. For example, we may be unable to satisfy the 50% Ownership Test if (i)
the status of our stockholders as qualified stockholders changes, (ii) the
direct or indirect beneficial ownership of the shares held by our current
shareholders changes, or (iii) sufficient qualified stockholders fail to satisfy
the applicable documentation requirements.
We do not believe that we will be able to satisfy the Publicly-Traded Test
for so long as our stock is traded on the OTC Bulletin Board.
Taxation in Absence of Exemption
To the extent the benefits of 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 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:
o We have, or are considered to have, a fixed place of business in the
United States involved in the earning of shipping income; and
o 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 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 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 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.
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 income" (or "passive category income" for taxable years beginning after
December 31, 2006) or, in the case of certain types of U.S. Holders, "financial
services income," (which will be treated as "general category income" income for
taxable years beginning after December 31, 2006) for purposes of computing
allowable foreign tax credits for United States foreign tax credit purposes.
Our common stock is listed on the OTCBB under the symbol ESEAF.OB. We have
applied to list our common stock on the NASDAQ National Market. We cannot assure
you that such listing will be obtained. Unless and until our common stock is
readily tradable on the NASDAQ National Market or another established securities
market in the United States, dividends paid on our common stock will be taxable
as ordinary income to a U.S. Holder. The OTC Bulletin Board is not an
established securities market for this purpose. If our common stock comes to be
listed on the NASDAQ National Market or another established securities market in
the United States, dividends paid on our common stock to a U.S. Holder who is an
individual, trust or estate (a "U.S. Individual Holder") will generally be
treated as "qualified dividend income" that is taxable to such U.S. Individual
Holders at preferential tax rates (through 2010) provided that (1) 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 (2) 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. 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. Legislation has
been recently introduced in the U.S. Senate which, if enacted in its present
form, would preclude our dividends from qualifying for such preferential rates
prospectively from the date of the enactment. 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
stockholder's adjusted basis (or fair market value in certain circumstances) 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:
o 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
o 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. 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 are 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 IRS Form 8621 with his United States
federal income tax return. If we were aware that 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 QEF election
described above.
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 our stock is treated as "marketable stock," a
U.S. Holder would be allowed to 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. For
so long as our stock is traded on the OTC Bulletin Board, our stock will not be
treated as "marketable stock" for this purpose. If our stock comes to be listed
on the NASDAQ National Market, then our stock will be treated as "marketable
stock" for this purpose. 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.
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:
o the excess distribution or gain would be allocated ratably over the
Non-Electing Holders' aggregate holding period for the common stock;
o the amount allocated to the current taxable year and any taxable year
before we became a passive foreign investment company would be taxed
as ordinary income; and
o 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 pension or profit sharing trust or
other tax-exempt organization that did not borrow funds 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 holder's 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 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:
o 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
o 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.
Such payments will also be subject to backup withholding tax if you are a
non-corporate U.S. Holder and you:
o fail to provide an accurate taxpayer identification number;
o 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
o 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 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.
We encourage each stockholder to consult with his, her or its own tax
advisor as to particular tax consequences to it of holding and disposing of
Euroseas shares, including the applicability of any state, local or foreign tax
laws and any proposed changes in applicable law.
F. Dividends and paying agents
Not Applicable.
G. Statement by experts
Not Applicable.
H. Documents on display
We file reports and other information with the SEC. These materials,
including this annual report and the accompanying exhibits, may be inspected and
copied at the public reference facilities maintained by the Commission at 100 F
Street, N.E., Washington, D.C. 20549, or from the SEC's website
http://www.sec.gov. You may obtain information on the operation of the public
reference room by calling 1 (800) SEC-0330 and you may obtain copies at
prescribed rates.
I. Subsidiary Information
Not Applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we face risks that are non-financial or
non-quantifiable. Such risks principally include country risk, credit risk and
legal risk. Our operations may be affected from time to time in varying degrees
by these risks but their overall effect on us is not predictable. We have
identified the following market risks as those which may have the greatest
impact upon our operations:
Interest Rate Fluctuation Risk
The international drybulk industry is a capital intensive industry,
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. We do not use financial instruments such as interest rate
swaps to manage the impact of interest rate changes on earnings and cash flows
and increasing interest rates could adversely impact future earnings.
As at December 31, 2005, we had $48.56 million of floating rate debt
outstanding with margins over LIBOR ranging from 1.1% to 1.60%. 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, an
increase of 100 basis points would have decreased our net income and cash flows
in the three-month period to December 31, 2005 by approximately $120,000
assuming that the current debt level was the same throughout the quarter.
In March of 2004, we entered into an interest rate swap agreement on a
notional amount of $3.00 million. Under this swap agreement, we receive interest
based on the 3-month LIBOR rate and we pay based on 1.10% fixed rate if the
1-year LIBOR remains below 4.02%: otherwise we pay the 1-year LIBOR rate. This
agreement was terminated in October 2005.
The following table sets forth the sensitivity of loans in U.S. dollars to
a 100 basis points increase in LIBOR during the next five years:
Year Ended December 31, Amount in $
-------------------------------------------------
2006 430,000
2007 300,000
2008 176,000
2009 95,000
2010 and thereafter 69,000
On December 30, 2005, we drew down $15.5 million under our loan agreement signed
on December 28, 2005 to finance our acquisition of m/v Artemis. This increased
the sensitivity of our loans to 100 basis points increases in LIBOR by: $155,000
until December 31, 2006; $129,000 year ended December 31, 2007; $94,000 year
ended December 31, 2008; $59,000 year ended December 31, 2009; and $55,000 for
2010 and thereafter.
Foreign Exchange Rate Risk
The international drybulk and containership shipping industry's functional
currency is the U.S. Dollar. We generate all of our revenues in U.S. dollars,
but incur approximately 27% of our vessel running expenses in currencies other
than U.S. dollars. In addition, our management fee is denominated in euros (590
euros per vessel per day in 2004 and 2005). At December 31, 2005, approximately
16% of our outstanding accounts payable were denominated in currencies other
than the U.S. dollar, mainly in Euros. We do not make use of currency exchange
contracts to reduce the risk of adverse foreign currency movements but we
believe that our exposure from market rate fluctuations is unlikely to be
material. Net foreign exchange gains for the year to December 31, 2005 were
$538.
Inflation Risk
The general rate of inflation has been relatively low in recent years and
as such its associated impact on costs has been minimal. We do not believe that
inflation has had, or is likely to have in the foreseeable future, a significant
impact on expenses. Should inflation increase, it will increase our expenses and
subsequently have a negative impact on our earnings. Item 12. Description of
Securities Other than Equity Securities Not Applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
None.
Item 15. Controls and Procedures
We evaluated the effectiveness of the Company's disclosure controls and
procedures as December 31, 2005. Based on that evaluation, the chief executive
officer and the chief financial officer concluded that the Company's disclosure
controls and procedures were effective to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
regulations.
There have been no changes in internal controls over financial reporting
(identified in connection with management's evaluation of such internal controls
over financial reporting) that occurred during the year covered by this annual
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal controls over financial reporting.
Pursuant to an exemption for foreign private issuers, we are not required
to comply with all of the corporate governance requirements of NASDAQ that are
applicable to U.S. listed companies. A description of the significant
differences between our corporate governance practices and the NASDAQ
requirements may be found on our website under "Corporate Governance" at
http://www.euroseas.gr.
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that all the members of our Audit
Committee qualify as financial experts and they are all considered to be
independent according to the SEC rules. Mr. Panos Kyriakopoulos serves as the
chairman of our Audit Committee with Mr. Gerald Turner and Mr. George Taniskidis
as members.
Item 16B. Code of Ethics
We have adopted a code of ethics that applies to officers and employees.
Our code of ethics is posted in our website: http://www.euroseas.gr under
"Corporate Governance" and is filed as Exhibit 11.1 to this annual report.
Item 16C. Principal Accountant Fees and Services
Our principal auditors, Deloitte Hadjipavlou, Sofianos & Cambanis S.A. have
charged us for audit, audit-related and non-audit services as follows:
-------------------------------------------------------------------------------
2005 2004
(dollars in (dollars in
thousands) thousands)(1)
-------------------------------------------------------------------------------
Audit Fees $ 615 _
Further assurance/audit related fees _ _
Tax fees _ _
Other fees/expenses 2 _
Total $ 617 _
-------------------------------------------------------------------------------
Audit fees relate to audit services provided in connection with our Private
Placement in August 2005, merger with Cove Apparel, Inc., our F-1 and F-4
filings and the audit of our consolidated financial statements. For those
services our principal auditors charged us $615,000 of fees plus $2,291 of
expenses.
The audit committee is responsible for the appointment, replacement,
compensation, evaluation and oversight of the work of the independent auditors.
As part of this responsibility, the Audit Committee pre-approves the audit and
non-audit services performed by the independent auditors in order to assure that
they do not impair the auditor's independence from the Company. The Audit
Committee has adopted a policy which sets forth the procedures and the
conditions pursuant to which services proposed to be performed by the
independent auditors may be pre-approved.
All audit services and other services provided by Deloitte Hadjipavlou,
Sofianos & Cambanis S.A., after the formation of our audit committee in November
2005 were pre-approved by the audit committee.
(1) In 2004, Euroseas Ltd. did not exist. The fees for audit services provided
to the ship-owning subsidiaries for the year ended December 31, 2004 were paid
by the management company of the vessels.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Not Applicable.
PART III
Item 17. Financial Statements
See Item 18
Item 18. Financial Statements
The following financial statements set forth on pages F-1 through F-36 are filed
as part of this annual report.
Item 19. Exhibits
1.1 Articles of Incorporation of Euroseas Ltd.(1)
1.2 Bylaws of Euroseas Ltd. (1)
2.1 Specimen Common Stock Certificate(1)
2.2 Form of Securities Purchase Agreement(1)
2.3 Form of Registration Rights Agreement(1)
2.4 Form of Warrant(1)
2.5 Registration Rights Agreement between Euroseas Ltd. and Friends
Investment Company Inc., dated November 2, 2005(2)
4.1 Form of Lock-up Agreement(1)
4.2 Loan Agreement between Diana Trading Ltd., as borrower, and
Oceanopera Shipping Limited, as corporate guarantor, and HSBC Bank
plc, as the lender, dated October 16, 2002 for the amount of
5,900,000(1)
4.3 Loan Agreement between Diana Trading Ltd., as borrower, and HSBC
Bank plc, as lender, for the amount of $4,200,000 dated May 9,
2005(1)
4.4 Loan Agreement dated May 16, 2005 between EFG Eurobank Ergasias
S.A., as lender, and Alcinoe Shipping Limited, Oceanopera Shipping
Limited, Oceanpride Shipping Limited, and Searoute Maritime
Limited, as borrowers, for the amount of $13,500,000(1)
4.5 Secured Loan Facility Agreement dated May 24, 2005 between
Allendale Investments S.A. and Alterwall Business Inc. as
borrowers, Fortis Bank (Nederland) N.V. and others as lenders, and
Fortis Bank (Nederland) N.V. as agent and security trustee for
$20,000,000(1)
4.6 Form of Standard Ship Management Agreement(1)
4.7 Agreement between Eurobulk Ltd. and Eurochart S.A., for the
provision of exclusive brokerage services, dated December 20,
2004(1)
4.8 Form of Current Time Charter(1)
4.9 Services Agreement between Euroseas Ltd. and Eurobulk Ltd. dated
November 2, 2005(2)
4.10 Loan Agreement between Salina Shipping Corp., as borrower, and
Calyon, as lender, for the amount of USD$15,500,000 dated December
28, 2005(3)
8.1 Subsidiaries of the Registrant(4)
11.1 Code of Ethics(4)
12.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(4)
12.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer(4)
13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(4)
13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(4)
----------
(1) Filed as an Exhibit to the Company's Registration Statement (File No.
333-129145) on October 20, 2005.
(2) Filed as an Exhibit to the Company's Amendment No.1 to Registration
Statement (File No. 333-129145) on December 5, 2005.
(3) Filed as an Exhibit to the Company's Amendment No. 2 to Registration
Statement (File No. 333-129145) on January 19, 2006.
(4) Filed herewith.
Euroseas Ltd. and Subsidiaries
Consolidated financial statements
December 31, 2004 and 2005
-------------------------------------------------------------------------------
Index to consolidated financial statements
Pages
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2005 F-3
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2004 and 2005 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2004 and 2005 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2004 and 2005 F-6
Notes to the Consolidated Financial Statements F-7
-------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------------------------------
To the Board of Directors and Stockholders
of the Euroseas Ltd. and subsidiaries
We have audited the accompanying consolidated balance sheets of the Euroseas Ltd
and subsidiaries (the "Company") as of December 31, 2005 and 2004 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period 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 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. The Company is not required to
have, nor were we engaged to perform, an audit of its 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 audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Euroseas Ltd and subsidiaries at
December 31, 2005 and 2004 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte.
Hadjipavlou, Sofianos & Cambanis S.A.
Athens, Greece
March 3, 2006 except for Note 15(e) as to
which the date is March 20, 2006, Note 15(f)
as to which the date is March 27, 2006, Note 15 (g)
to which the date is April 10, 2006 and Note 15 (h)
to which the date is April 11, 2006.
Euroseas Ltd. and Subsidiaries
Consolidated balance sheets
December 31, 2004 and 2005
(All amounts expressed in U.S. Dollars)
-------------------------------------------------------------------------------
Notes 2004 2005
-----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 15,497,482 20,447,301
Trade accounts receivable, net 245,885 46,118
Prepaid expenses 207,551 85,625
Claims and other receivables 137,783 306,303
Due from related company 8 - 3,012,720
Inventories 3 303,478 371,691
Restricted cash 68,980 1,080,949
-----------------------------------------------------------------------------
Total current assets 16,461,159 25,350,707
-----------------------------------------------------------------------------
Fixed assets
Vessels, net 4 34,171,164 52,334,897
-----------------------------------------------------------------------------
Long-term assets
Deferred charges, net 5 2,205,178 1,855,829
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total long-term assets 36,376,342 54,190,726
-----------------------------------------------------------------------------
Total assets 52,837,501 79,541,433
-----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Long-term debt, current portion 9 6,030,000 14,430,000
Trade accounts payable 879,541 837,182
Accrued expenses 7 321,056 1,777,637
Deferred revenues 1,908,189 1,370,058
Due to related company 8 4,626,060 -
-----------------------------------------------------------------------------
Total current liabilities 13,764,846 18,414,877
-----------------------------------------------------------------------------
Long-term liabilities
Long-term debt, net of current portion 9 7,960,000 34,130,000
-----------------------------------------------------------------------------
Total long-term liabilities 7,960,000 34,130,000
-----------------------------------------------------------------------------
Total liabilities 21,724,846 52,544,877
-----------------------------------------------------------------------------
Commitments and contingencies 11 - -
Shareholders' equity
Common stock (par value $0.01,
100,000,000 shares authorized,
36,781,159 issued and outstanding) 12 297,542 367,812
Preferred shares (par value $0.01,
20,000,000 shares authorized, no shares - -
issued and outstanding)
Additional paid-in capital 12 17,073,381 17,883,781
Retained earnings 13,741,732 8,744,963
-----------------------------------------------------------------------------
Total shareholders' equity 31,112,655 26,996,556
-----------------------------------------------------------------------------
Total liabilities and shareholders' equity 52,837,501 79,541,433
-----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of income
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
Notes 2003 2004 2005
------------------------------------------------------------------------------
Revenues
Voyage revenue 25,951,023 45,718,006 44,523,401
Commissions 8 (906,017) (2,215,197) (2,388,349)
------------------------------------------------------------------------------
Net revenue 25,045,006 43,502,809 42,135,052
------------------------------------------------------------------------------
Operating expenses
Voyage expenses 13 436,935 370,345 670,551
Vessel operating expenses 13 8,775,730 8,906,252 8,610,279
General and administrative
expenses - - 420,755
Management fees 8 1,722,800 1,972,252 1,911,856
Amortization and depreciation 4,5 4,757,933 3,461,678 4,208,252
Net gain on sale of vessel 4 - (2,315,477) -
------------------------------------------------------------------------------
Total operating expenses 15,693,398 12,395,050 15,821,693
------------------------------------------------------------------------------
Operating income 9,351,608 31,107,759 26,313,359
------------------------------------------------------------------------------
Other income/(expenses)
Interest and finance cost (793,257) (708,284) (1,495,871)
Derivative gain/(loss) - 27,029 (100,029)
Foreign exchange gain/(loss) (690) (1,808) 538
Interest income 36,384 187,069 460,457
------------------------------------------------------------------------------
Other income (expenses), net (757,563) (495,994) (1,134,905)
------------------------------------------------------------------------------
Equity in net loss of an 6 (167,433) - -
associate
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Net income 8,426,612 30,611,765 25,178,454
------------------------------------------------------------------------------
Earnings per share - basic
and diluted 0.28 1.03 0.78
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Weighted average number of
shares outstanding during
the year
basic and diluted - 29,754,166 29,754,166 32,218,427
------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of shareholders' equity
Years ended December 31, 2003, 2004 and 2005
(All amounts, except per share data, expressed in U.S. Dollars)
-------------------------------------------------------------------------------
Number Common Preferred
Comprehensive of Stock Shares Paid - in
Income Shares Amount Amount Capital Retained
(Note 12) (Note 12) (Note 12) (Note 12) Earnings Total
--------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2002 - 29,754,166 297,542 - 19,573,236 1,414,856 21,285,634
Net income 8,426,612 - - - - 8,426,612 8,426,612
Dividends
paid/return
of capital - - - (950,000) (1,276,000) (2,226,000)
--------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2003 29,754,166 297,542 - 18,623,236 8,565,468 27,486,246
Net income 30,611,765 - - - - 30,611,765 30,611,765
Dividends
paid/return
of capital - - - - (1,549,855) (25,435,501) (26,985,356)
--------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2004 29,754,166 297,542 - 17,073,381 13,741,732 31,112,655
--------------------------------------------------------------------------------------------------------------------
Net income 25,178,454 25,178,454 25,178,454
Issuance of
shares, net
of issuance
costs 7,026,993 70,270 - 17,510,400 - 17,580,670
Dividends
paid/return
of capital - - - - (16,700,000) (30,175,223) (46,875,223)
--------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2005 36,781,159 367,812 - 17,883,781 8,744,963 26,996,556
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of cash flows
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2003 2004 2005
------------------------------------------------------------------------------
Cash flows from operating
activities:
Net income 8,426,612 30,611,765 25,178,454
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation of vessels 4,158,159 2,530,100 2,657,914
Amortization of deferred charges 667,176 982,259 1,634,082
Equity in net loss 167,433 - -
Provision for doubtful accounts 3,592 (27,907) -
Gain on sale of a vessel - (2,315,477) -
Loss on derivative - - 100,029
Changes in operating assets and
liabilities:
(Increase)/decrease in:
Trade accounts receivable 110,471 213,762 199,767
Prepaid expenses 26,552 (133,437) 121,927
Claims and other receivables (171,731) 208,524 (268,549)
Inventories (7,748) 51,449 (68,213)
Increase/(decrease) in:
Due to related company (482,778) 3,541,236 (7,638,780)
Trade accounts payable (650,863) 77,487 (42,359)
Accrued expenses (43,308) 66,193 334,874
Deferred revenue (274,764) 673,157 (538,131)
Dry-docking expenses paid (972,671) (2,270,418) (1,076,233)
------------------------------------------------------------------------------
Net cash provided by operating 10,956,132 34,208,693 20,594,782
activities
------------------------------------------------------------------------------
Cash flows from investing
activities:
Purchase of a vessel - - (20,821,647)
(Contributions to) and drawings
from the cash retention accounts 214,832 33,224 (1,011,969)
Proceeds from sale of a vessel - 6,723,018 -
------------------------------------------------------------------------------
Net cash provided by (used in) 214,832 6,756,242 (21,833,616)
investing activities
------------------------------------------------------------------------------
Cash flows from financing
activities:
Issuance of share capital upon - - 70,270
incorporation
Net proceeds from shares issued - - 18,632,106
in a private placement
Dividends paid/return of capital (1,200,000) (26,962,500) (46,875,223)
Repayment of advances from (300,000) - -
shareholders
Loan arrangement fees paid (28,000) - (208,500)
Proceeds from long-term debts 3,000,000 - 53,200,000
Repayment of long-term debts (6,250,000) (6,605,000) (18,630,000)
------------------------------------------------------------------------------
Net cash provided by (used) in (4,778,000) (33,567,500) 6,188,653
financing activities
------------------------------------------------------------------------------
Net increase in cash and cash 6,392,964 7,397,435 4,949,819
equivalents
Cash and cash equivalents at 1,707,083 8,100,047 15,497,482
beginning of year
------------------------------------------------------------------------------
Cash and cash equivalents at end 8,100,047 15,497,482 20,447,301
of year
------------------------------------------------------------------------------
Cash paid for interest 725,034 474,430 1,372,957
Non cash items:
Dividend and return of capital 1,026,000 22,856 -
from investment in an associate
(Note 6)
The accompanying notes are an integral part of these
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
1. Basis of Presentation and General Information
Euroseas Ltd. (the "Company") was formed on May 5, 2005 under the laws of the
Republic of the Marshall Islands to consolidate the beneficial owners of the
ship-owning companies listed below. On June 28, 2005 the beneficial owners
exchanged all their shares in the ship-owning companies for shares in Friends
Investment Company Inc., a newly formed Marshall Islands company. On June 29,
2005, Friends Investment Company Inc. then exchanged all the shares in the
ship-owning companies for Euroseas Ltd. common shares, thus, becoming the sole
shareholder of the Company. The transaction described above constitutes a
reorganization of companies under common control, and has been accounted for in
a manner similar to a pooling of interests, as each ship-owning company was
under the common control of the Pittas family prior to the transfer of ownership
of the ship-owning companies to Euroseas Ltd. Accordingly, the accompanying
consolidated financial statements have been presented as if the ship-owning
companies were consolidated subsidiaries of the Company for all periods
presented and using the historical carrying costs of the assets and the
liabilities of the ship-owning companies.
On August 25, 2005, Euroseas Ltd. sold 7,026,993 common shares at $3.00 each in
an institutional private placement, together with 0.25 of detachable warrants
for each Euroseas Ltd. common share sold to acquire up to 1,756,743 Euroseas
Ltd. common shares. The total proceeds, net of issuance costs of about
$3,500,000, amounted to $17,510,400. The warrants allow their holders to acquire
Euroseas Ltd. common shares at a price of $3.60 per share and are exercisable
for a period of five years from the issuance of the warrants. The Company and
the investors in the institutional private placement have entered into a
registration rights agreement to register with the Securities and Exchange
Commission of the United States (SEC) the Euroseas Ltd. common shares that were
issued in such private placement and the Euroseas Ltd. common shares that will
be issued to satisfy the exercise of the warrants. The registration rights
agreement contains a liquidated damages provision.
On August 25, 2005, as a condition to the institutional private placement
described above, the Company and Cove Apparel, Inc. (Cove, an unrelated party
and a public corporation) signed an Agreement and Plan of Merger (the "Merger
Agreement"). The Merger Agreement provides for the merger of Cove and Euroseas
Acquisition Company Inc., a Delaware corporation and a wholly-owned subsidiary
of the Company formed on June 21, 2005, with the current stockholders of Cove
receiving 0.102969 shares of Euroseas Ltd. common shares for each share of Cove
common stock they presently own. As part of the merger, the Company has agreed
to file a registration statement with the SEC to register for re-sale the
Euroseas Ltd. common shares issuable in the merger to certain Cove stockholders
(only the 818,604 shares to be issued to Cove-affiliated stockholders, need to
be registered; the remaining 260,563 shares to be issued in the merger can
freely trade). Upon consummation of the merger, the separate existence of Cove
will cease, and Euroseas Acquisition Company Inc. will continue as the surviving
corporation and as a wholly owned subsidiary of Euroseas Ltd. under the name
Cove Apparel, Inc [see Note 15(f)]. As of the date of the merger, Cove is
required only have cash of approximately $10,000 and equity of the same amount.
The operations of the vessels are managed by Eurobulk Ltd. (the "manager"), a
corporation controlled by the Pittas family -- the controlling shareholders of
Friends Investment Company Inc.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
For the years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
1. Basis of Presentation and General Information - continued
The manager has an office in Greece located at 40 Ag. Konstantinou Ave,
Maroussi, Greece. The manager provides the Company with a wide range of shipping
services such as technical support and maintenance, insurance consulting,
chartering, financial and accounting services, as well as executive management
services, in consideration for fixed and variable fees (see Note 8).
The Company is engaged in the ocean transportation of dry bulk and containers
through ownership and operation of dry bulk and container carriers owned by the
following ship-owning companies:
o Searoute Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the
Cyprus flag 33,712 DWT bulk carrier motor vessel "Ariel", which was built
in 1977 and acquired on March 5, 1993.
o Oceanopera Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of
the Cyprus flag 34,750 DWT bulk carrier motor vessel "Nikolaos P", which
was built in 1984 and acquired on July 22, 1996.
o Oceanpride Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "John P", which was
built in 1981 and acquired on March 7, 1998.
o Alcinoe Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "Pantelis P", which
was built in 1981 and acquired on June 4, 1997.
o Alterwall Business Inc. incorporated in Panama on January 15, 2001, owner
of the Panama flag 18,253 DWT container carrier motor vessel "HM Qingdao1"
which was built in 1990 and acquired on February 16, 2001.
o Allendale Investment S.A. incorporated in Panama on January 22, 2002, owner
of the Panama flag 18,154 DWT container carrier motor vessel "Kuo Hsiung",
which was built in 1993 and acquired on May 13, 2002.
o Diana Trading Ltd. incorporated in the Marshall Islands on September 25,
2002, owner of the Marshall Islands flag 69,734 DWT bulk carrier motor
vessel "Irini", which was built in 1988 and acquired on October 15, 2002.
o Salina Shipholding Corp., incorporated in the Marshall Islands on October
20, 2005, owner of the Marshall Islands flag 29,693 DWT container carrier
motor vessel "Artemis", which was built in 1987 and acquired on November
25, 2005.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
1. Basis of Presentation and General Information - continued
In addition, the accompanying financial statements include the accounts of the
following ship-owning companies which were also managed by Eurobulk Ltd. during
the periods presented:
(a) Silvergold Shipping Ltd. incorporated in Cyprus on May 16, 1994. Up to June
3, 1996, the Company was engaged in ship owning activities, but thereafter,
the Company's assets and liabilities were liquidated and the retained
earnings were distributed to the shareholders. The Company remained dormant
until October 10, 2000 when it acquired the 18,000 DWT Cyprus flag
container carrier motor vessel "Widar", which was built in 1986. The vessel
was sold on April 24, 2004. The Pittas family, the controlling shareholders
of Friends Investment Company Ltd. which is the Company's largest
shareholder, also owned Silvergold Shipping Ltd., and, accordingly, these
accompanying financial statements also consolidated the accounts of
Silvergold Shipping Ltd. until May 31, 2005, when Silvergold Shipping Ltd.
declared a final dividend of $35,000 to its shareholders.
(b) Fitsoulas Corporation Limited which was incorporated in Malta on September
24, 1999, was the owner of the Malta flag 41,427 DWT bulk carrier motor
vessel Elena Heart, which was built in 1983 and acquired on October 22,
1999. The vessel was sold on March 31, 2003. The group of beneficial
shareholders, which included the Pittas family, which own the above
mentioned ship-owing companies also exercised significant influence over
Fitsoulas Corporation Limited through their 38% interest in that company,
and this investment was therefore accounted for in the accompanying
financial statements using the equity method.
During the years ended December 31, 2003, 2004 and 2005, the following
charterers individually accounted for more than 10% of the Company's voyage and
time charter revenues as follows:
Year ended December 31,
Charterer
2003 2004 2005
-----------------------------------------------------------------------------
A - - 26.85%
B 23.01% 11.50% 17.48%
C - 20.60% 12.32%
D 31.30% 12.20% -
E - 14.07% -
F - 10.52% -
G 10.55% - -
2. Significant Accounting Policies
The accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The following are the significant accounting policies
adopted by the Company:
Principles of consolidation
The accompanying consolidated financial statements included the accounts of
Euroseas Ltd. and its subsidiaries. Inter-company transactions were eliminated
on consolidation.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
Investment in an associate
An associate is an entity over which shareholders of the Company exercises
significant influence but not control. The results of operations, and assets and
liabilities of an associate are reflected in the accompanying consolidated
financial statements using the equity method of accounting. Under this method of
accounting, investment in an associate are carried on the consolidated balance
sheet at cost as adjusted for the Company's share in the post acquisition net
earnings or net loss of an associate.
Use of estimates
The preparation of the accompanying consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the date of the consolidated financial statements, and the stated amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other comprehensive income
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Statement of Comprehensive Income" ("SFAS 130"), which
requires separate presentation of certain transactions which are recorded
directly as components of stockholders' equity. The Company has no other
comprehensive income and, accordingly, comprehensive income equals net income
for all periods presented.
Foreign currency translation
The Company's functional currency is the U.S. dollar. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates prevailing at the balance sheet date. Income and expenses denominated in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
at the date of the transaction. Resulting exchange gains and/or losses on
settlement or translation are included in the accompanying consolidated
statements of operations.
Cash equivalents
Cash equivalents are time deposits or other certificates purchased with an
original maturity of three months or less.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Significant Accounting Policies - Continued
Trade accounts receivable
The amount shown as trade accounts receivable, at each balance sheet date,
includes estimated recoveries from each voyage or time charter, net of a
provision for doubtful accounts. At each balance sheet date, the Company
provides for doubtful accounts on the basis of specific identified doubtful
receivables. At December 31, 2004 and 2005, no provision for doubtful debts was
considered necessary.
Claims and other receivables
Claims and other receivables principally represent claims arising from hull or
machinery damages, crew salaries claims or other insured risks that have been
submitted to insurance adjusters or are currently being compiled. All amounts
are shown net of applicable deductibles.
Inventories
Inventories consist of bunkers, lubricants and victualling on board the
Company's vessels at the balance sheet date and are stated at the lower of cost
and market value. Victualling is valued using the FIFO method while bunkers and
lubricants are valued on an average cost basis.
Vessels
Vessels are stated at cost which comprises the vessels' contract price, costs of
major repairs and improvements upon acquisition, direct delivery and other
acquisition expenses less accumulated depreciation. 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 otherwise these amounts are charged to expense as
incurred.
Expenditures for vessel repair and maintenance is charged against income in the
period incurred.
Depreciation
Depreciation is calculated on a straight line basis with reference to the cost
of the vessel, age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel, which
is estimated to range from 25 to 30 years from the completion of its
construction. Remaining useful lives of property are periodically reviewed and
revised to recognize changes in conditions and such revisions, if any, are
recognized over current and future periods.
The Company changed its estimate of the scrap value of its vessels in 2004 (see
Note 4).
Revenue and expense recognition
Revenues are generated from voyage and time charter agreements. Time charter
revenues are recorded over the term of the charter as service is provided. Under
a voyage charter, the revenues and associated voyage costs are recognized on a
pro-rata basis over the duration of the voyage. Probable losses on voyages are
provided for in full at the time such losses can be estimated. A voyage is
deemed to commence upon the completion of discharge of the vessel's previous
cargo and is deemed to end upon the completion of discharge of the current
cargo. Demurrage income, which in included in voyage revenues, represents
payments received from the charterer when loading or discharging time exceeded
the stipulated time in the voyage charter and is recognized when earned.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies - Continued
Revenue and expense recognition - continued
Charter fees received in advance is recorded as a liability until charter
services are rendered.
Vessels operating expenses comprise all expenses relating to the operation of
the vessels, including crewing, repairs and maintenance, insurance, stores,
lubricants and miscellaneous expenses. Vessels operating expenses are recognized
as incurred; payments in advance of services or use are recorded as prepaid
expenses. Voyage expenses comprise all expenses relating to particular voyages,
including bunkers, port charges, canal tolls, and agency fees.
For the Company's vessels operating in chartering pools, revenues and voyage
expenses are pooled and allocated to each pool's participants on a time charter
equivalent basis in accordance with an agreed-upon formula.
Dry-docking and special survey costs
Dry-docking and special survey costs are deferred and amortized over the
estimated period to the next scheduled dry-docking or survey, which are
generally two and a half years and five years, respectively. Unamortized
dry-docking and special survey costs of vessels that are sold are written-off to
income in the year of the vessel's sale.
Pension and retirement benefit obligations - crew
The ship-owning companies employ the crews on board the vessels under short-term
contracts (usually up to 9 months). Accordingly, they are not liable for any
pension or post retirement benefits.
Financing costs
Loan arrangement fees are deferred and amortized to interest expense over the
duration of the underlying loan using the effective interest method. Unamortized
fees relating to loan repaid or refinanced are expensed in the period the
repayment or refinancing occurs.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies - Continued
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 assets as being held for sale in accordance with SFAS No.
144, "Accounting for the Impairment or the Disposal of Long-Lived Assets" when
the following criteria are met: management has committed to a plan to sell the
asset; the asset is available for immediate sale in its present condition; an
active program to locate a buyer and other actions required to complete the plan
to sell the asset have been initiated; the sale of the asset is probable, and
transfer of the asset is expected to qualify for recognition as a completed sale
within one year; the asset is being actively marketed for sale at a price that
is reasonable in relation to its current fair value and actions required to
complete the plan 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 assets are not
depreciated once they meet the criteria to be held for sale.
Impairment of long-lived assets
The Company follows SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the asset's carrying amount. In the evaluation of the fair value and
future benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets.
If the carrying value of the related asset exceeds the undiscounted cash flows,
the carrying value is reduced to its fair value. Various factors including
future charter rates and vessel operating costs are included in this analysis.
The Company determined that no impairment loss needed to be recognized for
applicable assets for any years presented.
Derivative financial instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value with changes in the instruments' fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. Pursuant to SFAS No. 133, the transactions did not qualify as a hedge or
meet the criteria of hedge accounting. All gains or losses on the derivative
financial instruments are reflected in the consolidated statements of income.
For the year ended December 31, 2004, the interest rate swaps did not qualify
for hedge accounting treatment. Accordingly, all gains or losses have been
recorded in the consolidated statements of income. The fair value at December
31, 2004 of $27,029 is included in claims and other receivables. There were no
interest rate swaps for the year ended December 31, 2005.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies - Continued
Earning per common share
Basic earnings per common share are computed by dividing the net income by the
weighted average number of common shares outstanding during the year. Potential
common shares that are anti-dilutive, such as the warrants outstanding as of
December 31, 2005 since their exercise price exceeds the fair value of Euroseas
Ltd. common shares, are excluded from earnings per share. Additional 1,079,167
Euroseas Ltd. common shares were issued subsequent to December 31, 2005 [see
Note 15(f)].
Segment reporting
The Company reports financial information and evaluates its operations by
charter revenue and not by the length of ship employment for its customers, i.e.
spot or time charters. The Company does not use 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 and thus the Company has determined that it operates under one
reporting segment. 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 geographical information is impracticable.
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
"Consolidation of Variable Interest Entities," which clarified the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities ("VIEs") only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN
46R), which clarified certain complexities of FIN 46. FIN 46R is applicable for
financial statements issued for reporting periods that end after March 5, 2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard will not have a material impact on the financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually the
vesting period). SFAS No.123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective for our fiscal year 2006.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies - Continued
Recent accounting pronouncements (continued)
On December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("FAS 153"). This statement amends APB Opinion N(degree)29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. Under SFAS No. 153, if a non-monetary
exchange of similar productive assets meets a commercial-substance criterion and
fair value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS No. 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
The FASB has issued SFAS No.154, Accounting Changes and Error Corrections, a
replacement of APB Opinion N(degree)20 and SFAS No. 3. The Statement applies to
all voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle.
SFAS No.154 requires retrospective applications to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. Opinion 20 previously required that most voluntary change in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves financial reporting because its requirements enhance the
consistency of financial information between periods. The Company is analyzing
the effect which this pronouncement will have on its financial condition,
statement of operations, and cash flows. This statement will be effective for
the Company on January 1, 2006. The Company does not believe that this
pronouncement will have and effect on it's financial condition, results of
operation or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." This Statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and resolves issues addressed in Statement 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets."
SFAS No. 155 permits fair value re-measurement for any hybrid financial
instruments that contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS No.
155 also clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The Company has not completed the study of what effect SFAS No. 155 will
have on its financial position and results of operations.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
For the years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies - Continued
Recent accounting pronouncements - Continued
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating
to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment "(Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47 "Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143", which clarifies the term "conditional asset retirement
obligation" as used in SFAS No. 143 "Accounting for Asset Retirement
Obligations". Specifically, FIN 47 provides that an asset retirement obligation
is conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. Management is currently evaluating the effect
that adoption of FIN 47 will have on the Company's financial position and
results of operations.
3. Inventories
This consisted of the following:
2004 2005
----------------------------------------------------------------------------
Lubricants 256,223 312,390
Victualling 47,255 59,301
----------------------------------------------------------------------------
Total 303,478 371,691
----------------------------------------------------------------------------
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
4. Vessels, net
The amounts in the accompanying consolidated balance sheets are as follows:
Net Book
Accumulated Value
Costs Depreciation
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Balance, January 1, 2004 61,587,219 (20,491,150) 41,096,069
- Depreciation for the year - (2,530,100) (2,530,100)
- Sale of vessel (5,826,825) 1,432,020 (4,394,805)
-----------------------------------------------------------------------------
Balance, December 31, 2004 55,760,394 (21,589,230) 34,171,164
-----------------------------------------------------------------------------
- Depreciation for the year (2,657,914) (2,657,914)
- Purchase of vessel 20,821,647 - 20,821,647
-----------------------------------------------------------------------------
Balance, December 31, 2005 76,582,041 (24,247,144) 52,334,897
-----------------------------------------------------------------------------
The Company increased in 2004 its estimate of the scrap value of the vessels to
reflect increases in the market price in the scrap metal market. The effect of
this change in estimate was to reduce 2004 depreciation expense by $1,400,010
and increase 2004 net income by the same amount, or $0.05 per share.
In addition, in 2004, the estimated useful life of the vessel M/V Ariel was
extended from 28 years to 30 years as a result of the dry-docking performed in
such year.
M/V Widar was sold in April 2004 and the Company recognized net gain on sale of
$2,315,477. Depreciation expense for M/V Widar for the year ended December 31,
2004 amounted to $136,384.
5. Deferred Charges, net
This consisted of:
2004 2005
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Balance, beginning of year 929,757 2,205,178
Additions 2,270,418 1,284,733
Amortization of dry-docking/
special survey expenses (931,578) (1,550,338)
Amortization of loan (50,681) (83,744)
arrangement fees
Unamortized portion written-off (12,738) -
upon sale of M/V Widar
------------------------------------------------------------------------------
Balance, end of year 2,205,178 1,855,829
------------------------------------------------------------------------------
The additions of $1,284,733 in 2005 consisted of loan financing fees of $208,500
and dry-docking/special survey expenses of $1,076,233. The additions of
$2,270,418 in 2004 consisted of dry-docking/special survey expenses.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
For the years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
6. Investment in an Associate
Fitsoulas Corporation Limited is 38% owned by common shareholders with the
ship-owning companies listed in Note 1 to the financial statements. The amounts
in the accompanying consolidated financial statements are as follows:
Fitsoulas Corporation Limited sold its vessel on March 31, 2003. The Company's
share of the net loss inclusive of the loss on sale of the vessel of Fitsoulas
Corporation Limited was $167,433 for the year ended December 31, 2003.
Thereafter, dividends of $76,000 were declared and capital of $950,000 was
returned directly to the shareholders in 2003 and dividend of $22,856 were
declared and returned directly to the shareholders in 2004.
7. Accrued Expenses
This account consisted of:
2004 2005
------------------------------------------------------------------------------
Accrued private placement expenses - 1,121,397
Accrued payroll expenses 95,615 31,928
Accrued interest 100,366 139,536
Accrued general and administrative - 269,666
expenses
Other accrued expenses 125,075 215,110
------------------------------------------------------------------------------
Total 321,056 1,777,637
------------------------------------------------------------------------------
8. Related Party Transactions
Management fees paid to the Manager (see Note 1) amounted to $1,772,800,
$1,972,252 and $1,911,856 in 2003, 2004 and 2005, respectively.
Amounts due from related party represent net disbursements and collections made
by the Manager on behalf of the ship-owning companies during the normal course
of operations for which they have the right of offset. Amounts due from related
parties mainly consist of advances to the Manager of funds to pay for all
anticipated vessel expenses. The amount of $3,012,720 due from related parties
as of December 31, 2005 therefore consists entirely of deposits in the accounts
of the Manager. As of February 28, 2006 the amount due from related party was
about $676,675. Interest earned on funds deposited in related party accounts is
credited to the account of the ship-owning companies or Euroseas Ltd.
The Company uses brokers for various services, as is industry practice.
Eurochart S.A., a company controlled by certain members of the Pittas family and
therefore a related party, provides vessel sales and purchases services, and
chartering services to the Company whereby the Company pays commission of 1% of
the vessel sales price and 1.25% of charter revenues. Commission expenses for
the years ended December 31, 2003, 2004 and 2005 for vessel sales were $0,
$70,000 and $206,500, respectively, and commissions for chartering services were
$286,605, $534,717 and $536,180, also respectively.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
For the years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
8. Related Party Transactions - continued
Certain members of the Pittas family together with another unrelated ship
management company, have one joint venture with the insurance broker Sentinel
Maritime Services Inc. and one with the crewing agent More Maritime Agencies
Inc. The shareholders' percentage participation in these joint ventures was 27%
in 2003, 35% in 2004 and 48% in 2005. Total fees charged by Sentinel Marine
Services Inc. and More Maritime Agencies Inc. in 2004 were $209,685 and $23,543,
respectively, and $219,400 and $45,277, respectively, in 2005.
9. Long-Term Debt
This consisted of bank loans of the ship-owning companies are as follows:
December 31,
-----------------------------------
Borrower 2004 2005
-----------------------------------------------------------------------------
Diana Trading Limited (a) $ 4,140,000 $ 6,560,000
Alcinoe Shipping Limited/
Oceanpride Shipping Limited/
Searoute Maritime Ltd/
Oceanopera Shipping Ltd (b) 1,600,000 9,500,000
Alterwall Business Inc./
Allendale Investments S.A (c) 8,250,000 17,000,000
Salina Shipholding Corp. (d) 15,500,000
-----------------------------------------------------------------------------
13,990,000 48,560,000
Current portion (6,030,000) (14,430,000)
-----------------------------------------------------------------------------
Long-term portion $ 7,960,000 $ 34,130,000
-----------------------------------------------------------------------------
The future annual loan repayments are as follows:
-----------------------------------------------------------------------------
2006 14,430,000
2007 11,780,000
2008 11,850,000
2009 3,100,000
Thereafter 7,400,000
-----------------------------------------------------------------------------
Total $ 48,560,000
-----------------------------------------------------------------------------
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
9. Long-term Debt - continued
(a) This consisted of loan amounting to $4,900,000 and $1,000,000 drawn on
October 16, 2002 and on December 2, 2002, respectively. The loan is payable
in twenty-four consecutive quarterly installments of $220,000 each, and a
balloon payment of $620,000 payable together with the final quarterly
installment due in October 2008. The interest is based on LIBOR plus 1.6%
per annum.
An additional loan of $4,200,000 was drawn on May 9, 2005. The loan is
payable in twelve consecutive quarterly installments consisting of four
installments of $450,000 each, and eight installments of $300,000 each with
the final installment due in May 2008. The interest is based on LIBOR plus
1.25% per annum.
(b) The balance as of December 31, 2004 represents the balance of the
$3,000,000 loan drawn by Alcinoe Shipping Limited and Oceanpride Shipping
Limited on April 1, 2003 against a loan facility for which they are jointly
and severally liable. Interest is based on LIBOR plus 1.75% per annum.
Alcinoe Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd. drew $13,500,000 against a loan facility for which
they are jointly and severally liable. Prior to obtaining the loan, an
amount of $1,400,000 was paid in settlement of the outstanding loans as at
March 31, 2005 for Alcinoe Shipping Ltd. and Oceanpride Shipping Ltd. The
loan is payable in twelve consecutive quarterly installments consisting of
two installments of $2,000,000 each, one installment of $1,500,000, nine
installments of $600,000 each and a balloon payment of $2,600,000 payable
with the final installment due in May 2008. Interest is based on LIBOR plus
1.5% per annum.
(c) The loan balance as of December 31, 2004 consisted of the following loans:
i. A $6,000,000 loan drawn by Allendale Investments S.A. on May 31,
2002 with a balance of $4,500,000. The interest was based on
LIBOR plus 1.75% per annum.
ii. A $6,000,000 loan drawn by Alterwall Business Inc. with a balance
of $3,750,000. The interest was based on LIBOR plus 1.5% per
annum.
Allendale Investments S.A. and Alterwall Business Inc. drew
$20,000,000 on May 26, 2005 against a loan facility for which they are
jointly and severally liable. The outstanding amount of their existing
loans from the same creditor bank was $7,800,000 and was repaid in
full. The loan is payable in twenty-four unequal consecutive quarterly
installments of $1,500,000 each in the first year, $1,125,000 each in
the second year, $775,000 each in the third year, $450,000 each in the
fourth through sixth years and a balloon payment of $1,000,000 payable
with the final installment due in May 2011. The interest is based on
LIBOR plus 1.25% per annum as long as the outstanding loan amount
remains below 60% of the fair market value (FMV) of M/V HM Qingdao I
and M/V Kuo Hsiung and 1.375% if the outstanding loan amount is above
60% of the FMV of such vessels.
Euroseas Ltd. and subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
9. Long-term Debt - continued
(d) This is a $15,500,000 loan drawn by Salina Shipholding Corp. on December
30, 2005. The loan is payable in ten consecutive monthly installments
consisting of six installments of $1,750,000 each and four installments of
$650,000 each and a balloon payment of $2,400,000 payable with the final
installment in January 2011. The first installment is due in June 2006. The
interest is based on LIBOR plus a margin that ranges between 0.9-1.1%,
depending on the asset cover ratio. The loan is secured with the following:
(i) first priority mortgage over M/V Artemis, (ii) first assignment of
earnings and insurance of M/V Artemis, (iii) a corporate guarantee of
Euroseas Ltd., and (iv) a minimum cash balance equal to an amount of no
less than $300,000 in an account Salina Shipholding Corp. maintains with
the bank, and, overall liquidity (cash and cash equivalents) of $300,000
for each of the Company's vessels throughout the life of the facility.
In addition to the terms specific to each loan described above, all the above
loans are secured with one or more of the following:
o first priority mortgage over the respective vessels on a joint and several
basis.
o first assignment of earnings and insurance.
o a personal guarantee of one shareholder.
o a corporate guarantee of Eurobulk Ltd. and/or Euroseas Ltd.
o a pledge of all the issued shares of each borrower.
The loan agreements contain covenants such as restrictions as to changes in
management and ownership of the vessels, distribution of profits or assets,
additional indebtedness and mortgaging of vessels without the lender's prior
consent, the sale of vessels, minimum requirements regarding the hull ratio
cover and minimum cash retention accounts (restricted cash). Restricted cash are
deposits with certain banks that can only be used to pay the current loan
installments. The Company is not in default in any of the foregoing covenants.
Interest expenses for the years ended December 31, 2003, 2004 and 2005 amounted
to $609,741, $566,880 and $1,412,127, respectively.
Euroseas Ltd. and subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
10. Income Taxes
Under the laws of the countries of the companies' incorporation and/or vessels'
registration, the companies are not subject to tax on international shipping
income, however, they are subject to registration and tonnage taxes, which have
been included in Vessel operating expenses in the accompanying consolidated
statements of income.
Pursuant to the Internal Revenue Code of the United States (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 certain requirements.
Among other things, in order to qualify for this exemption, the company
operating the ships must be incorporated in a country, which grants an
equivalent exemption from income taxes to U.S corporations. All the company's
ship-operations subsidiaries satisfy this particular criteria. In addition these
Companies must be more than 50% owned by individuals who are residents as
defined in the countries of incorporation or another foreign country that grants
an equivalent exemption to U.S corporations. These companies also currently
satisfy the more that 50% benefit ownership requirement. In addition, upon
completion of the public offering of the company' shares, the management of the
Company believes that by virtue of the special rule applicable to situations
where the ship operating companies are beneficially owned by a publicly traded
company like the Company, the more than 50% beneficial ownership requirement can
also be satisfied based on the trading volume and the anticipated widely held
ownership of the Company's shares, but no assurance can be given that this will
remain so in the future, since continued compliance with this rule is subject to
factors outside the Company's control.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
-----------------------------------------------------------------------------
11. Commitments and Contingencies
There are no material legal proceedings to which the Company is a party or to
which any of its properties are subject, other than routine litigation
incidental to the Company's business. In the opinion of the management, the
disposition of these lawsuits should not have a material impact on the
consolidated results of operations, financial position and cash flows.
The distribution of the net earnings by one of the chartering pools which has
one of the Company's vessels in its pool has not yet been finalized for the year
ended December 31, 2005. Any effect on the Company's income resulting from any
future reallocation of pool income cannot be reasonably estimated, however, the
effect on the results for the year is not expected to be significant.
12. Common Stock and Additional Paid-in Capital
Common stock relates to 36,781,159 shares with a par value of $0.01 each. The
amount shown in the accompanying consolidated balance sheets, as additional
paid-in capital, represents payments received in excess of par value which is
treated from the accounting point of view as capital. In 2005, the Company sold
7,026,993 common shares in an institutional private placement, together with
0.25 detachable warrants for each common share to acquire up to 1,756,743 common
shares (see Note 1). The value of the warrants, which is included in "Additional
Paid-in Capital," was estimated to be about $600,000.
13. Voyage, Vessel Operating Expenses and Commissions
These consisted of:
Year ended December 31,
-----------------------------
2003 2004 2005
-----------------------------------------------------------------------------
Voyage expense
Port charges and canal dues 179,745 165,661 234,535
Bunkers 227,398 182,026 416,712
Agency fees 29,792 22,658 19,304
-----------------------------------------------------------------------------
Total 436,935 370,345 670,551
-----------------------------------------------------------------------------
Vessel operating expenses
Crew wages and related costs 4,569,039 4,460,233 4,281,680
Insurance 1,334,517 1,486,179 1,525,683
Repairs and maintenance 595,194 515,820 515,373
Lubricants 455,931 446,034 484,930
Spares and consumable stores 1,555,286 1,660,600 1,465,063
Professional and legal fees 34,206 46,997 23,975
Others 231,557 290,389 313,575
-----------------------------------------------------------------------------
Total 8,775,730 8,906,252 8,610,279
-----------------------------------------------------------------------------
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
13. Voyage, Vessel Operating Expenses and Commissions - continued
Commission consisted of commissions charged by:
Year ended December 31,
-----------------------------
2003 2004 2005
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Third parties 619,552 1,610,480 1,645,669
Related parties (see Note 8) 286,605 604,717 742,680
-----------------------------------------------------------------------------
906,017 2,215,197 2,388,349
-----------------------------------------------------------------------------
14. Financial Instruments
The principal financial assets of the Company consists of cash on hand and at
banks, interest rate swaps and accounts receivable due from charterers. The
principal financial liabilities of the Company consist of long-term loans and
accounts payable due to suppliers.
Interest rate risk
The Company entered into interest rate swap contracts as economic hedges to its
exposure to variability in its floating rate long term debt. Under the terms of
the interest rate swaps the Company and the bank agreed to exchange, at
specified intervals the difference between a paying fixed rate and floating rate
interest amount calculated by reference to the agreed principal amounts and
maturities. Interest rate swaps allow the Company to convert long-term
borrowings issued at floating rates into equivalent fixed rates. Even though the
interest rate swaps were entered into for economic hedging purposes, the
derivatives described below do not qualify for accounting purposes as fair value
hedges, under FASB Statement No. 133, Accounting for derivative instruments and
hedging activities, as the Company does not have currently written
contemporaneous documentation, identifying the risk being hedged, and both on a
prospective and retrospective basis performed an effective test supporting that
the hedging relationship is highly effective. Consequently, the Company
recognizes the change in fair value of these derivatives in the consolidated
statements of income.
Concentration of credit risk
Financial instruments, which potentially subject the Company to significant
concentration of credit risk consist primarily 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 evaluation of the relative credit standing of these financial
institutions that are considered in the Company's investment strategy. 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.
Fair value
The carrying values of cash, 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 bearing interest
at variable interest rates approximates the recorded values.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
15. Subsequent Events
(a) The SEC declared effective on February 3, 2006 the Company's
registration statement on Form F-4 that registered the 1,079,167
Euroseas Ltd. common shares that will be issued to Cove shareholders
(see Note 1). A definitive joint information statement/prospectus
describing the merger was mailed to Cove stockholders on or about
February 8, 2006. The Cove common stock will continue to trade on the
OTC Bulletin Board until the consummation of the merger [see item (f)
below].
(b) The SEC also declared effective on February 3, 2006 the Company's
registration statement on Form F-1 that registered the re-sale of the
7,026,993 Euroseas Ltd. common shares and 1,756,743 Euroseas Ltd.
common shares issuable upon the exercise of the warrants issued in
connection with the institutional private placement as well as 818,604
shares to be issued to certain Cove's shareholders as part of the
merger with Cove (see Note 1).
(c) On February 7, 2006 the Board of Directors declared a cash dividend of
$0.06 per Euroseas Ltd. common share (i) payable on or about March 2,
2006 to the holders of record of Euroseas Ltd. common shares as of
February 28, 2006, and (ii) payable to Cove shareholders who are
entitled to receive Euroseas Ltd. common shares in connection with the
merger, with such payment being made only to the holders of record of
Cove common stock as of the effective date of the merger and such
dividend payment being made upon exchange of their Cove common shares
for Euroseas Ltd. common shares [see item (f) below].
(d) The Company submitted on February 10, 2006 an application to list the
Euroseas Ltd. common shares on the OTC Bulletin Board. On March 2,
2006 Euroseas received approval to list its common stock on the OTC
Bulletin Board.
(e) On March 20, 2006, a subsidiary of the Company signed a Memorandum of
Agreement to sell M/V "John P", a handysize bulk carrier of 26,354 DWT
built in 1981 for $4.95 million. The vessel is to be delivered to the
buyers in late June / early July 2006.
(f) On March 27, 2006, Euroseas Ltd. consummated the merger with Cove and,
as a result, Cove merged into Euroseas Acquisition Company Inc., and
the separate corporate existence of Cove ceased. Cove stockholders
received 0.102969 shares of Euroseas Ltd. common shares (or an
aggregate of 1,079,167 Euroseas Ltd. common shares) and received
dividends of $0.01339 for each share of Cove common stock owned (or an
aggregate of $140,334) related to dividends previously declared by
Euroseas Ltd. Euroseas Acquisition Company Inc. changed its name to
Cove Apparel, Inc. Following the merger, and following the exchange of
all common stock of Cove into Euroseas Ltd. common shares, Euroseas
Ltd. has a total of 37,860,341 common shares outstanding. Also, the
common stock of Cove has been de-listed and no longer trades on the
OTC Bulletin Board.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
------------------------------------------------------------------------------
15. Subsequent Events - continued
(g) On April 10, 2006, Xenia International Corporation, a wholly-owned
subsidiary of the Company signed a Memorandum of Agreement to purchase
"Tasman Trader", a multipurpose dry cargo vessel of 22,568 DWT and 950
TEU built in 1990 for $10.78 million. The vessel is to be delivered to
Euroseas Ltd. between April 25 and May 8, 2006 at the seller's option.
(h) On April 11, 2006, a subsidiary of the Company agreed to sell m/v
"Pantelis P", a handysize bulk carrier of 26,354 DWT built in 1981 for
$4.65 million. The vessel is to be delivered to the buyers between May
15 and June 30, 2006 at Euroseas Ltd. option.
(i) (unaudited) The vessel m/v "Pantelis P" was delivered to the buyers on
May 31, 2006. As a result of the sale of m/v "Pantelis P" and of m/v
"John P", the Company has agreed to make a $3,000,000 additional
re-payment to the bank financing the above ships (along with m/v
"Ariel" and m/v "Nikolaos") with the remaining repayments of the loan
proportionally reduced by the ratio of the $3,000,000 payment over the
current outstanding balance for this loan of $7,400,000. The revised
loan payment schedule agreement has not been signed. $1,500,000 of the
additional repayment was made on May 31, 2006 following the delivery
to the buyers of m/v Pantelis P.
(j) (unaudited)
On May 9, 2006, the Board of Directors declared a cash dividend of
$0.06 per Euroseas common share payable on or about June 16, 2006 to
the holders of record of Euroseas common shares as of June 2, 2006.
(k) (unaudited)
On June 26, 2006, the Company was informed that a loan facility for an
amount not to exceed $8,250,000 to partly finance the purchase of m/v
"Tasman Trader" was approved by Fortis Bank. The facility is to be
repaid in 23 equal consecutive quarterly installments of $265,000
each, the first installment commencing 3 months from drawdown. In
addition, a final balloon payment of $2,155,000 will be payable
together with the 23rd and final installment. The facility has similar
covenants to the rest of the Company's loans. The Company signed the
loan facility on June 30, 2006.
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 on its behalf.
EUROSEAS LTD.
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(Registrant)
By: /s/ Aristides J. Pittas
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Aristides J. Pittas
Chairman, President and CEO
Date: June 30, 2006