Filed pursuant to Rule No. 424(b)(3)
File Number: 333-129145
EUROSEAS LTD.
PROSPECTUS SUPPLEMENT NO. 4
DATED AUGUST 30, 2006
TO PROSPECTUS DATED
FEBRUARY 6, 2006
This Prospectus Supplement No. 4 supplements information contained in
our prospectus dated February 6, 2006, as amended and supplemented from time to
time (the "Euroseas Prospectus"). The information in this Supplement No. 4
supplements, modifies and supersedes some of the information contained in the
Euroseas Prospectus.
The primary purposes of this Prospectus Supplement No. 4 are to update
certain information contained in the Euroseas Prospectus under the caption
"Selling Shareholders" and to update certain financial information of Euroseas
Ltd. to June 30, 2006.
You should read this Prospectus Supplement No. 4 in conjunction with
the Euroseas Prospectus. This Prospectus Supplement No. 4 is not complete
without, and may not be delivered or utilized except in connection with, the
Euroseas Prospectus including any amendments or supplements thereto.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
SELLING SHAREHOLDERS
The following information supplements the information set forth in the
Prospectus under the caption "Selling Shareholders." This supplement is being
filed to list Portside Growth and Opportunity Fund and Rockmore Investment
Master Fund, Ltd. as Selling Shareholders as a result of their acquisition of
certain securities formerly owned by Omicron Master Trust, a Selling Shareholder
under the Prospectus. The total number of shares being sold under the
Registration Statement has not increased as a result of these transactions.
Shares of Common Shares of Common
Stock Beneficially Stock Beneficially
Owned Prior to the Owned After the
Offering Offering
-------------------------------- --------------------------
Number of Number of Number of
Shares Percent Shares Shares Percent
Beneficially of Being Beneficially of
Selling Stockholder Owned Class(1) Offered Owned(2) Class(1)
------------------------------------------------- ------------------ --------- -------------- ------------- --------
Portside Growth and Opportunity Fund ((3)) 227,744 * 227,744 0 *
Rockmore Investment Master Fund Ltd. (4) 131,986 * 131,986 0 *
Omicron Master Trust (5) 56,936 * 56,936 0 *
* Less than one percent
(1) Based on 37,860,341 shares of Euroseas common stock issued and outstanding.
For purposes of calculating the percentage ownership, any shares that the
selling shareholder has the right to acquire within 60 days under warrants or
options have been included in the total number of shares outstanding for that
person, in accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended.
(2) Assumes that the selling shareholder sells all of its shares of common stock
beneficially owned by it and offered hereby.
(3) Reflects 227,744 shares of common stock. Ramius Capital Group, L.L.C.
("Ramius Capital") is the investment adviser of Portside Growth and Opportunity
Fund ("Portside") and consequently has voting control and investment discretion
over securities held by Portside. Ramius Capital disclaims beneficial ownership
of the shares held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W.
Strauss and Jeffrey M. Solomon are the sole managing members of C4S & Co.,
L.L.C., the sole managing member of Ramius Capital. As a result, Messrs. Cohen,
Stark, Strauss and Solomon may be considered beneficial owners of any shares
deemed to be beneficially owned by Ramius Capital. Messrs. Cohen, Stark, Strauss
and Solomon disclaim beneficial ownership of these shares.
The investment advisor to Portside is Ramius Capital. An affiliate of Ramius
Capital is a NASD member. However, this affiliate will not sell any shares
purchased in this offering by Portside and will receive no compensation
whatsoever in connection with sales of shares purchased in this transaction. The
address for the selling shareholder is c/o Ramius Capital Group, L.L.C., 666
Third Ave., 26th Fl, New York, New York, 10017.
(4) Reflects 105,589 shares of common stock and 26,397 shares of common stock
issuable upon the exercise of warrants. Rockmore Capital, LLC ("Rockmore
Capital") and Rockmore Partners, LLC ("Rockmore Partners"), each a limited
liability company formed under the laws of the State of Delaware, serve as the
investment manager and general partner, respectively, to Rockmore Investments
(US) LP, a Delaware limited partnership, which invests all of its assets through
Rockmore Investment Master Fund Ltd., an exempted company formed under the laws
of Bermuda ("Rockmore Master Fund"). By reason of such relationships, Rockmore
Capital and Rockmore Partners may be deemed to share dispositive power over the
shares of our common stock owned by Rockmore Master Fund. Rockmore Capital and
Rockmore Partners disclaim beneficial ownership of such shares of our common
stock. Rockmore Partners has delegated authority to Rockmore Capital regarding
the portfolio management decisions with respect to the shares of common stock
owned by Rockmore Master Fund and, as of August 30, 2006, Mr. Bruce T. Bernstein
and Mr. Brian Daly, as officers of Rockmore Capital, are responsible for the
portfolio management decisions of the shares of common stock owned by Rockmore
Master Fund. By reason of such authority, Messrs. Bernstein and Daly may be
deemed to share dispositive power over the shares of our common stock owned by
Rockmore Master Fund. Messrs. Bernstein and Daly disclaim beneficial ownership
of such shares of our common stock and neither of such persons has any legal
right to maintain such authority. No other person has sole or shared voting or
dispositive power with respect to the shares of our common stock as those terms
are used for purposes under Regulation 13D-G of the Securities Exchange Act of
1934, as amended. No person or "group" (as that term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended, or the SEC's Regulation 13D-G)
controls Rockmore Master Fund. The address for the selling shareholder is c/o
Rockmore Capital, LLC, 650 Fifth Ave., 24th Fl, New York, New York, 10019.
(5) Reflects 56,936 shares of common stock issuable upon the exercise of
warrants. Omicron Capital, L.P., a Delaware limited partnership ("Omicron
Capital"), serves as investment manager to Omicron Master Trust, a trust formed
under the laws of Bermuda ("Omicron"), Omicron Capital, Inc., a Delaware
corporation ("OCI"), serves as general partner of Omicron Capital, and
Winchester Global Trust Company Limited ("Winchester") serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may be deemed
to share dispositive power over the shares of our common stock owned by Omicron,
and Winchester may be deemed to share voting and dispositive power over the
shares of our common stock owned by Omicron. Omicron Capital, OCI and Winchester
disclaim beneficial ownership of such shares of our common stock. Omicron
Capital has delegated authority from the board of directors of Winchester
regarding the portfolio management decisions with respect to the shares of
common stock owned by Omicron and, as of August 30, 2006, Mr. Olivier H. Morali,
officer of OCI, has delegated authority from the board of directors of OCI
regarding the portfolio management decisions of Omicron Capital with respect to
the shares of common stock owned by Omicron. By reason of such delegated
authority, Mr. Morali may be deemed to have sole dispositive power over the
shares of common stock owned by Omicron. Mr. Morali disclaims beneficial
ownership of such shares of common stock and has no legal right to maintain such
delegated authority. No other person has sole or shared voting or dispositive
power with respect to the shares of common stock being offered by Omicron, as
those terms are used for purposes under Regulation 13D-G of the Securities
Exchange Act of 1934, as amended. Omicron and Winchester are not "affiliates" of
one another, as that term is used for purposes of the Securities Exchange Act of
1934, as amended, or of any other person named in this prospectus as a selling
stockholder. No person or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended, or the SEC's Regulation 13D-G)
controls Omicron and Winchester. The address for the selling shareholder is c/o
Omicron Capital, L.P., 650 Fifth Ave., 24th Fl, New York, New York, 10019.
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Financial Statements
June 30, 2005 and 2006
-------------------------------------------------------------------------------
Index to Unaudited Condensed Consolidated Financial Statements
Pages
Unaudited Condensed Consolidated Balance Sheets as of
December 31, 2005 and June 30, 2006 2
Unaudited Condensed Consolidated Statements of Income for the three
and six month periods ended June 30, 2005 and 2006 3
Unaudited Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six month period ended June 30, 2006 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2005 and 2006 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(All amounts expressed in U.S. Dollars)
-------------------------------------------------------------------------------
December 31, June 30,
Notes 2005 2006
------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 20,447,301 20,205,705
Trade accounts receivable, net 46,118 155,508
Claims and other receivables 306,303 171,648
Due from related company 6 3,012,720 1,828,647
Inventories 3 371,691 563,921
Prepaid expenses 85,625 231,432
Restricted cash 1,080,949 378,243
----------------------------------------------------------------------------------------------------------
Total current assets 25,350,707 23,535,104
----------------------------------------------------------------------------------------------------------
Fixed assets
Vessels, net 52,334,897 59,679,713
----------------------------------------------------------------------------------------------------------
Other long-term assets
Deferred charges, net 1,855,829 1,461,348
----------------------------------------------------------------------------------------------------------
Total long-term assets 54,190,726 61,141,061
----------------------------------------------------------------------------------------------------------
Total assets 79,541,433 84,676,165
----------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Long-term debt, current portion 7 14,430,000 13,840,000
Trade accounts payable 837,182 1,405,695
Accrued expenses 5 1,777,637 1,353,035
Deferred revenues 1,370,058 1,164,831
Fair value of the below market time charter acquired 4 - 1,153,832
----------------------------------------------------------------------------------------------------------
Total current liabilities 18,414,877 18,917,393
----------------------------------------------------------------------------------------------------------
Long-term liabilities
Long-term debt, net of current portion 7 34,130,000 33,280,000
----------------------------------------------------------------------------------------------------------
Total long-term liabilities 34,130,000 33,280,000
----------------------------------------------------------------------------------------------------------
Total liabilities 52,544,877 52,197,393
----------------------------------------------------------------------------------------------------------
Commitments and contingencies 10 - -
Shareholders' equity
Common stock (par value $0.01, 100,000,000 shares
authorized, 36,781,159 and 37,860,341 issued and
outstanding) 11 367,812 378,603
Preferred shares (par value $0.01, 20,000,000 shares
authorized, no shares issued and outstanding) - -
Additional paid-in capital 11 17,883,781 17,882,990
Retained earnings 8,744,963 14,217,179
----------------------------------------------------------------------------------------------------------
Total shareholders' equity 26,996,556 32,478,772
----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 79,541,433 84,676,165
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
(All amounts expressed in U.S. Dollars)
-------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
Notes 2005 2006 2005 2006
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Voyage revenue 4 11,103,103 10,612,199 23,833,736 20,421,220
Commissions 6 (630,730) (416,385) (1,340,228) (895,968)
--------------------------------------------------------------------------------------------------------------------------
Net revenue 10,472,373 10,195,814 22,493,508 19,525,252
--------------------------------------------------------------------------------------------------------------------------
Operating expenses
Voyage expenses 25,613 325,176 131,903 866,365
Vessel operating expenses (including Management 6 2,687,011 3,050,919 5,236,171 6,168,603
fees of $473,074, $601,266, $965,384 and
$1,112,850)
General and administrative expenses 0 287,515 0 521,940
Amortization and depreciation 9 906,885 1,638,585 1,824,322 3,195,074
--------------------------------------------------------------------------------------------------------------------------
Net gain on sale of vessel 9 0 (2,165,799) 0 (2,165,799)
--------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,619,509 3,136,396 7,192,396 8,586,183
--------------------------------------------------------------------------------------------------------------------------
Operating income 6,852,864 7,059,418 15,301,112 10,939,069
--------------------------------------------------------------------------------------------------------------------------
Other income/(expenses)
Interest and finance cost (488,157) (713,581) (545,719) (1,391,947)
Derivative gain/(loss) 8 (116,518) 0 (82,029) 0
Foreign exchange gain/(loss) 249 (172) 312 (2,007)
Interest income 27,498 250,909 89,698 470,341
--------------------------------------------------------------------------------------------------------------------------
Other income (expenses), net (576,928) (462,844) (537,738) (923,613)
--------------------------------------------------------------------------------------------------------------------------
Net income 6,275,936 6,596,574 14,763,374 10,015,456
---------------------------------------------------------- ----------------- ------------- --------------- ---------------
Earnings per share - basic and diluted 12 0.21 0.17 0.50 0.27
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding
during the year
- basic and diluted 12 29,754,166 37,860,341 29,754,166 37,347,580
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity
For the six month period ended June 30, 2006
(All amounts, except per share data, expressed in U.S. Dollars)
--------------------------------------------------------------------------------
Common Preferred
Comprehensive Number Shares Shares Paid - in Retained
Income of Shares Amount Amount Capital Earnings Total
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2005 36,781,159 367,812 - 17,883,781 8,744,963 26,996,556
---------------------------------------------------------------------------------------------------------------------------
Net income 10,015,456 - - - - 10,015,456 10,015,456
----------
Issuance of shares 1,079,182 10,791 - (791) - 10,000
Dividends - - - - (4,543,240) (4,543,240)
---------------------------------------------------------------------------------------------------------------------------
Balance
June 30, 2006 37,860,341 378,603 - 17,882,990 14,217,179 32,478,772
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts expressed in U.S. Dollars)
-------------------------------------------------------------------------------
Six months ended June 30,
--------------------------------
2005 2006
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 14,763,374 10,015,456
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of vessels 1,191,864 2,632,155
Amortization of deferred 632,458 562,919
drydock expenses
Amortization of deferred finance 61,784 36,127
cost
Gain on sale of vessel - (2,165,799)
(Gain)/Loss on derivative 82,029 -
Changes in operating assets
and liabilities:
(Increase)/decrease in:
Trade accounts receivable 236,233 (109,390)
Prepaid expenses 77,845 (145,807)
Claims and other receivables (13,887) 134,655
Inventories (16,287) (192,230)
Due from related company (8,621,660) 1,184,073
Increase/(decrease) in:
Trade accounts payable 67,219 568,513
Accrued expenses 116,914 (424,602)
Deferred revenue 268,634 (288,462)
Dry-docking expenses paid (688,739) (299,322)
--------------------------------------------------------------------------------
Net cash provided by operating 8,157,781 11,508,281
activities
------------------------------------------------------------- ------------------
Cash flows from investing activities:
Purchase of vessel - (10,854,321)
(Contributions to) and drawings
from the cash retention accounts (1,230,155) 702,706
Net proceeds from sale of a - 4,416,228
vessel
--------------------------------------------------------------------------------
Net cash provided by (used in) (1,230,155) (5,735,387)
investing activities
--------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of share capital upon merger - 10,000
Dividends paid/return of capital (44,225,000) (4,543,240)
Loan arrangement fees paid, (157,500) (41,250)
capitalized
Proceeds from long-term debts 37,700,000 8,250,000
Repayment of long-term debts (10,290,000) (9,690,000)
--------------------------------------------------------------------------------
Net cash provided by (used) in (16,972,500) (6,014,490)
financing activities
--------------------------------------------------------------------------------
Net increase in cash and cash (10,044,874) (241,596)
equivalents
Cash and cash equivalents at 15,497,482 20,447,301
beginning of year
--------------------------------------------------------------------------------
Cash and cash equivalents at end of year 5,452,608 20,205,705
--------------------------------------------------------------------------------
Cash paid for interest 260,376 1,417,443
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
For the six month periods ended June 30, 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 listed below. On June 28, 2005, the beneficial owners
exchanged all their shares in the ship-owning companies for shares in Friends
Investment Company Inc., a newly formed Marshall Islands company. On June 29,
2005, Friends Investment Company Inc. then exchanged all the shares in the
ship-owning companies for 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 unaudited
condensed 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 listed below.
On August 25, 2005, Euroseas Ltd. sold 7,026,993 common shares at $3.00 each in
an institutional private placement, together with 0.25 of detachable warrants
for each common share to acquire up to 1,756,743 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 stock at a price
of $3.60 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 provides 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 stockholders of
Cove receiving 0.102969 shares of Euroseas Ltd. common stock for each share of
Cove common stock. 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 1,079,167 Euroseas Ltd. common shares
issued to Cove stockholders. The SEC also declared effective on February 3, 2006
the Company's registration statement on Form F-1 that registered the re-sale of
the 7,026,993 Euroseas Ltd. common shares and 1,756,743 Euroseas Ltd. common
shares issuable upon the exercise of the warrants issued in connection with the
institutional private placement, as well as 818,604 shares to be issued to
certain Cove stockholders as part of the merger with Cove.
The Company submitted on February 10, 2006 an application to list the Euroseas
Ltd. common shares on the OTC Bulletin Board
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 1,079,182
Euroseas Ltd. common shares and received dividends totaling to $140,334 related
to dividends previously declared by Euroseas Ltd. (the difference of 15 shares
is due to rounding-up fractional shares during the exchange). Euroseas
Acquisition Company Inc. changed its name to Cove Apparel, Inc. Also, following
the completion of the merger, the common stock of Cove was 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 was approved to trade on March 2, 2006 and started trading on the OTC
Bulletin Board on May 5, 2006.
The operations of the vessels are managed by Eurobulk Ltd. (the "manager"), a
corporation controlled by members of the Pittas family -- the controlling
shareholder of Friends Investment Company Inc.
The manager has an office in Greece located at 40 Ag. Konstantinou Street, 151
24, Maroussi, Greece. The manager provides the Company with a wide range of
shipping services such as technical support and maintenance, insurance
consulting, chartering, financial and accounting services, as well as executive
management services, in consideration for fixed and variable fees (Note 6).
The Company is engaged in the ocean transportation of drybulk and containers
through the ownership and operation of the following drybulk and container
carriers:
o Searoute Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the
Cyprus flag 33,712 DWT bulk carrier motor vessel "Ariel", which was built
in 1977 and acquired on March 5, 1993.
o Oceanopera Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of
the Cyprus flag 34,750 DWT bulk carrier motor vessel "Nikolaos P", which
was built in 1984 and acquired on July 22, 1996.
o Oceanpride Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "John P", which was
built in 1981 and acquired on March 7, 1998.
o Alcinoe Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "Pantelis P", which
was built in 1981 and acquired on June 4, 1997.
o Alterwall Business Inc. incorporated in Panama on January 15, 2001, owner
of the Panama flag 18,253 DWT container carrier motor vessel "HM Qingdao1"
(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 "Tasman Trader", which was built in 1990 and acquired on April
27, 2006.
In addition, the historical financial statements include the accounts of the
vessel owning company, Silvergold Shipping Ltd., which was managed by Eurobulk
Ltd. during the periods presented. Silvergold Shipping Ltd. was incorporated in
Cyprus on May 16, 1994. Until June 3, 1996, the Company was engaged in ship
owning activities, but thereafter, the Company's assets and liabilities were
liquidated and the retained earnings were distributed to the shareholders. The
Company remained dormant until October 10, 2000 when it acquired the 18,000 DWT
Cyprus flag container carrier motor vessel "Widar", which was built in 1986. The
vessel was sold on April 24, 2004. The Pittas family, the controlling
shareholders of Friends Investment Company Ltd., who is the Company's largest
shareholder, also owned the ship owning company Silvergold Shipping Ltd., and,
accordingly, these accompanying financial statements also consolidate the
accounts of Silvergold Shipping Ltd until May 31, 2005, when Silvergold Shipping
Ltd. declared a final dividend of $35,000 to its shareholders.
2. Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted principles for interim
financial information in the United States of America. Accordingly, they do not
include all the information and notes required by U.S. generally accepted
accounting principles for complete financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments considered necessary for a fair presentation of the Company's
financial position, results of operations and cash flow for the periods
presented. Operating results for the six month period ended June 30, 2006 are
not necessarily indicative of the results that might be expected for the fiscal
year ending December 31, 2006.
The unaudited condensed consolidated financial statements as of and for the
three and six months periods ended June 30, 2006 and 2005 should be read in
conjunction with the audited condensed consolidated financial statements for the
year ended December 31, 2005 as filed with the SEC on Form 20-F.
The following are the significant accounting policies adopted by the Company:
Principles of consolidation
The accompanying unaudited condensed 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 unaudited condensed consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the consolidated financial statements, and the
stated amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Other comprehensive income
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Statement of Comprehensive Income" ("SFAS 130"), which
requires separate presentation of certain transactions which are recorded
directly as components of stockholders' equity. The Company has no other
comprehensive income and, accordingly, comprehensive income equals net income
for all periods presented.
Foreign currency translation
The Company's functional currency is the U.S. dollar. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates prevailing at the balance sheet date. Income and expenses denominated in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
at the date of the transaction. Resulting exchange gains and/or losses on
settlement or translation are included in the accompanying consolidated
statements of operations.
Cash equivalents
Cash equivalents are time deposits or other certificates purchased with an
original maturity of three months or less.
Trade accounts receivable
The amount shown as trade accounts receivable, at each balance sheet date,
includes estimated recoveries from each voyage or time charter, net of a
provision for doubtful accounts. At each balance sheet date, the Company
provides for doubtful accounts on the basis of specific identified doubtful
receivables. At December 31, 2005 and June 30, 2006, no provision for doubtful
debts was considered necessary.
Claims and other receivables
Claims and other receivables principally represent claims arising from hull or
machinery damages, crew salaries claims or other insured risks that have been
submitted to insurance adjusters or are currently being compiled. All amounts
are shown net of applicable deductibles.
Inventories
Inventories consist of bunkers, lubricants and victualling on board the
Company's vessels at the balance sheet date and are stated at the lower of cost
and market value. Victualling is valued using the first-in-first-out (FIFO)
method while bunkers and lubricants are valued on an average cost basis.
Vessels
Vessels are stated at cost which comprises the vessels' contract price, costs of
major repairs and improvements upon acquisition, direct delivery and other
acquisition expenses less accumulated depreciation. Subsequent expenditures for
conversions and major improvements are also capitalized when they appreciably
extend the life, increase the earning capacity or improve the efficiency or
safety of the vessels; otherwise these amounts are charged to expense as
incurred.
Expenditures for vessel repair and maintenance is charged against income in the
period incurred.
Depreciation
Depreciation is calculated on a straight line basis with reference to the cost
of the vessel, age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel, which
is estimated to range from 25 to 30 years from the completion of its
construction. Remaining useful lives of property are periodically reviewed and
revised to recognize changes in conditions and such revisions, if any, are
recognized over current and future periods.
Revenue and expense recognition
Revenues are generated from voyage and time charter agreements. Time charter
revenues are recorded over the term of the charter as service is provided. Under
a voyage charter, the revenues and associated voyage costs are recognized on a
pro-rata basis over the duration of the voyage. Probable losses on voyages are
provided for in full at the time such losses can be estimated. A voyage is
deemed to commence upon the completion of discharge of the vessel's previous
cargo and is deemed to end upon the completion of discharge of the current
cargo. Demurrage income, which in included in voyage revenues, represents
payments received from the charterer when loading or discharging time exceeded
the stipulated time in the voyage charter and is recognized when earned.
Charter fees received in advance is recorded as a liability until charter
services are rendered.
Vessels operating expenses comprise all expenses relating to the operation of
the vessels, including crewing, repairs and maintenance, insurance, stores,
lubricants and miscellaneous expenses. Vessels operating expenses are recognized
as incurred; payments in advance of services or use are recorded as prepaid
expenses. Voyage expenses comprise all expenses relating to particular voyages,
including bunkers, port charges, canal tolls, and agency fees.
For the Company's vessels operating in chartering pools, revenues and voyage
expenses are pooled and allocated to each pool's participants on a time charter
equivalent basis in accordance with an agreed-upon formula.
Dry-docking and special survey costs
Dry-docking and special survey costs are deferred and amortized over the
estimated period to the next scheduled dry-docking or survey, which are
generally two and a half years and five years, respectively. Unamortized
dry-docking and special survey costs of vessels that are sold are written-off to
income in the year of the vessel's sale.
Pension and retirement benefit obligations - crew
The ship-owning companies employ the crews on board the vessels under short-term
contracts (usually up to 9 months). Accordingly, they are not liable for any
pension or post retirement benefits.
Financing costs
Loan arrangement fees are deferred and amortized to interest expense over the
duration of the underlying loan using the effective interest method. Unamortized
fees relating to loan repaid or refinanced are expensed in the period the
repayment or refinancing occurs.
Assets held for sale
It is the Company's policy to dispose of vessels when suitable opportunities
occur and not necessarily to keep them until the end of their useful life. The
Company classifies assets as being held for sale in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" when the
following criteria are met: management has committed to a plan to sell the
asset; the asset is available for immediate sale in its present condition; an
active program to locate a buyer and other actions required to complete the plan
to sell the asset have been initiated; the sale of the asset is probable, and
transfer of the asset is expected to qualify for recognition as a completed sale
within one year; the asset is being actively marketed for sale at a price that
is reasonable in relation to its current fair value and actions required to
complete the plan indicate that it is unlikely that significant changes to the
plan will be made or that the plan will be withdrawn.
Long-lived assets classified as held for sale are measured at the lower of their
carrying amount or fair value less cost to sell. These assets are not
depreciated once they meet the criteria to be held for sale.
Impairment of long-lived assets
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. In the evaluation of the fair value and future
benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets.
If the carrying value of the related asset exceeds the undiscounted cash flows,
the carrying value is reduced to its fair value. Various factors including
future charter rates and vessel operating costs are included in this analysis.
The Company determined that no impairment loss needed to be recognized for
applicable assets for any years presented.
Fair value of time charter acquired
When a vessel is acquired with a time charter contract, the fair value of the
time charter is added to the book value of the asset and considered as deferred
revenue. The adjusted book value is depreciated over the remaining life of the
vessel, while the deferred revenues are amortized over the duration of the
charter. Company calculates the fair value of the charter as the present value
of the difference of the charter rate from 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.
Derivative financial instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value with changes in the instrument's fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. Pursuant to SFAS No. 133, the transactions did not qualify as a hedge or
meet the criteria of hedge accounting. All gains or losses on the derivative
financial instruments are reflected in the consolidated statements of income.
For the six month period ended June 30, 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. The fair value at June
30, 2005 of ($82,029) is included in claims and other receivables. There were no
interest rate swaps for the six month period ended June 30, 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
June 30, 2006 since their exercise price exceeds the fair value of Euroseas Ltd.
common share, are excluded from earnings per share.
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 December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually the
vesting period). SFAS No.123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective for our fiscal year 2006.
The implementation of this standard did not have a material impact on the
Company's financial position, results of operations or cash flows.
On December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("FAS 153"). This statement amends APB Opinion No. 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. Under SFAS No. 153, if a non-monetary exchange
of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS No. 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
The FASB has issued SFAS No.154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and SFAS No. 3. The Statement applies to all
voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle.
SFAS No.154 requires retrospective applications to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. Opinion 20 previously required that most voluntary change in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves financial reporting because its requirements enhance the
consistency of financial information between periods. The Company is analyzing
the effect which this pronouncement will have on its financial condition,
statement of operations, and cash flows. This statement is effective for the
Company on January 1, 2006. This statement did not have an effect on the
Company's financial condition, results of operation or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." This Statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and resolves issues addressed in Statement 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets."
SFAS No. 155 permits fair value re-measurement for any hybrid financial
instruments that contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS No.
155 also clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The Company has not completed the study of what effect SFAS No. 155 will
have on its financial position and results of operations.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47 "Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143", which clarifies the term "conditional asset retirement
obligation" as used in SFAS No. 143 "Accounting for Asset Retirement
Obligations". Specifically, FIN 47 provides that an asset retirement obligation
is conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. This statement did not have an impact on the
Company's financial position and results of operations.
Uncertainty in Income Taxes--In June 2006, the FASB issued FIN No. 48,
"Accounting for uncertainty in Income Taxes." FIN No. 48 requires recognition of
a tax benefit to the extent of management's best estimate of the impact of a tax
position, provided it is more than likely than not that the tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. FIN No. 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. The Company has
not completed the study of what effect FIN No. 48 will have on its financial
position and results of operations.
3. Inventories
The amounts shown in the accompanying consolidated balance sheets consisted of
the following:
December 31, June 30,
2005 2006
------------------------------------------------------------------------------
Lubricants 312,390 416,082
Victualling 59,301 147,839
------------------------------------------------------------------------------
Total 371,691 563,921
------------------------------------------------------------------------------
4. Deferred Revenue
Deferred voyage revenue represents cash received from charterers prior to it
being earned. These amounts are recognized as income in the period the related
services are rendered. In addition, m/v "Tasman Trader" was bought with a time
charter contract until December 17, 2008 at $8,850. The charter rate was below
market rates for an equivalent charter at the time resulting in a below market
price for the vessel (see Note 9). The present value of the below the market
charter was estimated by the Company at $1,237,072 and was booked as deferred
revenue which will be amortized over the duration of the charter. $83,240 of the
above is included in voyage revenues for the three and six month periods ended
June 30, 2006, and the remaining $1,153,832 is part of deferred revenues.
5. Accrued Expenses
This account consisted of:
December 31, June 30,
2005 2006
--------------------------------------------------------------------------------
Accrued private placement expenses 1,121,397 802,800
Accrued payroll expenses 31,928 33,646
Accrued interest 139,536 77,913
Accrued general and administrative expenses 269,666 159,553
Other accrued expenses 215,110 278,673
--------------------------------------------------------------------------------
Total 1,777,637 1,353,035
--------------------------------------------------------------------------------
6. Related Party Transactions
The Company's vessel owning companies are parties to management agreements with
the manager, also controlled by the Pittas family, whereby the manager provides
technical and commercial management for a fixed daily fee of Euro 590 per vessel
for the periods ended June 30, 2005 and an average of Euro 607 for the period
ended June 30, 2006. Such management fees amounted to $965,384 and $1,112,850 in
2005 and 2006, respectively. These agreements were renewed on January 31, 2005
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. The increase for the period from February 1 to June 30, 2006 amounted to
$29,725; the increase for the period February 1, 2006 to March 31, 2006 was
billed in April 2006.
The Company uses brokers to provide services, as is industry practice. Eurochart
S.A., a company also controlled by the Pittas family, provides sales and
purchases (S&P) and chartering services to the Company. A commission of 1% on
vessel sales price and 1%-1.25% on charter revenue is paid to Eurochart S.A. for
these services. There was no 1% sales commission paid to Eurochart S.A. for the
period ended June 30, 2005 as there were no vessel sales or purchases during
either period; for the six month period ended on June 30, 2006 an amount of
$154,250 was paid to Eurochart S.A. as commission for the purchase of m/v
"Tasman Trader" and sale of m/v "Pantelis P". The commission on charter revenue
for the six month periods ended June 30, 2005 and 2006 amounted to $294,587 and
$248,780, respectively.
The former shareholders of the ship-owning companies that became wholly owned
subsidiaries of the Company, together with another ship management company, have
one joint venture with the insurance broker Sentinel Maritime Services Inc. and
one with the crewing agent More Maritime Agencies Inc. The shareholders'
percentage participation in these joint ventures was 58% in 2005 and 68.60% in
2006. These companies provide certain insurance and crewing services for the
ship-owning subsidiaries and their fees are included in operating expenses.
Amounts due to or from related parties represent net disbursements and
collections made on behalf of the vessel-owning companies by the manager during
the normal course of operations for which a right of off-set exists. As of June
30, 2006, the amount due from related companies was $1,828,647. Based on the
management agreement between Euroseas Ltd. and Eurobulk Ltd. an estimate of the
quarter's operating expenses, expected drydock expenses, management fee and
executive services fee is to be advanced in the beginning of the quarter to
Eurobulk Ltd. For the current fleet, this advance is estimated between
$3,300,000 and $3,500,000 excluding any advances needed for drydock expenses and
is paid in advance around the beginning of each quarter.
7. Long-term Debt
This consisted of bank loans of the ship-owning companies as follows:
-------------------------------------------
Borrower December 31, June 30,
2005 2006
----------------------------------------------------------------------------------------------
Diana Trading Limited (a) $ 6,560,000 $ 5,220,000
Alcinoe Shipping Limited/Oceanpride
Shipping Limited
Searoute Maritime Ltd
Oceanopera Shipping Ltd
(b) 9,500,000 5,900,000
Alterwall Business Inc.
Allendale Investments S.A (c) 17,000,000 14,000,000
Salina Shipholding Corp. (d) 15,500,000 13,750,000
Xenia International Corp (e) - 8,250,000
----------------------------------------------------------------------------------------------
48,560,000 47,120,000
Current portion (14,430,000) (13,840,000)
----------------------------------------------------------------------------------------------
Long-term portion $ 34,130,000 $ 33,280,000
----------------------------------------------------------------------------------------------
The future annual loan repayments are as follows:
To June 30
----------------------------------------------------------------------------------------------
2007 13,840,000
2008 12,940,000
2009 6,320,000
2010 4,160,000
Thereafter 9,860,000
----------------------------------------------------------------------------------------------
Total $ 47,120,000
----------------------------------------------------------------------------------------------
(a) This consisted of loan amounting to $4,900,000 and $1,000,000 drawn on
October 16, 2002 and on December 2, 2002, respectively. The loan is payable
in twenty-four consecutive quarterly installments of $220,000 each, and a
balloon payment of $620,000 payable together with the final quarterly
installment due in October 2008. The interest is based on LIBOR plus 1.6%
per annum.
An additional loan of $4,200,000 was drawn on May 9, 2005. The loan is
payable in twelve consecutive quarterly installments consisting of four
installments of $450,000 each, and eight installments of $300,000 each with
the final installment due in May 2008. The interest is based on LIBOR plus
1.25% per annum.
(b) Alcinoe Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd. drew $13,500,000 against a loan facility for which
they are jointly and severally liable. Prior to obtaining the loan, an
amount of $1,400,000 was paid in settlement of the outstanding loans as at
June 30, 2005 for Alcinoe Shipping Ltd. and Oceanpride Shipping Ltd. The
loan is payable in twelve consecutive quarterly installments consisting of
two installments of $2,000,000 each, one installment of $1,500,000, nine
installments of $600,000 each and a balloon payment of $2,600,000 payable
with the final installment due in May 2008. Interest is based on LIBOR plus
1.5% per annum.
In 2006, two additional early repayments of $1,500,000 each (for a total of
$3,000,000) corresponding to the sale of M/V John P and M/V Pantelis P took
place in June and July (see Note 9(a) and 9(b)). The repayment schedule
starting July 1, 2006 has been agreed to $300,000 per quarter with a
$2,000,000 balloon payment along with the last installment in the second
quarter of 2008.
(c) The loan balance as of December 31, 2004 consisted of the following loans:
i. A $6,000,000 loan drawn by Allendale Investments S.A. on May 31, 2002
with a balance of $4,500,000. The interest was based on LIBOR plus
1.75% per annum.
ii. A $6,000,000 loan drawn by Alterwall Business Inc. with a balance of
$3,750,000. The interest was based on LIBOR plus 1.5% per annum.
Allendale Investments S.A. and Alterwall Business Inc. drew $20,000,000 on
May 26, 2005 against a loan facility for which they are jointly and
severally liable. The outstanding amount of their existing loans from the
same creditor bank was $7,800,000 and was repaid in full. The loan is
payable in twenty-four unequal consecutive quarterly installments of
$1,500,000 each in the first year, $1,125,000 each in the second year,
$775,000 each in the third year, $450,000 each in the fourth through sixth
years and a balloon payment of $1,000,000 payable with the final
installment due in May 2011. The interest is based on LIBOR plus 1.25% per
annum as long as the outstanding loan amount remains below 60% of the fair
market value (FMV) of M/V HM Qingdao I and M/V Kuo Hsiung and 1.375% if the
outstanding loan amount is above 60% of the FMV of such vessels.
(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 in January 2011. The first installment is due in June 2006. The
interest is based on LIBOR plus a margin that ranges between 0.9-1.1%,
depending on the asset cover ratio. The loan is secured with the following:
(i) first priority mortgage over M/V Artemis, (ii) first assignment of
earnings and insurance of M/V Artemis, (iii) a corporate guarantee of
Euroseas Ltd., and (iv) a minimum cash balance equal to an amount of no
less than $300,000 in an account Salina Shipholding Corp. maintains with
the bank, and, overall liquidity (cash and cash equivalents) of $300,000
for each of the Company's vessels throughout the life of the facility.
(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 installment in March 2012. The first
installment is due in September 2006. 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) a minimum cash balance equal to an amount of no less than
$300,000 in an account Xenia International Corp. maintained with the bank,
and, overall liquidity (cash and cash equivalents) of $300,000 for each of
the Company's vessels throughout the life of the facility.
In addition to the terms specific to each loan described above, all the above
loans are secured with one or more of the following:
o first priority mortgage over the respective vessels on a joint and several
basis.
o first assignment of earnings and insurance.
o a personal guarantee of one shareholder.
o a corporate guarantee of Eurobulk Ltd. and/or Euroseas Ltd.
o a pledge of all the issued shares of each borrower.
The loan agreements contain covenants such as restrictions as to changes in
management and ownership of the vessel shipowning companies, distribution of
profits or assets, additional indebtedness and mortgaging of vessels without the
lender's prior consent, the sale of vessels, maximum fleet leverage, minimum
requirements regarding the hull ratio cover and minimum cash retention accounts
(restricted cash). Restricted cash are deposits with certain banks that can only
be used to pay the current loan installments. The Company is not in default with
respect to any of the foregoing covenants.
8. Derivative Gains
The gains for the period ended June 30, 2005 arose from interest rate swaps that
did not meet the criteria for hedge accounting treatment. Accordingly, all gains
or losses have been recorded in the statement of income for the period. The swap
was provided for in the period ended September 30, 2005 and settled in October
2005.
9. Vessels, net
Since December 31, 2005 the Company has bought m/v "Tasman Trader", sold m/v
"Pantelis P" and signed an agreement to sell m/v "John P".
On March 20, 2006, Oceanpride Shipping Ltd., a wholly-owned subsidiary of the
company, signed a Memorandum of Agreement to sell M/V "John P", a handysize bulk
carrier of 26,354 DWT built in 1981 for a gross price of $4.95 million with 4%
sales commissions. The vessel was delivered to the buyers on July 5, 2006
resulting in a capital gain of approximately $2,295,791. As a result of the sale
of M/V "John P" (see Note 13(b)), the Company has agreed to make a $1,500,000
additional re-payment to the bank financing the above ship along with M/V
"Ariel" and M/V "Nikolaos P" (see Note 7(b)). m/v "John P" was considered as
"asset held for sale" during the period April 1, 2006 to July 5, 2006 and was
not further depreciated during the three month period ended June 30, 2006. For
the three month period ended March 31, 2006 m/v "John P" was depreciated by
$60,697. Its book value as of June 30, 2006 is $2,145,894.
m/v Tasman Trader was bought for $10,775,000 with a time charter until December
17, 2008 at $8,850. The charter rate was below market rates for an equivalent
charter at the time resulting in a below market price. The present value of the
below the market charter was estimated by the Company at $1,237,072.
Consequently, the book value of the vessel (charter free) was increased by the
same amount plus capitalized purchase expenses of $79,321 for a total book value
of $12,091,393. The present value of the below market charter is booked as
deferred revenue and will be amortized over the duration of the charter.
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. For the six month period ended June 30,
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 capital
gain of $2,165,799.
10. 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
period ended June 30, 2006. Any effect on the Company's income resulting from
any future reallocation of pool income cannot be reasonably estimated but will
not materially affect the Company's results.
11. Common Stock and Additional Paid-in Capital
Common stock relates to 37,860,341 shares with a par value of $0.01 each. The
amount shown in the accompanying consolidated balance sheets, as additional
paid-in capital, represents payments received in excess of par value which is
treated from the accounting point of view as capital. In 2005, the Company sold
7,026,993 common shares in an institutional private placement, together with
0.25 detachable warrants for each common share to acquire up to 1,756,743 common
shares (see Note 1). The value of the warrants, which is included in "Additional
Paid-in Capital," was estimated to be about $600,000.
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 1,079,182 common share were issued 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
of the share capital ($10,791) and a decrease of paid-in capital of $791, as
Cove Apparel Inc. had at the time of merger cash and shareholders equity of
$10,000.
12. Earnings Per Share
Basic and diluted earnings per common share are computed as follows:
June 30, 2005 June 30, 2006
--------------------------------------------------------------------------------
Income:
Net income 14,763,374 10,015,456
Basic and Diluted earnings per share:
Weighted average common shares -
Outstanding 29,754,166 37,347,580
Basic earnings per share: 0.50 0.27
13. Subsequent Events
(a) On July 5, 2006, the Company delivered to its buyers M/V "John P", a
handysize bulk carrier of 26,354 DWT built in 1981. A Memorandum of
Agreement to sell the vessel was signed on March 27, 2006 for a gross price
of $4.95 million less 4% sales commissions. The Company expects to book
about $2,295,791 gain from the sale.
(b) On July 25, 2006, Prospero Maritime Inc., a wholly-owned subsidiary of the
company signed a Memorandum of Agreement to purchase m/v "Torm Tekla", a
panamax size drybulk vessel of 69,268 DWT built in 1993 for $23.46 million.
The vessel is to be delivered to Euroseas Ltd. between August 20 and
September 20, 2006 at the seller's option. The acquisition will be financed
with about 35% of equity (about $8 million) from the Company's cash
reserves and the remaining about 65% with a bank loan of up to $15.5
million; a loan for the above amount has been approved and signed on August
30, 2006 and it will be drawn simultaneously with the delivery of the
vessel to the Company.
(c) On August 7, 2006, the Board of Directors declared a cash dividend of $0.06
per Euroseas Ltd. common share payable on or about September 15, 2006 to
the holders of record of Euroseas Ltd. common shares as of September 5,
2006.
(d) On August 8, 2006, the annual shareholders meeting of the Company approved
the Company's 2006 Stock Incentive Plan. The plan will be administered by
the Board of Directors which can make awards totaling in aggregate up to
1,800,000 shares over the next 10 years. The persons eligible to receive
awards under the Plan are those 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.
02558-0002#699118