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, 2006
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, $0.03 par value NASDAQ Global Market
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, $0.03 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:
12,620,150
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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
The Company hereby incorporates this Form 20-F into the Company's Registration
Statement on Form F-1, filed on October 20, 2005, Registration No. 333-129145.
TABLE OF CONTENTS
Page
Forward-Looking Statements...................................................1
Part I
Item 1. Identity of Directors, Senior Management and Advisers............2
Item 2. Offer Statistics and Expected Timetable..........................2
Item 3. Key Information..................................................2
Item 4. Information on the Company......................................22
Item 4A. Unresolved Staff Comments.......................................33
Item 5. Operating and Financial Review and Prospects....................33
Item 6. Directors, Senior Management and Employees......................44
Item 7. Major Shareholders and Related Party Transactions...............49
Item 8. Financial information...........................................52
Item 9. The Offer and Listing...........................................53
Item 10. Additional Information..........................................54
Item 11. Quantitative and Qualitative Disclosures about Market Risk......61
Item 12. Description of Securities Other than Equity Securities..........62
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................63
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceed............................................63
Item 15. Controls and Procedures.........................................63
Item 16A Audit Committee Financial Expert................................64
Item 16B Code of Ethics..................................................64
Item 16C Principal Accountant Fees and Services..........................64
Item 16D Exemptions from the Listing Standards for Audit Committees......64
Item 16E Purchase of Equity Securities by the Issuer
and Affiliated Purchasers....................................64
Part III
Item 17. Financial Statements............................................65
Item 18. Financial Statements............................................65
Item 19. Exhibits........................................................65
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 annual report contains forward-looking statements. These
forward-looking statements include information about possible or assumed future
results of our operations or our performance. Words such as "expects,"
"intends," "plans," "believes," "anticipates," "estimates," and variations of
such words and similar expressions are intended to identify the forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, no assurance can be given that such
expectations will prove to have been correct. These statements involve known and
unknown risks and are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond our control. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Forward-looking
statements include, but are not limited to, statements regarding:
o our future operating or financial results;
o future, pending or recent acquisitions, business strategy, areas of
possible expansion, and expected capital spending or operating
expenses;
o drybulk and container shipping industry trends, including charter
rates and factors affecting vessel supply and demand;
o our financial condition and liquidity, including our ability to obtain
additional financing in the future to fund capital expenditures,
acquisitions and other general corporate activities;
o availability of crew, number of off-hire days, drydocking requirements
and insurance costs;
o our expectations about the availability of vessels to purchase or the
useful lives of our vessels;
o our expectations relating to dividend payments and our ability to make
such payments;
o our ability to leverage to our advantage our manager's relationships
and reputations in the drybulk and container shipping industry;
o changes in seaborne and other transportation patterns;
o changes in governmental rules and regulations or actions taken by
regulatory authorities;
o potential liability from future litigation;
o global and regional political conditions;
o acts of terrorism and other hostilities; and
o other factors discussed in the section titled "Risk Factors."
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS ANNUAL REPORT, OR THE DOCUMENTS TO WHICH WE REFER
YOU IN THIS ANNUAL REPORT, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS WITH
RESPECT TO SUCH STATEMENTS OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY STATEMENT IS BASED.
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, 2005 and 2006 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. - Summary of Selected Historical
Financials.
Euroseas Ltd. - Summary of Selected Historical Financials
Year Ended December 31,
2002 2003 2004 2005 2006
(All amounts in U.S. dollars, except for share data)
Income Statement Data
Voyage revenues 15,291,761 25,951,023 45,718,006 44,523,401 42,143,361
Commissions (420,959) (906,017) (2,215,197) (2,388,349) (1,829,534)
Net revenue 14,870,802 25,045,006 43,502,809 42,135,052 40,313,827
Voyage expenses (531,936) (436,935) (370,345) (670,551) (1,154,738)
Vessel operating expenses (7,164,271) (8,775,730) (8,906,252) (8,610,279) 10,368,817)
Amortization dry-docking and special survey expense
and vessel depreciation (1) (4,053,049) (4,757,933) (3,461,678) (4,208,252) (7,292,838)
Management fees (1,469,690) (1,722,800) (1,972,252) (1,911,856) (2,266,589)
Other general and administration expenses - - - (420,755) (1,076,884)
Net gain on sale of vessels - - 2,315,477 - 4,445,856
Operating income 1,651,856 9,351,608 31,107,759 26,313,359 22,599,817
Interest and other financing costs (799,970) (793,257) (708,284) (1,495,871) (3,398,858)
Interest income 6,238 36,384 187,069 460,457 870,046
Net income 891,628 8,426,612 30,611,765 25,178,454 20,069,407
Balance Sheet Data
Current assets 3,192,345 9,409,339 16,461,159 25,350,707 9,975,596
Vessels, net 45,254,226 41,096,067 34,171,164 52,334,897 95,494,342
Deferred assets and other long term assets 1,812,551 952,613 2,205,178 1,855,829 12,035,321
Total assets 50,259,122 51,458,019 52,837,501 79,541,433 117,505,259
Current liabilities including current portion
of long term 10,878,488 8,481,773 13,764,846 18,414,877 21,665,399
Long term debt, including current portion 23,845,000 20,595,000 13,990,000 48,560,000 74,950,000
Total liabilities 28,973,488 23,971,773 21,724,846 52,544,877 79,493,599
Common shares outstanding (adjusted for the 1-for-3 split) 9,918,056 9,918,056 9,918,056 12,260,387 12,620,150
Share capital 297,542 297,542 297,542 367,812 378,605
Total shareholders' equity 21,285,634 27,486,246 31,112,655 26,996,556 38,011,660
Other Financial Data
Net cash provided by operating activities 5,631,343 10,956,132 34,208,693 20,594,782 20,968,824
Net cash received from (paid to) related party (177,169) 482,778 (3,541,236) 7,638,780 (363,461)
Net cash provided by (used in) investing activities (17,036,079) 214,832 6,756,242 (21,833,616) (55,367,015)
Net cash provided by (used in) financing activities 12,247,355 (4,778,000) (33,567,500) 6,188,653 16,741,997
Earnings per share, basic and diluted 0.09 0.85 3.09 2.34 1.60
Dividends declared 687,500 1,276,000 25,435,501 30,175,223 9,465,082
Cash paid for common dividend / return of capital 687,500 1,200,000 26,962,500 46,875,223(2) 9,465,082
Cash dividends / return of capital, declared per common
share 0.07 0.12 2.72 4.36 0.76
Weighted average number of shares outstanding during period 9,918,056 9,918,056 9,918,056 10,739,476 12,535,365
2002 2003 2004 2005 2006
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Fleet Data (3)
Number of vessels 6.82 8.00 7.31 7.10 8.09
Calendar days 2,490 2,920 2,677 2,591 2,942
Available days 2,448 2,867 2,554 2,546 2,895
Voyage days 2,440 2,846 2,542 2,508 2,864
Utilization Rate (percent) 99.7% 99.3% 99.5% 98.5% 98.9%
(In U.S. dollars per day per vessel)
Average TCE rate 6,049 8,965 17,839 17,485 14,313
Running Cost 2,877 3,005 3,327 3,323 3,524
Management Fee 590 590 737 738 770
G&A Expenses - - - 162 366
Total Operating Expenses 3,467 3,595 4,064 4,223 4,660
(1) 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.
(2) 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.
(3) For the definition of calendar days, available days, voyage days and
utilization 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.
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 and
container shipping industry. 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 may not be able to correctly assess
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 us to 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, container and multipurpose vessels;
o demand for drybulk, container 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 container shipping industry, 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.
In addition, we periodically re-evaluate the carrying amount and period
over which long-lived assets are depreciated to determine if events have
occurred which would require modification to their carrying values or their
useful lives. A determination that a vessel's estimated remaining useful life or
market value has declined could result in an impairment charge against our
earnings and a reduction in our shareholders' equity. Any change in the assessed
value of any of our vessels might also 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.
Our future profitability will be dependent on the level of charter rates in the
international drybulk and container shipping industry.
Charter rates for the international drybulk and container shipping industry
have reached record highs during the past two years; however, by the beginning
of 2006 rates declined and while drybulk rates have recovered since early 2006
and continue strong in 2007, container ship rates have remained flat for most of
2006, further declined by the end of the year and only modestly recovered in the
beginning of 2007. We anticipate that the future demand for our drybulk,
container 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 economic growth may not 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 April 1, 2007 the capacity of the fully cellular
worldwide container vessel fleet was approximately 9.7 million teu, with
approximately 4.6 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 container ship commodities, and
separately for containerized cargo;
o global and regional economic and political conditions;
o the distance drybulk and containerized commodities are to be moved by
sea;
o environmental and other regulatory developments;
o currency exchange rates;
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 the price of steel and other materials;
o port congestion;
o changes in environmental and other regulations that may limit the
useful life of vessels; and
o the number of vessels that are out of service.
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, 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. Such
growth may not be sustained and the Chinese economy may 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
may result in decreased revenues and/or profitability.
Although most of our vessels are currently under period charters, in the
future, we may have more of these vessels and/or any newly acquired vessels on
spot charters. The spot market is highly competitive and rates within this
market are subject to volatile fluctuations, while period charters provide
income at pre-determined rates over more extended periods of time. If we decide
to spot charter our vessels, we may not be able to keep 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.
An over-supply of drybulk carrier and container ship capacity may lead to
reductions in charter hire rates and profitability.
The market supply of drybulk carriers and especially container ships has
been increasing, and the number of container ships on order have recently
reached historic highs. These newbuildings are expected to begin being delivered
in significant numbers starting in 2007. An over-supply of drybulk carrier and
container ship capacity may result in a reduction of charter hire rates. If such
a reduction occurs upon the expiration or termination of our drybulk carriers'
and container ships' current charters, such as during 2007, when the charters
under which two of our container ships are currently deployed expire, we may
only be able to recharter those drybulk carriers and container ships at reduced
or unprofitable rates or we may not be able to charter these vessels at all.
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 may not be
able to 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, certificates and financial assurances 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, our
affiliated ship management company, are ISM Code-certified, but we may not be
able to maintain such certification 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 may 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
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If we cannot use the remaining proceeds of our follow-on offering to acquire
vessels and expand our fleet, we may use the proceeds of this offering for
general corporate purposes which may result in lower earnings.
We intend to use the remaining proceeds of our recent follow-on offering to
acquire additional vessels and expand our fleet. Our management will have the
discretion to identify and acquire vessels. If our management is unable to
identify and acquire vessels on terms acceptable to us, we may use the remaining
proceeds for general corporate purposes. It may take a substantial period of
time before we can locate and purchase suitable vessels. During this period, the
remaining proceeds of the offering may be invested on a short-term basis and
therefore may not yield returns at rates comparable to what a vessel might have
earned.
We depend entirely on Eurobulk to manage and charter our fleet, which may
adversely affect our operations if Eurobulk fails to perform its obligations.
We have no employees and we currently contract the commercial and technical
management of our fleet, including crewing, maintenance and repair, to Eurobulk,
our affiliated ship management company. We may lose Eurobulk's services or
Eurobulk may fail to perform its obligations to us which 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 there may be 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, and 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 are controlled by Friends, which may limit your ability to influence our
actions.
As of April 27, 2007, Friends, our largest shareholder, owns or controls
54.0% of the outstanding shares of our common stock. As a result of this share
ownership and for so long as Friends owns a significant percentage of our
outstanding common stock, Friends will be able to influence the outcome of any
shareholder vote, including the election of directors, the adoption or amendment
of provisions in our articles of incorporation or bylaws and possible mergers,
corporate control contests and other significant corporate transactions. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, merger, consolidation, takeover or other
business combination involving us. This concentration of ownership could also
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which could in turn have an adverse effect
on the market price of our common stock.
We are a "controlled company" under NASDAQ rules, and as such we are entitled to
exemption from certain NASDAQ corporate governance standards, and you may not
have the same protections afforded to stockholders of companies that are subject
to all of the NASDAQ corporate governance requirements.
Friends owns or controls a majority of our outstanding voting stock. As a
result, we are a "controlled company" within the meaning of the NASDAQ corporate
governance standards. Under NASDAQ rules, a company of which more than 50% of
its voting power is held by an individual, group or another company is a
"controlled company" and may elect not to comply with certain NASDAQ corporate
governance requirements, including (1) the requirement that a majority of the
board of directors consist of independent directors and (2) the requirement to
maintain independent compensation and nominating committees. We may utilize
these exemptions. As a result, non-independent directors, including members of
our management who also serve on our board of directors, will, among other
things, fix the compensation of our management, make stock and option awards and
resolve governance issues regarding our company. Accordingly, in the future you
may not have the same protections afforded to stockholders of companies that are
subject to all of the NASDAQ corporate governance requirements.
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 other vessels that are or 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 is expected to manage at least one vessel other than those owned by
Euroseas. In the past, Eurobulk has managed other vessels where the Pittas
family was a minority shareholder but never any where there was no Pittas family
participation at all. However, it is possible that in the future Eurobulk may
manage additional 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. Eurobulk may not be able to resolve all
conflicts of interest in a manner beneficial to us.
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, container ships or
multipurpose vessels 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. Eurobulk, Friends Investment Company Inc. and Aristides J. Pittas, our
Chairman and Chief Executive Officer, have granted us a right of first refusal
to acquire any drybulk vessel or container ship which any of them may consider
for acquisition in the future. In addition, Mr. Pittas will use his best efforts
to cause any entity with respect to which he directly or indirectly controls to
grant us this right of first refusal. Were we, however, to decline any such
opportunity offered to us or we do not have the resources or desire to accept
any such opportunity, Eurobulk, Friends and Aristides J. Pittas, and any of
their respective Affiliates, could acquire such vessels.
Our officers do not devote all of their time to our business.
Our officers are involved in other business activities that may result in
their spending less time than is appropriate or necessary in order to manage our
business successfully. Our Chief Executive Officer, Chief Financial Officer and
Secretary are not employed directly by us, but rather their services are
provided pursuant to our master management agreement with Eurobulk. These
officers may spend a material portion of their time providing services to
Eurobulk and its affiliates on matters unrelated 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
regular minimum quarterly dividends of $0.22 per share in 2007 to holders of our
common stock, when, as and if declared by our Board of Directors. However, we
may not earn sufficient charterhire or we may incur 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.
If we are not successful in acquiring additional vessels, any unused net
proceeds from our recent follow-on 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
this 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 charter hire
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, charter
rates in the drybulk and container shipping industry, 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
(retained earnings and the excess of consideration received for the sale of
shares above the par value of the shares), but if there is no surplus, dividends
may be declared out of the net profits (basically, the excess of our revenue
over our expenses) for the fiscal year in which the dividend is declared or the
preceding fiscal year. Marshall Islands law also prohibits the payment of
dividends while a company is insolvent or if it would be rendered insolvent upon
the payment of a dividend. As a result, we may not be able to pay dividends.
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 on acceptable terms.
During periods in which charter rates are high, vessel values generally are
high as well, and it may be difficult to consummate vessel acquisitions at
favorable prices. In addition, 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 may not 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 may not 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 December 31, 2006, we had total bank debt of $74.95
million. Our current repayment schedule requires us to repay $18.04 million of
this debt over the next 12 months. 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. To
finance vessel purchases, we have borrowed, and may continue to borrow, under
loan agreements that provide for periodic interest rate adjustments 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. Eurobulk may not 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 of 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 and container 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 highly competitive markets that are capital
intensive and highly fragmented. Competition arises primarily from other vessel
owners, some of whom have substantially greater resources than us. Competition
for the transportation of drybulk and container 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 will not be able to take advantage of favorable opportunities in the current
spot market with respect to vessels employed on period charters.
As of April 27, 2007, eight of the ten vessels in our fleet are employed
under period charters with remaining terms ranging between four months and 59
months, and one of our vessels is partly protected from market fluctuations (77%
of its capacity in 2007 and 42% in 2008) via its participation in a shipping
pool and three "short panamax funds" (cargo funds). Although period charters
provide relatively steady streams of revenue, vessels committed to period
charters may not be available for spot charters during periods of increasing
charter hire rates, when spot charters might be more profitable. If we cannot
re-charter these vessels on period charters or trade them in the spot market
profitably, our results of operations and operating cash flow may suffer. We may
not be able to secure charter hire rates in the future that will enable us to
operate our vessels profitably.
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 marine disaster;
o piracy;
o environmental accidents;
o grounding, fire, explosions and collisions;
o cargo and property losses or damage;
o business interruptions caused by mechanical failure, human error, war,
terrorism, political action in various countries, labor strikes or
adverse weather conditions; and
o work stoppages or other labor problems with crew members serving on
our vessels.
Such occurrences could result in death or injury to persons, loss of
property or environmental damage, delays in the delivery of cargo, loss of
revenues from or termination of charter contracts, governmental fines, penalties
or restrictions on conducting business, higher insurance rates, and damage to
our reputation and customer relationships generally. Any of these circumstances
or events could increase our costs or lower our revenues, which could result in
reduction in the market price of our shares of common stock. The involvement of
our vessels in an environmental disaster may harm our reputation as a safe and
reliable vessel owner and operator.
The operation of drybulk carriers has certain unique operational risks.
The operation of certain ship types, such as drybulk carriers, has certain
unique risks. With a drybulk carrier, the cargo itself and its interaction with
the ship can be a risk factor. By their nature, drybulk cargoes are often heavy,
dense, easily shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during unloading operations
with grabs, jackhammers (to pry encrusted cargoes out of the hold), and small
bulldozers. This treatment may cause damage to the vessel. Vessels damaged due
to treatment during unloading procedures may be more susceptible to breach to
the sea. Hull breaches in drybulk carriers may lead to the flooding of the
vessels holds. If a drybulk carrier suffers flooding in its forward holds, the
bulk cargo may become so dense and waterlogged that its pressure may buckle the
vessels bulkheads leading to the loss of a vessel. If we are unable to
adequately maintain our vessels we may be unable to prevent these events. Any of
these circumstances or events could negatively impact our business, financial
condition, results of operations and ability to pay dividends. In addition, the
loss of any of our vessels could harm our reputation as a safe and reliable
vessel owner and operator.
The operation of container ships has certain unique operational risks.
The operation of container ships has certain unique risks. Container ships
operate at high speeds in order to move cargoes around the world quickly and
minimize delivery delays. These high speeds can result in greater impact in
collisions and groundings resulting in more damage to the vessel when compared
to vessels operating at lower speeds. In addition, due to the placement of the
containers on a container ship, there is a greater risk that containers carried
on deck will be lost overboard if an accident does occur. Furthermore, with the
highly varied cargo that can be carried on a single container ship, there can be
additional difficulties with any clean-up operation following an accident. Also,
we may not be able to correctly control the contents and condition of cargoes
within the containers which may give rise to events such as customer complaints,
accidents on-board the ships or problems with authorities due to carriage of
illegal cargoes. Any of these circumstances or events could negatively impact
our business, financial condition, results of operations and ability to pay
dividends. In addition, the loss of any of our vessels could harm our reputation
as a safe and reliable vessel owner and operator.
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 may 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 cost of maintaining a vessel in good operating condition
increases with the age of the vessel. As of April 27, 2007, the average age of
our fleet was approximately 17 years. As our fleet ages, we will incur increased
costs. Older vessels are typically less fuel efficient and more costly to
maintain than more recently constructed vessels. Cargo insurance rates also
increase with the age of a vessel, making older vessels less desirable to
charterers. Governmental regulations and safety or other equipment standards
related to the age of a vessel may also require expenditures for alterations or
the addition of new equipment to our vessels and may restrict the type of
activities in which our vessels may engage.
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. As our vessels age, market conditions may not justify
those expenditures or enable us to operate our vessels profitably during the
remainder of their useful lives. 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 defense 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 may not be adequately insured
against all risks and 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, the insurers may 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 international operations expose us to risks of 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 operate could have a material adverse
effect on our trade patterns and adversely affect our operations and
performance.
Obligations associated with being a public company require significant company
resources and management attention.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (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. However, as a non-accelerated
filer, we are not yet subject to this requirement. Currently, we would be
subject to such requirement by the end of our fiscal year ending December 31,
2007. 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.
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 may not be able to 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 a limited operating
history as a stand-alone entity and 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 a limited
operating history as a stand-alone entity and as a publicly traded company. Our
consolidated financial statements include the financial position, results of
operations and cash flows of shipowning companies managed by Eurobulk and
majority owned by the Pittas family prior to their contribution to us. Although
our results of operations, cash flows and financial condition reflected in the
consolidated 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.
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 current method of operation, we do not believe that we have
been, are or will be a PFIC with respect to any taxable year. In this regard, we
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 method of operation. Accordingly, the U.S. Internal Revenue
Service, or IRS, or a court of law may not accept our position, and there is a
risk that the IRS or a court of law could determine that we are a PFIC.
Moreover, we may 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
United States Internal Revenue Code of 1986 (the "Code") (which election could
itself have adverse consequences for such shareholders, as discussed below under
"Tax Consequences -- United States 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 or our shares, as if the
excess distribution or gain had been recognized ratably over the shareholder's
holding period of our shares. See "Tax Consequences -- United States 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 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 promulgated thereunder.
We believe that we and each of our subsidiaries qualify for this statutory
tax exemption and we have taken 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 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 may not be
able to maintain 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.
It may be difficult to enforce service of process and enforcement of judgments
against us and our officers and directors.
We are a Marshall Islands corporation, and our executive offices are
located outside of the United States in Maroussi, Greece. A majority of our
directors and officers reside outside of the United States, and a substantial
portion of our assets and the assets of our officers and directors are located
outside of the United States. As a result, you may have difficulty serving legal
process within the United States upon us or any of these persons. You may also
have difficulty enforcing, both in and outside of the United States, judgments
you may obtain in the U.S. courts against us or these persons in any action,
including actions based upon the civil liability provisions of U.S. federal or
state securities laws.
There is also substantial doubt that the courts of the Marshall Islands or
Greece would enter judgments in original actions brought in those courts
predicated on U.S. federal or state securities laws.
Risk Factors Relating To Our Common Stock
There may not be a liquid market for our common stock, which may cause our
common stock to trade at lower prices and make it difficult to sell your common
stock.
Although our shares of common stock have traded on the NASDAQ Global Market
since January 31, 2007, the trading volume has been low. 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 market price of our common stock has been and may in the future be subject
to significant fluctuations.
The market price of our common stock has been and may in the future be
subject to significant fluctuations as a result of many factors, some of which
are beyond our control. Among the factors that have in the past and could in the
future affect our stock price are:
o quarterly variations in our results of operations;
o changes in sales or earnings estimates or publication of research
reports by analysts;
o speculation in the press or investment community about our business or
the shipping industry generally;
o changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
o strategic actions by us or our competitors such as acquisitions or
restructurings;
o regulatory developments;
o additions or departures of key personnel;
o general market conditions; and
o domestic and international economic, market and currency factors
unrelated to our performance.
The stock markets in general, and the markets for drybulk shipping and
shipping stocks in general, have experienced extreme volatility that has
sometimes been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading price of our
common stock.
Our stock price may fall below the minimum share price requirements of the
NASDAQ Global Market.
Although the price of shares of our common stock is currently above the
minimum share price requirement to maintain the listing of our shares on the
NASDAQ Global Market, we cannot predict what the price will be in the future. If
our share price falls below $5.00, our common stock will not be marginable and
this may reduce the liquidity of our common stock. If our share price falls
below the required $1.00 minimum share price requirement for listed stock or we
fail to maintain any other listing requirements, our stock could be delisted.
Any of these events could result in an active trading market no longer existing
for our shares.
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 payment of dividends;
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 and container shipping industry has been highly
unpredictable and volatile. The market for stock of companies in this industry
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 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 prior Form F-1 registration statement that was declared
effective on February 3, 2006, we registered for resale 2,342,331 shares of
common stock issued in a private placement transaction on August 25, 2005 (the
"Private Placement"), 585,589 shares of our common stock issuable upon the
exercise of warrants issued in the Private Placement and 272,868 shares of our
common stock issued to certain affiliates of Cove Apparel, Inc. ("Cove"), in
connection with the merger of Cove with our wholly-owned subsidiary, Euroseas
Acquisition Company Inc. At no time did Euroseas Ltd., the parent company, merge
with or into Cove. Registration of such shares has, except for any shares
purchased by affiliates, resulted in such shares becoming freely tradable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act").
In addition, we have entered into a registration rights agreement with
Friends Investment Company Inc. ("Friends"), our largest shareholder, pursuant
to which we have granted Friends the right to require us to register under 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. Friends has agreed to waive its
rights under the registration rights agreement until 180 days from January 30,
2007. 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. Shares not registered pursuant to the registration rights
agreement may, subject to a lock-up agreement to which Friends is a party, 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.
On January 30, 2007, we issued an additional 5,750,000 shares pursuant to
our follow-on common stock offering. We may issue additional shares of our stock
in the future and our stockholders may elect to sell large numbers of shares
held by them from time to time. Our amended and restated articles of
incorporation authorize us to issue up to 100,000,000 shares of common stock and
20,000,000 shares of preferred stock, of which 18,370,150 shares of common stock
are outstanding as of April 27, 2007. Entities affiliated with our President and
Chief Executive Officer and certain other large affiliated shareholders
currently own or control 10,251,390 shares (assuming no exercise of 83,334
warrants owned by Eurobulk Marine Holdings, Inc.), or approximately 54.0%, of
our outstanding common stock. The number of shares of stock available for sale
in the public market will be limited by restrictions applicable under securities
laws and agreements that we and our executive officers, directors and principal
shareholders have entered into with the underwriters of our follow-on common
stock offering. Subject to certain exceptions, these agreements generally
restrict us and our executive officers, directors and certain shareholders from
directly or indirectly offering, selling, pledging, hedging or otherwise
disposing of our equity securities or any security that is convertible into or
exercisable or exchangeable for our equity securities and from engaging in
certain other transactions relating to such securities for a period of 180 days
(with respect to our officers, directors, Friends and Eurobulk Marine) and 90
days (with respect to certain other large, non-affiliated shareholders) from
January 30, 2007 without the prior written consent of Oppenheimer & Co. Inc.
Dividends paid on the common stock to U.S. individuals, trusts and estates may
be taxed as ordinary income.
Our common stock is listed on the NASDAQ Global Market and dividends on our
common stock are treated as "qualified dividend income" which is taxed to U.S.
individuals, trusts and estates at preferential tax rates. If our common stock
fails to maintain the requirements of the NASDAQ Global Market or another
established securities market in the United States, our shares will trade over
the counter and any dividends paid on the shares will be treated for U.S. tax
purposes as ordinary income rather than "qualified dividend income" and lose the
preferential tax treatment. We might not be able to maintain the listing of our
common stock on the NASDAQ Global Market or another established securities
market in the United States. In such case, any dividends paid on the common
stock will not be treated as "qualified dividend income" and will not be subject
to tax at preferential rates.
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. 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 U.S. jurisdictions. Stockholder 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 U.S. jurisdiction.
Item 4. Information on the Company
A. History and development of the Company
We are a Marshall Islands company incorporated in May 2005. We are a
provider of worldwide ocean-going transportation services. We own and operate
drybulk carriers that transport major bulks such as iron ore, coal and grains,
and minor bulks such as bauxite, phosphate and fertilizers. We also own and
operate container ships and multipurpose vessels that transport dry and
refrigerated containerized cargoes, mainly including manufactured products and
perishables. As of April 27, 2007, our fleet consisted of four drybulk carriers,
comprised of two Panamax drybulk carriers and two Handysize drybulk carriers,
five containerships and one multipurpose vessel. The total cargo carrying
capacity of the four bulk carriers is 212,443 deadweight tons, or dwt, and of
the three containerships is 110,042 dwt and 7,487 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 four vessels (and of
three additional vessels that have 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. We have purchased six additional vessels since June
2005.
On August 25, 2005, we raised approximately $17.5 million in net 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 2,342,331 shares of common stock at a price of $9.00 per share (adjusted
for the 1-for-3 reverse split of our common stock effected on October 6, 2006),
as well as warrants to purchase an additional 585,589 shares of common stock.
The warrants have a five year term and an exercise price of $10.80 per share
(adjusted for the 1-for-3 reverse split of our common stock). 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.
On February 5, 2007, we raised approximately $43.1 million in net proceeds
from a follow-on common stock offering. Our shares originally traded on the
OTCBB under the symbol ESEAF.OB until October 5, 2006 and EUSEF.OB from October
6, 2006 to January 30, 2007. Since January 31, 2007, our shares have traded on
the NASDAQ Global Market under the symbol ESEA.
Our executive offices are located at 40 Ag. Konstantinou Ave., 151 24,
Maroussi, Greece. Our telephone number is +30-211-1804005.
B. Business overview
Our fleet consists of: (i) drybulk carriers that transport iron ore, coal,
grain and other dry cargoes along worldwide shipping routes; (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, 2005 and 2006 we had a fleet utilization of 99.7%, 99.3%, 99.5%, 98.5% and
98.9%, respectively, our vessels achieved daily time charter equivalent rates of
$6,049, $8,965, $17,839, $17,485 and $14,313, respectively, and we generated
revenues of $15.29 million, $25.95 million, $45.72 million, $44.52 million and
$42.14 million, respectively.
Our business strategy is focused on providing consistent shareholder
returns by carefully selecting the timing and the structure of our investments
in drybulk and containership vessels and by reliably, safely and competitively
operating the vessels we own, through our affiliate, Eurobulk. Representing a
continuous shipowning and management history that dates back to the 19th
century, we believe that one of our advantages in the industry is our ability to
select and safely operate drybulk and containership vessels of any age. We
continuously evaluate sale and purchase opportunities, as well as long term
employment opportunities for our vessels.
Our Fleet
As of April 27, 2007, the profile and deployment of our fleet is the following:
Year
Name Type Dwt TEU Built Employment TCE Rate ($/day)
----------------------------------------------------------------------------------------------------
Dry Bulk
--------
----------------------------------------------------------------------------------------------------
Baumarine
Pool - until
IRINI Panamax 69,734 1988 end 2008 $17,000 to $20,000 (*)
TC until
ARISTIDES NP Panamax 69,268 1993 Jan-09 $29,000
TC until
NIKOLAOS P. Handysize 34,750 1984 Aug-08 $21,300
GREGOS Handysize 38,691 1984 Spot $22,500/next $27,000
----------------------------------------------------------------------------------------------------
Total Dry Bulk Vessels 4 212,443
----------------------------------------------------------------------------------------------------
Container Carriers
------------------
TC until
ARTEMIS Intermediate 29,693 2,098 1987 Dec-08 $19,000
TC until
YM XINGANG I Handysize 23,596 1,599 1993 Jul-09 $26,650
TC until
MANOLIS P Handysize 20,346 1,452 1995 Mar-08 $13,450
TC until
YM QINGDAO I Feeder 18,253 1,169 1990 April-08 $12,800
TC until
KUO HSIUNG Feeder 18,154 1,169 1993 Nov-07 $12,000
----------------------------------------------------------------------------------------------------
Total Container 5 110,042 7,487
----------------------------------------------------------------------------------------------------
Multipurpose Vessels
--------------------
----------------------------------------------------------------------------------------------------
$8,850 until Dec-08,
TC until $9,500 until Dec-10,
TASMAN TRADER Multipurpose 22,568 950 1990 Mar-12 $9,000 until Mar-12
----------------------------------------------------------------------------------------------------
Total Multipurpose 1 22,568 950
Vessels
------------------
----------------------------------------------------------------------------------------------------
FLEET GRAND TOTAL 10 345,053 8,437
----------------------------------------------------------------------------------------------------
(*) The owning company of m/v Irini participates in 2 short funds (contracts of
affreightment to carry cargo) that provide an effective coverage of m/v Irini
for 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 period
to the end of 2008 for the percent of the earnings mentioned above respectively
in 2007 and 2008.
We plan to expand our fleet by investing in vessels in the drybulk,
containership and multipurpose segments by targeting primarily mid-age vessels
at the time of purchase under market conditions as those prevailing during the
first three months of 2007. 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
five containerships, our multipurpose vessel, one of our panamax bulkers and one
of our handysize bulkers are employed under time charters. Our other 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 two "short" funds (contracts to carry cargo at agreed rates), minimizing its
exposure to the spot market (covered at 77% for 2007 and 42% for 2008,
approximately).
As of April 27, 2007, 88% of our ship capacity days in 2007 accounting for
fixed spot employment in the first and second quarter of the year, and 40% of
our ship capacity days in 2008, are under time charter contracts or protected
from market fluctuations.
Management of Our Fleet
The operations of our vessels are managed by Eurobulk Ltd., or Eurobulk, an
affiliated company, under a master management agreement with us and separate
management agreements with each ship-owning company. Eurobulk was founded in
1994 by members of the Pittas family and is a reputable ship management company
with strong industry relationships and experience in managing vessels. Under our
master management agreement, Eurobulk is responsible for providing us with
executive services and commercial management services, which include obtaining
employment for our vessels and managing our relationships with charterers.
Eurobulk also performs 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 drydocking 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.
Our master management agreement with Eurobulk is effective as of October 1,
2006 and has an initial term of 5 years until September 30, 2011. The master
management agreement cannot be terminated by Eurobulk without cause or under the
other limited circumstances, such as sale of the Company or Eurobulk or the
bankruptcy of either party. This master management agreement will automatically
be extended after the initial period for an additional five year period unless
terminated on or before the 90th day preceding the initial termination date.
Pursuant to the master management agreement, each new vessel we acquire in the
future will enter into a separate five year management agreement with Eurobulk.
In addition, upon expiration of the current ship management agreements between
Eurobulk and each vessel-owing subsidiary, such subsidiaries will enter into new
ship management agreements with Eurobulk that terminate contemporaneously with
the master management agreement.
In exchange for providing us with the services described above, we pay
Eurobulk 630 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 all aspects of commercial, technical, operational and
financial areas of our business. Aristides J. Pittas, our Chairman and
Chief Executive Officer, holds a dual graduate degree in Naval
Architecture and Marine Engineering and Ocean Systems Management from
the Massachusetts Institute of Technology. He has worked in various
technical, shipyard and ship management capacities and since 1991 has
focused on the ownership and operation of vessels carrying dry
cargoes. Dr. Anastasios Aslidis, our Chief Financial Officer, holds a
Ph.D. in Ocean Systems Management also from Massachusetts Institute of
Technology and has over 19 years of experience, primarily as a partner
at a Boston based international consulting firm focusing on investment
and risk management in the maritime industry.
o Cost Effective Vessel Operations. We believe that because of the
efficiencies afforded to us through Eurobulk, the strength of our
management team and the quality of our fleet, we are, and will
continue to be, a reliable, low cost vessel operator, without
compromising our high standards of performance, reliability and
safety. Despite the average age of our fleet being approximately 19
years during 2006, our total vessel operating expenses, including
management fees and general and administrative expenses were $4,660
per day for the year ended December 31, 2006. We consider this amount
to be among the lowest of the publicly listed drybulk shipping
companies in the U.S. Our technical and operating expertise allows us
to efficiently manage and transport a wide range of cargoes with a
flexible trade route profile, which helps reduce ballast time between
voyages and minimize off-hire days. Our professional, well-trained
masters, officers and on board crews further help us to control costs
and ensure consistent vessel operating performance. We actively manage
our fleet and strive to maximize utilization and minimize maintenance
expenditures. For the year ended December 31, 2006, our fleet
utilization was 98.9% and since 2002 our utilization rate has averaged
in excess of 99.0%.
o Strong Relationships with Customers and Financial Institutions. We
believe Eurobulk and the Pittas family have developed strong industry
relationships and have gained acceptance with charterers, lenders and
insurers because of their long-standing reputation for safe and
reliable service and financial responsibility through various shipping
cycles. Through Eurobulk, we offer reliable service and cargo carrying
flexibility that enables us to attract customers and obtain repeat
business. We also believe that the established customer base and
reputation of Eurobulk and the Pittas family helps us to secure
favorable employment for our vessels with well known charterers.
Our Business Strategy
Our business strategy is focused on providing consistent shareholder
returns by carefully timing and structuring acquisitions of drybulk carriers and
container ships and by reliably, safely and competitively operating our vessels
through Eurobulk. We continuously evaluate purchase and sale opportunities, as
well as long term employment opportunities for our vessels. Additionally, with
the remaining proceeds from our recent follow-on offering, we plan to expand our
fleet to increase our revenues and earnings and make our drybulk carrier and
container ship fleet more cost efficient and attractive to our customers. We
believe the following describe our business strategy:
o Renew and Expand our Fleet. We expect to grow our fleet in a
disciplined manner through timely and selective acquisitions of
quality vessels. We perform in-depth technical review and financial
analysis of each potential acquisition and only purchase vessels as
market conditions and developments present themselves. We will be
initially focused on purchasing well-maintained, secondhand vessels,
which should provide a significant value proposition given the strong
charter rates that exist currently. However, we will also consider
purchasing younger vessels or newbuildings if the value proposition
exists at the time. Furthermore, as part of our fleet renewal, we will
continue to sell certain vessels when we believe it is in the best
interests of the Company and our shareholders.
o Maintain Balanced Employment. We intend to strategically employ our
fleet between period and spot charters. We actively pursue period
charters to obtain adequate cash flow to cover our fleet's fixed
costs, consisting of vessel operating expenses, management fees,
general and administrative expenses, interest expense and drydocking
costs for the upcoming 12-month period. We look to deploy the
remainder of our fleet through period charters, spot charters,
shipping pools or contracts of affreightment depending on our view of
the direction of the markets and other tactical or strategic
considerations. We believe this balanced employment strategy will
provide us with more predictable operating cash flows and sufficient
downside protection, while allowing us to participate in the potential
upside of the spot market during periods of rising charter rates. On
the basis of our fixed spot and existing period contracts,
approximately 88% of our vessel capacity in 2007 and approximately 40%
in 2008 are fixed, which will help protect us from market
fluctuations, enable us to make significant principal and interest
payments on our debt and pay dividends to our shareholders.
o Operate a Fleet in Two Sectors. While remaining focused on the dry
cargo segment of the shipping industry, we intend to continue to
develop a diversified fleet of drybulk carriers and container ships of
up to Panamax size. A diversified drybulk fleet profile will allow us
to better serve our customers in both major and minor bulk trades, as
well as to reduce any dependency on any one cargo, trade route or
customer. We will remain focused on the smaller size ship segment of
the container market, which has not experienced the same level of
expansion in vessel supply that has occurred with larger container
ships. A diversified fleet, in addition to enhancing the stability of
our cash flows, will also help us to reduce our exposure to
unfavorable developments in any one shipping sector and to benefit
from upswings in any one shipping sector experiencing rising charter
rates.
o Optimize Use of Financial Leverage. We will use bank debt to partly
fund our vessel acquisitions and increase financial returns for our
shareholders. We actively assess the level of debt we incur in light
of our ability to repay that debt based on the level of cash flow
generated from our balanced chartering strategy and efficient
operating cost structure. Our debt repayment schedule as of December
31, 2006 calls for a reduction of more than 45% of our then
outstanding debt by the end of 2008. We expect this will increase our
ability to borrow funds to make additional vessel acquisitions in
order to grow our fleet and pay consistent and possibly higher
dividends to our shareholders.
Our Customers
Our major charterer customers during the last three years include Klaveness
(Bulkhandling and Baumarine shipping pools), Cheng Lie, Swiss Marine, Hamburg
Bulk Carriers, Phoenix, Yang Ming Lines and Italia Maritima. We are a
relationship driven company, and our top five customers in 2006 include three of
our top five customers from 2005 (Cheng Lie, Yang Ming Lines and Klaveness). Our
top five customers accounted for approximately 60% of our total revenues in
2006, 72% of our total revenues in 2005 and 69% of our total revenues for 2004.
In 2006, our largest five customers, Italia Maritima, Klaveness, Cheng Lie, Yang
Ming Lines and Tasman Orient Lines, accounted for 16.6%, 15.1%, 12.7%, 10.4% and
5.3% of our total revenues, respectively.
Year ended December 31,
Charterer 2004 2005 2006
-------------------------------------------------------------------------------
A - - 16.63%
B - 5.50% 15.06%
C 11.50% 17.48% 12.67%
D - 9.60% 10.40%
E - - 5.32%
F - 26.85% -
G 20.60% 12.32% -
H 14.07% - -
I 12.20% - -
J 10.52% - -
The Dry Cargo and Containership Industries
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 60,000 dwt, while
Panamax vessels are those ranging from 60,000 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. Intermediate
container ships are vessels with carrying capacity from 2,000 to 3,000 teu.
Handysize container ships are vessels with carrying capacity from 1,300 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 1,300 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, period charters or
shipping 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 shipowners of drybulk carriers in the Handysize, Handymax
and Panamax drybulk carrier sectors and the container ship sector. Ownership of
drybulk carriers and container ships is highly fragmented and is divided among
state controlled and independent shipowners. Some of our publicly listed
competitors include Diana Shipping Inc. (NYSE: DSX), DryShips Inc. (NASDAQ:
DRYS), Excel Maritime Carriers Ltd. (NYSE: EXM), Eagle Bulk Shipping Inc.
(NASDAQ: EGLE), Genco Shipping and Trading Limited (NASDAQ: GSTL), Navios
Maritime Holdings Inc. (NASDAQ: BULK), Quintana Maritime Limited (NASDAQ: QMAR),
Danaos Corporation (NYSE: DAC) and Goldenport Holdings Inc. (LSE: GPRT).
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.
The container ship industry seasonal trends are driven by the import
patterns of manufactured goods and refrigerated cargoes by the major importers,
such as the United States, Europe, Japan and others. The volume of containerized
trade is usually higher in the fall in preparation for the holiday season.
During this period of time, container shipping rates are higher and, as a
result, the charter rates for container ships are higher. However, fluctuations
due to seasonality in the container shipping industry are much less pronounced
than in the drybulk shipping industry.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of
our vessels. Our 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 our vessels. Failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend operation of one or more of our 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, we may not be able to maintain such
certification indefinitely.
Environmental Regulations - The United States of America Oil Pollution Act of
1990 ("OPA")
OPA established an extensive regulatory and liability regime for the
protection and cleanup of the environment from oil spills. OPA affects all
shipowners 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 was amended in 2006 to increase the limits of the liability of
responsible parties for non-tank vessels to the greater of $950 per gross ton or
$800,000 (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 shipowners 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 for non-tank vessels in the amount of $900 per gross ton, which
includes the OPA limitation on liability of $600 per gross ton and the U.S.
Comprehensive Environmental Response, Compensation, and Liability Act liability
limit of $300 per gross ton. We expect that the Coast Guard will increase the
amount of financial responsibility to reflect the 2006 increase in liability
under OPA. 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 intend to
comply in the future, with all applicable state regulations in the ports where
our vessels call.
Environmental Regulation - The United States of America Clean Water Act
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil or
hazardous substances in navigable waters and imposes strict liability in the
form of penalties for any unauthorized discharges. The CWA also imposes
substantial liability for the costs of removal, remediation and damages and
compliments the remedies available under OPA and CERCLA.
Currently, under U.S. Environmental Protection Agency, or EPA, regulations
that have been in place since 1978, vessels are exempt from the requirement to
obtain CWA permits for the discharge in U.S. ports of ballast water and other
substances incidental to the normal operation of vessels. However, on March 30,
2005, the United States District Court for the Northern District of California
ruled in Northwest Environmental Advocate v. EPA, 2005 U.S. Dist. LEXIS 5373,
that EPA exceeded its authority in creating an exemption for ballast water. On
September 18, 2006, the court issued an order granting permanent injunctive
relief to the plaintiffs, invalidating the blanket exemption in EPA's
regulations for all discharges incidental to the normal operation of a vessel as
of September 30, 2008, and directing EPA to develop a system for regulating all
discharges from vessels by that date. Under the Court's ruling, shipowners and
operators of vessels visiting U.S. ports would be required to comply with the
CWA permitting program to be developed by EPA or face penalties. EPA has
appealed this decision to the Ninth Circuit Court of Appeals, but, if the lower
court's order is ultimately upheld, we will incur certain costs to obtain CWA
permits for our vessels.
Environmental Regulation - Other Environmental Initiatives
The European Union is considering legislation that will affect the
operation of vessels and the liability of shipowners for oil pollution. It is
difficult to predict what legislation, if any, may be promulgated by the
European Union or any other country or authority.
The U.S. National Invasive Species Act, or NISA, was enacted in 1996 in
response to growing reports of harmful organisms being released into U.S. ports
through ballast water taken on by ships in foreign ports. Under NISA, the U.S.
Coast Guard adopted regulations in July 2004 imposing mandatory ballast water
management practices for all vessels equipped with ballast water tanks entering
U.S. waters. These requirements can be met by performing mid-ocean ballast
exchange, by retaining ballast water on board the ship, or by using
environmentally sound alternative ballast water management methods approved by
the U.S. Coast Guard. (However, mid-ocean ballast exchange is mandatory for
ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the
foreign export of Alaskan North Slope crude oil.) Mid-ocean ballast exchange is
the primary method for compliance with the Coast Guard regulations, since
holding ballast water can prevent ships from performing cargo operations upon
arrival in the United States, and alternative methods are still under
development. Vessels that are unable to conduct mid-ocean ballast exchange due
to voyage or safety concerns may discharge minimum amounts of ballast water (in
areas other than the Great Lakes and the Hudson River), provided that they
comply with recordkeeping requirements and document the reasons they could not
follow the required ballast water management requirements. The Coast Guard is
developing a proposal to establish ballast water discharge standards, which
could set maximum acceptable discharge limits for various invasive species,
and/or lead to requirements for active treatment of ballast water.
At the international level, the IMO adopted an International Convention for
the control and Management of Ships' Ballast Water and Sediments in February
2004 (the "BWM Convention"). The Convention's implementing regulations call for
a phased introduction of mandatory ballast water exchange requirements
(beginning in 2009), to be replaced in time with mandatory concentration limits.
The BWM Convention will not enter into force until 12 months after it has been
adopted by 30 states, the combined merchant fleets of which represent not less
than 35% of the gross tonnage of the world's merchant shipping.
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.
The following table lists the next drydocking and special survey for the
vessels in our current fleet.
Vessel Next Type
------------------------------------------- ------------- ------------
TASMAN TRADER............................ June 2010 Special Survey
YM QINGDAO I............................. July 2010 Special Survey
ARTEMIS.................................. April 2010 Special Survey
YM XINGANG I ............................ December 2007 Drydocking
ARISTIDES N.P. .......................... March 2008 Special Survey
KUO HSIUNG .............................. April 2008 Special Survey
IRINI.................................... June 2008 Special Survey
NIKOLAOS P .............................. March 2009 Special Survey
GREGOS................................... June 2007 Drydocking
MANOLIS P................................ July 2007 Drydocking
------------
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical
failure, physical damage, collision, property loss, cargo loss or damage and
business interruption due to political circumstances in foreign countries,
hostilities and labor strikes. In addition, there is always an inherent
possibility of marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in
international trade. OPA, which imposes virtually unlimited liability upon
shipowners, 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 shipowners 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 shipping 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. Ariel was sold on February
22, 2007.
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. John P was sold on July 5,
2006.
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. Pantelis P was sold on May 31,
2006. On February 22, 2007, Alcinoe Shipping Ltd. acquired the 38,691 dwt
Cyprus flag dry bulk moter vessel "Gregos", which was built in 1984.
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.
o Prospero Maritime Inc., incorporated in the Marshall Islands on July 21,
2006, owner of the Marshall Islands flag 69,268 dwt dry bulk motor vessel
"Aristides N.P.", which was built in 1993 and acquired on September 4,
2006.
o Xingang Shipping Ltd., incorporated in Liberia on October 16, 2006, owner
of the Liberian flag 23,596 dwt container carrier "YM Xingang I", which
was built in February 1993 and acquired on November 15, 2006.
o Manolis Shipping Ltd., incorporated in Marshall Islands on March 16, 2007,
owner of the Marshall Islands flag 20,346 dwt container carrier motor
vessel "Manolis P", which was built in 1995 and acquired on April 12,
2007.
As of December 31, 2006, our vessels m/v Ariel and m/v Nikolaos P, were
collateral to a loan with an outstanding balance of $3,800,000. Our vessels, m/v
HM Quingdao 1 and m/v Kuso Hsiung, were collateral to a loan with an outstanding
balance of $11,750,000; our vessel m/v Irini was collateral to two loans with an
aggregate balance of $4,180,000. Our vessel, m/v Artemis, was collateral to a
loan with an outstanding amount of $12,000,000. Our vessel, m/v Tasman Trader,
was collateral to a loan with an outstanding balance of $7,720,000. Our vessel,
m/v Aristides N.P., was collateral to a loan with an outstanding balance of
$15,500,000. Our vessel, m/v YM Xingang I, was collateral to a loan with an
outstanding balance of $20,000,000. Our vessel, m/v Gregos, was added as
collateral to the same loan as our vessel, m/v YM Xingang I, after its
acquisition on February 22, 2007.
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 Marshall Islands company incorporated in May 2005. We are a
provider of worldwide ocean-going transportation services. We own and operate
drybulk carriers that transport major bulks such as iron ore, coal and grains,
and minor bulks such as bauxite, phosphate and fertilizers. We also own and
operate container ships and multipurpose vessels that transport dry and
refrigerated containerized cargoes, mainly including manufactured products and
perishables. As of April 27, 2007, our fleet consisted of four drybulk carriers,
comprised of two Panamax drybulk carriers and two Handysize drybulk carriers,
five containerships and one multipurpose vessel. The total cargo carrying
capacity of the four bulk carriers is 212,443 deadweight tons, or dwt, and of
the three containerships is 110,042 dwt and 7,487 twenty-foot equivalent units,
or teu. Our multipurpose vessel can carry 22,568 dwt and/or 950 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 and Containership
Industries" under Item 4B for a description of the above mentioned types of
vessel employment). As of April 27, 2007, 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, 2006, we have
purchased one drybulk carrier (m/v Gregos built in 1984) and one container ship
(m/v Manolis P both built in 1995) in accordance with our strategy of renewing
our fleet and expanding it utilizing the funds we raised in our follow-on common
stock offering that was completed on February 5, 2007.
A. Operating results
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 1.25% 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 630 Euros per vessel per day and is payable monthly in
advance adjusted annually for inflation.
Vessel 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 (see Item 3A Selected
Consolidated Financial Data.
Amortization of deferred drydocking and special survey expense. 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.
Other general and administrative expenses. We 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 increased 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 as part of
our management agreement. In 2006, the management fee paid to Eurobulk for
such executive compensation services to us as a public company was
$508,750, incremental to the vessel management fee. In 2005, we paid
$250,000 for such services to Eurobulk starting on July 1, 2005. The fee
for executive services is adjusted annually for inflation every July 1st.
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, 2006 compared year ended December 31, 2005.
Voyage revenues. Voyage revenues for the period were $42.14 million, down
5.3% compared to the same period in 2005 during which voyage revenues amounted
to $44.52 million. The decrease was primarily due to the lower charter rates our
vessels achieved in 2006 as compared to 2005. Our fleet of 8.09 vessels had
throughout the period 31 unscheduled offhire days, primarily due to an
unscheduled repair for m/v Ariel and 47 days of scheduled offhire for the
drydocking of m/v Nikolaos P and m/v Kuo Hsiung, generating an average TCE rate
per vessel of $14,313 per day compared to $17,485 per day per vessel for the
same period in 2005. 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 in 2006 were on average weaker compared to 2005, although in
the second half of 2006 the drybulk market recovered significantly. The lower
average market rates during 2006 influenced the earnings of our vessel employed
in the spot market.
Commissions. Commissions for the period were $1.83 million. At 4.34% of
voyage revenues, commissions were lower than in the same period in 2005. For the
year ended December 31, 2005, commissions amounted to $2.39 million, or 5.36% of
voyage revenues. The lower level of commissions in 2006 is partly due to the
fact that more vessels operated in pools (where commissions are paid by the pool
thus reducing the commissions paid by us) and the lower level of commissions of
certain period charters (for example, m/v Tasman Trader's charter had
commissions of 2.25%).
Voyage expenses. Voyage expenses for the year were $1.15 million related to
expenses for certain voyage charters. For the year ended December 31, 2005,
voyage expenses amounted to $0.67 million. Because our vessels are generally
chartered under time charter contracts, voyage expenses represent a small
fraction (1.5% and 2.7% in 2005 and 2006, respectively) of voyage revenues; in
2006, we had more voyage charters than in 2005 which resulted in higher voyage
expenses.
Vessel operating expenses. Vessel operating expenses were $10.37 million
for the period compared to $8.61 million for the same period in 2005. This
difference was due to the higher average number of vessels we operated in 2006,
specifically an average of 8.09 vessels in 2006 compared to 7.10 vessels in
2005. Daily vessel operating expenses per vessel increased modestly between the
two periods to $3,524 per day in 2006 compared to $3,323 per day in 2005, a 6.1%
increase, reflecting primarily higher crew and lubricant costs.
Management fees. These are part of the fees we pay to Eurobulk under our
management agreement. As of December 31, 2006, Eurobulk charged us 610 Euros per
day per vessel totalling $2.27 million for the period, or $770 per day per
vessel. For the same period in 2005, management fees amounted to $1.91 million,
or $738 per day per vessel based on the daily rate per vessel of 590 Euros. The
Euro exchange rate has been on average about 1% higher in 2006 as compared to
2005. The increase in the management fees paid in 2006 also resulted from an
increase in the average number of vessels we owned during the period; in 2006,
we owned 8.09 vessels compared to an average of 7.10 vessels we owned during
2005.
Other general and administrative expenses. These are expenses we pay as
part of our operation as a public company and include the fixed portion of our
management agreement fees, legal and auditing fees, directors' and officers'
liability insurance and other miscellaneous corporate expenses. In 2006, we had
a total of $1.1 million of general and administrative expenses as compared to
$0.4 million in 2005. We started incurring these expenses in the second half of
2005 and mainly after the completion of our private placement in August 2005.
Our 2006 level of general and administrative expenses reflect a full year of
incurring them compared to less than half a year in 2005.
Amortization of drydocking and special survey expense and vessel
depreciation. Amortization and depreciation for the period was $7.29 million.
This consists of $6.28 million of depreciation and $1.01 million of amortization
of deferred drydocking expenditures. Comparatively, depreciation and
amortization for the same period in 2005 amounted to $2.66 million and $1.55
million, respectively, for a total of $4.21 million. Depreciation in 2006 was
higher than in 2005 because of the higher average number of vessels and also
because the depreciation associated with vessels bought in 2006 was higher than
the corresponding depreciation of the vessels sold during 2006. Amortization in
2006 is lower than the same period in 2005 due to the sale of m/v Pantelis P and
m/v John P in the middle of 2006, while the 3 vessels bought during 2006 did not
have any amortization during the year.
Net gain or Loss from vessel sales. There were two vessels sold in 2006 for
a gain of $4.45 million. There were no vessel sales in the year ended December
31, 2005.
Interest and other financing costs, net. Interest and other financing
costs, net for the period were $2.53 million. Of this amount, $3.40 million
relates to interest incurred, loan fees and expenses paid and deferred loan fees
written-off during the period, offset by $0.87 million of interest income during
the period. Comparatively, during the same period in 2005, net interest and
finance costs amounted to $1.04 million, comprised of $1.50 million of interest
incurred and loan fees and offset by $0.46 million of interest income. Interest
incurred and loan fees are higher in 2006 due to the higher loan amount
outstanding as a result of the new loans undertaken in June 2006, August 2006
and November 2006.
Derivative and Foreign Exchange Gains or Losses. In 2006, we had a $1,598
foreign exchange loss and no derivative gains or losses. In 2005, 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.
Net income. As a result of the above, net income for the year ended on
December 31, 2006 was $20.07 million compared to $25.18 million for the same
period in 2005, representing a decrease of 20.3%.
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
modest decline in the management fees paid in 2005 is also attributed to the
lower average number of vessels we owned during the period; in 2005, we owned
7.10 vessels compared to an average of 7.31 vessels we owned during 2004.
Other general and administrative expenses. These are expenses we pay as
part of our operation as a public company and include the fixed portion of our
management agreement fees, legal and auditing fees, directors' and officers'
liability insurance and other miscellaneous corporate expenses. In 2005, we had
a total of $0.4 million of general and administrative expenses. We started
incurring these expenses in the second half of 2005 and mainly after the
completion of our private placement in August 2005. In 2004, we had no general
and administration expenses.
Amortization of drydocking and special survey expense and vessel
depreciation. Amortization and depreciation 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.
Net 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 other financing costs, net. Interest and other financing
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%.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America, 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. As of December 31, 2006, one of our
vessels has already reached an age of 29 years and continues to be employed
(this vessel, m/v Ariel, was sold for further trading in February 2007).
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 (see Item
3A Selected Consolidated Financial Data. 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.
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 expenses
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.
Charter fees received in advance are recorded as a liability (deferred
revenue) until charter services are rendered.
Vessels operating expenses comprise all expenses relating to the operation
of the vessels, including crewing, insurance, repairs and maintenance, stores,
lubricants, spares and consumables, professional and legal fees and
miscellaneous expenses. Vessel 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. For vessels
that simultaneously participate in spot chartering pools and cargo pools (pools
of contracts of affreightment, also called, short funds; in the Company's case,
participation in cargo pools requires participation in spot chartering pools), a
combined time charter equivalent revenue is provided by the operator of the
vessel and cargo pools
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 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.
Fair value of time charter acquired
We record all identified tangible and intangible assets or any liabilities
associated with the acquisition of a vessel at fair value. Where vessels are
acquired with existing time charters, the Company determines the present value
of the difference between: (i) the contractual charter rate and (ii) the
prevailing market rate for a charter of equivalent duration. In discounting the
charter rate differences in future periods, the Company uses its Weighted
Average Cost of Capital (WACC) adjusted to account for the credit quality of the
charterer. The capitalized above-market (assets) and below-market (liabilities)
charters are amortized as a reduction and increase, respectively, to voyage
revenues over the remaining term of the charter.
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 March 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No.
156 Accounting for Servicing of Financial Assets--an amendment of FASB Statement
No. 140. The Statement requires that an entity separately recognize a servicing
asset or a servicing liability when it undertakes an obligation to service a
financial asset under a servicing contract in certain situations. Such servicing
assets or servicing liabilities are required to be initially measured at fair
value, if practicable. Statement 156 also allows an entity to choose one of two
methods when subsequently measuring its servicing assets and servicing
liabilities: (1) the amortization method or (2) the fair value measurement
method. The amortization method existed under Statement 140 and remains
unchanged. The Statement is effective for financial statements issued for fiscal
years beginning after September 15, 2006. The Company has analyzed this
pronouncement and has concluded that this pronouncement does not have any effect
on its financial condition, results of operation or cash flows.
In September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, Accounting
for Planned Major Maintenance Activities. FSP AUG AIR-1 addresses the accounting
for planned major maintenance activities. Specifically, the FSP prohibits the
practice of the accrue-in-advance method of accounting for planned major
maintenance activities. FSP AUG AIR-1 is effective for fiscal years beginning
after December 15, 2006. The Company has analyzed FSP AUG AIR-1 and concluded
that is does not have any effect on its financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. The
Statement provides a single definition of fair value, together with a framework
for measuring it, and requires additional disclosure about the use of fair value
to measure assets and liabilities. Statement 157 also emphasizes that fair value
is a market-based measurement, not an entity-specific measurement, and sets out
a fair value hierarchy with the highest priority being quoted prices in active
markets. Under the Statement, fair value measurements are disclosed by level
within that hierarchy. The Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. This statement will be effective for the Company on
January 1, 2008. The Company does not believe that this pronouncement will have
an effect on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115. This Statement permits entities to choose to measure certain
financial assets and financial liabilities at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities using different attributes and applying complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. This statement will be effective for the Company on January 1, 2008.
The Company does not believe that this pronouncement will have an effect on its
financial position, results of operations or cash flows.
On September 13, 2006, the SEC released SAB No. 108, which provides guidance on
materiality. SAB No. 108 states that registrants should use both a balance sheet
(iron curtain) approach and an income statement (rollover) approach when
quantifying and evaluating the materiality of a misstatement, contains guidance
on correcting errors under the dual approach, and provides transition guidance
for correcting errors existing in prior years. If prior-year errors that had
been previously considered immaterial (based on the appropriate use of the
registrant's prior approach) now are considered material based on the approach
in the SAB, the registrant need not restate prior period financial statements.
SAB No. 108 is effective for annual financial statements covering the first
fiscal year ending after November 15, 2006. This statement is effective for the
Company for the fiscal year ending December 31, 2006. The Company has concluded
that the adoption of SAB No. 108 does not have any effect on its financial
position, results of operations and cash flows.
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 recent follow-on common
stock offering, 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, 2006, we had a cash balance of $2.79 million, funds due
from related companies of $2.65 million and $3.85 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 $2.65 million due from related parties as of December 31, 2006
therefore consists entirely of such deposits. 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 deficit of $11.69 million including the current portion of long term
debt which was $18.04 million as of December 31, 2006. All of the $9.47 million
dividend declared was paid as of December 31, 2006. We consider our liquidity
sufficient for our operations. We expect to finance all our working capital
requirements from cash generated from operations and proceeds from our January
30, 2007 follow-on common stock offering.
Net cash from operating activities.
Our net cash from operating activities for 2006 was $20.97 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 $20.07 million, which was reduced by a gain of $4.45 million from the sale
of m/v Pantelis P and m/v John P and increased by $7.37 million of depreciation
and amortization amongst other adjustments. In 2005, net cash flow from
operating activities was $20.59 million based on a contribution of net income of
$25.18 million.
Net cash from investing activities.
In 2006, we purchased m/v Tasman Trader for $10.85 million, m/v Aristides
NP for $23.57 million and m/v YM Xingang I for $27.33 million for a total of
$61.75 million, we received proceeds from the sale of m/v Pantelis P and m/v
John P totaling $9.15 million, and, we had to put in retention accounts $65,672
and increase restricted cash by $2.70 million to satisfy requirements of our new
loan facilities for a total of funds used in investment activities of $55.37
million. It is our strategy to expand and renew our fleet by pursuing selective
acquisitions. At the same time, we sell vessels in order to renew our fleet or
take advantage of opportune market conditions. In 2005, cash flow used in
investing activities amounted to $21.83 million reflecting the purchase of m/v
Artemis for $20.82 million in November 2005 and contribution in retention
accounts of $1.01 million.
Net cash used in financing activities.
In 2006, net cash provided by financing activities amounted to $16.74
million. This is mainly accounted by net proceeds from long term debt of $26.39
offset by $9.47 million of dividends and $0.15 million in loan arrangement fees
paid. In 2005, net cash provided by financing activities amounted to $6.19
million mainly reflecting $18.63 in net proceeds from a private placement,
$34.57 million of net proceeds from long term debt offset by $46.88 million of
dividend payments / return of capital.
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 2006, we drew three loans to partly finance the acquisition of the three
vessels we acquired totaling $43.75 million.
As of December 31, 2006, after considering the loan repayments and new
loans discussed in the preceding paragraph, we had eight outstanding loans with
a combined outstanding balance of $74.95 million. These loans have maturity
dates between 2008 and 2013. Our long-term debt as of December 31, 2006
comprises bank loans granted to our vessel-owning subsidiaries. A description of
our loans as of December 31, 2006 is provided in Note 9 of our attached
financial statements. In 2007, we plan to repay approximately $18.0 million of
our long term debt.
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, 2006.
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
container ship, m/v Bitre Ritscher (renamed m/v Manolis P), which was delivered
to us in April 2007, and one drybulk carrier, m/v Gregos, which was delivered to
us in February 2007. We financed both of those purchases initially with 100%
equity. We subsequently arranged for a loan to partly finance the acquisition of
m/v Gregos and we are in the process to arrange for a loan to finance partly the
acquisition of m/v Manolis P to free funds for further acquisitions. Our three
acquisitions during 2006, m/v Tasman Trader, m/v Aristides NP and m/v YM Xingang
I, were financed with both equity and bank debt.
In December 2006, we signed an agreement to sell m/v Ariel. We delivered
m/v Ariel on February 22, 2007. We will use the proceeds from the sale of the
above vessel for general corporate purposes including additional acquisitions,
repayment of debt or payment of dividends.
Two of our vessels in our operating fleet underwent scheduled special
surveys in 2006, two vessels underwent special survey or drydocking in 2007 and
three additional vessels are scheduled to undergo a special survey or drydocking
in 2007. 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 January 8, 2007, the Company announced the declaration of its sixth
consecutive dividend since its Private Placement in August 2005. This dividend
of $0.22 per common share was paid on or about February 15, 2007 to all
shareholders of record as of January 29, 2007. This follows the Company's prior
dividend declarations of $0.21 per common share on November 9, 2006, $0.18 per
common share on August 7, 2006, $0.18 per common share on May 9, 2006, $0.18 per
common share on February 7, 2006 and of $0.21 per share on November 2, 2005. The
aggregate amount of all such dividends was $14,891,738.
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
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, the first half of 2005 and again in late 2006 and early 2007, 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 March 31, 2007, the global
drybulk carrier orderbook amounted to approximately 99 million dwt, or about 27%
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 4.9 million teu, or about 45% 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 between 26 and 27 years, with smaller
vessels scrapped at later age. 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, 2005 and 2006, the majority of the
handysize and handymax bulkers and feedership, handysize and intermediate size
containerships that were scrapped were in excess of 30 years of age. Panamax
drybulk carriers were scrapped at an average age of 29 years over 2004, 2005 and
2006.
E. Off-balance Sheet Arrangements
As of December 31, 2006 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,
2006:
Less Than One to
One Three Three to More Than
In U.S. dollars Total Year Years Five Years Five Years
----------------------------------------------------------------------------------------------------
Bank debt $74,950,000 $18,040,000 $26,345,000 $14,820,000 $15,745,000
Interest Payment (1) $ 9,808,000 $ 3,278,000 $ 3,971,000 $ 1,970,000 $ 589,000
Vessel Management fees (2) $15,397,586 $ 2,966,525 $ 6,433,314 $ 5,997,747 --
Other Management fees (3) $ 2,669,983 $ 526,556 $ 1,109,046 $ 1,034,381 --
(1) Assuming the amortization of the loan described above and an estimated
average effective interest rate of about 6.55%, 6.50%, 6.45% and 6.40% for the
four periods, respectively, based on an underlying assumption for LIBOR of
5.50%.
(2) Refers to our obligation for management fees of 630 Euros per day per
vessel (approximately $840) for the nine vessels owned by Euroseas at December
31, 2006 and those acquired and sold up to April 27, 2007 under our five-year
management contract under our Master Management Agreement, which expires on
October 1, 2011. 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 1.33 USD/Euro).
(3) Refers to our obligation for management fees of $517,500 per year under
our Master Management Agreement with Eurobulk for the cost of providing
management services to Euroseas as a public company. This fee is adjusted for
inflation in Greece during the previous calendar year every July 1st. From July
1st, 2007 on, we have assumed an inflation rate of 3.5% per year.
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 48 Chairman, President and CEO; Class A Director
Dr. Anastasios Aslidis 47 CFO and Treasurer; Class A Director
Aristides P. Pittas 55 Vice Chairman; Class A Director
Stephania Karmiri 39 Secretary
Panagiotis Kyriakopoulos 46 Class B Director
George Skarvelis 46 Class B Director
George Taniskidis 46 Class C Director
Gerald Turner 59 Class C Director
Aristides J. Pittas has been a member of our Board of Directors and our
Chairman and Chief Executive Officer 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 of Eurobulk 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 Manager 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 Naval Architecture and
Marine Engineering from the Massachusetts Institute of Technology.
Dr. Anastasios Aslidis has been our Chief Financial Officer and Treasurer
and member of our Board of Directors since September 2005. Prior 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, 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 also served as consultant to the Boards 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 tenure 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 1989
and 1993, Dr. Aslidis worked on economic modeling of the offshore drilling
industry and on the development of a trading support system for the drybulk
shipping industry on behalf of a major European shipowner. 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 the Massachusetts Institute of Technology, and a
Ph.D. in Ocean Systems Management (1989) also from Massachusetts Institute of
Technology.
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 sale and purchase 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
our inception on May 5, 2005. Since July 2002, he has been the Chief Executive
Officer 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 on May 5, 2005. 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
shipping companies. 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 on May 5, 2005. He is the Chairman and Managing Director of Millennium
Bank and a member of the Board of Directors of BankEuropa (subsidiary bank of
Millennium Bank 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 on May 5, 2005. 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 no direct employees. The services of our Chief Executive Officer,
Chief Financial Officer and Secretary are provided by Eurobulk. In July 2005 we
entered into a written services agreement with Eurobulk where we pay $500,000
per year, before bonuses, adjusted annually for Greek inflation to account for
the increased management cost associated with us being a public company. As of
October 1, 2006, these services are now provided to us under our master
management agreement with Eurobulk. Under this master management agreement, that
includes the provision of the services of our executives, Mr. Aristides J.
Pittas, Dr. Anastasios Aslidis and Mrs. Stephania Karmiri, we pay Eurobulk
$517,500 per year, before bonuses, on an annualized basis for the provision of
these services, adjusted annually every July 1st for Greek inflation.
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 expires in 2008. The term of our Class B
directors expires in 2009 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 Audit Committee is responsible for reviewing the
Company's accounting controls and the appointment of the Company's outside
auditors. The members of the Audit Committee are Mr. Panos Kyriakopoulos
(Chairman and audit committee "financial expert" as such term is defined under
SEC regulations), Mr. Gerald Turner and Mr. George Taniskidis. Our Board of
Directors does not have separate compensation or nominations committees, and
instead, the entire Board of Directors performs those responsibilities.
Code of Ethics
We have adopted a code of ethics that complies with the applicable
guidelines issued by the SEC. Our code of ethics is posted on our website:
http://www.euroseas.gr under "Corporate Governance."
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 of Directors and the Board of Directors 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 of Directors 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 of Directors, 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 of Directors 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, 2006,
approximately 75 officers and 150 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.
Number of
Shares
of Voting
Stock Percent of
Beneficially Voting
Name of Beneficial Owner(1) Owned Stock
--------------------------------------------------- -------------- ------------
Friends Investment Company Inc.(2) ...... 9,918,056 54.0%
Aristides J. Pittas(3) .................. -- *
George Skarvelis(4) ..................... -- *
George Taniskidis(5) .................... -- *
Gerald Turner(6) ........................ -- *
Panagiotis Kyriakopoulos(7) ............. -- *
Aristides P. Pittas(8) .................. -- *
Anastasios Aslidis....................... -- *
Stephania Karmiri(9) .................... -- *
-------------- ------------
All directors and officers and 5% owners as a group 9,918,056 54.0%
============== ============
------------
* Indicates less than 1.0%.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a) of
the Securities Exchange Act of 1934, as amended, 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 9,918,056 shares of common stock held of record by Friends. A
majority of the shareholders of Friends are members of the Pittas family.
Investment power and voting control by Friends resides in its Board of
Directors which consists of five directors, a majority of whom are members
of the Pittas family. Actions by Friends may be taken by a majority of the
members on its Board of Directors.
(3) Does not include 1,190,167 shares of common stock held of record by
Friends, by virtue of Mr. Pittas' ownership interest in Friends. Also does
not include 40,000 shares of common stock held of record by Eurobulk Marine
Holdings, Inc. ("Eurobulk Marine") and 10,000 shares of common stock
issuable upon the exercise of warrants by Eurobulk Marine, by virtue of Mr.
Pittas' ownership interest in Eurobulk Marine. Eurobulk Marine was an
investor in our Private Placement in August 2005. Friends and Eurobulk
Marine are each controlled by members of the Pittas family. Mr. Pittas
disclaims beneficial ownership except to the extent of his pecuniary
interest.
(4) Does not include 525,657 shares of common stock held of record by Friends,
by virtue of Mr. Skarvelis' ownership interest in Friends. Also does not
include 17,667 shares of common stock held of record by Eurobulk Marine and
4,417 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Skarvelis' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Skarvelis disclaims beneficial ownership except to the
extent of his pecuniary interest.
(5) Does not include 9,918 shares of common stock held of record by Friends, by
virtue of Mr. Taniskidis' ownership in Friends. Also does not include 333
shares of common stock held of record by Eurobulk Marine and 83 shares of
common stock issuable upon the exercise of warrants by Eurobulk Marine, by
virtue of Mr. Taniskidis' ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family. Mr.
Taniskidis disclaims beneficial ownership except to the extent of his
pecuniary interest.
(6) Does not include 140,836 shares of common stock held of record by Friends,
by virtue of Mr. Turner's ownership interest in Friends. Also does not
include 4,733 shares of common stock held of record by Eurobulk Marine and
1,183 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Turner's ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Turner disclaims beneficial ownership except to the
extent of his pecuniary interest.
(7) Does not include 59,508 shares of common stock held of record by Friends,
by virtue of Mr. Kyriakopoulos' ownership in Friends. Also does not include
2,000 shares of common stock held of record by Eurobulk Marine and 500
shares of common stock issuable upon the exercise of warrants by Eurobulk
Marine, by virtue of Mr. Kyriakopoulos' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Kyriakopoulos disclaims beneficial ownership except to
the extent of his pecuniary interest.
(8) Does not include 813,281 shares of common stock held of record by Friends,
by virtue of Mr. Pittas' ownership interest in Friends. Also does not
include 27,333 shares of common stock held of record by Eurobulk Marine and
6,833 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Pittas' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Pittas disclaims beneficial ownership except to the
extent of his pecuniary interest.
(9) Does not include 1,984 shares of common stock held of records by Friends,
by virtue of Mrs. Karmiri's ownership in Friends. Also does not include 67
shares of common stock held of record by Eurobulk Marine and 17 shares of
common stock issuable upon the exercise of warrants by Eurobulk Marine, by
virtue of Mrs. Karmiri's ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family. 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
In August 2006, we adopted an equity incentive plan which entitles our
Board of Directors to grant to our officers, key employees and directors awards
in the form of (i) incentive stock options, (ii) non-qualified stock options,
(iii) stock appreciation rights, (iv) dividend equivalent rights, (v) restricted
stock, (vi) unrestricted stock, (vii) restricted stock units and (viii)
performance shares. The aggregate number of shares of common stock with respect
to which options or restricted shares may at any time be granted under the plan
are 600,000 shares of Common Stock. The plan is administered by our Board of
Directors. The plan does not have any set term. However, the Board of Directors
may not grant any incentive stock options after the tenth anniversary of the
adoption of the Plan. As of April 27, 2007, no awards have been made under the
plan.
Options
No options were granted during the fiscal year ended December 31, 2006.
There are currently no options outstanding to acquire any of our shares.
Warrants
In connection with our Private Placement in August 2005, we issued warrants
to purchase 585,589 shares of our common stock. The warrants have a five year
term and an exercise price of $10.80 per share. We do not currently have any
other outstanding warrants.
Item 7. Major Shareholders and Related Party Transactions
A. Major Stockholders
The following table sets forth certain information regarding the beneficial
ownership of our voting stock as of April 27, 2007 by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of our voting stock, each of our directors and executive officers, and all of
our directors and executive officers as a group. All of our shareholders,
including the shareholders listed in this table, are entitled to one vote for
each share of stock held.
Name of Beneficial Owner(1) Number of
Shares
of Voting
Stock Percent of
Beneficially Voting
Owned Stock
------------------------------------------------------------------ ------------
Friends Investment Company Inc.(2) ...... 9,918,056 54.0%
Aristides J. Pittas(3) .................. -- *
George Skarvelis(4) ..................... -- *
George Taniskidis(5) .................... -- *
Gerald Turner(6) ........................ -- *
Panagiotis Kyriakopoulos(7) ............. -- *
Aristides P. Pittas(8) .................. -- *
Anastasios Aslidis....................... -- *
Stephania Karmiri(9) .................... -- *
-------------- ------------
All directors and officers and 5% owners as a group 9,918,056 54.0%
============== ============
------------
* Indicates less than 1.0%.
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a) of
the Securities Exchange Act of 1934, as amended, 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 9,918,056 shares of common stock held of record by Friends. A
majority of the shareholders of Friends are members of the Pittas family.
Investment power and voting control by Friends resides in its Board of
Directors which consists of five directors, a majority of whom are members
of the Pittas family. Actions by Friends may be taken by a majority of the
members on its Board of Directors.
(3) Does not include 1,190,167 shares of common stock held of record by
Friends, by virtue of Mr. Pittas' ownership interest in Friends. Also does
not include 40,000 shares of common stock held of record by Eurobulk Marine
Holdings, Inc. ("Eurobulk Marine") and 10,000 shares of common stock
issuable upon the exercise of warrants by Eurobulk Marine, by virtue of Mr.
Pittas' ownership interest in Eurobulk Marine. Eurobulk Marine was an
investor in our Private Placement in August 2005. Friends and Eurobulk
Marine are each controlled by members of the Pittas family. Mr. Pittas
disclaims beneficial ownership except to the extent of his pecuniary
interest.
(4) Does not include 525,657 shares of common stock held of record by Friends,
by virtue of Mr. Skarvelis' ownership interest in Friends. Also does not
include 17,667 shares of common stock held of record by Eurobulk Marine and
4,417 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Skarvelis' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Skarvelis disclaims beneficial ownership except to the
extent of his pecuniary interest.
(5) Does not include 9,918 shares of common stock held of record by Friends, by
virtue of Mr. Taniskidis' ownership in Friends. Also does not include 333
shares of common stock held of record by Eurobulk Marine and 83 shares of
common stock issuable upon the exercise of warrants by Eurobulk Marine, by
virtue of Mr. Taniskidis' ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family. Mr.
Taniskidis disclaims beneficial ownership except to the extent of his
pecuniary interest.
(6) Does not include 140,836 shares of common stock held of record by Friends,
by virtue of Mr. Turner's ownership interest in Friends. Also does not
include 4,733 shares of common stock held of record by Eurobulk Marine and
1,183 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Turner's ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Turner disclaims beneficial ownership except to the
extent of his pecuniary interest.
(7) Does not include 59,508 shares of common stock held of record by Friends,
by virtue of Mr. Kyriakopoulos' ownership in Friends. Also does not include
2,000 shares of common stock held of record by Eurobulk Marine and 500
shares of common stock issuable upon the exercise of warrants by Eurobulk
Marine, by virtue of Mr. Kyriakopoulos' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Kyriakopoulos disclaims beneficial ownership except to
the extent of his pecuniary interest.
(8) Does not include 813,281 shares of common stock held of record by Friends,
by virtue of Mr. Pittas' ownership interest in Friends. Also does not
include 27,333 shares of common stock held of record by Eurobulk Marine and
6,833 shares of common stock issuable upon the exercise of warrants by
Eurobulk Marine, by virtue of Mr. Pittas' ownership interest in Eurobulk
Marine. Eurobulk Marine was an investor in our Private Placement in August
2005. Friends and Eurobulk Marine are each controlled by members of the
Pittas family. Mr. Pittas disclaims beneficial ownership except to the
extent of his pecuniary interest.
(9) Does not include 1,984 shares of common stock held of records by Friends,
by virtue of Mrs. Karmiri's ownership in Friends. Also does not include 67
shares of common stock held of record by Eurobulk Marine and 17 shares of
common stock issuable upon the exercise of warrants by Eurobulk Marine, by
virtue of Mrs. Karmiri's ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family. Mrs.
Karmiri disclaims beneficial ownership except to the extent of her
pecuniary interest.
B. Related Party Transactions
The operations of our vessels are managed by Eurobulk, an affiliated ship
management company, under a master management agreement with us and separate
management agreements with each shipowning company. Under this agreement,
Eurobulk is responsible for all aspects of management and compliance for the
Company, including the provision of the services of our Chief Executive Officer,
Chief Financial Officer and Secretary. Eurobulk is also responsible for all
commercial management services, which include obtaining employment for our
vessels and managing our relationships with charterers. Eurobulk also performs
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. Eurobulk also currently manages one other
vessel not owned by us.
Our master management agreement with Eurobulk is effective as of October 1,
2006 and has an initial term of 5 years until September 30, 2011. The master
management agreement cannot be terminated by Eurobulk without cause or under the
other limited circumstances, such as sale of the Company or Eurobulk or the
bankruptcy of either party. This master management agreement will automatically
be extended after the initial period for an additional five year period unless
terminated on or before the 90th day preceding the initial termination date.
Pursuant to the master management agreement, each new vessel we acquire in the
future will enter into a separate management agreement with Eurobulk. In
addition, upon expiration of the current ship management agreements between
Eurobulk and each vessel-owing subsidiary, such subsidiaries will enter into new
ship management agreements with Eurobulk that terminate contemporaneously with
the master management agreement. Under the master management agreement we pay
Eurobulk a fixed cost of $517,500 annually, adjusted annually for inflation
(every July), and a per ship per day cost of (euro)630 as of April 27, 2007 (or
$837.90 based on $1.33/euro exchange rate) adjusted annually for inflation
(every February 1st). Eurobulk has received fees for management and executive
compensation expenses of $1,722,800, $1,972,252, $2,161,856 and $2,775,339 for
years ended December 31, 2003, 2004, 2005 and 2006, respectively.
We receive chartering and sale and purchase services from Eurochart, an
affiliate, and pay a commission of 1.25% on charter revenue and 1% on vessel
purchase or sale price. We will pay additional commissions to major charterers
and their brokers as well that usually range from 3.75% to 5.00%. Eurochart has
received chartering and sale and purchase commissions of $286,605, $604,717,
$742,680 and $1,198,399 for years ended December 31, 2003, 2004, 2005 and 2006,
respectively.
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 per month and a commission on premium not exceeding 5%,
respectively.
Aristides J. Pittas, Euroseas' President, Chief Executive Officer and
Chairman, has provided personal guarantees for some of Euroseas' debts. Eurobulk
has provided corporate guarantees for all debts. Additionally, Aristides J.
Pittas is currently the Chairman of each of Eurochart and Eurobulk, both of
which are our affiliates.
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, 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.
Eurobulk, Friends Investment Company Inc. and Aristides J. Pittas, our
Chairman and Chief Executive Officer, have granted us a right of first refusal
to acquire any drybulk vessel or container ship which any of them may consider
for acquisition in the future. In addition, Mr. Pittas has granted us a right of
first refusal to accept any chartering out opportunity for a drybulk vessel or
container ship which may be suitable for any of our vessels, provided that we
have a suitable vessel, properly situated and available, to take advantage of
the chartering out opportunity. Mr. Pittas use his best efforts to cause that
any entity with respect to which he directly or indirectly controls to grant us
this right of first refusal.
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 regular 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. Our Board has adopted
a minimum target quarterly dividend of $0.22 per common share for 2007. The
exact timing and amount of dividend payments will be determined by our Board of
Directors and 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, $46,875,223 (consisting of
$30,175,223 of dividends and $16,700,000 as return of capital) and $9,465,082 in
2002, 2003, 2004, 2005 and 2006, respectively. While Euroseas has paid dividends
on an annual basis during the time it has been a private company, it has paid
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, $2,271,620 for each of the fourth quarter of
2005, first quarter of 2006 and second quarter of 2006, $2,650,223 for the third
quarter of 2006 and $2,776,433 for the fourth quarter of 2006. The most recent
dividend was declared and paid in 2007.
B. Significant Changes
After December 31, 2006 the following significant events occurred:
(a) On January 8, 2007, the Board of Directors declared a cash dividend of $0.22
per Euroseas Ltd. common share payable on or about February 15, 2007 to the
holders of record of Euroseas Ltd. common shares as of January 29, 2007.
(b) On December 19, 2006, a subsidiary of the Company agreed to sell m/v Ariel,
a handysize bulk carrier of 33,712 dwt built in 1977 for a gross price of $5.35
million less 2% sales commissions. The vessel was delivered to the buyers on
February 22, 2007.
(c) On February 5, 2007 the Company completed its follow-on offering of common
stock of 5,750,000 shares including the underwriters' exercise of the
over-allotment option at $8.25 per share. The gross proceeds of the offering
amounted to approximately $47.4 million, while the net proceeds to the Company
after the underwriters' discount and offering expenses amounted to approximately
$43.1 million.
(d) On February 5, 2007, the Company purchased the 38,691 dwt drybulk carrier
(m/v Triada), built in 1984, for $13.1 million. The vessel was delivered to the
Company on February 22, 2007. The acquisition was financed with approximately
$13.1 million from the Company's cash on hand. The Company instead of exercising
its option to re-pay $7 million of the $20 million loan drawn to finance its
November 2006 acquisition of the vessel m/v YM Xingang I (by using part of the
proceeds of its recently completed follow-on offering), will add m/v Triada
(renamed m/v Gregos) as additional collateral to the same loan. As a result of
the additional collateral, the margin of the loan will be reduced from 0.935%
above LIBOR to 0.90% above LIBOR.
(e) On March 21, 2007, the Company purchased the 1,452 teu container vessel m/v
Bitre Ritscher (renamed m/v Manolis P) built in 1995 in Germany, for $19.15
million. The vessel was delivered to the Company on April 12, 2007. The Company
plans to finance the acquisition with cash on hand, and, subsequently, arrange a
loan for approximately 50% of the purchase price, the terms of which are
currently under negotiation.
Item 9. The Offer and Listing
A. Offer and Listing Details
The trading market for shares of our common stock is the NASDAQ Global
Market, on which our shares trade under the symbol "ESEA". The following table
sets forth the high and low closing prices for shares of our common stock since
our listing originally in the OTCBB (under symbols ESEAF.OB and EUSEF.OB) and
since January 31, 2007 on the NASDAQ Global Market. The prices below have been
adjusted for the reverse 1-for-3 common stock split that was effected on October
6, 2006.
Period High Low
-------------------- ---- ----
2006....................18.93 6.70
2nd quarter 2006........18.93 8.82
3rd quarter 2006.........9.15 8.55
4th quarter 2006.........9.00 6.70
November 2006............9.00 5.60
December 2006............7.50 6.70
2007....................11.55 6.90
1st quarter 2007........10.18 6.90
January 2007.............9.50 6.90
February 2007...........10.18 8.61
March 2007..............10.05 8.90
April 2007*.............11.55 10.01
* Through April 26, 2007
B. Plan of Distribution
Not Applicable.
C. Markets
The trading market for shares of our common stock is the NASDAQ Global
Market, on which our shares trade under the symbol "ESEA". Our shares began
trading on the NASDAQ Global Market on January 31, 2007. Prior to such date, our
shares traded on the OTCBB under the symbol "EUSEF.OB" until October 5, 2006 and
then under the symbol "ESEAF.OB" until January 30, 2007.
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. Articles of Incorporation, as amended, and Bylaws
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
(Articles of Incorporation) and 3.2 (Bylaws) thereto as filed on October 20,
2005 with the SEC and to the Section of our F-1 Registration Statement (File No.
333-138780) entitled "Description of Capital Stock" and Exhibit 3.3 (Amendment
to Articles of Incorporation) thereto as filed on November 16, 2006 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 satisfied the 50% Ownership Test for our 2006 taxable
year. However, we may not be able to satisfy the 50% Ownership Test in the
future. For the 2007 taxable year and each taxable year thereafter, we
anticipate that we will satisfy the Publicly-Traded Test.
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. Dividends paid on our common stock after the time that our stock
became listed on the NASDAQ Global Market 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), (2) our common stock is readily tradable on an
established securities market in the United States (such as the NASDAQ Global
Market, on which our common stock is listed), and (3) the U.S. Individual Holder
has owned the common stock for more than 60 days in the 121-day period beginning
60 days before the date on which the common stock becomes ex-dividend. 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. Dividends
paid on our stock prior to the date on which our stock became listed on the
NASDAQ Global Market were not eligible for these preferential rates. Legislation
has been recently introduced in the U.S. House of Representatives 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 us 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.
Since our stock is traded on the NASDAQ Global Market, we believe that our stock
can be treated as "marketable stock" for the 2007 taxable year and each taxable
year thereafter. For taxable years prior to the 2007 taxable year, our stock was
not "marketable stock" since it was traded on the OTC Bulletin Board. 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. In 2006, we did not use and currently we do not have
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, 2006, we had $74.95 million of floating rate debt
outstanding with margins over LIBOR ranging from 0.90% 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 twelve-month period to December 31, 2006 by approximately $556,000
assuming the same debt profile throughout the year.
In March of 2004, we entered into an interest rate swap agreement on a
notional amount of $5.00 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 $
----------------------------------------------------------------
2007 496,000
2008 355,000
2009 252,000
2010 193,000
2011 and thereafter 203,000
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 33% of our vessel running expenses in currencies other
than U.S. dollars. In addition, our management fee is denominated in euros (590
euros during January 2006, 610 euros since February 1, 2006 and 630 euros per
vessel per day as of February 1, 2007). At December 31, 2006, approximately 27%
of our outstanding accounts payable were denominated in currencies other than
the U.S. dollar, mainly in Euros. We do not use 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 losses for the year to December 31, 2006 were $1,598.
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
On January 30, 2007, our registration statement on Form F-1 (File No.
333-138780) relating to our follow-on common stock offering was declared
effective by the SEC. On February 5, 2007, we raised approximately $47 million
in gross proceeds from such offering. The offering terminated after all
registered securities were sold. The offering was underwritten by Oppenheimer &
Co., Ferris, Baker Watts, Incorporated, Cantor Fitzgerald & Co. and Fortis
Securities LLC. The offering was an offering of our common stock, par value
$0.03 per share, and such stock is not convertible. In the offering, we
registered 5,750,000 shares of common stock (including shares issuable in
connection with the exercise of the underwriters' over-allotment option) and the
aggregate price of the offering amount registered was $47,437,500. In the
offering, we sold 5,750,000 shares (including shares issuable in connection with
the exercise of the underwriters' over-allotment option), at an offering price
of $8.25 per share for an aggregate price of $47,437,500.
From January 30, 2007, the effective date of the registration statement on
Form F-1, until April 27, 2007, we estimate that we incurred approximately $3.3
million expenses for our account in connection with the issuance and
distribution of the registered securities for underwriting discounts and
commissions, finders' fees, expenses paid to or for underwriters, other expenses
and total expenses. Our total expenses of our follow-on common stock offering
are estimated at approximately $4.3 million. None of these payments were made
direct or indirectly to our directors, officers, general partners or their
associates, to persons owning 10% or more of any class of our equity securities
or our affiliates.
Our net offering proceeds after deducting the total expenses described
above was approximately $43.1 million.
From January 30, 2007, the effective date of the registration statement on
Form F-1, until April 27, 2007, we used approximately $32.3 million of the net
offering proceeds for the acquisition of two vessels, m/v Gregos and m/v Manolis
P. None of the foregoing payments were made directly or indirectly to our
directors, officers, general partners or their associates, to persons owning 10%
or more of any class of our equity securities or our affiliates except for
$322,500 paid as purchase commissions to Eurochart in connection with the
purchase price of these two vessels, as per the terms of our master management
agreement with our fleet manager, Eurobulk Ltd., which is partly owned by our
Chairman and CEO.
Item 15. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
our Chief Financial Officer, has concluded, based upon its evaluation as of the
end of the period covered by this report, that our "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure
that information required to be disclosed in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
The controls and procedures are designed to ensure that information required to
be disclosed is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There have been no changes in internal controls over financial reporting
that occurred during the year covered by this annual report that have 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.".
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:
2006 2005
(dollars (dollars
in thousands) in thousands)
----------------- --------------
Audit Fees $ 388 $ 615
Further assurance/audit related fees - -
Tax fees - -
Other fees/expenses 3 2
Total $ 391 $ 617
In 2005, 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. In 2006, audit fees relate to audit services provided in connection to
a post-effective amendment to our prior F-1 filing related to our private
placement of August 2005, our F-1 filing related to our follow-on offering
initially filed in November 2006 and the audit of our consolidated financial
statements. For these services our principal auditors charged us $388,000 of
fees plus $3,000 of expenses.
The audit committee is responsible for the appointment, replacement,
compensation, evaluation and oversight of the work of the independent registered
public accounting firm. As part of this responsibility, the Audit Committee
pre-approves the audit and non-audit services performed by the independent
registered public accounting firm 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 registered public
accounting firm 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.
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-32 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)
1.3 Amendment to Articles of Incorporation of Euroseas Ltd. (5)
2.1 Specimen Common Stock Certificate(6)
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 Master Management Agreement between Euroseas Ltd. and Eurobulk Ltd.
dated as of September 29, 2006 (5)
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)
4.11 Loan Agreement between Xenia International Corp., as borrower, and
Fortis Bank N.V./S.A., Athens Branch and others, as lenders, for the
amount of USD$8,250,000 dated June 30, 2006 (4)
4.12 Loan Agreement between Prospero Maritime Inc., as borrower, and
Calyon, as lender, for the amount of USD$15,500,000 dated August 30,
2006 (4)
4.13 Euroseas 2006 Equity Incentive Plan (5)
4.14 Loan Agreement between Xingang Shipping Ltd., as borrower, and HSBC
Bank plc, as lender, for the amount of USD$20,000,000 dated November
14, 2006 (5)
4.15 Form of Right of First Refusal(6)
4.16 Form of Advisory Agreement(6)
8.1 Subsidiaries of the Registrant(7)
12.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer(7)
12.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer(7)
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(7)
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(7)
15.1 Consent of Deloitte, Hadjipavlou, Sofianos & Cambanis S.A.(7)
(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 as an Exhibit to the Company's Post-Effective Amendment No. 1 to
Registration Statement (File No. 333-12945) on September 12, 2006.
(5) Filed as an Exhibit to the Company's Registration Statement (File No.
333-138780) on November 16, 2006.
(6) Filed as an Exhibit to the Company's Amendment No. 1 to Registration
Statement (File No. 333-138780) on January 10, 2007.
(7) Filed herewith.
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.
----------------------------
(Registrant)
By: /s/ Aristides J. Pittas
-----------------------------
Aristides J. Pittas
Chairman, President and CEO
Date: April 27, 2007
Euroseas Ltd. and Subsidiaries
Consolidated financial statements
December 31, 2005 and 2006
--------------------------------------------------------------------------------
Index to consolidated financial statements
Pages
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2006 F-3
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2005 and 2006 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2005 and 2006 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2005 and 2006 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 Euroseas Ltd. and subsidiaries
We have audited the accompanying consolidated balance sheets of Euroseas Ltd.
and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte.
Hadjipavlou, Sofianos & Cambanis S.A.
Athens, Greece
April 27, 2007
Euroseas Ltd. and Subsidiaries
Consolidated balance sheets
December 31, 2005 and 2006
(All amounts, except share data, expressed in U.S. Dollars)
-----------------------------------------------------------------------------------------------------
Notes 2005 2006
-----------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 20,447,301 2,791,107
Trade accounts receivable 46,118 378,216
Other receivables 306,303 268,864
Due from related company 8 3,012,720 2,649,259
Inventories 3 371,691 716,131
Restricted cash 1,080,949 1,146,621
Vessel held for sale 4 - 1,782,840
Prepaid expenses 85,625 242,558
-----------------------------------------------------------------------------------------------------
Total current assets 25,350,707 9,975,596
-----------------------------------------------------------------------------------------------------
Fixed assets
Vessels, net 4, 11 52,334,897 95,494,342
Long-term assets
Restricted cash - 2,700,000
Deferred charges, net 5 1,855,829 1,291,844
Deferred offering expenses - 500,000
Fair value of above market time charter acquired 7, 11 - 7,543,477
-----------------------------------------------------------------------------------------------------
Total long-term assets 54,190,726 107,529,663
-----------------------------------------------------------------------------------------------------
Total assets 79,541,433 117,505,259
-----------------------------------------------------------------------------------------------------
Liabilities and shareholders'equity
Current liabilities
Long-term debt, current portion 9 14,430,000 18,040,000
Trade accounts payable 837,182 1,034,713
Accrued expenses 6 1,777,637 1,233,185
Deferred revenues 1,370,058 1,357,501
-----------------------------------------------------------------------------------------------------
Total current liabilities 18,414,877 21,665,399
-----------------------------------------------------------------------------------------------------
Long-term liabilities
Long-term debt, net of current portion 9 34,130,000 56,910,000
Fair value of below market time charters acquired 7, 11 - 918,200
-----------------------------------------------------------------------------------------------------
Total long-term liabilities 34,130,000 57,828,200
-----------------------------------------------------------------------------------------------------
Total liabilities 52,544,877 79,493,599
-----------------------------------------------------------------------------------------------------
Commitments and contingencies 13 - -
Shareholders'equity
Common stock (par value $0.03, 100,000,000 shares
authorized, 12,260,387 and 12,620,150 issued and
outstanding) 14 367,812 378,605
Preferred shares (par value $0.01, 20,000,000 shares
authorized, no shares issued and outstanding) - -
Additional paid-in capital 14 17,883,781 18,283,767
Retained earnings 8,744,963 19,349,288
-----------------------------------------------------------------------------------------------------
Total shareholders'equity 26,996,556 38,011,660
-----------------------------------------------------------------------------------------------------
Total liabilities and shareholders'equity 79,541,433 117,505,259
-----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of income
Years ended December 31, 2004, 2005 and 2006
(All amounts, except for share data, expressed in U.S. Dollars)
------------------------------------------------------------------------------------------------------
Notes 2004 2005 2006
------------------------------------------------------------------------------------------------------
Revenues
Voyage revenue 45,718,006 44,523,401 42,143,361
Commissions 8, 16 (2,215,197) (2,388,349) (1,829,534)
------------------------------------------------------------------------------------------------------
Net revenue 43,502,809 42,135,052 40,313,827
------------------------------------------------------------------------------------------------------
Operating expenses
Voyage expenses 16 370,345 670,551 1,154,738
Vessel operating expenses 16 8,906,252 8,610,279 10,368,817
Amortization of dry-docking and
special survey expense and vessel
depreciation 4, 5 3,461,678 4,208,252 7,292,838
Management fees 8 1,972,252 1,911,856 2,266,589
Other general and administrative
expenses - 420,755 1,076,884
Net gain on sale of vessels 4, 11 (2,315,477) - (4,445,856)
------------------------------------------------------------------------------------------------------
Total operating expenses 12,395,050 15,821,693 17,714,010
------------------------------------------------------------------------------------------------------
Operating income 31,107,759 26,313,359 22,599,817
------------------------------------------------------------------------------------------------------
Other income/(expenses)
Interest and other financing costs (708,284) (1,495,871) (3,398,858)
Derivative gain/(loss) 10 27,029 (100,029) -
Foreign exchange gain/(loss) (1,808) 538 (1,598)
Interest income 187,069 460,457 870,046
------------------------------------------------------------------------------------------------------
Other income (expenses), net (495,994) (1,134,905) (2,530,410)
------------------------------------------------------------------------------------------------------
Net income 30,611,765 25,178,454 20,069,407
------------------------------------------------------------------------------------------------------
Earnings per share - basic and diluted 15 3.09 2.34 1.60
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding during the year
- basic and diluted 15 9,918,056 10,739,476 12,535,365
------------------------------------------------------------------------------------------------------
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, 2004, 2005 and 2006
(All amounts, except share data, expressed in U.S. Dollars)
-----------------------------------------------------------------------------------------------------------
Number Common Preferred
of Stock Shares Paid - in
Comprehensive Shares Amount Amount Capital Retained
Income (Note 14) Note 14) (Note 14) (Note 14) Earnings Total
------------------------------------------------------------------------------------------------------------
Balance,
January 1,
2004 9,918,056 297,542 - 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 9,918,056 297,542 - 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 2,342,331 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 12,260,387 367,812 - 17,883,781 8,744,963 26,996,556
------------------------------------------------------------------------------------------------------------
Net income 20,069,407 20,069,407 20,069,407
Issuance of
shares, net
of issuance
costs 359,763 10,793 - (793) - 10,000
Reversal of
unutilized
accrued
offering
expenses 400,779 400,779
Dividends paid - - - - (9,465,082) (9,465,082)
------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2006 12,620,150 378,605 - 18,283,767 19,349,288 38,011,660
------------------------------------------------------------------------------------------------------------
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, 2004, 2005 and 2006
(All amounts expressed in U.S. Dollars)
--------------------------------------------------------------------------------------------------------
2004 2005 2006
--------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 30,611,765 25,178,454 20,069,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of vessels 2,530,100 2,657,914 6,277,328
Amortization of deferred charges 982,259 1,634,082 1,090,111
Amortization of fair value of time charters - - (351,369)
Provision for doubtful accounts (27,907) - -
Gain on sale of vessels (2,315,477) - (4,445,856)
Loss (gain) on derivative (27,029) 100,029 -
Changes in operating assets and liabilities:
(Increase)/decrease in:
Trade accounts receivable 213,762 199,767 (332,098)
Prepaid expenses (133,437) 121,927 (156,933)
Other receivables 235,553 (268,549) 37,439
Inventories 51,449 (68,213) (344,440)
Increase/(decrease) in:
Due to related company 3,541,236 (7,638,780) 363,461
Trade accounts payable 77,487 (42,359) 197,531
Accrued expenses 66,193 334,874 (602,002)
Deferred revenue 673,157 (538,131) (12,557)
Dry-docking expenses paid (2,270,418) (1,076,233) (821,198)
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 34,208,693 20,594,782 20,968,824
--------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of vessels - (20,821,647) (53,830,357)
Cash paid for above-market charter acquired - - (7,923,480)
Change in restricted cash 33,224 (1,011,969) (2,765,672)
Proceeds from sale of vessels 6,723,018 - 9,152,494
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing 6,756,242 (21,833,616) (55,367,015)
activities
--------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of share capital - 70,270 10,000
Net proceeds from shares issued in a private - 18,632,106 -
placement
Dividends paid/return of capital (26,962,500) (46,875,223) (9,465,082)
Loan arrangement fees paid - (208,500) (151,250)
Deferred offering expenses paid - - (41,671)
Proceeds from long-term debts - 53,200,000 43,750,000
Repayment of long-term debts (6,605,000) (18,630,000) (17,360,000)
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing (33,567,500) 6,188,653 16,741,997
activities
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash 7,397,435 4,949,819 (17,656,194)
equivalents
Cash and cash equivalents at beginning of year 8,100,047 15,497,482 20,447,301
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 15,497,482 20,447,301 2,791,107
--------------------------------------------------------------------------------------------------------
Cash paid for interest 474,430 1,372,957 3,081,676
Non cash items:
Dividend and return of capital from investment 22,856 - -
in an associate
Fair value of below-market charters acquired 1,649,572
Reversal of unutilized accrued offering expenses 400,779
Deferred offering expenses - - 458,329
--------------------------------------------------------------------------------------------------------
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, 2004, 2005 and 2006
(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 in existence at that time (see list 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 shares in Euroseas
Ltd., thus becoming the sole shareholder of Euroseas Ltd. 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 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 in existence at that time (see list
below).
On August 25, 2005, Euroseas Ltd. sold 2,342,331 common shares at $9.00 per
share in an institutional private placement, together with 0.25 of detachable
warrants for each common share to acquire up to 585,589 common shares. The total
proceeds, net of issuance costs of $3,500,309, amounted to $17,510,400. The
warrants allow their holders to acquire one share of Euroseas Ltd. stock at a
price of $10.80 per share and are exercisable for a period of five years from
the issue of the warrant.
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 public shell corporation) signed an Agreement and Plan of Merger (the
"Merger Agreement"). The Merger Agreement provided for the merger of Cove and
Euroseas Acquisition Company Inc., a Delaware corporation and a wholly-owned
subsidiary of Euroseas Ltd. formed on June 21, 2005, with the current
stockholders of Cove receiving 0.0034323 shares of Euroseas Ltd. common shares
for each share of Cove common stock they presently own. Euroseas Ltd., as part
of the merger, filed a registration statement with the Securities and Exchange
Commission (SEC) to register the shares issued in the merger to the Cove
stockholders.
The SEC declared effective on February 3, 2006 the Company's registration
statement on Form F-4 that registered the Euroseas Ltd. common shares issued to
Cove shareholders. 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
2,342,331 Euroseas Ltd. common shares and 585,589 Euroseas Ltd. common shares
issuable upon the exercise of the warrants issued in connection with the
institutional private placement as well as 272,868 Euroseas Ltd. common shares
that were issued to certain Cove's shareholders as part of the merger with Cove.
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. The Cove stockholders received Euroseas Ltd.
common shares and received dividends totaling to $140,334 related to dividends
previously declared by Euroseas Ltd. Euroseas Acquisition Company Inc. changed
its name to Cove Apparel, Inc. Also, following the completion of the merger, the
common stock of Cove has been de-listed and no longer trades on the OTC Bulletin
Board. On the date of the merger, Cove had cash of $10,000, had no other assets
and had no liabilities.
Euroseas Ltd. common share was approved to trade on March 2, 2006 and started
trading on the OTC Bulletin Board on May 5, 2006. On October 6, 2006, the
Company effected a 1-for-3 reverse split of its common stock (see also Note 14).
On January 31, 2007 upon the completion of the Company's follow-on common stock
offering of 5,750,000 shares (see Note 18(c)), the Euroseas Ltd. common share
started trading on the NASDAQ Global Market.
The operations of the vessels are managed by Eurobulk Ltd. (the "manager"), a
corporation controlled by members of the Pittas family. The Pittas family is the
controlling shareholders of Friends Investment Company Inc.
The manager has an office in Greece located at 40 Ag. Konstantinou Ave,
Maroussi, Athens, 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 (M/V) "Ariel", which was
built in 1977 and acquired on March 5, 1993. M/V "Ariel" was sold on
February 22, 2007.
o Oceanopera Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of
the Cyprus flag 34,750 DWT bulk carrier M/V "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 M/V "John P", which was built in
1981 and acquired on March 7, 1998. M/V "John P" was sold on July 5, 2006.
o Alcinoe Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the Cyprus flag 26,354 DWT bulk carrier M/V "Pantelis P", which was built
in 1981 and acquired on June 4, 1997. M/V "Pantelis P" was sold on May 31,
2006.
o Alterwall Business Inc. incorporated in Panama on January 15, 2001, owner
of the Panama flag 18,253 DWT container carrier M/V "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 M/V "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 M/V
"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
M/V "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
M/V "Tasman Trader", which was built in 1990 and acquired on April 27,
2006.
o Prospero Maritime Inc., incorporated in the Marshall Islands on July 21,
2006, owner of the Marshall Islands flag 69,268 DWT dry bulk M/V "Aristides
N.P.", which was built in 1993 and acquired on September 4, 2006.
o Xingang Shipping Ltd., incorporated in Liberia on October 16, 2006, owner
of the Liberian flag 23,596 DWT container carrier M/V "YM Xingang I" ,
which was built in February 1993 and acquired on November 15, 2006.
In addition, the accompanying consolidated financial statements include the
accounts of the ship-owning company, Silvergold Shipping Ltd., which was also
managed by Eurobulk Ltd. during the periods presented.
o Silvergold Shipping Ltd. (Silvergold) incorporated in Cyprus on May 16,
1994. Up to June 3, 1996, Silvergold was engaged in ship owning activities,
but thereafter, Silvergold's assets and liabilities were liquidated and the
remaining net assets were distributed to shareholders. The Company remained
dormant until October 10, 2000 when it acquired the 18,000 DWT Cyprus flag
container carrier M/V "Widar", which was built in 1986. M/V "Widar" 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 and, accordingly, these accompanying financial
statements also consolidated the accounts of Silvergold until May 31, 2005,
when Silvergold declared a final dividend of $35,000 to its shareholders.
During the years ended December 31, 2004, 2005 and 2006, 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 2004 2005 2006
-------------------------------------------------------------------------------
A - - 16.63%
B - 5.50% 15.06%
C 11.50% 17.48% 12.67%
D - 9.60% 10.40%
E - 26.85% -
F 20.60% 12.32% -
G 12.20% - -
H 14.07% - -
I 10.52% - -
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.
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 presents separately comprehensive income, if any, and its components
in 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. The 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.
Trade accounts receivable
The amount shown as trade accounts receivable, at each balance sheet date,
includes estimated recoveries from each voyage or time charter. At each balance
sheet date, the Company provides for doubtful accounts on the basis of specific
identified doubtful receivables. At December 31, 2005 and 2006, no provision for
doubtful debts was considered necessary.
Inventories
Inventories are stated at the lower of cost and market value. Victualling is
valued using the FIFO (First-In First-Out) method while 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 expenses 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 is 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.
Charter fees received in advance is recorded as a liability (deferred revenue)
until charter services are rendered.
Vessel operating expenses comprise all expenses relating to the operation of the
vessels, including crewing, insurance, repairs and maintenance, stores,
lubricants, spares and consumables, professional and legal fees 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. Revenues and voyage
expenses are recognized during the period services were performed. For vessels
that simultaneously participate in spot chartering pools and cargo pools (pools
of contracts of affreightment, also called, short funds; in the Company's case,
participation in cargo pools requires participation in spot chartering pools), a
combined time charter equivalent revenue is provided by the operator of the
vessel and cargo pools.
Dry-docking and special survey expenses
Dry-docking and special survey expenses are deferred and amortized over the
estimated period to the next scheduled dry-docking or special survey, which are
generally two and a half years and five years, respectively. Unamortized
dry-docking and special survey expenses 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.
Assets held for sale
It is the Company's policy to dispose of vessels when suitable opportunities
occur and not necessarily to keep them until the end of their useful life. The
Company classifies vessels as being held for sale when: management has committed
to a plan to sell the vessels; the vessels are available for immediate sale in
its present condition; an active program to locate a buyer and other actions
required to complete the plan to sell the vessels have been initiated; the sale
of the vessels is probable, and transfer of the asset is expected to qualify for
recognition as a completed sale within one year; the vessels are being actively
marketed for sale at a price that is reasonable in relation to 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 vessels are not
depreciated once they meet the criteria to be classified as held for sale.
Impairment of long-lived assets
Impairment losses are recognized on long-lived assets used in operations when
indicators of impairment are present and if the carrying amount of the
long-lived asset is not recoverable from the undiscounted cash flows estimated
to be generated by those assets and the asset's carrying amount is less than its
fair value. In determining fair value and future benefits derived from use 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 its undiscounted future net 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 did not note, for all years presented, any events or
changes in circumstances indicating that the carrying amount of its vessels may
not be recoverable.
Fair value of time charter acquired
The Company records all identified tangible and intangible assets or any
liabilities associated with the acquisition of a vessel at fair value. Where
vessels are acquired with existing time charters, the Company determines the
present value of the difference between: (i) the contractual charter rate and
(ii) the prevailing market rate for a charter of equivalent duration. In
discounting the charter rate differences in future periods, the Company uses its
Weighted Average Cost of Capital (WACC) adjusted to account for the credit
quality of the charterer. The capitalized above-market (assets) and below-market
(liabilities) charters are amortized as a reduction and increase, respectively,
to voyage revenues over the remaining term of the charter.
Derivative financial instruments
Every derivative instrument (including certain derivative instruments embedded
in other contracts) are recorded in the balance sheet as either an asset or
liability measured at its fair value with changes in the instruments' fair value
recognized currently in earnings unless specific hedge accounting criteria are
met.
For the years ended December 31, 2004 and 2005, 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. There were no interest
rate swaps for the year ended December 31, 2006.
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 and December 31, 2006 since their exercise price exceeds the
fair value of Euroseas Ltd. common shares, are excluded from diluted earnings
per share calculation. Additional 5,750,000 Euroseas Ltd. common shares were
issued subsequent to December 31, 2006 as a result of the Company's follow-on
offering of common stock [see Note 18(c)].
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 March 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No.
156 Accounting for Servicing of Financial Assets--an amendment of FASB Statement
No. 140. The Statement requires that an entity separately recognize a servicing
asset or a servicing liability when it undertakes an obligation to service a
financial asset under a servicing contract in certain situations. Such servicing
assets or servicing liabilities are required to be initially measured at fair
value, if practicable. Statement 156 also allows an entity to choose one of two
methods when subsequently measuring its servicing assets and servicing
liabilities: (1) the amortization method or (2) the fair value measurement
method. The amortization method existed under Statement 140 and remains
unchanged. The Statement is effective for financial statements issued for fiscal
years beginning after September 15, 2006. The Company has analyzed this
pronouncement and has concluded that this pronouncement does not have any effect
on its financial condition, results of operation or cash flows.
In September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, Accounting
for Planned Major Maintenance Activities. FSP AUG AIR-1 addresses the accounting
for planned major maintenance activities. Specifically, the FSP prohibits the
practice of the accrue-in-advance method of accounting for planned major
maintenance activities. FSP AUG AIR-1 is effective for fiscal years beginning
after December 15, 2006. The Company has analyzed FSP AUG AIR-1 and concluded
that is does not have any effect on its financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. The
Statement provides a single definition of fair value, together with a framework
for measuring it, and requires additional disclosure about the use of fair
value to measure assets and liabilities. Statement 157 also emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy with the highest priority being quoted
prices in active markets. Under the Statement, fair value measurements are
disclosed by level within that hierarchy. The Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. This statement will be effective
for the Company on January 1, 2008. The Company does not believe that this
pronouncement will have an effect on its financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115. This Statement permits entities to choose to measure certain
financial assets and financial liabilities at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities using different attributes and applying complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement is
effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007. This statement will be effective for the Company on
January 1, 2008. The Company does not believe that this pronouncement will have
an effect on its financial position, results of operations or cash flows.
Recent accounting pronouncements - Continued
On September 13, 2006, the SEC released staff accounting bulleting ("SAB") No.
108, which provides guidance on materiality. SAB No. 108 states that
registrants should use both a balance sheet (iron curtain) approach and an
income statement (rollover) approach when quantifying and evaluating the
materiality of a misstatement, contains guidance on correcting errors under the
dual approach, and provides transition guidance for correcting errors existing
in prior years. If prior-year errors that had been previously considered
immaterial (based on the appropriate use of the registrant's prior approach)
now are considered material based on the approach in the SAB, the registrant
need not restate prior period financial statements, but is required to record
one-time cumulative effect adjustment to correct for misstatements in prior
fiscal years. SAB No. 108 is effective for annual financial statements covering
the first fiscal year ending after November 15, 2006. This statement was
effective for the Company for the fiscal year ended December 31, 2006. The
Company has concluded that adoption of SAB No. 108 does not have any effect on
its financial position, results of operations and cash flows.
3. Inventories
This consisted of the following:
2005 2006
-------------------------------------------------------------------------------
Lubricants 312,390 637,758
Victualling 59,301 78,373
-------------------------------------------------------------------------------
Total 371,691 716,131
-------------------------------------------------------------------------------
4. Vessels, net
The amounts in the accompanying consolidated balance sheets are as follows:
Accumulated Net Book
Costs Depreciation Value
--------------------------------------------------------------------------------
Balance, January 1, 2005 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
--------------------------------------------------------------------------------
- Depreciation for the year (6,277,328) (6,277,328)
- Purchase of vessels 55,479,929 - 55,479,929
- Vessels held for sale (6,119,713) 4,336,873 (1,782,840)
- Sale of vessels (12,411,482) 8,151,166 (4,260,316)
--------------------------------------------------------------------------------
Balance, December 31, 2006 113,530,775 (18,036,433) 95,494,342
--------------------------------------------------------------------------------
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 $0.14 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 Pantelis P was sold in May 2006 and the Company recognized net gain from the
sale of $2,165,799. Depreciation expense for M/V Pantelis P for the year ended
December 31, 2006 amounted to $107,587. M/V John P was sold in July 2006 and the
Company recognized net gain from the sale of $2,280,057. Depreciation expense
for M/V John P for the year ended December 31, 2006 amounted to $60,067 (see
Note 11).
On December 19, 2006, Searoute Maritime Ltd., a wholly-owned subsidiary of the
company, signed a Memorandum of Agreement to sell M/V "Ariel", a handysize bulk
carrier of 33,712 DWT built in 1977 for a gross price of $5,350,000 with 2%
sales commissions. The vessel was delivered to the buyers on February 22, 2007
resulting in a gain of approximately $3,400,000. M/V "Ariel" is presented as
"vessel held for sale" in the consolidated balance sheet as of December 31,
2006. The vessel was already fully depreciated as of December 19, 2006 and,
therefore, its classification as "vessel held for sale" had no effect on the
depreciation. The book value of M/V "Ariel" (representing its estimated salvage
value) as of December 31, 2006 is $1,782,840.
5. Deferred Charges, net
This consisted of:
2005 2006
--------------------------------------------------------------------------------
Balance, beginning of year 2,205,178 1,855,829
Additions 1,284,733 972,448
Amortization of dry-docking and
special survey expenses (1,550,338) (1,015,510)
Amortization of loan arrangement fees (83,744) (74,601)
Unamortized portion of dry-docking and
special survey expenses written-off upon
sale of M/V Pantelis P and M/V John P - (446,322)
--------------------------------------------------------------------------------
Balance, end of year 1,855,829 1,291,844
--------------------------------------------------------------------------------
The additions of $972,448 in 2006 consisted of loan financing fees of $151,250
and dry-docking and special survey expenses of $821,198. The additions of
$1,284,733 in 2005 consisted of loan financing fees of $208,500 and dry-docking
and special survey expenses of $1,076,233.
6. Accrued Expenses
The accrued expenses account consisted of:
2005 2006
--------------------------------------------------------------------------------
Accrued follow-on offering expenses 1,121,397 458,329
Accrued payroll expenses 31,928 72,807
Accrued interest 139,536 291,567
Accrued general and administrative expenses 269,666 199,678
Other accrued expenses 215,110 210,804
--------------------------------------------------------------------------------
Total 1,777,637 1,233,185
--------------------------------------------------------------------------------
7. Fair Value of Above or Below Market Time Charters Acquired
M/V "Tasman Trader" was acquired on April 27, 2006 with an outstanding time
charter terminating on December 17, 2008 with a charter rate of $8,850 per day
and M/V "Aristides N.P." was acquired on September 4, 2006 with an outstanding
time charter contract terminating on November 8, 2006 with a charter rate of
$19,750 per day. These charter rates were below the market rates for equivalent
time charters prevailing at the time the foregoing vessels were acquired (see
Note 11). The present values of the below the market charters were estimated by
the Company at $1,237,072 and $412,500, respectively, and were recorded as
liabilities in the consolidated balance sheets. Net voyage revenues included
$318,872 as amortization of the below market rate charters for M/V "Tasman
Trader" and $412,500 for M/V "Aristides N.P." for the year ended December 31,
2006. The unamortized below market rate charter for M/V "Tasman Trader" was
$918,200 and none for M/V "Aristides N.P." as of December 31, 2006 and is
recorded as a liability in the consolidated balance sheets.
M/V "YM Xingang I" was acquired on November 15, 2006 with an outstanding time
charter terminating on July 21, 2009 with a charter rate of $26,650 per day.
This charter rate was above the market rates for equivalent time charters
prevailing at the time (see Note 11). The present value of the above the market
charter was estimated by the Company at $7,923,480, and was recorded as an asset
in the consolidated balance sheets. Net voyage revenues included $380,003 as
amortization of the above market rate charter for M/V "YM Xingang I" for the
year ended December 31, 2006. The remaining unamortized above market rate
charter was $7,543,477 as of December 31, 2006.
8. Related Party Transactions
The Company's vessel owning companies are parties to management agreements with
Eurobulk Ltd. ("Management Company"), which is controlled by members of the
Pittas family, whereby the Management Company provides technical and commercial
vessel management for a fixed daily fee of Euro 590 per vessel for 2004 and 2005
and an average of Euro 608 for 2006 under our Master Management Agreement (see
below). Vessel management fees paid to the Management Company amounted to
$1,972,252, $1,911,856 and $2,266,589 in 2004, 2005 and 2006, respectively.
These agreements were renewed on January 31, 2005 and amended in August and
October 2006 with an initial term of five years and will automatically be
extended after the initial term until terminated by the parties. Termination is
not effective until two months following notice having been delivered in writing
by either party after the expiration of the initial five-year period. An annual
adjustment of the management fee due to inflation as provided under the
management agreement took effect on the annual anniversary of the agreement on
January 31, 2006 increasing the management fee by Euro 20 per vessel per day to
Euro 610 per vessel.
Our master management agreement with Eurobulk is effective as of October 1, 2006
and has an initial term of five years until September 30, 2011. In addition to
the vessel management services, Eurobulk provides us with management services
for our needs as a public company. In 2006, compensation for such services to us
as a public company was $508,750, incremental to the management fee. The
compensation for executive services is adjusted annually for inflation every
July 1st.
Amounts due to or from related parties represent net disbursements and
collections made on behalf of the vessel-owning companies by the Management
Company during the normal course of operations for which a right of off-set
exists. As of December 31, 2006 and 2005, the amount due from related companies
was $2,649,259 and $3,012,720, respectively. Based on the master management
agreement between Euroseas Ltd. and Euroseas' shipowning subsidiaries and
Eurobulk Ltd. an estimate of the quarter's operating expenses, expected drydock
expenses, vessel management fee and fee for management executive services is to
be advanced in the beginning of quarter to Eurobulk Ltd. For the fleet as of
December 31, 2006, this advance is estimated between $3,500,000 and $4,000,000
excluding any advances needed for drydock expenses and is paid in advance around
the beginning of each quarter. 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,
provides vessel sale and purchase 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,
2004 and 2006 for vessel sales were $70,000 and $96,000, respectively, incurred
for the sale of M/V Widar in 2004, and, sale of M/V "Pantelis P" and M/V "John
P" in 2006; there were no sales of vessels in 2005. Eurochart S.A. also received
commissions from the sellers of $206,500 and $610,250 for the Company's
acquisition of M/V Artemis in 2005, and, M/V "Tasman Trader", M/V "Aristides
N.P." and M/V "YM Xingang I", in 2006; there were no acquisitions in 2004. The
commissions for vessel acquisitions were ultimately charged to the Company.
Commissions for chartering services were $534,717, $536,180 and $492,149 in
2004, 2005 and 2006, respectively.
8. Related Party Transactions - Continued
Certain members of the Pittas family, together with another unrelated ship
management company, have formed a joint venture with the insurance broker
Sentinel Maritime Services Inc., and with a crewing agent More Maritime Agencies
Inc. The shareholders' percentage participation in these joint ventures was 35%
in 2004, 48% in 2005 and 78% in 2006. Sentinel Maritime Services Inc. is paid a
commission on premium not exceeding 5%; More Maritime Agencies Inc. is paid a
fee of $50 per crew member per month. Total fees charged by Sentinel Marine
Services Inc. and More Maritime Agencies Inc. in 2004 were $209,685 and $23,543,
respectively, $219,400 and $45,277, in 2005 and $60,750 and $79,495, in 2006,
respectively.
9. Long-Term Debt
This consisted of bank loans of the ship-owning companies are as follows:
Borrower December 31, December 31,
2005 2006
--------------------------------------------------------------------------------
Diana Trading Limited (a) $ 6,560,000 $ 4,180,000
Alcinoe Shipping Limited/
Oceanpride Shipping Limited/
Searoute Maritime Ltd/
Oceanopera Shipping Ltd (b) 9,500,000 3,800,000
Alterwall Business Inc./
Allendale Investments S.A (c) 17,000,000 11,750,000
Salina Shipholding Corp. (d) 15,500,000 12,000,000
Xenia International Corp (e) - 7,720,000
Prospero Maritime Inc. (f) - 15,500,000
Xingang Shipping Ltd. (g) - 20,000,000
--------------------------------------------------------------------------------
48,560,000 74,950,000
Less: Current portion (14,430,000) (18,040,000)
--------------------------------------------------------------------------------
Long-term portion $ 34,130,000 $ 56,910,000
--------------------------------------------------------------------------------
The future annual loan repayments are as follows:
To December 31
--------------------------------------------------------------------------------
2007 18,040,000
2008 17,535,000
2009 8,810,000
2010 9,210,000
2011 5,610,000
Thereafter 15,745,000
--------------------------------------------------------------------------------
Total $ 74,950,000
--------------------------------------------------------------------------------
(a) This consisted of a 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) Alcinoe Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd. drew, in 2005, $13,500,000 against a loan facility
for which they are jointly and severally liable. 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. The interest is based on LIBOR plus 1.5% per
annum.
The Company made two additional early repayments for a total of $3,000,000
from the sales proceeds of M/V "John P" and M/V "Pantelis P" in June 2006
and July 2006 (see Note 8). The Company also negotiated a revised repayment
schedule starting July 1, 2006, which provides for payment of $300,000 per
quarter and a balloon payment of $2,300,000 payable with the final
installment due in the second quarter of 2008.
(c) 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 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 "YM Qingdao I" and M/V "Kuo
Hsiung" and plus 1.375% if the outstanding loan amount is above 60% of the
FMV of such vessels.
(d) This is a $15,500,000 loan drawn by Salina Shipholding Corp. on December
30, 2005. The loan is payable in ten consecutive semi-annual 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 due in January 2011. 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., (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, (v) overall liquidity (cash
and cash equivalents) of $300,000 for each of the Company's vessels
throughout the life of the facility.
(e) This is a $8,250,000 loan drawn by Xenia International Corp. on June 30,
2006. The loan is payable in twenty three consecutive quarterly
installments consisting of $265,000 each and a balloon payment of
$2,155,000 payable with the final quarterly installment due in March 2012.
The interest is based on LIBOR plus a margin of 0.95%. The loan is secured
with the following: (i) first priority mortgage over M/V "Tasman Trader",
(ii) first assignment of earnings and insurance of M/V "Tasman Trader",
(iii) a corporate guarantee of Euroseas Ltd., and, (iv) overall liquidity
(cash and cash equivalents) of $300,000 for each of the Company's vessels
throughout the life of the facility.
(f) This is a $15,500,000 loan drawn by Prospero Maritime Inc. on September 4,
2006. The loan is payable in fourteen consecutive semi-annual installments
consisting of two installments of $1,200,000 each, one installment of
$1,000,000 each and eleven installments of $825,000 each and a balloon
payment of $3,025,000 payable with the final semi-annual installment due in
September 2013. The interest is based on LIBOR plus a margin that ranges
between 0.9%-0.95%, depending on the asset cover ratio. The loan is secured
with the following: (i) first priority mortgage over M/V "Aristides N.P.",
(ii) first assignment of earnings and insurance of M/V "Aristides N.P.",
(iii) a corporate guarantee of Euroseas Ltd., (iv) a minimum cash balance
equal to an amount of no less than $300,000 in an account Prospero Maritime
Inc. maintains with the bank, and, (v) overall liquidity (cash and cash
equivalents) of $300,000 for each of the Company's vessels throughout the
life of the facility.
(g) This is a $20,000,000 loan drawn by Xingang Shipping Ltd. on November 15,
2006. The loan is payable in eight consecutive quarterly installments of
$1.0 million each, the first of which is due in February 2007, followed by
four consecutive quarterly installments of $750,000 each, followed by
sixteen consecutive installments of $250,000 each and a balloon payment of
$5.0 million payable with the final quarterly instalment due in November
2013. The interest is based on LIBOR plus a margin of 0.935%. The Company
has the option to prepay $7.0 million during the first year following the
drawdown, in which case the remaining repayment installments during the
first three years may be reduced by a maximum of 35% each with the balance
of the prepayment amount to be setoff against the balloon payment. The
margin will be reduced to 0.90% if the Company exercises its option to
prepay. The loan is secured with the following: (i) first priority mortgage
over M/V "YM Xingang I", (ii) first assignment of earnings and insurance,
(iii) a corporate guarantee of Euroseas Ltd. and (iv) a third mortgage on
M/V "Irini" also financed by the same bank.
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. 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 vessel shipowning companies, distribution of
profits or assets, additional indebtedness and mortgage of vessels without the
lender's prior consent, sale of vessels, maximum fleet leverage, sale of capital
stock of our subsidiaries, ability to make investments and other capital
expenditures, entering in mergers or acquisitions, minimum requirements
regarding the hull ratio cover, minimum cash balance requirements and minimum
cash retention accounts (restricted cash). The loans agreements also require
that the Company to make deposits in retention accounts with certain banks that
can only be used to pay the current loan installments. Minimum cash balance
requirements are in addition to cash held in retention accounts. These cash
deposits amounted to $1,080,949 and $3,846,621 as of December 31, 2005 and 2006,
respectively, and are shown as "Restricted cash" under "Current Assets" and
"Long-Term Assets" in the consolidated balance sheets. The Company is not in
default of any of the foregoing covenants.
Interest expense for the years ended December 31, 2004, 2005 and 2006 amounted
to $566,880, $1,412,127 and $3,324,257 respectively. At December 31, 2006, LIBOR
for the Company's loans was on average approximately 5.35% and the average
interest rate on our debt was approximately 6.40%.
10. Derivative Financial Instruments
The gains for the period ended December 31, 2004 and the losses for the period
ended December 31, 2005 arose from interest rate swaps entered into in 2004 and
settled in 2005 that did not meet the criteria for hedge accounting treatment.
The Company did not enter into any derivative transaction in 2006.
11. Vessel Sales and Purchases
The Company, in 2006, acquired M/V "Tasman Trader", M/V "Aristides N.P." and M/V
"YM Xingang I" and sold M/V "Pantelis P" and M/V "John P"; in 2005, it acquired
M/V "Artemis"; and in 2004, it sold M/V "Widar".
M/V "Tasman Trader" was acquired for $10,775,000 with an existing time charter
(see Note 7) below the prevailing market charter rate. Consequently, the Company
recorded M/V "Tasman Trader" at $12,091,393 consisting of the amount paid plus
the present value of the below market charter rate of $1,237,072 and additional
cost of acquisition amounting to $79,321.
M/V "Aristides N.P." was acquired for $23,460,000 with an existing time charter
(see Note 7) below the prevailing market charter rate. Consequently, the Company
recorded M/V "Aristides N.P." at $23,985,752 consisting of the amount paid plus
the present value of the below market charter rate of $412,500 and additional
cost of acquisition of $113,252.
M/V "YM Xingang I" was acquired for $27,250,000 with an existing time charter
(see Note 7) above prevailing market rates. Consequently, the Company recorded
M/V "YM Xingang I" at $19,402,784 which is calculated as the total amount paid
less the present value of the above market charter rate of $7,923,480, plus
additional acquisition cost of $76,264.
M/V "Pantelis P" was sold on May 31, 2006. The net sale proceeds from the sale
of M/V "Pantelis P" were $4,416,228. In 2006, the depreciation of M/V "Pantelis"
until it was sold amounted to $107,587 resulting in a book value at the time of
sale of $2,114,421. The unamortized deferred drydock charge at the time of sale
was $136,008 resulting in a gain on sale of $2,165,799.
M/V "John P" was sold on July 5, 2006. The net sale proceeds from the sale of
M/V "John P" were $4,736,266. The book value of M/V "John P" as of July 5, 2006
was $2,145,894 and its related unamortized deferred drydocking expenses was
$310,315. A gain on sale of $2,280,057 was recognized from the sale of M/V "John
P".
M/V "Artemis" was acquired on November 22, 2005 for $20,650,000 and the Company
incurred additional acquisition expenses of $171,647 for a total acquisition
cost of $20,821,647.
M/V "Widar" was sold in April 2004 and the Company recognized net gain on sale
of $2,315,477. Depreciation expenses for M/V "Widar" for the year ended December
31, 2004 amounted to $136,384.
12. 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.
13. 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, 2006. 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.
14. Common Stock and Additional Paid-in Capital
Common stock relates to 12,620,150 shares with a par value of $0.03 each
adjusted for the 1-for-3 reverse split of the Company's common stock effected on
October 6, 2006 (see below). There are warrants outstanding to acquire up to
585,589 common shares as adjusted for the reverse stock split (see Note 1). The
value of the warrants, which is included in "Additional Paid-in Capital," was
estimated to be about $600,000 as of August 25, 2005 when the warrants were
issued.
On March 27, 2006 and as part of the merger of Euroseas Acquisition Company
Inc., (a wholly owned subsidiary of Euroseas Ltd.), with Cove Apparel Inc. an
additional 359,728 Euroseas Ltd common shares, as adjusted for the reverse
split, were issued on March 27, 2007 to Cove Apparel Inc.'s shareholders (a
total of 15 more shares than originally calculated were issued to Cove Apparel
Inc.'s shareholders due to the rounding-up of fractional shares during the
exchange). The issuance of these shares was recorded as an increase in share
capital ($10,793) and a decrease in paid-in capital of $793, as Cove Apparel
Inc. had at the time of merger net assets of $10,000.
On October 6, 2006, the Company effected an 1-for-3 reverse stock split of its
common stock. As a result of the reverse stock split, the par value of the
Company's common shares was increased to $0.03 per share and the number of
outstanding shares was increased to 12,620,150. There was no change in the
number of authorized common shares of the Company. All share and per share
amounts in these financial statements have been retroactively restated to
reflect this stock split.
Stock Incentive Plan
The shareholders approved on August 8, 2006 during its annual meeting the
Company's 2006 Stock Incentive Plan (Plan). The Plan will be administered by the
Board of Directors which can make awards totaling in aggregate up to 600,000
shares as adjusted for the reverse split over the next 10 years. The persons
eligible to receive awards under the Plan are officers, directors, and
executive, managerial, administrative and professional employees of the Company,
(collectively, "key persons") as the Board, in its sole discretion, shall select
based upon such factors as the Board shall deem relevant. Awards may be made
under the Plan in the form of incentive stock options, non-qualified stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, unrestricted stock, restricted stock units and performance shares. No
awards have been made under this plan as of December 31, 2006.
15. Earnings Per Share
Basic and diluted earnings per common share are computed as follows:
2004 2005 2006
----------------------------------------------------------------------------------------
Income:
Net income 30,611,765 25,178,454 20,069,407
Basic and Diluted earnings per share:
Weighted average common shares -
Outstanding (as adjusted for the 1 for 3
reverse stock split on October 6, 2006) 9,918,056 10,739,476 12,535,365
Basic and diluted earnings per share 3.09 2.34 1.60
The Company's warrants for the acquisition of 585,589 shares of common stock
have an exercise price of $10.80 per share which was above the fair value of the
Company shares during the period the warrants have been outstanding.
Consequently, the Company's warrants are not dilutive.
16. Voyage, Vessel Operating Expenses and Commissions
These consisted of:
Year ended December 31,
-----------------------------------------------------------
2004 2005 2006
----------------------------------------------------------------------------------------------
Voyage expense
Port charges and canal dues 165,661 234,535 289,496
Bunkers 182,026 416,712 845,123
Agency fees 22,658 19,304 20,119
----------------------------------------------------------------------------------------------
Total 370,345 670,551 1,154,738
----------------------------------------------------------------------------------------------
Vessel operating expenses
Crew wages and related costs 4,460,233 4,281,680 5,132,985
Insurance 1,486,179 1,525,683 1,591,986
Repairs and maintenance 515,820 515,373 314,132
Lubricants 446,034 484,930 808,338
Spares and consumable stores 1,660,600 1,465,063 1,811,691
Professional and legal fees 46,997 23,975 31,488
Others 290,389 313,575 678,197
----------------------------------------------------------------------------------------------
Total 8,906,252 8,610,279 10,368,817
Commission consisted of commissions charged by:
Year ended December 31,
-------------------------------------------------------
2004 2005 2006
-------------------------------------------------------
Third parties 1,680,480 1,852,169 1,337,385
Related parties (see Note 8) 534,717 536,180 492,149
---------------------------------------------------------------------------------------------
2,215,197 2,388,349 1,829,534
---------------------------------------------------------------------------------------------
17. 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.
18. Subsequent Events
a) The Board of Directors declared a cash dividend of $0.22 per Euroseas
Ltd. common share on January 8, 2007. Such cash dividend was paid on
or about February 15, 2007 to the holders of record of Euroseas Ltd.
common shares as of January 29, 2007.
b) On February 22, 2007, a subsidiary of the Company delivered to its
buyers M/V "Ariel" (see Note 4). The vessel was agreed to be sold on
December 19, 2006 for a gross price of $5.35 million less 2% sales
commissions.
c) The Company completed on February 5, 2007 a follow-on offering of
5,750,000 shares at $8.25 per share. The gross proceeds of the
offering amounted to $47.4 million with the net proceeds after the
underwriters' discount and offering expenses amounting to $43.1
million.
d) A subsidiary of the Company, on February 5, 2007, purchased the 38,691
dwt drybulk carrier (M/V Triada), built in 1984, for $13.1 million.
The vessel was delivered to a subsidiary of the Company on February
22, 2007. The acquisition was financed with $13.1 million from the
Company's cash balance. The Company instead of exercising its option
to re-pay $7 million of the $20 million loan drawn to finance its
November 2006 acquisition of the vessel M/V "YM Xingang I" (by using
part of the proceeds of its recently completed follow-on offering),
will add M/V Triada (renamed M/V Gregos) as an additional collateral
to the same loan. As a result of the additional collateral, the margin
of the loan will be reduced from 0.935% above LIBOR to 0.90% above
LIBOR.
e) A subsidiary of the Company, on March 21, 2007, purchased the 1,452
TEU container vessel M/V Bitre Ritscher (renamed M/V "Manolis P")
built in 1995 in Germany, for $19.15 million. The vessel was delivered
to the Company on April 12, 2007. The Company plans to finance the
acquisition with cash reserves from its balance sheet, and,
subsequently, arrange a loan for about 50% of the purchase price the
terms of which are currently under negotiation.