Filed pursuant to Rule No. 424(b)(3)
File Number: 333-129145
EUROSEAS LTD.
PROSPECTUS SUPPLEMENT NO. 3
DATED MAY 18, 2006
TO PROSPECTUS DATED
FEBRUARY 6, 2006
This Prospectus Supplement No. 3 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. 3
supplements, modifies and supersedes some of the information contained in the
Euroseas Prospectus.
The primary purpose of this Prospectus Supplement No. 3 is to update
certain financial information of Euroseas Ltd. to March 31, 2006.
You should read this Prospectus Supplement No. 3 in conjunction with the
Euroseas Prospectus. This Prospectus Supplement No. 3 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.
Euroseas Ltd. and Subsidiaries
Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and 2006
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Index to Unaudited Condensed Consolidated Financial Statements
Pages
Unaudited Condensed Consolidated Balance Sheets as
of December 31, 2005 and March 31, 2006 2
Unaudited Condensed Consolidated Statements of Income
for the three month periods ended March 31, 2005 and 2006 3
Unaudited Condensed Consolidated Statements of Shareholders'
Equity for the three month period ended March 31, 2006 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 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)
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December 31, March 31,
Notes 2005 2006
----------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 20,447,301 21,283,078
Trade accounts receivable, net 46,118 146,736
Prepaid expenses 85,625 173,000
Claims and other receivables 306,303 97,164
Due from related company 6 3,012,720 238,260
Inventories 3 371,691 613,657
Restricted cash 1,080,949 1,619,446
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Total current assets 25,350,707 24,171,341
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Fixed assets
Vessels, net 52,334,897 51,065,203
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Long-term assets
Deferred charges, net 1,855,829 1,669,034
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Total long-term assets 54,190,726 52,734,237
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Total assets 79,541,433 76,905,578
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Liabilities and shareholders' equity
Current liabilities
Long-term debt, current portion 7 14,430,000 13,005,000
Trade accounts payable 837,182 852,459
Accrued expenses 5 1,777,637 1,795,656
Deferred revenues 4 1,370,058 1,213,645
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Total current liabilities 18,414,877 16,866,760
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Long-term liabilities
Long-term debt, net of current portion 7 34,130,000 31,885,000
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Total long-term liabilities 34,130,000 31,885,000
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Total liabilities 52,544,877 48,751,760
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Commitments and contingencies 10 - -
Shareholders' equity
Common stock (par value $0.01, 100,000,000 shares
authorized, 36,781,159 and 37,860,326 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 9,892,225
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----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 26,996,556 28,153,818
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----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 79,541,433 76,905,578
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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 March 31,
Notes 2005 2006
-------------------------------------------------------------------------------
Revenues
Voyage revenue 12,730,633 9,809,021
Commissions 6 (709,498) (479,583)
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Net revenue 12,021,135 9,329,438
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Operating expenses
Voyage expenses 106,290 541,189
Vessel operating expenses 2,056,850 2,606,100
General and administrative expenses - 234,425
Management fees 6 492,310 511,584
Amortization and depreciation 917,437 1,556,489
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Total operating expenses 3,572,887 5,449,787
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Operating income 8,448,248 3,879,651
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Other income/(expenses)
Interest and finance cost (57,562) (678,366)
Derivative gain/(loss) 8 34,489 -
Foreign exchange gain/(loss) 63 (1,835)
Interest income 62,200 219,432
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Other income (expenses), net 39,190 (460,769)
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Net income 8,487,438 3,418,882
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Earnings per share - basic and diluted 12 0.285 0.093
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Weighted average number of shares
outstanding during the year
- basic and diluted 12 29,754,166 36,829,122
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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 three month period ended March 31, 2006
(All amounts, except per share data, expressed in U.S. Dollars)
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Number Common Preferred
Comprehensive of Shares Shares Paid - in Retained
Income Shares Amount Amount Capital Earnings Total
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Balance
December 31, 2005 36,781,159 367,812 - 17,883,781 8,744,963 26,996,556
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Net income 3,418,882 - - - - 3,418,882 3,418,882
---------
Issuance of shares,
net of issuance
costs 1,079,167 10,791 - (791) - 10,000
Dividends - - - - (2,271,620) (2,271,620)
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Balance
March 31, 2006 37,860,326 378,603 - 17,882,990 9,892,225 28,153,818
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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
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(All amounts expressed in U.S. Dollars)
Three months ended March 31,
2005 2006
----------------------------------------
Cash flows from operating activities:
Net income 8,487,438 3,418,882
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of vessels 595,930 1,269,694
Amortization of deferred charges 335,001 286,795
Changes in operating assets and liabilities:
(Increase)/decrease in:
Trade accounts receivable (36,622) (100,618)
Prepaid expenses 71,244 (87,375)
Claims and other receivables (110,560) 209,139
Inventories 15,034 (241,966)
Due from related company (4,742,824) 2,774,460
Increase/(decrease) in:
Trade accounts payable 334,178 15,277
Accrued expenses 109,418 (62,347)
Deferred revenue 416,144 (156,413)
Dry-docking expenses paid - (19,634)
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Net cash provided by operating activities 5,474,381 7,305,894
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Cash flows from investing activities:
(Contributions to) and drawings from the cash retention accounts (63,471) (538,497)
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Net cash provided by (used in) investing activities (63,471) (538,497)
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Cash flows from financing activities:
Issuance of share capital upon incorporation - 10,791
Net proceeds from shares issued in a private placement - (791)
Dividends paid/return of capital - (2,271,620)
Proceeds from long-term debts 3,600,000 -
Repayment of long-term debts (4,320,000) (3,670,000)
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Net cash provided by (used) in financing activities (720,000) (5,931,620)
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Net increase in cash and cash equivalents 4,690,910 835,777
Cash and cash equivalents at beginning of year 15,497,482 20,447,301
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Cash and cash equivalents at end of year 20,188,392 21,283,078
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Cash paid for interest 148,758 579,739
Non cash items:
Drydock Expense (see Note 10) - 80,366
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 three month periods ended March 31, 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 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. The Company and investors in the institutional private placement
have entered into a registration rights agreement to register the shares that
were issued in such private placement and the shares that will be issued to
satisfy the exercise of the warrants. The registration rights agreement contains
a liquidated damages provision plus an estimated penalty provision.
On August 25, 2005, as a condition to the institutional private placement
described above, the Company and Cove Apparel, Inc. (Cove, an unrelated party
and 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 current
stockholders of Cove receiving 0.102969 shares of Euroseas Ltd. common stock for
each share of Cove common stock they presently own. As part of the merger,
Euroseas Ltd. agreed to file a registration statement with the Securities and
Exchange Commission 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
that would be 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 7,026,993 Euroseas Ltd. common shares and
1,756,743 Euroseas Ltd. common shares issuable upon the exercise of the warrants
issued in connection with the institutional private placement as well as 818,604
shares to be issued to certain Cove's shareholders as part of the merger with
Cove.
The Company submitted on February 10, 2006 an application to list the Euroseas
Ltd. common shares on the OTC Bulletin Board. Euroseas was approved to trade on
the OTC Bulletin Board on March 2, 2006.
On March 27, 2006, Euroseas Ltd. consummated the merger with Cove and, as a
result, Cove merged into Euroseas Acquisition Company Inc., and the separate
corporate existence of Cove ceased. Cove stockholders received 0.102969 shares
of Euroseas Ltd. common shares (or an aggregate of 1,079,167 Euroseas Ltd.
common shares) and received dividends of $0.01339 for each share of Cove common
stock owned (or an aggregate of $140,334) related to dividends previously
declared by Euroseas Ltd. Euroseas Acquisition Company Inc. changed its name to
Cove Apparel, Inc. Following the merger, and following the exchange of all
common stock of Cove into Euroseas Ltd. common shares, Euroseas Ltd. has a total
of 37,860,326 common shares outstanding. Also, 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 and equity of the same amount.
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, 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 (Note 6).
The Company is engaged in the ocean transportation of dry bulk and containers
through the ownership and operation of the following dry bulk 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 Cove Apparel, Inc. incorporated in the State of Delaware on June 21, 2005
as Euroseas Acquisition Company Inc. and renamed Cove Apparel, Inc. after
its merger with Cove Apparel, Inc. on March 27, 2006.
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. 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, 2005. The Pittas family, the controlling
shareholders of Friends Investment Company Ltd., who is the Company's largest
shareholder, also own 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 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 three month period ended March 31, 2006 are not
necessarily indicative of the results that might be expected for the fiscal year
ending December 31, 2006.
The consolidated financial statements as of and for the three months period
ended March 31, 2006 and 2005 should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2005 as filed
with the SEC on Form 424B3.
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 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 March 31, 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 FIFO method while bunkers and
lubricants are valued on an average cost basis.
Vessels
Vessels are stated at cost which comprises the vessels' contract price, costs of
major repairs and improvements upon acquisition, direct delivery and other
acquisition expenses less accumulated depreciation. Subsequent expenditures for
conversions and major improvements are also capitalized when they appreciably
extend the life, increase the earning capacity or improve the efficiency or
safety of the vessels otherwise these amounts are charged to expense as
incurred.
Expenditures for vessel repair and maintenance is charged against income in the
period incurred.
Depreciation
Depreciation is calculated on a straight line basis with reference to the cost
of the vessel, age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel, which
is estimated to range from 25 to 30 years from the completion of its
construction. Remaining useful lives of property are periodically reviewed and
revised to recognize changes in conditions and such revisions, if any, are
recognized over current and future periods.
The Company changed its estimate of the scrap value of its vessels in 2004.
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 the disposal of long-lived assets" when
the following criteria are met: management has committed to a plan to sell the
asset; the asset is available for immediate sale in its present condition; an
active program to locate a buyer and other actions required to complete the plan
to sell the asset have been initiated; the sale of the asset is probable, and
transfer of the asset is expected to qualify for recognition as a completed sale
within one year; the asset is being actively marketed for sale at a price that
is reasonable in relation to its current fair value and actions required to
complete the plan indicate that it is unlikely that significant changes to the
plan will be made or that the plan will be withdrawn.
Long-lived assets classified as held for sale are measured at the lower of their
carrying amount or fair value less cost to sell. These assets are not
depreciated once they meet the criteria to be held for sale.
Impairment of long-lived assets
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. In the evaluation of the fair value and future
benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets.
If the carrying value of the related asset exceeds the undiscounted cash flows,
the carrying value is reduced to its fair value. Various factors including
future charter rates and vessel operating costs are included in this analysis.
The Company determined that no impairment loss needed to be recognized for
applicable assets for any years presented.
Derivative financial instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value with changes in the instruments' fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. Pursuant to SFAS No. 133, the transactions did not qualify as a hedge or
meet the criteria of hedge accounting. All gains or losses on the derivative
financial instruments are reflected in the consolidated statements of income.
For the year ended March 31, 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 March 31, 2005 of
$34,489 is included in claims and other receivables. There were no interest rate
swaps for the year ended March 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
March 31, 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 January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
"Consolidation of Variable Interest Entities," which clarified the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities ("VIEs") only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN
46R), which clarified certain complexities of FIN 46. FIN 46R is applicable for
financial statements issued for reporting periods that end after March 5, 2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard will not have a material impact on the financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually the
vesting period). SFAS No.123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective for our fiscal year 2006.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("FAS 153"). This statement amends APB Opinion N(degree)29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. Under SFAS No. 153, if a non-monetary
exchange of similar productive assets meets a commercial-substance criterion and
fair value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS No. 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
Recent accounting pronouncements (continued)
The FASB has issued SFAS No.154, Accounting Changes and Error Corrections, a
replacement of APB Opinion N(degree)20 and SFAS No. 3. The Statement applies to
all voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle.
SFAS No.154 requires retrospective applications to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. Opinion 20 previously required that most voluntary change in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves financial reporting because its requirements enhance the
consistency of financial information between periods. The Company is analyzing
the effect which this pronouncement will have on its financial condition,
statement of operations, and cash flows. This statement will be effective for
the Company on January 1, 2006. The Company does not believe that this
pronouncement will have and effect on it's financial condition, results of
operation or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." This Statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and resolves issues addressed in Statement 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets."
SFAS No. 155 permits fair value re-measurement for any hybrid financial
instruments that contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS No.
155 also clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The Company has not completed the study of what effect SFAS No. 155 will
have on its financial position and results of operations.
Recent accounting pronouncements - Continued
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating
to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment "(Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47 "Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143", which clarifies the term "conditional asset retirement
obligation" as used in SFAS No. 143 "Accounting for Asset Retirement
Obligations". Specifically, FIN 47 provides that an asset retirement obligation
is conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. Management is currently evaluating the effect
that adoption of FIN 47 will have on the Company's financial position and
results of operations.
3. Inventories
The amounts shown in the accompanying consolidated balance sheets consisted of
the following:
March 31, March 31,
2005 2006
-----------------------------------------------------------------------------
Bunkers - 195,485
Lubricants 312,390 357,239
Victualling 59,301 60,933
-----------------------------------------------------------------------------
Total 371,691 613,657
-----------------------------------------------------------------------------
4. Deferred Revenue
Deferred voyage revenue represents cash received from charterers prior to it
being earned. These amounts are recognized as income in the appropriate future
periods.
5. Accrued Expenses
This account consisted of:
December 31, March 31,
2005 2006
--------------------------------------------------------------------------------
Accrued private placement expenses 1,121,397 886,291
Accrued payroll expenses 31,928 34,283
Accrued interest 139,536 98,627
Accrued general and administrative expenses 269,666 333,349
Other accrued expenses 215,110 443,106
--------------------------------------------------------------------------------
Total 1,777,637 1,795,656
--------------------------------------------------------------------------------
6. Related Party Transactions
The Company's vessel owning companies are parties to management agreements with
Eurobulk Ltd. ("Management Company"), also controlled by the Pittas family,
whereby the Management Company provides technical and commercial management for
a fixed daily fee of Euro 590 per vessel for the periods ended March 31, 2005
and 2006. Such management fees amounted to $482,310 and $511,584 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.
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 periods ended March 31, 2005 and 2006 as there were no vessel sales or
purchases during either period. The commission on charter revenue for the three
month periods ended March 31, 2005 and 2006 amounted to $191,407 and $112,553,
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
shipowning 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 Management
Company during the normal course of operations for which a right of off-set
exists. As of March 31, 2006, the amount due from related companies was
$238,260.
7. Long-term Debt
This consisted of bank loans of the ship-owning companies are as follows:
Borrower December 31, March 31,
2005 2006
--------------------------------------------------------------------------------
Diana Trading Limited (a) $ 6,560,000 $ 5,890,000
Alcinoe Shipping Limited/
Oceanpride Shipping Limited/
Searoute Maritime Ltd/
Oceanopera Shipping Ltd (b) 9,500,000 8,000,000
Alterwall Business Inc./
Allendale Investments S.A (c) 17,000,000 15,500,000
Salina Shipholding Corp. (d) 15,500,000 15,500,000
--------------------------------------------------------------------------------
48,560,000 44,890,000
Current portion (14,430,000) (13,005,000)
--------------------------------------------------------------------------------
Long-term portion $ 34,130,000 $ 31,885,000
--------------------------------------------------------------------------------
The future annual loan repayments
are as follows:
To March 31
--------------------------------------------------------------------------------
2007 (e) 16,005,000
2008 (e) 11,430,000
2009 7,405,000
2010 3,100,000
Thereafter 6,950,000
--------------------------------------------------------------------------------
Total $ 44,890,000
--------------------------------------------------------------------------------
(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 $600,000 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
March 31, 2005 for Alcinoe Shipping Ltd. and Oceanpride Shipping Ltd. The
loan is payable in twelve consecutive quarterly installments consisting of
two installments of $2,000,000 each, one installment of $1,500,000, nine
installments of $600,000 each and a balloon payment of $2,600,000 payable
with the final installment due in May 2008. Interest is based on LIBOR plus
1.5% per annum.
In 2006, an additional early repayment of $3,000,000 will take place due to
the sale of M/V John P and M/V Pantelis P (see Note 9(a) and 9(b)).
(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) Loan repayments for the year to March 31, 2007 include an early repayment
of $3,000,000 due to the sale of M/V "John P" and M/V "Pantelis P" (see
Notes 9 and 13(b)). Correspondingly, loan repayments for the year to March
31, 2008 are adjusted to reflect the early repayment.
In addition to the terms specific to each loan described above, all the above
loans are secured with one or more of the following:
o first priority mortgage over the respective vessels on a joint and several
basis.
o first assignment of earnings and insurance.
o a personal guarantee of one shareholder.
o a corporate guarantee of Eurobulk Ltd. and/or Euroseas Ltd.
o a pledge of all the issued shares of each borrower.
The loan agreements contain covenants such as restrictions as to changes in
management and ownership of the vessels, distribution of profits or assets,
additional indebtedness and mortgaging of vessels without the lender's prior
consent, the sale of vessels, 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 in any of the
foregoing covenants.
8. Derivative Gains
The gains for the period ended March 31, 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 settled in the period ended September 30, 2005.
9. Vessel
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 is to be delivered to the buyers in late June /
early July 2006. As a result of the sale of M/V "John P" and of M/V "Pantelis P"
(see Note 13(b)), the company has agreed to make a $3,000,000 additional
re-payment to the bank financing the above ships along with M/V "Ariel" and M/V
"Nikolaos P" (see Note 7(b)).
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 March 31, 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.
M/V Kuo Hsiung was undergoing drydocking at March 31, 2006. The Company
estimated that a further $200,000 of the total cost is due after March 31, 2006.
An amount of $80,366 was treated as a non-cash item in the statement of cash
flows.
11. Common Stock and Additional Paid-in Capital
Common stock relates to 37,860,326 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 1,079,167 common share were issued to Cove Apparel, Inc.'s
shareholders. 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:
March 31, 2005 March 31, 2006
-------------------------------------------------------------------------------
Income:
Net income 8,487,438 3,418,881
Basic and Diluted earnings per share:
Weighted average common shares -
Outstanding 29,754,166 36,829,122
Basic earnings per share: 0.285 0.093
13. Subsequent Events
(a) On April 10, 2006, Xenia International Corp., a wholly-owned subsidiary of
the company signed a Memorandum of Agreement to purchase "Tasman Trader", a
multipurpose dry cargo vessel of 22,568 DWT and 950 TEU built in 1990 for
$10.82 million. The vessel was delivered to Euroseas Ltd. on April 27,
2006. The acquisition was financed 100% with equity from the company's cash
reserves; the company intends to draw a loan to finance part of the cost of
the acquisition but has not entered into any agreement with any bank.
(b) On April 11, 2006, a subsidiary of the Company agreed to sell M/V "Pantelis
P", a handysize bulk carrier of 26,354 DWT built in 1981 for a gross price
of $4.65 million less 4% sales commissions. The vessel is to be delivered
to the buyers between May 15 and June 30, 2006 at Euroseas Ltd. option. As
a result of the sale of M/V "Pantelis P" and of M/V "John P" (see Note 9),
the company has agreed to make a $3,000,000 additional re-payment to the
bank financing the above ships along with M/V "Ariel" and M/V "Nikolaos P"
(see Note 7(b)).
(c) On May 9, 2006 the Board of Directors declared a cash dividend of $0.06 per
Euroseas Ltd. common share payable on or about June 16, 2006 to the holders
of record of Euroseas Ltd. common shares as of June 2, 2006.
SK 02558 0002 670730