Filed pursuant to Rule No. 424(b)(3)
File Number: 333-129145
EUROSEAS LTD.
PROSPECTUS SUPPLEMENT NO. 2
DATED MAY 4, 2006
TO PROSPECTUS DATED
FEBRUARY 6, 2006
This Prospectus Supplement No. 2 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. 2
supplements, modifies and supersedes some of the information contained in the
Euroseas Prospectus.
The primary purpose of this Prospectus Supplement No. 2 is to update
certain financial information of Euroseas Ltd. to December 31, 2005.
This Prospectus Supplement No. 2 shall also update certain information
contained in the Plan of Distribution contained in the Euroseas Prospectus. BTG
Investments ("BTG"), a wholly owned affiliate of Roth Capital LLC ("Roth
Capital"), purchased shares and warrants in our Private Placement on August 25,
2005 (the "BTG Shares"). Under NASD rules, neither BTG nor Roth Capital will be
permitted to re-sell the BTG Shares until 180 days after the date of the first
sale of Common Stock registered pursuant to the Registration Statement on Form
F-1 (File No. 333-129145).
You should read this Prospectus Supplement No. 2 in conjunction with
the Euroseas Prospectus. This Prospectus Supplement No. 2 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
Consolidated financial statements
December 31, 2004 and 2005
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Index to consolidated financial statements
Pages
Report of Independent Registered Public Accounting Firm 2
Consolidated Balance Sheets as of December 31, 2004 and 2005 3
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2004 and 2005 4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2004 and 2005 5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2004 and 2005 6
Notes to the Consolidated Financial Statements 7
Report of Independent Registered Public Accounting Firm
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To the Board of Directors and Stockholders
of the Euroseas Ltd. and subsidiaries
We have audited the accompanying consolidated balance sheets of the Euroseas Ltd
and subsidiaries (the "Company") as of December 31, 2005 and 2004 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Euroseas Ltd and subsidiaries at
December 31, 2005 and 2004 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte.
Hadjipavlou, Sofianos & Cambanis S.A.
Athens, Greece
March 3, 2006 except for Note 15(e) as to
which the date is March 20, 2006, Note 15(f)
as to which the date is March 27, 2006,
Note 15 (g) to which the date is April
10, 2006 and Note 15 (h) to which the
date is April 11, 2006.
Euroseas Ltd. and Subsidiaries
Consolidated balance sheets
December 31, 2004 and 2005
(All amounts expressed in U.S. Dollars)
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Notes 2004 2005
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Assets
Current assets
Cash and cash equivalents 15,497,482 20,447,301
Trade accounts receivable, net 245,885 46,118
Prepaid expenses 207,551 85,625
Claims and other receivables 137,783 306,303
Due from related company 8 - 3,012,720
Inventories 3 303,478 371,691
Restricted cash 68,980 1,080,949
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Total current assets 16,461,159 25,350,707
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Fixed assets
Vessels, net 4 34,171,164 52,334,897
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Long-term assets
Deferred charges, net 5 2,205,178 1,855,829
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Total long-term assets 36,376,342 54,190,726
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Total assets 52,837,501 79,541,433
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Liabilities and shareholders' equity
Current liabilities
Long-term debt, current portion 9 6,030,000 14,430,000
Trade accounts payable 879,541 837,182
Accrued expenses 7 321,056 1,777,637
Deferred revenues 1,908,189 1,370,058
Due to related company 8 4,626,060 -
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Total current liabilities 13,764,846 18,414,877
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Long-term liabilities
Long-term debt, net of current portion 9 7,960,000 34,130,000
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Total long-term liabilities 7,960,000 34,130,000
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Total liabilities 21,724,846 52,544,877
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Commitments and contingencies 11 - -
Shareholders' equity
Common stock (par value $0.01, 100,000,000 297,542 367,812
shares authorized, 36,781,159 issued and 12
outstanding)
Preferred shares (par value $0.01, 20,000,000
shares authorized, no shares issued and - -
outstanding)
Additional paid-in capital 12 17,073,381 17,883,781
Retained earnings 13,741,732 8,744,963
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Total shareholders' equity 31,112,655 26,996,556
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Total liabilities and shareholders' equity 52,837,501 79,541,433
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The accompanying notes are an integral part of these consolidated
financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of income
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
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Notes 2003 2004 2005
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Revenues
Voyage revenue 25,951,023 45,718,006 44,523,401
Commissions 8 (906,017) (2,215,197) (2,388,349)
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Net revenue 25,045,006 43,502,809 42,135,052
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Operating expenses
Voyage expenses 13 436,935 370,345 670,551
Vessel operating expenses 13 8,775,730 8,906,252 8,610,279
General and administrative expenses - - 420,755
Management fees 8 1,722,800 1,972,252 1,911,856
Amortization and depreciation 4, 5 4,757,933 3,461,678 4,208,252
Net gain on sale of vessel 4 - (2,315,477) -
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Total operating expenses 15,693,398 12,395,050 15,821,693
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Operating income 9,351,608 31,107,759 26,313,359
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Other income/(expenses)
Interest and finance cost (793,257) (708,284) (1,495,871)
Derivative gain/(loss) - 27,029 (100,029)
Foreign exchange gain/(loss) (690) (1,808) 538
Interest income 36,384 187,069 460,457
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Other income (expenses), net (757,563) (495,994) (1,134,905)
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Equity in net loss of an associate 6 (167,433) - -
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Net income 8,426,612 30,611,765 25,178,454
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Earnings per share - basic and diluted 0.28 1.03 0.78
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Weighted average number of shares
outstanding during the year
- basic and diluted 29,754,166 29,754,166 32,218,427
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The accompanying notes are an integral part of these consolidated
financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of shareholders' equity
Years ended December 31, 2003, 2004 and 2005
(All amounts, except per share data, expressed in U.S. Dollars)
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Number Common Preferred
of Stock Shares Paid i in
Comprehensive Shares Amount Amount Capital Retained
Income (Note 12) (Note 12) (Note 12) (Note 12) Earnings Total
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Balance,
December 31,
2002 - 29,754,166 297,542 - 19,573,236 1,414,856 21,285,634
Net income 8,426,612 - - - - 8,426,612 8,426,612
Dividends
paid/return of
capital - - - (950,000) (1,276,000) (2,226,000)
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Balance,
December 31,
2003 29,754,166 297,542 - 18,623,236 8,565,468 27,486,246
Net income 30,611,765 - - - - 30,611,765 30,611,765
Dividends
paid/return of
capital - - - - (1,549,855) (25,435,501) (26,985,356)
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Balance,
December 31,
2004 29,754,166 297,542 - 17,073,381 13,741,732 31,112,655
Net income 25,178,454 25,178,454 25,178,454
Issuance of
shares, net
of issuance
costs 7,026,993 70,270 - 17,510,400 - 17,580,670
Dividends
paid/return
of capital - - - - (16,700,000) (30,175,223) (46,875,223)
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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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The accompanying notes are an integral part of these consolidated
financial statements.
Euroseas Ltd. and Subsidiaries
Consolidated statements of cash flows
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
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2003 2004 2005
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Cash flows from operating activities:
Net income 8,426,612 30,611,765 25,178,454
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of vessels 4,158,159 2,530,100 2,657,914
Amortization of deferred charges 667,176 982,259 1,634,082
Equity in net loss 167,433 - -
Provision for doubtful accounts 3,592 (27,907) -
Gain on sale of a vessel - (2,315,477) -
Loss on derivative - - 100,029
Changes in operating assets and liabilities:
(Increase)/decrease in:
Trade accounts receivable 110,471 213,762 199,767
Prepaid expenses 26,552 (133,437) 121,927
Claims and other receivables (171,731) 208,524 (268,549)
Inventories (7,748) 51,449 (68,213)
Increase/(decrease) in:
Due to related company (482,778) 3,541,236 (7,638,780)
Trade accounts payable (650,863) 77,487 (42,359)
Accrued expenses (43,308) 66,193 334,874
Deferred revenue (274,764) 673,157 (538,131)
Dry-docking expenses paid (972,671) (2,270,418 (1,076,233)
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Net cash provided by operating activities 10,956,132 34,208,693 20,594,782
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Cash flows from investing activities:
Purchase of a vessel - (20,821,647)
(Contributions to) and drawings from
the cash retention accounts 214,832 33,224 (1,011,969)
Proceeds from sale of a vessel - 6,723,018 -
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Net cash provided by (used in) 214,832 6,756,24 (21,833,616)
investing activities
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Cash flows from financing activities:
Issuance of share capital upon incorporation - - 70,270
Net proceeds from shares issued in a - - 18,632,106
private placement
Dividends paid/return of capital (1,200,000) (26,962,50 (46,875,223)
Repayment of advances from shareholders (300,000) - -
Loan arrangement fees paid (28,000) - (208,500)
Proceeds from long-term debts 3,000,000 - 53,200,000
Repayment of long-term debts (6,250,000) (6,605,00) (18,630,000)
----------------------------------------------------------------------------------------------------
Net cash provided by (used) in (4,778,000) (33,567,500) 6,188,653
financing activities
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Net increase in cash and cash equivalents 6,392,964 7,397,435 4,949,819
Cash and cash equivalents at beginning of year 1,707,083 8,100,047 15,497,482
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 8,100,047 15,497,482 20,447,301
----------------------------------------------------------------------------------------------------
Cash paid for interest 725,034 474,430 1,372,957
Non cash items:
Dividend and return of capital from 1,026,000 22,856 -
investment in an associate (Note 6)
The accompanying notes are an integral part of these consolidated
financial statements.
Euroseas Ltd. and Subsidiaries
Notes to the consolidated financial statements
Years ended December 31, 2003, 2004 and 2005
(All amounts expressed in U.S. Dollars)
--------------------------------------------------------------------------------
1. Basis of Presentation and General Information
Euroseas Ltd. (the "Company") was formed on May 5, 2005 under the laws of the
Republic of the Marshall Islands to consolidate the beneficial owners of the
ship-owning companies listed below. On June 28, 2005 the beneficial owners
exchanged all their shares in the ship-owning companies for shares in Friends
Investment Company Inc., a newly formed Marshall Islands company. On June 29,
2005, Friends Investment Company Inc. then exchanged all the shares in the
ship-owning companies for Euroseas Ltd. common shares, thus, becoming the sole
shareholder of the Company. The transaction described above constitutes a
reorganization of companies under common control, and has been accounted for in
a manner similar to a pooling of interests, as each ship-owning company was
under the common control of the Pittas family prior to the transfer of ownership
of the ship-owning companies to Euroseas Ltd. Accordingly, the accompanying
consolidated financial statements have been presented as if the ship-owning
companies were consolidated subsidiaries of the Company for all periods
presented and using the historical carrying costs of the assets and the
liabilities of the ship-owning companies.
On August 25, 2005, Euroseas Ltd. sold 7,026,993 common shares at $3.00 each in
an institutional private placement, together with 0.25 of detachable warrants
for each Euroseas Ltd. common share sold to acquire up to 1,756,743 Euroseas
Ltd. common shares. The total proceeds, net of issuance costs of about
$3,500,000, amounted to $17,510,400. The warrants allow their holders to acquire
Euroseas Ltd. common shares at a price of $3.60 per share and are exercisable
for a period of five years from the issuance of the warrants. The Company and
the investors in the institutional private placement have entered into a
registration rights agreement to register with the Securities and Exchange
Commission of the United States (SEC) the Euroseas Ltd. common shares that were
issued in such private placement and the Euroseas Ltd. common shares that will
be issued to satisfy the exercise of the warrants. The registration rights
agreement contains a liquidated damages provision.
On August 25, 2005, as a condition to the institutional private placement
described above, the Company and Cove Apparel, Inc. (Cove, an unrelated party
and a public corporation) signed an Agreement and Plan of Merger (the "Merger
Agreement"). The Merger Agreement provides for the merger of Cove and Euroseas
Acquisition Company Inc., a Delaware corporation and a wholly-owned subsidiary
of the Company formed on June 21, 2005, with the current stockholders of Cove
receiving 0.102969 shares of Euroseas Ltd. common shares for each share of Cove
common stock they presently own. As part of the merger, the Company has agreed
to file a registration statement with the SEC to register for re-sale the
Euroseas Ltd. common shares issuable in the merger to certain Cove stockholders
(only the 818,604 shares to be issued to Cove-affiliated stockholders, need to
be registered; the remaining 260,563 shares to be issued in the merger can
freely trade). Upon consummation of the merger, the separate existence of Cove
will cease, and Euroseas Acquisition Company Inc. will continue as the surviving
corporation and as a wholly owned subsidiary of Euroseas Ltd. under the name
Cove Apparel, Inc [see Note 15(f)]. As of the date of the merger, Cove is
required only have cash of approximately $10,000 and equity of the same amount.
The operations of the vessels are managed by Eurobulk Ltd. (the "manager"), a
corporation controlled by the Pittas family -- the controlling shareholders of
Friends Investment Company Inc.
The manager has an office in Greece located at 40 Ag. Konstantinou Ave,
Maroussi, Athens, Greece. The manager provides the Company with a wide range of
shipping services such as technical support and maintenance, insurance
consulting, chartering, financial and accounting services, as well as executive
management services, in consideration for fixed and variable fees (see Note 8).
The Company is engaged in the ocean transportation of dry bulk and containers
through ownership and operation of dry bulk and container carriers owned by the
following ship-owning companies:
o Searoute Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the
Cyprus flag 33,712 DWT bulk carrier motor vessel "Ariel", which was built
in 1977 and acquired on March 5, 1993.
o Oceanopera Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of
the Cyprus flag 34,750 DWT bulk carrier motor vessel "Nikolaos P", which
was built in 1984 and acquired on July 22, 1996.
o Oceanpride Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "John P", which was
built in 1981 and acquired on March 7, 1998.
o Alcinoe Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of
the Cyprus flag 26,354 DWT bulk carrier motor vessel "Pantelis P", which
was built in 1981 and acquired on June 4, 1997.
o Alterwall Business Inc. incorporated in Panama on January 15, 2001, owner
of the Panama flag 18,253 DWT container carrier motor vessel "HM Qingdao1"
which was built in 1990 and acquired on February 16, 2001.
o Allendale Investment S.A. incorporated in Panama on January 22, 2002, owner
of the Panama flag 18,154 DWT container carrier motor vessel "Kuo Hsiung",
which was built in 1993 and acquired on May 13, 2002.
o Diana Trading Ltd. incorporated in the Marshall Islands on September 25,
2002, owner of the Marshall Islands flag 69,734 DWT bulk carrier motor
vessel "Irini", which was built in 1988 and acquired on October 15, 2002.
o Salina Shipholding Corp., incorporated in the Marshall Islands on October
20, 2005, owner of the Marshall Islands flag 29,693 DWT container carrier
motor vessel "Artemis", which was built in 1987 and acquired on November
25, 2005.
In addition, the accompanying financial statements include the accounts of the
following ship-owning companies which were also managed by Eurobulk Ltd. during
the periods presented:
(a) Silvergold Shipping Ltd. incorporated in Cyprus on May 16, 1994. Up to June
3, 1996, the Company was engaged in ship owning activities, but thereafter,
the Company's assets and liabilities were liquidated and the retained
earnings were distributed to the shareholders. The Company remained dormant
until October 10, 2000 when it acquired the 18,000 DWT Cyprus flag
container carrier motor vessel "Widar", which was built in 1986. The vessel
was sold on April 24, 2004. The Pittas family, the controlling shareholders
of Friends Investment Company Ltd. which is the Company's largest
shareholder, also owned Silvergold Shipping Ltd., and, accordingly, these
accompanying financial statements also consolidated the accounts of
Silvergold Shipping Ltd. until May 31, 2005, when Silvergold Shipping Ltd.
declared a final dividend of $35,000 to its shareholders.
(b) Fitsoulas Corporation Limited which was incorporated in Malta on September
24, 1999, was the owner of the Malta flag 41,427 DWT bulk carrier motor
vessel Elena Heart, which was built in 1983 and acquired on October 22,
1999. The vessel was sold on March 31, 2003. The group of beneficial
shareholders, which included the Pittas family, which own the above
mentioned ship-owing companies also exercised significant influence over
Fitsoulas Corporation Limited through their 38% interest in that company,
and this investment was therefore accounted for in the accompanying
financial statements using the equity method.
During the years ended December 31, 2003, 2004 and 2005, the following
charterers individually accounted for more than 10% of the Company's voyage and
time charter revenues as follows:
Year ended December 31,
Charterer 2003 2004 2005
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A - - 26.85%
B 23.01% 11.50% 17.48%
C - 20.60% 12.32%
D 31.30% 12.20% -
E - 14.07% -
F - 10.52% -
G 10.55% - -
2. Significant Accounting Policies
The accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The following are the significant accounting policies
adopted by the Company:
Principles of consolidation
The accompanying consolidated financial statements included the accounts of
Euroseas Ltd. and its subsidiaries. Inter-company transactions were eliminated
on consolidation.
Investment in an associate
An associate is an entity over which shareholders of the Company exercises
significant influence but not control. The results of operations, and assets and
liabilities of an associate are reflected in the accompanying consolidated
financial statements using the equity method of accounting. Under this method of
accounting, investment in an associate are carried on the consolidated balance
sheet at cost as adjusted for the Company's share in the post acquisition net
earnings or net loss of an associate.
Use of estimates
The preparation of the accompanying consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the date of the consolidated financial statements, and the stated amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other comprehensive income
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Statement of Comprehensive Income" ("SFAS 130"), which
requires separate presentation of certain transactions which are recorded
directly as components of stockholders' equity. The Company has no other
comprehensive income and, accordingly, comprehensive income equals net income
for all periods presented.
Foreign currency translation
The Company's functional currency is the U.S. dollar. Assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at exchange
rates prevailing at the balance sheet date. Income and expenses denominated in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
at the date of the transaction. Resulting exchange gains and/or losses on
settlement or translation are included in the accompanying consolidated
statements of operations.
Cash equivalents
Cash equivalents are time deposits or other certificates purchased with an
original maturity of three months or less.
Trade accounts receivable
The amount shown as trade accounts receivable, at each balance sheet date,
includes estimated recoveries from each voyage or time charter, net of a
provision for doubtful accounts. At each balance sheet date, the Company
provides for doubtful accounts on the basis of specific identified doubtful
receivables. At December 31, 2004 and 2005, no provision for doubtful debts was
considered necessary.
Claims and other receivables
Claims and other receivables principally represent claims arising from hull or
machinery damages, crew salaries claims or other insured risks that have been
submitted to insurance adjusters or are currently being compiled. All amounts
are shown net of applicable deductibles.
Inventories
Inventories consist of bunkers, lubricants and victualling on board the
Company's vessels at the balance sheet date and are stated at the lower of cost
and market value. Victualling is valued using the FIFO method while bunkers and
lubricants are valued on an average cost basis.
Vessels
Vessels are stated at cost which comprises the vessels' contract price, costs of
major repairs and improvements upon acquisition, direct delivery and other
acquisition expenses less accumulated depreciation. Subsequent expenditures for
conversions and major improvements are also capitalized when they appreciably
extend the life, increase the earning capacity or improve the efficiency or
safety of the vessels otherwise these amounts are charged to expense as
incurred.
Expenditures for vessel repair and maintenance is charged against income in the
period incurred.
Depreciation
Depreciation is calculated on a straight line basis with reference to the cost
of the vessel, age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel, which
is estimated to range from 25 to 30 years from the completion of its
construction. Remaining useful lives of property are periodically reviewed and
revised to recognize changes in conditions and such revisions, if any, are
recognized over current and future periods.
The Company changed its estimate of the scrap value of its vessels in 2004 (see
Note 4).
Revenue and expense recognition
Revenues are generated from voyage and time charter agreements. Time charter
revenues are recorded over the term of the charter as service is provided. Under
a voyage charter, the revenues and associated voyage costs are recognized on a
pro-rata basis over the duration of the voyage. Probable losses on voyages are
provided for in full at the time such losses can be estimated. A voyage is
deemed to commence upon the completion of discharge of the vessel's previous
cargo and is deemed to end upon the completion of discharge of the current
cargo. Demurrage income, which in included in voyage revenues, represents
payments received from the charterer when loading or discharging time exceeded
the stipulated time in the voyage charter and is recognized when earned.
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 December 31, 2004, the interest rate swaps did not qualify
for hedge accounting treatment. Accordingly, all gains or losses have been
recorded in the consolidated statements of income. The fair value at December
31, 2004 of $27,029 is included in claims and other receivables. There were no
interest rate swaps for the year ended December 31, 2005.
Earning per common share
Basic earnings per common share are computed by dividing the net income by the
weighted average number of common shares outstanding during the year. Potential
common shares that are anti-dilutive, such as the warrants outstanding as of
December 31, 2005 since their exercise price exceeds the fair value of Euroseas
Ltd. common shares, are excluded from earnings per share. Additional 1,079,167
Euroseas Ltd. common shares were issued subsequent to December 31, 2005 [see
Note 15(f)].
Segment reporting
The Company reports financial information and evaluates its operations by
charter revenue and not by the length of ship employment for its customers, i.e.
spot or time charters. The Company does not use discrete financial information
to evaluate the operating results for each such type of charter. Although
revenue can be identified for these types of charters, management cannot and
does not identify expenses, profitability or other financial information for
these charters. As a result, management, including the chief operating decision
maker, reviews operating results solely by revenue per day and operating results
of the fleet and thus the Company has determined that it operates under one
reporting segment. Furthermore, when the Company charters a vessel to a
charterer, the charterer is free to trade the vessel worldwide and, as a result,
the disclosure of geographical information is impracticable.
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
"Consolidation of Variable Interest Entities," which clarified the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
address perceived weaknesses in accounting for entities commonly known as
special-purpose or off-balance sheet entities. It provides guidance for
identifying the party with a controlling financial interest resulting from
arrangements or financial interests rather than voting interests. It requires
consolidation of Variable Interest Entities ("VIEs") only if those VIEs do not
effectively disperse the risks and benefits amount the various parties involved.
On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN
46R), which clarified certain complexities of FIN 46. FIN 46R is applicable for
financial statements issued for reporting periods that end after March 5, 2004.
The Company has reviewed FIN 46R and determined that the adoption of the
standard will not have a material impact on the financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award-the requisite service period (usually the
vesting period). SFAS No.123R applies to all awards granted after the required
effective date, as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective for our fiscal year 2006.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
Recent accounting pronouncements (continued)
On December 16, 2004, FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("FAS 153"). This statement amends APB Opinion N(degree)29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. Under SFAS No. 153, if a non-monetary
exchange of similar productive assets meets a commercial-substance criterion and
fair value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS No. 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
The FASB has issued SFAS No.154, Accounting Changes and Error Corrections, a
replacement of APB Opinion N(degree)20 and SFAS No. 3. The Statement applies to
all voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle.
SFAS No.154 requires retrospective applications to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. Opinion 20 previously required that most voluntary change in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves financial reporting because its requirements enhance the
consistency of financial information between periods. The Company is analyzing
the effect which this pronouncement will have on its financial condition,
statement of operations, and cash flows. This statement will be effective for
the Company on January 1, 2006. The Company does not believe that this
pronouncement will have and effect on it's financial condition, results of
operation or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." This Statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and resolves issues addressed in Statement 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets."
SFAS No. 155 permits fair value re-measurement for any hybrid financial
instruments that contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS No.
155 also clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and amends SFAS No. 140 to eliminate
the prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The Company has not completed the study of what effect SFAS No. 155 will
have on its financial position and results of operations.
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating
to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment "(Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47 "Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143", which clarifies the term "conditional asset retirement
obligation" as used in SFAS No. 143 "Accounting for Asset Retirement
Obligations". Specifically, FIN 47 provides that an asset retirement obligation
is conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005. Management is currently evaluating the effect
that adoption of FIN 47 will have on the Company's financial position and
results of operations.
3. Inventories
This consisted of the following:
2004 2005
---------------------------------------------------------------------
Lubricants 256,223 312,390
Victualling 47,255 59,301
---------------------------------------------------------------------
Total 303,478 371,691
---------------------------------------------------------------------
4. Vessels, net
The amounts in the accompanying consolidated balance sheets are as follows:
Accumulated Net Book
Costs Depreciation Value
-------------------------------------------------------------------------------
Balance, January 1, 2004 61,587,219 (20,491,150) 41,096,069
- Depreciation for the year - (2,530,100) (2,530,100)
- Sale of vessel (5,826,825) 1,432,020 (4,394,805)
-------------------------------------------------------------------------------
Balance, December 31, 2004 55,760,394 (21,589,230) 34,171,164
-------------------------------------------------------------------------------
- Depreciation for the year (2,657,914) (2,657,914)
- Purchase of vessel 20,821,647 - 20,821,647
-------------------------------------------------------------------------------
Balance, December 31, 2005 76,582,041 (24,247,144) 52,334,897
-------------------------------------------------------------------------------
The Company increased in 2004 its estimate of the scrap value of the
vessels to reflect increases in the market price in the scrap metal market. The
effect of this change in estimate was to reduce 2004 depreciation expense by
$1,400,010 and increase 2004 net income by the same amount, or $0.05 per share.
In addition, in 2004, the estimated useful life of the vessel M/V Ariel
was extended from 28 years to 30 years as a result of the dry-docking performed
in such year.
M/V Widar was sold in April 2004 and the Company recognized net gain on
sale of $2,315,477. Depreciation expense for M/V Widar for the year ended
December 31, 2004 amounted to $136,384.
5. Deferred Charges, net
This consisted of:
2004 2005
--------------------------------------------------------------------------------
Balance, beginning of year 929,757 2,205,178
Additions 2,270,418 1,284,733
Amortization of dry-docking/
special survey expenses (931,578) 1,550,338)
Amortization of loan arrangement fees (50,681) (83,744)
Unamortized portion written-off upon sale of (12,738) -
M/V Widar
--------------------------------------------------------------------------------
Balance, end of year 2,205,178 1,855,829
--------------------------------------------------------------------------------
The additions of $1,284,733 in 2005 consisted of loan financing fees of $208,500
and dry-docking/special survey expenses of $1,076,233. The additions of
$2,270,418 in 2004 consisted of dry-docking/special survey expenses.
6. Investment in an Associate
Fitsoulas Corporation Limited is 38% owned by common shareholders with the
ship-owning companies listed in Note 1 to the financial statements. The amounts
in the accompanying consolidated financial statements are as follows:
Fitsoulas Corporation Limited sold its vessel on March 31, 2003. The Company's
share of the net loss inclusive of the loss on sale of the vessel of Fitsoulas
Corporation Limited was $167,433 for the year ended December 31, 2003.
Thereafter, dividends of $76,000 were declared and capital of $950,000 was
returned directly to the shareholders in 2003 and dividend of $22,856 were
declared and returned directly to the shareholders in 2004.
7. Accrued Expenses
This account consisted of:
2004 2005
--------------------------------------------------------------------------------
Accrued private placement expenses - 1,121,397
Accrued payroll expenses 95,615 31,928
Accrued interest 100,366 139,536
Accrued general and administrative expenses - 269,666
Other accrued expenses 125,075 215,110
-------------------------------------------------------------------------------
Total 321,056 1,777,637
-------------------------------------------------------------------------------
8. Related Party Transactions
Management fees paid to the Manager (see Note 1) amounted to $1,772,800,
$1,972,252 and $1,911,856 in 2003, 2004 and 2005, respectively.
Amounts due from related party represent net disbursements and collections made
by the Manager on behalf of the ship-owning companies during the normal course
of operations for which they have the right of offset. Amounts due from related
parties mainly consist of advances to the Manager of funds to pay for all
anticipated vessel expenses. The amount of $3,012,720 due from related parties
as of December 31, 2005 therefore consists entirely of deposits in the accounts
of the Manager. As of February 28, 2006 the amount due from related party was
about $676,675. Interest earned on funds deposited in related party accounts is
credited to the account of the ship-owning companies or Euroseas Ltd.
The Company uses brokers for various services, as is industry practice.
Eurochart S.A., a company controlled by certain members of the Pittas family and
therefore a related party, provides vessel sales and purchases services, and
chartering services to the Company whereby the Company pays commission of 1% of
the vessel sales price and 1.25% of charter revenues. Commission expenses for
the years ended December 31, 2003, 2004 and 2005 for vessel sales were $0,
$70,000 and $206,500, respectively, and commissions for chartering services were
$286,605, $534,717 and $536,180, also respectively.
Certain members of the Pittas family together with another unrelated ship
management company, have one joint venture with the insurance broker Sentinel
Maritime Services Inc. and one with the crewing agent More Maritime Agencies
Inc. The shareholders' percentage participation in these joint ventures was 27%
in 2003, 35% in 2004 and 48% in 2005. Total fees charged by Sentinel Marine
Services Inc. and More Maritime Agencies Inc. in 2004 were $209,685 and $23,543,
respectively, and $219,400 and $45,277, respectively, in 2005.
9. Long-Term Debt
This consisted of bank loans of the ship-owning companies are as follows:
December 31,
------------
Borrower 2004 2005
-------------------------------------------------------------------------------------------
Diana Trading Limited (a) 4,140,000 6,560,000
Alcinoe Shipping Limited/
Oceanpride Shipping Limited/
Searoute Maritime Ltd/
Oceanopera Shipping Ltd (b) 1,600,000 9,500,000
Alterwall Business Inc./
Allendale Investments S.A (c) 8,250,000 17,000,000
Salina Shipholding Corp. (d) 15,500,000
----------------------------------------------------- ------ -------------- -----------------
13,990,000 48,560,000
Current portion (6,030,000) (14,430,000)
----------------------------------------------------- ------ -------------- -----------------
Long-term portion 7,960,000 34,130,000
----------------------------------------------------- ------ -------------- -----------------
The future annual loan repayments are as follows:
------------------------------------------------------------------- ------- -----------------
2006 14,430,000
2007 11,780,000
2008 11,230,000
2009 3,720,000
Thereafter 7,400,000
------------------------------------------------------------------- ------- -----------------
Total 48,560,000
------------------------------------------------------------------- ------- -----------------
(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) The balance as of December 31, 2004 represents the balance of the
$3,000,000 loan drawn by Alcinoe Shipping Limited and Oceanpride Shipping
Limited on April 1, 2003 against a loan facility for which they are jointly
and severally liable. Interest is based on LIBOR plus 1.75% per annum.
Alcinoe Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd. drew $13,500,000 against a loan facility for which
they are jointly and severally liable. Prior to obtaining the loan, an
amount of $1,400,000 was paid in settlement of the outstanding loans as at
March 31, 2005 for Alcinoe Shipping Ltd. and Oceanpride Shipping Ltd. The
loan is payable in twelve consecutive quarterly installments consisting of
two installments of $2,000,000 each, one installment of $1,500,000, nine
installments of $600,000 each and a balloon payment of $2,600,000 payable
with the final installment due in May 2008. Interest is based on LIBOR plus
1.5% per annum.
(c) The loan balance as of December 31, 2004 consisted of the following loans:
i. A $6,000,000 loan drawn by Allendale Investments S.A. on May 31, 2002
with a balance of $4,500,000. The interest was based on LIBOR plus
1.75% per annum.
ii. A $6,000,000 loan drawn by Alterwall Business Inc. with a balance of
$3,750,000. The interest was based on LIBOR plus 1.5% per annum.
Allendale Investments S.A. and Alterwall Business Inc. drew $20,000,000 on
May 26, 2005 against a loan facility for which they are jointly and
severally liable. The outstanding amount of their existing loans from the
same creditor bank was $7,800,000 and was repaid in full. The loan is
payable in twenty-four unequal consecutive quarterly installments of
$1,500,000 each in the first year, $1,125,000 each in the second year,
$775,000 each in the third year, $450,000 each in the fourth through sixth
years and a balloon payment of $1,000,000 payable with the final
installment due in May 2011. The interest is based on LIBOR plus 1.25% per
annum as long as the outstanding loan amount remains below 60% of the fair
market value (FMV) of M/V HM Qingdao I and M/V Kuo Hsiung and 1.375% if the
outstanding loan amount is above 60% of the FMV of such vessels.
(d) This is a $15,500,000 loan drawn by Salina Shipholding Corp. on December
30, 2005. The loan is payable in ten consecutive monthly installments
consisting of six installments of $1,750,000 each and four installments of
$650,000 each and a balloon payment of $2,400,000 payable with the final
installment in January 2011. The first installment is due in June 2006. The
interest is based on LIBOR plus a margin that ranges between 0.9-1.1%,
depending on the asset cover ratio. The loan is secured with the following:
(i) first priority mortgage over M/V Artemis, (ii) first assignment of
earnings and insurance of M/V Artemis, (iii) a corporate guarantee of
Euroseas Ltd., and (iv) a minimum cash balance equal to an amount of no
less than $300,000 in an account Salina Shipholding Corp. maintains with
the bank, and, overall liquidity (cash and cash equivalents) of $300,000
for each of the Company's vessels throughout the life of the facility.
In addition to the terms specific to each loan described above, all the
above loans are secured with one or more of the following:
o first priority mortgage over the respective vessels on a joint and
several basis.
o first assignment of earnings and insurance.
o a personal guarantee of one shareholder.
o a corporate guarantee of Eurobulk Ltd. and/or Euroseas Ltd.
o a pledge of all the issued shares of each borrower.
The loan agreements contain covenants such as restrictions as to changes in
management and ownership of the vessels, distribution of profits or assets,
additional indebtedness and mortgaging of vessels without the lender's prior
consent, the sale of vessels, minimum requirements regarding the hull ratio
cover and minimum cash retention accounts (restricted cash). Restricted cash are
deposits with certain banks that can only be used to pay the current loan
installments. The Company is not in default in any of the foregoing covenants.
Interest expenses for the years ended December 31, 2003, 2004 and 2005 amounted
to $609,741, $566,880 and $1,412,127
10. Income Taxes
Under the laws of the countries of the companies' incorporation and/or vessels'
registration, the companies are not subject to tax on international shipping
income, however, they are subject to registration and tonnage taxes, which have
been included in Vessel operating expenses in the accompanying consolidated
statements of income.
Pursuant to the Internal Revenue Code of the United States (the "Code"), U.S.
source income from the international operations of ships is generally exempt
from U.S tax if the company operating the ships meets certain requirements.
Among other things, in order to qualify for this exemption, the company
operating the ships must be incorporated in a country, which grants an
equivalent exemption from income taxes to U.S corporations. All the company's
ship-operations subsidiaries satisfy this particular criteria. In addition these
Companies must be more than 50% owned by individuals who are residents as
defined in the countries of incorporation or another foreign country that grants
an equivalent exemption to U.S corporations. These companies also currently
satisfy the more that 50% benefit ownership requirement. In addition, upon
completion of the public offering of the company' shares, the management of the
Company believes that by virtue of the special rule applicable to situations
where the ship operating companies are beneficially owned by a publicly traded
company like the Company, the more than 50% beneficial ownership requirement can
also be satisfied based on the trading volume and the anticipated widely held
ownership of the Company's shares, but no assurance can be given that this will
remain so in the future, since continued compliance with this rule is subject to
factors outside the Company's control.
11. Commitments and Contingencies
There are no material legal proceedings to which the Company is a party or to
which any of its properties are subject, other than routine litigation
incidental to the Company's business. In the opinion of the management, the
disposition of these lawsuits should not have a material impact on the
consolidated results of operations, financial position and cash flows.
The distribution of the net earnings by one of the chartering pools which has
one of the Company's vessels in its pool has not yet been finalized for the year
ended December 31, 2005. Any effect on the Company's income resulting from any
future reallocation of pool income cannot be reasonably estimated, however, the
effect on the results for the year is not expected to be significant.
12. Common Stock and Additional Paid -in Capital
Common stock relates to 36,781,159 shares with a par value of $0.01 each. The
amount shown in the accompanying consolidated balance sheets, as additional
paid-in capital, represents payments received in excess of par value which is
treated from the accounting point of view as capital. In 2005, the Company sold
7,026,993 common shares in an institutional private placement, together with
0.25 detachable warrants for each common share to acquire up to 1,756,743 common
shares (see Note 1). The value of the warrants, which is included in "Additional
Paid-in Capital," was estimated to be about $600,000.
13. Voyage, Vessel Operating Expenses and Commissions
These consisted of:
Year ended December 31,
-----------------------------
2003 2004 2005
-------------------------------------------------------------------------------
Voyage expense
Port charges and canal dues 179,745 165,661 234,535
Bunkers 227,398 182,026 416,712
Agency fees 29,792 22,658 19,304
------------------------------------------------------------------------------
Total 436,935 370,345 670,551
------------------------------------------------------------------------------
Vessel operating expenses
Crew wages and related costs 4,569,039 4,460,233 4,281,680
Insurance 1,334,517 1,486,179 1,525,683
Repairs and maintenance 595,194 515,820 515,373
Lubricants 455,931 446,034 484,930
Spares and consumable stores 1,555,286 1,660,600 1,465,063
Professional and legal fees 34,206 46,997 23,975
Others 231,557 290,389 313,575
------------------------------------------------------------------------------
Total 8,775,730 8,906,252 8,610,279
------------------------------------------------------------------------------
Commission consisted of commissions charged by:
Year ended December 31,
-----------------------------
2003 2004 2005
-------------------------------------------------------------------------------
Third parties 619,552 1,610,480 1,645,669
Related parties (see Note 8) 286,605 604,717 742,680
------------------------------------------------------------------------------
906,017 2,215,197 2,388,349
------------------------------------------------------------------------------
14. Financial Instruments
The principal financial assets of the Company consists of cash on hand and at
banks, interest rate swaps and accounts receivable due from charterers. The
principal financial liabilities of the Company consist of long-term loans and
accounts payable due to suppliers.
Interest rate risk
The Company entered into interest rate swap contracts as economic hedges to its
exposure to variability in its floating rate long term debt. Under the terms of
the interest rate swaps the Company and the bank agreed to exchange, at
specified intervals the difference between a paying fixed rate and floating rate
interest amount calculated by reference to the agreed principal amounts and
maturities. Interest rate swaps allow the Company to convert long-term
borrowings issued at floating rates into equivalent fixed rates. Even though the
interest rate swaps were entered into for economic hedging purposes, the
derivatives described below do not qualify for accounting purposes as fair value
hedges, under FASB Statement No. 133, Accounting for derivative instruments and
hedging activities, as the Company does not have currently written
contemporaneous documentation, identifying the risk being hedged, and both on a
prospective and retrospective basis performed an effective test supporting that
the hedging relationship is highly effective. Consequently, the Company
recognizes the change in fair value of these derivatives in the consolidated
statements of income.
Concentration of credit risk
Financial instruments, which potentially subject the Company to significant
concentration of credit risk consist primarily of cash and trade accounts
receivable. The Company places its temporary cash investments, consisting mostly
of deposits, with high credit qualified financial institutions. The Company
performs periodic evaluation of the relative credit standing of these financial
institutions that are considered in the Company's investment strategy. The
Company limits its credit risk with accounts receivable by performing ongoing
credit evaluations of its customers' financial condition and generally does not
require collateral for its accounts receivable.
Fair value
The carrying values of cash, accounts receivable and accounts payable are
reasonable estimates of their fair value due to the short term nature of these
financial instruments. The fair value of long term bank loans bearing interest
at variable interest rates approximates the recorded values.
15. Subsequent Events
(a) The SEC declared effective on February 3, 2006 the Company's
registration statement on Form F-4 that registered the 1,079,167
Euroseas Ltd. common shares that will be issued to Cove shareholders
(see Note 1). A definitive joint information statement/prospectus
describing the merger was mailed to Cove stockholders on or about
February 8, 2006. The Cove common stock will continue to trade on the
OTC Bulletin Board until the consummation of the merger [see item (f)
below].
(b) The SEC also declared effective on February 3, 2006 the Company's
registration statement on Form F-1 that registered the re-sale of the
7,026,993 Euroseas Ltd. common shares and 1,756,743 Euroseas Ltd.
common shares issuable upon the exercise of the warrants issued in
connection with the institutional private placement as well as 818,604
shares to be issued to certain Cove's shareholders as part of the
merger with Cove (see Note 1).
(c) On February 7, 2006 the Board of Directors declared a cash dividend of
$0.06 per Euroseas Ltd. common share (i) payable on or about March 2,
2006 to the holders of record of Euroseas Ltd. common shares as of
February 28, 2006, and (ii) payable to Cove shareholders who are
entitled to receive Euroseas Ltd. common shares in connection with the
merger, with such payment being made only to the holders of record of
Cove common stock as of the effective date of the merger and such
dividend payment being made upon exchange of their Cove common shares
for Euroseas Ltd. common shares [see item (f) below].
(d) The Company submitted on February 10, 2006 an application to list the
Euroseas Ltd. common shares on the OTC Bulletin Board. Euroseas was
approved to trade on the OTC Bulletin Board on March 2, 2006 pending
approval by the NASD.
(e) On March 20, 2006, a subsidiary of the Company signed a Memorandum of
Agreement to sell M/V "John P", a handysize bulk carrier of 26,354 DWT
built in 1981 for $4.95 million. The vessel is to be delivered to the
buyers in late June / early July 2006.
(f) On March 27, 2006, Euroseas Ltd. consummated the merger with Cove and,
as a result, Cove merged into Euroseas Acquisition Company Inc., and
the separate corporate existence of Cove ceased. Cove stockholders
received 0.102969 shares of Euroseas Ltd. common shares (or an
aggregate of 1,079,167 Euroseas Ltd. common shares) and received
dividends of $0.01339 for each share of Cove common stock owned (or an
aggregate of $140,334) related to dividends previously declared by
Euroseas Ltd. Euroseas Acquisition Company Inc. changed its name to
Cove Apparel, Inc. Following the merger, and following the exchange of
all common stock of Cove into Euroseas Ltd. common shares, Euroseas
Ltd. has a total of 37,860,326 common shares outstanding. Also, the
common stock of Cove has been de-listed and no longer trades on the
OTC Bulletin Board.
(g) On April 10, 2006, a subsidiary of the Company signed a Memorandum of
Agreement to purchase "Tasman Trader", a multipurpose dry cargo vessel
of 22,568 DWT and 950 TEU built in 1990 for $10.78 million. The vessel
is to be delivered to Euroseas Ltd. between April 25 and May 8, 2006
at the sellers' option.
(h) On April 11, 2006, a subsidiary of the Company agreed to sell M/V
"Pantelis P", a handysize bulk carrier of 26,354 DWT built in 1981 for
$4.65 million. The vessel is to be delivered to the buyers between May
15 and June 30, 2006 at Euroseas Ltd. option.
SK 02558 0002 667417