Filed pursuant to Rule No. 424(b)(3)
File Number: 333-129144
EUROSEAS LTD.
PROSPECTUS SUPPLEMENT NO. 1
DATED FEBRUARY 15, 2006
TO JOINT INFORMATION STATEMENT/PROSPECTUS DATED
FEBRUARY 6, 2006
This Prospectus Supplement No. 1 supplements information contained in our
joint information statement/prospectus dated February 6, 2006, as amended and
supplemented from time to time (the "Euroseas Prospectus"). The information in
this Supplement No. 1 supplements, modifies and supersedes some of the
information contained in the Euroseas Prospectus.
The primary purpose of this Prospectus Supplement No.1 is to update certain
financial information of Euroseas Ltd. to September 30, 2005.
You should read this Prospectus Supplement No. 1 in conjunction with the
Euroseas Prospectus. This Prospectus Supplement No. 1 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 Consolidated Financial Statements
for the Nine Month Periods Ended
September 30, 2004 and 2005
Euroseas Ltd. and Subsidiaries
Unaudited Consolidated Financial Statements
September 30, 2004 and 2005
--------------------------------------------------------------------------------
Index to Unaudited Consolidated Financial Statements
Pages
Unaudited Consolidated Balance Sheets as of December 31, 2004
and September 30, 2005 -
Unaudited Consolidated Statements of Income for the nine
month periods ended September 30, 2004 and 2005 -
Unaudited Consolidated Statements of Shareholders' Equity
for the nine month period ended September 30, 2005 -
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2004 and 2005 -
Notes to the Unaudited Consolidated Financial Statements -
Euroseas Ltd. and Subsidiaries
Unaudited Consolidated Balance Sheets
(All amounts expressed in U.S. Dollars)
--------------------------------------------------------------------------------
December 31, September 30,
Notes 2004 2005
(Unaudited)
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 15,497,482 5,243,612
Accounts receivable trade, net 245,885 75,547
Prepaid expenses 207,551 166,560
Claims and other receivables 137,783 422,939
Due from related party 5 - 24,438,888
Inventories 3 303,478 306,008
Restricted cash 68,980 1,166,827
--------------------------------------------------------------------------------
Total current assets 16,461,159 31,820,381
--------------------------------------------------------------------------------
Fixed assets
Vessels, net 34,171,164 32,382,377
--------------------------------------------------------------------------------
Total fixed assets 34,171,164 32,382,377
--------------------------------------------------------------------------------
Other long-term assets
Deferred charges, net 2,205,178 1,963,298
--------------------------------------------------------------------------------
Total long-term assets 2,205,178 1,963,298
--------------------------------------------------------------------------------
Total assets 52,837,501 66,166,056
--------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Long-term debt, current portion 6,030,000 12,854,998
Trade accounts payable 879,541 881,246
Accrued expenses 321,056 1,565,292
Deferred revenue 4 1,908,189 1,064,217
Due to related parties 5 4,626,060 -
--------------------------------------------------------------------------------
Total current liabilities 13,764,846 16,365,753
--------------------------------------------------------------------------------
Long-term liabilities
Long-term debt, net of current portion 7,960,000 24,375,002
--------------------------------------------------------------------------------
Total long-term liabilities 7,960,000 24,375,002
--------------------------------------------------------------------------------
Total liabilities 21,724,846 40,740,755
--------------------------------------------------------------------------------
Commitments and contingencies 8 -
Shareholders' equity
Common stock (par value $0.01,
100,000,000 shares
authorized, 36,781,159 issued
and outstanding) 297,542 367,812
Preferred shares (par value $0.01,
20,000,000 liquidation
preference shares authorized,
no shares issued and outstanding) - -
Additional paid-in capital 17,073,381 18,383,781
Retained earnings 13,741,732 6,673,708
--------------------------------------------------------------------------------
Total shareholders' equity 31,112,655 25,425,301
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity 52,837,501 66,166,056
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Euroseas Ltd. and Subsidiaries
Unaudited Consolidated Statements of Income
(All amounts expressed in U.S. Dollars)
--------------------------------------------------------------------------------
Nine months ended
September 30,
2004 2005
Notes (Unaudited) Unaudited)
--------------------------------------------------------------------------------
Revenues
Voyage revenue 32,930,177 34,091,505
Commissions (1,601,152) (1,847,900)
--------------------------------------------------------------------------------
Net revenue 31,329,020 32,243,605
--------------------------------------------------------------------------------
Operating expenses
Voyage expenses 243,796 136,224
Vessel operating expenses 6,782,495 6,322,677
Management fees 1,472,501 1,430,464
General and administrative expenses - 130,864
Amortization and depreciation 2,474,524 2,806,348
Gain on sale of vessel (2,315,508) -
--------------------------------------------------------------------------------
Total operating expenses 8,657,808 10,826,577
--------------------------------------------------------------------------------
Operating income 22,671,212 21,417,028
--------------------------------------------------------------------------------
Other income/(expenses)
Interest and finance costs (435,530) (1,109,262)
Derivative loss 6 (91,433) (100,029)
Foreign exchange gain/(loss) (3,867) 539
Interest income 49,582 248,700
--------------------------------------------------------------------------------
Other income/(expenses), net (481,248) (960,052)
--------------------------------------------------------------------------------
Net income for the period 22,189,964 20,456,976
--------------------------------------------------------------------------------
Earnings per share - basic 7 0.746 0.664
- diluted 7 0.746 0.658
--------------------------------------------------------------------------------
Weighted average number of shares
outstanding during the period - basic 7 29,754,166 30,821,557
- diluted 7 29,754,166 31,088,404
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Euroseas Ltd. and Subsidiaries
Unaudited Consolidated Statements of Changes in Shareholders' Equity
For the nine month period ended September 30, 2005
(All amounts, except per share data, expressed in U.S. Dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Common Preferred
Comprehensive Number Shares Shares Paid-in Retained
Income of Shares Amount Amount Capital Earnings Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2004 29,754,166 297,542 - 17,073,381 13,741,732 31,112,655
Net income 20,456,976 - - - - 20,456,976 20,456,976
Issuance of shares,
net of issuance costs 7,026,993 70,270 - 18,010,400 - 18,080,670
costs
Dividends/return of capital - - - (16,700,000) (27,525,000) (44,225,000)
-----------------------------------------------------------------------------------------------------------------------------------
Balance
September 30, 2005 36,781,159 367,812 - 18,383,781 6,673,708 25,425,301
(unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(All amounts expressed in U.S. Dollars)
----------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------------------
2004 2005
(Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 22,189,964 20,456,976
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,931,671 1,788,788
Amortization for deferred dry-docking expenses 543,853 1,017,560
Amortization for deferred finance costs 35,796 71,159
Gain on sale of vessel (2,315,508) -
Provision for doubtful accounts (27,907) -
Loss on derivative 91,433 100,029
Investment in associate 22,856 -
Changes in operating assets and liabilities:
(Increase)/decrease in:
Accounts receivable trade (109,654) 170,338
Prepaid expenses (154,335) 40,991
Claims and other receivables 227,845 (385,185)
Inventories 60,515 (2,530)
Due from related companies (9,415,719) (29,064,948)
Increase/(decrease) in:
Trade accounts payable 655,726 1,705
Accrued expenses (180,985) (52,464)
Deferred revenue (160,428) (843,972)
Deferred dry-docking expenses (2,267,918) (689,339)
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,127,205 (7,390,892)
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase)/decrease in cash retention accounts 49,037 (1,097,848)
Proceeds from sale of vessel 6,723,050 -
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 6,772,087 (1,097,848)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Loan arrangement fees paid - (157,500)
Dividends paid/ return of capital (11,547,551) (44,225,000)
Issuance of share capital - 70,270
Proceeds from shares issued in a private placement - 19,307,099
Proceeds from long term debt - 37,700,000
Repayment of long-term debt (5,885,000) (14,459,999)
----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,432,551) (1,765,130)
----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 466,741 (10,253,870)
Cash and cash equivalents at beginning of period 8,100,047 15,497,482
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 8,566,788 5,243,612
----------------------------------------------------------------------------------------------------------------
Cash paid for interest 342,977 942,620
----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
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 $3,000,000 amounted to $18,010,400. 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 institution 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 (see Note 8), 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. has 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 consummation of the merger is expected in March
2006. 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 operating subsidiary of Euroseas Ltd. under
the name Cove Apparel, Inc. On the date of the merger, the parties agreed that
Cove will only have cash of approximately $10,000 and equity of the same amount.
In the event the Merger does not occur, Friends is entitled to receive for no
additional consideration such shares of common stock that would have otherwise
been issued in connection with the Merger (refer to note 9).
The operations of the vessels are managed by Eurobulk Ltd. (the "manager"), a
corporation controlled by 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 4).
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.
In addition, the historical financial statements include the accounts of the
following vessel owning companies which were 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., 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.
During the nine month periods ended September 30, 2004 and 2005, the following
charterers individually accounted for more than 10% of the Company's voyage and
time charter revenues as follows:
Nine months ended September 30,
Charterer 2004 2005
--------------------------------------------------------------------------
A - 24.75%
B - 17.75%
C 19.5% 16.12%
D 14.01% -
E 13.9% -
F 11.0% -
The accompanying consolidated financial statements have been prepared in
accordance with U.S. generally accepted principles for interim financial
information. 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 nine month period
ended September 30, 2005 are not necessarily indicative of the results that
might be expected for the fiscal year ending December 31, 2005.
The consolidated financial statements as of and for the nine months period ended
September 30, 2005 and 2004 should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2004 as filed
on Form F-1/A.
2. Inventories
The amounts shown in the accompanying consolidated balance sheets consisted of
the following:
December 31, September 30,
2004 2005
(Unaudited)
-----------------------------------------------------------------------------
Lubricants 256,223 238,251
Victualling 47,255 67,757
-----------------------------------------------------------------------------
Total 303,478 306,008
-----------------------------------------------------------------------------
3. Deferred Revenue
The account relates to deferred voyage revenue that represents cash received
from charterers prior to it being earned. These amounts are recognized as income
in the periods the services are provided.
4. 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 September 30,
2004 and 2005. Such management fees amounted to $1,472,501 and $1,430,464 in
2004 and 2005, 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. The amount paid to Eurochart S.A. for the 1% commission
amounted to $70,000 in the period ended September 30, 2004 and none in the
period ended September 30, 2005. There were no vessel sales during the period
ended September 30, 2005. The commission on charter revenue for the nine month
periods ended September 30, 2004 and 2005 amounted to $411,068 and $402,809,
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 35% in 2004 and 58% in
2005. These companies handle certain insurance fees and crewing costs for the
shipowning subsidiaries and their fees are included in operating expenses.
Amounts due to 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 September
30, 2005, the amount due from related companies was $24 million which mainly
reflect proceeds from the offering of $20 million as well as charter hire for
m/v Nikolaos P, John P and Pantelis P up to May 31, 2005 and for m/v Irini up to
June 30, 2005. The proceeds or collection from the charter hires were deposited
in the bank accounts of Silvergold Shipping Ltd (see Note 1), the company that
owned m/v Widar which was sold on April 24, 2004. The accompanying consolidated
financial statements consolidated the accounts of Silvergold Shipping Ltd. until
May 31, 2005 when Silvergold Shipping Ltd. paid a final dividend of $35,000 to
its shareholders. Silvergold Shipping Ltd., as the related party which is a
company also controlled by the Pittas family, continued to perform a treasury
function for us as of September 30, 2005, and therefore the cash balance that
date remained in the related party's account. The Company has subsequently
opened bank accounts in the name of Euroseas and the majority of the funds have
been transferred to these accounts.
5. Long-term Debt
Long-term debt comprises bank loans granted to the vessel-owning companies as
follows:
December 31, September 30, 2005
2004 (Unaudited)
--------------------------------------------------------------------------------
Diana Trading Limited 4,140,000 (a) 7,230,000
Alterwall Shipping Inc.
Allendale Investments S.A. 8,250,000 (b) 18,500,000
Alcinoe Shipping Limited
Oceanpride Shipping Limited
Searoute Maritime Limited
Oceanopera Shipping Limited 1,600,000 (c) 11,500,000
--------------------------------------------------------------------------------
13,990,000 37,230,000
--------------------------------------------------------------------------------
Current portion (6,030,000) (12,854,998)
--------------------------------------------------------------------------------
Long-term portion 7,960,000 24,595,002
The future annual loan repayments are as follows:
To September 30
--------------------------------------------------------------------------------
2006 12,854,998
2007 8,630,000
2008 8,955,000
2009 2,640,000
2010 1,800,000
2011 and thereafter 2,350,002
--------------------------------------------------------------------------------
Total 37,230,000
--------------------------------------------------------------------------------
(a) Diana Trading Limited (the owner of M/V Irini) has drawn $4,900,000 on
October 16, 2002 and $1,000,000 on December 2, 2002 under a loan agreement.
The loan is repayable in twenty-four consecutive quarterly installments of
$220,000 each, and a balloon payment of $600,000 payable together with the
last installment due in October 2008. The interest is based on LIBOR plus
1.6% per annum.
On May 9, 2005, an additional loan agreement was entered into amounting to
$4,200,000 which was drawn down on May 9, 2005. The loan is repayable in
twelve consecutive quarterly installments being four installments of
$450,000 each, and eight installments of $300,000 each with the last
installment due in May 2008. The first installment was payable in August
2005. The interest is calculated at LIBOR plus 1.25% per annum.
(b) Alcinoe Shipping Limited (the owner of M/V Pantelis P.) and Oceanpride
Shipping Limited (the owner of M/V John P.) had drawn $3,000,000 on April
1, 2003 against a loan facility for which they are jointly and severally
liable. The balance of the loan at December 31, 2004 is $1,600,000.
Interest is based on LIBOR plus 1.75% per annum.
Alcinoe Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd.
(the owner of M/V Ariel) and Oceanopera Shipping Ltd. (the owner of M/V
Nikolaos P) had drawn $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 new loan is
repayable in twelve consecutive quarterly installments being 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 last installment in May 2008. The first installment was due in
August 2005. Interest is based on LIBOR plus 1.5% per annum.
(c) Allendale Investments S.A. (the owner of M/V Kuo Hsiung) had drawn
$6,000,000 on May 31, 2002 under a loan agreement, the balance of which was
$4,500,000 at December 31, 2004. The interest was based on LIBOR plus 1.75%
per annum.
Alterwall Business Inc. (the owner of M/V HM Qingdao I, formerly M/V Kuo
Jane) had drawn $6,000,000 under a loan agreement, the balance of which was
$3,750,000 at December 31, 2004. Interest was calculated at LIBOR plus 1.5%
per annum.
Allendale Investments S.A. and Alterwall Business Inc. had drawn
$20,000,000 on May 26, 2005 against a loan facility for which they are
jointly and severally liable. The outstanding amount of the old loans from
the same creditor bank was $7,800,000 and was repaid in full. The loan is
repayable 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 last installment
due in May 2011. The interest is based on LIBOR plus 1.25% per annum as
long as the outstanding 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
amount is above 60% of the FMV of such vessels.
The 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.
o a pledge of all the issued shares of each borrower.
The loan agreements contain ship finance covenants including 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, as well as minimum
requirements regarding the hull ratio cover. The Company is not in default
of any credit facility covenant.
6. Derivative Losses
The losses for the period ended September 30, 2005 arose from interest rate
swaps that did not meet the criteria for hedge accounting treatment.
Accordingly, all gains or losses have been recorded in the statement of
income for the period. The fair value at December 31, 2004 was $27,029. The
swap was settled in the period ended September 30, 2005 resulting in losses
of $100,029.
7. Earnings Per Share
Basic and diluted earnings per common share are computed as follows:
September 30, 2004 September 30, 2005
(Unaudited) (Unaudited)
--------------------------------------------------------------------------------
Income:
Net income 22,189,964 20,456,976
Basic earnings per share:
Weighted average common shares -
outstanding 29,754,166 30,821,557
Diluted earnings per share:
Weighted average common shares -
Diluted 29,754,166 31,088,404
Basic earnings per share: 0.746 0.664
Diluted earnings per share: 0.746 0.658
8. 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 September 30, 2005. Any effect on the Company's income resulting
from any future reallocation of pool income cannot be reasonably estimated.
9. Subsequent Events
On October 25, 2005, the Company acquired a 2,083 TEU containership (M/V
Artemis), built in 1987, for $20.65 million. The vessel was delivered to the
Company on November 25, 2005.
On November 2, 2005, the Board of Directors declared a dividend of $0.07 per
share subject to the consent of Cove's shareholders, which consent was received
pursuant to an amendment to the Merger Agreement dated as of November 22, 2005.
The dividend was paid (i) on or about December 19, 2005 to those holders of
record of common stock of the Company on December 16, 2005; and (ii) (A) to the
stockholders of Cove Apparel, Inc. ("Cove") who are entitled to receive shares
of the Company's common stock in connection with Cove's merger with the
Company's wholly-owned subsidiary, Euroseas Acquisition Company, with such
payment being made only to those 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 shares for 1,079,167 shares of the Company's common stock
(assuming such merger is consummated), or (B) to Friends Investment Company Inc.
("Friends") if such merger is not consummated since Friends will be issued the
shares that would have otherwise been issued in the merger.
On November 2, 2005, the Board authorized a 1:2 reverse stock split subject to
consent of Cove's shareholders, which consent was received pursuant to an
amendment to the Merger Agreement dated as of November 22, 2005. The Management
was authorized, to decide not to proceed, on the reverse stock split if it
determines that it is no longer in the best interests of the Company and its
shareholders. No date for the split has been set and the Management has not
indicated whether it will or will not proceed with the split. On February 7,
2006, the Board of Directors decided to defer the decision regarding the reverse
stock split and the ratio of the split to the Annual Shareholders Meeting.
Salina Shipholding Corp. (the owner of the vessel M/V Artemis; which vessel was
acquired on October 25, 2005) had drawn $15,500,000 on December 30, 2005
pursuant to a loan agreement. The loan is repayable in ten consecutive monthly
installments being 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 last
installment in January 2011. The first installment is due in June 2006. 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 the respective vessel, (ii) first assignment of earnings and
insurance, (iii) a corporate guarantee of Euroseas Ltd., and (iv) a minimum
liquidity balance equal to an amount of no less than $300,000 standing to the
credit of the Operating Account throughout the life of the facility for each of
the Company's vessels. The loan agreement contains ship finance covenants
including restrictions as to changes in management and ownership of the vessel,
distribution of dividends or any other distribution of profits and assets,
additional indebtedness and mortgaging of the vessel without the lender's prior
consent, the sale of the vessel, minimum requirements regarding the hull ratio
cover and minimum cash retention account.
On February 3, 2006, the SEC declared effective our F-4 registration statement
concerning the proposed merger between Cove Apparel, Inc. (OTCBB:CVAP.OB) and
our wholly-owned subsidiary, Euroseas Acquisition Company Inc. Under the merger
agreement, Cove stockholders will receive 0.102969 shares of Euroseas common
stock for each share of Cove common stock owned. On September 26, 2005, four
stockholders of Cove representing 67.25% of the outstanding shares of Cove
common stock took action by written consent approving the merger. A definitive
joint information statement/prospectus describing the merger was mailed to Cove
stockholders on or about February 8, 2006. Until consummation of the merger,
Cove's common stock will continue to trade on the OTC Bulletin Board. Upon
consummation of the merger, Cove will become a wholly-owned subsidiary of
Euroseas and Cove's stock will be de-listed and no longer trade on the OTC
Bulletin Board. The merger is subject to customary closing conditions.
On February 3, 2006, the SEC declared effective the Company's F-1 registration
statement that registers the re-sale of the Company's common stock and shares
underlying the warrants issued in connection with our $21 million private
placement that was consummated on August 25, 2005. In the private placement, the
Company sold 7,026,993 shares of common stock at a price of $3.00 per share.
Investors also received warrants to acquire 1,756,743 shares of common stock at
an exercise price of $3.60 per share for a 5 year period. The Company is in the
process of applying to list its shares of common stock on the OTC Bulletin
Board. Once approved, its shares will trade on the OTC Bulletin Board until such
time as the Company qualifies to list its shares on the Nasdaq National Market.
On February 7, 2006 the Board of Directors declared a dividend in the amount of
$0.06 per share (i) payable on or about March 2, 2006 to those holders of record
of common stock of Euroseas on February 28, 2006, and (ii) (A) payable to the
stockholders of Cove who are entitled to receive shares of Euroseas 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 shares for shares of
Euroseas common stock (assuming such merger is consummated), or (B) payable to
Friends Investment Company, Inc. ("Friends") if such merger is not consummated
since Friends will be issued the shares that would otherwise been issued in the
merger.