Annual Report of a Foreign Private Issuer — Form 20-F Filing Table of Contents
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
o
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date
of event requiring this shell company
report
For
the transition period from
to
Commission
file number _________________________________
- -
EUROSEAS
LTD.
(Exact
name of Registrant as specified in its charter)
Euroseas
Ltd.
(Translation
of Registrant’s name into English)
Marshall
Islands
(Jurisdiction
of incorporation or organization)
Aethrion
Center, 40 Ag. Konstantinou Street, 151 24 Maroussi
Greece
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class
Name of each exchange on which
registered
Common
shares, $0.03 par value
NASDAQ
Global Select Market
Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
Common
shares, $0.03 par value
(Title
of Class)
Indicate
the number of outstanding shares of each of the issuer’s classes of
capital or common stock as of the close of the period covered by the
annual report:
30,261,113
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined by Rule 405 of the Securities Act.
If
this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
o Yes x No
Note
– Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check One)
Large
accelerated filer
Accelerated
filer
Non-accelerated
filer
o
x
o
Indicate
by check mark which financial statement item the registrant has elected to
follow.
o Item
17 x Item
18
If
this is an annual report, indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange
Act).
o Yes x No
(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
to be filed by Sections 12, 13 or 15(d) of the Securities Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court
Quantitative
and Qualitative Disclosures about Market Risk
64
Item
12.
Description
of Securities Other than Equity Securities
65
Part
II
Item
13.
Defaults,
Dividend Arrearages and Delinquencies
66
Item
14.
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
66
Item
15.
Controls
and Procedures
66
Item
16A
Audit
Committee Financial Expert
68
Item
16B
Code
of Ethics
68
Item
16C
Principal
Accountant Fees and Services
68
Item
16D
Excemptions
from the Listing Standards for Audit Committees
69
Item
16E
Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
69
Part
III
Item
17.
Financial
Statements
70
Item
18.
Financial
Statements
70
Item
19.
Exhibits
70
i
FORWARD-LOOKING
STATEMENTS
Euroseas
Ltd., or the Company, desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
cautionary statement in connection with this safe harbor
legislation. This annual report contains forward-looking
statements. These forward-looking statements include information
about possible or assumed future results of our operations or our performance.
Words such as “expects,”“intends,”“plans,”“believes,”“anticipates,”“estimates,” and variations of such words and similar expressions are intended
to identify the forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove to have been correct.
These statements involve known and unknown risks and are based upon a number of
assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond our control. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Forward-looking statements include, but are not
limited to, statements regarding:
·
our
future operating or financial
results;
·
future,
pending or recent acquisitions, business strategy, areas of possible
expansion, and expected capital spending or operating
expenses;
·
drybulk
and container shipping industry trends, including charter rates and
factors affecting vessel supply and
demand;
·
our
financial condition and liquidity, including our ability to obtain
additional financing in the future to fund capital expenditures,
acquisitions and other general corporate
activities;
·
availability
of crew, number of off-hire days, drydocking requirements and insurance
costs;
·
our
expectations about the availability of vessels to purchase or the useful
lives of our vessels;
·
our
expectations relating to dividend payments and our ability to make such
payments;
·
our
ability to leverage to our advantage our manager’s relationships and
reputations in the drybulk and container shipping
industry;
·
changes
in seaborne and other transportation
patterns;
·
changes
in governmental rules and regulations or actions taken by regulatory
authorities;
·
potential
liability from future litigation;
·
global
and regional political conditions;
·
acts
of terrorism and other hostilities;
and
·
other
factors discussed in the section titled “Risk
Factors.”
WE UNDERTAKE NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
ANNUAL REPORT, OR THE DOCUMENTS TO WHICH WE REFER YOU IN THIS ANNUAL REPORT, TO
REFLECT ANY CHANGE IN OUR EXPECTATIONS WITH RESPECT TO SUCH STATEMENTS OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY STATEMENT IS
BASED.
1
PART
I
Item 1.
Identity
of Directors, Senior Management and Advisers
Not
Applicable.
Item 2.
Offer
Statistics and Expected Timetable
Not
Applicable.
Item 3.
Key
Information
A.
Selected
Financial Data
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following information shows selected historical financial data for Euroseas. We
derived this information from our audited financial statements for the years
ended December 31, 2005, 2006 and 2007 included in this annual report. The
information is only a summary and should be read in conjunction with our
historical financial statements and related notes, and our Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein. The historical financial and other data presented
for the years ended December 31, 2003, and 2004 and as of December 31, 2005 have
been derived from audited financial statements not included in this Annual
Report and are provided for comparison purposes. The historical results included
below and elsewhere in this annual report are not indicative of our future
performance.
See next
page for table of Euroseas Ltd. – Summary of Selected Historical
Financials.
2
Euroseas
Ltd. - Summary of Selected Historical Financials
(All
amounts in U.S. dollars, except for share data)
Income
Statement Data
Voyage
revenues
25,951,023
45,718,006
44,523,401
42,143,361
86,104,365
Commissions
(906,017
)
(2,215,197
)
(2,388,349
)
(1,829,534
)
(4,024,032
)
Net
revenue
25,045,006
43,502,809
42,135,052
40,313,827
82,080,333
Voyage
expenses
(436,935
)
(370,345
)
(670,551
)
(1,154,738
)
(897,463
)
Vessel
operating expenses
(8,775,730
)
(8,906,252
)
(8,610,279
)
(10,368,817
)
(17,240,132
)
Amortization
drydocking and special survey expense and vessel
depreciation (1)
(4,757,933
)
(3,461,678
)
(4,208,252
)
(7,292,838
)
(17,963,072
)
Management
fees
(1,722,800
)
(1,972,252
)
(1,911,856
)
(2,266,589
)
(3,669,137
)
Other
general and administration expenses
-
-
(420,755
)
(1,076,884
)
(2,656,176
)
Net
gain on sale of vessels
-
2,315,477
-
4,445,856
3,411,397
Operating
income
9,351,608
31,107,759
26,313,359
22,599,817
43,065,750
Interest
and other financing costs
(793,257
)
(708,284
)
(1,495,871
)
(3,398,858
)
(4,850,239
)
Interest
income
36,384
187,069
460,457
870,046
2,357,633
Net
income
8,426,612
30,611,765
25,178,454
20,069,407
40,664,064
Balance
Sheet Data
Current
assets
9,409,339
16,461,159
25,350,707
9,975,596
118,307,463
Vessels,
net
41,096,067
34,171,164
52,334,897
95,494,342
238,248,984
Deferred
assets and other long term assets
952,613
2,205,178
1,855,829
12,035,321
14,634,384
Total
assets
51,458,019
52,837,501
79,541,433
117,505,259
371,190,831
Current
liabilities including current portion of long term debt
8,481,773
13,764,846
18,414,877
21,665,399
35,182,511
Long
term debt, including current portion
20,595,000
13,990,000
48,560,000
74,950,000
81,590,000
Total
liabilities
23,971,773
21,724,846
52,544,877
79,493,599
99,400,483
Common
shares outstanding (adjusted for the 1-for-3 split)
9,918,056
9,918,056
12,260,387
12,620,150
30,261,113
Share
capital
297,542
297,542
367,812
378,605
907,834
Total
shareholders' equity
27,486,246
31,112,655
26,996,556
38,011,660
271,790,348
Other
Financial Data
Net
cash provided by operating activities
10,956,132
34,208,693
20,594,782
20,968,824
48,958,771
Net
cash provided by (used in) investing activities
214,832
6,756,242
(21,833,616
)
(55,367,015
)
(146,671,991
)
Net
cash provided by (used in) financing activities
(4,778,000
)
(33,567,500
)
6,188,653
16,741,997
199,057,433
Earnings
per share, basic
0.85
3.09
2.34
1.60
1.89
Earnings
per share, diluted
0.85
3.09
2.34
1.60
1.88
Dividends
declared
1,276,000
25,435,501
30,175,223
(2)
9,465,082
20,278,538
Cash
paid for common dividend / return of capital
1,200,000
26,962,500
46,875,223
(2)
9,465,082
20,278,538
Cash
dividends / return of capital, declared per common share
0.12
2.72
4.67
(2)
0.75
1.00
Weighted
average number of shares outstanding during period, basic
9,918,056
9,918,056
10,739,476
12,535,365
21,566,619
Weighted
average number of shares outstanding during period,
diluted
9,918,056
9,918,056
10,739,476
12,535,365
21,644,920
3
2003
2004
2005
2006
2007
Other
Fleet Data (3)
Number
of vessels
8.00
7.31
7.10
8.09
11.48
Calendar
days
2,920
2,677
2,591
2,942
4,190
Available
days
2,867
2,554
2,546
2,895
3,980
Voyage
days
2,846
2,542
2,508
2,864
3,969
Utilization
Rate (percent)
99.3
%
99.5
%
98.5
%
98.9
%
99.7
%
(In
U.S. dollars per day per vessel)
Average
TCE rate (4)
8,965
17,839
17,485
14,312
21,468
Vessel
Operating Expenses
3,005
3,327
3,323
3,524
4,115
Management
Fees
590
737
738
770
875
G&A
Expenses
-
-
162
366
634
Total
Operating Expenses
3,595
4,064
4,223
4,660
5,624
(1) In
2004, the estimated scrap value of the vessels was increased from $170 to $300
per light ton to better reflect market price developments in the scrap metal
market. The effect of this change in estimate was to reduce 2004 depreciation
expense by $1,400,010 and increase 2004 net income by the same amount. In
addition, in 2004, the estimated useful life of the vessel m/v Ariel was extended from 28
years to 30 years since the vessel performed drydocking and it was not expected
to be sold until year - 2007 (m/v Ariel was sold in February
2007. The m/v Widar was sold in April 2004.
Depreciation expenses for m/v Widar for the year ended
December 31, 2004 amounted to $136,384 compared to $409,149 in
2003.
(2) This
amount reflects a dividend in the amount of $30,175,223 ($2.99 per share) and a
return of capital in the amount of $16,700,000 ($1.68 per share). The total
payment to shareholders made in 2005 is in excess of previously retained
earnings because the Company decided to distribute to its original shareholders
in advance of going public most of the profits relating to the Company’s
operations up to that time and to recapitalize the Company. This one-time
dividend cannot be considered indicative of future dividend payments and the
Company refers you to the other sections in this annual report for a clearer
understanding of the Company’s dividend policy.
(3) For
the definition of calendar days, available days, voyage days and utilization
rate see Item 5A-Operating Results.
(4) Time
charter equivalent rate, or, “TCE rate”, is determined by dividing voyage
revenues less voyage expenses or time charter equivalent revenue or “TCE
revenues” by the number of voyage days during the relevant time period. TCE
revenues, a non-GAAP measure, provides additional meaningful information in
conjunction with shipping revenues, the most directly comparable GAAP measure,
because it assists Company management in making decisions regarding the
deployment and use of its vessels and in evaluating their financial performance.
TCE revenues and TCE rate is also a standard shipping industry performance
measure used primarily to compare period-to-period changes in a shipping
company’s performance despite changes in the mix of charter types (i.e., spot
charters, time charters and bareboat charters) under which the vessels may be
employed between the periods. (see also Item 5A-Operating
Results).
4
Reconciliation
of TCE revenues as reflected in the consolidated statement of income and
calculation of TCE rate follow:
2003
2004
2005
2006
2007
(In
U.S. dollars except TCE rates, expressed in U.S. dollars per day and
voyage days)
Any
investment in our stock involves a high degree of risk. You should consider
carefully the following factors, as well as the other information set forth in
this annual report, before making an investment in our common stock. Some of the
following risks relate principally to the industry in which we operate and our
business in general. Other risks relate to the securities market for and
ownership of our common stock. Any of the described risks could significantly
and negatively affect our business, financial condition, operating results and
common stock price. The following risk factors describe the material risks that
are presently known to us.
We are an
independent shipping company that operates in the drybulk and container shipping
industry. Our profitability is dependent upon the freight rates we are able to
charge. The supply of and demand for shipping capacity strongly influences
freight rates. The demand for shipping capacity is determined primarily by the
demand for the type of commodities carried and the distance that those
commodities must be moved by sea. The demand for commodities is affected by,
among other things, world and regional economic and political conditions
(including developments in international trade, fluctuations in industrial and
agricultural production and armed conflicts), environmental concerns, weather
patterns, and changes in seaborne and other transportation costs. The size of
the existing fleet in a particular market, the number of new vessel deliveries,
the scrapping of older vessels and the number of vessels out of active service
(i.e., laid-up, drydocked, awaiting repairs or otherwise not available for
hire), determines the supply of shipping capacity, which is measured by the
amount of suitable tonnage available to carry cargo. The cyclical nature of the
shipping industry may lead to volatile changes in freight rates which may reduce
our revenues and net income.
5
In
addition to the prevailing and anticipated freight rates, factors that affect
the rate of newbuilding, scrapping and laying-up include newbuilding prices,
secondhand vessel values in relation to scrap prices, costs of bunkers and other
operating costs, costs associated with classification society surveys, normal
maintenance and insurance coverage, the efficiency and age profile of the
existing fleet in the market and government and industry regulation of maritime
transportation practices, particularly environmental protection laws and
regulations. These factors influencing the supply of and demand for shipping
capacity are outside of our control, and we may not be able to correctly assess
the nature, timing and degree of changes in industry conditions. Some of these
factors may have a negative impact on our revenues and net income.
The
value of our vessels may fluctuate, adversely affecting our earnings, liquidity
and causing us to breach our secured credit agreements.
The
market value of our vessels can fluctuate significantly. The market value of our
vessels may increase or decrease depending on the following
factors:
·
general
economic and market conditions affecting the shipping
industry;
·
supply
of drybulk, container and multipurpose
vessels;
·
demand
for drybulk, container and multipurpose
vessels;
·
types
and sizes of vessels;
·
other
modes of transportation;
·
cost
of newbuildings;
·
new
regulatory requirements from governments or self-regulated organizations;
and
·
prevailing
level of charter rates.
As
vessels grow older, they generally decline in value. Due to the cyclical nature
of the drybulk and container shipping industry, if for any reason we sell
vessels at a time when prices have fallen, we could incur a loss and our
business, results of operations, cash flow, financial condition and ability to
pay dividends could be adversely affected.
In
addition, we periodically re-evaluate the carrying amount and period over which
long-lived assets are depreciated to determine if events have occurred which
would require modification to their carrying values or their useful lives. A
determination that a vessel’s estimated remaining useful life or fair value has
declined below its carrying amount could result in an impairment charge against
our earnings and a reduction in our shareholders’ equity. Any change in the
assessed market value of any of our vessels might also cause a violation of the
covenants of each secured credit agreement which in turn might restrict our cash
and affect our liquidity. All of our credit agreements provide for a minimum
security maintenance ratio. If the assessed market value of our vessels declines
below certain thresholds, we will be deemed to have violated these covenants and
may incur penalties for breach of our credit agreements. For example, these
penalties could require us to prepay the shortfall between the assessed market
value of our vessels and the value of such vessels required to be maintained
pursuant to the secured credit agreement, or to provide additional security
acceptable to the lenders in an amount at least equal to the amount of any
shortfall. Further, we may agree on future loans to may include various other
covenants, in addition to the vessel-related ones, that may ultimately depend on
the assessed values of our vessels. Such covenants could
include, but are not limited to, maximum fleet leverage covenants and minimum
fair net worth covenants.
6
Our future
profitability will be dependent on the level of charter rates in the
international drybulk and container shipping
industry.
Charter
rates for the international drybulk and container shipping industry reached
record highs during 2004 and 2005; however, by the beginning of 2006 rates
declined. Drybulk rates recovered since early 2006 and reached new historic
highs in the fall of 2007. Although, drybulk rates have since
declined they remain high by historical standards. At the same time,
containership rates, after reaching historic highs in the middle of 2005,
declined by the end of the year and remained flat for most of 2006, further
declined by the end of 2006 and steadily recovered during 2007. Containership
rates remained at about the same level since the end of 2007 and are still below
the high levels achieved in the middle of 2005. Rates
in drybulk or containership
markets are influenced by the balance of demand for and supply of vessels and
may decline in the future.
Because
the factors affecting the supply and demand for vessels are outside of our
control and are unpredictable, the nature, timing, direction and degree of
changes in industry conditions are unpredictable. In addition, we may
not be able to successfully charter our vessels in the future or renew existing
charters at rates sufficient to allow us to meet our obligations or to pay
dividends to our shareholders.
Some of
the factors that influence demand for vessel capacity include:
·
supply
and demand for drybulk and containership commodities, and separately for
containerized cargo;
·
global
and regional economic and political
conditions;
·
the
distance drybulk and containerized commodities are to be moved by
sea;
·
environmental
and other regulatory developments;
·
currency
exchange rates;
·
changes
in global production and manufacturing distribution patterns of finished
goods that utilize drybulk and other containerized commodities;
and
·
changes
in seaborne and other transportation
patterns.
·
Some
of the factors that influence the supply of vessel capacity
include:
·
the
number of newbuilding deliveries;
·
the
scrapping rate of older vessels;
·
the
price of steel and other materials;
·
port
congestion;
·
changes
in environmental and other regulations that may limit the useful life of
vessels; and
·
the
number of vessels that are out of
service.
We
anticipate that the future demand for our drybulk, container and multipurpose
vessels and the charter rates of the corresponding markets will be dependent
upon continued economic growth in China, India and the overall world economy,
seasonal and regional changes in demand, and changes to the capacity of the
world fleet. The capacity of the world fleet seems likely to increase and
economic growth may not continue. Adverse economic, political, social or other
developments could also have a material adverse effect on our business and
results of operations. If the number of new ships delivered exceeds the number
of vessels being scrapped and lost, vessel capacity will increase. For instance,
given that as of April 1, 2008 the capacity of the fully cellular worldwide
container vessel fleet was approximately 11.1 million teu, with approximately
6.4 million teu of additional capacity on order, the growing supply of container
vessels may exceed future demand, particularly in the short term. If the supply
of vessel capacity increases but the demand for vessel capacity does not
increase correspondingly, charter rates and vessel values could materially
decline.
7
An
economic slowdown in the Asia Pacific region could materially reduce the amount
and/or profitability of our business.
A
significant number of the port calls made by our vessels involve the loading or
discharging of raw materials and semi-finished products in ports in the Asia
Pacific region. As a result, a negative change in economic conditions in any
Asia Pacific country, particularly in China, may have an adverse effect on our
business, financial position and results of operations, as well as our future
prospects. In particular, in recent years, China has been one of the world’s
fastest growing economies in terms of gross domestic product. Such growth may
not be sustained and the Chinese economy may experience contraction in the
future. Moreover, any slowdown in the economies of the United States of America,
the European Union or certain Asian countries may adversely effect economic
growth in China and elsewhere. Our business, financial position and results of
operations, as well as our future prospects, will likely be materially and
adversely affected by an economic downturn in any of these
countries.
Changes
in the economic and political environment in China and policies adopted by the
government to regulate its economy may have a material adverse effect on our
business, financial condition and results of operations.
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in such respects
as structure, government involvement, level of development, growth rate, capital
reinvestment, allocation of resources, rate of inflation and balance of payments
position. Prior to 1978, the Chinese economy was a planned economy. Since 1978,
increasing emphasis has been placed on the utilization of market forces in the
development of the Chinese economy. Annual and five year State Plans are adopted
by the Chinese government in connection with the development of the economy.
Although state-owned enterprises still account for a substantial portion of the
Chinese industrial output, in general, the Chinese government is reducing the
level of direct control that it exercises over the economy through State Plans
and other measures. There is an increasing level of freedom and autonomy in
areas such as allocation of resources, production, pricing and management and a
gradual shift in emphasis to a “market economy” and enterprise reform. Limited
price reforms were undertaken, with the result that prices for certain
commodities are principally determined by market forces. Many of the reforms are
unprecedented or experimental and may be subject to revision, change or
abolition based upon the outcome of such experiments. The Chinese government may
not continue to pursue a policy of economic reform. The level of imports to and
exports from China could be adversely affected by the nature of the economic
reforms pursued by the Chinese government, as well as by changes in political,
economic and social conditions or other relevant policies of the Chinese
government, such as changes in laws, regulations or export and import
restrictions, all of which could, adversely affect our business, operating
results and financial condition.
We
may become dependent on spot charters in the volatile shipping markets, which
may result in decreased revenues and/or profitability.
Although
most of our vessels are currently under time charters, in the future, we may
have more of these vessels and/or any newly acquired vessels on spot charters.
The spot market is highly competitive and rates within this market are subject
to volatile fluctuations, while time charters provide income at pre-determined
rates over more extended periods of time. If we decide to spot charter our
vessels, we may not be able to keep all our vessels fully employed in these
short-term markets or that future spot rates will be sufficient to enable our
vessels to be operated profitably. A significant decrease in charter rates could
affect the value of our fleet and could adversely affect our profitability and
cash flows with the result that our ability to pay debt service to our lenders
and dividends to our shareholders could be impaired.
8
An
over-supply of drybulk carrier and containership capacity may lead to reductions
in charter hire rates and profitability.
The
market supply of drybulk carriers and especially containerships has been
increasing, and the number of both the
drybulk vessels and containerships on order have recently reached historic
highs. The containership newbuildings are expected to continue being delivered
in significant numbers over the next several years. The drybulk vessel
newbuildings are expected to continue being delivered in 2008 at the same rates
as in 2006 and 2007, but it is anticipated that in 2009, and particularly in
2010, that their delivery rate will start increasing. An over-supply of drybulk
carrier and containership capacity may result in a reduction of charter hire
rates. If such a reduction occurs upon the expiration or termination of our
drybulk carriers’ and containerships’ current charters, such as during 2008 or
2009, when the charters under which at least nine of our containerships are
currently deployed expire, we may only be able to recharter those drybulk
carriers and containerships at reduced or unprofitable rates or we may not be
able to charter these vessels at all.
We
are subject to regulation and liability under environmental laws that could
require significant expenditures and affect our cash flows and net
income.
Our
business and the operation of our vessels are materially affected by government
regulation in the form of international conventions, national, state and local
laws and regulations in force in the jurisdictions in which the vessels operate,
as well as in the country or countries of their registration. Because such
conventions, laws, and regulations are often revised, we may not be able to
predict the ultimate cost of complying with such conventions, laws and
regulations or the impact thereof on the resale prices or useful lives of our
vessels. Additional conventions, laws and regulations may be adopted which could
limit our ability to do business or increase the cost of our doing business and
which may materially adversely affect our operations. We are required by various
governmental and quasi-governmental agencies to obtain certain permits,
licenses, certificates and financial assurances with respect to our
operations.
The
operation of our vessels is affected by the requirements set forth in the
International Maritime Organization’s (“IMO’s”) International Management Code
for the Safe Operation of Ships and Pollution Prevention (“ISM Code”). The ISM
Code requires shipowners and bareboat charterers to develop and maintain an
extensive “Safety Management System” that includes the adoption of a safety and
environmental protection policy setting forth instructions and procedures for
safe operation and describing procedures for dealing with emergencies. The
failure of a shipowner or bareboat charterer to comply with the ISM Code may
subject such party to increased liability, may decrease available insurance
coverage for the affected vessels, and/or may result in a denial of access to,
or detention in, certain ports. Currently, each of our vessels and Eurobulk
Ltd., or Eurobulk, our affiliated ship management company, are ISM
Code-certified, but we may not be able to maintain such certification
indefinitely.
Although
the United States of America is not a party, many countries have ratified and
follow the liability scheme adopted by the IMO and set out in the International
Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (the
“CLC”), and the Convention for the Establishment of an International Fund for
Oil Pollution of 1971, as amended and the Regulations for the Prevention of Air
Pollution from Ships to the International Convention for the Prevention of
Pollution from Ships (as modified in 1978 and 1997), including Annex VI thereto.
Under these conventions, a vessel’s registered owner is strictly liable for
pollution damage, including air pollution, caused on the territorial waters of a
contracting state by discharge of persistent oil, subject to certain complete
defenses. Many of the countries that have ratified the CLC have increased the
liability limits through a 1992 Protocol to the CLC. The right to limit
liability is also forfeited under the CLC where the spill is caused by the
owner’s actual fault or privity and, under the 1992 Protocol, where the spill is
caused by the owner’s intentional or reckless conduct. Vessels trading to
contracting states must provide evidence of insurance covering the limited
liability of the owner. In jurisdictions where the CLC has not been adopted,
various legislative schemes or common law govern, and liability is imposed
either on the basis of fault or in a manner similar to the CLC.
The
United States Oil Pollution Act of 1990 (“OPA”) established an extensive
regulatory and liability regime for the protection and clean-up of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States of America or any of its territories and possessions
or whose vessels operate in waters of the United States of America, which
includes the territorial sea of the United States of America and its 200
nautical mile exclusive economic zone. OPA allows for potentially unlimited
liability without regard to fault of vessel owners, operators and bareboat
charterers for all containment and clean-up costs and other damages arising from
discharges or threatened discharges of oil from their vessels, including bunkers
(fuel), in the U.S. waters. OPA also expressly permits individual states to
impose their own liability regimes with regard to hazardous materials and oil
pollution materials occurring within their boundaries.
9
While we
do not carry oil as cargo, we do carry fuel oil (bunkers) in our drybulk
carriers. We currently maintain, for each of our vessels, pollution liability
coverage insurance of $1 billion per incident. If the damages from a
catastrophic spill exceeded our insurance coverage, that would have a material
adverse affect on our financial condition.
Capital
expenditures and other costs necessary to operate and maintain our vessels may
increase due to changes in governmental regulations, safety or other equipment
standards.
Changes
in governmental regulations, safety or other equipment standards, as well as
compliance with standards imposed by maritime self-regulatory organizations and
customer requirements or competition, may require us to make additional
expenditures. In order to satisfy these requirements, we may, from time to time,
be required to take our vessels out of service for extended periods of time,
with corresponding losses of revenues. In the future, market conditions may not
justify these expenditures or enable us to operate some or all of our vessels
profitably during the remainder of their economic lives.
Increased
inspection procedures and tighter import and export controls could increase
costs and disrupt our business.
International
shipping is subject to various security and customs inspection and related
procedures in countries of origin and destination. Inspection procedures may
result in the seizure of contents of our vessels, delays in the loading,
offloading or delivery and the levying of customs duties, fines or other
penalties against us.
It is
possible that changes to inspection procedures could impose additional financial
and legal obligations on us. Furthermore, changes to inspection procedures could
also impose additional costs and obligations on our customers and may, in
certain cases, render the shipment of certain types of cargo uneconomical or
impractical. Any such changes or developments may have a material adverse effect
on our business, financial condition and results of operations.
Rising
fuel prices may adversely affect our profits.
Fuel
(bunkers) is a significant, if not the largest, operating expense for many of
our shipping operations when our vessels are under voyage charter. When a vessel
is operating under a time charter, these costs are paid by the charterer.
However fuel costs are taken into account by the charterer in determining the
amount of time charter hire and therefore fuel costs also indirectly affect time
charters. The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil and gas, actions by OPEC and other oil and gas producers, war and
unrest in oil producing countries and regions, regional production patterns and
environmental concerns. Fuel prices have been at historically high levels
recently, but shipowners have not really felt the effect of these high prices
because the shipping markets have also been at high levels. Any increase in the
price of fuel may adversely affect our profitability especially if such increase
is combined with lower drybulk and containership rates.
If
our vessels fail to maintain their class certification and/or fail any annual
survey, intermediate survey, dry-docking or special survey, that vessel would be
unable to carry cargo, thereby reducing our revenues and profitability and
violating certain loan covenants of our third-party indebtedness.
The hull
and machinery of every commercial vessel must be classed by a classification
society authorized by its country of registry. The classification society
certifies that a vessel is safe and seaworthy in accordance with the applicable
rules and regulations of the country of registry of the vessel and the Safety of
Life at Sea Convention (“SOLAS”). Our vessels are currently classed with Lloyd’s
Register of Shipping, Bureau Veritas and Nippon Kaiji Kyokai. ISM and
International Ship and Port Facilities Security (“ISPS”) certification have been
awarded by Bureau Veritas and the Panama Maritime Authority to our vessels and
Eurobulk.
A vessel
must undergo annual surveys, intermediate surveys, drydockings and special
surveys. In lieu of a special survey, a vessel’s machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Every vessel is also required to be
drydocked every two to three years for inspection of the underwater parts of
such vessel.
10
If any
vessel does not maintain its class and/or fails any annual survey, intermediate
survey, drydocking or special survey, the vessel will be unable to carry cargo
between ports and will be unemployable and uninsurable which could cause us to
be in violation of certain covenants in our loan agreements. Any such inability
to carry cargo or be employed, or any such violation of covenants, could have a
material adverse impact on our financial condition and results of operations.
That status could cause us to be in violation of certain covenants in our loan
agreements.
Rising
crew costs may adversely affect our profits.
Crew
costs are a significant operating expense for many of our shipping operations.
Crewing costs have reached recent highs and may continue at such rates. The cost
of employing suitable crew is unpredictable and fluctuates based on events
outside our control, including supply and demand and the wages paid by other
shipping companies. Crew costs have been at high levels recently, but shipowners
have not really felt the effect of these high prices because the shipping
markets have also been at high levels. Any increase in crew costs may adversely
affect our profitability especially if such increase is combined with lower
drybulk and containership rates..
Maritime
claimants could arrest our vessels, which could interrupt our cash
flow.
Crew
members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arresting or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of funds to have the
arrest lifted which would have a material adverse effect on our financial
condition and results of operations.
In
addition, in some jurisdictions, such as South Africa, under the “sister ship”
theory of liability, a claimant may arrest both the vessel which is subject to
the claimant’s maritime lien and any “associated” vessel, which is any vessel
owned or controlled by the same owner. Claimants could try to assert “sister
ship” liability against one of our vessels for claims relating to another of our
vessels.
Governments
could requisition our vessels during a period of war or emergency, resulting in
loss of earnings.
A
government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes the owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes the
charterer at dictated charter rates. Generally, requisitions occur during a
period of war or emergency. Government requisition of one or more of our vessels
could have a material adverse effect on our financial condition and results of
operations.
World
events outside our control may negatively affect our ability to operate, thereby
reducing our revenues and net income or our ability to obtain additional
financing, thereby restricting the implementation of our business
strategy.
Terrorist
attacks such as the attacks on the United States of America on September 11,2001, on London, England on July 7, 2005, and the response to these attacks, as
well as the threat of future terrorist attacks, continue to cause uncertainty in
the world financial markets and may affect our business, results of operations
and financial condition. The continuing conflict in Iraq may lead to additional
acts of terrorism and armed conflict around the world, which may contribute to
further economic instability in the global financial markets. These
uncertainties could also have a material adverse effect on our ability to obtain
additional financing on terms acceptable to us or at all. Terrorist attacks may
also negatively affect our operations and financial condition and directly
impact its vessels or its customers. Future terrorist attacks could result in
increased volatility of the financial markets in the United States of America
and globally and could result in an economic recession in the United States of
America or the world. Any of these occurrences could have a material adverse
impact on our financial condition and costs.
11
Company
Risk Factors
If
we do not use our cash on hand to acquire vessels and expand our fleet, we may
use it for general corporate purposes which may result in lower
earnings.
We intend
to use our cash on hand to acquire additional vessels and expand our fleet when
we believe market conditions are favorable for purchasing such vessels. Our
management will have the discretion to identify and acquire vessels. If our
management is unable to identify and acquire vessels on terms acceptable to us,
we may use our cash on hand for general corporate purposes. It may take a
substantial period of time before we can locate and purchase suitable vessels.
During this period, our cash on hand may be invested on a short-term basis and
therefore may not yield returns at rates comparable to what a vessel might have
earned.
We
depend entirely on Eurobulk to manage and charter our fleet, which may adversely
affect our operations if Eurobulk fails to perform its obligations.
We have
no employees and we currently contract the commercial and technical management
of our fleet, including crewing, maintenance and repair, to Eurobulk, our
affiliated ship management company. We may lose Eurobulk’s services or Eurobulk
may fail to perform its obligations to us which could have a material adverse
effect on our financial condition and results of our operations. Although we may
have rights against Eurobulk if it defaults on its obligations to us, you will
have no recourse against Eurobulk. Further, we expect that we will need to seek
approval from our lenders to change Eurobulk as our ship manager.
Because
Eurobulk is a privately held company, there is little or no publicly available
information about it and there may be very little advance warning of operational
or financial problems experienced by Eurobulk that may adversely affect
us.
The
ability of Eurobulk to continue providing services for our benefit will depend
in part on its own financial strength. Circumstances beyond our control could
impair Eurobulk’s financial strength, and because Eurobulk is privately held it
is unlikely that information about its financial strength would become public
unless Eurobulk began to default on its obligations. As a result, there may be
little advance warning of problems affecting Eurobulk, even though these
problems could have a material adverse effect on us.
As
of April 30, 2008, Friends Investment Company Inc. owns approximately 31.0% of
our outstanding shares of common stock, which may limit your ability to
influence our actions.
As of
April 30, 2008 Friends Investment Company Inc., or Friends, our largest
shareholder, owns approximately 31.0% of the outstanding shares of our common
stock. As a result of this share ownership and for so long as Friends owns a
significant percentage of our outstanding common stock, Friends will be able to
influence the outcome of any shareholder vote, including the election of
directors, the adoption or amendment of provisions in our articles of
incorporation or bylaws and possible mergers, corporate control contests and
other significant corporate transactions. This concentration of ownership may
have the effect of delaying, deferring or preventing a change in control,
merger, consolidation, takeover or other business combination involving us. This
concentration of ownership could also discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, which
could in turn have an adverse effect on the market price of our common
stock.
Our
corporate governance practices are in compliance with, and are not prohibited
by, the laws of the Republic of the Marshall Islands, and as such we are
entitled to exemption from certain NASDAQ corporate governance standards. As a
result, you may not have the same protections afforded to stockholders of
companies that are subject to all of the NASDAQ corporate governance
requirements.
Our
Company’s corporate governance practices are in compliance with, and are not
prohibited by, the laws of the Republic of the Marshall Islands. Therefore, we
are exempt from many of NASDAQ’s corporate governance practices other than the
requirements regarding the disclosure of a going concern audit opinion,
submission of a listing agreement, notification of material non-compliance with
NASDAQ corporate governance practices, and the establishment
and composition of an audit committee and a formal written audit committee
charter. For a list of the practices followed by us in lieu of NASDAQ’s
corporate governance rules, we refer you to the section of this annual report
entitled “Board Practices—Corporate Governance” Under Item
6.
12
We
and our principal officers have affiliations with Eurobulk that could create
conflicts of interest detrimental to us.
Our
principal officers are also principals, officers and employees of Eurobulk,
which is our ship management company. These responsibilities and relationships
could create conflicts of interest between us and Eurobulk. Conflicts may also
arise in connection with the chartering, purchase, sale and operations of the
vessels in our fleet versus other vessels that are or may be managed in the
future by Eurobulk. Circumstances in any of these instances may make one
decision advantageous to us but detrimental to Eurobulk and vice versa. Eurobulk
is expected to manage at least one vessel other than those owned by Euroseas. In
the past, Eurobulk has managed other vessels where the Pittas family was a
minority shareholder but never any where there was no Pittas family
participation at all. However, it is possible that in the future Eurobulk may
manage additional vessels which will not belong to Euroseas and in which the
Pittas family may have controlling, little or even no power or participation and
where such conflicts may arise. Eurobulk may not be able to resolve all
conflicts of interest in a manner beneficial to us.
Companies
affiliated with Eurobulk or our officers and directors may acquire vessels that
compete with our fleet.
Companies
affiliated with Eurobulk or our officers and directors own drybulk carriers and
may acquire additional drybulk carriers, containerships or multipurpose vessels
in the future. These vessels could be in competition with our fleet and other
companies affiliated with Eurobulk might be faced with conflicts of interest
with respect to their own interests and their obligations to us. Eurobulk,
Friends and Aristides J. Pittas, our Chairman and Chief Executive Officer, have
granted us a right of first refusal to acquire any drybulk vessel or
containership which any of them may consider for acquisition in the future. In
addition, Mr. Pittas will use his best efforts to cause any entity with respect
to which he directly or indirectly controls to grant us this right of first
refusal. Were we, however, to decline any such opportunity offered to us or we
do not have the resources or desire to accept any such opportunity, Eurobulk,
Friends and Aristides J. Pittas, and any of their respective Affiliates, could
acquire such vessels.
Our
officers do not devote all of their time to our business.
Our
officers are involved in other business activities that may result in their
spending less time than is appropriate or necessary in order to manage our
business successfully. Our Chief Executive Officer, Chief Financial Officer,
Chief Administrative Officer, Internal Auditor and Secretary are not employed
directly by us, but rather their services are provided pursuant to our master
management agreement with Eurobulk. These officers may spend a material portion
of their time providing services to Eurobulk and its affiliates on matters
unrelated to us.
We
are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations or to make
dividend payments.
We are a
holding company and our subsidiaries, which are all wholly-owned by us, conduct
all of our operations and own all of our operating assets. We have no
significant assets other than the equity interests in our wholly-owned
subsidiaries. As a result, our ability to make dividend payments to you depends
on our subsidiaries and their ability to distribute funds to us. If we are
unable to obtain funds from our subsidiaries, we may be unable or our Board of
Directors may exercise its discretion not to pay dividends.
We
may not be able to pay dividends.
We
currently intend to pay minimum quarterly dividends of $0.30 per share for all
of 2008 to holders of our common stock, when, as and if declared by our Board of
Directors. However, we may not earn sufficient revenues or we may incur expenses
or liabilities that would reduce or eliminate the cash available for
distribution as dividends. Our loan agreements may also limit the amount of
dividends we can pay under some circumstances based on certain covenants
included in the loan agreements.
13
If in
addition, the declaration and payment of dividends will be subject at all times
to the discretion of our Board of Directors. The timing and amount of dividends
will depend on our earnings, financial condition, cash requirements and
availability, restrictions in our loan agreements, growth strategy, charter
rates in the drybulk and container shipping industry, the provisions of Marshall
Islands law affecting the payment of dividends and other factors. Marshall
Islands law generally prohibits the payment of dividends other than from surplus
(retained earnings and the excess of consideration received for the sale of
shares above the par value of the shares), but if there is no surplus, dividends
may be declared out of the net profits (basically, the excess of our revenue
over our expenses) for the fiscal year in which the dividend is declared or the
preceding fiscal year. Marshall Islands law also prohibits the payment of
dividends while a company is insolvent or if it would be rendered insolvent upon
the payment of a dividend. As a result, we may not be able to pay
dividends.
If
we are unable to fund our capital expenditures, we may not be able to continue
to operate some of our vessels, which would have a material adverse effect on
our business and our ability to pay dividends.
In order
to fund our capital expenditures, we may be required to incur borrowings or
raise capital through the sale of debt or equity securities. Our ability to
access the capital markets through future offerings may be limited by our
financial condition at the time of any such offering as well as by adverse
market conditions resulting from, among other things, general economic
conditions and contingencies and uncertainties that are beyond our control. Our
failure to obtain the funds for necessary future capital expenditures would
limit our ability to continue to operate some of our vessels and could have a
material adverse effect on our business, results of operations and financial
condition and our ability to pay dividends. Even if we are successful in
obtaining such funds through financings, the terms of such financings could
further limit our ability to pay dividends.
If
we fail to manage our planned growth properly, we may not be able to
successfully expand our market share.
We intend
to continue to grow our fleet. Our growth will depend on:
·
locating
and acquiring suitable vessels;
·
identifying
and consummating acquisitions or joint
ventures;
·
integrating
any acquired business successfully with our existing
operations;
·
enhancing
our customer base;
·
managing
our expansion; and
·
obtaining
required financing on acceptable
terms.
During
periods in which charter rates are high, vessel values generally are high as
well, and it may be difficult to consummate vessel acquisitions at favorable
prices. In addition, growing any business by acquisition presents numerous
risks, such as undisclosed liabilities and obligations and difficulty
experienced in (1) obtaining additional qualified personnel, (2) managing
relationships with customers and suppliers, and (3) integrating newly acquired
operations into existing infrastructures. We may not be successful in executing
our growth plans or that we will not incur significant expenses and losses in
connection with the execution of those growth plans.
A
decline in the market value of our vessels could lead to a default under our
loan agreements and the loss of our vessels.
We have
incurred secured debt under loan agreements for our vessels and currently expect
to incur additional secured debt in connection with our acquisition of other
vessels. If the market value of our fleet declines, we may not be in compliance
with certain provisions of our existing loan agreements and we may not be able
to refinance our debt or obtain additional financing. If we are unable to pledge
additional collateral, our lenders could accelerate our debt and foreclose on
our fleet.
14
Our
existing loan agreements contain restrictive covenants that may limit our
liquidity and corporate activities.
Our
existing loan agreements impose operating and financial restrictions on us.
These restrictions may limit our ability to:
change
the management of our vessels or terminate or materially amend the
management agreement relating to each vessel;
and
·
sell
our vessels.
Therefore,
we may need to seek permission from our lenders in order to engage in some
corporate actions. The lenders’ interests may be different from our interests,
and we may not be able to obtain the lenders’ permission when needed. This may
prevent us from taking actions that are in our best interest.
Servicing
future debt would limit funds available for other purposes.
To
finance our fleet, we have incurred secured debt under loan agreements for our
vessels. We also currently expect to incur additional secured debt to finance
the acquisition of additional vessels. We must dedicate a portion of our cash
flow from operations to pay the principal and interest on our debt. These
payments limit funds otherwise available for working capital expenditures and
other purposes. As of December 31, 2007, we had total bank debt of approximately
$81.6 million. As of March 31, 2008, we had repaid $5.9 million of our total
bank debt, leaving us with total bank debt of $75.7 million. Our debt repayment
schedule as of December 31, 2007 requires us to repay $38.0 million over the
next two years. If we were unable to service our debt, it could have a material
adverse effect on our financial condition and results of
operations.
A rise in
interest rates could cause an increase in our costs and have a material adverse
effect on our financial condition and results of operations. To finance vessel
purchases, we have borrowed, and may continue to borrow, under loan agreements
that provide for periodic interest rate adjustments based on indices that
fluctuate with changes in market interest rates. If interest rates increase
significantly, it would increase our costs of financing our acquisition of
vessels, which could have a material adverse effect on our financial condition
and results of operations. Any increase in debt service would also reduce the
funds available to us to purchase other vessels.
Our
ability to obtain additional debt financing may be dependent on the performance
of our then existing charters and the creditworthiness of our
charterers.
The
actual or perceived credit quality of our charterers, and any defaults by them,
may materially affect our ability to obtain the additional debt financing that
we will require to purchase additional vessels or may significantly increase our
costs of obtaining such financing. Our inability to obtain additional financing
at all or at a higher than anticipated cost may materially
affect our results of operation and our ability to implement our business
strategy.
15
As
we expand our business, we may need to upgrade our operations and financial
systems, and add more staff and crew. If we cannot upgrade these systems or
recruit suitable employees, our performance may be adversely
affected.
Our
current operating and financial systems may not be adequate if we expand the
size of our fleet, and our attempts to improve those systems may be ineffective.
In addition, if we expand our fleet, we will have to rely on Eurobulk to recruit
suitable additional seafarers and shoreside administrative and management
personnel. Eurobulk may not be able to continue to hire suitable employees as we
expand our fleet. If Eurobulk’s unaffiliated crewing agent encounters business
or financial difficulties, we may not be able to adequately staff our vessels.
If we are unable to operate our financial and operations systems effectively or
to recruit suitable employees, our performance may be materially adversely
affected.
Because
we obtain some of our insurance through protection and indemnity associations,
we may also be subject to calls in amounts based not only on our own claim
records, but also the claim records of other members of the protection and
indemnity associations.
We may be
subject to calls in amounts based not only on our claim records but also the
claim records of other members of the protection and indemnity associations
through which we receive insurance coverage for tort liability, including
pollution-related liability. Our payment of these calls could result in
significant expense to us, which could have a material adverse effect on our
business, results of operations, cash flows, financial condition and ability to
pay dividends.
Labor
interruptions could disrupt our business.
Our
vessels are manned by masters, officers and crews that are employed by third
parties. If not resolved in a timely and cost-effective manner, industrial
action or other labor unrest could prevent or hinder our operations from being
carried out normally and could have a material adverse effect on our business,
results of operations, cash flows, financial condition and ability to pay
dividends.
In
the highly competitive international drybulk and container shipping industry, we
may not be able to compete for charters with new entrants or established
companies with greater resources.
We employ
our vessels in highly competitive markets that are capital intensive and highly
fragmented. Competition arises primarily from other vessel owners, some of whom
have substantially greater resources than us. Competition for the transportation
of drybulk and container cargoes can be intense and depends on price, location,
size, age, condition and the acceptability of the vessel and its managers to the
charterers. Due in part to the highly fragmented market, competitors with
greater resources could operate larger fleets through consolidations or
acquisitions that may be able to offer better prices and fleets.
We
will not be able to take advantage of favorable opportunities in the current
spot market with respect to vessels employed on time charters.
As of
April 30, 2008, 12 of the 15 vessels in our fleet are employed under time
charters with remaining terms ranging between four month and 47
months. The percentage of our fleet that is under time charter
contracts or short term spot contracts, or that is otherwise protected from
market fluctuations represents approximately 85% of our vessel capacity in 2008.
Although time charters provide relatively steady streams of revenue, vessels
committed to time charters may not be available for spot charters during periods
of increasing charter hire rates, when spot charters might be more profitable.
If we cannot re-charter these vessels on time charters or trade them in the spot
market profitably, our results of operations and operating cash flow may suffer.
We may not be able to secure charter hire rates in the future that will enable
us to operate our vessels profitably.
16
We
may be unable to attract and retain key management personnel and other employees
in the shipping industry, which may negatively affect the effectiveness of our
management and our results of operations.
Our
success depends to a significant extent upon the abilities and efforts of our
management team. Our success will depend upon our ability to hire additional
employees and to retain key members of our management team. The loss of any of
these individuals could adversely affect our business prospects and financial
condition. Difficulty in hiring and retaining personnel could adversely affect
our results of operations. We do not currently intend to maintain “key man” life
insurance on any of our officers.
Risks
involved with operating ocean-going vessels could affect our business and
reputation, which may reduce our revenues.
The
operation of an ocean-going vessel carries inherent risks. These risks include,
among others, the possibility of:
·
marine
disaster;
·
piracy;
·
environmental
accidents;
·
grounding,
fire, explosions and collisions;
·
cargo
and property losses or damage;
·
business
interruptions caused by mechanical failure, human error, war, terrorism,
political action in various countries, labor strikes or adverse weather
conditions; and
·
work
stoppages or other labor problems with crew members serving on our
vessels.
Such
occurrences could result in death or injury to persons, loss of property or
environmental damage, delays in the delivery of cargo, loss of revenues from or
termination of charter contracts, governmental fines, penalties or restrictions
on conducting business, higher insurance rates, and damage to our reputation and
customer relationships generally. Any of these circumstances or events could
increase our costs or lower our revenues, which could result in reduction in the
market price of our shares of common stock. The involvement of our vessels in an
environmental disaster may harm our reputation as a safe and reliable vessel
owner and operator.
The
operation of drybulk carriers has certain unique operational risks.
The
operation of certain ship types, such as drybulk carriers, has certain unique
risks. With a drybulk carrier, the cargo itself and its interaction with the
ship can be a risk factor. By their nature, drybulk cargoes are often heavy,
dense, easily shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during unloading operations
with grabs, jackhammers (to pry encrusted cargoes out of the hold), and small
bulldozers. This treatment may cause damage to the vessel. Vessels damaged due
to treatment during unloading procedures may be more susceptible to breach to
the sea. Hull breaches in drybulk carriers may lead to the flooding of the
vessels holds. If a drybulk carrier suffers flooding in its forward holds, the
bulk cargo may become so dense and waterlogged that its pressure may buckle the
vessels bulkheads leading to the loss of a vessel. If we are unable to
adequately maintain our vessels we may be unable to prevent these events. Any of
these circumstances or events could negatively impact our business, financial
condition, results of operations and ability to pay dividends. In addition, the
loss of any of our vessels could harm our reputation as a safe and reliable
vessel owner and operator.
17
The
operation of containerships has certain unique operational risks.
The
operation of containerships has certain unique risks. Containerships operate at
high speeds in order to move cargoes around the world quickly and minimize
delivery delays. These high speeds can result in greater impact in collisions
and groundings resulting in more damage to the vessel when compared to vessels
operating at lower speeds. In addition, due to the placement of the containers
on a containership, there is a greater risk that containers carried on deck will
be lost overboard if an accident does occur. Furthermore, with the highly varied
cargo that can be carried on a single containership, there can be additional
difficulties with any clean-up operation following an accident. Also, we may not
be able to correctly control the contents and condition of cargoes within the
containers which may give rise to events such as customer complaints, accidents
on-board the ships or problems with authorities due to carriage of illegal
cargoes. Any of these circumstances or events could negatively impact our
business, financial condition, results of operations and ability to pay
dividends. In addition, the loss of any of our vessels could harm our reputation
as a safe and reliable vessel owner and operator.
Our
vessels may suffer damage and it may face unexpected drydocking costs, which
could affect our cash flow and financial condition.
If our
vessels suffer damage, they may need to be repaired at a drydocking facility.
The costs of drydock repairs are unpredictable and may be substantial. We may
have to pay drydocking costs that our insurance does not cover. The loss of
earnings while these vessels are being repaired and reconditioned, as well as
the actual cost of these repairs, would decrease our earnings.
Purchasing
and operating previously owned, or secondhand, vessels may result in increased
operating costs and vessels off-hire, which could adversely affect our
earnings.
Although
we inspect the secondhand vessels prior to purchase, this inspection does not
provide us with the same knowledge about their condition and cost of any
required (or anticipated) repairs that it would have had if these vessels had
been built for and operated exclusively by us. Generally, we do not receive the
benefit of warranties on secondhand vessels.
In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. As of April 30, 2008 the average age of our fleet
was approximately 18.5 years. As our fleet ages, we will incur increased costs.
Older vessels are typically less fuel efficient and more costly to maintain than
more recently constructed vessels. Cargo insurance rates also increase with the
age of a vessel, making older vessels less desirable to charterers. Governmental
regulations and safety or other equipment standards related to the age of a
vessel may also require expenditures for alterations or the addition of new
equipment to our vessels and may restrict the type of activities in which our
vessels may engage.
Governmental
regulations, safety or other equipment standards related to the age of vessels
may require expenditures for alterations, or the addition of new equipment, to
our vessels and may restrict the type of activities in which the vessels may
engage. As our vessels age, market conditions may not justify those expenditures
or enable us to operate our vessels profitably during the remainder of their
useful lives. If we sell vessels, we are not certain that the price for which we
sell them will equal their carrying amount at that time.
We
may not have adequate insurance to compensate us adequately for damage to, or
loss of, our vessels.
We
procure hull and machinery insurance, protection and indemnity insurance, which
includes environmental damage and pollution insurance and war risk insurance and
freight, demurrage and defense insurance for our fleet. We do not maintain
insurance against loss of hire, which covers business interruptions that result
in the loss of use of a vessel. We may not be adequately insured against all
risks and we may not be able to obtain adequate insurance coverage for our fleet
in the future. The insurers may not pay particular claims. Our insurance
policies contain deductibles for which we will be responsible and limitations
and exclusions which may increase our costs. Moreover, the insurers may default
on any claims they are required to pay. If our insurance is not enough to cover
claims that may arise, it may have a material adverse effect on our financial
condition and results of operations.
18
Our
international operations expose us to risks of terrorism and piracy that may
interfere with the operation of our vessels.
We are an
international company and primarily conduct our operations outside the United
States of America. Changing
economic, political and governmental conditions in the countries where we are
engaged in business or where our vessels are registered affect our operations.
In the past, political conflicts, particularly in the Arabian Gulf, resulted in
attacks on vessels, mining of waterways and other efforts to disrupt shipping in
the area. Acts of terrorism and piracy have also affected vessels trading in
regions such as the South China Sea. The likelihood of future acts of terrorism
may increase, and our vessels may face higher risks of being attacked. We are
not fully insured against any of these risks. In addition, future hostilities or
other political instability in regions where our vessels operate could have a
material adverse effect on our trade patterns and adversely affect our
operations and performance.
Obligations
associated with being a public company require significant company resources and
management attention.
We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and the other rules and regulations of the
Commission, including the Sarbanes-Oxley Act of 2002. Section 404 of the
Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of
our internal control over financial reporting.
We work
with our legal, accounting and financial advisors to identify any areas in which
changes should be made to our financial and management control systems to manage
our growth and our obligations as a public company. We evaluate areas such as
corporate governance, corporate control, internal audit, disclosure controls and
procedures and financial reporting and accounting systems. We will make changes
in any of these and other areas, including our internal control over financial
reporting, which we believe are necessary. However, these and other measures we
may take may not be sufficient to allow us to satisfy our obligations as a
public company on a timely and reliable basis. In addition, compliance with
reporting and other requirements applicable to public companies will create
additional costs for us and will require the time and attention of management.
Our limited management resources may exacerbate the difficulties in complying
with these reporting and other requirements while focusing on executing our
business strategy. We may not be able to predict or estimate the amount of the
additional costs we may incur, the timing of such costs or the degree of impact
that our management’s attention to these matters will have on our
business.
Our
historical financial and operating data may not be representative of our future
results because we are a company with a limited operating history as a
stand-alone entity and as a publicly traded company.
Our
historical financial and operating data may not be representative of our future
results because we are a company with a limited operating history as a
stand-alone entity and as a publicly traded company. Our consolidated financial
statements include the financial position, results of operations and cash flows
of shipowning companies managed by Eurobulk and majority owned by the Pittas
family prior to their contribution to us. Although our results of operations,
cash flows and financial condition reflected in the consolidated financial
statements include all expenses allocable to our business, due to factors such
as the additional administrative and financial obligations associated with
operating as a publicly traded company, they may not be indicative of the
results of operations that we would have achieved had we operated as a public
entity for all periods presented or of future results that we may achieve as a
publicly traded company with our current holding company structure.
Exposure
to currency exchange rate fluctuations will result in fluctuations in our cash
flows and operating results.
We
generate all our revenues in U.S. dollars, but our ship manager, Eurobulk,
incurs approximately 35% of vessel operating expenses and we incur management
fees and some general and administrative expenses in currencies other than the
U.S. dollar. This difference could lead to fluctuations in our operating
expenses, which would affect our financial results. Expenses incurred in foreign
currencies increase when the value of the U.S. dollar falls, which would reduce
our profitability.
19
U.S. tax authorities
could treat us as a “passive foreign investment company,” which could have
adverse U.S. federal income tax consequences to U.S.
holders.
A
foreign corporation will be treated as a “passive foreign investment company,”
or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of its
gross income for any taxable year consists of certain types of “passive income”
or (2) at least 50% of the average value of the corporation’s assets produce or
are held for the production of those types of “passive income.” For purposes of
these tests, “passive income” includes dividends, interest, and gains from the
sale or exchange of investment property and rents and royalties other than rents
and royalties which are received from unrelated parties in connection with the
active conduct of a trade or business. For purposes of these tests, income
derived from the performance of services does not constitute “passive income.”
U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income
tax regime with respect to the income derived by the PFIC, the distributions
they receive from the PFIC and the gain, if any, they derive from the sale or
other disposition of their shares in the PFIC.
Based on
our current method of operation, we do not believe that we have been, are or
will be a PFIC with respect to any taxable year. In this regard, we treat the
gross income we derive or are deemed to derive from our time chartering
activities as services income, rather than rental income. Accordingly, we
believe that our income from our time chartering activities does not constitute
“passive income,” and the assets that we own and operate in connection with the
production of that income do not constitute passive assets.
There is,
however, no direct legal authority under the PFIC rules addressing our method of
operation. Accordingly, the U.S. Internal Revenue Service, or IRS, or a court of
law may not accept our position, and there is a risk that the IRS or a court of
law could determine that we are a PFIC. Moreover, we may constitute a PFIC for
any future taxable year if there were to be changes in the nature and extent of
our operations.
If the
IRS were to find that we are or have been a PFIC for any taxable year, our U.S.
shareholders will face adverse U.S. tax consequences. Under the PFIC rules,
unless those shareholders make an election available under the United States
Internal Revenue Code of 1986 (the “Code”) (which election could itself have
adverse consequences for such shareholders, as discussed in Item 10 of this
annual report under “Taxation — United States Federal Income Taxation of U.S.
Holders”), such shareholders would be liable to pay U.S. federal income tax at
the then prevailing income tax rates on ordinary income plus interest upon
excess distributions and upon any gain from the disposition of our shares, as if
the excess distribution or gain had been recognized ratably over the
shareholder’s holding period of our shares. See “Taxation — United States
Federal Income Taxation of U.S. Holders” in this annual report under Item 10 for
a more comprehensive discussion of the U.S. federal income tax consequences to
U.S. shareholders if we are treated as a PFIC.
Legislation
has been proposed in the United States which would prevent dividends on our
shares from qualifying for certain preferential rates for U.S. federal income
tax purposes.
“Qualified
dividend income” derived by noncorporate U.S. shareholders that are subject to
U.S. federal income tax is currently through 2010 subject to U.S. federal income
taxation at reduced rates. We expect that under current law, so long as our
shares are traded on the NASDAQ Capital Market, the NASDAQ Global Select Market
or the NASDAQ Global Market and we do not and have not qualified as a “passive
foreign investment company” for U.S. federal income tax purposes, distributions
treated as dividends for U.S. tax purposes on our shares will potentially be
eligible (that is, eligible if certain conditions relating to the shareholder
are satisfied) for treatment as qualified dividend income. Proposed legislation
which has been introduced in the U.S. Congress would, however, if enacted, make
it unlikely that such distributions on our shares would be eligible for such
treatment.
Dividends
paid on the common stock to U.S. individuals, trusts and estates may be taxed as
ordinary income.
Our
common stock is listed on the NASDAQ Global Select Market and dividends on our
common stock are potentially eligible to be treated as “qualified dividend
income” which is taxed to U.S. individuals, trusts and estates at preferential
tax rates. If our common stock fails to maintain the requirements of the NASDAQ
Global Select Market or another established securities market in the United
States, our shares will trade over the counter and any dividends paid on the
shares will be treated for U.S. tax purposes as ordinary income rather than
“qualified dividend income” and lose eligibility for the preferential tax
treatment.
20
We
may have to pay tax on United States source income, which would reduce our
earnings.
Under the
Code, 50% of the gross shipping income of a vessel owning or chartering
corporation, such as ourselves and our subsidiaries, that is attributable to
transportation that begins or ends, but that does not both begin and end, in the
United States may be subject to a 4% United States federal income tax without
allowance for deduction, unless that corporation qualifies for exemption from
tax under section 883 of the Code and the applicable Treasury Regulations
promulgated thereunder.
We
believe that we and each of our subsidiaries qualify for this statutory tax
exemption and we have taken this position for United States federal income tax
return reporting purposes. However, there are factual circumstances beyond our
control that could cause us to lose the benefit of this tax exemption and
thereby become subject to United States federal income tax on our United States
source income. Due to the factual nature of the issues involved, we may not be
able to maintain our tax-exempt status or that of any of our
subsidiaries.
If we or
our subsidiaries are not entitled to exemption under Section 883 for any taxable
year, we or our subsidiaries could be subject for those years to an effective 2%
United States federal income tax on the shipping income these companies derive
during the year that are attributable to the transport or cargoes to or from the
United States. The imposition of this taxation would have a negative effect on
our business and would result in decreased earnings available for distribution
to our shareholders.
It
may be difficult to enforce service of process and enforcement of judgments
against us and our officers and directors.
We are a
Marshall Islands corporation, and our executive offices are located outside of
the United States in Maroussi, Greece. A majority of our directors and officers
reside outside of the United States, and a substantial portion of our assets and
the assets of our officers and directors are located outside of the United
States. As a result, you may have difficulty serving legal process within the
United States upon us or any of these persons. You may also have difficulty
enforcing, both in and outside of the United States, judgments you may obtain in
the U.S. courts against us or these persons in any action, including actions
based upon the civil liability provisions of U.S. federal or state securities
laws.
There is
also substantial doubt that the courts of the Marshall Islands or Greece would
enter judgments in original actions brought in those courts predicated on U.S.
federal or state securities laws.
Risk
Factors Relating To Our Common Stock
The
trading volume for our common stock has been low, which may cause our common
stock to trade at lower prices and make it difficult to sell your common
stock.
Although
our shares of common stock have traded on the NASDAQ Global Market since January31, 2007 and on the NASDAQ Global Select Market since January 1, 2008, recently
the trading volume has been lower. Our shares may not actively trade in the
public market and any such limited liquidity may cause our common stock to trade
at lower prices and make it difficult to sell your common stock
The
market price of our common stock has been and may in the future be subject to
significant fluctuations.
The
market price of our common stock has been and may in the future be subject to
significant fluctuations as a result of many factors, some of which are beyond
our control. Among the factors that have in the past and could in the future
affect our stock price are:
·
quarterly
variations in our results of
operations;
·
changes
in sales or earnings estimates or publication of research reports by
analysts;
·
speculation
in the press or investment community about our business or the shipping
industry;
21
·
changes
in market valuations of similar companies and stock market price and
volume fluctuations generally;
·
strategic
actions by us or our competitors such as acquisitions or
restructurings;
·
regulatory
developments;
·
additions
or departures of key personnel;
·
general
market conditions; and
·
domestic
and international economic, market and currency factors unrelated to our
performance.
The stock
markets in general, and the markets for drybulk shipping and shipping stocks in
general, have experienced extreme volatility that has sometimes been unrelated
to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common
stock.
The price
of our shares may be volatile and less than you originally paid for such
shares.
The price
of our shares may be volatile, and may fluctuate due to factors such
as:
·
actual
or anticipated fluctuations in quarterly and annual
results;
·
mergers
and strategic alliances in the shipping
industry;
·
market
conditions in the industry;
·
changes
in government regulation;
·
fluctuations
in our quarterly revenues and earnings and those of our publicly held
competitors;
·
payment
of dividends;
·
shortfalls
in our operating results from levels forecasted by securities
analysts;
·
announcements
concerning us or our competitors;
and
·
the
general state of the securities
markets.
The
international drybulk and container shipping industry has been highly
unpredictable and volatile. The market for stock of companies in this industry
may be equally volatile. Our shares may trade at prices lower than you
originally paid for such shares.
Our
Articles of Incorporation and Bylaws contain anti-takeover provisions that may
discourage, delay or prevent (1) our merger or acquisition and/or (2) the
removal of incumbent directors and officers.
Our
current Articles of Incorporation and Bylaws contain certain anti-takeover
provisions. These provisions include blank check preferred stock, the
prohibition of cumulative voting in the election of directors, a classified
board of directors, advance written notice for shareholder nominations for
directors, removal of directors only for cause, advance written notice of
shareholder proposals for the removal of directors and limitations on action by
shareholders. These provisions, either individually or in the aggregate, may
discourage, delay or prevent (1) our merger or acquisition by means of a tender
offer, a proxy contest or otherwise, that a shareholder may consider in its best
interest and (2) the removal of incumbent directors and officers.
22
Future
sales of our stock could cause the market price of our common stock to
decline.
Sales of
a substantial number of shares of our common stock in the public market, or the
perception that these sales could occur, may depress the market price for our
common stock. These sales could also impair our ability to raise additional
capital through the sale of our equity securities in the future.
In 2007,
we issued a total of 17,325,000 new shares as part of our three common stock
offerings. Additionally, 248,463 and 166,667 shares were issued upon the
exercise of our warrants in 2007, and, in the four month period ended on April30, 2008, respectively; another 170,459 warrants remain
outstanding. Friends, our largest shareholder, has registered all of
its shares for re-sale under our registration statement that was declared
effective on May 16, 2007 which has resulted in these shares becoming freely
tradable without restriction under the Securities Act.
We may
issue additional shares of our stock in the future and our stockholders may
elect to sell large numbers of shares held by them from time to time. Our
amended and restated articles of incorporation authorize us to issue up to
100,000,000 shares of common stock and 20,000,000 shares of preferred
stock.
Sales of
a substantial number of any of the shares of common stock mentioned above may
cause the market price of our common stock to decline.
Because
the Republic of the Marshall Islands, where we are incorporated, does not have a
well-developed body of corporate law, shareholders may have fewer rights and
protections than under typical United States law, such as Delaware, and
shareholders may have difficulty in protecting their interest with regard to
actions taken by our Board of Directors.
Our corporate affairs are governed by
our Articles of Incorporation and Bylaws and by the Marshall Islands Business
Corporations Act (the “BCA”). The provisions of the BCA resemble provisions of
the corporation laws of a number of states in the United States. However, there
have been few judicial cases in the Republic of the Marshall Islands
interpreting the BCA. The rights and fiduciary responsibilities of directors
under the law of the Republic of the Marshall Islands are not as clearly
established as the rights and fiduciary responsibilities of directors under
statutes or judicial precedent in existence in certain U.S. jurisdictions.
Stockholder rights may differ as well. For example, under Marshall Islands law,
a copy of the notice of any meeting of the shareholders must be given not less
than 15 days before the meeting, whereas in Delaware such notice must be given
not less than 10 days before the meeting. Therefore, if immediate shareholder
action is required, a meeting may not be able to be convened as quickly as it
can be convened under Delaware law. Also, under Marshall Islands law, any action
required to be taken by a meeting of shareholders may only be taken without a
meeting if consent is in writing and is signed by all of the shareholders
entitled to vote, whereas under Delaware law action may be taken by consent if
approved by the number of shareholders that would be required to approve such
action at a meeting. Therefore, under Marshall Islands law, it may be more
difficult for a company to take certain actions without a meeting even if a
majority of the shareholders approve of such action. While the BCA does
specifically incorporate the non-statutory law, or judicial case law, of the
State of Delaware and other states with substantially similar legislative
provisions, public shareholders may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling
shareholders than would shareholders of a corporation incorporated in a U.S.
jurisdiction.
We are
Euroseas Ltd., a Marshall Islands company incorporated in May 2005. We are a
provider of worldwide ocean-going transportation services. We own and operate
drybulk carriers that transport major bulks such as iron ore, coal and grains,
and minor bulks such as bauxite, phosphate and fertilizers. We also own and
operate containerships and multipurpose vessels that transport dry and
refrigerated containerized cargoes, mainly including manufactured products and
perishables. As of April 30, 2008, our fleet consisted of five drybulk carriers,
comprised of three Panamax drybulk carriers and two Handysize drybulk carriers,
nine containerships and one multipurpose vessel. The total cargo carrying
capacity of the four bulk carriers is 277,316 deadweight tons, or dwt, and of
the nine containerships is 239,010 dwt and 15,321 twenty-foot equivalent units,
or teu. Our multipurpose vessel can carry 22,568 dwt and/or 950 teu.
Four of our vessels were acquired before January 1, 2004 and were controlled by
the Pittas family interests. On June 29, 2005, the shareholders of the four
vessels (and of three additional vessels that have since been sold) transferred
their shares in each of the vessels to Euroseas in exchange for shares in
Friends, a 100% owner of Euroseas at that time. We have purchased
eleven additional vessels since June 2005.
23
On August25, 2005, we raised approximately $17.5 million in net proceeds from the private
placement of our securities to a number of institutional and accredited
investors (the “Private Placement”). In the Private Placement, we issued
2,342,331 shares of common stock at a price of $9.00 per share (adjusted for the
1-for-3 reverse split of our common stock effected on October 6, 2006), as well
as warrants to purchase an additional 585,589 shares of common stock. The
warrants have a five year term and an exercise price of $10.80 per share
(adjusted for the 1-for-3 reverse split of our common stock).
On
February 5, 2007, we raised approximately $43.3 million in net proceeds from a
follow-on common stock offering. On July 5, 2007, we raised approximately $73.0
million in net proceeds from a follow-on common stock offering. On
November 9, 2007, we raised approximately $93.6 million in net proceeds from a
follow-on common stock offering.
Our
shares originally traded on the OTCBB under the symbol ESEAF.OB until October 5,2006 and EUSEF.OB from October 6, 2006 to January 30, 2007. Our
shares have traded on the NASDAQ Global Select Market under the symbol ESEA
since January 31, 2007 and on the NASDAQ Global Select Market since January 1,2008. Since January 1, 2008, our shares are traded on the NASDAQ
Global Select Market.
Our
executive offices are located at 40 Ag. Konstantinou Ave., 151 24, Maroussi,
Greece. Our telephone number is +30-211-1804005.
B.
Business
overview
Our fleet
consists of: (i) drybulk carriers that transport iron ore, coal, grain and other
dry cargoes along worldwide shipping routes; (ii) containerships that transport
container boxes providing scheduled service between ports; and (iii)
multipurpose vessels that can carry either bulk cargoes or
containers. Please see information in the section "Our Fleet", below.
During 2003, 2004, 2005, 2006 and 2007 we had a fleet utilization of 99.3%,
99.5%, 98.5%, 98.9% and 99.7%, respectively, our vessels achieved daily time
charter equivalent rates of $8,965, $17,839, $17,485, $14,313 and $21,468,
respectively, and we generated revenues of $25.95 million, $45.72
million, $44.52 million, $42.14 million and $86.10 million,
respectively.
Our
business strategy is focused on providing consistent shareholder returns by
carefully selecting the timing and the structure of our investments in drybulk
and containership vessels and by reliably, safely and competitively operating
the vessels we own, through our affiliate, Eurobulk. Representing a continuous
shipowning and management history that dates back to the 19th century, we
believe that one of our advantages in the industry is our ability to select and
safely operate drybulk and containership vessels of any age. We continuously
evaluate sale and purchase opportunities, as well as long term employment
opportunities for our vessels.
Our
Fleet
As of
April 30, 2008, the profile and deployment of our fleet is the
following:
Name
Type
Dwt
TEU
Year
Built
Employment
TCE Rate
($/day)
Dry Bulk Vessels
IRINI
(*)
Panamax
69,734
1988
Baumarine
Spot Pool – ‘til end 2008
Spot
/ Partly fixed
ARISTIDES
N.P.
Panamax
69,268
1993
TC
‘til Mar-09
$52,000
IOANNA
P.
Panamax
64,873
1984
TC
‘til Aug-08
$35,500
NIKOLAOS
P.
Handysize
34,750
1984
Spot
$41,000
GREGOS
Handysize
38,691
1984
Spot
$44,750
Total
Dry Bulk Vessels
5
277,316
Multipurpose Dry Cargo
Vessels
TASMAN
TRADER
1
22,568
950
1990
TC
‘til Mar-12
$8,850
‘til Dec-08,
$9,500
‘til Dec-10,
$9,000
‘til Mar-12
Container Carriers
TIGER
BRIDGE
Intermediate
31,627
2,228
1990
TC
‘til Jul-09
$16,500
ARTEMIS
Intermediate
29,693
2,098
1987
TC
‘til Dec-08
$19,000
DESPINA
P
Handysize
33,667
1,932
1990
TC
‘til Feb-09
$15,250
OEL
INTEGRITY (ex-JONATHAN P)
Handysize
33,667
1,932
1990
TC
‘til Apr-09
$16,500
OEL
TRANSWORLD (ex-CLAN GLADIATOR)
Handysize
30,007
1,742
1992
TC
‘til Oct-09
$18,500
YM
XINGANG I
Handysize
23,596
1,599
1993
TC
‘til Jul-09
$26,650
MANOLIS
P
Handysize
20,346
1,452
1995
TC
‘til Oct-09
$15,800
NINOS
(ex-YM
QINGDAO I)
Feeder
18,253
1,169
1990
TC
‘til Apr-09
$13,175
KUO
HSIUNG
Feeder
18,154
1,169
1993
TC
‘til Feb-09
$15,800
Total
Container Carriers
9
239,010
15,321
Fleet
Grand Total
15
538,894
16,271
(*)
"IRINI" is employed in the Baumarine spot pool that is managed by Klaveness, a
major global charterer in the dry bulk area, and also participates in “short”
funds (contracts to carry cargo at agreed rates), reducing its exposure to the
spot market.
We plan
to expand our fleet by investing in vessels in the drybulk, containership and
multipurpose markets by targeting primarily mid-age vessels at the time of
purchase under favorable market conditions. We also intend to take advantage of
the cyclical nature of the market by buying and selling ships when we believe
favorable opportunities exist. We employ our vessels in the spot and
time charter market, through pool arrangements and under contracts of
affreightment. Presently, our nine containerships, our multipurpose vessel, one
of our panamax bulkers and two of our handysize bulkers are employed under time
charters. Our other panamax vessel, m/v Irini, is employed in the
Baumarine pool that is managed by Klaveness, a major global charterer in the
drybulk area, and also participates in “short” funds (contracts to carry cargo
at agreed rates), reducing its exposure to the spot market.
24
As of
April 30, 2008, approximately 80% of our ship capacity days in 2008 accounting
for fixed spot employment in the first and second quarter of the year, and
approximately 30% of our ship capacity days in 2009, are under time charter
contracts or protected from market fluctuations.
Management
of Our Fleet
The
operations of our vessels are managed by Eurobulk Ltd., or Eurobulk, an
affiliated company, under a master management agreement with us and separate
management agreements with each ship-owning company. Eurobulk was founded in
1994 by members of the Pittas family and is a reputable ship management company
with strong industry relationships and experience in managing vessels. Under our
master management agreement, Eurobulk is responsible for providing us with
executive services and commercial management services, which include obtaining
employment for our vessels and managing our relationships with charterers.
Eurobulk also performs technical management services, which include managing
day-to-day vessel operations, performing general vessel maintenance, ensuring
regulatory and classification society compliance, supervising the maintenance
and general efficiency of vessels, arranging our hire of qualified officers and
crew, arranging and supervising drydocking and repairs, arranging insurance for
vessels, purchasing stores, supplies, spares and new equipment for vessels,
appointing supervisors and technical consultants and providing technical support
and shoreside personnel who carry out the management functions described above
and certain accounting services.
Our
master management agreement with Eurobulk is effective as of January 1, 2008 and
has an initial term of 5 years until December 31, 2012. The master management
agreement cannot be terminated by Eurobulk without cause or under the other
limited circumstances, such as sale of the Company or Eurobulk or the bankruptcy
of either party. This master management agreement will automatically be extended
after the initial period for an additional five year period unless terminated on
or before the 90th day preceding the initial termination date. Pursuant to the
master management agreement, each new vessel we acquire in the future will enter
into a separate five year management agreement with Eurobulk. In addition, upon
expiration of the current ship management agreements between Eurobulk and each
vessel-owing subsidiary, such subsidiaries will enter into new ship management
agreements with Eurobulk that terminate contemporaneously with the master
management agreement.
In
exchange for providing us with the services described above, we pay Eurobulk 630
euros per vessel per day adjusted annually for inflation.
Our
Competitive Strengths
We
believe that we possess the following competitive strengths:
·
Experienced Management
Team. Our management team has significant experience in all aspects
of commercial, technical, operational and financial areas of our business.
Aristides J. Pittas, our Chairman and Chief Executive Officer, holds a
dual graduate degree in Naval Architecture and Marine Engineering and
Ocean Systems Management from the Massachusetts Institute of Technology.
He has worked in various technical, shipyard and ship management
capacities and since 1991 has focused on the ownership and operation of
vessels carrying dry cargoes. Dr. Anastasios Aslidis, our Chief
Financial Officer, holds a Ph.D. in Ocean Systems Management also from
Massachusetts Institute of Technology and has over 20 years of experience,
primarily as a partner at a Boston based international consulting firm
focusing on investment and risk management in the maritime
industry.
·
Cost Effective Vessel
Operations. We believe that because of the efficiencies afforded to
us through Eurobulk, the strength of our management team and the quality
of our fleet, we are, and will continue to be, a reliable, low cost vessel
operator, without compromising our high standards of performance,
reliability and safety. Despite the average age of our fleet being
approximately 18 years during 2007, our total vessel operating expenses,
including management fees and general and administrative expenses were
$5,624 per day for the year ended December 31, 2007. We consider this
amount to be among the lowest of the publicly listed drybulk shipping
companies in the U.S. Our technical and operating expertise allows us to
efficiently manage and transport a wide range of cargoes with a flexible
trade route profile, which helps reduce ballast time between voyages and
minimize off-hire days. Our professional, well-trained masters, officers
and on board crews further help us to control costs and ensure consistent
vessel operating performance.
We actively manage our fleet and strive to maximize utilization and
minimize maintenance expenditures. For the year ended December 31, 2007,
our fleet utilization was 99.7% and since 2003 our utilization rate has
averaged in excess of 99.0%.
25
·
Strong Relationships with
Customers and Financial Institutions. We believe Eurobulk and the
Pittas family have developed strong industry relationships and have gained
acceptance with charterers, lenders and insurers because of their
long-standing reputation for safe and reliable service and financial
responsibility through various shipping cycles. Through Eurobulk, we offer
reliable service and cargo carrying flexibility that enables us to attract
customers and obtain repeat business. We also believe that the established
customer base and reputation of Eurobulk and the Pittas family helps us to
secure favorable employment for our vessels with well known
charterers.
Our
Business Strategy
Our
business strategy is focused on providing consistent shareholder returns by
carefully timing and structuring acquisitions of drybulk carriers and
containerships and by reliably, safely and competitively operating our vessels
through Eurobulk. We continuously evaluate purchase and sale opportunities, as
well as long term employment opportunities for our vessels.
·
Renew and Expand our
Fleet. We expect to grow our fleet in a disciplined manner through
timely and selective acquisitions of quality vessels. We perform in-depth
technical review and financial analysis of each potential acquisition and
only purchase vessels as market conditions and developments present
themselves. We continue to be focused on purchasing well-maintained,
secondhand vessels, which should provide a significant value proposition
given the strong charter rates that exist currently. However, we will also
consider purchasing younger vessels or newbuildings if the value
proposition exists at the time. Furthermore, as part of our fleet renewal,
we will continue to sell certain vessels when we believe it is in the best
interests of the Company and our
shareholders.
·
Maintain Balanced
Employment. We intend to strategically employ our fleet between
period and spot charters. We actively pursue period charters to obtain
adequate cash flow to cover our fleet’s fixed costs, consisting of vessel
operating expenses, management fees, general and administrative expenses,
interest expense and drydocking costs for the upcoming 12-month period. We
look to deploy the remainder of our fleet through period charters, spot
charters, shipping pools or contracts of affreightment depending on our
view of the direction of the markets and other tactical or strategic
considerations. We believe this balanced employment strategy will provide
us with more predictable operating cash flows and sufficient downside
protection, while allowing us to participate in the potential upside of
the spot market during periods of rising charter rates. On the basis of
our fixed spot and existing period contracts, approximately 80% of our
vessel capacity in 2008 and approximately 30% in 2009 are fixed, which
will help protect us from market fluctuations, enable us to make
significant principal and interest payments on our debt and pay dividends
to our shareholders.
·
Operate a Fleet in Two
Sectors. While remaining focused on the dry cargo segment of the
shipping industry, we intend to continue to develop a diversified fleet of
drybulk carriers and containerships of up to Panamax size. A diversified
drybulk fleet profile will allow us to better serve our customers in both
major and minor bulk trades, as well as to reduce any dependency on any
one cargo, trade route or customer. We will remain focused on the smaller
size ship segment of the container market, which has not experienced the
same level of expansion in vessel supply that has occurred with larger
containerships. A diversified fleet, in addition to enhancing the
stability of our cash flows, will also help us to reduce our exposure to
unfavorable developments in any one shipping sector and to benefit from
upswings in any one shipping sector experiencing rising charter
rates.
·
Optimize Use of Financial
Leverage. We will use bank debt to partly fund our vessel
acquisitions and increase financial returns for our shareholders. We
actively assess the level of debt we incur in light of our ability to
repay that debt based on the level of cash flow generated from our
balanced chartering strategy and efficient operating cost structure. Our
debt repayment schedule as of December 31, 2007 calls for a reduction of
more than 46% of our then outstanding debt by the end of 2009. We expect
this will increase our ability to borrow funds to make additional vessel
acquisitions in order to grow our fleet and pay consistent and possibly
higher dividends to our
shareholders.
26
Our
Customers
Our major
charterer customers during the last three years include Klaveness (Bulkhandling
and Baumarine shipping pools), Cheng Lie, Swiss Marine, Hamburg Bulk Carriers,
Phoenix, Yang Ming Lines and Italia Maritima. We are a relationship driven
company, and our top five customers in 2006 include three of our top five
customers from 2005 (Cheng Lie, Yang Ming Lines and Klaveness). Our top five
customers accounted for approximately 53% of our total revenues
in 2007, 60% of our total revenues in 2006 and 72% of our total
revenues in 2005. In 2007, our largest five customers, Klaveness, Yang Ming
Lines, Sinochart, Italia Maritima and Cheng Lie,, accounted for
15.1%, 12.5%, 12.1%, 7.6% and 5.2% of our total revenues, respectively.
Year
ended December 31,
Charterer
2005
2006
2007
A
5.50
%
15.06
%
15.07
%
B
9.60
%
10.40
%
12.53
%
C
-
-
12.10
%
D
-
16.63
%
7.60
%
E
17.48
%
12.67
%
5.19
%
F
26.85
%
-
-
G
12.32
%
-
-
H
-
5.32
%
-
The
Dry Cargo and Containership Industries
Dry cargo shipping refers to the
transport of certain commodities by sea between various ports in bulk or
containerized form.
The drybulk commodities are often
divided into two categories — major bulks and minor bulks. Major bulks include
items such as coal, iron ore and grains, while minor bulks include items such as
aluminum, phosphate rock, fertilizer raw materials, agricultural and mineral
cargo, cement, forest products and some steel products, including
scrap.
There are four main classes of bulk
carriers — Handysize, Handymax, Panamax and Capesize. These classes represent
the sizes of the vessel carrying the cargo in terms of deadweight ton (“dwt”)
capacity, which is defined as the total weight including cargo that the vessel
can carry when loaded to a defined load line on the vessel. Handysize vessels
are the smallest of the four categories and include those vessels weighing up to
40,000 dwt. Handymax carriers are those vessels that weigh between 40,000 and
60,000 dwt, while Panamax vessels are those ranging from 60,000 dwt to 80,000
dwt. Vessels over 80,000 dwt are called Capesize vessels.
Drybulk carriers are ordinarily
chartered either through a voyage charter or a time charter, under a longer term
contract of affreightment or in pools. Under a voyage charter, the owner agrees
to provide a vessel for the transport of cargo between specific ports in return
for the payment of an agreed freight rate per ton of cargo or an agreed dollar
lump sum amount. Voyage costs, such as canal and port charges and bunker
expenses, are the responsibility of the owner. Under a time charter, the ship
owner places the vessel at the disposal of a charterer for a given period of
time in return for a specified rate (either hire per day or a specified rate per
dwt capacity per month) with the voyage costs being the responsibility of the
charterer. In both voyage charters and time charters, operating costs (such as
repairs and maintenance, crew wages and insurance premiums), as well as
drydockings and special surveys, are the responsibility of the ship owner. The
duration of time charters varies, depending on the evaluation of market trends
by the ship owner and by charterers. Occasionally, drybulk vessels are chartered
on a bareboat basis. Under a bareboat charter, operations of the vessels and all
operating costs are the responsibility of the charterer, while the owner only
pays the financing costs of the vessel.
27
A contract of affreightment (“COA”) is another type of charter
relationship where a charterer and a ship owner enter into a written agreement
pursuant to which identified cargo will be carried over a specified period of
time. COA’s benefit charterers by providing them with fixed transport costs for
a commodity over an identified period of time.
COA’s benefit ship owners by offering ascertainable revenue over that same
period of time and eliminating the uncertainty that would otherwise be caused by
the volatility of the charter market. A shipping pool is a collection of similar
vessel types under various ownerships, placed under the care of a single
commercial manager. The manager markets the vessels as a single fleet and
collects the earnings which are distributed to individual owners under a
pre-arranged weighing system by which each entered vessel receives its share.
Pools have the size and scope to combine voyage charters, time charters and
contracts of affreightment with freight forward agreements for hedging purposes,
to perform more efficient vessel scheduling thereby increasing fleet
utilization.
Containership shipping refers to the
transport of containerized trade which encompasses mainly the carriage of
finished goods, but an increasing number of other cargoes in container boxes.
Containerized trade is the fastest growing sector of seaborne trade.
Containerships are further categorized by their size measured in twenty-foot
equivalent units (teu) and whether they have their own gearing. The different
categories of containerships are as follows. Post-panamax vessels are vessels
with carrying capacity of more than 4,000 teu. Panamax vessels are vessels with
carrying capacity from 3,000 to 4,000 teu. Intermediate containerships are
vessels with carrying capacity from 2,000 to 3,000 teu. Handysize containerships
are vessels with carrying capacity from 1,300 to 2,000 teu and are sometimes
equipped with cargo loading and unloading gear. Finally, Feeder containerships
are vessels with carrying capacity from 500 to 1,300 teu and are usually
equipped with cargo loading and unloading gear. Containerships are primarily
employed in time charter contracts with liner companies, which in turn employ
them as part of the scheduled liner operations. Feeder containership are put in
liner schedules feeding containers to and from central regional ports (hubs)
where larger containerships provide cross ocean or longer haul service. The
length of the time charter contract can range from several months to
years.
Our
Competitors
We
operate in markets that are highly competitive and based primarily on supply and
demand. We compete for charters on the basis of price, vessel location, size,
age and condition of the vessel, as well as on our reputation. Eurobulk arranges
our charters (whether spot charters, time charters or shipping pools) through
the use of Eurochart, an affiliated brokering company who negotiates the terms
of the charters based on market conditions. We compete primarily with other
shipowners of drybulk carriers in the Handysize, Handymax and Panamax drybulk
carrier sectors and the containership sector. Ownership of drybulk carriers and
containerships is highly fragmented and is divided among state controlled and
independent shipowners. Some of our publicly listed competitors include Diana
Shipping Inc. (NYSE: DSX), DryShips Inc. (NASDAQ: DRYS), Excel Maritime Carriers
Ltd. (NYSE: EXM), Eagle Bulk Shipping Inc. (NASDAQ: EGLE), Genco Shipping and
Trading Limited (NASDAQ: GSTL), Navios Maritime Holdings Inc. (NASDAQ: BULK),
Danaos Corporation (NYSE: DAC) and Goldenport Holdings Inc. (LSE:
GPRT).
Seasonality
Coal, iron ore and grains, which are
the major bulks of the drybulk shipping industry, are somewhat seasonal in
nature. The energy markets primarily affect the demand for coal, with increases
during hot summer periods when air conditioning and refrigeration require more
electricity and towards the end of the calendar year in anticipation of the
forthcoming winter period. The demand for iron ore tends to decline in the
summer months because many of the major steel users, such as automobile makers,
reduce their level of production significantly during the summer holidays.
Grains are completely seasonal as they are driven by the harvest within a
climate zone. Because three of the five largest grain producers (the United
States of America, Canada and the European Union) are located in the northern
hemisphere and the other two (Argentina and Australia) are located in the
southern hemisphere, harvests occur throughout the year and grains require
drybulk shipping accordingly.
The containership industry seasonal
trends are driven by the import patterns of manufactured goods and refrigerated
cargoes by the major importers, such as the United States, Europe, Japan and
others. The volume of containerized trade is usually higher in the fall in
preparation for the holiday season. During this period of time, container
shipping rates are higher and, as a result, the charter rates for containerships
are higher. However, fluctuations due to seasonality in the container shipping
industry are much less pronounced than in the drybulk shipping
industry.
28
Environmental
and Other Regulations
Government
regulation significantly affects the ownership and operation of our vessels. Our
vessels are subject to international conventions and national, state and local
laws and regulations in force in the countries in which our vessels may operate
or are registered.
A variety
of governmental and private entities subject our vessels to both scheduled and
unscheduled inspections. These entities include the local port authorities (U.S.
Coast Guard, harbor master or equivalent), classification societies, flag state
administration (country of registry) and charterers. Certain of these entities
require us to obtain permits, licenses and certificates for the operation of our
vessels. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one or more of our
vessels.
We
believe that the heightened level of environmental and quality concerns among
insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that will emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our vessels is in
substantial compliance with applicable environmental laws and regulations;
however, because such laws and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may limit our
ability to do business, increase our operating costs, force the early retirement
of our vessels, and/or affect their resale value, all of which could have a
material adverse effect on our financial condition and results of
operations.
Environmental
Regulation – International Maritime Organization (“IMO”)
The IMO
has negotiated international conventions that impose liability for oil pollution
in international waters and a signatory’s territorial waters. In September 1997,
the IMO adopted Annex VI to the International Convention for the Prevention of
Pollution from Ships to address air pollution from ships. Annex VI was ratified
in May 2004, and became effective in May 2005. Annex VI sets limits on sulfur
oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate
emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI
also includes a global cap on the sulfur content of fuel oil and allows for
special areas to be established with more stringent controls on sulfur
emissions. Our vessel manager has informed us that a plan to confirm with the
Annex VI regulations is in place and we believe we are in substantial compliance
with Annex VI. Additional or new conventions, laws and regulations
may be adopted that could adversely affect our ability to operate our
ships.
The
operation of our vessels is also affected by the requirements set forth in the
ISM Code. The ISM Code requires shipowners and bareboat charterers to develop
and maintain an extensive “Safety Management System” that includes the adoption
of a safety and environmental protection policy setting forth instructions and
procedures for safe operation and describing procedures for dealing with
emergencies. The failure of a shipowner or management company to comply with the
ISM Code may subject such party to increased liability, may decrease available
insurance coverage for the affected vessels, and may result in a denial of
access to, or detention in, certain ports. Currently, each of our vessels is ISM
Code-certified. However, we may not be able to maintain such certification
indefinitely.
Environmental
Regulations – The United States of America Oil Pollution Act of 1990
(“OPA”)
OPA
established an extensive regulatory and liability regime for the protection and
cleanup of the environment from oil spills. OPA affects all shipowners and
operators whose vessels trade in the United States of America, its territories
and possessions or whose vessels operate in waters of the United States of
America, which includes the United States’ territorial sea of the United States
of America and its 200 nautical mile exclusive economic zone.
Under
OPA, vessel owners, operators, charterers and management companies are
“responsible parties” and are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels, including
bunkers (fuel).
29
OPA was
amended in 2006 to increase the limits of the liability of responsible parties
for non-tank vessels to the greater of $950 per gross ton or $800,000 (subject
to possible adjustment for inflation). These limits of liability do not apply if
an incident was directly caused by violation of applicable United States federal
safety, construction or operating regulations or by a responsible party’s gross
negligence or willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with oil removal
activities.
We
currently maintain for each of our vessels pollution liability coverage
insurance in the amount of $1 billion per incident. If the damages from a
catastrophic pollution liability incident exceed our insurance coverage, the
payment of those damages may materially decrease our net income.
OPA
requires shipowners and operators of vessels to establish and maintain with the
United States Coast Guard evidence of financial responsibility sufficient to
meet their potential liabilities under OPA. In December 1994, the Coast Guard
implemented regulations requiring evidence of financial responsibility for
non-tank vessels in the amount of $900 per gross ton, which includes the OPA
limitation on liability of $600 per gross ton and the U.S. Comprehensive
Environmental Response, Compensation, and Liability Act liability limit of $300
per gross ton. We expect that the Coast Guard will increase the amount of
financial responsibility to reflect the 2006 increase in liability under OPA.
Under the regulations, vessel owners and operators may evidence their financial
responsibility by showing proof of insurance, surety bond, self-insurance, or
guaranty.
OPA
specifically permits individual states to impose their own liability regimes
with regard to oil pollution incidents occurring within their boundaries, and
some states have enacted legislation providing for unlimited liability for oil
spills. In some cases, states, which have enacted such legislation, have not yet
issued implementing regulations defining vessels owners’ responsibilities under
these laws. We currently comply, and intend to comply in the future, with all
applicable state regulations in the ports where our vessels call.
Environmental
Regulation – The United States of America Clean Water Act
The U.S.
Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances
in navigable waters and imposes strict liability in the form of penalties for
any unauthorized discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and compliments the remedies available
under OPA and CERCLA.
Currently,
under U.S. Environmental Protection Agency, or EPA, regulations that have been
in place since 1978, vessels are exempt from the requirement to obtain CWA
permits for the discharge in U.S. ports of ballast water and other substances
incidental to the normal operation of vessels. However, on March 30, 2005, the
United States District Court for the Northern District of California ruled in
Northwest Environmental Advocate v. EPA, 2005 U.S. Dist. LEXIS 5373, that EPA
exceeded its authority in creating an exemption for ballast water. On September18, 2006, the court issued an order granting permanent injunctive relief to the
plaintiffs, invalidating the blanket exemption in EPA’s regulations for all
discharges incidental to the normal operation of a vessel as of September 30,2008, and directing EPA to develop a system for regulating all discharges from
vessels by that date. Under the Court’s ruling, shipowners and operators of
vessels visiting U.S. ports would be required to comply with the CWA permitting
program to be developed by EPA or face penalties. EPA has appealed this decision
to the Ninth Circuit Court of Appeals, but, if the lower court’s order is
ultimately upheld, we will incur certain costs to obtain CWA permits for our
vessels.
Environmental
Regulation – Other Environmental Initiatives
The
European Union is considering legislation that will affect the operation of
vessels and the liability of shipowners for oil pollution. It is difficult to
predict what legislation, if any, may be promulgated by the European Union or
any other country or authority.
30
The U.S.
National Invasive Species Act, or NISA, was enacted in 1996 in response to
growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. Under NISA, the U.S. Coast
Guard adopted regulations in July 2004 imposing mandatory ballast water
management practices for all vessels equipped with ballast water tanks entering
U.S. waters. These requirements can be met by performing mid-ocean ballast
exchange, by retaining ballast water on board the ship, or by using
environmentally sound alternative ballast water management methods approved by
the U.S. Coast Guard. (However, mid-ocean ballast exchange is mandatory
for ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the
foreign export of Alaskan North Slope crude oil.) Mid-ocean ballast exchange is
the primary method for compliance with the Coast Guard regulations, since
holding ballast water can prevent ships from performing cargo operations upon
arrival in the United States, and alternative methods are still under
development. Vessels that are unable to conduct mid-ocean ballast exchange due
to voyage or safety concerns may discharge minimum amounts of ballast water (in
areas other than the Great Lakes and the Hudson River), provided that they
comply with recordkeeping requirements and document the reasons they could not
follow the required ballast water management requirements. The Coast Guard is
developing a proposal to establish ballast water discharge standards, which
could set maximum acceptable discharge limits for various invasive species,
and/or lead to requirements for active treatment of ballast water.
At the
international level, the IMO adopted an International Convention for the control
and Management of Ships’ Ballast Water and Sediments in February 2004 (the “BWM
Convention”). The Convention’s implementing regulations call for a phased
introduction of mandatory ballast water exchange requirements (beginning in
2009), to be replaced in time with mandatory concentration limits. The BWM
Convention will not enter into force until
12 months
after it has been adopted by 30 states, the combined merchant fleets of which
represent not less than 35% of the gross tonnage of the world’s merchant
shipping. As of May 31, 2007, the BWM Convention has been adopted by 10 states,
representing 3.42% of the gross tonnage of the world’s merchant
shipping.
Vessel
Security Regulations
Since the
terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the
Maritime Transportation Security Act of 2002 (“MTSA”), came into effect. To
implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of the United
States of America. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea (“SOLAS”) created a new chapter of the
convention dealing specifically with maritime security. The new chapter went
into effect in July 2004, and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
ISPS Code. Among the various requirements are:
·
on-board
installation of automatic information systems (“AIS”), to enhance
vessel-to-vessel and vessel-to-shore
communications;
·
on-board
installation of ship security alert
systems;
·
the
development of vessel security plans;
and
·
compliance
with flag state security certification
requirements.
The U.S.
Coast Guard regulations, intended to align with international maritime security
standards, exempt non-U.S. vessels from MTSA vessel security measures provided
such vessels have on board, by July 1, 2004, a valid International Ship Security
Certificate (“ISSC”) that attests to the vessel’s compliance with SOLAS security
requirements and the ISPS Code. Our vessels are in compliance with the various
security measures addressed by the MTSA, SOLAS and the ISPS Code. We do not
believe these additional requirements will have a material financial impact on
our operations.
Inspection
by Classification Societies
The hull
and machinery of every commercial vessel must be classed by a classification
society authorized by its country of registry. The classification society
certifies that a vessel is safe and seaworthy in accordance with the applicable
rules and regulations of the country of registry of the vessel and SOLAS. Our
vessels are currently classed with Lloyd’s Register of Shipping, Bureau Veritas
and Nippon Kaiji Kyokai. ISM and International Ship and Port Facilities Security
(“ISPS”) certification have been awarded by Bureau Veritas and the Panama
Maritime Authority to our vessels and Eurobulk, our ship management
company.
31
A vessel
must undergo annual surveys, intermediate surveys, drydockings and special
surveys. In lieu of a special survey, a vessel’s machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Every vessel is also required to be
drydocked every two to three years for inspection of the underwater parts of
such vessel. If any vessel does not maintain its class and/or fails any annual
survey, intermediate survey, drydocking or special survey, the vessel will be
unable to carry cargo between ports and will be unemployable and uninsurable
which could cause us to be in violation of certain covenants in our loan
agreements. Any such inability to carry cargo or be employed, or any such
violation of covenants, could have a material adverse impact on our financial
condition and results of operations.
The
following table lists the next drydocking and special survey for the vessels in
our current fleet.
Vessel
Next
Type
TASMAN
TRADER
June
2010
Special
Survey
NINOS
July
2010
Special
Survey
ARTEMIS
April
2010
Drydocking
YM
XINGANG I
February
2011
Drydocking
ARISTIDES
N.P.
February
2011
Drydocking
KUO
HSIUNG
April
2011
Drydocking
IRINI
June
2008
Special
Survey
NIKOLAOS
P
March
2009
Special
Survey
GREGOS
July
2009
Special
Survey
MANOLIS
P
April
2010
Special
Survey
OEL
TRANSWORLD
April
2010
Drydocking
DESPINA
P
January
2011
Special
Survey
OEL
INTEGRITY
December
2010
Special
Survey
TIGER
BRIDGE
October
2008
Drydocking
IOANNA
P
March
2009
Special
Survey
——————
Risk
of Loss and Liability Insurance
General
The
operation of any cargo vessel includes risks such as mechanical failure,
physical damage, collision, property loss, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, there is always an inherent possibility of
marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
OPA, which imposes virtually unlimited liability upon shipowners, operators and
bareboat charterers of any vessel trading in the exclusive economic zone of the
United States of America for certain oil pollution accidents in the United
States of America, has made liability insurance more expensive for shipowners
and operators trading in the United States of America market. While we believe
that our present insurance coverage is adequate, not all risks can be insured,
and there can be no guarantee that any specific claim will be paid, or that we
will always be able to obtain adequate insurance coverage at reasonable
rates.
Hull
and Machinery Insurance
We
procure hull and machinery insurance, protection and indemnity insurance, which
includes environmental damage and pollution insurance and war risk insurance and
FD&D insurance for our fleet. We do not maintain insurance against loss of
hire, which covers business interruptions that result in the loss of use of a
vessel.
32
Protection
and Indemnity Insurance
Protection
and indemnity insurance is provided by mutual protection and indemnity
associations, or P&I Associations, which covers our third-party liabilities
in connection with our shipping activities. This includes third party
liability and other related expenses of injury or death of crew, passengers and
other third parties, loss or damage to cargo, claims arising from collisions
with other vessels, damage to other third-party property, pollution arising from
oil or other substances, and salvage, towing and other related costs, including
wreck removal. Protection and indemnity insurance is a form of mutual indemnity
insurance, extended by protection and indemnity mutual associations, or
“clubs.”
Our
current protection and indemnity insurance coverage for pollution is $1 billion
per vessel per incident. The 14 P&I Associations that comprise the
International Group insure approximately 90% of the world’s commercial tonnage
and have entered into a pooling agreement to reinsure each association’s
liabilities. Our vessels are members of the UK Club. Each P&I Association
has capped its exposure to this pooling agreement at $4.5 billion. As a member
of a P&I Association, which is a member of the International Group, we are
subject to calls payable to the associations based on our claim records as well
as the claim records of all other members of the individual associations and
members of the shipping pool of P&I Associations comprising the
International Group.
Euroseas
is the sole owner of all outstanding shares of the subsidiaries listed in Note 1
of our consolidated financial statements under Item 18 and in Exhibit 8.1 to
this annual report.
D.
Property,
plants and equipment
We do not
own any real property. As part of the management services provided by
Eurobulk during the period in which we conducted business to date, we have
shared, at no additional cost, offices with Eurobulk. We do not have
current plans to lease or purchase office space, although we may do so in the
future.
Our
interests in our vessels are owned through our wholly-owned vessel owning
subsidiaries and these are our only material properties. Our vessels are subject
to mortgages. Specifically:
·
Searoute
Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the Cyprus
flag 33,712 dwt bulk carrier motor vessel Ariel, which was built
in 1977 and acquired on March 5, 1993. Ariel was sold on
February 22, 2007.
·
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.
·
Oceanpride
Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of the Cyprus
flag 26,354 dwt bulk carrier motor vessel John P, which was built
in 1981 and acquired on March 7, 1998. John P was sold on July5, 2006.
·
Alcinoe
Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of the
Cyprus flag 26,354 dwt bulk carrier motor vessel Pantelis P, which was
built in 1981 and acquired on June 4, 1997. Pantelis P was sold on
May 31, 2006. On February 22, 2007, Alcinoe Shipping Ltd.
acquired the 38,691 dwt Cyprus flag drybulk moter vessel Gregos, which was built
in 1984. On June 13, 2007, M/V Gregos was transferred to Gregos
Shipping Limited incorporated in the Marshall Islands and its flag was
changed to the flag of the Marshall
Islands.
·
Alterwall
Business Inc. incorporated in Panama on January 15, 2001, owner of the
Panama flag 18,253 dwt container carrier motor vessel Ninos (ex YM Qingdao 1), which
was built in 1990 and acquired on February 16,2001.
·
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.
·
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.
·
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 November25, 2005.
33
·
Xenia
International Corp., incorporated in the Marshall Islands on April 6,2006, owner of the Marshall Islands flag 22,568 dwt / 950 teu multipurpose
motor vessel m/v Tasman
Trader, which was built in 1990 and acquired on April 27,2006.
·
Prospero
Maritime Inc., incorporated in the Marshall Islands on July 21, 2006,
owner of the Marshall Islands flag 69,268 dwt dry bulk motor vessel Aristides N.P”, which
was built in 1993 and acquired on September 4,2006.
·
Xingang
Shipping Ltd., incorporated in Liberia on October 16, 2006, owner of the
Liberian flag 23,596 dwt container carrier YM Xingang I, which was
built in February 1993 and acquired on November 15,2006.
·
Manolis Shipping
Ltd., incorporated in Marshall Islands on March 16, 2007, owner of the
Marshall Islands flag 20,346 dwt container carrier motor vessel Manolis P, which was
built in 1995 and acquired on April 12,2007.
·
Eternity
Shipping Company, incorporated in the Marshall Islands on May 17, 2007,
owner of the Marshall Islands flag 30,007 dwt / 1,742 teu container
carrier motor vessel OEL
Transworld (ex Clan Gladiator), which
was built in 1992 and acquired on June 13,2007.
·
Emmentaly
Business Inc., incorporated in Panama on July 4, 2007, owner of the
Panamanian flag 33,667 dwt / 1,932 teu container carrier motor vessel
OEL Integrity (ex
Jonathan P), which was built in 1990 and acquired on August 7,2007.
·
Pilory
Associates Corp., incorporated in Panama on July 4, 2007, owner of the
Panamanian flag 33,667 dwt / 1,932 teu container carrier motor vessel
Despina P, which
was built in 1990 and acquired on August 13,2007.
·
Tiger
Navigation Corp., incorporated in Marshall Islands on August 29, 2007,
owner of the Marshall Islands flag 31,627 dwt / 2,228 teu container
carrier motor vessel Tiger Bridge, which was
built in 1990 and acquired on October 4,2007.
·
Trust
Navigation Corp., incorporated in Liberia on October 1, 2007, owner of the
Liberian flag 64,873 dwt bulk carrier motor vessel Ioanna P, which was
built in 1984 and acquired on November 1,2007.
As of
December 31, 2007, our vessel m/v Nikolaos P, was collateral to
a loan with an outstanding balance of $2,600,000. Our vessels, m/v
Ninos (ex YM Quingdao 1) and m/v Kuo Hsiung, were collateral
to a loan with an outstanding balance of $7,950,000; our vessel m/v Irini was collateral to two
loans with an aggregate balance of $2,100,000. Our vessel, m/v Artemis, was collateral to a
loan with an outstanding amount of $8,500,000. Our vessel, m/v Tasman Trader, was collateral
to a loan with an outstanding balance of $6,660,000. Our vessel, m/v
Aristides N.P., was collateral to a loan with an outstanding balance of
$13,100,000. Our vessels, m/v YM Xingang I and m/v Gregos, were collateral to a
loan with an outstanding balance of $16,000,000. Our vessel, m/v Manolis P, was collateral to
a loan with an outstanding amount of $9,680,000. Our vessel, m/v Ioanna P, was collateral to a
loan with an outstanding amount of $15,000,000.
Item
4A
Unresolved
Staff Comments
None.
Item 5.
Operating
and Financial Review and Prospects
The
following discussion should be read in conjunction with our financial statements
and footnotes thereto contained in this annual report. This discussion contains
forward-looking statements, which are based on our assumptions about the future
of our business. Our actual results may differ materially from those contained
in the forward-looking statements. Please read “Forward-Looking Statements” for
additional information regarding forward-looking statements used in this annual
report. Reference in the following discussion to “our” and “us” refer to
Euroseas, our subsidiaries and the predecessor operations of Euroseas, except
where the context otherwise indicates or requires.
34
We are a
Marshall Islands company incorporated in May 2005. We are a provider of
worldwide ocean-going transportation services. We own and operate drybulk
carriers that transport major bulks such as iron ore, coal and grains, and minor
bulks such as bauxite, phosphate and fertilizers. We also own and operate
containerships and multipurpose vessels that transport dry and refrigerated
containerized cargoes, mainly including manufactured products and perishables.
As of April 30, 2008, our fleet consisted of five drybulk carriers, comprised of
three Panamax drybulk carriers and two Handysize drybulk carriers, nine
containerships and one multipurpose vessel. The total cargo carrying capacity of
the four bulk carriers is 277,316 deadweight tons, or dwt, and of the nine
containerships is 239,010 dwt and 15,321 twenty-foot equivalent units, or
teu. Our multipurpose vessel can carry 22,568 dwt and/or 950
teu.
We
actively manage the deployment of our fleet between spot market voyage charters,
which generally last from several days to several weeks, and time charters,
which can last up to several years. Some of our vessels may
participate in shipping pools, or, in some cases participate in contracts of
affreightment (please refer to the section “The Dry Cargo and Containership
Industries” under Item 4B for a description of the above mentioned types of
vessel employment). As of April 30, 2008, one of our vessels
participated in a shipping pool.
Vessels
operating on time charters provide more predictable cash flows but can yield
lower profit margins than vessels operating in the spot market during periods
characterized by favorable market conditions. Vessels operating in the spot
market generate revenues that are less predictable but may enable us to achieve
increased profit margins during periods of high vessel rates although we are
exposed to the risk of declining vessel rates, which may have a materially
adverse impact on our financial performance. Vessels operating in
pools benefit from better scheduling, and thus increased utilization, and better
access to contracts of affreightment due to the larger commercial operation. We
are constantly evaluating opportunities to increase the number of our vessels
deployed on time charters or to participate in shipping pools (if available for
our vessels), however we only expect to enter into additional time charters or
shipping pools if we can obtain contract terms that satisfy our
criteria. Containerships are employed almost exclusively on time
charter contracts. We carefully evaluate the length and the rate of
the time charter contract at the time of fixing or renewing a contract
considering market conditions, trends and expectations.
We
constantly evaluate secondhand vessel purchase opportunities to expand our fleet
accretive to our earnings and cash flow, as well as, sale opportunities of
certain of our vessels.
A.
Operating
results
Factors
Affecting Our Results of Operations
We
believe that the important measures for analyzing trends in the results of our
operations consist of the following:
Calendar days. We define
calendar days as the total number of days in a period during which each vessel
in our fleet was in our possession including off-hire days associated with major
repairs, drydockings or special or intermediate surveys. Calendar days are an
indicator of the size of our fleet over a period and affect both the amount of
revenues and the amount of expenses that we record during that
period.
Available days. We define
available days as the total number of days in a period during which each vessel
in our fleet was in our possession net of off-hire days associated with
scheduled repairs, drydockings or special or intermediate surveys. The shipping
industry uses available days to measure the number of days in a period during
which vessels were available to generate revenues.
Voyage days. We define voyage
days as the total number of days in a period during which each vessel in our
fleet was in our possession net of off-hire days associated with scheduled and
unscheduled repairs, drydockings or special or intermediate surveys or days
waiting to find employment. The shipping industry uses voyage days to measure
the number of days in a period during which vessels actually generate
revenues.
Fleet utilization. We
calculate fleet utilization by dividing the number of our voyage days during a
period by the number of our available days during that period. The shipping
industry uses fleet utilization to measure a company’s efficiency in finding
suitable employment for its vessels and minimizing the amount of days that its
vessels are off-hire for reasons such as unscheduled repairs or days waiting to
find employment.
Spot Charter Rates. Spot
charter rates are volatile and fluctuate on a seasonal and year to year basis.
The fluctuations are caused by imbalances in the availability of cargoes for
shipment and the number of vessels available at any given time to transport
these cargoes.
35
Time Charter Equivalent
(“TCE”). A standard maritime industry performance measure used to
evaluate performance is the daily time charter equivalent, or daily TCE. Daily
TCE revenues are voyage revenues minus voyage expenses divided by the number of
voyage days during the relevant time period. Voyage expenses primarily consist
of port, canal and fuel costs that are unique to a particular voyage, which
would otherwise be paid by a charterer under a time charter. We believe that the
daily TCE neutralizes the variability created by unique costs associated with
particular voyages or the employment of drybulk carriers on time charter or on
the spot market (containership are chartered on a time charter basis) and
presents a more accurate representation of the revenues generated by our
vessels.
Basis
of Presentation and General Information
We use
the following measures to describe our financial performances:
Voyage revenues. Our voyage
revenues are driven primarily by the number of vessels in our fleet, the number
of voyage days during which our vessels generate revenues and the amount of
daily charter hire that our vessels earn under charters, which, in turn, are
affected by a number of factors, including our decisions relating to vessel
acquisitions and disposals, the amount of time that we spend positioning our
vessels, the amount of time that our vessels spend in drydock undergoing
repairs, maintenance and upgrade work, the age, condition and specifications of
our vessels, levels of supply and demand in the transportation market and other
factors affecting spot market charter rates in both the drybulk carrier and
containership markets.
Commissions. We pay
commissions on all chartering arrangements of 1.25% to Eurochart, one of our
affiliates, plus additional commission of usually up to 5% to other brokers
involved in the transaction. These additional commissions, as well as changes to
charter rates will cause our commission expenses to fluctuate from period to
period. Eurochart also receives a fee equal to 1% calculated as stated in the
relevant memorandum of agreement for any vessel bought or sold by them on our
behalf.
Voyage expenses. Voyage
expenses primarily consist of port, canal and fuel costs that are unique to a
particular voyage which would otherwise be paid by the charterer under a time
charter contract, as well as commissions. Under time charters, the charterer
pays voyage expenses whereas under spot market voyage charters, we pay such
expenses. The amounts of such voyage expenses are driven by the mix of charters
undertaken during the period.
Vessel operating expenses.
Vessel operating expenses include crew wages and related costs, the cost of
insurance, expenses relating to repairs and maintenance, the costs of spares and
consumable stores, tonnage taxes and other miscellaneous expenses. Our vessel
operating expenses, which generally represent fixed costs, have historically
changed in line with the size of our fleet. Other factors beyond our control,
some of which may affect the shipping industry in general (including, for
instance, developments relating to market prices for insurance or inflationary
increases) may also cause these expenses to increase.
Management fees. These are the
fees that we pay to Eurobulk, our ship manager and an affiliate, under our
management agreement with Eurobulk for the technical and commercial management
that Eurobulk performs on our behalf. The fee, as of April 30, 2008, is 630
Euros per vessel per day and is payable monthly in advance adjusted annually for
inflation on January 1st.
Vessel depreciation. We
depreciate our vessels on a straight-line basis with reference to the cost of
the vessel, age and scrap value as estimated at the date of acquisition.
Depreciation is calculated over the remaining useful life of the vessel, which
is estimated to range from 25 to 30 years from the date of original
construction. Remaining useful lives of property are periodically reviewed and
revised to recognize changes in conditions, new regulations or other reasons.
Revisions of estimated lives are recognized over current and future
periods.
Amortization of deferred drydocking
and special survey expense. Our vessels are required to be drydocked
approximately every 30 to 60 months for major repairs and maintenance that
cannot be performed while the vessels are trading. We capitalize the costs
associated with drydockings as they occur and amortize these costs on a
straight-line basis over the period between drydockings. Costs capitalized as
part of the drydocking include actual costs incurred at the drydock yard; cost
of travel, lodging and subsistence of our personnel sent to the drydocking site
to supervise; and the cost of hiring a third party to oversee a drydocking. We
believe that these criteria are consistent with industry practice and that our
policy of capitalization reflects the economics and market values of the
vessels. Commencing January 1, 2006, we revised our policy to exclude the cost
of hiring riding crews and the cost of parts used by riding crews from amounts
capitalized as drydocking cost. We have not restated any historical financial
statements because we determined that the impact of such a revision is not
material to our operating income and net income for any periods
presented.
36
Interest expense. We
traditionally finance vessel acquisitions partly with debt on which we incur
interest expense. The interest rate we pay is generally linked to the 3-month
LIBOR rate, although from time to time we utilize fixed rate loans or could use
interest rate swaps to eliminate our interest rate exposure. Interest due is
expensed in the period is accrued. Loan cost are amortized over the period of
the loan; the un-amortized portion is written-off if the loan is prepaid
early.
Other general and administrative
expenses. We incur expenses consisting mainly of executive compensation,
professional fees, directors liability insurance and reimbursement of our
directors’ and officers’ travel-related expenses. General and administrative
expenses increased once we became a public company due to the duties typically
associated with public companies. We acquire executive services, our Chief
Executive Officer, Chief Financial Officer, Chief Administrative Officer,
Internal Auditor and Secretary, through Eurobulk as part of our master
management agreement.
In
evaluating our financial condition, we focus on the above measures to assess our
historical operating performance and we use future estimates of the same
measures to assess our future financial performance. In addition, we
use the amount of cash at our disposal and our total indebtedness to assess our
short term liquidity needs and our ability to finance additional acquisitions
with available resources (see also discussion under “Capital Expenditures”
below). In assessing the future performance of our present fleet, the
greatest uncertainty relates to the spot market performance which affects those
of our vessels that are not employed under fixed time charter
contracts. Decisions about the acquisition of additional vessels or
possible sales of existing vessels are based on financial and operational
evaluation of such action and depend on the overall state of the drybulk,
containership and multipurpose vessel market, the availability of purchase
candidates, available employment and our general assessment of economic
prospects for the sectors in which we operate.
Voyage revenues. Voyage
revenues for the period were $86.10 million, up 104.3% compared to the same
period in 2006 during which voyage revenues amounted to $42.14 million. This
increase was primarily due to the significantly higher charter rates our vessels
achieved in 2007 as compared to 2006, especially in the drybulk market, and to
the larger fleet we operated. In 2007, we operated an average of 11.48 vessels,
a 41.9% increase over the average of 8.09 vessels we operated during 2006. Our
fleet of 11.48 vessels had throughout the period 11 unscheduled off-hire days
and 210 days of scheduled off-hire for the drydocking of seven vessels,
generating an average TCE rate per vessel of $21,468 per day compared
to $14,313 per day per vessel for the same period in 2006. The
average TCE rate our vessels achieve is a combination of the time charter rate
earned by our vessels under time charter contracts, which is not influenced by
market developments, and the TCE rate earned by our vessels employed in the spot
market which is influenced by market developments. Shipping markets
in 2007 were on average stronger compared to 2006, especially in the second half
of 2007 when the drybulk market reached all time high levels. The higher average
market rates during 2007 positively influenced the earnings of our vessels
employed in the spot market.
Commissions. Commissions for
the period were $4.02 million. At 4.67% of voyage revenues, commissions were
slightly higher than in the same period in 2006; for the year ended
December 31, 2006, commissions amounted to $1.83 million, or 4.34% of voyage
revenues. The higher level of commissions in 2007 is partly due to
the fact that more vessels operated in the spot market and the higher level of
commissions of certain time charters related to the vessels acquired in
2007.
Voyage expenses. Voyage
expenses for the year were $0.90 million related to expenses for certain voyage
charters. For the year ended December 31, 2006, voyage expenses amounted to
$1.15 million. Because our vessels are generally chartered under time charter
contracts, voyage expenses represent a small fraction (1.0% and 2.7% in 2007 and
2006, respectively) of voyage revenues; in 2006, we had more voyage charters
than in 2007 which resulted in higher voyage expenses.
Vessel operating expenses.
Vessel operating expenses were $17.24 million for the period compared to $10.37
million for the same period in 2006. This difference was due to the
higher average number of vessels we operated in 2007, specifically an average of
11.48 vessels in 2007 compared to 8.09 vessels in 2006. Daily vessel operating
expenses per vessel increased between the two periods to $4,115 per day in 2007
compared to $3,524 per day in 2006, a 16.8% increase, reflecting primarily
higher crew and lubricant costs and higher exchange rate of the euro and other
currencies with respect to the U.S. dollar.
37
Management fees. These are
part of the fees we pay to Eurobulk under our master management agreement. As of
December 31, 2007, Eurobulk charged us 630 Euros per day per vessel totalling
$3.67 million for the period, or $875 per day per vessel. For the same period in
2006, management fees amounted to $2.27 million, or $770 per day per vessel
based on the daily rate per vessel of 608.33 Euros. The Euro exchange
rate has been on average about 10% higher in 2007 as compared to
2006. The increase in the management fees paid in 2007 also resulted
from an increase in the average number of vessels we owned during the period; in
2007, we owned 11.48 vessels compared to an average of 8.09 vessels we owned
during 2006.
Other general and administrative
expenses. These are expenses we pay as part of our operation as a public
company and include the fixed portion of our management agreement fees, legal
and auditing fees, directors’ and officers’ liability insurance and other
miscellaneous corporate expenses. In 2007, we had a total of $2.66 million of
general and administrative expenses as compared to $1.08 million in
2006. The increase is mainly due to higher audit fees of
approximately $0.25 million in 2007 inclusive of the audit of our internal
controls over financial reporting, the cost required for us to implement
internal controls for financial reporting to comply with Section 404 of the
Sarbanes-Oxley Act of approximately $0.23 million as well as higher management
fees we paid to Eurobulk for executive services of approximately $0.10 million
in 2007, and $0.82 million for the cost of non-cash compensation of stock
incentives awards given to certain officers, directors and other key
persons.
Amortization of drydocking and
special survey expense and vessel depreciation. Amortization and
depreciation for the period was $17.96 million. This consists of $16.42 million
of depreciation and $1.54 million of amortization of deferred drydocking
expenditures. Comparatively, depreciation and amortization for the same period
in 2006 amounted to $6.28 million and $1.01 million, respectively, for a total
of $7.29 million. Depreciation in 2007 was higher than in 2006 because
of the higher average number of vessels and also because the
depreciation associated with vessels bought in 2007 (the one vessel sold in 2007
was fully depreciated). Amortization in 2007 is also higher than the same period
in 2006 due to seven vessels that underwent drydocking or special survey during
2007 plus the full effect of the amortization of the two vessels that underwent
drydocking or special survey in 2006.
Net gain or Loss from vessel
sales. There was one vessel sold in 2007 for a gain of $3.41 million
compared to two vessel sales in 2006 for a gain of $4.45 million.
Interest and other financing costs,
net. Interest and other financing costs, net for the period were $2.49
million. Of this amount, $4.85 million relates to interest incurred, loan fees
and expenses paid and deferred loan fees written-off during the period, offset
by $2.36 million of interest income during the period. Comparatively, during the
same period in 2006, net interest and finance costs amounted to $2.53 million,
comprised of $3.40 million of interest incurred and loan fees and offset by
$0.87 million of interest income. Interest incurred and loan fees were higher in
2007 due to the higher loan amount outstanding as a result of the new loans
undertaken in June 2007 and November 2007. Interest income was higher
in 2007 due the proceeds from three follow-on common stock offerings. As of
December 31, 2007, the net proceeds of the last offering, amounting to
approximately $93.6 million, were not invested.
Trading Securities and Foreign
Exchange Gains or Losses. In 2007, we had a $7,824 foreign exchange loss
compared to a $1,598 foreign exchange loss in 2006. In 2007, we had unrealized
gain from investments in trading securities of $98,744. We had no such gain in
2006.
Net income. As a result
of the above, net income for the year ended on December 31, 2007 was $40.66
million compared to $20.07 million for the same period in 2006, representing an
increase of 102.6%.
Voyage revenues. Voyage
revenues for the period were $42.14 million, down 5.3% compared to the same
period in 2005 during which voyage revenues amounted to $44.52 million. The
decrease was primarily due to the lower charter rates our vessels achieved in
2006 as compared to 2005. Our fleet of 8.09 vessels had throughout the period 31
unscheduled off-hire days, primarily due to an unscheduled repair for m/v Ariel and 47 days of
scheduled off-hire for the drydocking of m/v Nikolaos P and m/v Kuo Hsiung, generating an
average TCE rate per vessel of $14,313 per day compared to $17,485 per day per
vessel for the same period in 2005. The average TCE rate our vessels
achieve is a combination of the time charter rate earned by our vessels under
time charter contracts, which is not influenced by market developments, and the
TCE rate earned by our vessels employed in the spot market which is influenced
by market developments. Shipping markets in 2006 were on average
weaker compared to 2005, although in the second half of 2006 the drybulk market
recovered significantly. The lower average market rates during 2006 influenced
the earnings of our vessels employed in the spot market.
38
Commissions. Commissions for
the period were $1.83 million. At 4.34% of voyage revenues, commissions were
lower than in the same period in 2005. For the year ended December 31, 2005,
commissions amounted to $2.39 million, or 5.36% of voyage revenues. The lower
level of commissions in 2006 is partly due to the fact that more
vessels operated in pools (where commissions are paid by the pool thus reducing
the commissions paid by us) and the lower level of commissions of certain time
charters (for example, m/v Tasman Trader’s charter had
commissions of 2.25%).
Voyage expenses. Voyage
expenses for the year were $1.15 million related to expenses for certain voyage
charters. For the year ended December 31, 2005, voyage expenses amounted to
$0.67 million. Because our vessels are generally chartered under time charter
contracts, voyage expenses represent a small fraction (1.5% and 2.7% in 2005 and
2006, respectively) of voyage revenues; in 2006, we had more voyage charters
than in 2005 which resulted in higher voyage expenses.
Vessel operating expenses.
Vessel operating expenses were $10.37 million for the period compared to $8.61
million for the same period in 2005. This difference was due to the
higher average number of vessels we operated in 2006, specifically an average of
8.09 vessels in 2006 compared to 7.10 vessels in 2005. Daily vessel operating
expenses per vessel increased modestly between the two periods to $3,524 per day
in 2006 compared to $3,323 per day in 2005, a 6.1% increase, reflecting
primarily higher crew and lubricant costs.
Management fees. These are
part of the fees we pay to Eurobulk under our master management agreement. As of
December 31, 2006, Eurobulk charged us 610 Euros per day per vessel totalling
$2.27 million for the period, or $770 per day per vessel. For the same period in
2005, management fees amounted to $1.91 million, or $738 per day per vessel
based on the daily rate per vessel of 590 Euros. The Euro exchange
rate has been on average about 1% higher in 2006 as compared to
2005. The increase in the management fees paid in 2006 also resulted
from an increase in the average number of vessels we owned during the period; in
2006, we owned 8.09 vessels compared to an average of 7.10 vessels we owned
during 2005.
Other general and administrative
expenses. These are expenses we pay as part of our operation as a public
company and include the fixed portion of our management agreement fees, legal
and auditing fees, directors’ and officers’ liability insurance and other
miscellaneous corporate expenses. In 2006, we had a total of $1.1 million of
general and administrative expenses as compared to $0.4 million in
2005. We started incurring these expenses in the second half of 2005
and mainly after the completion of our private placement in August
2005. Our 2006 level of general and administrative expenses reflect a
full year of incurring them compared to less than half a year in
2005.
Amortization of drydocking and
special survey expense and vessel depreciation. Amortization and
depreciation for the period was $7.29 million. This consists of $6.28 million of
depreciation and $1.01 million of amortization of deferred drydocking
expenditures. Comparatively, depreciation and amortization for the same period
in 2005 amounted to $2.66 million and $1.55 million, respectively, for a total
of $4.21 million. Depreciation in 2006 was higher than in 2005 because
of the higher average number of vessels and also because the
depreciation associated with vessels bought in 2006 was higher than the
corresponding depreciation of the vessels sold during 2006. Amortization in 2006
is lower than the same period in 2005 due to the sale of m/v Pantelis P and m/v John P in the middle of 2006,
while the 3 vessels bought during 2006 did not have any amortization during the
year.
Net gain or Loss from vessel
sales. There were two vessels sold in 2006 for a gain of $4.45
million. There were no vessel sales in the year ended December 31,2005.
Interest and other financing costs,
net. Interest and other financing costs, net for the period were $2.53
million. Of this amount, $3.40 million relates to interest incurred, loan fees
and expenses paid and deferred loan fees written-off during the period, offset
by $0.87 million of interest income during the period. Comparatively, during the
same period in 2005, net interest and finance costs amounted to $1.04 million,
comprised of $1.50 million of interest incurred and loan fees and offset by
$0.46 million of interest income. Interest incurred and loan fees are higher in
2006 due to the higher loan amount outstanding as a result of the new loans
undertaken in June 2006, August 2006 and November 2006.
39
Derivative and Foreign Exchange
Gains or Losses. In 2006, we had a $1,598 foreign exchange loss and no
derivative gains or losses. In 2005, we had a derivative loss of $0.10 million
due to an interest rate swap on a notional amount of $5 million, and foreign
exchange gains of less than $0.01 million.
Net income. As a result of
the above, net income for the year ended on December 31, 2006 was $20.07 million
compared to $25.18 million for the same period in 2005, representing a decrease
of 20.3%.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, or U.S. GAAP. The preparation of those financial statements requires us
to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies that involve a high degree of judgment
and the methods of their application.
Depreciation
We record
the value of our vessels at their cost (which includes acquisition costs
directly attributable to the vessel and expenditures made to prepare the vessel
for its initial voyage) less accumulated depreciation. We depreciate our vessels
on a straight-line basis over their estimated useful lives, estimated to range
from 25 to 30 years from date of initial delivery from the shipyard. We believe
that the 25 to 30 year range of depreciable life is consistent with that of
other ship owners. As of December 31, 2006, one of our vessels had already
reached an age of 29 years and continued to be employed (this vessel, m/v Ariel, was sold for further
trading in February 2007). Depreciation is based on cost less the estimated
residual scrap value. In 2004, the estimated scrap value of the vessels was
increased from $170 to $300 per LWT to better reflect market price developments
in the scrap metal market (see Item 3A Selected Consolidated Financial Data). An
increase in the useful life of the vessel or in the residual value would have
the effect of decreasing the annual depreciation charge and extending it into
later periods. A decrease in the useful life of the vessel or in the residual
value would have the effect of increasing the annual depreciation
charge.
Revenue
and expense recognition
Revenues
are generated from voyage and time charter agreements. If a charter
agreement exists, the price is fixed, service is provided and the collection of
the related revenue is reasonably assured, revenues are recorded over the term
of the charter as service is provided and recognized on a pro-rata basis over
the duration of the voyage or time charter adjusted for the off-hire days that a
vessel spends undergoing repairs, maintenance or upgrade work. A voyage is
deemed to commence upon the later of the completion of discharge of the vessel’s
previous cargo or the time it receives a contract that is not cancelable and is
deemed to end upon the completion of discharge of the current
cargo. A time charter contract is deemed to commence from the time of
the delivery of the vessel to an agreed port and is deemed to end upon the
re-delivery of the vessel at an agreed port. We generally enter into a charter
agreement for the vessel’s next voyage or time charter prior to the time of
discharge of the previous cargo or completion of previous time charter. We do
not begin recognizing voyage or time charter revenue until a charter contract
has been agreed to both by us and the customer, even if the vessel has
discharged its cargo or completed the previous time charter and it is
sailing to the anticipated load port for its next voyage or to the port it will
be delivered to the next charterer. Demurrage income, which is included in
voyage revenues, represents payments received from the charterer when loading or
discharging time exceeded the stipulated time in the voyage charter and is
recognized when earned. Probable losses on voyages are provided for in full at
the time such losses can be estimated.
For the
Company’s vessels operating in chartering pools, revenues and voyage expenses
are pooled and allocated to each pool’s participants on a time charter
equivalent basis in accordance with an agreed-upon formula. For vessels that
simultaneously participate in spot chartering pools and cargo pools (pools of
contracts of affreightment, also called, short funds; in the Company’s case,
participation in cargo pools requires participation in spot chartering pools), a
combined time charter equivalent revenue is provided by the operator of the
vessel and cargo pools. Revenues and voyage expenses are recognized during the
period services were performed, the collectability has been reasonably assured,
an agreement with the pool exists and price is determinable.
40
Charter
fees received in advance are recorded as a liability (deferred revenue) until
charter services are rendered.
Vessels
operating expenses comprise all expenses relating to the operation of the
vessels, including crewing, insurance, repairs and maintenance, stores,
lubricants, spares and consumables, professional and legal fees and
miscellaneous expenses. Vessel operating expenses are incurred when the vessel
is chartered under a voyage charter and 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. Voyage expenses are recognized on a
pro-rata basis over the estimated length of the each voyage. The impact of
recognizing voyage expenses on a pro-rata basis over the length of the each
voyage is not materially different on a quarterly and annually basis from a
method of recognizing such expenses as incurred.
Deferred
drydock costs
Our
vessels are required to be drydocked approximately every 30 to 60 months for
major repairs and maintenance that cannot be performed while the vessels are
trading. We capitalize the costs associated with drydockings as they occur and
amortize these costs on a straight-line basis over the period between
drydockings. Costs capitalized as part of the drydocking include actual costs
incurred at the drydock yard, cost of travel, lodging and subsistence of our
personnel sent to the drydocking site to supervise and the cost of hiring a
third party to oversee a drydocking. We believe that these criteria are
consistent with industry practice and that our policy of capitalization reflects
the economics and market values of the vessels. Commencing January 1, 2006, we
revised our policy to exclude the cost of hiring riding crews and the cost of
parts used by riding crews from amounts capitalized as drydocking cost. We have
not restated any historical financial statements because we determined that the
impact of such a revision is not material to our operating income and net income
for any periods presented.
Fair
value of time charter acquired
We record
all identified tangible and intangible assets or any liabilities associated with
the acquisition of a vessel at fair value. Where vessels are acquired with
existing time charters, the Company determines the present value of the
difference between: (i) the contractual charter rate and (ii) the prevailing
market rate for a charter of equivalent duration. In discounting the charter
rate differences in future periods, the Company uses its Weighted Average Cost
of Capital (WACC) adjusted to account for the credit quality of the
charterer. The capitalized above-market (assets) and below-market
(liabilities) charters are amortized as a reduction and increase, respectively,
to voyage revenues over the remaining term of the charter.
Impairment
of long-lived assets
We
evaluate the carrying amounts and periods over which long-lived assets are
depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flows for each vessel and
compare it to the vessel carrying value. In the event that impairment occurred,
we would determine the fair value of the related asset and we record a charge to
operations calculated by comparing the asset’s carrying value to the estimated
fair market value. We estimate fair market value primarily through the use of
third party valuations performed on an individual vessel basis. To
date, no impairment loss indicators have arisen.
Stock
incentive plan awards
We
include share-based compensation in “Other general and administrative expenses”
in the consolidated statements of income. Share-based compensation represents
vested and nonvested restricted shares granted to employees and to non-employee
directors, for their services as directors, as well as to non-employees. These
shares are measured at their fair value equal to the market value of the
Company's common stock on the grant date. The shares that do not contain any
future service vesting conditions are considered vested shares and a total fair
value of such shares is expensed on the grant date. The shares that contain a
time-based service vesting condition are considered nonvested shares on the
grant date and a total fair value of such shares recognized on a straight-line
basis over the requisite service period . In addition, nonvested awards granted
to non-employees are measured at its then-current fair value as of the financial
reporting dates until non-employees complete the service.
41
Investments
We
classify unrestricted publicly traded investments as trading securities and
record them at fair value. For trading securities, the Company records
unrealized gains or losses resulting from changes in fair value between
measurement dates as a component of “Gain (loss) on trading securities”.
Purchases of, or proceeds from, the sale of trading securities are classified as
cash flows from operating activities. Upon adoption of Statement of Financial
Accounting Standards No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS No. 159”), the classification of purchases of, or
proceeds from, the sale of trading securities will be classified to cash flows
from operating activities or cash flows from investing activities based upon the
Company’s intent with respect to these securities.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value measurements. SFAS
No. 157 is effective for financial assets and liabilities in fiscal years
beginning after November 15, 2007 and for non-financial assets and liabilities
in fiscal years beginning after March 15, 2008. The Company does not expect the
adoption of SFAS No. 157 to have a material impact on Company’s consolidated
financial statements.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No.
115” (SFAS No. 159”) which provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility in
financial reporting that can occur when related assets and liabilities are
recorded on different bases. SFAS No. 159 amends FASB Statement No. 95,
“Statement of Cash Flows” (“SFAS No. 95”) and FASB Statement No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No.
115”). SFAS No. 159 specifies that cash flows from trading securities, including
securities for which an entity has elected the fair value option, should be
classified in the statement of cash flows based on the nature of and purpose for
which the securities were acquired. Before this amendment, SFAS No. 95 and SFAS
No. 115 specified that cash flows from trading securities must be classified as
cash flows from operating activities. This statement is effective for the
Company beginning January 1, 2008. Upon adoption, the Company will be
classifying proceeds from sales of trading securities within the statement of
cash flows as an investing activity based on the intention for which any
securities are acquired. The Company does not expect any of the other provisions
of SFAS No. 159 to have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill
acquired. SFAS No. 141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008, and will be adopted by the Company in the first quarter
of fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 141(R) on the Company's consolidated
results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”).” SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by the Company in the first quarter of
fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on the Company's consolidated
results of operations and financial condition.
In March
2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (“SFAS No. 161”). The new standard is intended to
improve financial reporting about derivative instruments and heding activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The
Company is currently evaluating the potential impact, if any, of the adoption of
SFAS No. 161 on the Company's consolidated results of operations, cash flows and
financial condition.
As of
December 31, 2007, we had a cash balance of $104.14 million, funds due from
related companies of $5.29 million and $6.24 million cash in restricted
retention accounts. Amounts due from related party represent net disbursements
and collections made by our fleet manager, Eurobulk, on behalf of the
ship-owning companies during the normal course of operations for which they have
the right of offset. Amounts due from related parties mainly consist of advances
to our fleet manager of funds to pay for all anticipated vessel
expenses. The amount of $5.29 million due from related parties as of
December 31, 2007 therefore consists entirely of such deposits. Interest earned
on funds deposited in related party accounts is credited to the account of the
ship-owning companies or Euroseas. Working capital is current assets minus
current liabilities, including the current portion of long term debt. We have a
working capital surplus of $83.12 million including the current portion of long
term debt which was $25.58 million as of December 31, 2007. All of the $20.28
million dividend declared was paid as of December 31, 2007. We consider our
liquidity sufficient for our operations. We expect to finance all our
working capital requirements from cash generated from operations and proceeds
from our November 2007 follow-on common stock offering.
Net
cash from operating activities.
Our net
cash from operating activities for 2007 was $48.96 million. This represents the
net amount of cash, after expenses, generated by chartering our vessels.
Eurobulk and another related party, on our behalf, collect our chartering
revenues and pay our chartering expenses. Net income for the period was $40.66
million, which was reduced by a gain of $3.41 million from the sale of m/v Ariel and increased by $18.03
million of depreciation and amortization amongst other adjustments. In 2006, net
cash flow from operating activities was $20.97 million based on a contribution
of net income of $20.07 million reduced by a gain of $4.45 million from the sale
of two vessels and increased by $7.37 million of depreciation and amortization
amongst other adjustments.
Net
cash from investing activities.
In 2007, we purchased seven vessels
for a total cash outflow of $149.50 million, we received proceeds of $5.22
million from the sale of m/v Ariel, and, we had to put in
retention accounts and increase restricted cash by $2.39 million to satisfy
requirements of our new loan facilities for a total of funds used in investment
activities of $146.67 million. In 2006, we purchased three vessels
for a total of $61.75 million, we received proceeds from the sale of m/v Pantelis P and m/v John P totaling $9.15
million, and, we had to put in retention accounts and increase restricted cash
by $2.77 million to satisfy requirements of our new loan facilities for a total
of funds used in investment activities of $55.37 million. It is our strategy to
expand and renew our fleet by pursuing selective acquisitions. At the
same time, we sell vessels in order to renew our fleet or take advantage of
opportune market conditions.
Net
cash used in financing activities.
In 2007,
net cash provided by financing activities amounted to $199.06 million. This is
accounted by the $214.22 million raised in three follow-on common stock
offerings (after underwriter discounts) and via outstanding warrants exercised.
This amount was reduced by $20.28 million of dividends, $1.41 million of
offering expenses and $0.11 million of loan arrangement fees paid and further
increased by net borrowings of $6.64 million. In 2006, net cash provided by
financing activities amounted to $16.74 million. This is mainly accounted by net
proceeds from long term debt of $26.39 offset by $9.47 million of dividends and
$0.15 million in loan arrangement fees paid.
43
Debt
Financing
We
operate in a capital intensive industry which requires significant amounts of
investment, and we fund a major portion of this investment through long term
debt. We maintain debt levels we consider prudent based on our market
expectations, cash flow, interest coverage and percentage of debt to capital.
During 2007, we drew down on two loans to partly finance the acquisition of two
of the vessels we acquired totaling $25.00 million.
As of
December 31, 2007, after considering the loan repayments and new loans discussed
in the preceding paragraph, we had ten outstanding loans with a combined
outstanding balance of $81.59 million. These loans have maturity dates between
2008 and 2015. Our long-term debt as of December 31, 2007 comprises bank loans
granted to our vessel-owning subsidiaries. A description of our loans
as of December 31, 2007 is provided in Note 9 of our attached financial
statements. In 2008, we plan to repay approximately $25.58 million of our long
term debt.
Our loans
have various covenants which include restrictions to changes in management and
ownership of the vessels, additional indebtedness and mortgaging of vessels
without lenders’ consent, the sale of vessels, as well as minimum requirements
regarding the hull cover ratio and corporate liquidity. We have no
restrictions in the distribution of dividends or any other distribution of
profits or assets from our shipowning subsidiaries to us if the loan covenants
are satisfied. If we are found to be in default of any covenants we
might be required to provide supplemental collateral to the lenders, usually in
the form of restricted cash. Increases in restricted cash required to
satisfy loan covenants, would reduce funds available for investment or working
capital and could have a negative impact on our operations. If we
cannot correct any violated covenants, we might be required to repay all or part
of our loans, which, in turn, might require us to sell one or more of our
vessels under distressed conditions. We are not in default of any credit
facility covenant as of December 31, 2007.
Capital
Expenditures
We make
capital expenditures from time to time in connection with our vessel
acquisitions. Our two most recent vessel acquisitions consist of one
containership, m/v Tiger
Bridge, which was delivered to us in October 2007, and one drybulk
carrier, m/v Ioanna P,
which was delivered to us in November 2007. We financed m/v Tiger Bridge with 100%
equity. We financed m/v Ioanna P with equity and a
$10.00 million loan. Of our seven acquisitions during 2007, four were
financed with 100% equity, m/v OEL Transworld, m/v Despina P, m/v OEL Interity and m/v Tiger Bridge, while the
remaining three were financed with equity and debt. In addition to m/v Ioanna P, we
financed m/v Manolis P
with $15.00 loan in addition to equity and we added m/v Gregos as an additional
collateral (along with m/v YM
Xingang I) to a loan we had drawn in 2006.
Seven of
our vessels in our operating fleet underwent scheduled drydocking or special
survey in 2007, three vessels underwent special survey or drydocking in 2008 and
two additional vessels are scheduled to undergo a special survey or drydocking
in 2008. This process of recertification may require us to reposition these
vessels from a discharge port to shipyard facilities, which will reduce our
operating days during the period. The loss of earnings associated with the
decrease in operating days, together with the capital needs for repairs and
upgrades, is expected to result in increased cash flow needs. We expect to fund
these expenditures with cash on hand.
Dividends
On March8, 2008, the Company announced the declaration of its eleventh consecutive
dividend since its Private Placement in August 2005. This dividend of
$0.31 per common share will be paid on or about June 18, 2008 to all
shareholders of record as of June 6, 2008. This follows the Company’s
prior dividend declarations of $0.30 per common share, on February 7, 2008,
$0.29 per common share on October 16, 2007, $0.25 per common share on July 17,2007, $0.24 per common share on May 8, 2007, $0.22 per common share on January8, 2007, $0.21 per common share on November 9, 2006, $0.18 per common share on
August 7, 2006, $0.18 per common share on May 9, 2006, $0.18 per common share on
February 7, 2006 and of $0.21 per share on November 2, 2005. The
aggregate amount of all such dividends paid was $41,522,174; an additional
$9,128,334 is scheduled to be paid on or about June 18, 2008, and, an additional
$130,500 will be paid if and when unvested restricted incentive stock awards
vest.
C.
Research
and development, patents and licenses,
etc.
Not
applicable.
44
D.
Trend
Information
Our
results of operations depend primarily on the charter hire rates that we are
able to realize. Charter hire rates paid for drybulk, containership and
multipurpose carriers are primarily a function of the underlying balance between
vessel supply and demand.
The
demand for drybulk carrier, containership and multipurpose vessel capacity is
determined by the underlying demand for commodities transported in these
vessels, which in turn is influenced by trends in the global economy. One of the
main reasons for the resurgence in drybulk and containerized trade has been the
growth in imports by China of iron ore, coal and steel products during the last
five years and exports of finished goods. Demand for drybulk carrier and
containership capacity is also affected by the operating efficiency of the
global fleet, with port congestion, which has been a feature of the market in
2004, the first half of 2005 and again in late 2006 and 2007, absorbing
additional tonnage especially in the drybulk market.
The
supply of drybulk carriers, containerships and multipurpose vessels is dependent
on the delivery of new vessels and the removal of vessels from the global fleet,
either through scrapping or loss. As of April 1, 2008, the global
drybulk carrier orderbook amounted to approximately 236.1 million dwt, or about
59.5% of the existing fleet, with more than half of the vessels on the orderbook
expected to be delivered within 30 months. Containership orderbook
(including multipurpose vessels) amounted to approximately 6.8 million teu, or
about 55.5% of the existing fleet with most vessels, again, expected to be
delivered within 30 months. The level of scrapping activity is
generally a function of scrapping prices in relation to current and prospective
charter market conditions, as well as operating, repair and survey costs. The
average age at which a vessel is scrapped over the last ten years has been
between 26 and 27 years, with smaller vessels scrapped at later age. However,
due to recent strength in the drybulk and container shipping industry, the
average age at which the vessels are scrapped has increased; during 2004, 2005,
2006 and 2007, the majority of the handysize and handymax bulkers and
feedership, handysize and intermediate size containerships that were scrapped
were in excess of 30 years of age. Panamax drybulk carriers were
scrapped at an average age of 29 years over 2004, 2005, 2006 and
2007.
E.
Off-balance
Sheet Arrangements
As of
December 31, 2007 we did not have any off-balance sheet
arrangements.
F.
Tabular
Disclosure of Contractual
Obligations
Contractual
Obligations and Commitments
Contractual
obligations are set forth in the following table as of December 31,2007:
In
U.S. dollars
Total
Less Than One Year
One to
Three Years
Three to
Five Years
More
Than
Five
Years
Bank
debt
$
81,590,000
$
25,575,000
$
26,900,000
$
11,960,000
$
17,155,000
Interest
Payment (1)
$
12,575,594
$
3,920,299
$
4,956,358
$
2,464,925
$
1,234,013
Vessel
Management fees (2)
$
29,224,447
$
5,449,815
$
11,478,537
$
12,096,295
—
Other
Management fees (3)
$
5,898,712
$
1,100,000
$
2,316,848
$
2,481,865
—
(1) Assuming
the amortization of the loan described above and an estimated average effective
interest rate of about 5.45%, 5.42%, 5.37% and 5.31% for the four periods,
respectively, based on an underlying assumption for LIBOR of 4.50%.
(2) Refers
to our obligation for management fees of 630 Euros per day per vessel
(approximately $995) for the fifteen vessels owned by Euroseas at December 31,2007 under our five-year management contract under our Master Management
Agreement, which expires on December 31, 2012. For years two to five
we have assumed no changes in the number of vessels, an inflation rate of 3.5%
per year and no changes in this US Dollar to Euro exchange rate (assumed
approximately at 1.58 USD/Euro).
(3) Refers
to our obligation for management fees of $1,100,000 per year under our Master
Management Agreement with Eurobulk for the cost of providing management services
to Euroseas as a public company. This fee is adjusted for inflation in Greece
during the previous calendar year every January 1st. From
January 1st, 2009
on, we have assumed an inflation rate of 3.5% per year.
45
G. Safe
Harbor
See
section “Forward-Looking Statements” at the beginning of this annual
report.
The
following sets forth the name and position of each of our directors and
executive officers.
Name
Age
Position
Aristides
J. Pittas
Dr.
Anastasios Aslidis
Aristides
P. Pittas
Stephania
Karmiri
Panagiotis
Kyriakopoulos
George
Skarvelis
George
Taniskidis
Gerald
Turner
49
48
56
40
47
47
47
60
Chairman,
President and CEO; Class A Director
CFO
and Treasurer; Class A Director
Vice
Chairman; Class A Director
Secretary
Class
B Director
Class
B Director
Class
C Director
Class
C Director
Aristides J. Pittas has been
a member of our Board of Directors and our Chairman and Chief Executive Officer
since our inception on May 5, 2005. Since 1997, Mr. Pittas has also been
the President of Eurochart S.A., our affiliate. Eurochart is a shipbroking
company specializing in chartering and selling and purchasing ships. Since 1997,
Mr. Pittas has also been the President of Eurotrade, a ship operating
company and our affiliate. Since January 1995, Mr. Pittas has been the
President and Managing Director of Eurobulk, our affiliate. He resigned as
Managing Director of Eurobulk in June 2005. Eurobulk is a ship management
company that provides ocean transportation services. From September 1991 to
December 1994, Mr. Pittas was the Vice President of Oceanbulk Maritime SA,
a ship management company. From March 1990 to August 1991, Mr. Pittas
served both as the Assistant to the General Manager and the Head of the Planning
Department of Varnima International SA, a shipping company operating tanker
vessels. From June 1987 until February 1990, Mr. Pittas was the head of the
Central Planning department of Eleusis Shipyards S.A. From January 1987 to June
1987, Mr. Pittas served as Assistant to the General Manager of Chios
Navigation Shipping Company in London, a company that provides ship management
services. From December 1985 to January 1987, Mr. Pittas worked in the
design department of Eleusis Shipyards S.A. where he focused on shipbuilding and
ship repair. Mr. Pittas has a B.Sc. in Marine Engineering from University
of Newcastle - Upon-Tyne and a MSc in both Ocean Systems Management and Naval
Architecture and Marine Engineering from the Massachusetts Institute of
Technology.
Dr. Anastasios Aslidis
has been our Chief Financial Officer and Treasurer and member of our Board of
Directors since September 2005. Prior to joining Euroseas, Dr. Aslidis was
a partner at Marsoft, an international consulting firm focusing on investment
and risk management in the maritime industry. Dr. Aslidis has more than
19 years
of experience in the maritime industry. Between 2003 and 2005, he worked on
financial risk management methods for shipowners and banks lending to the
maritime industry, especially as pertaining to compliance to the Basel II
Capital Accords. He also served as consultant to the Boards of Directors of
shipping companies (public and private) advising in strategy development, asset
selection and investment timing. Between 1993 and 2003, as part of his tenure at
Marsoft, he worked on various projects including development of portfolio and
risk management methods for shipowners, establishment of investments funds and
structuring private equity in the maritime industry and business development for
Marsoft’s services. Between 1989 and 1993, Dr. Aslidis worked on economic
modeling of the offshore drilling industry and on the development of a trading
support system for the drybulk shipping industry on behalf of a major European
shipowner. Dr. Aslidis holds a diploma in Naval Architecture and Marine
Engineering from the National Technical University of Athens (1983), M.S. in
Ocean Systems Management (1984) and Operations Research (1987) from the
Massachusetts Institute of Technology, and a Ph.D. in Ocean Systems Management
(1989) also from Massachusetts Institute of Technology.
46
Aristides P. Pittas has been
a member of our Board of Directors since our inception on May 5, 2005 and our
Vice Chairman since September 1, 2005. Mr. Pittas has been a shareholder in
over 70 oceangoing vessels during the last 20 years. Since February 1989,
Mr. Pittas has been the Vice President of Oceanbulk Maritime SA, a ship
management company. From November 1987 to February 1989, Mr. Pittas was
employed in the supply department of Drytank SA, a shipping company. From
November 1981 to June 1985, Mr. Pittas was employed at Trust Marine
Enterprises, a brokerage house as a sale and purchase broker. From September
1979 to November 1981, Mr. Pittas worked at Gourdomichalis Maritime SA in
the operation and Freight Collection department. Mr. Pittas has a B.Sc in
Economics from Athens School of Economics.
Stephania Karmiri has been
our Secretary since our inception on May 5, 2005. Since July 1995,
Mrs. Karmiri has been executive secretary to Eurobulk, our affiliate.
Eurobulk is a ship management company that provides ocean transportation
services. At Eurobulk, Mrs. Karmiri has been responsible for dealing with
sale and purchase transactions, vessel registrations/deletions, bank loans,
supervision of office administration and office/vessel telecommunication. From
May 1992 to June 1995, she was secretary to the technical department of
Oceanbulk Maritime SA, a ship management company. From 1988 to 1992,
Mrs. Karmiri served as assistant to brokers for Allied Shipbrokers, a
company that provides shipbroking services to sale and purchase transactions.
Mrs. Karmiri has taken assistant accountant and secretarial courses from
Didacta college.
Panagiotis Kyriakopoulos has
been a member of our Board of Directors since our inception on May 5, 2005.
Since July 2002, he has been the Chief Executive Officer of New Television S.A.,
one of the leading Mass Media Companies in Greece, running television and radio
stations. From July 1997 to July 2002 he was the C.E.O. of the Hellenic Post
Group, the Universal Postal Service Provider, having the largest retail network
in Greece for postal and financial services products. From March 1996 until July
1997, Mr. Kyriakopoulos was the General Manager of ATEMKE SA, one of the
leading construction companies in Greece listed on the Athens Stock Exchange.
From December 1986 to March 1996, he was the Managing Director of Globe Group of
Companies, a group active in the areas of shipowning and management, textiles
and food and distribution. The company was listed on the Athens Stock Exchange.
From June 1983 to December 1986, Mr. Kyriakopoulos was an assistant to the
Managing Director of Armada Marine S.A., a company active in international
trading and shipping, owning and managing a fleet of 12
vessels. Presently he is a member of the Board of Directors of the Hellenic Post
and General Secretary of the Hellenic Private Television Owners Union. He has
also been an investor in the shipping industry for more than 20 years.
Mr. Kyriakopoulos has a B.Sc. degree in Marine Engineering from the
University of Newcastle upon Tyne and a MSc. degree in Naval Architecture and
Marine Engineering with specialization in Management from the Massachusetts
Institute of Technology.
George Skarvelis has been a
member of our Board of Directors since our inception on May 5, 2005. He has been
active in shipping since 1982. In 1992, he founded Marine Spirit S.A., a ship
management company. Between 1999 and 2003, Marine Spirit acted as one of the
crewing managers for Eurobulk. From 1986 until 1992, Mr. Skarvelis was
operations director at Markos S. Shipping Ltd. From 1982 until 1986, he worked
with Glysca Compania Naviera, a management company of five vessels. Over the
years Mr. Skarvelis has been a shareholder in numerous shipping companies.
He has a B.Sc. in economics from the Athens University Law School.
George Taniskidis has been a
member of our Board of Directors since our inception on May 5, 2005. He is the
Chairman and Managing Director of Millennium Bank and a member of the Board of
Directors of BankEuropa (subsidiary bank of Millennium Bank in Turkey). He is a
member of the Executive Committee of the Hellenic Banks Association. From 2003
until 2005, he was a member of the Board of Directors of Visa International
Europe, elected by the Visa issuing banks of Cyprus, Malta, Portugal, Israel and
Greece. From 1990 to 1998, Mr. Taniskidis worked at XIOSBANK (until its
acquisition by Piraeus Bank in 1998) in various positions, with responsibility
for the bank’s credit strategy and network. Mr. Taniskidis studied Law in
the National University of Athens and in the University of Pennsylvania Law
School, where he received a LL.M. After law school, he joined the law firm of
Rogers & Wells in New York, where he worked until 1989 and was also a member
of the New York State Bar Association. He is also a member of the Young
Presidents Organization.
Gerald Turner has been a
member of our Board of Directors since our inception on May 5, 2005. Since 1999,
he has been the Chairman and Managing Director of AON Turner Reinsurance
Services. From 1987 to 1999, he was the Chairman and sole owner of Turner
Reinsurance services. From 1977 to 1987, he was the Managing Director of E.W.
Payne Hellas (member of the Sedgwik group).
47
Family
Relationships
Aristides
P. Pittas is the cousin of Aristides J. Pittas, our CEO.
B.
Compensation
Executive
Compensation
We have
no direct employees. The services of our Chief Executive Officer, Chief
Financial Officer, Chief Administrative Officer, Internal Auditor and Secretary
are provided by Eurobulk. In July 2005 we entered into a written services
agreement with Eurobulk where we pay $500,000 per year, before bonuses, adjusted
annually for Greek inflation to account for the increased management cost
associated with us being a public company. As of October 1, 2006, these services
are now provided to us under our master management agreement with Eurobulk.
Under this master management agreement, as amended in July 2007 and February
2008, that includes the provision of the services of our executives, Mr.
Aristides J. Pittas, Dr. Anastasios Aslidis, Mr. Symeon Pariaros and Mrs.
Stephania Karmiri, and, our internal auditor, we pay Eurobulk $1,100,000 per
year starting January 1, 2008, before bonuses, for the provision of these
services, adjusted annually every January 1st for
Greek inflation. In 2005, 2006 and 2007 we paid $250,000, $508,750 and $608,750,
respectively.
Director
Compensation
Our
directors who are also our employees or have executive positions or beneficially
own greater than 10% of the outstanding common stock will receive no
compensation for serving on our Board or its committees.
Directors
who are not our employees, do not have any executive position and do not
beneficially own greater than 10% of the outstanding common stock will receive
the following compensation: an annual retainer of $10,000, plus $2,500 for
attending the quarterly meeting of the Board of Directors, plus an additional
retainer of $5,000, if serving as Chairman of the Audit Committee.
All
directors are reimbursed reasonable out-of-pocket expenses incurred in attending
meetings of our Board of Directors or any committee of our Board of
Directors.
Equity
Incentive Plan
In August
2006, we adopted an equity incentive plan which entitles our Board of Directors
to grant to our directors, officers and key employees awards in the form of (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) dividend equivalent rights, (v) restricted stock, (vi)
unrestricted stock, (vii) restricted stock units and (viii) performance shares.
The aggregate number of shares of common stock with respect to which options or
restricted shares may at any time be granted under the plan are 600,000 shares
of Common Stock. The plan is administered by our Board of Directors. The plan
does not have any set term. However, the Board of Directors may not grant any
incentive stock options after the tenth anniversary of the adoption of the
Plan. This plan was terminated and replaced by a substantially
similar plan in October 2007 that entitles our Board of Directors to grant
awards under the plan to directors, officers and key employees of the Company
and its affiliates.
On
December 18, 2007, the Board of Directors awarded 135,000 shares of restricted
stock to the directors, officers and key employees of our manager, Eurobulk
Ltd., 50% of which vested on December 20, 2007 and the remainder will vest on
December 15, 2008. On February 7, 2008, the Board of Directors
awarded 150,000 shares of restricted stock to the directors, officers and key
employees of our manager, Eurobulk Ltd., 50% of which will vest of August 7,2008 and the remainder on August 7, 2009. Vesting of the awards is conditioned
on continuous employment throughout the period to the vesting date.
C.
Board
Practices
The term
of our Class A directors expires in 2008. The term of our Class B directors
expires in 2009 and the term of our Class C directors expires in
2010.
48
Audit
Committee
We
currently have an audit committee comprised of three independent members of our
Board of Directors. The Audit Committee is responsible for reviewing the
Company’s accounting controls and the appointment of the Company’s
outside auditors. The members of the Audit Committee are Mr. Panos
Kyriakopoulos (Chairman and audit committee “financial expert” as such term is
defined under SEC regulations), Mr. Gerald Turner and Mr. George
Taniskidis. Our Board of Directors does not have separate compensation or
nominations committees, and instead, the entire Board of Directors performs
those responsibilities.
Code
of Ethics
We have
adopted a code of ethics that complies with the applicable guidelines issued by
the SEC. Our code of ethics is posted on our website: http://www.euroseas.gr
under “Corporate Governance.”
Corporate
Governance
Our
Company’s corporate governance practices are in compliance with, and are not
prohibited by, the laws of the Republic of the Marshall Islands. Therefore, we
are exempt from many of NASDAQ’s corporate governance practices other than the
requirements regarding the disclosure of a going concern audit opinion,
submission of a listing agreement, notification of material non-compliance with
NASDAQ corporate governance practices, and the establishment and composition of
an audit committee and a formal written audit committee charter. The practices
followed by us in lieu of NASDAQ’s corporate governance rules are described
below.
·
We
are not required under Marshall Islands law to maintain a board of
directors with a majority of independent directors, and we cannot
guarantee that we will always in the future maintain a board of directors
with a majority of independent
directors.
·
In
lieu of a compensation committee comprised of independent directors, our
Board of Directors will be responsible for establishing the executive
officers’ compensation and benefits. Under Marshall Islands law,
compensation of the executive officers is not required to be determined by
an independent committee.
·
In
lieu of a nomination committee comprised of independent directors, our
Board of Directors will be responsible for identifying and recommending
potential candidates to become board members and recommending directors
for appointment to board committees. Shareholders may also identify and
recommend potential candidates to become candidates to become board
members in writing. No formal written charter has been prepared or adopted
because this process is outlined in our
bylaws.
·
In
lieu of obtaining an independent review of related party transactions for
conflicts of interests, consistent with Marshall Islands law requirements,
a related party transaction will be permitted if: (i) the material facts
as to his or her relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors and the
Board of Directors in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, or, if
the votes of the disinterested directors are insufficient to constitute an
act of the Board of Directors as defined in Section 55 of the Marshall
Islands Business Corporations Act, by unanimous vote of the disinterested
directors; or (ii) the material facts as to his relationship or interest
are disclosed and the shareholders are entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by a simple
majority vote of the shareholders; or (iii) the contract or transaction is
fair as to the Company as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof or the
shareholders. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or
transaction.
·
As
a foreign private issuer, we are not required to solicit proxies or
provide proxy statements to NASDAQ pursuant to NASDAQ corporate governance
rules or Marshall Islands law. Consistent with Marshall Islands law, we
will notify our shareholders of meetings between 15 and 60 days before the
meeting. This notification will contain, among other things, information
regarding business to be transacted at the meeting. In addition, our
bylaws provide that shareholders must give us advance notice to properly
introduce any business at a meeting of the shareholders. Our bylaws also
provide that shareholders may designate in writing a proxy to act on their
behalf.
49
·
In
lieu of holding regular meetings at which only independent directors are
present, our entire board of directors, a majority of whom are
independent, will hold regular meetings as is consistent with the laws of
the Republic of the Marshall
Islands.
·
The
Board of Directors adopted a new equity incentive plan which replaced the
existing equity incentive plan. Shareholder approval was not necessary to
terminate the original equity incentive plan or to establish a new equity
incentive plan since Marshall Islands law permits the Board of Directors
to take these actions. The Company has filed the appropriate documentation
with the Nasdaq Global Market reflecting this
event.
Other
than as noted above, we are in full compliance with all other applicable NASDAQ
corporate governance standards.
D.
Employees
We have no salaried employees,
although we reimburse our fleet manager, Eurobulk, for the salaries of our CEO,
CFO, CAO, internal auditor and Secretary. Eurobulk also ensures that
all seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions, and that all our vessels
employ experienced and competent personnel. As of December 31, 2007,
approximately 135 officers and 225 crew members served on board the vessels in
our fleet.
E.
Share
Ownership
The
following table sets forth certain information the ownership of our common stock
by each of our directors and executive officers, and all of our directors and
executive officers as a group as of April 30, 2008.
Name
of Beneficial Owner(1)
Number
of Shares
of
Voting Stock
Beneficially
Owned
Percent
of
Voting
Stock
Friends
Investment Company Inc.(2)
9,418,056
31.1
%
Aristides
J. Pittas(3)
70,000
*
George
Skarvelis(4)
10,000
*
George
Taniskidis(5)
10,000
*
Gerald
Turner(6)
10,000
*
Panagiotis
Kyriakopoulos(7)
10,000
*
Aristides
P. Pittas(8)
20,000
*
Anastasios
Aslidis(9)
45,000
*
Stephania
Karmiri(10)
—
*
All
directors and officers and 5% owners as a group
9,593,056
31.3
%
——————
*
Indicates
less than 1.0%.
(1)
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the
Securities Exchange Act of 1934, as amended, and generally includes voting
or investment power with respect to securities. Except as subject to
community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by
him/her.
(2)
Includes
9,418,056 shares of common stock held of record by Friends. A majority of
the shareholders of Friends are members of the Pittas family. Investment
power and voting control by Friends resides in its Board of Directors
which consists of five directors, a majority of whom are members of the
Pittas family. Actions by Friends may be taken by a majority of the
members on its Board of Directors.
(3)
Does
not include 1,130,167 shares of common stock held of record by Friends, by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not
include 50,000 shares of common stock held of record by Eurobulk Marine
Holdings, Inc. (“Eurobulk Marine”), by virtue of Mr. Pittas’
ownership interest in Eurobulk Marine. Eurobulk Marine was an investor in
our
Private Placement in August 2005. Friends and Eurobulk Marine are each
controlled by members of the Pittas family. Mr. Pittas disclaims
beneficial ownership except to the extent of his pecuniary interest.
Includes 20,000 shares vesting on August 11, 2008, 15,000 shares vesting
on December 15, 2008 and 20,000 shares vesting on August 11,2009.
50
(4)
Does
not include 499,156 shares of common stock held of record by Friends, by
virtue of Mr. Skarvelis’ ownership interest in Friends. Also does not
include 22,084 shares of common stock held of record by Eurobulk Marine,
by virtue of Mr. Skarvelis’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Skarvelis disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 2,500 shares vesting on August11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500 shares
vesting on August 11, 2009.
(5)
Does
not include 9,418 shares of common stock held of record by Friends, by
virtue of Mr. Taniskidis’ ownership in Friends. Also does not include
416 shares of common stock held of record by Eurobulk Marine, by virtue of
Mr. Taniskidis’ ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends
and Eurobulk Marine are each controlled by members of the Pittas family.
Mr. Taniskidis disclaims beneficial ownership except to the extent of
his pecuniary interest. Includes 2,500 shares vesting on August 11, 2008,
2,500 shares vesting on December 15, 2008 and 2,500 shares vesting on
August 11, 2009.
(6)
Does
not include 133,737 shares of common stock held of record by Friends, by
virtue of Mr. Turner’s ownership interest in Friends. Also does not
include 5,916 shares of common stock held of record by Eurobulk Marine, by
virtue of Mr. Turner’s ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Turner disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 2,500 shares vesting on August11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500 shares
vesting on August 11, 2009.
(7)
Does
not include 56,508 shares of common stock held of record by Friends, by
virtue of Mr. Kyriakopoulos’ ownership in Friends. Also does not
include 2,500 shares of common stock held of record by Eurobulk Marine, by
virtue of Mr. Kyriakopoulos’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Kyriakopoulos disclaims beneficial ownership except to
the extent of his pecuniary interest. Includes 2,500 shares vesting on
August 11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500
shares vesting on August 11, 2009.
(8)
Does
not include 772,281 shares of common stock held of record by Friends, by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not
include 34,166 shares of common stock held of record by Eurobulk Marine,
by virtue of Mr. Pittas’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Pittas disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 5,000 shares vesting on August11, 2008, 5,000 shares vesting on December 15, 2008 and 5,000 shares
vesting on August 11, 2009.
Does
not include 1,884 shares of common stock held of records by Friends, by
virtue of Mrs. Karmiri’s ownership in Friends. Also does not include
83 shares of common stock held of record by Eurobulk Marine, by virtue of
Mrs. Karmiri’s ownership interest in Eurobulk Marine. Eurobulk Marine
was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family.
Mrs. Karmiri disclaims beneficial ownership except to the extent of
her pecuniary interest.
All of
the shares of our common stock have the same voting rights and are entitled to
one vote per share.
Equity
Incentive Plan
See
section 6(B) of this annual report, “Directors, Senior Management and
Employees—Compensation.”
Options
No
options were granted during the fiscal year ended December 31, 2007. There are
currently no options outstanding to acquire any of our shares.
Warrants
In
connection with our Private Placement in August 2005, we issued warrants to
purchase 585,589 shares of our common stock. The warrants have a five year term
and an exercise price of $10.80 per share.
51
During
2007, 248,463 of the above warrants were exercised; an additional 166,667
warrants were exercised in February 2008. As of April 30, 2008, there are
170,459 warrants outstanding. We do not currently have any other outstanding
warrants.
The
following table sets forth certain information regarding the beneficial
ownership of our voting stock as of April 30, 2008 by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of our voting stock, each of our directors and executive officers, and all of
our directors and executive officers as a group. All of our shareholders,
including the shareholders listed in this table, are entitled to one vote for
each share of stock held.
Name
of Beneficial Owner(1)
Number
of Shares
of
Voting Stock
Beneficially
Owned
Percent
of
Voting
Stock
Friends
Investment Company Inc.(2)
9,418,056
31.1
%
Aristides
J. Pittas(3)
70,000
*
George
Skarvelis(4)
10,000
*
George
Taniskidis(5)
10,000
*
Gerald
Turner(6)
10,000
*
Panagiotis
Kyriakopoulos(7)
10,000
*
Aristides
P. Pittas(8)
20,000
*
Anastasios
Aslidis(9)
45,000
*
Stephania
Karmiri(10)
—
*
All
directors and officers and 5% owners as a group
9,593,056
31.3
%
——————
*
Indicates
less than 1.0%.
(1)
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the
Securities Exchange Act of 1934, as amended, and generally includes voting
or investment power with respect to securities. Except as subject to
community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by
him/her.
(2)
Includes
9,418,056 shares of common stock held of record by Friends. A majority of
the shareholders of Friends are members of the Pittas family. Investment
power and voting control by Friends resides in its Board of Directors
which consists of five directors, a majority of whom are members of the
Pittas family. Actions by Friends may be taken by a majority of the
members on its Board of Directors.
(3)
Does
not include 1,130,167 shares of common stock held of record by Friends, by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not
include 50,000 shares of common stock held of record by Eurobulk Marine
Holdings, Inc. (“Eurobulk Marine”), by virtue of Mr. Pittas’
ownership interest in Eurobulk Marine. Eurobulk Marine was an investor in
our Private Placement in August 2005. Friends and Eurobulk Marine are each
controlled by members of the Pittas family. Mr. Pittas disclaims
beneficial ownership except to the extent of his pecuniary interest.
Includes 20,000 shares vesting on August 11, 2008, 15,000 shares vesting
on December 15, 2008 and 20,000 shares vesting on August 11,2009.
(4)
Does
not include 499,156 shares of common stock held of record by Friends, by
virtue of Mr. Skarvelis’ ownership interest in Friends. Also does not
include 22,084 shares of common stock held of record by Eurobulk Marine,
by virtue of Mr. Skarvelis’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Skarvelis disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 2,500 shares vesting on August11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500 shares
vesting on August 11, 2009.
(5)
Does
not include 9,418 shares of common stock held of record by Friends, by
virtue of Mr. Taniskidis’ ownership in Friends. Also does not include
416 shares of common stock held of record by Eurobulk Marine, by virtue of
Mr. Taniskidis’ ownership interest in Eurobulk Marine. Eurobulk
Marine was an investor in our Private Placement in August 2005. Friends
and Eurobulk Marine are each controlled by members of the Pittas family.
Mr. Taniskidis disclaims beneficial ownership except
to the extent of his pecuniary interest. Includes 2,500 shares vesting on
August 11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500
shares vesting on August 11,2009.
52
(6)
Does
not include 133,737 shares of common stock held of record by Friends, by
virtue of Mr. Turner’s ownership interest in Friends. Also does not
include 5,916 shares of common stock held of record by Eurobulk Marine, by
virtue of Mr. Turner’s ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Turner disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 2,500 shares vesting on August11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500 shares
vesting on August 11, 2009.
(7)
Does
not include 56,508 shares of common stock held of record by Friends, by
virtue of Mr. Kyriakopoulos’ ownership in Friends. Also does not
include 2,500 shares of common stock held of record by Eurobulk Marine, by
virtue of Mr. Kyriakopoulos’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Kyriakopoulos disclaims beneficial ownership except to
the extent of his pecuniary interest. Includes 2,500 shares vesting on
August 11, 2008, 2,500 shares vesting on December 15, 2008 and 2,500
shares vesting on August 11, 2009.
(8)
Does
not include 772,281 shares of common stock held of record by Friends, by
virtue of Mr. Pittas’ ownership interest in Friends. Also does not
include 34,166 shares of common stock held of record by Eurobulk Marine,
by virtue of Mr. Pittas’ ownership interest in Eurobulk Marine.
Eurobulk Marine was an investor in our Private Placement in August 2005.
Friends and Eurobulk Marine are each controlled by members of the Pittas
family. Mr. Pittas disclaims beneficial ownership except to the
extent of his pecuniary interest. Includes 5,000 shares vesting on August11, 2008, 5,000 shares vesting on December 15, 2008 and 5,000 shares
vesting on August 11, 2009.
Does
not include 1,884 shares of common stock held of records by Friends, by
virtue of Mrs. Karmiri’s ownership in Friends. Also does not include
83 shares of common stock held of record by Eurobulk Marine, by virtue of
Mrs. Karmiri’s ownership interest in Eurobulk Marine. Eurobulk Marine
was an investor in our Private Placement in August 2005. Friends and
Eurobulk Marine are each controlled by members of the Pittas family.
Mrs. Karmiri disclaims beneficial ownership except to the extent of
her pecuniary interest.
The
operations of our vessels are managed by Eurobulk, an affiliated ship management
company, under a master management agreement with us and separate management
agreements with each shipowning company. Under this agreement, Eurobulk is
responsible for all aspects of management and compliance for the Company,
including the provision of the services of our Chief Executive Officer, Chief
Financial Officer and Secretary. Eurobulk is also responsible for all commercial
management services, which include obtaining employment for our vessels and
managing our relationships with charterers. Eurobulk also performs technical
management services, which include managing day-to-day vessel operations,
performing general vessel maintenance, ensuring regulatory and classification
society compliance, supervising the maintenance and general efficiency of
vessels, arranging our hire of qualified officers and crew, arranging and
supervising dry docking and repairs, arranging insurance for vessels, purchasing
stores, supplies, spares and new equipment for vessels, appointing supervisors
and technical consultants and providing technical support and shoreside
personnel who carry out the management functions described above and certain
accounting services. Eurobulk also currently manages one other vessel not owned
by us.
Our
master management agreement with Eurobulk is effective as of January 1, 2008 and
has an initial term of 5 years until December 31, 2012. The master management
agreement cannot be terminated by Eurobulk without cause or under the other
limited circumstances, such as sale of the Company or Eurobulk or the bankruptcy
of either party. This master management agreement will automatically be extended
after the initial period for an additional five year period unless terminated on
or before the 90th day preceding the initial termination date. Pursuant to the
master management agreement, each new vessel we acquire in the future will enter
into a separate management agreement with Eurobulk. In addition, upon expiration
of the current ship management agreements between Eurobulk and each vessel-owing
subsidiary, such subsidiaries will enter into new ship management agreements
with Eurobulk that terminate contemporaneously with the master management
agreement. Under the master management agreement we pay Eurobulk a fixed cost of
$1,100,000 annually, adjusted for Greek inflation every January 1st, and a
per ship per day cost of €630 as of April 30, 2008 (or $995.40 based on
$1.58/euro exchange rate) adjusted annually for inflation (every January 1st).
Eurobulk has received fees for management and executive compensation expenses of
$1,722,800, $1,972,252, $2,161,856, $2,775,339 and $4,277,887 for
years ended December 31, 2003, 2004, 2005, 2006 and 2007,
respectively.
53
We
receive chartering and sale and purchase services from Eurochart, an affiliate,
and pay a commission of 1.25% on charter revenue and 1% on vessel purchase or
sale price. We will pay additional commissions to major charterers and their
brokers as well that usually range from 3.75% to 5.00%. Eurochart has received
chartering and vessel sale commissions of $286,605, $604,717, $536,180, $588,149
and $1,177,916 for years ended December 31, 2003, 2004, 2005, 2006 and 2007,
respectively. Eurochart also received 1% commission for vessel
acquisitions from the sellers of the vessels that we acquired.
More
Maritime Agencies Inc. are crewing agents and Sentinel Marine Services Inc. are
insurance brokering companies and affiliates to whom we will pay a fee of $50
per crew member per month and a commission on premium not exceeding 5%,
respectively.
Aristides
J. Pittas, Euroseas’ President, Chief Executive Officer and Chairman, has
provided personal guarantees for some of Euroseas’ debts. Eurobulk has provided
corporate guarantees for all debts. Additionally, Aristides J. Pittas is
currently the Chairman of each of Eurochart and Eurobulk, both of which are our
affiliates.
We have
entered into a registration rights agreement with Friends, our largest
shareholder, pursuant to which we granted Friends the right, under certain
circumstances and subject to certain restrictions, to require us to register
under the Securities Act shares of our common stock held by Friends. Under the
registration rights agreement, Friends has the right to request us to register
the sale of shares held by it on its behalf and may require us to make available
shelf registration statements permitting sales of shares into the market from
time to time over an extended period. In addition, Friends has the ability to
exercise certain piggyback registration rights in connection with registered
offerings initiated by us.
Eurobulk,
Friends Investment Company Inc. and Aristides J. Pittas, our Chairman and Chief
Executive Officer, have granted us a right of first refusal to acquire any
drybulk vessel or containership which any of them may consider for acquisition
in the future. In addition, Mr. Pittas has granted us a right of first refusal
to accept any chartering out opportunity for a drybulk vessel or containership
which may be suitable for any of our vessels, provided that we have a suitable
vessel, properly situated and available, to take advantage of the chartering out
opportunity. Mr. Pittas use his best efforts to cause that any entity with
respect to which he directly or indirectly controls to grant us this right of
first refusal.
C.
Interests
of Experts and Counsel
Not
Applicable.
Item 8.
Financial
information
A.
Consolidated
Statements and Other Financial
Information
To our
knowledge, there are no material legal proceedings to which we are a party or to
which any of our properties are subject, other than routine litigation
incidental to our business. In our opinion, the disposition of these lawsuits
should not have a material impact on our consolidated results of operations,
financial position and cash flows.
54
Dividend
Policy
Our
policy is to declare regular quarterly dividends to shareholders from our net
profits each February, May, August and November in amounts the Board of
Directors may from time to time determine are appropriate. Our intention is to
pay a minimum quarterly dividend of $0.30 per common share for 2008. The exact
timing and amount of dividend payments will be determined by our Board of
Directors and will be dependent upon our earnings, financial
condition, cash requirement and availability, restrictions in its loan
agreements, growth strategy, the provisions of Marshall Islands law affecting
the payment of distributions to shareholders and other factors, such as the
acquisition of additional vessels. However, we do not believe that the
acquisition of vessels to our fleet will impact our dividend policy of paying
quarterly dividends to our shareholders out of our net profits. We believe that
the addition of vessels to our fleet in the future should enable us to pay a
higher dividend per share than we would otherwise be able to pay without
additional vessels since such additional vessels should increase our earnings.
However, we cannot give any current estimate of what dividends may be in the
future since any such dividend amounts will depend upon the amount of revenues
those vessels are able to generate and the costs incurred in operating such
vessels.
The
payment of dividends is not guaranteed or assured, and may be discontinued at
any time at the discretion of our Board of Directors. Because we are a holding
company with no material assets other than the stock of its subsidiaries, our
ability to pay dividends will depend on the earnings and cash flow of its
subsidiaries and their ability to pay dividends to us. If there is a substantial
decline in the drybulk, containership or multipurpose charter market, our
earnings would be negatively affected, thus limiting its ability to pay
dividends. Marshall Islands law generally prohibits the payment of dividends
other than from surplus or while a company is insolvent or would be rendered
insolvent upon the payment of such dividends. Dividends may be declared in
conformity with applicable law by, and at the discretion of, our Board of
Directors at any regular or special meeting. Dividends may be declared and paid
in cash, stock or other property of Euroseas.
Euroseas
paid $1,200,000, $26,962,500, $46,875,223 (consisting of $30,175,223 of
dividends and $16,700,000 as return of capital), $9,465,082 and $20,278,538 in
2003, 2004, 2005, 2006 and 2007, respectively. While Euroseas has paid dividends
on an annual basis during the time it has been a private company, it has paid
dividends on a quarterly basis since it has become a public company. Since our
Private Placement in August 2005, we declared and paid dividends of $2,650,223
for the third quarter of 2005, $2,271,620 for each of the fourth quarter of
2005, first quarter of 2006 and second quarter of 2006, $2,650,223 for the third
quarter of 2006, $2,776,433 for the fourth quarter of 2006, $4,409,321 for the
first quarter of 2007, $6,052,064 for the second quarter of 2007, $7,040,717 for
the third quarter of 2007 and $9, 128,334 for the fourth quarter of 2007 (an
additional $65,250 dividend for the fourth quarter of 2007 will be paid if and
when unvested incentive stock awards vest).. The most recent dividend was
declared and paid in 2008. A dividend declared for the first quarter
of 2008 is scheduled to be paid in June 2008 (see Item 8.B(d)
below).
a) On
February 7, 2008, the Board of Directors declared a cash dividend of $0.30 per
Euroseas Ltd. common share. Such cash dividend was paid on or about
March 14, 2008 to the holders of record of Euroseas Ltd. common shares as of
March 4, 2008.
b) On
February 7, 2008, the Board of Directors granted a stock incentive award of
150,000 shares to directors, officers and key persons, 50% of which will vest on
August 7, 2008 and the remaining 50% on August 7, 2009.
c) On
February 7, 2008, the Board of Directors approved the Amended Master Management
Agreement with Eurobulk Ltd. under which the annual part of the management fee
to Eurobulk Ltd. is increased to $1.1 million as of January 1, 2008 while the
daily management fee per vessel will remain at Euro 630 for 2008 as Eurobulk
Ltd. agreed to forgo the scheduled - as of February 1, 2008 - inflation
increase. Both components of the management fee are scheduled to be adjusted for
inflation on January 1 of each year.
d) On
May 8, 2008, the Board of Directors declared a cash dividend of $0.31 per share
of Euroseas Ltd. common stock. Such cash dividend will be paid on or
about June 18, 2008 to the holders of record of Euroseas Ltd. common stock as of
June 6, 2008.
55
Item 9. The
Offer and Listing
A.
Offer
and Listing Details
The trading market for shares of our
common stock is the NASDAQ Global Select Market, on which our shares trade under
the symbol "ESEA". The following table sets forth the high and low closing
prices for shares of our common stock since our listing originally in the OTCBB
(under symbols ESEAF.OB and EUSEF.OB), since January 31, 2007 on the NASDAQ
Global Market and since January 1, 2008 on the NASDAQ Global Select
Market. The prices below have been adjusted for the reverse 1-for-3
common stock split that was effected on October 6, 2006.
The trading market for shares of our
common stock is the NASDAQ Global Select Market, on which our shares trade under
the symbol "ESEA". Our shares began trading on the NASDAQ Global
Market on January 31, 2007 and on the NASDAQ Global Select Market on January 1,2008. Prior to such date, our shares traded on the OTCBB under the
symbol “ESEAF.OB” until October 5, 2006 and then under the symbol “EUSEF.OB”
until January 30, 2007.
We have
no material contracts, other than contracts entered into in the ordinary course
of business, to which the Company or any member of the group is a
party.
D.
Exchange
Controls
Under
Marshall Islands law, there are currently no restrictions on the export or
import of capital, including foreign exchange controls or restrictions that
affect the remittance of dividends, interest or other payments to non-resident
holders of our shares.
E.
Taxation
The
following is a discussion of the material Marshall Islands and United States
federal income tax considerations applicable to us and U.S. Holders and Non-U.S.
Holders, each as discussed below, of our common stock. The following
discussion is based upon the provisions of the United States Internal Revenue
Code of 1986, as amended, or the Code, existing and proposed United States
Treasury Department regulations, administrative rulings, pronouncements and
judicial decisions, all as of the date of this Annual Report.
Marshall
Islands Tax Considerations
We are
incorporated in the Marshall Islands. Under current Marshall Islands law, we are
not subject to tax on income or capital gains, and no Marshall Islands
withholding tax will be imposed upon payments of dividends by us to our
stockholders.
United
States Federal Income Tax
The
following are the material United States federal income tax consequences to us
of our activities and to U.S. Holders and Non-U.S. Holders, each as defined
below, of our common stock. The following discussion of United States federal
income tax matters is based on the United States Internal Revenue Code of 1986,
or the Code, judicial decisions, administrative pronouncements, and existing and
proposed regulations issued by the United States Department of the Treasury, all
of which are subject to change, possibly with retroactive effect. This
discussion is based in part upon Treasury Regulations promulgated under Section
883 of the Code. The discussion below is based, in part, on the description of
our business as described in “Business” above and assumes that we conduct our
business as described in that section. References in the following discussion to
“we” and “us” are to Euroseas and its subsidiaries on a consolidated
basis.
57
United
States Federal Income Taxation of Our Company
Taxation
of Operating Income: In General
Unless
exempt from United States federal income taxation under the rules discussed
below, a foreign corporation is subject to United States federal income taxation
in respect of any income that is derived from the use of vessels, from the
hiring or leasing of vessels for use on a time, voyage or bareboat charter
basis, from the participation in a pool, partnership, strategic alliance, joint
operating agreement, code sharing arrangements or other joint venture it
directly or indirectly owns or participates in that generates such income, or
from the performance of services directly related to those uses, which we refer
to as “shipping income,” to the extent that the shipping income is derived from
sources within the United States. For these purposes, 50% of shipping income
that is attributable to transportation that begins or ends, but that does not
both begin and end, in the United States constitutes income from sources within
the United States, which we refer to as “U.S.-source shipping
income.”
Shipping
income attributable to transportation that both begins and ends in the United
States is considered to be 100% from sources within the United States. We are
not permitted by law to engage in transportation that produces income which is
considered to be 100% from sources within the United States.
Shipping
income attributable to transportation exclusively between non-U.S. ports will be
considered to be 100% derived from sources outside the United States. Shipping
income derived from sources outside the United States will not be subject to any
United States federal income tax.
In the
absence of exemption from tax under Section 883, our gross U.S.-source shipping
income would be subject to a 4% tax imposed without allowance for deductions as
described below.
Exemption
of Operating Income from United States Federal Income Taxation
Under
Section 883 of the Code, we will be exempt from United States federal income
taxation on our U.S.-source shipping income if:
·
we
are organized in a foreign country (our “country of organization”) that
grants an “equivalent exemption” to corporations organized in the United
States; and
either
·
more
than 50% of the value of our stock is owned, directly or indirectly, by
“qualified stockholders,” individuals who are “residents” of our country
of organization or of another foreign country that grants an “equivalent
exemption” to corporations organized in the United States, which we refer
to as the “50% Ownership Test,” or
·
our
stock is “primarily and regularly traded on an established securities
market” in our country of organization, in another country that grants an
“equivalent exemption” to United States corporations, or in the United
States, which we refer to as the “Publicly-Traded
Test.”
The
Marshall Islands, the jurisdiction where we and our ship-owning subsidiaries are
incorporated, grants an “equivalent exemption” to United States corporations.
Therefore, we will be exempt from United States federal income taxation with
respect to our U.S.-source shipping income if we satisfy either the 50%
Ownership Test or the Publicly-Traded Test.
We
believe that we satisfied the 50% Ownership Test for our 2007 taxable year and
we intend to take this position on our United States federal income tax return.
For the 2008 taxable year and each taxable year thereafter, we anticipate that
we will satisfy the Publicly-Traded Test.
Taxation
in Absence of Exemption
To the
extent the benefits of Section 883 are unavailable, our U.S. source shipping
income, to the extent not considered to be “effectively connected” with the
conduct of a U.S. trade or business, as described below, would be subject to a
4% tax imposed by Section 887 of the Code on a gross basis, without the benefit
of deductions. Since under the sourcing rules described above, no more than 50%
of our shipping income would be treated as being derived from U.S. sources, the
maximum effective rate of U.S. federal income tax on our shipping income would
never exceed 2% under the 4% gross basis tax regime.
58
To the
extent the benefits of the Section 883 exemption are unavailable and our
U.S.-source shipping income is considered to be “effectively connected” with the
conduct of a U.S. trade or business, as described below, any such “effectively
connected” U.S.-source shipping income, net of applicable deductions, would be
subject to the U.S. federal corporate income tax currently imposed at rates of
up to 35%. In addition, we may be subject to the 30% “branch profits” taxes on
earnings effectively connected with the conduct of such trade or business, as
determined after allowance for certain adjustments, and on certain interest paid
or deemed paid attributable to the conduct of its U.S. trade or
business.
Our
U.S.-source shipping income would be considered “effectively connected” with the
conduct of a U.S. trade or business only if:
·
We
have, or are considered to have, a fixed place of business in the United
States involved in the earning of shipping income;
and
·
substantially
all of our U.S.-source shipping income is attributable to regularly
scheduled transportation, such as the operation of a vessel that follows a
published schedule with repeated sailings at regular intervals between the
same points for voyages that begin or end in the United
States.
We do not
intend to have, or permit circumstances that would result in having any vessel
operating to the United States on a regularly scheduled basis. Based on the
foregoing and on the expected mode of our shipping operations and other
activities, we believe that none of our U.S.-source shipping income are or will
be “effectively connected” with the conduct of a U.S. trade or
business.
United
States Taxation of Gain on Sale of Vessels
Regardless
of whether we qualify for exemption under Section 883, we will not be subject to
United States federal income taxation with respect to gain realized on a sale of
a vessel, provided the sale is considered to occur outside of the United States
under United States federal income tax principles. In general, a sale of a
vessel will be considered to occur outside of the United States for this purpose
if title to the vessel, and risk of loss with respect to the vessel, pass to the
buyer outside of the United States. It is expected that any sale of a vessel by
us will be considered to occur outside of the United States.
United
States Federal Income Taxation of U.S. Holders
As used
herein, the term “U.S. Holder” means a beneficial owner of common stock that is
a United States citizen or resident, United States corporation or other United
States entity taxable as a corporation, an estate the income of which is subject
to United States federal income taxation regardless of its source, or a trust if
a court within the United States is able to exercise primary jurisdiction over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
This
discussion does not purport to deal with the tax consequences of owning common
stock to all categories of investors, some of which, such as dealers in
securities, investors whose functional currency is not the United States dollar
and investors that own, actually or under applicable constructive ownership
rules, 10% or more of our common stock, may be subject to special rules. This
discussion deals only with holders who hold the common stock as a capital asset.
You are encouraged to consult your own tax advisors concerning the overall tax
consequences arising in your own particular situation under United States
federal, state, local or foreign law of the ownership of common
stock.
If a
partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your tax advisor.
59
Distributions
Subject
to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our common stock to a U.S. Holder will
generally constitute dividends, which may be taxable as ordinary income or
“qualified dividend income” as described in more detail below, to the extent of
our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Distributions in excess of our earnings
and profits will be treated first as a nontaxable return of capital to the
extent of the U.S. Holder’s tax basis in his common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us. Dividends paid with respect to our common stock will generally be treated as
“passive category income” or, in the case of certain types of U.S. Holders,
“general category income” for purposes of computing allowable foreign tax
credits for United States foreign tax credit purposes.
Dividends
paid on our common stock to a U.S. Holder who is an individual, trust or estate
(a “U.S. Individual Holder”) will generally be treated as “qualified dividend
income” that is taxable to such U.S. Individual Holders at preferential tax
rates (through 2010) provided that (1) we are not a passive foreign investment
company for the taxable year during which the dividend is paid or the
immediately preceding taxable year (which we do not believe we are, have been or
will be), (2) our common stock is readily tradable on an established securities
market in the United States (such as the NASDAQ Global Select Market, on which
our common stock is listed), and (3) the U.S. Individual Holder has owned the
common stock for more than 60 days in the 121-day period beginning 60 days
before the date on which the common stock becomes ex-dividend. There is no
assurance that any dividends paid on our common stock will be eligible for these
preferential rates in the hands of a U.S. Individual Holder. Dividends paid on
our stock prior to the date on which our stock became listed on the NASDAQ
Global Select Market were not eligible for these preferential
rates. Legislation has been recently introduced in the U.S. Congress
which, if enacted in its present form, would preclude our dividends from
qualifying for such preferential rates prospectively from the date of the
enactment. Any dividends paid by us which are not eligible for these
preferential rates will be taxed as ordinary income to a U.S. Individual
Holder.
Special
rules may apply to any “extraordinary dividend” generally, a dividend in an
amount which is equal to or in excess of ten percent of a stockholder’s adjusted
basis (or fair market value in certain circumstances) in a share of common stock
paid by us. If we pay an “extraordinary dividend” on our common stock that is
treated as “qualified dividend income,” then any loss derived by a U.S.
Individual Holder from the sale or exchange of such common stock will be treated
as long-term capital loss to the extent of such dividend.
Sale,
Exchange or other Disposition of Common Stock
Assuming
we do not constitute a passive foreign investment company for any taxable year,
a U.S. Holder generally will recognize taxable gain or loss upon a sale,
exchange or other disposition of our common stock in an amount equal to the
difference between the amount realized by the U.S. Holder from such sale,
exchange or other disposition and the U.S. Holder’s tax basis in such stock.
Such gain or loss will be treated as long-term capital gain or loss if the U.S.
Holder’s holding period is greater than one year at the time of the sale,
exchange or other disposition. Such capital gain or loss will generally be
treated as U.S.- source income or loss, as applicable, for U.S. foreign tax
credit purposes. A U.S. Holder’s ability to deduct capital losses is subject to
certain limitations.
Passive
Foreign Investment Company Status and Significant Tax Consequences
Special
United States federal income tax rules apply to a U.S. Holder that holds stock
in a foreign corporation classified as a passive foreign investment company for
United States federal income tax purposes. In general, we will be treated as a
passive foreign investment company with respect to a U.S. Holder if, for any
taxable year in which such holder held our common stock, either:
·
at
least 75% of our gross income for such taxable year consists of passive
income (e.g., dividends, interest, capital gains and rents derived other
than in the active conduct of a rental business);
or
·
at
least 50% of the average value of the assets held by the corporation
during such taxable year produce, or are held for the production of,
passive income.
For
purposes of determining whether we are a passive foreign investment company, we
will be treated as earning and owning our proportionate share of the income and
assets, respectively, of any of our subsidiary corporations in which we own at
least 25 percent of the value of the subsidiary’s stock. Income earned, or
deemed earned, by us in connection with the performance of services would not
constitute passive income. By contrast, rental income would generally constitute
“passive income” unless we were treated under specific rules as deriving our
rental income in the active conduct of a trade or business.
60
Based on
our current operations and future projections, we do not believe that we are,
nor do we expect to become, a passive foreign investment company with respect to
any taxable year. Although there is no legal authority directly on point, and we
are not relying upon an opinion of counsel on this issue, our belief is based
principally on the position that, for purposes of determining whether we are a
passive foreign investment company, the gross income we derive or are deemed to
derive from the time chartering and voyage chartering activities of our
wholly-owned subsidiaries should constitute services income, rather than rental
income. Correspondingly, such income should not constitute passive income, and
the assets that we or our wholly-owned subsidiaries own and operate in
connection with the production of such income, in particular, the vessels,
should not constitute passive assets for purposes of determining whether we are
a passive foreign investment company. We believe there is substantial legal
authority supporting our position consisting of case law and Internal Revenue
Service pronouncements concerning the characterization of income derived from
time charters and voyage charters as services income for other tax purposes.
However, in the absence of any legal authority specifically relating to the
statutory provisions governing passive foreign investment companies, the
Internal Revenue Service or a court could disagree with our position. In
addition, although we intend to conduct our affairs in a manner to avoid being
classified as a passive foreign investment company with respect to any taxable
year, we cannot assure you that the nature of our operations will not change in
the future.
If we
were to be classified as a PFIC in any taxable year, a U.S. Holder (i) would
generally be required to treat any gain on sales of our shares held by him as
ordinary income and pay an interest charge on the value of the deferral of their
U.S. federal income tax attributable to such gain and (ii) could also be subject
to an interest charge on distributions paid by us.
The above
results may be eliminated if a “mark-to-market” election or “qualified electing
fund” election is available and a U.S. validly makes such an
election. If a U.S. Holder makes a “qualified electing fund”
election, then generally, in lieu of the foregoing treatment, our earnings would
be currently included in the U.S. Holder’s gross income. If a
“mark-to-market” election is made, such holder generally will be required to
take into account the difference, if any, between the fair market value and its
adjusted tax basis in shares at the end of each taxable year as ordinary income
or ordinary loss (to the extent of any net mark-to-market gain previously
included in income). In addition, any gain from a sale or other disposition of
shares will be treated as ordinary income, and any loss will be treated as
ordinary loss (to the extent of any net mark-to-market gain previously included
in income.
61
United States Federal
Income Taxation of “Non-U.S. Holders”
A
beneficial owner of common stock that is not a U.S. Holder is referred to herein
as a “Non-U.S. Holder.”
Dividends
on Common Stock
Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on dividends received from us with respect to our common stock,
unless that income is effectively connected with the Non-U.S. Holder’s conduct
of a trade or business in the United States. If the Non-U.S. Holder is entitled
to the benefits of a United States income tax treaty with respect to those
dividends, that income is taxable only if it is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United
States.
Sale,
Exchange or Other Disposition of Common Stock
Non-U.S.
Holders generally will not be subject to United States federal income tax or
withholding tax on any gain realized upon the sale, exchange or other
disposition of our common stock, unless:
·
the
gain is effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States. If the Non-U.S. Holder is entitled
to the benefits of an income tax treaty with respect to that gain, that
gain is taxable only if it is attributable to a permanent establishment
maintained by the Non-U.S. Holder in the United States;
or
·
the
Non-U.S. Holder is an individual who is present in the United States for
183 days or more during the taxable year of disposition and other
conditions are met.
If the
Non-U.S. Holder is engaged in a United States trade or business for United
States federal income tax purposes, the income from the common stock, including
dividends and the gain from the sale, exchange or other disposition of the stock
that is effectively connected with the conduct of that trade or business will
generally be subject to regular United States federal income tax in the same
manner as discussed in the previous section relating to the taxation of U.S.
Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings and
profits that are attributable to the effectively connected income, which are
subject to certain adjustments, may be subject to an additional branch profits
tax at a rate of 30%, or at a lower rate as may be specified by an applicable
income tax treaty.
Backup
Withholding and Information Reporting
In
general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting requirements. Such
payments will also be subject to backup withholding tax if you are a
non-corporate U.S. Holder and you:
·
fail
to provide an accurate taxpayer identification
number;
·
are
notified by the Internal Revenue Service that you have failed to report
all interest or dividends required to be shown on your federal income tax
returns; or
·
in
certain circumstances, fail to comply with applicable certification
requirements.
Non-U.S.
Holders may be required to establish their exemption from information reporting
and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or
W-8IMY, as applicable.
If you
sell your common stock to or through a United States office or broker, the
payment of the proceeds is subject to both United States backup withholding and
information reporting unless you certify that you are a non-U.S. person, under
penalties of perjury, or you otherwise establish an exemption. If you sell your
common stock through a non-United States office of a non-United States broker
and the sales proceeds are paid to you outside the United States then
information reporting and backup withholding generally will not apply to that
payment. However, United States information reporting requirements, but not
backup withholding, will apply to a payment of sales proceeds, even if that
payment is made to you outside the United States, if you sell your common stock
through a non-United States office of a broker that is a United States person or
has some other contacts with the United States.
62
Backup
withholding tax is not an additional tax. Rather, you generally may obtain a
refund of any amounts withheld under backup withholding rules that exceed your
income tax liability by filing a refund claim with the Internal Revenue
Service.
We
encourage each stockholder to consult with his, her or its own tax advisor as to
particular tax consequences to it of holding and disposing of Euroseas shares,
including the applicability of any state, local or foreign tax laws and any
proposed changes in applicable law.
We file
reports and other information with the SEC. These materials, including this
annual report and the accompanying exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 100 F Street, N.E.,
Washington, D.C. 20549, or from the SEC's websitehttp://www.sec.gov. You may
obtain information on the operation of the public reference room by calling 1
(800) SEC-0330 and you may obtain copies at prescribed rates.
I.
Subsidiary
Information
Not
Applicable.
Item 11.
Quantitative
and Qualitative Disclosures about Market
Risk
In the
normal course of business, we face risks that are non-financial or
non-quantifiable. Such risks principally include country risk, credit risk and
legal risk. Our operations may be affected from time to time in varying degrees
by these risks but their overall effect on us is not predictable. We have
identified the following market risks as those which may have the greatest
impact upon our operations:
Interest
Rate Fluctuation Risk
The
international drybulk industry is a capital intensive industry, requiring
significant amounts of investment. Much of this investment is financed by long
term debt. Our debt usually contains interest rates that fluctuate with LIBOR.
In 2007, we did not use and currently we do not have financial instruments such
as interest rate swaps to manage the impact of interest rate changes on earnings
and cash flows and increasing interest rates could adversely impact future
earnings.
As at
December 31, 2007, we had $81.59 million of floating rate debt outstanding with
margins over LIBOR ranging from 0.80% to 1.60%. Our interest expense is affected
by changes in the general level of interest rates. As an indication of the
extent of our sensitivity to interest rate changes, an increase of 100 basis
points would have decreased our net income and cash flows in the twelve-month
period to December 31, 2007 by approximately $773,000 assuming the same debt
profile throughout the year.
In March
of 2004, we entered into an interest rate swap agreement on a notional amount of
$5.00 million. Under this swap agreement, we receive interest based on the
3-month LIBOR rate and we pay based on 1.10% fixed rate if the 1-year LIBOR
remains below 4.02%: otherwise we pay the 1-year LIBOR rate. This agreement was
terminated in October 2005.
The
following table sets forth the sensitivity of loans in U.S. dollars to a 100
basis points increase in LIBOR during the next five years:
Year
Ended December 31,
Amount
in $
2008
717,000
2009
513,000
2010
399,000
2011
262,000
2012
and thereafter
427,000
Foreign
Exchange Rate Risk
The
international drybulk and containership shipping industry’s functional currency
is the U.S. Dollar. We generate all of our revenues in U.S. dollars, but incur
approximately 35% of our vessel operating expenses in 2007 in currencies other
than U.S. dollars. In addition, our management fee is denominated in
euros (590 euros in 2005 and during January 2006, 610 euros since February 1,2006 and 630 euros per vessel per day since of February 1, 2007), and, certain
general and administrative expenses (about 8.5% in 2007) were in euros. At
December 31, 2007, approximately 35% of our outstanding accounts payable were
denominated in currencies other than the U.S. dollar, mainly in Euros. We do not
use currency exchange contracts to reduce the risk of adverse foreign currency
movements but we believe that our exposure from market rate fluctuations is
unlikely to be material. Net foreign exchange losses for the year to December31, 2007 were $7,824.
Inflation
Risk
The
general rate of inflation has been relatively low in recent years and as such
its associated impact on costs has been minimal. We do not believe that
inflation has had, or is likely to have in the foreseeable future, a significant
impact on expenses. Should inflation increase, it will increase our expenses and
subsequently have a negative impact on our earnings.
Item 12.
Description
of Securities Other than Equity
Securities
Not
Applicable.
63
PART
II
Item 13.
Defaults,
Dividend Arrearages and
Delinquencies
None.
Item 14.
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
None.
Item 15.
Controls
and Procedures
(a) Evaluation
of Disclosure Controls and Procedures
Pursuant
to Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the
“Exchange Act”), the Company’s management, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of December 31, 2007. The term disclosure
controls and procedures are defined under SEC rules as controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives.
Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer has
concluded that our disclosure controls and procedures are effective, as of
December 31, 2007.
(b) Management’s
Annual Report on Internal Control over Financial Reporting
The Company’s management is
responsible for establishing and maintaining adequate internal control over
financial reporting as such term is identified in Exchange Act Rule
13a-15(f) and 15d-15(f). Internal control over financial reporting is a
process designed by, or under the supervision of, the issuer’s principal
executive and principal financial officers, or persons performing similar
functions, and effected by the issuer’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with the authorization of its
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on its consolidated
financial statements.
Our management, with the
participation of Chief Executive Officer and Chief Financial Officer, assessed
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2007. In making this assessment, the Company used the control
criteria framework of the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") published in its report entitled Internal Control-Integrated
Framework. As a result of its assessment, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s internal controls over financial
reporting are effective as of December 31, 2007.
64
(c) Report
of Independent Registered Public Accounting Firm
Deloitte,
Hadjipavlou, Sofianos and Cambanis S.A., or Deloitte., an independent registered
public accounting firm, as auditors of our consolidated financial statements for
the year ended December 31, 2007, has issued the following attestation report on
the effectiveness of our internal control over financial reporting as of
December 31, 2007:
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the internal control over financial reporting of Euroseas Ltd and
subsidiaries (the "Company") as of December 31, 2007, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting”. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2007 of the Company and our report dated May 8,2008 expressed an unqualified opinion on those financial
statements.
(d) Changes
in Internal Control over Financial Reporting
No change
in the Company’s internal control over financial reporting occurred during the
period covered by this annual report that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
Item 16A.
Audit
Committee Financial Expert
Our Board of Directors has determined
that all the members of our Audit Committee qualify as financial experts and
they are all considered to be independent according to the SEC
rules. Mr. Panos Kyriakopoulos serves as the chairman of our Audit
Committee with Mr. Gerald Turner and Mr. George Taniskidis as
members.
We have adopted a code of ethics that
applies to officers and employees. Our code of ethics is posted in our website:
http://www.euroseas.gr under "Corporate Governance".
Item
16C. Principal Accountant Fees and
Services
Our principal auditors, Deloitte
Hadjipavlou, Sofianos & Cambanis S.A. have charged us for audit,
audit-related and non-audit services as follows:
2007
(dollars
in thousands)
2006
(dollars
in thousands)
Audit
Fees
$
750
$
388
Further
assurance / audit related fees
_
_
Tax
fees
_
_
Other
fees / expenses
3
3
Total
$
753
$
391
In 2007, audit fees relate to regular
audit services and audit of our internal controls and services required for
follow-on common stock offerings. For those services our principal
auditors charged us $750,000 of fees plus $2,698 of expenses. In
2006, audit fees relate to audit services provided in connection to a
post-effective amendment to our prior F-1 filing related to our private
placement of August 2005, our F-1 filing related to our follow-on offering
initially filed in November 2006 and the audit of our consolidated financial
statements. For these services our principal auditors charged us
$388,000 of fees plus $3,000 of expenses.
The audit committee is responsible
for the appointment, replacement, compensation, evaluation and oversight of the
work of the independent registered public accounting firm. As part of this
responsibility, the Audit Committee pre-approves the audit and non-audit
services performed by the independent registered public accounting firm in order
to assure that they do not impair the auditor's independence from the Company.
The Audit Committee has adopted a policy which sets forth the procedures and the
conditions pursuant to which services proposed to be performed by the
independent registered public accounting firm may be pre-approved.
All audit services and other services
provided by Deloitte Hadjipavlou, Sofianos & Cambanis S.A., after the
formation of our audit committee in November 2005 were pre-approved by the audit
committee.
Item
16D. Exemptions from the Listing
Standards for Audit Committees
Not
Applicable.
Item
16E. Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
Not
Applicable.
66
PART
III
Item 17.
Financial
Statements
See Item
18
Item 18.
Financial
Statements
The
following financial statements set forth on pages F-1 through F-5 are filed as
part of this annual report.
Loan
Agreement between Diana Trading Ltd., as borrower, and Oceanopera Shipping
Limited, as corporate guarantor, and HSBC Bank plc, as the lender, dated
October 16, 2002 for the amount of 5,900,000(1)
4.3
Loan
Agreement between Diana Trading Ltd., as borrower, and HSBC Bank plc, as
lender, for the amount of $4,200,000 dated May 9,2005(1)
4.
4.4
Loan
Agreement dated May 16, 2005 between EFG Eurobank Ergasias S.A., as
lender, and Alcinoe Shipping Limited, Oceanopera Shipping Limited,
Oceanpride Shipping Limited, and Searoute Maritime Limited, as borrowers,
for the amount of $13,500,000(1)
4.5
Secured
Loan Facility Agreement dated May 24, 2005 between Allendale
Investments S.A. and Alterwall Business Inc. as borrowers, Fortis Bank
(Nederland) N.V. and others as lenders, and Fortis Bank (Nederland) N.V.
as agent and security trustee for $20,000,000(1)
4.6
Form
of Standard Ship Management Agreement(1)
4.7
Agreement
between Eurobulk Ltd. and Eurochart S.A., for the provision of exclusive
brokerage services, dated December 20, 2004(1)
4.8
Form
of Current Time Charter(1)
4.9
Amended
and Restated Master Management Agreement between Euroseas Ltd. and
Eurobulk Ltd. dated as of July 17, 2007(7)
4.10
Loan
Agreement between Salina Shipping Corp., as borrower, and Calyon, as
lender, for the amount of USD$15,500,000 dated December 28,2005(3)
4.11
Loan
Agreement between Xenia International Corp., as borrower, and Fortis Bank
N.V./S.A., Athens Branch and others, as lenders, for the amount of
USD$8,250,000 dated June 30, 2006(4)
4.12
Loan
Agreement between Prospero Maritime Inc., as borrower, and Calyon, as
lender, for the amount of USD$15,500,000 dated August 30,2006(4)
4.13
Euroseas
2006 Equity Incentive Plan(5)
4.14
Loan
Agreement between Xingang Shipping Ltd., as borrower, and HSBC Bank plc,
as lender, for the amount of USD$20,000,000 dated November 14,2006(5)
4.15
Form
of Right of First Refusal(6)
4.16
Form
of Advisory Agreement(6)
4.17
Loan
Agreement between Manolis Shipping Limited, as borrower, and EFG Eurobank
Ergasias S.A., as lender, for the amount of USD$10,000,000 dated June 7,2007(7)
4.18
Loan
Agreement between Trust Navigation Corp., as borrower and EFG Eurobank
Ergasias S.A., as lender, for the amount of USD$15,000,000 dated October29, 2007(7)
The
Registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign on
its behalf.
We have
audited the accompanying consolidated balance sheets of Euroseas Ltd and
subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2007. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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 as of December31, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated May 8, 2008, expressed an unqualified
opinion on the Company's internal control over financial reporting.
Euroseas
Ltd. (the “Company”) was formed on May 5, 2005 under the laws of the Republic of
the Marshall Islands to consolidate the beneficial owners of the ship owning
companies in existence at that time (see list below). On June 28, 2005, the
beneficial owners exchanged all their shares in the ship-owning companies for
shares in Friends Investment Company Inc., a newly formed Marshall Islands
company. On June 29, 2005, Friends Investment Company Inc. then
exchanged all the shares in the ship-owning companies for shares in Euroseas
Ltd., thus, becoming the sole shareholder of Euroseas Ltd. The
transaction described above constitutes a reorganization of companies under
common control, and has been accounted for in a manner similar to a pooling of
interests, as each ship-owning company was under the common control of the
Pittas family prior to the transfer of ownership of the companies to Euroseas
Ltd. Accordingly, the accompanying consolidated financial statements
have been presented as if the ship-owning companies were consolidated
subsidiaries of the Company for all periods presented and using the historical
carrying costs of the assets and the liabilities of the ship-owning companies in
existence at that time (see list below). All share counts are
adjusted for the Company’s 1-for-3 reverse common stock split effected on
October 6, 2006.
On August25, 2005, Euroseas Ltd. sold 2,342,331 common shares at $9.00 per share in an
institutional private placement, together with 0.25 of detachable warrants for
each common share to acquire up to 585,589 common shares. The total
proceeds, net of issuance costs of $3,500,309, amounted to
$17,510,400. The warrants allow their holders to acquire one share of
Euroseas Ltd. stock at a price of $10.80 per share and are exercisable for a
period of five years from the issue of the warrant.
On August25, 2005, as a condition to the institutional private placement described above,
the Company and Cove Apparel, Inc. (Cove, an unrelated party and public shell
corporation) signed an Agreement and Plan of Merger (the “Merger
Agreement”). The Merger Agreement provided for the merger of Cove and
Euroseas Acquisition Company Inc., a Delaware corporation and a wholly-owned
subsidiary of Euroseas Ltd. formed on June 21, 2005, with the current
stockholders of Cove receiving 0.0034323 shares of Euroseas Ltd. common
shares for each share of Cove common stock they presently
own. Euroseas Ltd., as part of the merger, filed a registration
statement with the Securities and Exchange Commission (SEC) to register the
shares issued in the merger to the Cove stockholders.
The SEC
declared effective on February 3, 2006the Company’s registration statement on
Form F-4 that registered the Euroseas Ltd. common shares issued to Cove
shareholders. The SEC also declared effective on February 3, 2006 the
Company’s registration statement on Form F-1 that registered the re-sale of the
2,342,331 Euroseas Ltd. common shares and 585,589 Euroseas Ltd. common shares
issuable upon the exercise of the warrants issued in connection with the
institutional private placement as well as 272,868 Euroseas Ltd. common shares
that were issued to certain Cove shareholders as part of the merger with
Cove.
1. Basis
of Presentation and General Information - continued
On March27, 2006, Euroseas Ltd. consummated the merger with Cove and, as a result, Cove
merged into Euroseas Acquisition Company Inc., and the separate corporate
existence of Cove ceased. The Cove stockholders received Euroseas
Ltd. common shares and received dividends totaling to $140,334 related to
dividends previously declared by Euroseas Ltd. Euroseas Acquisition
Company Inc. changed its name to Cove Apparel, Inc. Also, following
the completion of the merger, the common stock of Cove has been de-listed and no
longer trades on the OTC Bulletin Board. On the date of the merger, Cove had
cash of $10,000, had no other assets and had no liabilities.
Euroseas
Ltd. common share was approved to trade on March 2, 2006 and started trading on
the OTC Bulletin Board on May 5, 2006. On October 6, 2006, the
Company effected a 1-for-3 reverse split of its common
stock. On January 31, 2007 upon the pricing of the Company’s
follow-on common stock offering of 5,750,000 shares the Euroseas Ltd. common
share started trading on the NASDAQ Global Market. The total proceeds of the
follow-on common stock offering, net of issuance costs of $4,122,289, amounted
to $43,315,220. On June 29, 2007the Company priced, and, on July 5, 2007
completed an additional follow-on offering of 5,750,000 shares of common
stock. The total proceeds of this follow-on offering, net of issuance
costs of $4,609,428, amounted to $73,015,572. On November 6, 2007the Company
priced, and, on November 9, 2007 completed an additional follow-on offering of
5,825,000 shares of common stock. The total proceeds of this follow-on offering,
net of issuance costs of $5,468,812, amounted to $93,556,187.
The
operations of the vessels are managed by Eurobulk Ltd. (the “manager”), a
corporation controlled by members of the Pittas family. The Pittas
family is the controlling shareholders of Friends Investment Company Inc. which
owns 31.1% of the Company’s shares as of December 31, 2007.
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:
·
Searoute
Maritime Ltd. incorporated in Cyprus on May 20, 1992, owner of the Cyprus
flag 33,712 DWT bulk carrier motor vessel (M/V) “Ariel”, which was built
in 1977 and acquired on March 5, 1993. M/V “Ariel” was sold on
February 22, 2007.
·
Oceanopera
Shipping Ltd. incorporated in Cyprus on June 26, 1995, owner of the Cyprus
flag 34,750 DWT bulk carrier M/V “Nikolaos P”, which was built in 1984 and
acquired on July 22, 1996.
·
Oceanpride
Shipping Ltd. incorporated in Cyprus on March 7, 1998, owner of the Cyprus
flag 26,354 DWT bulk carrier M/V “John P”, which was built in 1981 and
acquired on March 7, 1998. M/V “John P” was sold on July 5,2006.
1.
Basis of Presentation and General Information -
continued
·
Alcinoe
Shipping Ltd. incorporated in Cyprus on March 20, 1997, owner of the
Cyprus flag 26,354 DWT bulk carrier M/V “Pantelis P”, which was built in
1981 and acquired on June 4, 1997. M/V “Pantelis P” was sold on
May 31, 2006. On February 22, 2007, Alcinoe Shipping Ltd.
acquired the 38,691 DWT Cyprus flag drybulk carrier M/V “Gregos”, which
was built in 1984. On June 13, 2007, M/V Gregos was transferred
to Gregos Shipping Limited incorporated in the Marshall Islands and its
flag was changed to the flag of the Marshall
Islands.
·
Allendale
Investment S.A. incorporated in Panama on January 22, 2002, owner of the
Panama flag 18,154 DWT container carrier M/V “Kuo Hsiung”, which was built
in 1993 and acquired on May 13,2002.
·
Alterwall
Business Inc. incorporated in Panama on January 15, 2001, owner of the
Panama flag 18,253 DWT container carrier M/V “Ninos” (previously named M/V
“Quingdao I”) which was built in 1990 and acquired on February 16,2001.
·
Diana
Trading Ltd. incorporated in the Marshall Islands on September 25, 2002,
owner of the Marshall Islands flag 69,734 DWT bulk carrier M/V “Irini”,
which was built in 1988 and acquired on October 15,2002.
·
Salina
Shipholding Corp., incorporated in the Marshall Islands on October 20,2005, owner of the Marshall Islands flag 29,693 DWT container carrier M/V
“Artemis”, which was built in 1987 and acquired on November 25,2005.
·
Xenia
International Corp., incorporated in the Marshall Islands on April 6,2006, owner of the Marshall Islands flag 22,568 DWT / 950 TEU multipurpose
M/V “Tasman Trader”, which was built in 1990 and acquired on April 27,2006.
·
Prospero
Maritime Inc., incorporated in the Marshall Islands on July 21, 2006,
owner of the Marshall Islands flag 69,268 DWT dry bulk M/V “Aristides
N.P.”, which was built in 1993 and acquired on September 4,2006.
·
Xingang
Shipping Ltd., incorporated in Liberia on October 16, 2006, owner of the
Liberian flag 23,596 DWT container carrier M/V “YM Xingang I” , which was
built in February 1993 and acquired on November 15,2006.
·
Manolis
Shipping Ltd., incorporated in the Marshall Islands on March 16, 2007,
owner of the Marshall Islands flag 20,346 DWT / 1,452 TEU container
carrier M/V “Manolis P”, which was built in 1995 and acquired on April 12,2007.
·
Eternity
Shipping Company, incorporated in the Marshall Islands on May 17, 2007,
owner of the Marshall Islands flag 30,007 DWT / 1,742 TEU container
carrier M/V “Clan Gladiator”, which was built in 1992 and acquired on June13, 2007. On May 9, 2008, M/V “Clan Gladiator” was renamed M/V “OEL
Transworld”.
1. Basis
of Presentation and General Information - continued
·
Emmentaly
Business Inc., incorporated in Panama on July 4, 2007, owner of the
Panamanian flag 33,667 DWT / 1,932 TEU container carrier M/V “Jonathan P”,
which was built in 1990 and acquired on August 7, 2007. On April 16, 2008,
M/V “Jonathan P” was renamed M/V “OEL
Integrity”.
·
Pilory
Associates Corp., incorporated in Panama on July 4, 2007, owner of the
Panamanian flag 33,667 DWT / 1,932 TEU container carrier M/V “Despina P”,
which was built in 1990 and acquired on August 13,2007.
·
Tiger
Navigation Corp., incorporated in Marshall Islands on August 29, 2007,
owner of the Marshall Islands flag 31,627 DWT / 2,228 TEU container
carrier M/V “Tiger Bridge”, which was built in 1990 and acquired on
October 4, 2007.
·
Trust
Navigation Corp., incorporated in Liberia on October 1, 2007, owner of the
Liberian flag 64,873 DWT bulk carrier M/V “Ioanna P”, which was built in
1984 and acquired on November 1,2007.
In
addition, the accompanying consolidated financial statements include the
accounts of the ship-owning company, Silvergold Shipping Ltd., which
was also managed by Eurobulk Ltd. during the periods presented.
·
Silvergold Shipping Ltd.
(Silvergold) incorporated in Cyprus on May 16, 1994. Up to June3, 1996, Silvergold was engaged in ship owning activities, but thereafter,
Silvergold’s assets and liabilities were liquidated and the remaining net
assets were distributed to shareholders. The Company remained
dormant until October 10, 2000 when it acquired the 18,000 DWT Cyprus flag
container carrier M/V “Widar”, which was built in 1986. M/V
“Widar” was sold on April 24, 2004. The Pittas family, the controlling
shareholders of Friends Investment Company Ltd. which is the Company’s
largest shareholder, also owned Silvergold and, accordingly, these
accompanying financial statements also consolidated the accounts of
Silvergold until May 31, 2005, when Silvergold declared a final dividend
of $35,000 to its
shareholders.
During
the years ended December 31, 2005, 2006 and 2007, the following charterers
individually accounted for more than 10% of the Company’s voyage and time
charter revenues as follows:
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The following are the significant accounting policies
adopted by the Company:
Principles
of consolidation
The
accompanying consolidated financial statements included the accounts of Euroseas
Ltd. and its subsidiaries. Inter-company transactions were eliminated
on consolidation.
Use
of estimates
The
preparation of the accompanying consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the date of the consolidated financial statements, and the stated amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Other
comprehensive income
The
Company presents separately comprehensive income, if any, and its components in
stockholders’ equity. The Company has no other comprehensive income
and, accordingly, comprehensive income equals net income for all periods
presented.
Foreign
currency translation
The
Company’s functional currency is the U.S. dollar. Assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
at exchange rates prevailing at the balance sheet date. Income and
expenses denominated in foreign currencies are translated into U.S. dollars at
exchange rates prevailing at the date of the transaction. The
resulting exchange gains and/or losses on settlement or translation are included
in the accompanying consolidated statements of operations.
Cash
equivalents
Cash
equivalents are time deposits or other certificates purchased with an original
maturity of three months or less.
Restricted
Cash
Restricted
cash reflects deposits with certain banks that can only be used to pay the
current loan installments or are required to be maintained as a certain minimum
cash balance per mortgaged vessel.
The
amount shown as trade accounts receivable, at each balance sheet date, includes
estimated recoveries from each voyage or time charter. At each balance sheet
date, the Company provides for doubtful accounts on the basis of specific
identified doubtful receivables. At December 31, 2005, 2006 and 2007,
no provision for doubtful debts was considered necessary.
Inventories
Inventories
are stated at the lower of cost and market value. Inventories are
valued using the FIFO (First-In First-Out) method. On January 1, 2007, the
Company changed its accounting policy for the valuation of the inventories of
lubricants to the FIFO method to more accurately value its inventories and
better match revenues and expenses. Until December 31, 2006, inventories of
lubricants were valued on an average cost basis; victualling inventories have
always been valued using the FIFO method. The net cumulative effect of this
change amounted to ($13,568) which was recorded in the vessel operating
expenses. The effect on the years 2005 and 2006 is immaterial and, therefore,
the Company has not retrospective applied the new accounting
principle.
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 are 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.
2. Summary
of Significant Accounting Policies - Continued
Revenue
and expense recognition
Revenues
are generated from voyage and time charter agreements. If a charter
agreement exists, the price is fixed, service is provided and the collection of
the related revenue is reasonably assured, revenues are recorded over the term
of the charter as service is provided and recognized on a pro-rata basis over
the duration of the voyage or time charter adjusted for the off-hire days that a
vessel spends undergoing repairs, maintenance or upgrade work. A voyage is
deemed to commence upon the later of the completion of discharge of the vessel’s
previous cargo or the time it receives a contract that is not cancelable and is
deemed to end upon the completion of discharge of the current
cargo. A time charter contract is deemed to commence from the time of
the delivery of the vessel to an agreed port and is deemed to end upon the
re-delivery of the vessel at an agreed port. We generally enter into a charter
agreement for the vessel’s next voyage or time charter prior to the time of
discharge of the previous cargo or completion of previous time charter. We do
not begin recognizing voyage or time charter revenue until a charter contract
has been agreed to both by us and the customer, even if the vessel has
discharged its cargo or completed the previous time charter and it is
sailing to the anticipated
load port for its next voyage or to the port it will be delivered to the next
charterer. 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.
Probable losses on voyages are provided for in full at the time such losses can
be estimated.
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, which is determined
by points awarded to each vessel in the pool based on the vessel’s age, design
and other performance characteristics. For vessels that simultaneously
participate in spot chartering pools and cargo pools (pools of contracts of
affreightment, also called, short funds; in the Company’s case, participation in
cargo pools requires participation in spot chartering pools), a combined time
charter equivalent revenue is provided by the operator of the vessel and cargo
pools. Revenues and voyage expenses are recognized during the period services
were performed, the collectability has been reasonably assured, an agreement
with the pool exists and price is determinable.
Charter
fees received in advance is recorded as a liability (deferred revenue) until
charter services are rendered.
Vessels
operating expenses comprise all expenses relating to the operation of the
vessels, including crewing, insurance, repairs and maintenance, stores,
lubricants, spares and consumables, professional and legal fees and
miscellaneous expenses. Vessel operating expenses are recognized as incurred;
payments in advance of services or use are recorded as prepaid expenses. Voyage
expenses are incurred when the vessel is chartered under a voyage charter and
comprise all expenses relating to particular voyages, including bunkers, port
charges, canal tolls, and agency fees. Voyage expenses are recognized on a
pro-rata basis over the estimated length of the each voyage. The impact of
recognizing voyage expenses on a pro-rata basis over the length of the each
voyage is not materially different on a quarterly and annually basis from a
method of recognizing such expenses as incurred.
Summary
of Significant Accounting Policies -
Continued
Dry-docking
and special survey expenses
Dry-docking
and special survey expenses are deferred and amortized over the estimated period
to the next scheduled dry-docking or special survey, which are generally two and
a half years and five years, respectively. Unamortized dry-docking
and special survey expenses of vessels that are sold are written-off to income
in the year of the vessel’s sale.
Pension
and retirement benefit obligations – crew
The
ship-owning companies employ the crews on board the vessels under short-term
contracts (usually up to 9 months). Accordingly, they are not liable
for any pension or post retirement benefits.
Financing
costs
Loan
arrangement fees are deferred and amortized to interest expense over the
duration of the underlying loan using the effective interest method. Unamortized
fees relating to loan repaid or refinanced are expensed in the period the
repayment or refinancing occurs.
Assets
held for sale
It is the
Company’s policy to dispose of vessels when suitable opportunities occur and not
necessarily to keep them until the end of their useful life. The Company
classifies vessels as being held for sale when: management has committed to a
plan to sell the vessels; the vessels are available for immediate sale in its
present condition; an active program to locate a buyer and other actions
required to complete the plan to sell the vessels have been initiated; the sale
of the vessels is probable, and transfer of the asset is expected to qualify for
recognition as a completed sale within one year; the vessels are being actively
marketed for sale at a price that is reasonable in relation to its current fair
value and actions required to complete the plan indicate that it is unlikely
that significant changes to the plan will be made or that the plan will be
withdrawn.
Long-lived
assets classified as held for sale are measured at the lower of their carrying
amount or fair value less cost to sell. These vessels are not
depreciated once they meet the criteria to be classified as held for
sale.
Impairment
of long-lived assets
Impairment
losses are recognized on long-lived assets used in operations when indicators of
impairment are present and if the carrying amount of the long-lived asset is not
recoverable from the undiscounted cash flows estimated to be generated by those
assets and the asset’s carrying amount is less than its fair value. In
determining fair value and future benefits derived from use of long-lived
assets, the Company performs an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets. If the carrying
value of the related asset exceeds its undiscounted future net cash flows, the
carrying value is reduced to its fair value. Various factors including future
charter rates and vessel operating costs are included in this analysis. The
Company did not note, for all years presented, any events or changes in
circumstances indicating that the carrying amount of its vessels may not be
recoverable.
Summary
of Significant Accounting Policies -
Continued
Fair
value of time charter acquired
The
Company records all identified tangible and intangible assets or any liabilities
associated with the acquisition of a vessel at fair value. Where vessels are
acquired with existing time charters, the Company determines the present value
of the difference between: (i) the contractual charter rate and (ii) the
prevailing market rate for a charter of equivalent duration. In discounting the
charter rate differences in future periods, the Company uses its Weighted
Average Cost of Capital (WACC) adjusted to account for the credit quality of the
charterer. The capitalized above-market (assets) and below-market
(liabilities) charters are amortized as a reduction and increase, respectively,
to voyage revenues over the remaining term of the charter.
Stock
incentive plan awards
Share-based
compensation represents vested and nonvested restricted shares granted to
employees and to non-employee directors, for their services as directors, as
well as to non-employees and is included in “Other general and administrative
expenses” in the consolidated statements of income. These shares are measured at
their fair value equal to the market value of the Company's common stock on the
grant date. The shares that do not contain any future service vesting conditions
are considered vested shares and a total fair value of such shares is expensed
on the grant date. The shares that contain a time-based service vesting
condition are considered nonvested shares on the grant date and a total fair
value of such shares recognized on a straight-line basis over the requisite
service period. In addition, nonvested awards granted to non-employees are
measured at its then-current fair value as of the financial reporting dates
until non-employees complete the service (Note 13).
Investments
The
Company classifies unrestricted publicly traded investments as trading
securities and records them at fair value. For trading securities, the Company
records unrealized gains or losses resulting from changes in fair value between
measurement dates as a component of Gain on trading securities. Net unrealized
gains and losses recognized during the reporting period on trading securities
still held at the reporting date amounted to $0, $0 and $98,744 for the years
ended December 31, 2005, 2006 and 2007, respectively. None of the trading
securities were sold during the period. Purchases of, or proceeds from, the sale
of trading securities are classified as cash flows from operating activities.
Upon adoption of Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),
the classification of purchases of, or proceeds from, the sale of trading
securities will be classified to cash flows from operating activities or cash
flows from investing activities based upon the Company’s intent with respect to
these securities ( see Note 2 – Recent Accounting Pronouncements).
Summary
of Significant Accounting Policies -
Continued
Derivative
financial instruments
Every
derivative instrument (including certain derivative instruments embedded in
other contracts) are recorded in the balance sheet as either an asset or
liability measured at its fair value with changes in the instruments' fair value
recognized currently in earnings unless specific hedge accounting criteria are
met.
For the
year ended December 31, 2005, the interest rate swaps did not qualify for hedge
accounting treatment. Accordingly, all gains or losses have been
recorded in the consolidated statement of income. There were no interest rate
swaps for the years ended December 31, 2006 and 2007.
Earning
per common share
Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. The weighted-average number of common shares outstanding does not
include any potentially dilutive securities or any unvested restricted shares of
common stock. These unvested restricted shares, although classified as issued
and outstanding at December 31, 2007, are considered contingently returnable
until the restrictions lapse and will not be included in the basic net income
per share calculation until the shares are vested.
Diluted
net income per share gives effect to all potentially dilutive securities. The
Company’s outstanding warrants and nonvested restricted shares were potentially
dilutive securities during the twelve months ended December 31, 2007 (Note
14).
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
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value measurements. SFAS
No. 157 is effective for financial assets and liabilities in fiscal years
beginning after November 15, 2007 and for non-financial assets and liabilities
in fiscal years beginning after March 15, 2008. The Company does not expect the
adoption of SFAS No. 157 to have a material impact on Company’s consolidated
financial statements.
Summary
of Significant Accounting Policies -
Continued
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No.
115” (SFAS No. 159”) which provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility in
financial reporting that can occur when related assets and liabilities are
recorded on different bases. SFAS No. 159 amends FASB Statement No. 95,
“Statement of Cash Flows” (“SFAS No. 95”) and FASB Statement No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No.
115”). SFAS No. 159 specifies that cash flows from trading securities, including
securities for which an entity has elected the fair value option, should be
classified in the statement of cash flows based on the nature of and purpose for
which the securities were acquired. Before this amendment, SFAS No. 95 and SFAS
No. 115 specified that cash flows from trading securities must be classified as
cash flows from operating activities. This statement is effective for the
Company beginning January 1, 2008. Upon adoption, the Company will be
classifying proceeds from sales of trading securities within the statement of
cash flows as an operating or investing activity based on the intention for
which any securities are acquired. The Company does not expect any of the other
provisions of SFAS No. 159 to have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill
acquired. SFAS No. 141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008, and will be adopted by the Company in the first quarter
of fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 141(R) on the Company's consolidated
results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”).” SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by the Company in the first quarter of
fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on the Company's consolidated
results of operations and financial condition.
In March
2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Acitivities” (“SFAS No. 161”). The new standard is intended
to improve financial reporting about derivative instruments and heding
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,2008. The Company is currently evaluating the potential impact, if
any, of the adoption of SFAS No. 161 on the Company's consolidated results of
operations, cash flows and financial condition.
M/V
Pantelis P was sold in May 2006 and the Company recognized net gain from the
sale of $2,165,799. Depreciation expense for M/V Pantelis P for the year ended
December 31, 2006 amounted to $107,587. M/V John P was sold in July
2006 and the Company recognized net gain from the sale of $2,280,057.
Depreciation expense for M/V John P for the year ended December 31, 2006
amounted to $60,067 (see Note 11).
On
December 19, 2006, Searoute Maritime Ltd., a wholly-owned subsidiary of the
company, signed a Memorandum of Agreement to sell M/V “Ariel”, a handysize bulk
carrier of 33,712 DWT built in 1977 for a gross price of $5,350,000 with 2%
sales commissions. The vessel was delivered to the buyers on February 22, 2007
resulting in a gain of approximately $3,400,000. M/V “Ariel” is
presented as “vessel held for sale” in the consolidated balance sheet as of
December 31, 2006. The vessel was already fully depreciated
as of December 19, 2006 and, therefore, its classification as “vessel held for
sale” had no effect on the depreciation. The book value of M/V
“Ariel” (representing its estimated salvage value) as of December 31, 2006 was
$1,782,840.
The
Company, in 2006, acquired M/V “Tasman Trader”, M/V “Aristides N.P.” and M/V “YM
Xingang I”.
M/V
“Tasman Trader” was acquired for $10,775,000 with an existing time charter (see
Note 7) below the prevailing market charter rate. Consequently, the
Company recorded M/V “Tasman Trader” at $12,091,393 consisting of the amount
paid plus the present value of the below market charter rate of $1,237,072 and
additional cost of acquisition amounting to $79,321.
M/V
“Aristides N.P.” was acquired for $23,460,000 with an existing time charter (see
Note 7) below the prevailing market charter rate. Consequently, the
Company recorded M/V “Aristides N.P.” at $23,985,752 consisting of the amount
paid plus the present value of the below market charter rate of $412,500 and
additional cost of acquisition of $113,252.
M/V “YM
Xingang I” was acquired for $27,250,000 with an existing time charter (see Note
7) above prevailing market rates. Consequently, the Company recorded
M/V “YM Xingang I” at $19,402,784 which is calculated as the total amount paid
less the present value of the above market charter rate of $7,923,480, plus
additional acquisition cost of $76,264.
In 2007,
the Company acquired a total of seven vessels.
On
February 22, 2007, the Company took delivery of M/V “Gregos”, a 38,691 dwt bulk
carrier built in 1984. At the time of purchase, the Company assessed
that the vessel’s condition would allow it to operate economically for at least
5 years and decided to use a depreciation life of 28 years for M/V “Gregos”
measured from the date of vessel construction in 1984. The vessel underwent
dry-docking in June 2007, and, the Company also intends to pass the vessel
through its next special survey in 2009. M/V “Gregos” was acquired
for $13,100,000. The Company recorded M/V “Gregos” at $13,165,025 consisting of
the amount paid plus additional cost of acquisition amounting to
$65,027.
On April12, 2007, the Company took delivery of M/V “Manolis P”, a 20,356 dwt / 1,452 teu
container carrier built in 1995. M/V “Manolis P” was acquired for $19,150,000.
The Company recorded M/V “Manolis P” at $19,210,275 consisting of the amount
paid plus additional cost of acquisition amounting to $60,275.
On June13, 2007, the Company took delivery of M/V “Clan Gladiator”, a 30,007 dwt /
1,742 teu container carrier built in 1992. M/V “Clan Gladiator” was acquired for
$25,700,000. The Company recorded M/V “Clan Gladiator” at $25,753,439 consisting
of the amount paid plus additional cost of acquisition amounting to $53,439. On
May 9, 2008, M/V “Clan Gladiator” was renamed M/V “OEL Transworld”.
On August7, 2007, the Company took delivery of M/V “Jonathan P”, a 33,667 dwt / 1,932 teu
container carrier built in 1990. M/V “Jonathan P” was acquired for $18,700,000.
The Company recorded M/V “Jonathan P” at purchase at $18,791,829, consisting of
the amount paid plus additional cost of acquisition amounting to $91,829, and
recorded vessel improvements of $526,244. On April 16, 2008, M/V “Jonathan P”
was renamed M/V “OEL Integrity”.
On August13, 2007, the Company took delivery of M/V “Despina P”, a 33,667 dwt / 1,932 teu
container carrier built in 1990. M/V “Despina P” was acquired for $18,700,000.
The Company recorded M/V “Despina P” at purchase at $18,779,334, consisting of
the amount paid plus additional cost of acquisition amounting to $79,334, and
recorded vessel improvements of $560,475.
On
October 4, 2007, the Company took delivery of M/V “Tiger Bridge”, a 31,627 dwt /
2,228 teu container carrier built in 1990. M/V “Tiger Bridge” was acquired for
$24,000,000 along with a below market charter of $16,500 per day until July
2009. The Company recorded M/V “Tiger Bridge” at $26,308,421 consisting of the
amount paid plus additional cost of acquisition amounting to $44,498 plus the
cost of the below market charter estimated at $2,263,923 (see Note
7).
On
November 1, 2007, the Company took delivery of M/V “Ioanna P”, a 64,873 dwt bulk
carrier built in 1984. At the time of purchase, the Company assessed
that the vessel’s condition would allow it to operate economically for at least
5 years and decided to use a depreciation life of 28 years for M/V “Ioanna P”
measured from the date of vessel construction in 1984. The vessel underwent
dry-docking in 2007, and, the Company also intends to pass the vessel through
its next special survey in 2009. M/V “Ioanna P” was acquired for
$28,600,000 along with a below market time charter of $35,500 per day until July
2008. The Company recorded M/V “Ioanna P” at $36,082,695 consisting of the
amount paid plus additional cost of acquisition amounting to $71,137 plus the
cost of the below market charter estimated at $7,411,558 (see Note
7).
5.
Deferred
Charges, net
This
consisted of:
2005
2006
2007
Balance,
beginning of year
2,205,178
1,855,829
1,291,844
Additions
1,284,733
972,448
5,880,007
Amortization
of dry-docking and
special
survey expenses
(1,550,338
)
(1,015,510
)
(1,539,981
)
Amortization
of loan arrangement fees
(83,744
)
(74,601
)
(72,715
)
Unamortized
portion of dry-docking and special survey expenses written-off upon sale
of vessels
-
(446,322
)
(29,285
)
Balance,
end of year
1,855,829
1,291,844
5,529,870
The
additions of $1,284,733 in 2005 consisted of loan financing fees of $208,500 and
dry-docking and special survey expenses of $1,076,233 for two vessels, M/V
“Irini” and M/V “John P”. The additions of $972,448 in 2006 consisted of loan
financing fees of $151,250 and dry-docking and special survey expenses of
$821,198 for two vessels, M/V “Nikolaos P” and M/V “Kuo Hsiung”. The additions
of $5,880,007 in 2007 consisted of loan financing fees of $110,000 and
dry-docking and special survey expenses of $5,770,007 for seven vessels, M/V
“Artemis”, M/V “Ninos”, M/V “Tasman Trader”, M/V “Gregos”, M/V “Manolis P”, M/V
“Despina P” and M/V “OEL Integrity” (ex M/V “Jonathan P”).
Fair
Value of Above or Below Market Time Charters
Acquired
M/V
“Tasman Trader” was acquired on April 27, 2006 with an outstanding time charter
terminating on December 17, 2008 with a charter rate of $8,850 per day and M/V
“Aristides N.P.” was acquired on September 4, 2006 with an outstanding time
charter contract terminating on November 8, 2006 with a charter rate of $19,750
per day. These charter rates were below the market rates for
equivalent time charters prevailing at the time the foregoing vessels were
acquired. The present values of the below the market charters were
estimated by the Company at $1,237,072 and $412,500, respectively, and were
recorded as liabilities in the consolidated balance sheets. Net
voyage revenues included $318,872 as amortization of the below market rate
charters for M/V “Tasman Trader” and $412,500 for M/V “Aristides N.P.” for the
year ended December 31, 2006 and $465,503 for M/V “Tasman Trade” for the year
ended December 31, 2007. The unamortized below market rate charter
for M/V “Tasman Trader” was $918,200 and $452,697 and none for M/V “Aristides
N.P.” as of December 31, 2006 and 2007, respectively, and is recorded as a
liability in the consolidated balance sheets.
M/V “YM
Xingang I” was acquired on November 15, 2006 with an outstanding time charter
terminating on July 21, 2009 with a charter rate of $26,650 per
day. This charter rate was above the market rates for equivalent time
charters prevailing at the time. The present value of the above the
market charter was estimated by the Company at $7,923,480, and was recorded as
an asset in the consolidated balance sheets. Net voyage revenues
included a reduction of $380,003 and $2,938,963 as amortization of the above
market rate charter for M/V “YM Xingang I” for the years ended December 31, 2006
and 2007, respectively. The remaining unamortized above market rate charter was
$7,543,477 and $4,604,514 as of December 31, 2006 and 2007, respectively, and is
recorded as a long term asset in the consolidated balance sheets.
M/V
“Tiger Bridge” was acquired on October 4, 2007 with an outstanding time charter
terminating on August 4, 2009 with a charter rate of $16,500 per
day. This charter rate was below the market rates for equivalent time
charters prevailing at the time. The present value of the
below-market charter was estimated by the Company at $2,263,924, and was
recorded as a liability in the consolidated balance sheets. Net
voyage revenues included $298,946 as amortization of the below-market rate
charter for M/V “Tiger Bridge” for the year ended December 31, 2007. The
remaining unamortized above market rate charter was $1,964,977 as of December31, 2007.
Fair
Value of Above or Below Market Time Charters Acquired -
continued
M/V
“Ioanna P” was acquired on November 1, 2007 with an outstanding time charter
terminating on August 4, 2008 with a charter rate of $35,500 per
day. This charter rate was below the market rates for equivalent time
charters prevailing at the time. The present value of the
below-market charter was estimated by the Company at $7,441,558 and was recorded
as a liability in the consolidated balance sheets. Net voyage
revenues included $1,626,260 as amortization of the below-market rate charter
for M/V “Ioanna P” for the year ended December 31, 2007. The remaining
unamortized above market rate charter was $5,785,298 as of December 31,2007.
8.
Related
Party Transactions
The
Company’s vessel owning companies are parties to management agreements with
Eurobulk Ltd. (“Management Company”), which is controlled by members of the
Pittas family, whereby the Management Company provides technical and commercial
vessel management for a fixed daily fee of Euro 590 per vessel for 2005, an
average of Euro 608 for 2006 and Euro 628 for 2007 under the Company’s Master
Management Agreement (see below). Vessel management fees paid to the
Management Company amounted to $1,911,856, $2,266,589 and $3,669,137 in 2005,
2006 and 2007, respectively. These agreements were renewed on January 31, 2005
and amended in August and October 2006 with an initial term of five years and
will automatically be extended after the initial term until terminated by the
parties. Termination is not effective until two months following
notice having been delivered in writing by either party after the expiration of
the initial five-year period. An annual adjustment of the management fee due to
inflation as provided under the management agreement took effect on the annual
anniversary of the agreement on January 31, 2006 increasing the management fee
by Euro 20 per vessel per day to Euro 610 and on January 31, 2007 to Euro 630
per vessel per day. Eurobulk Ltd. agreed not adjust the daily management fee for
inflation in 2008. The Company’s master management agreement with
Eurobulk - effective as of October 1, 2006 and with an initial term of five
years until September 30, 2011 – was amended and renewed for five years on
February 7, 2008 with effect from January 1, 2008. Future inflation
adjustments will take effect on January 1.
In
addition to the vessel management services, Eurobulk provides us with management
services for the Company’s needs as a public company. In 2006, compensation for
such services to us as a public company was $508,750, incremental to the
management fee. The Euroseas Board of Directors approved an increase
of the management services fee to $700,000 per year starting July 1, 2007,
resulting in total cost for such services in 2007 of $608,750. On
February 7, 2008, as part of the amended and renewed master management
agreement, the Board of Directors approved a further increase to this component
of the management fee to $1,100,000 per year starting on January 1, 2008 to be
adjusted for inflation every January 1.
Amounts
due to or from related parties represent net disbursements and collections made
on behalf of the vessel-owning companies by the Management Company during the
normal course of operations for which a right of off-set exists. As
of December 31, 2006 and 2007, the amount due from related companies was
$2,649,259 and $5,291,196, respectively. Based on the master management
agreement between Euroseas Ltd. and Euroseas’ shipowning subsidiaries and
Eurobulk Ltd. an estimate of the quarter’s operating expenses, expected drydock
expenses, vessel management fee and fee for management executive services is to
be advanced in the beginning of quarter to Eurobulk Ltd. For the
fleet as of December 31, 2007 this advance is estimated between $7,500,000 and
$9,000,000 excluding any advances needed for drydock expenses and is paid in
advance around the beginning of each quarter. Interest earned on funds deposited
in related party accounts is credited to the account of the ship-owning
companies or Euroseas Ltd.
The
Company uses brokers for various services, as is industry
practice. Eurochart S.A., a company controlled by certain members of
the Pittas family, provides vessel sale and purchase services, and chartering
services to the Company whereby the Company pays commission of 1% of the vessel
sales price and 1.25% of charter revenues. Commission expenses for
the years ended December 31, 2007 and 2006 for vessel sales were $53,500 and
$96,000, respectively, incurred for the sale of M/V “Ariel” in 2007, and, sale
of M/V “Pantelis P” and M/V “John P” in 2006; there were no sales of vessels in
2005. Eurochart S.A. also received 1% commission for vessel acquisitions from
the sellers of the vessels that the Company acquired. Commissions to Eurochart
S.A. for chartering services were $536,180, $492,149 and $1,124,416 in 2005,
2006 and 2007, respectively.
Certain
members of the Pittas family, together with another unrelated ship management
company, have formed a joint venture with the insurance broker Sentinel Maritime
Services Inc., and with a crewing agent More Maritime Agencies Inc. The
shareholders’ percentage participation in these joint ventures was 48% in 2005,
78% in 2006 and 78% in 2007. Sentinel Maritime Services Inc. is paid
a commission on premium not exceeding 5%; More Maritime Agencies Inc. is paid a
fee of $50 per crew member per month. Total fees charged by Sentinel Marine
Services Inc. and More Maritime Agencies Inc. were $219,400 and $45,277, in
2005, $60,750 and $79,495, in 2006, and, $67,900 and $117,145 in 2007,
respectively. These amounts are recorded in “Vessel operating
expenses” under “Operating expenses”.
This
consisted of a loan amounting to $4,900,000 and $1,000,000 drawn in
2002. The loan is payable in twenty-four consecutive quarterly
installments of $220,000 each, and a balloon payment of $620,000 payable
together with the final quarterly installment due in October
2008. The interest is based on LIBOR plus 1.6% per
annum.
An
additional loan of $4,200,000 was drawn on May 9, 2005. The
loan is payable in twelve consecutive quarterly installments consisting of
four installments of $450,000 each, and eight installments of $300,000
each with the final installment due in May 2008. The interest
is based on LIBOR plus 1.25% per
annum.
(b)
Alcinoe
Shipping Ltd., Oceanpride Shipping Ltd., Searoute Maritime Ltd. and
Oceanopera Shipping Ltd. drew, in 2005,
$13,500,000 against a loan facility for which they are jointly and
severally liable. The loan is payable in twelve consecutive
quarterly installments consisting of two installments of $2,000,000 each,
one installment of $1,500,000, nine installments of $600,000 each and a
balloon payment of $2,600,000 payable with the final installment due in
May 2008. The interest is based on LIBOR plus 1.5% per
annum.
The
Company made two additional early repayments for a total of $3,000,000 from the
sales proceeds of M/V “John P” and M/V “Pantelis P” in June 2006 and July 2006.
The Company also negotiated a revised repayment schedule starting July 1, 2006,
which provides for payment of $300,000 per quarter and a balloon payment of
$2,000,000 payable with the final installment due in the second quarter of
2008. After the sale of the above mentioned vessels in 2006 and the
sale of M/V “Ariel” in February 2007, Oceanopera Shipping Ltd., the owner of M/V
“Nikolaos P” remains the sole liable entity for this loan facility.
(c)
Allendale
Investments S.A. and Alterwall Business Inc. drew $20,000,000 on May 26,2005 against a loan facility for which they are jointly and severally
liable. The loan is payable in twenty-four unequal consecutive
quarterly installments of $1,500,000 each in the first year, $1,125,000
each in the second year, $775,000 each in the third year, $450,000 each in
the fourth through sixth years and a balloon payment of $1,000,000 payable
with the final installment due in May 2011. The interest is
based on LIBOR plus 1.25% per annum as long as the outstanding loan amount
remains below 60% of the fair market value (FMV) of M/V “Ninos” and M/V
“Kuo Hsiung” and plus 1.375% if the outstanding loan amount is above 60%
of the FMV of such vessels.
(d)
This
is a $15,500,000 loan drawn by Salina Shipholding Corp. on December 30,2005. The loan is payable in ten consecutive semi-annual
installments consisting of six installments of $1,750,000 each and four
installments of $650,000 each and a balloon payment of $2,400,000 payable
with the final installment due in January 2011. The interest is based on
LIBOR plus a margin that ranges between 0.9%-1.1%, depending on the asset
cover ratio. The loan is secured with the following: (i) first priority
mortgage over M/V “Artemis”, (ii) first assignment of earnings and
insurance of M/V “Artemis”, (iii) a corporate guarantee of Euroseas Ltd.,
(iv) a minimum cash balance equal to an amount of no less than $300,000 in
an account Salina Shipholding Corp. maintains with the bank, and, (v)
overall liquidity (cash and cash equivalents) of $300,000 for each of the
Company’s vessels throughout the life of the
facility.
This
is an $8,250,000 loan drawn by Xenia International Corp. on June 30,2006. The loan is payable in twenty three consecutive quarterly
installments consisting of $265,000 each and a balloon payment of
$2,155,000 payable with the final quarterly installment due in March 2012.
The interest is based on LIBOR plus a margin of 0.95%. The loan is secured
with the following: (i) first priority mortgage over M/V “Tasman Trader”,
(ii) first assignment of earnings and insurance of M/V “Tasman Trader”,
(iii) a corporate guarantee of Euroseas Ltd., and, (iv) overall liquidity
(cash and cash equivalents) of $300,000 for each of the Company’s vessels
throughout the life of the
facility.
(f)
This
is a $15,500,000 loan drawn by Prospero Maritime Inc. on September 4,2006. The loan is payable in fourteen consecutive semi-annual
installments consisting of two installments of $1,200,000 each, one
installment of $1,000,000 each and eleven installments of $825,000 each
and a balloon payment of $3,025,000 payable with the final semi-annual
installment due in September 2013. The interest is based on LIBOR plus a
margin that ranges between 0.9%-0.95%, depending on the asset cover ratio.
The loan is secured with the following: (i) first priority mortgage over
M/V “Aristides N.P.”, (ii) first assignment of earnings and insurance of
M/V “Aristides N.P.”, (iii) a corporate guarantee of Euroseas Ltd., (iv) a
minimum cash balance equal to an amount of no less than $300,000 in an
account Prospero Maritime Inc. maintains with the bank, and, (v) overall
liquidity (cash and cash equivalents) of $300,000 for each of the
Company’s vessels throughout the life of the
facility.
(g)
This
is a $20,000,000 loan drawn by Xingang Shipping Ltd. on November 15, 2006;
Alcinoe Shipping Ltd., owner of the M/V “Gregos”, became a guarantor to
the loan in March 2007. The loan is payable in eight consecutive quarterly
installments of $1.0 million each, the first of which is due in February
2007, followed by four consecutive quarterly installments of $750,000
each, followed by sixteen consecutive installments of $250,000 each and a
balloon payment of $5.0 million payable with the final quarterly
instalment due in November 2013. The interest was based on LIBOR plus a
margin of 0.935% initially; after Alcinoe Shipping Ltd. became a guarantor
the rate became 0.90%. The loan is secured with the following: (i) first
priority mortgage over M/V “YM Xingang I”, (ii) first assignment of
earnings and insurance, (iii) a corporate guarantee of Euroseas Ltd. and
(iv) a third mortgage on M/V “Irini” also financed by the same
bank.
(h)
This
is a $10,000,000 loan drawn by Manolis Shipping Ltd. on June 11, 2007. The
loan is payable in thirty-two consecutive quarterly instalments of
$160,000 each, the first of which is due in September 2007, plus a balloon
payment of $4,880,000 payable with the final quarterly instalment in June
2015. The interest is based on LIBOR plus a margin of 0.80% if the ratio
of the outstanding loan to the vessel value is below 55%, otherwise the
margin is 0.90%. The loan is secured with the following: (i)
first priority mortgage over M/V “Manolis P”, (ii) first assignment of
earnings and insurance, (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 Manolis Shipping Ltd. maintains with the bank. Other
covenants and guarantees are similar to the rest of the loans of the
Company.
This
is a $15,000,000 loan drawn by Trust Navigation Corp. on November 1, 2007.
The loan is payable in four consecutive quarterly instalments of
$1,850,000 each, the first of which is due in February 2008, followed by
four consecutive quarterly instalments of $750,000 each, followed by four
consecutive quarterly instalments of $550,000 each, plus a balloon payment
of $2,400,000 payable with the final quarterly instalment in November
2010. The interest is based on LIBOR plus a margin of
0.90%. The loan is secured with the following: (i) first
priority mortgage over M/V “Ioanna P”, (ii) first assignment of earnings
and insurance, (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 Trust Navigation Corp. maintains with the bank. Other
covenants and guarantees are similar to the rest of the loans of the
Company.
In
addition to the terms specific to each loan described above, all the above loans
are secured with one or more of the following:
·
first
priority mortgage over the respective vessels on a joint and several
basis.
·
first
assignment of earnings and
insurance.
·
a
personal guarantee of one
shareholder.
·
a
corporate guarantee of Euroseas
Ltd.
·
a
pledge of all the issued shares of each
borrower.
The loan
agreements contain covenants such as restrictions as to changes in management
and ownership of the vessel shipowning companies, distribution of profits or
assets, additional indebtedness and mortgage of vessels without the lender’s
prior consent, sale of vessels, maximum fleet leverage, sale of capital stock of
our subsidiaries, ability to make investments and other capital expenditures,
entering in mergers or acquisitions, minimum requirements regarding the hull
ratio cover, minimum cash balance requirements and minimum cash retention
accounts (restricted cash). The loans agreements also require the
Company to make deposits in retention accounts with certain banks that can only
be used to pay the current loan instalments. Minimum cash balance requirements
are in addition to cash held in retention accounts. These cash deposits amounted
to $3,846,621 and $6,239,879 as of December 31, 2006 and 2007, respectively, and
are shown as “Restricted cash” under “Current Assets” and “Long-Term Assets” in
the consolidated balance sheets. The Company is not in default of any of the
foregoing covenants.
Interest
expense for the years ended December 31, 2005, 2006 and 2007 amounted to
$1,412,127, $3,324,257 and $4,777,524 respectively. At December 31,2007, LIBOR for the Company’s loans was on average approximately 5% and the
average interest rate on our debt was approximately 6.0%.
The
losses for the period ended December 31, 2005 arose from interest rate swaps
entered into in 2004 and settled in 2005 that did not meet the criteria for
hedge accounting treatment. The Company did not enter into any
derivative transaction in 2006 or 2007.
11. 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 criterion. In
addition, these Companies must be more than 50% of the value of the stock is
owned, directly or indirectly, 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, the “50% Ownership Test”, or, the
stock is “primarily and regularly traded on an established securities market” in
our country of organization, in another country that grants an “equivalent
exemption” to United States corporations, or in the United States, the
“Publicly-Traded Test.”. These companies also satisfied the more that “50%
Ownership Test” requirement for 2005, 2006 and 2007. In addition, 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 “Publicly-Traded Test” will be
satisfied for 2008 and thereafter, but no assurance can be given that this will
remain so, since continued compliance with this rule is subject to factors
outside the Company’s control.
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.
(b)
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, 2007. The effect on the Company’s
income resulting from a subsequent reallocation of pool income on the
results for the year was not
significant.
(c)
Future
minimum time charter revenue net of commissions, based on non-cancelable
time charter contracts as of December 31, 2007 will be $40.7 million for
2008, $10.9 million for 2009, $3.3 million for 2010, $3.2 million for 2011
and $0.5 million for 2012 assuming the scheduled drydockings and special
surveys (20-25 days every two and a half years) and one additional offhire
day per quarter to account for any unscheduled off-hire
time.
13.
Stock
Incentive Plan
On July17, 2007, the Board of Directors terminated the Company’s 2006 Stock Incentive
Plan without making any awards. On October 25, 2007, the Board of Directors
approved the Company’s 2007 Stock Incentive Plan (the “Plan”). The Plan is
administered by the Board of Directors which can make awards totaling in
aggregate up to 600,000 shares as over the next 10 years. The persons eligible
to receive awards under the Plan are officers, directors, and executive,
managerial, administrative and professional employees of the Company or Eurobulk
or Eurochart, (collectively, “key persons”) as the Board, in its sole
discretion, shall select based upon such factors as the Board shall deem
relevant. Awards may be made under the Plan in the form of incentive
stock options, non-qualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, unrestricted stock, restricted stock units
and performance shares. The Board awarded 135,000 nonvested
restricted shares to 12 key persons on December 18, 2007 of which 50% vested on
December 20, 2007 with the remaining will vest on December 15, 2008 subject to
continuous employment with the Company. Awards to officers and directors
amounted to 80,000 shares; the remaining 55,000 shares were awarded to employees
of Eurobulk. An additional award of 150,000 nonvested restricted shares was made
to the same 12 key persons on February 7, 2008 of which 50% will vest on August7, 2008 and 50% on August 7, 2009; awards to officers and directors amounted to
95,000 shares and the remaining 55,000 shares were awarded to employees of
Eurobulk.
All
nonvested restricted shares are conditional upon the grantee’s continued service
as an employee of the Company, Eurobulk or as a director until the applicable
vesting date. The grantee does not have the right to vote such unvested
restricted shares until they vest or exercise any right as a shareholder of
these shares, however, the unvested shares will accrue dividends as declared and
paid which will be retained by the Company until the share vest at which time
they are payable to the grantee. As of December 31, 2007 the unvested restricted
shares accrued no dividends. As unvested restricted share grantees accrue
dividends on awards that are expected to vest, such dividends are charged to
retained earnings.
The
Company estimates the forfeitures of nonvested restricted shares to be
immaterial. The Company will, however, re-evaluate the reasonableness of its
assumption at each reporting period.
The
compensation cost that has been charged against income for those plans was
$822,782 for the year ended December 31, 2007.
As of
December 31, 2007, there was $790,952 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan based on the closing stock price of $12.4 on December 31, 2007 used for the
valuation of the shares awarded to non-employees. That cost is expected to be
recognized over a weighted-average period of 0.956 years. The total fair value
of shares vested during the year ended December 31, 2007 was $797,925 and the
recognized portion of the unvested shares was $24,857.
Basic and
diluted earnings per common share are computed as follows:
2005
2006
2007
Income:
Net
income
25,178,454
20,069,407
40,664,064
Basic
earnings per share:
Weighted
average common shares –
Outstanding
10,739,476
12,535,365
21,566,619
Basic
earnings per share
2.34
1.60
1.89
Effect
of dilutive securities
Warrants
-
-
78,301
Weighted
average common shares –
Outstanding
10,739,476
12,535,365
21,644,920
Diluted
earnings per share
2.34
1.60
1.88
During
the year ended December 31, 2007, 248,463 warrants were exercised for gross
proceeds of $2,683,400. As of December 31, 2007, the Company has
outstanding warrants that entitle their holders to purchase 337,125 shares of
common stock at an exercise price of $10.80 per share. The exercise price of
then outstanding 585,589 warrants was above the average market price of the
Company’s shares during the years ended December 31, 2005 and 2006.
Consequently, the Company’s warrants were anti-dilutive and not included in the
computation of diluted earnings per share for the years ended December 31, 2005
and 2006.
In April
2005, the Company decided to distribute to its original shareholders in advance
of going public most of the profits relating to the Company’s operations up to
that time; the Company, declared and paid dividend in the amount of $27,525,000
($2.78 per share) and return of capital in the amount of $16,700,000 ($1.69 per
share); after its private placement in August 2005, the Company declared and
paid a dividend of $2,650,223 ($0.21 per share) for a total dividend / return of
capital in 2005 of $46,875,223 ($4.67 per share). In 2006 and 2007,
the Company declared and paid dividends of $9,465,082 ($0.75 per share) and
$20,278,535 ($1.00 per share), respectively.
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. The Company had derivative instruments only
in 2005.
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. The fair value of trading
securities is based on the closing price on the last day of the reporting
period.
On
February 7, 2008, the Board of Directors declared a cash dividend of $0.30
per Euroseas Ltd. common share. Such cash dividend was paid on
or about March 14, 2008 to the holders of record of Euroseas Ltd. common
shares as of March 4, 2008.
b)
On
February 7, 2008, the Board of Directors granted a stock incentive award
of 150,000 shares to directors, officers and key persons, 50% of which
will vest on August 7, 2008 and the remaining 50% on August 7,2009.
c)
On
February 7, 2008, the Board of Directors approved the Amended Master
Management Agreement with Eurobulk Ltd. under which the annual part of the
management fee to Eurobulk Ltd. is increased to $1.1 million as of January1, 2008 while the daily management fee per vessel will remain at Euro 630
for 2008 as Eurobulk Ltd. agreed to forgo the scheduled - as of February1, 2008 - inflation increase. Both components of the management fee are
scheduled to be adjusted for inflation on January 1 of each
year.
d)
On
May 8, 2008, the Board of Directors declared a cash dividend of $0.31 per
Euroseas Ltd. common share. Such cash dividend was paid on or
about June 18, 2008 to the holders of record of Euroseas Ltd. common
shares as of June 6, 2008.
F-35
Dates Referenced Herein and Documents Incorporated by Reference
